<PAGE>
As filed with the Securities and Exchange Commission on July 16, 1999
================================================================================
1933 Act File No. 333-_____
1940 Act File No. 811-_____
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-2
(Check appropriate box or boxes)
[X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[ ] Pre-Effective Amendment No. __________
[ ] Post-Effective Amendment No. __________
and
[X] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[ ] Amendment No. __________
Nuveen Maryland 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:
Janet D. Olsen Thomas S. Harman
Bell, Boyd & Lloyd Morgan, Lewis & Bockius LLP
70 W. Madison St. 1800 M Street, N.W.
Chicago, IL 60602 Washington, D.C. 20036
Approximate Date of Proposed Public Offering:
As soon as practicable after the effective date of this Registration Statement
------------------------
If any of the securities being registered on this form are offered on a
delayed or continuous basis in reliance on Rule 415 under the Securities Act of
1933, other than securities offered in connection with a dividend reinvestment
plan, check the following box. [ ]
It is proposed that this filing will become effective (check appropriate
box)
[X] when declared effective pursuant to section 8(c)
-------------------------
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
===================================================================================================================================
Proposed Maximum
Title of Securities Being Amount Proposed Maximum Aggregate Offering Amount of
Registered Being Registered Offering Price Per Unit Price (1) Registration Fee
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Shares, $.01 par value 100,000 Shares $15.00 $1,500,000 $417.00
===================================================================================================================================
</TABLE>
================================================================================
(1) Estimated solely for the purpose of calculating the registration fee.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such dates as the Commission, acting pursuant to said Section 8(a),
may determine.
===============================================================================
<PAGE>
NUVEEN MARYLAND DIVIDEND ADVANTAGE MUNICIPAL FUND
-----------------
CROSS REFERENCE SHEET
Part A - Prospectus
<TABLE>
<CAPTION>
<S> <C> <C>
Items in Part A of Form N-2 Location in Prospectus
--------------------------- ----------------------
Item 1. Outside Front Cover Cover Page
Item 2. Cover Pages; Other Offering Information Cover Page
Item 3. Fee Table and Synopsis Prospectus Summary; Summary of Fund Expenses
Item 4. Financial Highlights Not Applicable
Item 5. Plan of Distribution Cover Page; Prospectus Summary; Underwriting
Item 6. Selling Shareholders Not Applicable
Item 7. Use of Proceeds Use of Proceeds; The Fund's Investments
Item 8. General Description of the Registrant The Fund; The Fund's Investments; MuniPreferred(R) Shares and
Leverage; Risks; How the Fund Manages Risk; Description of
Shares; Certain Provisions in the Declaration of Trust
Item 9. Management Management of the Fund; Custodian and Transfer Agent
Item 10. Capital Stock, Long-Term Debt, and Other
Securities Description of Shares; MuniPreferred Shares and Leverage;
Distributions; Dividend Reinvestment Plan; Certain
Provisions in the Declaration of Trust; Tax Matters
Item 11. Defaults and Arrears on Senior Securities Not Applicable
Item 12. Legal Proceedings Other Matters
Item 13. Table of Contents of the Statement of
Additional Information Table of Contents of the Statement of
Additional Information
</TABLE>
<PAGE>
Part B - Statement of Additional Information
<TABLE>
<CAPTION>
Location in Statement of
Items in Part B of Form N-2 Additional Information
--------------------------- ----------------------
<S> <C> <C>
Item 14. Cover Page Cover Page
Item 15. Table of Contents Cover Page
Item 16. General Information and History Not Applicable
Item 17. Investment Objectives The Fund's Investments; Certain Trading Strategies of the
Fund; Portfolio Transactions
Item 18. Management Management of the Fund; Portfolio Transactions
Item 19. Control Persons and Principal Holders of
Securities Management of the Fund; Statement of Net Assets
Item 20. Investment Advisory and Other Services Management of the Fund; Custodian and Transfer Agent;
Experts
Item 21. Brokerage Allocation and Other Practices Portfolio Transactions
Item 22. Tax Status Tax Matters; Distributions
Item 23. Financial Statements Report of Independent Auditors; Statement of Net Assets
</TABLE>
Part C - Other Information
Items 24-33 have been answered in Part C of this Registration Statement.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this Prospectus is not complete and may be changed. No +
+person may sell these securities until the registration statement filed with +
+the Securities and Exchange Commission is effective. This Prospectus is not +
+an offer to sell these securities and is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION--DATED AUGUST , 1999
PROSPECTUS
NUVEEN LOGO
100,000 Shares
Nuveen Maryland Dividend Advantage Municipal Fund
Common Shares
$15.00 per share
----------
Investment Objectives. The Fund is a closed-end, diversified management
investment company. The Fund's investment objectives are:
. 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.
Portfolio Contents. The Fund will invest its net assets in a diversified
portfolio of municipal bonds that are exempt from regular federal and Maryland
income taxes. Under normal market conditions, the Fund expects to be fully
invested in such tax-exempt municipal bonds. The Fund will invest at least 80%
of its net assets in investment grade quality municipal bonds. The Fund may
invest up to 20% of its net assets in
(continued on following page)
----------
These securities involve certain risks. See "Risks" beginning on page 14.
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 September , 1999, containing
additional information about the Fund, has been filed with the Securities and
Exchange Commission and is hereby 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 33 of this
Prospectus, by calling (800) 257-8787 or obtain a copy 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.
----------
<TABLE>
<CAPTION>
Total Total
Assuming No Assuming Full
Exercise of Exercise of
Overallotment Overallotment
Per Share Option Option
--------- ------------- -------------
<S> <C> <C> <C>
Public Offering Price $15.00 $ $
Sales Load $ 0.675 $ $
------- ------------ ------------
Proceeds to the Fund $14.325 $ $
</TABLE>
The underwriters named in this prospectus may purchase up to
additional common shares from the Fund under certain circumstances.
The underwriters are offering the common shares subject to various
conditions. The underwriters expect to deliver the common shares to purchasers
on or about September , 1999.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
----------
John Nuveen & Co.
Incorporated
September , 1999
<PAGE>
(continued from previous page)
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.
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.
2
<PAGE>
PROSPECTUS SUMMARY
This is only a summary. You should review the more detailed information
contained in the Prospectus and in the Statement of Additional Information.
The Fund............... Nuveen Maryland Dividend Advantage Municipal Fund (the
"Fund") is a newly organized, closed-end, diversified
management investment company. The Fund is designed
to provide tax benefits to investors who are
residents of Maryland. "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
John Nuveen & Co. Incorporated and . 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." John Nuveen & Co. Incorporated has
agreed to pay (i) all organizational expenses and
(ii) offering costs (other than sales load) that
exceed $0.02 per Common Share.
Investment Objectives.. The Fund's investment objectives are to provide
current income exempt from regular federal and
Maryland 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. The Fund will invest its net assets in a
diversified portfolio of municipal bonds that are
exempt from regular federal and Maryland income tax.
Under normal market conditions, the Fund expects to
be fully invested in such tax-exempt municipal bonds.
The Fund will invest at least 80% of its net assets
in municipal bonds that at the time of investment are
investment grade quality. Investment grade quality
bonds are bonds rated within the four highest grades
(Baa or BBB or better by Moody's Investor Service,
Inc. ("Moody's"), Standard & 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 unrated but judged to be of
comparable quality by the Fund's investment adviser.
Bonds of below investment grade quality are regarded
as having predominately speculative characteristics
with respect to capacity to pay interest and repay
principal, and are commonly referred to as junk
bonds. The Fund cannot assure you that it will attain
its investment objectives. See "The Fund's
Investments."
3
<PAGE>
Special The Fund expects that a substantial portion of its
Considerations......... 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................ Approximately one to three months after completion of
this offering (subject to market conditions), the
Fund intends to offer preferred shares of beneficial
interest ("MuniPreferred Shares") representing
approximately 35% of the Fund's capital after their
issuance. The issuance of MuniPreferred Shares will
leverage your shares. Leverage involves special
risks. There is no assurance that the Fund's
leveraging strategy will be successful. See "Risks."
The money the Fund obtains by selling the
MuniPreferred Shares will be invested in long-term
municipal bonds, 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 agreed to reimburse the
Fund for fees and expenses in the amount of .30% of
average daily total net assets of the Fund for the
first five years of the Fund's operations (through
September 30, 2004), and for a declining amount for
an additional five years (through September 30,
2009). Nuveen Advisory is a wholly-owned subsidiary
of John Nuveen & Co. Incorporated ("Nuveen"). See
"Management of the Fund."
4
<PAGE>
Distributions.......... Commencing with the Fund's first dividend, the Fund
intends to make regular monthly cash distributions to
you at a level rate based on the projected
performance of the Fund. The Fund's ability to
maintain a level dividend rate will depend on a
number of factors, including dividends payable on the
MuniPreferred Shares. As portfolio and market
conditions change, the rate of dividends on the
Common Shares and the Fund's dividend policy could
change. Over time, the Fund will distribute all of
its net investment income (after it pays accrued
dividends on any outstanding MuniPreferred Shares).
In addition, at least annually, the Fund intends to
distribute net realized capital gains and taxable
ordinary income, if any, to you so long as the net
realized capital gains and taxable ordinary income
are not necessary to pay accrued dividends on, or
redeem or liquidate, any MuniPreferred Shares. Your
initial distribution is expected to be declared
approximately 45 days, and paid approximately 60 to
90 days, from the completion of this offering,
depending on market conditions. You may elect to
automatically reinvest some or all of your
distributions in additional Common Shares under the
Fund's Dividend Reinvestment Plan. See
"Distributions" and "Dividend Reinvestment Plan."
Listing................ The Common Shares have been approved for listing on
the New York Stock Exchange, subject to notice of
issuance. See "Description of Shares--Common Shares."
The trading or "ticker" symbol of the Common Shares
is expected to be " ."
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 Shares; Conversion to Open-End
Fund" and the Statement of Additional Information
under "Repurchase of Fund Shares; Conversion to Open-
End Fund." The Common Shares are designed primarily
for long-term investors, and you should not view the
Fund as a vehicle for trading purposes.
5
<PAGE>
Special Risk
Considerations.........
No Operating History. The Fund is a newly organized
closed-end investment company with no history of
operations.
Interest Rate Risk. When market 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. Because the Fund will
invest primarily in long-term bonds, the Common Share
net asset value and market price per share will
fluctuate more in response to changes in market
interest rates than if the Fund invested primarily in
shorter-term bonds. The Fund's use of leverage, as
described below, will tend to increase Common Share
interest rate risk.
Credit Risk. Credit risk is the risk that one or more
municipal bonds in the Fund's portfolio will decline
in price, or fail to pay interest or principal when
due, because the issuer of the bond experiences a
decline in its financial status. The Fund may invest
up to 20% (measured at the time of investment) of its
net assets in municipal bonds that are rated Ba/BB or
B or that are unrated but judged to be of comparable
quality by Nuveen Advisory. The prices of these lower
grade bonds are more sensitive to negative
developments, such as a decline in the issuer's
revenues or a general economic downturn, than are the
prices of higher grade securities.
Concentration in Maryland Issuers. The Fund's policy
of investing primarily in municipal obligations of
issuers located in Maryland makes the Fund more
susceptible to adverse economic, political or
regulatory occurrences affecting such issuers.
Leverage Risk. The use of leverage through the
issuance of MuniPreferred Shares creates an
opportunity for increased Common Share net income,
but also creates special risks for Common
Shareholders. There is no assurance that the Fund's
leveraging strategy will be successful. It is
anticipated that MuniPreferred dividends will be
based on shorter-term municipal bond rates of return
(which would be redetermined periodically, pursuant
to an auction process), and that the Fund will invest
the proceeds of the MuniPreferred Shares offering in
long-term, 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
6
<PAGE>
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.
Anti-takeover Provisions. The Agreement and
Declaration of Trust includes provisions that could
limit the ability of other entities or persons to
acquire control of the Fund or convert the Fund to
open-end status. The provisions of the Declaration
described above could have the effect of depriving
the Common Shareholders of opportunities to sell
their Common Shares at a premium over the then
current market price of the Common Shares.
7
<PAGE>
SUMMARY OF FUND EXPENSES
The following table assumes the issuance of MuniPreferred Shares in an
amount equal to 35% of the Fund's capital (after their issuance), and shows
Fund expenses both as a percentage of net assets attributable to Common Shares
and as a percentage of total net assets.
<TABLE>
<CAPTION>
Percentage of
Total Net Assets
----------------
<S> <C> <C>
Shareholder Transaction Expenses
Sales Load Paid by You (as a
percentage of offering price)....... 4.50%
Dividend Reinvestment Plan Fees...... None*
<CAPTION>
Percentage of Net
Assets Attributable Percentage of
to Common Shares Total Net Assets
------------------- ----------------
<S> <C> <C>
Annual Expenses
Management Fees...................... 1.00% .65%
Fee and Expense Reimbursement (Years
1-5)................................ (.46%)** (.30%)**
---- ----
Net Management Fees.................... .54%** .35%**
Other Expenses......................... .31% .20%
---- ----
Total Net Annual Expenses.............. .85%** .55%**
---- ----
</TABLE>
- --------
*You will be charged a $2.50 service charge and pay brokerage charges if you
direct the Plan Agent to sell your Common Shares held in a dividend
reinvestment account.
** Nuveen Advisory has agreed to reimburse the Fund for fees and expenses in
the amount of .30% of average daily total net assets for the first 5 years
of the Fund's operations, .25% of average daily total net assets in year 6,
.20% in year 7, .15% in year 8, .10% in year 9 and .05% in year 10. Without
the reimbursement, "Total Net Annual Expenses" would be estimated to be .85%
of average daily total net assets and 1.31% of average daily total net
assets attributable to Common Shares. Nuveen has agreed to pay (i) all
organizational expenses and (ii) offering costs (other than sales load) that
exceed $0.02 per Common Share (.13% of offering price).
The purpose of the table above is to help you understand all fees and
expenses that you, as a Common Shareholder, would bear directly or indirectly.
The expenses shown in the table are based on estimated amounts for the Fund's
first year of operations and assume that the Fund issues Common Shares.
See "Management of the Fund" and "Dividend Reinvestment Plan."
The following example illustrates the expenses (including the sales load of
$45) that you would pay on a $1,000 investment in Common Shares, assuming (1)
total net annual expenses of .85% of net assets attributable to Common Shares
and .55% of total net assets in years 1 through 5, increasing to 1.23% and
.80%, respectively, in year 10 and (2) a 5% annual return:(/1/)
<TABLE>
<CAPTION>
Expenses Based on Percentage of 1 Year 3 Years 5 Years 10 Years(/2/)
------------------------------- ------ ------- ------- -------------
<S> <C> <C> <C> <C>
Net Assets Attributable to Common
Shares.............................. $53 $71 $90 $160
Total Net Assets..................... $50 $62 $74 $121
</TABLE>
- --------
(1) The example should not be considered a representation of future expenses.
The example assumes that the estimated Other Expenses set forth in the
Annual Expenses table are accurate, that fees and expenses increase as
described in note 2 below and that all dividends and distributions are
reinvested at net asset value. Actual expenses may be greater or less than
those assumed. Moreover, the Fund's actual rate of return may be greater or
less than the hypothetical 5% return shown in the example.
(2) Assumes reimbursement of fees and expenses of .25% of average daily total
net assets in year 6, .20% in year 7, .15% in year 8, .10% in year 9 and
.05% in year 10. Nuveen Advisory has not agreed to reimburse the Fund for
any portion of its fees and expenses beyond September 30, 2009.
8
<PAGE>
THE FUND
The Fund is a recently organized, closed-end, diversified management
investment company registered under the Investment Company Act of 1940, as
amended (the "1940 Act"). The Fund was organized as a Massachusetts business
trust on June 1, 1999, pursuant to an Agreement and Declaration of Trust
governed by the laws of the Commonwealth of Massachusetts (the "Declaration").
As a newly organized entity, the Fund has no operating history. The Fund's
principal office is located at 333 West Wacker Drive, Chicago, Illinois 60606,
and its telephone number is (800) 257-8787. The Fund is designed to provide
tax benefits to investors who are residents of Maryland.
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 $0.02 per Common Share. The
Fund will invest the net proceeds of the offering in accordance with the
Fund's investment objectives and policies as stated below. It is presently
anticipated that the Fund will be able to invest substantially all of the net
proceeds in municipal bonds that meet those investment objectives and policies
within three months after the completion of the offering. Pending such
investment, it is anticipated that the proceeds will be invested in short-
term, tax-exempt securities.
THE FUND'S INVESTMENTS
Investment Objectives and Policies
The Fund's investment objectives are:
. to provide current income exempt from regular federal and Maryland
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.
9
<PAGE>
The Fund will invest its net assets in a diversified portfolio of municipal
bonds that are exempt from regular federal and Maryland income tax. Under
normal market conditions, the Fund expects to be fully invested (at least 95%
of its assets) in such tax-exempt municipal bonds. The Fund will invest at
least 80% of its net assets in investment grade quality municipal bonds.
Investment grade quality means that such bonds are rated, at the time of
investment, within the four highest grades (Baa or BBB or better by Moody's,
S&P or Fitch) or are unrated but judged to be of comparable quality by Nuveen
Advisory. The Fund may invest up to 20% of its net assets in municipal bonds
that are rated, at the time of investment, Ba/BB or B by Moody's, S&P or Fitch
or that are unrated but judged to be of comparable quality by Nuveen Advisory.
Bonds of below investment grade quality (Ba/BB or below) are commonly referred
to as junk bonds. Bonds of below investment grade quality are regarded as
having predominately speculative characteristics with respect to capacity to
pay interest and repay principal. The foregoing credit quality policies apply
only at the time a security is purchased, and the Fund is not required to
dispose of a security in the event that a rating agency downgrades its
assessment of the credit characteristics of a particular issue. In determining
whether to retain or sell such a security, Nuveen Advisory may consider such
factors as Nuveen Advisory's assessment of the credit quality of the issuer of
such security, the price at which such security could be sold and the rating,
if any, assigned to such security by other rating agencies. A general
description of Moody's, S&P's and Fitch's ratings of municipal bonds is set
forth in Appendix A to the Statement of Additional Information. See "Municipal
Bonds--Concentration Risk" below for a general description of the economic and
credit characteristics of municipal issuers in Maryland. 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 Maryland income taxes. For more information, see the Statement of
Additional Information.
The Fund cannot change its investment objectives without the approval of
the holders of a "majority of the outstanding" Common Shares and MuniPreferred
Shares voting together as a single class, and of the holders of a "majority of
the outstanding" MuniPreferred Shares voting as a separate class. A "majority
of the outstanding" 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
10
<PAGE>
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 Maryland, a city in Maryland, 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 Maryland income tax, although
the interest may be subject to the federal alternative minimum tax. The Fund
may also invest in municipal bonds issued by United States territories (such
as Puerto Rico or Guam) that are exempt from regular federal and Maryland
income tax.
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.
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.
11
<PAGE>
Other Investment Companies
The Fund may invest up to 10% of its net assets in securities of other
open- or closed-end investment companies that invest primarily in municipal
bonds of the types in which the Fund may invest directly. The Fund generally
expects to invest in other investment companies either during periods when it
has large amounts of uninvested cash, such as the period shortly after the
Fund receives the proceeds of the offering of its Common Shares or
MuniPreferred Shares, or during periods when there is a shortage of
attractive, high-yielding municipal bonds available in the market. As a
stockholder in an investment company, the Fund will bear its ratable share of
that investment company's expenses, and would remain subject to payment of the
Fund's management, advisory and administrative fees with respect to assets so
invested. Common Shareholders would therefore be subject to duplicative
expenses to the extent the Fund invests in other investment companies. Nuveen
Advisory will take expenses into account when evaluating the investment merits
of an investment in the investment company relative to available municipal
bond investments. In addition, the securities of other investment companies
may also be leveraged and will therefore be subject to the same leverage risks
described herein. As described in the Prospectus in the section entitled
"Risks", the net asset value and market value of leveraged shares will be more
volatile and the yield to shareholders will tend to fluctuate more than the
yield generated by unleveraged shares.
Initial Portfolio Composition
If current market conditions persist, the Fund expects that approximately
85% of its initial portfolio will consist of investment grade quality
municipal bonds, rated as such at the time of investment, meaning that such
bonds are rated by national rating agencies within the four highest grades of
the investment grade category or are unrated but judged to be of comparable
quality by Nuveen Advisory (approximately 55% in Aaa/AAA; 15% in Aa/AA; 15% 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 "Certain Trading Strategies of the Fund--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
"The Fund's Investments--Investment Objectives and Policies."
MUNIPREFERRED SHARES AND LEVERAGE
Approximately one to three months after the completion of the offering of
the Common Shares (subject to market conditions), the Fund intends to offer
MuniPreferred Shares representing approximately 35% of the Fund's capital
immediately after the issuance of the MuniPreferred Shares. The MuniPreferred
Shares have complete priority upon distribution of assets over the Common
Shares. The issuance of MuniPreferred Shares will leverage the Common Shares.
Leverage involves special risks. There is no assurance that the Fund's
leveraging strategy will be successful. Although the timing and other terms of
the offering and the terms of the MuniPreferred Shares will be determined by
the Fund's Board of Trustees, the Fund expects to invest the proceeds of the
MuniPreferred Shares offering in long-term municipal bonds. 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.
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<PAGE>
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 Investment Company Act of 1940, as amended (the "Investment
Company Act" or the "1940 Act"), the Fund is not permitted to issue preferred
shares unless immediately after such issuance the value of the Fund's total
net assets is at least 200% of the liquidation value of the outstanding
preferred shares (i.e., such liquidation value may not exceed 50% of the
Fund's total net assets). In addition, the Fund is not permitted to declare
any cash dividend or other distribution on its Common Shares unless, at the
time of such declaration, the value of the Fund's total net assets is at least
200% of such liquidation value. If MuniPreferred Shares are issued, the Fund
intends, to the extent possible, to purchase or redeem MuniPreferred Shares
from time to time to the extent necessary in order to maintain coverage of any
MuniPreferred Shares of at least 200%. If the Fund has MuniPreferred Shares
outstanding, two of the Fund's trustees will be elected by the holders of
MuniPreferred Shares, voting separately as a class. The remaining trustees of
the Fund will be elected by holders of Common Shares and MuniPreferred Shares
voting together as a single class. In the event the Fund failed to pay
dividends on MuniPreferred Shares for two years, MuniPreferred 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 Investment Company Act. It is not anticipated that these covenants
or guidelines will impede Nuveen Advisory from managing the Fund's portfolio
in accordance with the Fund's investment objectives and policies.
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<PAGE>
The Fund may also borrow money as a temporary measure for extraordinary or
emergency purposes, including the payment of dividends and the settlement of
securities transactions which otherwise might require untimely dispositions of
Fund securities.
Assuming that the MuniPreferred Shares will represent approximately 35% of
the Fund's capital and pay dividends at an annual average rate of 2.70%, the
income generated by the Fund's portfolio (net of estimated expenses) must
exceed .945% 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 4.80% yield on the Fund's investment
portfolio, net of expenses, and the Fund's currently projected annual
MuniPreferred Share dividend rate of 2.70%. See "Risks" and "MuniPreferred
Shares and Leverage."
<TABLE>
<S> <C> <C> <C> <C> <C>
Components of Portfolio Return
Net Income.......................... 4.80 % 4.80 % 4.80 % 4.80% 4.80%
Capital (Loss) or Gain.............. (14.80)% (9.80)% (4.80)% 0.20% 5.20%
Assumed Portfolio Total Return........ (10.00)% (5.00)% (0.00)% 5.00% 10.00%
Common Share Dividends.............. 5.93 % 5.93 % 5.93 % 5.93% 5.93%
Common Share Capital Gain/(Loss).... (22.77)% (15.08)% (7.38)% 0.31% 8.00%
Common Share Total Return............. (16.84)% (9.15)% (1.45)% 6.24% 13.93%
</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.
RISKS
The net asset value of the Common Shares will fluctuate with and be
affected by, among other things, interest rate risk, credit risk, reinvestment
risk and leverage risk, and an investment in Common Shares will be subject to
market discount risk, inflation risk, municipal bond market risk and "Year
2000" risk, each of which is more fully described below.
Newly Organized. The Fund is a newly organized, diversified, closed-end
management investment company and has no operating history.
14
<PAGE>
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 fluctuate
more in response to changes in interest rates than does the value of shorter-
term bonds. Because the Fund will invest primarily in long-term bonds, the
Common Share net asset value and market price per share will fluctuate more in
response to changes in market interest rates than if the Fund invested
primarily in shorter-term bonds. The Fund's use of leverage, as described
below, will tend to increase Common Share interest rate risk.
Credit Risk. Credit risk is the risk that an issuer of a municipal bond
will become unable to meet its obligation to make interest and principal
payments. In general, lower rated municipal bonds carry a greater degree of
risk that the issuer will lose its ability to make interest and principal
payments, which could have a negative impact to the Fund's net asset value or
dividends. The Fund may invest up to 20% of its net assets in municipal bonds
that are rated Ba/BB or B by Moody's, S&P or Fitch or that are unrated but
judged to be of comparable quality by the Fund's investment adviser. Bonds
rated Ba/BB or B are regarded as having predominately speculative
characteristics with respect to capacity to pay interest and repay principal,
and these bonds are commonly referred to as junk bonds. The prices of these
lower grade bonds are more sensitive to negative developments, such as a
decline in the issuer's revenues or a general economic downturn, than are the
prices of higher grade securities.
Concentration Risk.
Maryland has benefited from the expansion in the national economy. The
State's once sluggish economy has shown improvement, although employment and
income growth rates remain at or below national averages and below neighboring
states. Services, wholesale and retail trade, and government account for most
of the State's employment. Unlike in most states, government employment
surpasses manufacturing employment in Maryland.
The State's unemployment rate, which fell to 4.4% in June 1998 from 5.2% in
1997, remains below the national average. Per capita income, which was $28,969
in 1997, is 113% of the national average.
The State's constitution mandates a balanced budget. During its spring 1998
term, the Maryland legislature voted to accelerate the income tax reduction it
passed in 1997; as a result, income taxes will be reduced by 5% in 1998, more
than the 2% reduction originally planned for 1998. The 1998 reduction is part
of the total 10% reduction to the State's income tax, which is being phased in
through 2002. Maryland's general obligation debt, which is constitutionally
limited to a maximum term of 15 years, remains moderate. Maryland's general
obligation debt carries triple-A ratings from Moody's, Standard and Poor's,
and Fitch.
15
<PAGE>
Municipal Bond Market Risk. Investing in the municipal bond market involves
certain risks. The amount of public information available about the municipal
bonds in the Fund's portfolio is generally less than that for corporate
equities or bonds, and the investment performance of the Fund may therefore be
more dependent on the analytical abilities of Nuveen Advisory than would be a
stock fund or taxable bond fund. The secondary market for municipal bonds,
particularly the below investment grade bonds in which the Fund may invest,
also tends to be less well-developed or liquid than many other securities
markets, which may adversely affect the Fund's ability to sell its bonds at
attractive prices.
Reinvestment Risk. Reinvestment risk is the risk that income from the
Fund's bond portfolio will decline if and when the Fund invests the proceeds
from matured, traded or called bonds at market interest rates that are below
the portfolio's current earnings rate. A decline in income could affect the
Common Shares' market price or their overall 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
16
<PAGE>
Shareholders. Changes in the future direction of interest rates are very
difficult to predict accurately. If the Fund were to reduce leverage based on
a prediction about future changes to interest rates, and that prediction
turned out to be incorrect, the reduction in leverage would likely operate to
reduce the income and/or total returns to Common Shareholders relative to the
circumstance where the Fund had not reduced leverage. The Fund may decide that
this risk outweighs the likelihood of achieving the desired reduction to
volatility in income and share price if the prediction were to turn out to be
correct, and determine not to reduce leverage as described above.
The Fund may invest in the securities of other investment companies. Such
securities may also be leveraged and will therefore be subject to the leverage
risks described above. Such additional leverage may in certain market
conditions serve to reduce the net asset value of the Fund's Common Shares and
the returns to Common Shareholders.
Inflation Risk. Inflation risk is the risk that the value of assets or
income from investment will be worth less in the future as inflation decreases
the value of money. As inflation increases, the real value of the Common
Shares and distributions can decline. In addition, during any periods of
rising inflation, MuniPreferred Share dividend rates would likely increase,
which would tend to further reduce returns to Common Shareholders.
"Year 2000" Risk. "Year 2000" risk is the risk that the computer systems
used by Nuveen Advisory, its service providers and industry wide information
and transaction clearinghouses to manage the Fund's investments and process
shareholder transactions may not be able to correctly process activity
occurring in the Year 2000 because of the way computers historically have
stored dates. In addition, Year 2000 issues may affect the ability of
municipal issuers to meet their interest and principal payment obligations to
their bond holders, and may adversely affect their credit ratings.
In addition, it is possible that the markets for municipal securities in
which the Fund invests may be detrimentally affected by computer failures
throughout the financial services industry beginning on or before January 1,
2000. Improperly functioning trading systems may result in settlement problems
and liquidity issues. In addition, corporate and governmental data processing
errors may result in revenue collection, distribution and production problems
and overall economic uncertainties. Earnings and Revenues of individual
issuers will be affected by remediation costs, which may be substantial and
may be reported inconsistently in financial statements. Accordingly, the
Fund's investments may be adversely affected. The statements above are subject
to the Year 2000 Information and Readiness Disclosure Act, which may limit the
legal rights regarding the use of such statements in the case of a dispute.
HOW THE FUND MANAGES RISK
Investment Limitations
The Fund has adopted certain investment limitations designed to limit
investment risk and maintain portfolio diversification. These limitations are
fundamental and may not be changed without the approval of the holders of a
majority of the outstanding Common Shares and MuniPreferred Shares voting
together as a single class, and the approval of the holders of a majority of
the MuniPreferred Shares voting as a separate class. The Fund may not:
. Invest more than 25% of total Fund assets in securities of issuers in
any one industry; except that this limitation does not apply to
municipal bonds backed by the assets and revenues of governments or
political subdivisions of governments; and
17
<PAGE>
. Invest more than 5% of total Fund assets in securities of any one
issuer, except that this limitation does not apply to bonds issued by
the United States Government, its agencies and instrumentalities or to
the investment of 25% of its total assets.
The Fund may become subject to guidelines which are more limiting than the
investment restrictions set forth above in order to obtain and maintain ratings
from Moody's or S&P on the MuniPreferred Shares that it intends to issue. The
Fund does not anticipate that such guidelines would have a material adverse
effect on the Fund's Common Shareholders or the Fund's ability to achieve its
investment objectives. See "Investment Objectives" in the Statement of
Additional Information for information about these guidelines and additional
fundamental and non-fundamental investment policies of the Fund.
Quality Investments
The Fund will invest at least 80% of its net assets in bonds of investment
grade quality at the time of investment. Investment grade quality means that
such bonds are rated by national rating agencies within the four highest grades
(Baa or BBB or better by Moody's, S&P or Fitch) or are unrated but judged to be
of comparable quality by Nuveen Advisory.
Limited Issuance of MuniPreferred Shares
Under the 1940 Act, the Fund could issue MuniPreferred Shares having a total
liquidation value (original purchase price of the shares being liquidated plus
any accrued and unpaid dividends) of up to one-half of the value of the total
net assets of the Fund. If the total liquidation value of the MuniPreferred
Shares was ever more than one-half 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 and MuniPreferred Shares discussed in this Prospectus. This
higher than required margin of net asset value provides a cushion against later
fluctuations in the value of the Fund's portfolio and will subject Common
Shareholders to less income and net asset value volatility than if the Fund
were more leveraged. The Fund intends to purchase or redeem MuniPreferred
Shares, if necessary, to keep the liquidation value of the MuniPreferred Shares
below one-half of the value of the Fund's total net assets.
Management of Investment Portfolio and Capital Structure to Limit Leverage Risk
The Fund may take certain actions if short-term 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.
18
<PAGE>
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.
Year 2000 Issues
Nuveen Advisory is working with the Fund's service providers and
clearinghouses to adapt their systems to address the Year 2000 issue. Nuveen
Advisory and the Fund expect, but there can be no assurance, that the
necessary work will be completed on a timely basis. Nuveen Advisory is also
requesting information from municipal issuers so that issuers' Year 2000
readiness, if made available, can be taken into account in making investment
decisions. However, there can be no assurance that the requested information
will be provided to Nuveen Advisory, or that issuers of municipal bonds in the
Fund's portfolio will begin or complete the work necessary to address any Year
2000 issues on a timely basis.
MANAGEMENT OF THE FUND
Trustees and Officers
The Board of Trustees is responsible for the management of the Fund,
including supervision of the duties performed by Nuveen Advisory. There are
seven trustees of the Fund, one of whom is an "interested person" (as defined
in the 1940 Act) and six of whom are not "interested persons." The names and
business addresses of the trustees and officers of the Fund and their
principal occupations and other affiliations during the past five years are
set forth under "Management of the Fund" in the Statement of Additional
Information.
Investment Adviser
Nuveen Advisory, 333 West Wacker Drive, Chicago, Illinois 60606, serves as
the investment adviser to the Fund. In this capacity, Nuveen Advisory is
responsible for the selection and on-going monitoring of the municipal bonds
in the Fund's investment portfolio, managing the Fund's business affairs and
providing certain clerical, bookkeeping and administrative services. Nuveen
Advisory serves as investment adviser to investment portfolios with more than
$35 billion in assets under management. See the Statement of Additional
Information under "Management of the Fund-Investment Adviser."
19
<PAGE>
Overall investment management strategy and operating policies for the Fund
are set by the Investment Management Committee of John Nuveen & Co.
Incorporated ("Nuveen"), subject to the ultimate oversight and supervision of
the Board of Trustees. The Investment Management Committee is comprised of the
several principal executive officers and portfolio managers of Nuveen and
Nuveen Advisory. Day to day operations and execution of specific investment
strategies is the responsibility of Nuveen Advisory. Nuveen Advisory manages
the Fund using a team of analysts and portfolio managers that focus on a
specific group of funds. is the portfolio manager of the
Fund and will provide daily oversight for, and execution of, the Fund's
investment activities.
Nuveen Advisory is a wholly-owned subsidiary of Nuveen, 333 West Wacker
Drive, Chicago, Illinois 60606. Founded in 1898, Nuveen and its affiliates
have over $60 billion of net assets under management or surveillance. Nuveen
is a subsidiary of The John Nuveen Company which, in turn, is a majority-owned
subsidiary of The St. Paul Companies, Inc., a publicly-traded company which is
principally engaged in providing property-liability insurance through
subsidiaries.
Investment Management Agreement
Pursuant to an investment management agreement between Nuveen Advisory and
the Fund, the Fund has agreed to pay for the services and facilities provided
by Nuveen Advisory an annual management fee, payable on a monthly basis,
according to the following schedule:
<TABLE>
<CAPTION>
Daily Total Net Assets* Management Fee
----------------------- --------------
<S> <C>
For the first $125 million................................. .6500%
For the next $125 million.................................. .6375%
For the next $250 million.................................. .6250%
For the next $500 million.................................. .6125%
For the next $1 billion.................................... .6000%
For assets over $2 billion................................. .5750%
</TABLE>
- --------
*Including net assets attributable to MuniPreferred Shares.
In addition to the fee of Nuveen Advisory, the Fund pays all other costs
and expenses of its operations, including compensation of its trustees (other
than those affiliated with Nuveen Advisory), custodian, transfer and dividend
disbursing expenses, legal fees, expenses of independent auditors, expenses of
repurchasing shares, expenses of preparing, printing and distributing
shareholder reports, notices, proxy statements and reports to governmental
agencies, and taxes, if any.
20
<PAGE>
For the first ten years of the Fund's operation, Nuveen Advisory has agreed
to reimburse the Fund for fees and expenses in the amounts, and for the time
periods, set forth below:
<TABLE>
<CAPTION>
Percentage
Reimbursed
(as a percentage
Year Ending of average daily
September 30, net assets)
- ------------- ----------------
<S> <C>
1999*........... 0.30%
2000............ 0.30%
2001............ 0.30%
2002............ 0.30%
2003............ 0.30%
2004............ 0.30%
</TABLE>
<TABLE>
<CAPTION>
Percentage
Reimbursed
(as a percentage
Year Ending of average daily
September 30, net assets)
- ------------- ----------------
<S> <C>
2005............ 0.25%
2006............ 0.20%
2007............ 0.15%
2008............ 0.10%
2009............ 0.05%
</TABLE>
- --------
*From the commencement of operations.
Nuveen Advisory has not agreed to reimburse the Fund for any portion of its
fees and expenses beyond September 30, 2009.
NET ASSET VALUE
The Fund's net asset value per share is determined as of the close of
trading (normally 4:00 p.m. eastern time) on each day the New York Stock
Exchange is open for business. Net asset value is calculated by taking the
fair value of the Fund's total assets, including interest or dividends accrued
but not yet collected, less all liabilities, and dividing by the total number
of shares outstanding. The result, rounded to the nearest cent, is the net
asset value per share.
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 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
21
<PAGE>
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 New York Stock
Exchange or elsewhere, for the participants' accounts. It is possible that
the market price for the Common Shares may increase before the Plan Agent
has completed its purchases. Therefore, the average purchase price per
share paid by the Plan Agent may exceed the market price at the time of
valuation, resulting in the purchase of fewer shares than if the dividend
or distribution had been paid in Common Shares issued by the Fund. The Plan
Agent will use all dividends and distributions received in cash to purchase
Common Shares in the open market within 30 days of the dividend payment
date. Interest will not be paid on any uninvested cash payments.
You may withdraw from the Plan at any time by giving written notice to the
Plan Agent. If you withdraw or the Plan is terminated, you will receive a
certificate for each whole share in your account under the Plan and you will
receive a cash payment for any fraction of a share in your account. If you
wish, the Plan Agent will sell your shares and send you the proceeds, minus
brokerage commissions and a $2.50 service fee.
The Plan Agent maintains all shareholders' accounts in the Plan and gives
written confirmation of all transactions in the accounts, including
information you may need for tax records. Common Shares in your account will
be held by the Plan Agent in non-certificated form. Any proxy you receive will
include all Common Shares you have received under the Plan.
22
<PAGE>
There is no brokerage charge for reinvestment of your dividends or
distributions in Common Shares. However, all participants will pay a pro rata
share of brokerage commissions incurred by the Plan Agent when it makes open
market purchases.
Automatically reinvesting dividends and distributions does not mean that
you do not have to pay income taxes due upon receiving dividends and
distributions.
The Fund reserves the right to amend or terminate the Plan if change seems
desirable to the Board of Trustees. There is no direct service charge to
participants in the Plan; however, the Fund reserves the right to amend the
Plan to include a service charge payable by the participants. Additional
information about the Plan may be obtained from 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 New York Stock
Exchange, subject to notice of issuance. The Fund intends to hold annual
meetings of shareholders so long as the Common Shares are listed on a national
securities exchange and such meetings are required as a condition to such
listing.
The Fund's net asset value per share generally increases when interest
rates decline, and decreases when interest rates rise, and these changes are
likely to be greater because the Fund intends to have a leveraged capital
structure. Net asset value will be reduced immediately following the offering
by the amount of the sales load and organization and offering expenses paid by
the Fund. Nuveen has agreed to pay (i) all organizational expenses and (ii)
offering costs (other than sales load) that exceed $0.02 per Common Share. See
"Use of Proceeds."
Unlike open-end funds, closed-end funds like the Fund do not continuously
offer shares and do not provide daily redemptions. Rather, if a shareholder
determines to buy additional Common Shares or sell shares already held, the
shareholder may conveniently do so by trading on the exchange through a broker
or otherwise. Shares of closed-end investment companies may frequently trade
on an exchange at prices lower than net asset value. Shares of closed-end
investment companies like the Fund that invest predominately in investment
grade municipal bonds have during some periods traded at prices higher than
net asset value and during other periods have traded at prices lower than net
asset value. Because the market value of the Common Shares may be influenced
by such factors as dividend levels
23
<PAGE>
(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.
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.
24
<PAGE>
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 very remote.
The Declaration includes provisions that could limit the ability of other
entities or persons to acquire control of the Fund or to convert the Fund to
open-end status. Specifically, the Declaration requires a vote by holders of
at least two-thirds of the Common Shares and MuniPreferred Shares, voting
together as a single class, except as described below, to authorize (1) a
conversion of the Fund from a closed-end to an open-end investment company,
(2) a merger or consolidation of the Fund, or a series or class of the Fund,
with any corporation, association, trust or other organization or a
reorganization or recapitalization of the Fund, or a series or class of the
Fund, (3) a sale, lease or
25
<PAGE>
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. 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.
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, price, dividend stability,
relative demand for and supply of such shares in the market, general market
and economic conditions and other factors. Because shares of closed-end
investment companies may frequently trade at prices lower than net asset
value, the Fund's Board of Trustees has currently determined that, at least
annually, it will consider action that
26
<PAGE>
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 New York Stock Exchange. In contrast to a closed-
end investment company, shareholders of an open-end investment company may
require the company to redeem their shares at any time (except in certain
circumstances as authorized by or under the 1940 Act) at their net asset
value, less any redemption charge that is in effect at the time of redemption.
See the Statement of Additional Information under "Certain Provisions in the
Declaration of Trust" for a discussion of the voting requirements applicable
to the conversion of the Fund to an open-end company.
Before deciding whether to take any action if the Common Shares trade below
net asset value, the Board would consider all relevant factors, including the
extent and duration of the discount, the liquidity of the Fund's portfolio,
the impact of any action that might be taken on the Fund or its shareholders,
and market considerations. Based on these considerations, even if the Fund's
shares should trade at a discount, the Board of Trustees may determine that,
in the interest of the Fund and its shareholders, no action should be taken.
See the Statement of Additional Information under "Repurchase of Fund Shares;
Conversion to Open-End Fund" for a further discussion of possible action to
reduce or eliminate such discount to net asset value.
TAX MATTERS
Federal Income Tax Matters
The discussion below and in the Statement of Additional Information
provides general tax information related to an investment in the Common
Shares. Because tax laws are complex and often change, you should consult your
tax adviser about the tax consequences of an investment in the Fund.
The Fund primarily invests in municipal bonds from issuers located in
Maryland or in municipal bonds whose income is otherwise exempt from regular
federal and Maryland income taxes. Consequently, the regular monthly dividends
you receive will be exempt from regular federal and Maryland income taxes. A
portion of these dividends, however, will likely be subject to the federal
alternative minimum tax.
Although the Fund does not seek to realize taxable income or capital gains,
the Fund may realize and distribute taxable income or capital gains from time
to time as a result of the Fund's normal investment activities. The Fund 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. Taxable dividends
do not qualify for a dividends received deduction if you are a corporate
shareholder.
Each year, you will receive a year-end statement that describes the tax
status of dividends paid to you during the preceding year, including the
source of investment income by state and the portion of
27
<PAGE>
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 tax-free dividends, at least 50% of
the value of the Fund's total assets must consist of tax-exempt obligations.
The Fund intends to meet this requirement. If the Fund failed to do so, it
would not be able to pay tax-free dividends and your distributions
attributable to interest received by the Fund from any source would be taxable
as ordinary income.
The Fund may be required to withhold 31% of certain of your dividends if
you have not provided the Fund with your correct taxpayer identification
number (normally your Social Security number), or if you are otherwise subject
to back-up withholding. If you receive Social Security benefits, you should be
aware that tax-free income is taken into account in calculating the amount of
these benefits that may be subject to federal income tax. If you borrow money
to buy Fund shares, you may not deduct the interest on that loan. Under I.R.S.
rules, Fund shares may be treated as having been bought with borrowed money
even if the purchase of the Fund shares cannot be traced directly to borrowed
money.
If you are subject to the federal alternative minimum tax, a portion of
your regular monthly dividends may be taxable.
Maryland Tax Matters
Tax Treatment
The Fund's regular monthly dividends will not be subject to Maryland
personal income taxes to the extent they are paid out of income earned on
Maryland municipal bonds or U.S. government securities. You will be subject to
Maryland personal income tax, however, to the extent the Fund distributes any
taxable income, or if you sell or exchange Fund shares and realize a capital
gain on the transaction.
The treatment of corporate shareholders of the Fund is similar to that
described above.
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.
28
<PAGE>
The defendants are vigorously defending the case and filed motions to
dismiss the entire lawsuit asserting that the claims are without merit and to
oppose certification of any classes. By opinion dated March 30, 1999, the court
granted most of the defendants' motion to dismiss and denied plaintiffs' motion
to certify defendant and plaintiff classes. The court dismissed all claims
against the funds, the funds' directors and Nuveen. The court dismissed these
claims without prejudice (which means that the plaintiffs can re-file the
claims if they can correct the defect that led to the claim being dismissed) on
the ground that the claims should have been brought as derivative claims on
behalf of the funds. The only remaining claim is brought under Section 36(b) of
the 1940 Act against Nuveen Advisory, and relates solely to advisory fees
Nuveen Advisory received from the six relevant funds. While the Fund cannot
assure you that the litigation will be decided in Nuveen Advisory's favor,
Nuveen Advisory believes a decision, if any, against it would have no material
effect on the Fund, its Common Shares, or the ability of Nuveen Advisory to
perform its duties under the investment management agreement.
UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement
dated the date hereof, each Underwriter named below has severally agreed to
purchase, and the Fund has agreed to sell to such Underwriter, the number of
Common Shares set forth opposite the name of such Underwriter.
<TABLE>
<CAPTION>
Number
of
Name Shares
- ---- -------
<S> <C>
John Nuveen & Co. Incorporated..........................................
-------
Total.................................................................
-------
</TABLE>
The underwriting agreement provides that the obligations of the several
Underwriters to purchase the Common Shares included in this offering are
subject to approval of certain legal matters by counsel and to certain other
conditions. The Underwriters are obligated to purchase all the Common Shares
(other than those covered by the over-allotment option described below) if they
purchase any of the Common Shares. The representatives have advised the Fund
that the Underwriters do not intend to confirm any sales to any accounts over
which they exercise discretionary authority.
The Underwriters, for whom John Nuveen & Co. Incorporated and
are acting as representatives, propose to offer some of the Common
Shares directly to the public at the public offering price set forth on the
cover page of this Prospectus and some of the Common Shares to certain dealers
at the public offering price less a concession not in excess of $0.45 per
Common Share. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $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
September , 1999. In connection with this offering, Nuveen may perform
clearing services without charge for brokers and dealers for whom it regularly
provides clearing services that are participating in the offering as members of
the selling group.
The Fund has granted to the Underwriters an option, exercisable for days
from the date of this Prospectus, to purchase up to additional Common
Shares at the public offering price less the underwriting discount. The
Underwriters may exercise such option solely for the purpose of covering
29
<PAGE>
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 John Nuveen & Co. Incorporated, on behalf of the Underwriters, dispose of or
hedge any Common Shares or any securities convertible into or exchangeable for
Common Shares. John Nuveen & Co. Incorporated in its sole discretion may
release any of the securities subject to these agreements at any time without
notice.
Prior to the offering, there has been no public market for the Common
Shares. Consequently, the initial public offering price for the Common Shares
was determined by negotiation among the Fund, Nuveen Advisory and the
representatives. There can be no assurance, however, that the price at which
the Common Shares will sell in the public market after this offering will not
be lower than the price at which they are sold by the Underwriters or that an
active trading market in the Common Shares will develop and continue after this
offering. The Common Shares have been approved for listing on the New York
Stock Exchange, subject to official notice of issuance.
The Fund and Nuveen Advisory have each agreed to indemnify the several
Underwriters or contribute to losses arising out of certain liabilities,
including liabilities under the Securities Act.
Nuveen has agreed to pay (i) all organizational expenses and (ii) offering
costs (other than sales load) that exceed $0.02 per share.
In connection with the requirements for listing the Fund's Common Shares on
the New York Stock Exchange, the Underwriters have undertaken to sell lots of
100 or more Common Shares to a minimum of 2,000 beneficial owners in the United
States. The minimum investment requirement is 100 Common Shares.
Certain Underwriters may make a market in the Common Shares after trading in
the Common Shares has commenced on the New York Stock Exchange. No Underwriter
is, however, obligated to conduct market-making activities and any such
activities may be discontinued at any time without notice, at the sole
discretion of the Underwriter. No assurance can be given as to the liquidity
of, or the trading market for, the Common Shares as a result of any market-
making activities undertaken by any Underwriter. This Prospectus is to be used
by any Underwriter in connection with the offering and, during the period in
which a prospectus must be delivered, with offers and sales of the Common
Shares in market-making transactions in the over-the-counter market at
negotiated prices related to prevailing market prices at the time of the sale.
The Underwriters have advised the Fund that, pursuant to Regulation M under
the Securities Exchange Act of 1934, as amended, certain persons participating
in the offering may engage in transactions, including stabilizing bids,
covering transactions or the imposition of penalty bids, which may have the
effect of stabilizing or maintaining the market price of the Common Shares at a
level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for or the purchase of the Common Shares on behalf
of an Underwriter for the purpose of fixing or maintaining the price of the
Common Shares. A "covering transaction" is a bid for or purchase of the Common
Shares on behalf of an Underwriter to reduce a short position incurred by the
Underwriters in
30
<PAGE>
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 Shares at the offering price to the public set forth
on the cover page of the Prospectus or to enforce contracts for the resale of
the Common Shares by the Underwriters.
Representatives that sell at least a specified number of Common Shares will
share in the syndicate management fee based on the respective number of shares
sold by them.
The Fund anticipates that from time to time the representatives of the
Underwriters and certain other Underwriters may act as brokers or dealers in
connection with the execution of the Fund's portfolio transactions after they
have ceased to be Underwriters and, subject to certain restrictions, may act as
brokers while they are Underwriters.
John Nuveen & Co. Incorporated, one of the representatives of the
Underwriters, is the parent company of Nuveen Advisory.
CUSTODIAN AND TRANSFER AGENT
The custodian of the assets of the Fund is The Chase Manhattan Bank, 4 New
York Plaza, New York, NY 10004-2413. The Custodian performs custodial, fund
accounting and portfolio accounting services. The Fund's transfer, shareholder
services and dividend paying agent is also The Chase Manhattan Bank.
31
<PAGE>
LEGAL OPINIONS
Certain legal matters in connection with the Common Shares will be passed
upon for the Fund by Bell, Boyd & Lloyd, Chicago, Illinois, and for the
Underwriters by . Bell, Boyd & Lloyd may rely
as to certain matters of Massachusetts law on the opinion of Bingham Dana LLP,
Boston, Massachusetts, and as to certain matters of Maryland law on the opinion
of .
32
<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................................... 9
Other Investment Policies and Techniques............................. 18
Management of the Fund............................................... 21
Investment Adviser................................................... 28
Portfolio Transactions............................................... 29
Distributions........................................................ 30
Description of Shares................................................ 31
Certain Provisions in the Declaration of Trust....................... 34
Repurchase of Fund Shares; Conversion to Open-End Fund............... 35
Tax Matters.......................................................... 38
Performance Related and Comparative Information...................... 41
Experts.............................................................. 41
Additional Information............................................... 42
Report of Independent Auditors....................................... 42
Financial Statements................................................. 42
Appendices........................................................... A-1
</TABLE>
33
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
You should rely only on the information contained in this Prospectus. The Fund
has not authorized anyone to provide you with different information. The Fund
is not making an offer of these securities in any state where the offer is not
permitted. You should not assume that the information provided by this Prospec-
tus is accurate as of any date other than the date on the front of this Pro-
spectus.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary......................................................... 3
Summary of Fund Expenses................................................... 8
The Fund................................................................... 9
Use of Proceeds............................................................ 9
The Fund's Investments..................................................... 9
MuniPreferred Shares and Leverage.......................................... 12
Risks...................................................................... 14
How the Fund Manages Risk.................................................. 17
Management of the Fund..................................................... 19
Net Asset Value............................................................ 21
Distributions.............................................................. 21
Dividend Reinvestment Plan................................................. 22
Description of Shares...................................................... 23
Certain Provisions in the Declaration of Trust............................. 25
Repurchase of Fund Shares; Conversion to Open-End Fund..................... 26
Tax Matters................................................................ 27
Other Matters.............................................................. 28
Underwriting............................................................... 29
Custodian and Transfer Agent............................................... 31
Legal Opinions............................................................. 32
Table of Contents for the Statement of Additional Information.............. 33
</TABLE>
------------
Until , 1999 (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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
100,000 Shares
Nuveen Maryland
Dividend Advantage
Municipal Fund
Common Shares
--------
PROSPECTUS
September , 1999
--------
John Nuveen & Co.
Incorporated
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FRH-AFL-6-99
<PAGE>
The information in this Statement of Additional Information is not complete
and may be changed. No person may sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
Statement of Additional Information is not an offer to sell these securities and
is not soliciting an offer to buy these securities in any state where the offer
or sale is not permitted.
SUBJECT TO COMPLETION--DATED AUGUST __, 1999
Nuveen Insured Dividend Advantage Municipal Fund
Nuveen Arizona Dividend Advantage Municipal Fund
Nuveen Insured California Dividend Advantage Municipal Fund
Nuveen Connecticut Dividend Advantage Municipal Fund
Nuveen Florida Dividend Advantage Municipal Fund
Nuveen Maryland Dividend Advantage Municipal Fund
Nuveen Massachusetts Dividend Advantage Municipal Fund
Nuveen Michigan Dividend Advantage Municipal Fund
Nuveen New Jersey Dividend Advantage Municipal Fund
Nuveen Insured New York Dividend Advantage Municipal Fund
Nuveen North Carolina Dividend Advantage Municipal Fund
Nuveen Ohio Dividend Advantage Municipal Fund
Nuveen Pennsylvania Dividend Advantage Municipal Fund
Nuveen Virginia Dividend Advantage Municipal Fund
STATEMENT OF ADDITIONAL INFORMATION
Each of Nuveen Insured Dividend Advantage Municipal Fund (a "Fund" or the
"Dividend Fund"), Nuveen Arizona Dividend Advantage Municipal Fund (a "Fund" or
the "Arizona Fund"), Nuveen Insured California Dividend Advantage Municipal Fund
(a "Fund" or the "Insured California Fund"), Nuveen Connecticut Dividend
Advantage Municipal Fund (a "Fund" or the "Connecticut Fund"), Nuveen Florida
Dividend Advantage Municipal Fund (a "Fund" or the "Florida 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 Michigan Dividend Advantage Municipal Fund (a
"Fund" or the "Michigan Fund"), Nuveen New Jersey Dividend Advantage Municipal
Fund (a "Fund" or the "New Jersey Fund"), Nuveen Insured New York Dividend
Advantage Municipal Fund (a "Fund" or "Insured New York Fund"), Nuveen North
Carolina Dividend Advantage Municipal Fund (a "Fund" or the "North Carolina
Fund"), Nuveen Ohio Dividend Advantage Municipal (a "Fund" or the "Ohio Fund"),
Nuveen Pennsylvania Dividend Advantage Municipal Fund (a "Fund" or the
"Pennsylvania Fund") and Nuveen Virginia Dividend Advantage Municipal Fund (a
"Fund" or the "Virginia Fund") (collectively, the "Funds") is a newly organized,
closed-end, diversified management investment company.
1
<PAGE>
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 September
__, 1999 (the "Prospectus"). This Statement of Additional Information does not
include all information that a prospective investor should consider before
purchasing Common Shares, and investors should obtain and read 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.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
--------
<S> <C>
Use of Proceeds 3
Investment Objectives 6
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
Additional Information 41
Report of Independent Auditors 42
Financial Statements 42
Ratings of Investments (Appendix A) A-1
Taxable Equivalent Yield Table (Appendix B) B-1
Description of Insurers (Appendix C) C-1
Hedging Strategies and Risks (Appendix D) D-1
State-Specific Disclosure (Appendix E) E-1
Additional Performance Related and Comparative Information F-1
</TABLE>
This Statement of Additional Information is dated September __, 1999
2
<PAGE>
USE OF PROCEEDS
Dividend 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.
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.
Insured California 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.
Florida 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.
Michigan 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.
New Jersey 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.
Insured New York 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.
Ohio 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>
Pennsylvania 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.
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 $0.02 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:
Dividend Fund - to provide current income exempt from regular federal
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.
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.
Insured California Fund - to provide current income exempt from regular
federal and California income tax, and to enhance portfolio value relative to
the municipal bond market by investing in tax-exempt municipal bonds that the
Fund's investment adviser believes are underrated or undervalued or that
represent municipal market sectors that are undervalued.
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.
Florida Fund - to provide current income exempt from regular federal and
Florida 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.
Michigan Fund - to provide current income exempt from regular federal and
Michigan 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.
New Jersey Fund - to provide current income exempt from regular federal and
New Jersey income tax, and to enhance portfolio value relative to the municipal
bond market by investing in tax-exempt municipal bonds that the Fund's
investment adviser believes are underrated or undervalued or that represent
municipal market sectors that are undervalued.
Insured New York Fund - to provide current income exempt from regular
federal, New York State and New York City 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.
Ohio Fund - to provide current income exempt from regular federal and Ohio
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.
Pennsylvania Fund - to provide current income exempt from regular federal
and Pennsylvania 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>
Underrated municipal bonds are those whose ratings do not, in the opinion
of Nuveen Advisory Corp. ("Nuveen Advisory"), reflect their true
creditworthiness. Municipal bonds may be underrated because of the time that has
elapsed since their rating was assigned or reviewed, or because of positive
factors that may not have been fully taken into account by rating agencies, or
for other similar reasons. Undervalued municipal bonds are bonds that, in Nuveen
Advisory's opinion, are worth more than the value assigned to them in the
marketplace. Nuveen Advisory may at times believe that bonds associated with a
particular municipal market sector (for example, electric utilities), or issued
by a particular municipal issuer, are undervalued. Nuveen Advisory may purchase
such a bond for a Fund's portfolio because it represents a market sector or
issuer that Nuveen Advisory considers undervalued, even if the value of the
particular bond appears to be consistent with the value of similar bonds.
Municipal bonds of particular types or purposes (e.g., hospital bonds,
industrial revenue bonds or bonds issued by a particular municipal issuer) may
be undervalued because there is a temporary excess of supply in that market
sector, or because of a general decline in the market price of municipal bonds
of the market sector for reasons that do not apply to the particular municipal
bonds that are considered undervalued.
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 reflect their true
creditworthiness. Each Fund attempts to increase its portfolio value relative
to the municipal bond market by prudent selection of municipal bonds, regardless
of which direction the market may move. Any capital appreciation realized by 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.
Each of Dividend Fund, Insured California Fund and Insured New York Fund
(collectively, the "Insured Funds") seeks to achieve its investment objectives
by investing all of its assets in a diversified portfolio of tax-exempt
municipal bonds that are either covered by insurance guaranteeing the timely
payment of principal and interest thereof, or are backed by an escrow or trust
account containing sufficient U.S. Government or U.S. Government agency
securities to ensure timely payment of principal and interest. Uninsured
municipal bonds backed by an escrow or trust account will not constitute more
than 20% of the Fund's assets.
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 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) Invest more than 5% of its total assets in securities of any one
issuer, except that this limitation shall not apply to bonds issued by the
United States Government, its agencies and instrumentalities or to the
investment of 25% of its total assets.
For purposes of the foregoing and "Description of Shares--MuniPreferred
Shares--Voting Rights" below, "majority of the outstanding," when used with
respect to particular shares of 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 Dividend Fund will invest its net assets in a diversified portfolio of
municipal bonds that are exempt from regular federal income tax. The Arizona
Fund will invest its net assets in a diversified portfolio of municipal bonds
that are exempt from regular federal and Arizona income tax. The Insured
California Fund will invest its net assets in a diversified portfolio of
municipal bonds that are exempt from regular federal and California income tax.
The Connecticut Fund will invest its net assets in a diversified portfolio of
municipal bonds that are exempt from regular federal and Connecticut income tax.
The Florida Fund will invest its net assets in a diversified portfolio of
municipal bonds that are exempt from regular federal and Florida income
tax. The Maryland Fund will invest its net assets in a diversified portfolio of
municipal bonds that are exempt from regular federal and Maryland income tax.
The Massachusetts Fund will invest its net assets in a diversified portfolio of
municipal bonds that are exempt from regular federal and Massachusetts income
tax. The Michigan Fund will invest its net assets in a diversified portfolio of
municipal bonds that are exempt from regular federal and Michigan income tax.
The New Jersey Fund will invest its net assets in a diversified portfolio of
municipal bonds that are exempt from regular federal and New Jersey income tax.
The Insured New York Fund will invest its net assets in a diversified portfolio
of municipal bonds that are exempt from regular federal, New York State and New
York City income tax. The North Carolina Fund will invest its net assets in a
diversified portfolio of municipal bonds that are exempt from regular federal
and North Carolina income tax. The Ohio Fund will invest its net assets in a
diversified portfolio of municipal bonds that are exempt from regular federal
and Ohio income tax. The Pennsylvania Fund will invest its net assets in a
diversified portfolio of municipal bonds that are exempt from regular federal
and Pennsylvania income tax. The Virginia Fund will invest its net assets in a
diversified 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.
A Fund (other than the Insured Funds) will invest at least 80% of its
net assets in investment grade quality municipal bonds rated as such at the time
of investment. Investment
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grade quality means that such bonds are rated within the four highest grades
(Baa or BBB or better) by Moody's, S&P or Fitch or are unrated but judged to be
of comparable quality by Nuveen Advisory. A Fund (other than the Insured Funds)
may invest up to 20% of its net assets in municipal bonds that are, at the time
of investment, rated Ba/BB or B by Moody's, S&P or Fitch or that are unrated but
judged to be of comparable quality by Nuveen Advisory. Bonds of below investment
grade quality (Ba/BB or below) are commonly referred to as junk bonds. Issuers
of bonds rated Ba/BB or B are regarded as having current capacity to make
principal and interest payments but are subject to business, financial or
economic conditions which could adversely affect such payment capacity. The
foregoing policies are fundamental policies of each Fund (other than the Insured
State Funds). 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.
Except to the extent that each of the Insured Funds buys temporary
investments as described herein, each Insured Fund will, as a fundamental
policy, invest substantially all of its assets in tax-exempt municipal bonds
that are either covered by insurance guaranteeing the timely payment of
principal and interest on the bonds, or are backed by an escrow or trust account
containing sufficient U.S. Government or U.S. Government agency securities to
ensure timely payment of principal and interest. Uninsured municipal bonds
backed by an escrow or trust account will not constitute more than 20% of an
Insured Fund's net assets.
Each insured municipal bond that an Insured Fund holds will either be (1)
covered by an insurance policy applicable to specific security, whether obtained
by the issuer of the security or a third part at the time of original issuance,
or by an Insured Fund or a third part after the original insurance, or (2)
covered by portfolio insurance through a master municipal insurance policy the
Fund has purchased. Each Insured Fund will only buy portfolio
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insurance from insurers whose claims-paying ability Moody's rates "Aaa" or S&P's
rates "AAA".
Information about the various municipal bond insurers with whom each of the
Insured State Funds intends to maintain specific insurance policies for
particular municipal bonds or policies of portfolio insurance is set forth in
Appendix C hereto.
Each of the Insured Funds also may invest in municipal bonds that are
backed by an escrow or trust account containing securities issued or guaranteed
by the U.S. Government or U.S. Government agencies and backed by the full faith
and credit of the United States, in an amount that is sufficient to ensure the
payment of interest and principal. These bonds generally will not be insured. An
Insured Fund may buy municipal bonds that have been (1) advance refunded, where
the proceeds of the refunding have been used to buy U.S. Government or U.S.
Government agency securities that are placed in escrow and whose interest and
principal payments are sufficient to cover the remaining scheduled debt service
on that municipal bond; or (2) issued under state or local housing finance
programs that use the issuance proceeds to fund mortgages that are then
exchanged for U.S. Government or U.S. Government agency securities and deposited
with a trustee as security for those municipal bonds. Both types of municipal
bonds are normally regarded as having the credit characteristics of the
underlying U.S. Government or U.S. Government agency securities.
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 may be shortened from time to time 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 cash on
hand fully invested, including the period during which the net proceeds of the
offering are being invested, a Fund may invest any percentage of its assets in
short-term investments including high quality, short-term securities which may
be either tax-exempt or taxable and securities of other open or closed-end
investment companies that invest primarily in municipal bonds of the type in
which a Fund may invest directly. Each Fund intends to invest in taxable short-
term investments only in the event that suitable tax-exempt temporary
investments are not available at reasonable prices and yields. Tax-exempt
temporary investments include various obligations issued by state and local
governmental issuers, such as tax-exempt notes (bond anticipation notes, tax
anticipation notes and revenue anticipation notes or other such municipal bonds
maturing in three years or less from the date of issuance) and municipal
commercial paper. Each Fund will invest only in taxable temporary investments
which are U.S. Government securities or securities rated within the highest
grade by Moody's, S&P or Fitch, and which mature within one year from the date
of purchase or carry a variable or floating rate of interest. See Appendix A for
a general description of Moody's, S&P's and Fitch's ratings of securities in
such categories. Taxable temporary investments of 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 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. Each Fund expects that a
substantial portion of the current income it produces will be included in
alternative minimum taxable income. Special considerations apply to corporate
investors. See "Tax Matters."
Also included within the general category of municipal bonds described in
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.
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
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 may also invest in securities of other open or closed-end
investment companies that invest primarily in municipal bonds of the type in
which the Fund may invest directly. The Fund will generally select obligations
which may not be redeemed at the option of the issuer for approximately seven to
nine years.
Additional information on Municipal Bond Insurance (applicable to Insured
Funds only)
Original Issue Insurance. If interest or principal on a municipal bond is
due, but the issuer fails to pay it, the insurer will make payments in the
amount due to its fiscal agent no later than one business day after the insurer
has been notified of the issuer's nonpayment. The fiscal agent will pay the
amount due to an Insured State Fund after the fiscal agent receives evidence of
an Insured Fund's right to receive payment of principal and/or interest, and
evidence that all of the rights of payment due shall thereupon vest in the
insurer. When the insurer pays an Insured State Fund the payment due from the
issuer, the insurer will succeed to that Fund's rights to that payment.
Portfolio Insurance. Each portfolio insurance policy will be noncancellable
and will remain in effect so long as the applicable Insured Fund is in
existence, the Insured Fund continues to own the municipal bonds covered by the
policy, and the Insured Fund pays the premiums for the policy. Each insurer
generally will reserve the right at any time upon 90 days' written notice to the
Insured Fund to refuse to insure any additional bonds the Insured Fund buys
after the effective date of the notice. An Insured Fund's Board of Trustees will
generally reserve the right to terminate each policy upon seven day's written
notice to an insurer if it determines that the cost of the policy is not
reasonable in relation to the value of the insurance to that Insured Fund.
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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) Securities issued by 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 D to this
Statement of Additional Information.
Factors Pertaining to Specific States
Factors pertaining to Arizona are set forth in Appendix E-1; factors
pertaining to California are set forth in Appendix E-2; factors pertaining to
Connecticut are set forth in Appendix E-3; factors pertaining to Florida are set
forth in Appendix E-4; factors pertaining to Maryland are set forth in Appendix
E-5; factors pertaining to Massachusetts are set forth in Appendix E-6; factors
pertaining to Michigan are set forth in Appendix E-7; factors pertaining to New
Jersey are set forth in Appendix E-8; factors pertaining to New York are set
forth in Appendix E-9; factors pertaining to North Carolina are set forth in
Appendix E-10; factors pertaining to Ohio are set forth in Appendix E-11;
factors pertaining to Pennsylvania are set forth in Appendix E-12; and factors
pertaining to Virginia are set forth in Appendix E-13.
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
19
<PAGE>
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
20
<PAGE>
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 Age Positions and Principal Occupations During
---------------- --- ------------- ----------------------------
Offices with a Past Five Years
-------------- ---------------
Fund
----
<S> <C> <C> <C>
Timothy R. Schwertfeger* 50 Chairman and Chairman since July 1, 1996 of The
333 West Wacker Drive Trustee John Nuveen Company, John
Chicago, IL 60606 Nuveen & Co. Incorporated,
Nuveen Advisory Corp. and
Nuveen Institutional Advisory
Corp.; prior thereto, Executive Vice
President and Director of The John
Nuveen Company, John Nuveen &
Co. Incorporated, Nuveen Advisory
Corp. and Nuveen Institutional
Advisory Corp., Chairman and
Director (since January 1997) of
Nuveen Asset Management, Inc.;
Director (since 1996) of
Institutional Capital Corporation;
Chairman and Director of
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Name and Address Age Positions and Principal Occupations During
---------------- --- ------------- ----------------------------
Offices with a Past Five Years
-------------- ---------------
Fund
----
<S> <C> <C> <C>
Rittenhouse Financial Services Inc.
(since 1999).
Robert P. Bremner 58 Trustee Private Investor and Management
3725 Huntington Street, Consultant.
N.W.
Washington, D.C. 20015
Lawrence H. Brown 64 Trustee Retired (August 1989) as Senior Vice
201 Michigan Avenue President of The Northern Trust
Highwood, IL 60040 Company
Anne E. Impellizzeri 66 Trustee Executive Director of Manitoga
5 Peter Cooper Rd. (Center for Russel Wright's Design
New York, NY 10010 with Nature); formerly President and
Chief Executive Officer of
Blanton-Peale Institute.
Peter R. Sawers 66 Trustee Adjunct Professor of Business and
22 The Landmark Economics, University of Dubuque,
Northfield, IL 60093 Iowa; Adjunct Professor, Lake Forest
Graduate School of Management, Lake
Forest, Illinois; Chartered
Financial Analyst; Certified
Management Consultant.
William J. Schneider 54 Trustee Senior Partner, Miller-Valentine
4000 Miller-Valentine Ct. Partners, Vice President,
P. O. Box 744 Miller-Valentine Group.
Dayton, OH 45401
Judith M. Stockdale 51 Trustee Executive Director, Gaylord and
35 E. Wacker Drive Dorothy Donnelley Foundation (since
Suite 2600 1994); prior thereto, Executive
Chicago, IL 60601 Director, Great Lakes Protection
Fund (from 1990 to 1994).
Alan G. Berkshire 38 Senior Vice President Senior Vice President (since May 1999),
333 W. Wacker Drive and Assistant Secretary General Counsel (since September 1997)
Chicago, IL 60606 and Secretary (since May 1998) of the
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Name and Address Age Positions and Principal Occupations During
---------------- --- ------------- ----------------------------
Offices with a Past Five Years
-------------- ---------------
Fund
----
<S> <C> <C> <C>
John Nuveen Company, John Nuveen & Co.
Incorporated, Nuveen Advisory Corp.
and Nuveen Institutional Advisory
Corp.; formerly, Vice President;
prior thereto, Partner in the
law firm of Kirkland & Ellis.
Peter H. D'Arrigo 31 Vice President and Vice President of John Nuveen & Co.
333 W. Wacker Drive Treasurer Incorporated (January 1999), prior
Chicago, IL 60606 thereto, Assistant Vice President
(January 1997); formerly, Associate
of John Nuveen & Co. Incorporated;
Chartered Financial Analyst.
Michael S. Davern 41 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 53 Vice President Vice President of John Nuveen & Co.
333 W. Wacker Drive Incorporated; Vice President (since
Chicago, IL 60606 January 1998) of Nuveen Advisory
Corp. and Nuveen Institutional
Advisory Corp.
William M. Fitzgerald 35 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 44 Vice President and Vice President of John Nuveen & Co.
333 W. Wacker Drive Controller Incorporated; Certified Public
Chicago, IL 60606 Accountant.
J. Thomas Futrell 44 Vice President Vice President of Nuveen Advisory
333 W. Wacker Drive Corp.; Chartered Financial Analyst.
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Name and Address Age Positions and Principal Occupations During
---------------- --- ------------- ----------------------------
Offices with a Past Five Years
-------------- ---------------
Fund
----
<S> <C> <C> <C>
Chicago, IL 60606
Richard A. Huber 36 Vice President Vice President of Nuveen
333 W. Wacker Drive Institutional Advisory Corp. (since
Chicago, IL 60606 March 1998) and Nuveen Advisory
Corp. (since January 1997); prior
thereto, Vice President and
Portfolio Manager of Flagship
Financial.
Steven J. Krupa 41 Vice President Vice President of Nuveen Advisory
333 W. Wacker Drive Corp.
Chicago, IL 60606
Larry W. Martin 47 Vice President and Vice President, Assistant Secretary
333 W. Wacker Drive Assistant Secretary and Assistant General Counsel of
Chicago, IL 60606 John Nuveen & Co. Incorporated; Vice
President and Assistant Secretary of
Nuveen Advisory Corp. and Nuveen
Institutional Advisory Corp.; Vice
President and Assistant Secretary
(since January 1997) of Nuveen Asset
Management, Inc.; Assistant
Secretary of The John Nuveen Company.
Edward F. Neild, IV 33 Vice President Vice President (since September
333 W. Wacker Drive 1996), previously Assistant Vice
Chicago, IL 60606 President (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 41 Vice President Vice President (since September
333 W. Wacker Drive 1997), previously Assistant Vice
Chicago, IL 60606 President (since September 1996)
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Name and Address Age Positions and Principal Occupations During
---------------- --- ------------- ----------------------------
Offices with a Past Five Years
-------------- ---------------
Fund
----
<S> <C> <C> <C>
of Nuveen Advisory Corp.,
Portfolio Manager prior thereto.
Stuart W. Rogers 43 Vice President Vice President of John Nuveen & Co.
333 W. Wacker Drive Incorporated.
Chicago, IL 60606
Thomas C. Spaulding, Jr. 47 Vice President Vice President of Nuveen Advisory
333 W. Wacker Drive Corp. and Nuveen Institutional
Chicago, IL 60606 Advisory Corp.; Chartered Financial
Analyst.
William S. Swanson 33 Vice President Vice President of John Nuveen & Co.
333 W. Wacker Drive Incorporated (since October 1997),
Chicago, IL 60606 prior thereto, Assistant Vice
President (since September 1996);
formerly, Associate of John Nuveen &
Co. Incorporated; Chartered
Financial Analyst.
Gifford R. Zimmerman 42 Vice President and Vice President, Assistant Secretary
333 W. Wacker Drive Secretary and Associate General Counsel of
Chicago, IL 60606 John Nuveen & Co. Incorporated; Vice
President and Assistant Secretary of
Nuveen Advisory Corp. and Nuveen
Institutional Advisory Corp.;
Assistant Secretary, The John Nuveen
Company (since May 1994); Chartered
Financial Analyst.
</TABLE>
Peter R. Sawers and Timothy R. Schwertfeger serve as members of the
Executive Committee of the Board of Trustees 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.
Mr. Schwertfeger is also a director or trustee, as the case may be, of 103
Nuveen open-end and closed-end funds advised by Nuveen Advisory and Nuveen
Institutional Advisory Corp.
25
<PAGE>
The other trustees of each Fund are directors or trustees, as the case may
be, of 37 Nuveen open-end funds and 55 Nuveen closed-end funds advised by Nuveen
Advisory.
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 through the end of that Fund's first full fiscal year. No Fund
has a retirement or pension plans. The officers and trustees affiliated with
Nuveen serve without any compensation from a Fund.
<TABLE>
<CAPTION>
Insured
Insured Arizona California Connecticut
Name of Trustee Fund* Fund* Fund* Fund*
------------------------ -------------------- -------------------- -------------------- --------------------
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Robert P. Bremmer $132 $132 $132 $132
- -------------------------------------------------------------------------------------------------------------------------
Lawrence H. Brown $143 $143 $143 $143
- -------------------------------------------------------------------------------------------------------------------------
Anne E. Impellizzeri $132 $132 $132 $132
- -------------------------------------------------------------------------------------------------------------------------
Peter R. Sawers $132 $132 $132 $132
- -------------------------------------------------------------------------------------------------------------------------
William J. Schneider $132 $132 $132 $132
- -------------------------------------------------------------------------------------------------------------------------
Judith M. Stockdale $132 $132 $132 $132
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Florida Maryland Massachusetts Michigan
Name of Trustee Fund* Fund* Fund* Fund*
--------------------- -------------------- -------------------- -------------------- --------------------
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Robert P. Bremmer $132 $132 $132 $132
- -------------------------------------------------------------------------------------------------------------------------
Lawrence H. Brown $143 $143 $143 $143
- -------------------------------------------------------------------------------------------------------------------------
Anne E. Impellizzeri $132 $132 $132 $132
- -------------------------------------------------------------------------------------------------------------------------
Peter R. Sawers $132 $132 $132 $132
- -------------------------------------------------------------------------------------------------------------------------
William J. Schneider $132 $132 $132 $132
- -------------------------------------------------------------------------------------------------------------------------
Judith M. Stockdale $132 $132 $132 $132
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Insured
New Jersey New York North Carolina Ohio
Name of Trustee Fund* Fund* Fund* Fund*
-------------------- -------------------- -------------------- -------------------- --------------------
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Robert P. Bremmer $132 $132 $132 $132
- -------------------------------------------------------------------------------------------------------------------------
Lawrence H. Brown $143 $143 $143 $143
- -------------------------------------------------------------------------------------------------------------------------
Anne E. Impellizzeri $132 $132 $132 $132
- -------------------------------------------------------------------------------------------------------------------------
Peter R. Sawers $132 $132 $132 $132
- -------------------------------------------------------------------------------------------------------------------------
William J. Schneider $132 $132 $132 $132
- -------------------------------------------------------------------------------------------------------------------------
Judith M. Stockdale $132 $132 $132 $132
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Estimate Total
Pennsylvania Virginia Compensation From A Fund
Name of Trustee Fund* Fund* and Fund Complex**
- ------------------------ -------------------- -------------------- ------------------------
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
Robert P. Bremmer $132 $132 $68,000(1)
- ------------------------------------------------------------------------------------------------------
Lawrence H. Brown $143 $143 $74,000
- ------------------------------------------------------------------------------------------------------
Anne E. Impellizzeri $132 $132 $68,000(2)
- ------------------------------------------------------------------------------------------------------
Peter R. Sawers $132 $132 $68,000(2)
- ------------------------------------------------------------------------------------------------------
William J. Schneider $132 $132 $68,000(2)
- ------------------------------------------------------------------------------------------------------
Judith M. Stockdale $132 $132 $68,000(3)
- ------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------
* Based on the estimated compensation to be earned by the independent
trustees for the period from inception to the fiscal year ending for services
to the Fund.
**Based on the estimated compensation paid to the trustees for the one year
period ending 12/31/99 for services to the open-end and closed-end funds advised
by Nuveen Advisory.
(1) Includes $7,871 in estimated deferred compensation.
(2) Includes $52,470 in estimated deferred compensation.
(3) Includes $13,118 in estimated deferred compensation.
No Fund has any employees. Its officers are compensated by Nuveen Advisory
or Nuveen.
INVESTMENT ADVISER
Nuveen Advisory acts as investment adviser to each Fund, with
responsibility for the overall management of each Fund. Its address is 333 West
Wacker Drive, Chicago, Illinois 60606. Nuveen Advisory is also responsible for
managing a Fund's business affairs and providing day-to-day administrative
services to each Fund. For additional information regarding the management
services performed by Nuveen Advisory, see "Management of the Fund" in a Fund's
Prospectus.
Nuveen Advisory is a wholly-owned subsidiary of Nuveen, which is also a co-
managing underwriter of each Fund's shares. Nuveen is sponsor of the Nuveen
Defined Portfolios, registered unit investment trusts, is the principal
underwriter for the Nuveen Mutual Funds, and has served as co-managing
underwriter for the shares of the Nuveen Exchange-Traded Funds. Over 1,300,000
individuals have invested to date in Nuveen's funds and trusts. Founded in 1898,
Nuveen brings over a century of expertise to the municipal bond market.
According to data from Strategic Insight, Nuveen is the leading sponsor of
exchange-traded municipal bond funds as measured by number of funds (__) and
fund assets under management ($__ billion). Overall, Nuveen and its affiliates
manage or oversee more than $60 billion in assets in a variety of products.
Nuveen is a subsidiary of The John Nuveen Company which, in turn, is
approximately 78% owned by The St. Paul Companies, Inc. ("St. Paul"). St. Paul
is a publicly-traded company
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>
For the first $125 million .6500%
For the next $125 million .6375%
For the next $250 million .6250%
For the next $500 million .6125%
For the next $1 billion .6000%
For assets over $2 billion .5750%
</TABLE>
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
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
Sept. 30, Reimbursed Sept. 30, Reimbursed
------------- ------------ ------------- -------------
<S> <C> <C> <C>
1999* .30% 2005 0.25%
2000 .30% 2006 0.20%
2001 .30% 2007 0.15%
2002 .30% 2008 0.10%
2003 .30% 2009 0.05%
2004 .30%
</TABLE>
- -----------------------
*From the commencement of operations.
Reducing Fund expenses in this manner will tend to increase the amount of
income available for the Common Shareholders. Nuveen Advisory has not agreed to
reimburse a Fund for any portion of its fees and expenses beyond September 30,
2009.
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
gains 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 New York 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.
Distribution Preference. The MuniPreferred Shares have complete priority
over the Common Shares as to distribution of assets.
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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. 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 New York 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 New York
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 New York 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
"Concentration Risk" and "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, 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. In order to qualify 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 Common
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 and futures) 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 the total
assets is invested in the securities of any one issuer (other than United States
Government securities and securities of other regulated investment companies) or
two or more issuers controlled by a Fund and engaged in the same, similar or
related trades or business.
As a regulated investment company, a Fund will not be subject to federal
income tax in any taxable year for which it distributes at least 90% of the sum
of (i) its "investment company taxable income" (which includes dividends,
taxable interest, taxable original issue discount and market discount income,
income from securities lending, net short-term capital gain in excess of long-
term capital loss, and any other taxable income other than "net capital gain"
(as defined below) and is reduced by deductible expenses) and (ii) its net tax-
exempt interest (the excess of its gross tax-exempt interest income over certain
disallowed deductions). A Fund may retain for investment its net capital gain
(which consists of the excess of its net long-term capital gain over its short-
term capital loss). However, if 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 capital gain, it
may designate the retained amount as undistributed capital gains in a notice to
its Common Shareholders who, if subject to federal income tax on long-term
capital gains, (i) will be required to include in income for federal income tax
purposes, as long-term capital gain, their share of such undistributed amount,
and (ii) will be entitled to credit their proportionate shares of the tax paid
by a Fund against their federal income tax liabilities, if any, and to claim
refunds to the extent the credit exceeds such liabilities. For federal income
tax purposes, the tax basis of shares owned by a Common Shareholder of 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 Common Shareholder's
gross income and the tax deemed paid by the Common Shareholder under clause (ii)
of the preceding sentence. Each
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Fund intends to distribute at least annually to its Common Shareholders all or
substantially all of its net tax-exempt interest and any investment company
taxable income and net capital gain.
Treasury regulations permit a regulated investment company, in determining
its investment company taxable income and net capital gain, i.e., the excess of
net long-term capital gain over net short-term capital loss for any taxable
year, to elect (unless it has made a taxable year election for excise tax
purposes as discussed below) to treat all or part of any net capital loss, any
net long-term capital loss or any net foreign currency loss incurred after
October 31 as if it had been incurred in the succeeding year.
Distributions by 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 gains 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 gains realized by a Fund and distributed to Common
Shareholders in cash or additional shares will be taxable to Common Shareholders
as long-term capital gains regardless of the length of time investors have owned
shares of the Fund. Distributions by a Fund that do not constitute ordinary
income dividends or capital gain dividends will be treated as a return of
capital to the extent of (and in reduction of) the 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 Common
Shareholders of record on a specified date in one of those months and paid
during the following January, will be treated as having been distributed by a
Fund (and received by the Common Shareholders) on December 31.
The redemption or exchange of Common Shares normally will result in capital
gain or loss to the Common Shareholders. Generally, a Common Shareholder's gain
or loss will be long-term gain or loss if the shares have been held for more
than one year. Present law taxes both long- and short-term capital gains of
corporations at the rates applicable to ordinary income. For non-corporate
taxpayers, however, net capital gains (i.e., the excess of net long-term capital
gain over net short-term capital loss) with respect to securities will be taxed
at a maximum rate of 20%, while short-term capital gains and other ordinary
income will be taxed at a maximum
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rate of 39.6%. Because of the limitations on itemized deductions and the
deduction for personal exemptions applicable to higher income taxpayers, the
effective tax rate may be higher in certain circumstances.
All or a portion of a sales charge paid in purchasing Common Shares cannot
be taken into account for purposes of determining gain or loss on the redemption
or exchange of such shares within 90 days after their purchase to the extent
Common Shares or shares of another fund are subsequently acquired without
payment of a sales charge pursuant to the reinvestment or exchange privilege.
Any disregarded portion of such charge will result in an increase in the Common
Shareholder's tax basis in the shares subsequently acquired. In addition, no
loss will be allowed on the redemption or exchange of Common Shares if the
Common Shareholder purchases other shares of 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 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 number (in
the case of individuals, their Social Security number) and certain
certifications, or who are otherwise subject to backup withholding.
The foregoing is a general and abbreviated summary of the provisions of the
Code and Treasury Regulations presently in effect as they directly govern the
taxation of the Fund and its Common Shareholders. For complete provisions,
reference should be made to the pertinent Code sections and Treasury
Regulations. The Code and Treasury Regulations are subject to change by
legislative or administrative action, and any such change may be retroactive
with respect to Fund transactions. Common Shareholders are advised to consult
their own tax
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Advisers 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 E-1; tax
matters pertaining to California are set forth in Appendix E-2; tax matters
pertaining to Connecticut are set forth in Appendix E-3; tax matters pertaining
to Florida are set forth in Appendix E-4; tax matters pertaining tax matters to
Maryland are set forth in Appendix E-5; pertaining to Massachusetts are set
forth in Appendix E-6; tax matters pertaining to Michigan are set forth in
Appendix E-7; tax matters pertaining to New Jersey are set forth in Appendix
E-8; tax matters pertaining to New York are set forth in Appendix E-9; tax
matters pertaining to North Carolina are set forth in Appendix E-10; tax matters
pertaining to Ohio are set forth in Appendix E-11; tax matters pertaining to
Pennsylvania are set forth in Appendix E-12; and tax matters pertaining to
Virginia are set forth in Appendix E-13.
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, California, Connecticut, Florida, Maryland,
Massachusetts, Michigan, New Jersey, New York, North Carolina, Ohio,
Pennsylvania 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 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 F for additional performance related and comparative information.
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EXPERTS
The Statement of Net Assets of each Fund as of September __, 1999 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.
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
41
<PAGE>
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 Insured Dividend Advantage Municipal Fund
[TO COME]
NUVEEN INSURED DIVIDEND ADVANTAGE MUNICIPAL FUND
FINANCIAL STATEMENTS
[TO COME]
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
Nuveen California Dividend Advantage Municipal Fund 2
[TO COME]
NUVEEN CALIFORNIA DIVIDEND ADVANTAGE MUNICIPAL FUND 2
FINANCIAL STATEMENTS
[TO COME]
REPORT OF INDEPENDENT AUDITORS
To the Board of Trustees and Shareholder
42
<PAGE>
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 Florida Dividend Advantage Municipal Fund
[TO COME]
NUVEEN FLORIDA 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]
43
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Trustees and Shareholder
Nuveen Michigan Dividend Advantage Municipal Fund
[TO COME]
NUVEEN MICHIGAN DIVIDEND ADVANTAGE MUNICIPAL FUND
FINANCIAL STATEMENTS
[TO COME]
REPORT OF INDEPENDENT AUDITORS
To the Board of Trustees and Shareholder
Nuveen New Jersey Dividend Advantage Municipal Fund
[TO COME]
NUVEEN NEW JERSEY DIVIDEND ADVANTAGE MUNICIPAL FUND
FINANCIAL STATEMENTS
[TO COME]
REPORT OF INDEPENDENT AUDITORS
To the Board of Trustees and Shareholder
Nuveen Insured New York Dividend Advantage Municipal Fund
[TO COME]
NUVEEN INSURED NEW YORK DIVIDEND ADVANTAGE MUNICIPAL FUND
FINANCIAL STATEMENTS
[TO COME]
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 Ohio Dividend Advantage Municipal Fund
[TO COME]
NUVEEN OHIO DIVIDEND ADVANTAGE MUNICIPAL FUND
FINANCIAL STATEMENTS
[TO COME]
REPORT OF INDEPENDENT AUDITORS
To the Board of Trustees and Shareholder
Nuveen Pennsylvania Dividend Advantage Municipal Fund
[TO COME]
NUVEEN PENNSYLVANIA 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:
Long Term Debt
An S&P corporate or municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers, or
lessees.
The debt rating is not a recommendation to purchase, sell, or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished by the issuer or obtained
by S&P from other sources it considers reliable. S&P does not perform an audit
in connection with any rating and may, on occasion, rely on unaudited financial
information. The ratings may be changed, suspended, or withdrawn as a result of
changes in, or unavailability of, such information, or based on other
circumstances.
The ratings are based, in varying degrees, on the following considerations:
1. Likelihood of default--capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in
accordance with the terms of the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization, or other arrangement under
the laws of bankruptcy and other laws affecting creditors' rights.
Investment Grade
AAA Debt rated `AAA' has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA Debt rated `AA' has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A Debt rated `A' has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than debt in higher rated
categories.
BBB Debt rated `BBB' is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse
A-1
<PAGE>
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
Speculative Grade Rating
Debt rated `BB', `B', `CCC', `CC' and `C' is regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. `BB' indicates the least degree of speculation and `C' the highest.
While such debt will likely have some quality and protective characteristics
these are outweighed by major uncertainties or major exposures to adverse
conditions.
BB Debt rated `BB' has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments.
The `BB' rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied `BBB--' rating.
B Debt rated `B' has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal.
The `B' rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied `BB' or `BB--' rating.
CCC Debt rated `CCC' has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event
of adverse business, financial, or economic conditions, it is not likely to
have the capacity to pay interest and repay principal.
The `CCC' rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied `B' or `B--' rating.
CC The rating `CC' typically is applied to debt subordinated to senior debt
that is assigned an actual or implied `CCC' debt rating.
C The rating `C' typically is applied to debt subordinated to senior debt
which is assigned an actual or implied `CCC--' debt rating. The `C' rating
may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
CI The rating `CI' is reserved for income bonds on which no interest is being
paid.
D Debt rated `D' is in payment default. The `D' rating category is used when
interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such
A-2
<PAGE>
grace period. The `D' rating also will be used upon the filing of a
bankruptcy petition if debt service payments are jeopardized.
Plus (+) or Minus (--): The ratings from `AA' to `CCC' may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Provisional Ratings: The letter "p" indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project financed by
the debt being rated and indicates that payment of debt service requirements is
largely or entirely dependent upon the successful and timely completion of the
project. This rating, however, while addressing credit quality subsequent to
completion of the project, makes no comment on the likelihood of, or the risk of
default upon failure of, such completion. The investor should exercise judgment
with respect to such likelihood and risk.
L The letter `L' indicates that the rating pertains to the principal amount
of those bonds to the extent that the underlying deposit collateral is
federally insured by the Federal Savings & Loan Insurance Corp. or the
Federal Deposit Insurance Corp.* and interest is adequately collateralized.
In the case of certificates of deposit the letter `L' indicates that the
deposit, combined with other deposits being held in the same right and
capacity will be honored for principal and accrued pre-default interest up
to the federal insurance limits within 30 days after closing of the insured
institution or, in the event that the deposit is assumed by a successor
insured institution, upon maturity.
* Continuance of the rating is contingent upon S&P's receipt of an executed copy
of the escrow agreement or closing documentation confirming investments and cash
flow.
NR Indicates no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
Municipal Notes
An S&P note rating reflects the liquidity concerns and market access risks
unique to notes. Notes due in 3 years or less will likely receive a note
rating. Notes maturing beyond 3 years will most likely receive a long-term debt
rating. The following criteria will be used in making that assessment:
-- Amortization schedule (the larger the final maturity relative to other
maturities, the more likely it will be treated as a note).
-- Source of payment (the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1 Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will be
given a plus (+) designation.
A-3
<PAGE>
SP-2 Satisfactory capacity to pay principal and interest.
SP-3 Speculative capacity to pay principal and interest.
A note rating is not a recommendation to purchase, sell, or hold a security
inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in or unavailability of such
information or based on other circumstances.
Commercial Paper
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into several categories, ranging from "A-1" for the highest
quality obligations to "D" for the lowest. These categories are as follows:
A-1 This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1."
A-3 Issues carrying this designation have adequate capacity for timely payment.
They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
B Issues rated "B" are regarded as having only speculative capacity for
timely payment.
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D Debt rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the date due, even
if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period.
A commercial rating is not a recommendation to purchase, sell, or hold a
security inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in or unavailability of such
information or based on other 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 edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
Aa Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than
in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
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>
Con(.) Bonds for which the security depends upon the completion of some act or
the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b)
earnings of projects unseasoned in operation experience, (c) rentals
which begin when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable
credit stature upon completion of construction or elimination of basis
of condition.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
category from Aa to B in the public finance sectors. The modifier 1
indicates that the issuer is in the higher end of its letter rating
category; the modifier 2 indicates a mid-range ranking; the modifier 3
indicates that the issuer is in the lower end of the letter ranking
category.
Short-Term Loans
MIG 1/VMIG 1 This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or
demonstrated broadbased access to the market for refinancing.
MIG 2/VMIG 2 This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
MIG 3/VMIG 3 This designation denotes favorable quality. All security elements
are accounted for but there is lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and
market access for refinancing is likely to be less well-established.
MIG 4/VMIG 4 This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and although not
distinctly or predominantly speculative, there is specific risk.
S.G. This designation denotes speculative quality. Debt instruments in this
category lack margins of protection.
Commercial Paper
Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics:
-- Leading market positions in well-established industries.
-- 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
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or related supporting institutions) have an acceptable
capacity for repayment of short-term promissory obligations. The effect of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating categories.
Fitch IBCA, Inc.--A brief description of the applicable Fitch IBCA, Inc.
("Fitch") ratings symbols and meanings (as published by Fitch) follows:
Long-Term Credit Ratings
Investment Grade
AAA Highest credit quality. `AAA' ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong
capacity for timely payment of financial commitments. This capacity is
highly unlikely to be adversely affected by foreseeable events.
AA Very high credit quality. `AA' ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A High credit quality. `A' ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher
ratings.
BBB Good credit quality. `BBB' ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances
and in economic conditions are more likely to impair this capacity. This
is the lowest investment-grade category.
Speculative Grade
BB Speculative. `BB' ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change over
time; however, business or
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.
RatingAlert: Ratings are placed on RatingAlert to notify investors that there is
a reasonable probability of a rating change and the likely direction of such
change. These are designated as "Positive", indicating a potential upgrade,
"Negative", for a potential downgrade, or "Evolving", if ratings may be raised,
lowered or maintained. RatingAlert is typically resolved over a relatively
short period.
A-9
<PAGE>
APPENDIX B
TAXABLE EQUIVALENT YIELD TABLE
The taxable equivalent yield is the current yield you would need to earn on
a taxable investment in order to equal a stated tax-free yield on a municipal
investment. To assist you to more easily compare municipal investments like 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%
- --------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
28.0% 5.56% 6.25% 6.94% 7.64% 8.33%
31.0% 5.80% 6.52% 7.25% 7.97% 8.70%
36.0% 6.25% 7.03% 7.81% 8.59% 9.38%
39.6% 6.62% 7.45% 8.28% 9.11% 9.93%
</TABLE>
ARIZONA
<TABLE>
<CAPTION>
Federal State Combined
Tax Tax Tax
Single Return Bracket Joint Return Bracket Rate Rate* Rate*
- --------------------- -------------------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
</TABLE>
- ---------------------
* [Insert any Arizona-specific notes from local counsel.] The State Tax Rates
are those for [1998]. Please note that the table does not reflect (i) any
federal or state limitations on the amounts of allowable itemized deductions,
phase-outs of personal or dependent exemption credits or other allowable
credits, (ii) any local taxes imposed, or (iii) any taxes other than personal
income taxes. The table assumes that federal taxable income is equal to state
income subject to tax, and in cases where more than one state rate falls within
a federal bracket, the highest state rate corresponding to the highest income
within that federal bracket is used.
B-1
<PAGE>
CALIFORNIA
<TABLE>
<CAPTION>
Federal Single Federal Joint Federal State Combined
Return Bracket* Return Bracket* Tax Rate Tax Rate** Tax Rate**
--------------- --------------- --------- ---------- ----------
<S> <C> <C> <C> <C>
$0-25,750 $0-43,050 15.00% 6.00% 20.10%
25,751-62,450 43,051-104,050 28.00% 9.30% 34.70%
62,451-130,250 104,051-158,550 31.00% 9.30% 37.42%
130,251-283,150 158,551-283,150 36.00% 9.30% 41.95%
Over 283,150 Over 283,150 39.60% 9.30% 45.22%
</TABLE>
___________________
* The federal tax brackets shown are for 1999.
** The State Tax Rates used to determine the rates shown in the State Tax Rate
and Combined Tax Rate columns are those for [1998]. 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. Persons whose taxable
income is less than the maximum amount shown in the applicable line of the
applicable Federal Bracket column may be taxable on incremental income at state
and combined tax rates that are lower than the rates shown in the State Tax Rate
and Combined Tax Rate column.
CONNECTICUT
<TABLE>
<CAPTION>
Federal State Combined
Tax Tax Tax
Single Return Bracket Joint Return Bracket Rate Rate* Rate*
- --------------------- -------------------- -------- ------ --------
<S> <C> <C> <C> <C>
</TABLE>
- ---------------------
* [Insert any Connecticut-specific notes from local counsel.] The State Tax
Rates are those for [1998]. 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
B-2
<PAGE>
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.
MARYLAND
<TABLE>
<CAPTION>
Federal State Combined
Tax Tax Tax
Single Return Bracket Joint Return Bracket Rate Rate* Rate*
- --------------------- -------------------- ------- ----- --------
<S> <C> <C> <C> <C>
</TABLE>
- ---------------------
* [Insert any Maryland-specific notes from local counsel.] The State Tax Rates
are those for [1998]. 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.
MASSACHUSETTS
<TABLE>
<CAPTION>
Federal State Combined
Tax Tax Tax
Single Return Bracket Joint Return Bracket Rate Rate* Rate*
- --------------------- -------------------- ------- ----- --------
<S> <C> <C> <C> <C>
</TABLE>
- ---------------------
* [Insert any Massachusetts-specific notes from local counsel.] The State Tax
Rates are those for [1998]. 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
B-3
<PAGE>
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.
MICHIGAN
<TABLE>
<CAPTION>
Federal State Combined
Tax Tax Tax
Single Return Bracket Joint Return Bracket Rate Rate* Rate*
- --------------------- -------------------- ------- ----- --------
<S> <C> <C> <C> <C>
</TABLE>
- ---------------------
* [Insert any Michigan-specific notes from local counsel.] The State Tax Rates
are those for [1998]. 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.
NEW JERSEY
<TABLE>
<CAPTION>
Federal State Combined
Tax Tax Tax
Single Return Bracket Joint Return Bracket Rate Rate* Rate*
- --------------------- -------------------- ------- ----- --------
<S> <C> <C> <C> <C>
</TABLE>
- ---------------------
* [Insert any New Jersey-specific notes from local counsel.] The State Tax Rates
are those for [1998]. 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
B-4
<PAGE>
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.
NEW YORK
(State Only)
<TABLE>
<CAPTION>
Single Joint Federal State Combined
Return Bracket Return Bracket Tax Rate Tax Rate Tax Rate*
- ---------------- ---------------- -------- -------- ---------
<S> <C> <C> <C> <C>
$0-25,750 $0-43,050 15.00% 6.850% 20.80%
25,750-62,450 43,050-104,050 28.00% 6.850% 32.90%
62,450-130,250 104,050-158,550 31.00% 6.850% 35.70%
130,250-283,150 158,550-283,150 36.00% 6.850% 40.40%
Over 283,150 Over 283,150 39.60% 6.850% 43.70%
</TABLE>
- -----------------------
* 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 are rounded down to the
nearest tenth. Further, the table does not reflect the New York State
supplemental income tax based upon a taxpayer's New York State taxable income
and New York State adjusted gross income. This supplemental tax results in an
increased marginal State income tax rate to the extent a taxpayer's New York
State adjusted gross income ranges between $100,000 and $150,000.
NEW YORK
(State and City)
<TABLE>
<CAPTION>
Single Joint Federal State Combined
Return Bracket Return Bracket Tax Rate Tax Rate Tax Rate*
- ---------------- ---------------- -------- -------- ---------
<S> <C> <C> <C> <C>
$0-25,750 15.00% 10.621% 24.00%
$0-43,050 15.00% 10.564% 24.00%
25,750-62,450 43,050-104,050 28.00% 10.678% 35.50%
62,450-130,250 104,050-158,550 31.00% 10.678% 38.50%
130,250-283,150 158,550-283,150 36.00% 10.678% 43.00%
Over 283,150 Over 283,150 39.60% 10.678% 46.00%
</TABLE>
- -----------------------
* Combined Tax Rate includes Federal, State and New York City income taxes.
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
B-5
<PAGE>
credits, (ii) any local taxes imposed (other than New York City), 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 are rounded down to the nearest tenth. Further, the table does
not reflect the New York State supplemental income tax based upon a taxpayer's
New York State taxable income and New York State adjusted gross income. This
supplemental tax results in an increased marginal State income tax rate to the
extent a taxpayer's New York State adjusted gross income ranges between $100,000
and $150,000.
NORTH CAROLINA
<TABLE>
<CAPTION>
Federal State Combined
Tax Tax Tax
Single Return Bracket Joint Return Bracket Rate Rate* Rate*
- --------------------- -------------------- ------- ----- --------
<S> <C> <C> <C> <C>
</TABLE>
- ---------------------
* [Insert any North Carolina-specific notes from local counsel.] The State Tax
Rates are those for [1998]. 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.
OHIO
<TABLE>
<CAPTION>
Federal State Combined
Tax Tax Tax
Single Return Bracket Joint Return Bracket Rate Rate* Rate*
- --------------------- -------------------- ------- ----- --------
<S> <C> <C> <C> <C>
</TABLE>
- ---------------------
B-6
<PAGE>
* [Insert any Ohio-specific notes from local counsel.] The State Tax Rates are
those for [1998]. 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.
PENNSYLVANIA
<TABLE>
<CAPTION>
Federal State Combined
Tax Tax Tax
Single Return Bracket Joint Return Bracket Rate Rate* Rate*
- --------------------- -------------------- ------- ----- --------
<S> <C> <C> <C> <C>
</TABLE>
- ---------------------
* [Insert any Pennsylvania-specific notes from local counsel.] The State Tax
Rates are those for [1998]. 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.
VIRGINIA
<TABLE>
<CAPTION>
Federal State Combined
Tax Tax Tax
Single Return Bracket Joint Return Bracket Rate Rate* Rate*
- --------------------- -------------------- ------- ----- --------
<S> <C> <C> <C> <C>
</TABLE>
- ---------------------
B-7
<PAGE>
* [Insert any Virginia-specific notes from local counsel.] The State Tax Rates
are those for [1998]. 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-8
<PAGE>
APPENDIX C:
DESCRIPTION OF INSURERS
Set forth below is information about the various municipal bond insurers
with whom each Insured State Fund intends to maintain specific insurance
policies for particular municipal bonds or policies of portfolio insurance. The
information in this Appendix is based on information supplied by the insurers,
and the Funds cannot verify its accuracy and completeness.
AMBAC ASSURANCE CORPORATION ("AMBAC ASSURANCE")
Ambac Assurance Corporation ("Ambac Assurance") is a Wisconsin-domiciled
stock insurance corporation regulated by the Office of the Commissioner of
Insurance of the State of Wisconsin and licensed to do business in 50 states,
the District of Columbia, the Territory of Guam and the Commonwealth of Puerto
Rico, with admitted assets of approximately $3,290,000,000 (unaudited) and
statutory capital of approximately $1,920,000 (unaudited) as of December 31,
1998. Statutory capital consists of Ambac Assurance's policyholders' surplus
and statutory contingency reserve. Standard & Poor's Ratings Services, a
division of The McGraw-Hill Companies, Inc., Moody's Investors Service and Fitch
IBCA, Inc. have assigned a triple-A financial strength rating to Ambac
Assurance. Ambac Assurance has obtained a ruling from the Internal Revenue
Service to the effect that the insuring of an obligation to Ambac Assurance will
not affect the treatment for federal income tax purposes of interest on such
obligation and that insurance proceeds representing maturing interest paid by
Ambac Assurance under policy provisions substantially identical to those
contained in its municipal bond insurance policy shall be treated for federal
income tax purposes in the same manner as if such payments were made by the
issuer of the bonds.
Ambac Assurance makes no representation regarding the bonds or the
advisability of investing in the bonds and makes no representation regarding,
nor has it participated in the preparation of, the Prospectus and Statement of
Additional Information, other than the information supplied by Ambac Assurance
and presented under this heading "Ambac Assurance Corporation."
FINANCIAL SECURITY ASSURANCE INC. ("FINANCIAL SECURITY")
Financial Security is a monoline insurance company incorporated under the
laws of the State of New York. Financial Security is licensed to engage in the
financial guaranty insurance business in all 50 states, the District of Columbia
and Puerto Rico.
Financial Security is a wholly owned subsidiary of Financial Security
Assurance Holdings Ltd. ("Holdings"), a New York Stock Exchange listed company.
Major shareholders of Holdings include Fund American Enterprise Holdings, Inc.,
XL Capital Ltd., MediaOne Group, Inc., and The Tokio Marine and Fire Insurance
Co., Ltd. No shareholder is obligated to pay any debts of or any claims against
Financial Security. Financial Security is domiciled in the State of New York
and is subject to regulation by the State of New York Insurance Department. As
of December 31, 1998, the total policyholders' surplus and contingency reserves
and the total unearned premium reserve, respectively, of Financial Security and
its consolidated subsidiaries
C-1
<PAGE>
were, in accordance with statutory accounting principles, approximately
$1,037,710,000 (audited) and $595,900,000 (audited), the total shareholders'
equity and total unearned premium reserve, respectively, of Financial Security
and its consolidated subsidiaries were, in accordance with generally accepted
accounting principles, approximately $1,104,591,000 (audited) and $504,603,000
(audited). Copies of Financial Security's financial statements may be obtained
in writing to Financial Security at 350 Park Avenue, New York, New York 10022,
Attention: Communications Department. Financial Security's telephone number is
(212) 826-0100. Financial Security's financial statements are included as
exhibits to the Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q
filed with the Securities and Exchange Commission by Holdings and may be
reviewed at Holdings' website: www.fsa.com.
MBIA INSURANCE CORPORATION ("MBIA")
The Insurer is the principal operating subsidiary of MBIA, Inc., a New York
Stock Exchange listed company. MBIA Inc. is not obligated to pay the debts of
or claims against the Insurer. The Insurer is domiciled in the State of New
York and licensed to do business in and subject to regulation under the laws of
all 50 states, the District of Columbia, the Commonwealth of Puerto Rico, the
Commonwealth of the Northern Marina Islands, the Virgin Islands of the United
States and the Territory of Guam. The Insurer has two European branches, one in
the Republic of France and the other in the Kingdom of Spain. New York has laws
prescribing minimum capital requirements, limiting classes and concentrations of
investments and requiring the approval of policy rates and forms. State laws
also regulate the amount of both the aggregate and individual risks that may be
insured, the payment of dividends by the Insurer, changes in control and
transactions among affiliates. Additionally, the Insurer is required to
maintain contingency reserves on its liabilities in certain amounts and for
certain periods of time.
As of December 31, 1997 the Insurer has admitted assets of $5.3 billion
(audited), total liabilities of $3.5 billion (audited), and total capital and
surplus of $1.8 billion (audited) determined in accordance with statutory
accounting practices prescribed or permitted by insurance regulatory
authorities. As of September 30, 1998, the Insurer had admitted assets of $6.3
billion (unaudited), total liabilities of $4.1 billion (unaudited), and total
capital and surplus of $2.2 billion (unaudited) determined in accordance with
statutory accounting practices prescribed or permitted by insurance regulatory
authorities.
Furthermore, copies of the Insurer's year end financial statements prepared
in accordance with statutory accounting practices are available without charge
from the Insurer. A copy of the Annual Report on Form 10-K of MBIA Inc. is
available from the Insurer. A copy of the Annual Report on Form 10-K of MBIA
Inc. is available from the Insurer or the Securities and Exchange Commission.
The address of the Insurer is 113 King Street, Armonk, New York 10504. The
telephone number of the insurer is (914) 273-4545.
The Insurer's policy of portfolio insurance unconditionally and irrevocably
guarantees to the Fund, the full and complete payment required to be made by or
on behalf of the issuer to the applicable paying agent or its successor of an
amount equal to (i) the principal of (either at the stated maturity or by
advancement of maturity pursuant to a mandatory sinking fund payment) and
interest on, the municipal bonds as such payments shall become due but shall not
be so paid (except that in the event of any acceleration of the due date of such
principal by reason of
C-2
<PAGE>
mandatory or optional redemption or acceleration resulting from default or
otherwise, other than any advancement of maturity pursuant to a mandatory
sinking fund payment, the payments guaranteed by the Insurer's policy shall be
made in such amounts and at such times as such payments of principal would have
been due had there not been any such acceleration) and (ii) the reimbursement of
any such payment which is subsequently recovered from the Fund pursuant to a
final judgment by a court of competent jurisdiction that such payment
constitutes an avoidable preference to the Fund within the meaning of any
applicable bankruptcy law (a "Preference").
The Insurer's policy does not insure against loss of any prepayment premium
which may at any time be payable with respect to any municipal bond. The
Insurer's policy does not, under circumstance, insure against loss relating to:
(i) optional or mandatory redemptions (other than mandatory sinking fund
redemptions); (ii) any payments to be made on an accelerated basis; (iii)
payments of the purchase price of municipal bonds upon tender thereof; or (iv)
any Preference relating to (i) through (iii) above. The Insurer's policy also
does not insure against nonpayment of principal of or interest on the municipal
bonds resulting from the insolvency, negligence or any other act or omission of
any paying agent for the municipal bonds.
With the respect to small issue industrial development bonds and pollution
control revenue bonds covered by the policy, the Insurer guarantees the full and
complete payments required to be made by or on behalf of an issuer of such bonds
if there occurs pursuant to the terms of the bonds an event which results in the
loss of the tax-exempt status of interest on such bonds, including principal,
interest or premium payments payable thereon, if any, as and when required to be
made by or on behalf of the issuer pursuant to the terms of such bonds.
When the Insurer receives from the paying agent or the Fund, (1) telephonic
or telegraphic notice (subsequently confirmed in writing by registered or
certified mail), or (2) written notice by registered or certified mail, that a
required payment of any insured amount which is then due has not been made, the
Insurer on the due date of such payment or within one business day after receipt
of notice of such nonpayment, whichever is later, will make a deposit of funds,
in an account with State Street Bank and Trust Company, N.A., in New York, New
York, or its successor, sufficient for the payment of any such insured amounts
which are then due. Upon presentment and surrender of such municipal bonds or
presentment of such other proof of ownership of the municipal bonds, together
with any appropriate instruments of assignment to evidence the assignment of the
insured amounts due on the municipal bonds as are paid by the Insurer, and
appropriate instruments to effect the appointment of the Insurer as agent for
the Fund in any legal proceeding related to payment of insured amounts on
municipal bonds, such instruments being in a form satisfactory to State Street
Bank and Trust Company, N.A., State Street Bank and Company, N.A. shall disburse
to the Fund or the paying agent payment of the insured amounts due on such
municipal bonds, less any amount held by the paying agent for the payment of
such insured amounts and legally available therefor.
FINANCIAL GUARANTY INSURANCE COMPANY ("FINANCIAL GUARANTY")
The Portfolio Insurance Policy is non-cancellable except for failure to pay
the premium. The premium rate for each purchase of a security covered by the
Portfolio Insurance Policy is fixed for the life of the Insured Bond. The
insurance premiums are payable monthly by the Fund and are adjusted for
purchases, sales and payments prior to maturity of Insured Bonds during the
C-3
<PAGE>
month. In the event of a sale of any Insured Bond by the Fund or payment thereof
prior to maturity, the Portfolio Insurance policy terminates as to such Insured
Under the provisions of the Portfolio Insurance Policy, Financial Guaranty
unconditionally and irrevocably agrees to pay to State Street Bank and Trust
Company, or its successor, as its agent (the "Fiscal Agent"), that portion of
the principal of and interest on the Insured Bonds which shall become due for
payment but shall be unpaid by reason of nonpayment by the issuer of the Insured
Bonds. The term "due for payment" means, when referring to the principal of an
Insured Bond, its stated maturity date or the date on which it shall have been
called for mandatory sinking fund redemption and does not refer to any earlier
date on which payment is due by reason of call for redemption (other than by
mandatory sinking fund redemption), acceleration or other advancement of
maturity and means, when referring to interest on an Insured Bond, the stated
date for payment of interest. In addition, the Portfolio Insurance Policy covers
nonpayment by the issuer that results from any payment of principal or interest
made by such issuer on the Insured Bond to the Fund which has been recovered
from the Fund or its shareholders pursuant to the United States Bankruptcy Code
by a trustee in bankruptcy in accordance with a final, nonappealable order of a
court having competent jurisdiction.
Financial Guaranty will make such payments to the Fiscal Agent on the date
such principal or interest becomes due for payment or on the business next
following the day on which Financial Guaranty shall have received notice of
nonpayment, whichever is later. The Fiscal Agent will disburse the Trustee the
face amount of principal and interest which is then due for payment but is
unpaid by reason of nonpayment by the issuer, but only upon receipt by the
Fiscal Agent of (i) evidence of the Trustee's right to receive payment of the
principal or interest due for payment and (ii) evidence, including any
appropriate instruments of assignment, that all of the rights to payment of such
principal or interest due for payment thereupon shall vest in Financial
Guaranty. Upon such disbursement, Financial Guaranty shall become the owner of
the Insured Bond, appurtenant coupon or right to payment of principal or
interest on such Insured Bond and shall be fully subrogated to all of the
Trustee's rights thereunder, including the right to payment, thereof.
In determining whether to insure municipal securities held in the Fund,
Financial Guaranty will apply its own standards which are not necessarily the
same as the criteria used in regard to the selection of securities by the Fund.
Certain of the municipal securities under the Portfolio Insurance Policy
may also be insured under an insurance policy obtained by the issuer of such
municipal securities. The premium for any insurance policy or policies obtained
by an issuer or Insured Bonds has been paid in advance by such issuer and any
such policy or policies are non-cancellable and will continue in force so long
as the Insured Bonds so insured are outstanding. Financial Guaranty has also
agreed, if requested by the Funds on or before the fifth day preceding the 1st
day of any month, to insure to maturity Insured Bonds sold by the Trustee during
the month immediately following such request of the Funds. The premium for any
such insurance to maturity provided by Financial Guaranty is paid by the Fund
and any such insurance is non-cancellable and will continue in force so long as
the Bonds so insured are outstanding.
Financial Guaranty is a wholly-owned subsidiary of FGIC Corporation (the
"Corporation"), a Delaware holding company. The Corporation is a subsidiary of
General
C-4
<PAGE>
Electric Capital Corporation. Financial Guaranty is a monoline financial
guaranty insurer domiciled in the State of New York and subject to regulation by
the State of New York Insurance Department. As of December 31, 1998, the total
capital and surplus of Financial Guaranty was $1,258,215,191. Financial Guaranty
prepares financial statements on the basis of both statutory accounting
principles and generally accepted accounting principles. Copies of such
financial statements may be obtained by writing to Financial Guaranty at 115
Broadway, New York, New York 10006, Attention: Communications Department
(telephone number: (212) 312-3000) or to the New York State Insurance Department
at 25 Beaver Street, New York, New York 10004-2319, Attention: Financial
Condition Property/Casualty Bureau (telephone number: (212) 480-5187).
The policies of insurance obtained by the Fund from Financial Guaranty and
the negotiations in respect thereof represent the only relationship between
Financial Guaranty and the Fund. Otherwise neither Financial Guaranty nor its
parent, FGIC Corporation, or any affiliate thereof has nay significant
relationship, direct or indirect, with the Fund or the Board of Directors of the
Fund.
The above municipal bond insurers have insurance claims-paying ability
ratings of AAA from S&P and Aaa from Moody's. Financial Guaranty also has an
insurance claims-paying ability rating of AAA from Fitch. An S&P insurance
claims-paying ability rating is an assessment of an operating insurance
company's financial capacity to meet obligations under an insurance policy in
accordance with its terms. An insurer with an insurance claims-paying ability
rating of AAA has the highest rating assigned by S&P. Capacity to honor
insurance contracts is adjudged by S&P to be extremely strong and highly likely
to remain so over a long period of time. A Moody's insurance claims-paying
ability rating is an opinion of the ability of an insurance company to repay
punctually senior policyholder obligations and claims. An insurer with an
insurance claims-paying ability rating of Aaa is adjudged by Moody's to be of
the best quality. In the opinion of Moody's, the policy obligations of an
insurance company with an insurance claims-paying ability rating of Aaa carry
the smallest degree of credit risk and, while the financial strength of these
companies is likely to change, such changes as can be visualized are most
unlikely to impair the company's fundamentally strong position.
An insurance claims-paying ability rating by S&P or Moody's does not
constitute an opinion on any specific contract in that such an opinion can only
be rendered upon the review of the specific insurance contract. Furthermore, an
insurance claims-paying ability rating does not take into account deductibles,
surrender or cancellation penalties or the timeliness of payment, nor does it
address the ability of a company to meet nonpolicy obligations (i.e., debt
contracts).
The assignment of ratings by S&P or Moody's to debt issues that are fully
or partially supported by insurance policies, contracts or guarantees is a
separate process form the determination of claims-paying ability ratings. The
likelihood of a timely flow of funds from the insurer to the trustee for the
bondholders is a key element in the rating determination for such debt issues.
S&P's and Moody's ratings are not recommendations to buy, sell or hold the
municipal bonds insured by policies issued by AMBAC Assurance, Financial
Security, MBIA or Financial Guaranty and such ratings may be subject to revision
or withdrawal at any time by the rating
C-5
<PAGE>
agencies. Any downward revision or withdrawal of either or both ratings may have
an adverse effect on the market price of the municipal bonds insured by policies
issued by AMBAC Assurance, Financial Security, MBIA or Financial Guaranty.
S&P's ratings of AMBAC Assurance, Financial Security, MBIA and Financial
Guaranty should be evaluated independent of Moody's ratings. Any further
explanation as to the significance of the ratings may be obtained only from the
applicable rating agency. See Appendix A for more information about ratings by
Moody's and S&P.
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<PAGE>
APPENDIX D
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.
D-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.
D-2
<PAGE>
APPENDIX E-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 form ore than four years, and
it should remain there through 1999. After climbing by 6.2% in 1994, during
which the State's economy produced the second-highest number of jobs of any year
in Arizona history, job creation in Arizona is leveling off with employment
growth of 5.6% in 1996-97, and growth of 4.7% through November 1998 which ranked
Arizona #1 in the nation for nonagricultural job growth through that period.
Arizona's wage and salary employment grew 5.6% in 1996, 4.5% in 1997 and 4.6% in
1998. The unemployment rate was around 4.0% for 1998 and has remained around
3.6% in early 1999, but is expected to increase throughout 1999. Arizona's
unemployment compares with a national rate of 4.9% in 1997 and 4.5% in 1998.
Arizona ranked third in the nation in personal income growth during 1991-
96. Personal income grew 7.2% in 1997 and 1998 and is expected to grown by 7.8%
in 1999. This compares with personal income growth of 5.6% in 1997 and 5.1%
1998 nationally.
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 3.2% in 1996, 2.7% in 1997 and 2.5% in
1998, 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.
During the 1999 session, the Legislature will consider fiscal year 2000-2001.
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
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selected for annual review and appropriation are designated as Major Budget
Units (MBUs). The 18 MBU's 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 1998 with a
$525.8 million ending balance and the Executive plan for fiscal year 1999
anticipates a $60.8 million balance. Overall, fiscal year 1998 revenues totaled
$5.745 billion. Corporate income tax revenue declined by 10%, from $600 million
in fiscal year 1997 to $528 million in fiscal year 1998. Individual income tax
revenues grew by 8.2% from Fiscal year 1997 to Fiscal year 1998. Expenditures
for fiscal year 1998 total $5.219 billion.
The current forecast for fiscal year 1999 revenue is $5.960 billion and
expenditures of $5.90 billion, leaving a balance of $60 million. The major
revenue sources, transaction privilege taxes, is forecast to produce $2.547
billion for fiscal year 1999. Overall, General Fund revenues will grow
modestly, including 4% in fiscal year 1999 and 5.7% in fiscal year 2000. The
1999 rate of growth reflects the impact of the $120 million tax reduction
program passed in 1998, and the 2000 revenue estimate includes an incremental
reduction to account for an additional $60 million of tax reductions already
enacted. After spending $2.926 billion on education in fiscal year 1998, the
Executive fiscal plan for fiscal year 1999 increases education spending to
$3.405 billion.
For Fiscal Biennium 2000-2001, the Executive is recommending a base
operating budget of $5.7 billion and $6.03 billion, respectively. The majority
of recommended expenditures for Fiscal Biennium 2000-2001 are in education. A
projected ending balance of $26.9 million and $4.7 million is expected for
Fiscal Biennium 2000-2001. By the end of Fiscal year 2001, the Budget
Stabilization Fund balance is estimated to reach $425 million, or 7.08% of
revenues. The Medical Services Stabilization Fund, by the end of Fiscal year
2001 is estimated to reach $100.8 million, and the Temporary Assistance
Stabilization Fund $59.7 million.
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 t hat reformulates education funding by providing $250
million in state funds to build new schools and places a statutory cap on the
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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 _______, 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.
Assuming that the Fund will be classified as a "diversified management
company" under Section 5(b)(1) of the 1940 Act and registered as such under the
1940 Act, the Fund will be exempt from Arizona income tax.
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.
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_________ 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.
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APPENDIX E-2
Factors Pertaining to California
The Fund's concentration on municipal bonds issued by the State of
California (the "State") or its agencies and by local governments in the State
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
California issuers. The information presented below has been derived from
official statements and other public reports of the State, but does not purport
to be comprehensive. Also, the financial strength of local governments in
California is not directly related to the strength of the State, and factors not
listed below may affect individual local governments.
During the early 1990's, California experienced significant financial
difficulties, which reduced its credit standing, but the State's finances have
improved significantly since 1994, with ratings increases since 1996. The
ratings of certain related debt of other issuers for which California has an
outstanding lease purchase, guarantee or other contractual obligation (such as
for state-insured hospital bonds) are generally linked directly to California's
rating. Should the financial condition of California deteriorate again, its
credit ratings could be reduced, and the market value and marketability of all
outstanding notes and bonds issued by California, its public authorities or
local governments could be adversely affected.
Economic Factors
California's economy is the largest among the 50 states and one of the
largest in the world. The State's population of almost 34 million represents
over 12% of the total United States population and grew by 26% in the 1980's,
more than double the national rate. Population growth slowed to less than 1%
annually in 1994 and 1995, but rose to 1.8% in 1996 and 1.6% in 1997. During
the early 1990's, net population growth in the State was due to births and
foreign immigration, but in recent years, in-migration from the other states has
increased.
Total personal income in the State, at an estimated $902 billion in 1998,
accounts for almost 13% of all personal income in the nation. Total employment
is over 15 million, the majority of which is in the service, trade and
manufacturing sectors.
From mid-1990 to late 1993, the State suffered a recession with the worst
economic, fiscal and budget conditions since the 1930s. Construction,
manufacturing (especially aerospace), and financial services, among others, were
all severely affected, particularly in Southern California. Employment levels
stabilized by late 1993 and pre-recession job levels were reached in 1996.
Unemployment, while remaining higher than the national average, has come down
from its 10% recession peak to under 6% in early 1999. Economic indicators show
a steady and strong recovery underway in California since the start of 1994
particularly in high technology manufacturing and services, including computer
software, electronic manufacturing and motion picture/television production, and
other services, entertainment and tourism, and both residential and commercial
construction. International economic problems starting in 1997 had some
moderating impact on California's economy, but negative impacts, such as a sharp
drop in exports to Asia which have hurt the manufacturing and agricultural
sectors, have apparently been
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offset by increased exports to Latin American and other nations, and a greater
strength in services, computer software and construction. Current forecasts
predict continued strong growth of the State's economy in 1999, with a slowdown
predicted in 2000 and beyond. Any delay or reversal of the recovery may create
new shortfalls in State revenues.
Constitutional Limitations on Taxes, Other Charges and Appropriations
Limitation on Property Taxes. Certain California municipal bonds may be
obligations of issuers which rely in whole or in part, directly or indirectly,
on ad valorem property taxes as a source of revenue. The taxing powers of
California local governments and districts are limited by Article XIIIA of the
California Constitution, enacted by the voters in 1978 and commonly known as
"Proposition 13." Briefly, Article XIIIA limits to 1% of full cash value of the
rate of ad valorem property taxes on real property and generally restricts the
reassessment of property to 2% per year, except under new construction or change
of ownership (subject to a number of exemptions). Taxing entities may, however,
raise ad valorem taxes above the 1% limit to pay debt service on voter-approved
bonded indebtedness.
Under Article XIIIA, the basic 1% ad valorem tax levy is applied against
the assessed value of property as of the owner's date of acquisition (or as of
March 1, 1975, if acquired earlier), subject to certain adjustments. This
system has resulted in widely varying amounts of tax on similarly situated
properties. Several lawsuits have been filed challenging the acquisition-based
assessment system of Proposition 13, but it was upheld by the U.S. Supreme Court
in 1992.
Article XIIIA prohibits local governments from raising revenues through ad
valorem taxes above the 1% limit; it also requires voters of any governmental
unit to give two-thirds approval to levy any "special tax." Court decisions,
however, allowed a non-voter approved levy of "general taxes" which were not
dedicated to a specific use.
Limitations on Other Taxes, Fees and Charges. On November 5, 1996, the
voters of the State approved Proposition 218, called the "Right to Vote on Taxes
Act." Proposition 218 added Articles XIIIC and XIIID to the State Constitution,
which contain a number of provisions affecting the ability of local agencies to
levy and collect both existing and future taxes, assessments, fees and charges.
Article XIIIC requires that all new or increased local taxes be submitted
to the electorate before they become effective. Taxes for general governmental
purposes require a majority vote and taxes for specific purposes require a two-
thirds vote. Further, any general purpose tax which was imposed, extended or
increased without voter approval after December 31, 1994 must be approved by a
majority vote within two years.
Article XIIID contains several new provisions making it generally more
difficult for local agencies to levy and maintain "assessments" for municipal
services and programs. Article XIIID also contains several new provisions
affecting "fees" and "charges", defined for purposes of Article XIIID to mean
"any levy other than an ad valorem tax, a special tax, or an assessment, imposed
by a [local government] upon a parcel or upon a person as an incident of
property ownership, including a user fee or charge for a property related
service." All new and existing
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property related fees and charges must conform to requirements prohibiting,
among other things, fees and charges which generate revenues exceeding the funds
required to provide the property related service or are used for unrelated
purposes. There are new notice, hearing and protest procedures for levying or
increasing property related fees and charges, and, except for fees or charges
for sewer, water and refuse collection services (or fees for electrical and gas
service, which are not treated as "property related" for purposes of Article
XIIID), no property related fee or charge may be imposed or increased without
majority approval by the property owners subject to the fee or charge or, at the
option of the local agency, two-thirds voter approval by the electorate residing
in the affected area.
In addition to the provisions described above, Article XIIIC removes
limitations on the initiative power in matters of local taxes, assessments, fees
and charges. Consequently, local voters could, by future initiative, repeal,
reduce or prohibit the future imposition or increase of any local tax,
assessment, fee or charge. It is unclear how this right of local initiative may
be used in cases where taxes or charges have been or will be specifically
pledged to secure debt issues.
The interpretation and application of Proposition 218 will ultimately be
determined by the courts with respect to a number of matters, and it is not
possible at this time to predict with certainly the outcome of such
determinations. Proposition 218 is generally viewed as restricting the fiscal
flexibility of local governments, and for this reason, some ratings of
California cities and counties have been, and others may be, reduced.
Appropriations Limits. The State and its local governments are subject to
an annual "appropriations limit" imposed by Article XIIIB of the California
Constitution, enacted by the voters in 1979 and significantly amended by
Propositions 98 and 111 in 1988 and 1990, respectively. Article XIIIB prohibits
the State or any covered local government from spending "appropriations subject
to limitation" in excess of the appropriations limit imposed. "Appropriations
subject to limitation" are authorizations to spend "proceeds of taxes," which
consist of tax revenues and certain other funds, including proceeds from
regulatory licenses, user charges or other fees, to the extent that such
proceeds exceed the cost of providing the product or service, but "proceeds of
taxes" exclude most State subventions to local governments. No limit is imposed
on appropriations of funds which are not "proceeds of taxes," such as reasonable
user charges or fees, and certain other non-tax funds, including bond proceeds.
Among the expenditures not included in the Article XIIIB appropriations
limit are (1) the debt service cost of bonds issued or authorized prior to
January 1, 1979, or subsequently authorized by the voters, (2) appropriations
arising from certain emergencies declared by the Governor, (3) appropriations
for certain capital outlay projects, (4) appropriations by the State of post-
1989 increases in gasoline taxes and vehicle weight fees, and (5) appropriations
made in certain cases or emergency.
The appropriations limit for each year is adjusted annually to reflect
changes in cost of living and population, and any transfers of service
responsibilities between government units. The definitions for such adjustments
were liberalized in 1990 to follow more closely growth in the State's economy.
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"Excess" revenues are measured over a two year cycle. Local governments
must return any excess to taxpayers by rate reductions. The State must refund
50% of any excess, with the other 50% paid to schools and community colleges.
With more liberal annual adjustment factors since 1988, and depressed revenues
since 1990 because of the recession, few governments are currently operating
near their spending limits, but this condition may change over time. Local
governments may by voter approval exceed their spending limits for up to four
years. During fiscal year 1986-87, State receipts from proceeds of taxes
exceeded its appropriations limit by $1.1 billion, which was returned to
taxpayers. Since that year, appropriations subject to limitation have been
under the State limit. State appropriations were $6.8 billion under the limit
for fiscal year 1998-99.
Because of the complex nature of Articles XIIIA, XIIIB, XIIIC and XIIID of
the California Constitution, the ambiguities and possible inconsistencies in
their terms, and the impossibility of predicting future appropriations or
changes in population and cost of living, and the probability of continuing
legal challenges, it is not currently possible to determine fully the impact of
these Articles on California municipal bonds or on the ability of the State or
local governments to pay debt service on such California municipal bonds. It is
not possible, at the present time, to predict the outcome of any pending
litigation with respect to the ultimate scope, impact or constitutionality of
these Articles or the impact of any such determinations upon State agencies or
local governments, or upon their ability to pay debt service on their
obligations. Further initiatives or legislative changes in laws or the
California Constitution may also affect the ability of the State or local
issuers to repay their obligations.
Obligations of the State of California
Under the California Constitution, debt service on outstanding general
obligation bonds is the second charge to the General Fund after support of the
public school system and public institutions of higher education. As of May 1,
1999, the State had outstanding approximately $19.7 billion of long-term general
obligation bonds, plus $546 million of general obligation commercial paper which
will be refunded by long-term bonds in the future, and $6.6 billion of lease-
purchase debt supported by the State General Fund. The State also had about
$15.2 billion of authorized and unissued long-term general obligation bonds and
lease-purchase debt. In FY 1997-98, debt service on general obligation bonds
and lease purchase debt was approximately 4.4% of General Fund revenues.
Recent Financial Results
The principal sources of General Fund revenues in 1997-1998 were the
California personal income tax (51% of total revenues), the sales tax (32%),
bank and corporation taxes (11%), and the gross premium tax on insurance (2%).
The State maintains a Special Fund for Economic Uncertainties (the "SFEU"),
derived from General Fund revenues, as a reserve to meet cash needs of the
General Fund, but which is required to be replenished as soon as sufficient
revenues are available. Year-end balances in the SFEU are included for
financial reporting purposes in the General Fund balance. Because of the
recession and an accumulated budget deficit, no reserve was budgeted in the SFEU
from 1992-93 to 1995-96.
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General. Throughout the 1980's, State spending increased rapidly as the
State population and economy also grew rapidly, including increased spending for
many assistance programs to local governments, which were constrained by
Proposition 13 and other laws. The largest State program is assistance to local
public school districts. In 1988, an initiative (Proposition 98) was enacted
which (subject to suspension by a two-thirds vote of the Legislature and the
Governor) guarantees local school districts and community college districts a
minimum share of State General Fund revenues (currently about 35%).
Recent Budgets. As a result of the severe economic recession from 1990-94
and other factors, the State experienced substantial revenue shortfalls, and
greater than anticipated social service costs, in the early 1990's. The State
accumulated and sustained a budget deficit in the budget reserve, the SFEU,
approaching $2.8 billion at its peak at June 30, 1993. The Legislature and
Governor agreed on a number of different steps to respond to the adverse
financial conditions and produce Budget Acts in the Years 1991-92 to 1994-95
(although not all of these actions were taken in each year):
. significant cuts in health and welfare program expenditures;
. transfers of program responsibilities and some funding sources from the
State to local governments, coupled with some reduction in mandates on
local government;
. transfer of about $3.6 billion in annual local property tax revenues
from cities, counties, redevelopment agencies and some other districts
to local school districts, thereby reducing State funding for schools;
. reduction in growth of support for higher education programs, coupled
with increases in student fees;
. revenue increases (particularly in the 1992-93 Fiscal Year budget),
most of which were for a short duration;
. increased reliance on aid from the federal government to offset the
costs of incarcerating, educating and providing health and welfare
services to undocumented aliens (although these efforts have produced
much less federal aid than the State Administration had requested); and
. various one-time adjustments and accounting changes (some of which have
been challenged in court and reversed).
A consequence of the accumulated budget deficits in the early 1990's,
together with other factors such as disbursement of funds to local school
districts "borrowed" from future fiscal years and hence not shown in the annual
budget, was to significantly reduce the State's cash resources available to pay
its ongoing obligations. The State's cash condition became so serious that from
late spring 1992 until 1995, the State had to rely on issuance of short term
notes which matured in a subsequent fiscal year to finance its ongoing deficit,
and pay current obligations. For a two-month period in the summer of 1992,
pending adoption of the annual Budget Act, the
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State was forced to issue registered warrants (IOUs) to some of its suppliers,
employees and other creditors. The last of these deficit notes was repaid in
April, 1996.
The State's financial condition improved markedly during the 1995-96,
1996-97 and 1997-98 fiscal years, with a combination of better than expected
revenues, slowdown in growth of social welfare programs, and continued spending
restraint based on the actions taken in earlier years. The State's cash
position also improved, and no external deficit borrowing has occurred over the
end of these three fiscal years.
The economy grew strongly during these fiscal years, and a result, the
General Fund took in substantially greater tax revenues (around $2.2 billion in
1995-96, $1.6 billion in 1996-97 and $2.1 billion in 1997-98) than were
initially planned when the budgets were enacted. These additional funds were
largely directed to school spending as mandated by Proposition 98, and to make
up shortfalls from reduced federal health and welfare aid in 1995-96 and 1996-
97. The accumulated budget deficit from the recession years was finally
eliminated. The Department of Finance estimates that the State's budget reserve
(the SFEU) totaled about $400 million as of June 30, 1997 and $1.8 billion at
June 30, 1998.
FY 1997-98 Budget. In May 1997, the California Supreme Court ruled that
the State had acted illegally in 1993 and 1994 by using a deferral of payments
to the Public Employees Retirement Fund to help balance earlier budgets. In
response to this court decision, the Governor ordered an immediate repayment to
the Retirement Fund of about $1.235 billion, which was made in late July, 1997,
and substantially "used up" the then-expected additional General Fund revenues
for the fiscal year. The 1997-98 Budget Act provided another year of rapidly
increasing funding for K-14 public education. Support for higher education
units in the State also increased by about 6 percent. Because of the pension
payment, most other State programs were funded at levels consistent with prior
years, and several initiatives had to be dropped. The final results for FY
1997-98 showed General Fund revenues and transfers of $54.7 billion and
expenditures of $53.3 billion.
Part of the 1997-98 Budget Act was completion of State welfare reform
legislation to implement the new federal law passed in 1996. The new State
program, called "CalWORKs," became effective January 1, 1998, and emphasizes
programs to bring aid recipients into the workforce. As required by federal
law, new time limits are placed on receipt of welfare aid.
FY 1998-99 Budget. The FY 1998-99 Budget Act was signed on August 21,
1998. After giving effect to line-item vetoes made by the Governor, the Budget
plan resulted in spending of about $57.3 billion for the General Fund and $14.7
billion for Special Funds. The Budget Act assumed General Fund revenues and
transfers in FY 1998-99 of $57.0 billion. After enactment of the Budget Act,
the Legislature passed a number of additional fiscal bills, which resulted in a
net increase of expenditures of about $250 million, but the Administration also
raised its estimate of revenues from the 1997-98 fiscal year. In total, the
Administration projected in September, 1998 that the balance in the SFEU at June
30, 1999 would be about $1.2 billion.
The Administration released new projections for the balance of FY 1998-99
on January 8, 1999 as part of the Governor's Proposed Budget for 1999-2000 (the
"Governor's Budget"). As a result of somewhat slower economic growth largely
due to the Asian economic slowdown,
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resulting in reduced revenues, and higher health and welfare caseloads than
projected, the Administration projected that the SFEU would be reduced to about
$600 million as of June 30, 1999. However, a later report in February, 1999 from
the State Legislative Analyst stated that economic activity in the State
appeared to be stronger in late 1998 than the Governor's Budget predicted, and
revenues for 1998-99 could be as much as $750 million higher than projected by
the Governor's Budget.
As has been the case in the last several years, spending on K-12 education
increased significantly, by a total of $2.2 billion, with projected per-pupil
spending of $5,695, more than one-third higher than the per-pupil spending
during the last recession year of 1993-94.
Funding to support higher education was also increased significantly (15%
for the University of California and 14% for the California State University
system). The Budget included some increases in health and welfare programs,
including the first increase in the monthly welfare grant since levels were cut
during the recession.
One of the most important elements of the 1998-99 Budget Act was agreement
on substantial tax cuts. The largest of these is a phased-in cut in the Vehicle
License Fee (an annual tax on the value of cars registered in the State, the
"VLF"). Starting in 1999, the VLF is reduced by 25%. Under current law, VLF
funds are automatically transferred to cities and counties, so the new
legislation provides for the General Fund to make up the reductions. If State
General Fund revenues continue to grow above certain targeted levels in future
years (a development which appears unlikely given more recent revenue
projections), the cut could reach as much as 67.5% by the year 2003. The
initial 25% VLF cut will be offset by about $500 million in General Fund money
in FY 1998-99, and $1 billion for future years. Other tax cuts in FY 1998-99
include an increase in the dependent credit exemption for personal income tax
filers, restoration of a renter's tax credit for taxpayers, and a variety of
business tax relief measures. The total cost of these tax cuts is estimated at
$1.4 billion in FY 1998-99.
The Administration released new projections for the balance of FY 1998-99
on May 14, 1999 as part of the May Revision of the Governor's Proposed Budget
for 1999-2000 (the "May Revision"). The May Revision revealed that the State's
economy was much stronger in late 1998 and into 1999 than the Administration had
thought when it made its first FY 1999-2000 Budget Proposal in January 1999. As
a result, the May Revision updates 1998-99 General Fund revenues to be $57.9
billion, almost $1 billion above the original FY 1998-99 estimates, and over
$1.6 billion above the Administration's January estimate. Most of the increase
is from personal income taxes, reflecting stronger wage employment than
previously estimated, and extraordinary growth in capital gain realizations
resulting from the stock market's rise. The May Revision projects the SFEU will
have a balance of almost $1.9 billion at June 30, 1999.
Although, as noted, the Administration projects a budget reserve in the
SFEU of about $1.9 billion on June 30, 1999, the General Fund balance on that
date also reflects $1.0 billion of "loans" which the General Fund made to local
schools in the recession years, representing cash outlays above the mandatory
minimum funding level. Settlement of litigation over these transactions in July
1996 calls for repayment of these loans over the period ending in 2001-02, about
equally split between outlays from the General Fund and from schools'
entitlements. The
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1998-99 Budget Act contained a $300 million appropriation from the General Fund
toward this settlement.
Proposed FY 1999-2000 Budget. The newly elected Governor, Gray Davis,
released his proposed FY 1999-00 Budget in January 1999. It projected somewhat
lower General Fund revenues than in earlier projections, due to slower economic
growth, which was expected in late 1998, but totaling an estimated $60.3
billion. The May Revision has sharply increased the revenue estimates, by over
$2.7 billion, to a total of almost $63.0 billion, which would represent a 9%
increase above FY 1998-99. Again, the greatest increase is expected in personal
income taxes (about 10% year-over-year increase), with more moderate increases
in sales taxes (6%) and corporate taxes (3%).
The January Governor's Budget proposed $60.5 billion of expenditures in FY
1999-00, with a $400 million SFEU reserve. The proposal contained some
education funding initiatives and certain limited initiatives in other areas,
but was overall relatively limited by the expectation of smaller revenue gains.
In the May Revision, the Governor has proposed several additional initiatives to
respond to the over $4.3 billion of new revenues over the two years. These
include over $1.2 billion more for K-12 education (much of which is mandated by
Proposition 98), over $1 billion of infrastructure spending, increases for
higher education, public safety, health and welfare and many other programs, but
only a small increase in funding to local governments. Total proposed General
Fund spending for FY 1999-00 in the May Revision is $63.2 billion.
The Governor also proposed to increase the SFEU to about $1 billion by
June 30, 2000, and also proposed to "set aside" over $650 million to pay for
future employee pay increases, possible litigation costs, and a possible future
VLF tax cut based on the current law. If these moneys are not spent for these
purposes, they would increase the SFEU reserve. The final FY 1999-00 Budget must
still be agreed on between the Governor and the Legislature, and it may contain
different provisions than the Governor's proposals described above.
Although the State's strong economy is producing record revenues to the
State government, the State's budget continues to be under stress from mandated
spending on education, a rising prison population, and social needs of a growing
population with many immigrants. These factors which limit State spending
growth also put pressure on local governments. There can be no assurances that,
if economic conditions weaken, or other factors intercede, the State will not
experience budget gaps in the future.
Bond Rating
The ratings on California's long-term general obligation bonds were reduced
in the early 1990's for "AAA" levels which had existed prior to the recession.
After 1996, the three major rating agencies raised their ratings of California's
general obligation bonds, which as of February 1999 were assigned ratings of
"A+" from Standard & Poor's, "Aa3" from Moody's and "AA-" from Fitch.
There can be no assurance that such ratings will be maintained in the
future. It should be noted that the creditworthiness of obligations issued by
local California issuers may be unrelated
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to creditworthiness of obligations issued by the State of California, and that
there is no obligation on the part of the State to make payment on such local
obligations in the event of default.
Legal Proceedings
The State is involved in certain legal proceedings (described in the
State's recent financial statements) that, if decided against the State, may
require the State to make significant future expenditures or may substantially
impair revenues. Trial courts have recently entered tentative decisions or
injunctions which would overturn several parts of the State's recent budget
compromises. The matters covered by these lawsuits include reductions in
welfare compromises. The matters covered by these lawsuits include reductions
in welfare payments and the use of certain cigarette tax funds for health costs.
All of these cases are subject to further proceedings and appeals, and if
California eventually loses, the final remedies may not have to be implemented
in one year.
Year 2000 Preparations
The State and local governments, along with all other public and private
institutions in the nation, face a major challenge to ensure that their computer
systems, including microchips embedded into existing machinery, will not fail
prior to or at the January 1, 2000 date which may not be recognized properly by
software utilizing only two digits to identify a year. The new State
Administration has placed a very high priority on "Year 2000" remediation and
contingency planning. The State has a Department of Information Technology
("DOIT") which coordinates activities, provides technical assistance to State
agencies and local governments, and reports on the status of remediation efforts
by over 100 State departments and agencies.
DOIT has reported that, as of early 1999, 372 of 564 "mission critical"
systems in State government had been remediated (although final testing was
still going on in some cases). Of the balance, 54 were being retired and 138
were in process. DOIT does not report on all State agencies. In addition to
hardware and software changes, agencies are preparing business contingency plans
in case of computer problems at 1/1/2000, and are actively coordinating with
outside agencies, vendors, contractors and others with whom computer data is
shared. The State Treasurer and State Controller, responsible for State fiscal
controls and debt service payments, have reported they were fully remediated by
December 31, 1998 and are spending the 1999 year in testing and confirmation of
their systems.
The State has expended and plans to spend many hundreds of millions of
dollars on Year 2000 projects of all sorts, and has set aside several tens of
millions of dollars in contingency funds to support late-coming needs. There is
no survey of local government costs, or the overall status of their activities.
It is likely that larger government agencies are better prepared at this time
than smaller ones. Both the State and local governments are preparing emergency
plans for Year 2000 computer difficulties similar to their normal planning for
natural emergencies, such as floods or earthquakes.
Obligations of Other Issuers
Other Issuers of California Municipal Obligations. There are a number of
State agencies, instrumentalities and political subdivisions of the State that
issue municipal
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obligations, some of which may be conduit revenue obligations payable from
payments from private borrowers. These entities are subject to various economic
risks and uncertainties, and the credit quality of the securities issued by them
may vary considerably from the credit quality of obligations backed by the full
faith and credit of the State.
State Assistance. Property tax revenues received by local governments
declined more than 50% following passage of Proposition 13. Subsequently, the
California Legislature enacted measures to provide for the redistribution of the
State's General Fund surplus to local agencies, the reallocation of certain
State revenues to local agencies and the assumption of certain governmental
functions by the State to assist municipal issuers to raise revenues. Total
local assistance from the State's General Fund was budgeted at approximately 75%
of General Fund expenditures in recent years, including the effect of
implementing reductions in certain aid programs. To reduce State General Fund
support for school districts, the 1992-93 and 1993-94 Budget Acts caused local
governments to transfer $3.9 billion of property tax revenues to school
districts, representing loss of the post-Proposition 13 "bailout" aid. Local
governments have in return received greater revenues and greater flexibility to
operate health and welfare programs. However, except for agreement in 1997 on a
new program for the State to substantially take over funding for local trial
courts (saving cities and counties some $400 million annually), there has been
no large-scale reversal of the property tax shift to help local government.
To the extent the State should be constrained by its Article XIIIB
appropriations limit, or its obligation to conform to Proposition 98, or other
fiscal considerations, the absolute level, or the rate of growth, of State
assistance to local governments may continue to be reduced. Any such reductions
in State aid could compound the serious fiscal constraints already experienced
by many local governments, particularly counties. Los Angeles County, the
largest in the State, was forced to make significant cuts in services and
personnel, particularly in the health care system, in order to balance its
budget in FY1995-96 and FY1996-97. Orange County, which emerged from Federal
Bankruptcy Court protection in June 1996, has significantly reduced county
services and personnel, and faces strict financial conditions following large
investment fund losses in 1994 which resulted in bankruptcy.
Counties and cities may face further budgetary pressures as a result of
changes in welfare and public assistance programs, which were enacted in August,
1997 in order to comply with the federal welfare reform law. Generally,
counties play a large role in the new system, and are given substantial
flexibility to develop and administer programs to bring aid recipients into the
workforce. Counties are also given financial incentives if either at the county
or statewide level, the "Welfare-to-Work" programs exceed minimum targets;
counties are also subject to financial penalties for failure to meet such
targets. Counties remain responsible to provide "general assistance" for able-
bodied indigents who are ineligible for other welfare programs. The long-term
financial impact of the new CalWORKs system on local governments is still
unknown.
Assessment Bonds. California municipal obligations which are assessment
bonds may be adversely affected by a general decline in real estate values or a
slowdown in real estate sales activity. In many cases, such bonds are secured
by land which is undeveloped at the time of issuance but anticipated to be
developed within a few years after issuance. In the event of such reduction or
slowdown, such development may not occur or may be delayed, thereby increasing
the risk of a default on the bonds. Because the special assessments or taxes
securing these bonds
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are not the personal liability of the owners of the property assessed, the lien
on the property is the only security for the bonds. Moreover, in most cases the
issuer of these bonds is not required to make payments on the bonds in the event
of delinquency in the payment of assessments or taxes, except from amounts, if
any, in a reserve fund established for the bonds.
California Long Term Lease Obligations. Based on a series of court
decisions, certain long-term lease obligations, though typically payable from
the general fund of the State or a municipality, are not considered
"indebtedness" requiring voter approval. Such leases, however, are subject to
"abatement" in the event the facility being leased is unavailable for beneficial
use and occupancy by the municipality during the term of the lease. Abatement
is not a default, and there may be no remedies available to the holders of the
certificates evidencing the lease obligation in the event abatement occurs. The
most common cases of abatement are failure to complete construction of the
facility before the end of the period during which lease payments have been
capitalized and uninsured casualty losses to the facility (e.g., due to
earthquake). In the event abatement occurs with respect to a lease obligation,
lease payments may be interrupted (if all available insurance proceeds and
reserves are exhausted) and the certificates may not be paid when due. Although
litigation is brought from time to time which challenges the constitutionality
of such lease arrangements, the California Supreme Court issued a ruling in
August, 1998 which reconfirmed the legality of these financing methods.
Other Considerations
The repayment of industrial development securities secured by real property
may be affected by California laws limiting foreclosure rights of creditors.
Securities backed by health care and hospital revenues may be affected by
changes in State regulations governing cost reimbursements to health care
providers under Medi-Cal (the State's Medicaid program), including risks related
to the policy of awarding exclusive contracts to certain hospitals.
Limitations on ad valorem property taxes may particularly affect "tax
allocation" bonds issued by California redevelopment agencies. Such bonds are
secured solely by the increase in assessed valuation of a redevelopment project
area after the start of redevelopment activity. In the event that assessed
values in the redevelopment project decline (e.g., because of a major natural
disaster such as an earthquake), the tax increment revenue may be insufficient
to make principal and interest payments on these bonds. Both Moody's and S&P
suspended ratings on California tax allocation bonds after the enactment of
Articles XIIIA and XIIIB, and only resumed such ratings on a selective basis.
Proposition 87, approved by California voters in 1988, requires that all
revenues produced by a tax rate increase go directly to the taxing entity which
increased such tax rate to repay that entity's general obligation indebtedness.
As a result, redevelopment agencies (which, typically, are the issuers of tax
allocation securities) no longer receive an increase in tax increment when taxes
on property in the project area are increased to repay voter-approved bonded
indebtedness.
The effect of these various constitutional and statutory changes upon the
ability of California municipal securities issuers to pay interest and principal
on their obligations remains unclear. Furthermore, other measures affecting the
taxing or spending authority of California or
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its political subdivisions may be approved or enacted in the future. Legislation
has been or may be introduced which would modify existing taxes or other
revenue-raising measures or which either would further limit or, alternatively,
would increase the abilities of the state and local governments to impose new
taxes or increase existing taxes. It is not possible, at present, to predict the
extent to which any such legislation will be enacted. Nor is it possible, at
present, to determine the impact of any such legislation on California municipal
obligations in which the Fund may invest, future allocations of state revenues
to local governments or the abilities of state or local governments to pay the
interest on, or repay the principal of, such California municipal obligations.
Substantially all of California is within an active geologic region subject
to major seismic activity. Northern California in 1989 and Southern California
in 1994 experienced major earthquakes causing billions of dollars in damages.
The federal government provided more than $13 million in aid for both
earthquakes, and neither event is expected to have any long-term negative
economic impact. Any California municipal obligation in the Fund could be
affected by an interruption of revenues because of damaged facilities, or,
consequently, income tax deductions for casualty losses or property tax
assessment reductions. Compensatory financial assistance could be constrained
by the inability of (i) an issuer to have obtained earthquake insurance coverage
rates; (ii) an insurer to perform on its contracts of insurance in the event of
widespread losses; or (iii) the federal or State government to appropriate
sufficient funds within their respective budget limitations.
California Tax Matters
The following is based upon the advice of ________, special California
counsel to the Fund.
The following is a general, abbreviated summary of certain provisions of
the applicable California tax law as presently in effect as it directly governs
the taxation of resident individual and corporate Common Shareholders of the
Fund. This summary does not address the taxation of other shareholders nor does
it discuss any local taxes that may be applicable. These provisions are subject
to change by legislative or administrative action, and any such change may be
retroactive with respect to transactions of the Fund.
The following is based on the assumptions that the Fund will qualify under
Subchapter M of the Code as a regulated investment company, that it will satisfy
the conditions which will cause distributions of the Fund to qualify as exempt-
interest dividends to shareholders for federal and California purposes, and that
it will distribute all interest and dividends it receives to the shareholders.
The Fund will be subject to the California corporate franchise and
corporation income tax only if it has a sufficient nexus with California. If
it is subject to the California franchise or corporation income tax, the Fund
does not expect to pay a material amount of such tax.
If at the close of each quarter of the Fund's taxable year at least 50% of
the value of its total assets consists of obligations that, when held by
individuals, pay interest that is exempt from tax by California under California
or federal law, then distributions by the Fund that are
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attributable to interest on any such obligation will not be subject to the
California personal income tax. All other distributions, including distributions
attributable to capital gains, will be includable in gross income for purposes
of the California personal income tax.
Interest on indebtedness incurred or continued for the purpose of acquiring
or maintaining an investment in the Common Shares will not be deductible for
purposes of the California personal income tax.
All distributions of the Fund, regardless of source, to corporate Common
Shareholders that are subject to the California corporate franchise tax will be
included in gross income for purposes of such tax.
Gain on the sale, exchange, or other disposition of Common Shares will be
subject to the California personal income and corporate franchise tax.
In addition, any loss realized by a holder of Common Shares upon the sale
of shares held for six months or less may be disallowed to the extent of any
exempt interest dividends received with respect to such shares. Moreover, any
loss realized upon the sale of Common Shares within thirty days before or after
the acquisition of other Common Shares may be disallowed under the "wash sale"
rules.
Common Shares may be subject to the California estate tax if held by a
California decedent at the time of death.
Common Shareholders are advised to consult with their own tax advisers for
more detailed information concerning California tax matters.
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APPENDIX E-3
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 Obligations. The
Connecticut Fund is therefore susceptible to political, economic or regulatory
facts affecting issuers of Connecticut Municipal Obligations. 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.
Although it continues to lag the nation in job growth, Connecticut's
economy has performed relatively well recently, helping to narrow the gap with
the national economy. The State has reclaimed over 80% of the jobs it lost to
the recession of the early 1990's and has posted the strongest income gains in
the country. 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 in business and
personal services, health care, legal services, private education and gaming.
Unemployment has improved and is now below national averages, registering 3.4%
in April 1999 versus the national average of 4.3% for that 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 (37,598). The State's urban centers, however, continue to
struggle with population losses, above average rates of unemployment, and lower
per capita income levels. For example, according to the 1999 State Comptroller
Report, with the exception of Stamford, the State's largest cities (those with
over 100,000 residents) have all experienced a population loss in the 1990's.
The State Comptroller's report also notes that the State's child poverty rate is
rising especially in its urban areas.
In October, 1998, Standard & Poor's upgraded Connecticut's general
obligation debt rating to AA from AA-minus, citing the State's strengthened
financial position, more conservative budgeting and financial practices, and
steady economic growth. As of June 15, 1999, Moody's and Fitch maintained Aa3
and AA ratings on the State's general obligation debt. These ratings effect the
State's credit quality only, and do not indicate the creditworthiness of other
tax-exempt securities in which the fund may invest.
Connecticut Tax Matters
The following is based upon the advice of ________, special Connecticut
counsel to the Fund.
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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.
Distributions from the Fund that are attributable to interest or gain on
any obligation of Connecticut and its political subdivisions ("Connecticut
Obligations") or to interest on obligations of the United States or its
instrumentalities, U.S. territories and possessions that are exempt from state
taxation under federal law, will not be subject to the Connecticut personal
income tax. All other distributions, including distributions attributable to
interest on obligations of the United States or instrumentalities and that are
not exempt from state taxation under federal law distributions attributable to
capital gain (other than capital gain on Connecticut Obligations), will be
subject to the Connecticut personal income tax.
All distributions from the Fund, regardless of source, will be subject to
the Connecticut corporation business tax, but corporate shareholders may be
permitted a dividends received deduction for the portion of Fund distributions
received that are not exempt-interest dividends or capital gain dividends.
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.
Shares of the Fund may be subject to the Connecticut succession and
transfer tax and the Connecticut estate tax if owned by, or subject to a general
power of appointment by, a Connecticut decedent at the time of death.
Shareholders are advised to consult with their own tax advisers for more
detailed information concerning Connecticut and local tax matters.
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APPENDIX E-4
Factors Pertaining to Florida
As described above, except to the extent the Fund invests in temporary
investments, the Fund will invest substantially all of its net assets in Florida
municipal bonds. The Fund is therefore susceptible to statutory political,
economic and regulatory factors affecting issuers of Florida municipal bonds.
Some of these factors, including the State budget process, the State's economy,
and voter initiatives, may weaken or jeopardize the ability of Florida municipal
bond issuers to pay principal or interest on their bonds and, therefore, the
value of the Fund's investment portfolio. The following information provides
only a brief summary of some of the complex factors affecting the financial
situation in Florida (the "State"). This information is derived from sources
that are generally available to investors and is believed to be accurate. It is
based in part on information obtained from various State and local agencies in
Florida. No independent verification has been made of any of the following
information. It should also be noted that the creditworthiness of obligations
issued by local Florida issuers may be unrelated to the creditworthiness of
obligations issued by the State of Florida, and that there is no obligation on
the part of the State to make payment on such local obligations in the event of
default or financial difficulty.
Florida's Constitution allows the issuance of State bonds pledging the full
faith and credit of the State generally only upon approval of the electorate and
in an aggregate principal amount not exceeding 50% of the State's total tax
revenues for the two preceding fiscal years. A number of exceptions to the
election requirement have been enacted, allowing the issuance of full faith and
credit bonds in addition to a primary pledge of a separately identifiable
revenue source for certain uses such as road and bridge projects, education and
environmental facilities and projects.
State Economy. The State's economy has in the past been highly dependent
on the construction industry and construction-related manufacturing. This
dependency has declined in recent years and continues to do so in part as a
result of continued diversification of the State's economy. For example, total
construction employment as a share of total non-farm employment reached a peak
of 10% in 1973. In 1980, this dropped to just over 7%, and in 1990 edged
downward to 6% of total non-farm employment. This trend is expected to continue
as the State's economy continues to diversify. The Florida 1998 Estimating
Conference predicts that in the 2000-01 fiscal year, employment in construction
will be 5.1% of non-farm employment.
During the 1980s the State's job creation rate was well over twice the rate
for the nation as a whole and its growth rate in new non-agricultural jobs was
the fastest of the 11 most populous states and second only to California in the
absolute number of new jobs created. However, the State's historically strong
job growth rate is weakening. According to Florida's 1998 Estimating
Conference, after growing 4.1% in 1997-98, the State's total non-farm jobs are
expected to increase by 3.5% in 1998-99, and rise by 3.1% in 1999-2000. The
State's unemployment rate was 4.9% during 1996-97 and 4.7% in 1997-98. The
State's unemployment rate is currently projected to be 4.3% for each of the
1998-99 and 1999-2000 fiscal years.
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According to the U.S. Department of Commerce, for 1997, the State's per
capita personal income of $24,795 was slightly below the national average of
$25,298, but significantly ahead of that for the southeast United States, which
was $22,776. Real personal income growth is expected to increase by 4.6% in
1998-99 but increase only by 3.7% in 1999-2000, with real personal income per
capita expected to increase by 2.7% in 1998-99 and 2.0% in 1999-2000. A 1.8%
increase in real personal income per capita is projected by the end of 2000-
2001. The total number of tourists is forecasted to increase by 2.4% in 1998-99
and by 3.2% in 1999-2000.
State Budget. In fiscal year 1997-98, approximately 67.5% of the State's
total direct revenue was derived from State taxes, with Federal grants and other
special revenue accounting for the balance. State sales and use tax, corporate
income tax, and beverage tax amounted to 70.7%, 8.3% and 3.3%, respectively, of
total General Collections and Transfers during fiscal 1997-98. In that same
year, total appropriations for education, health and rehabilitative services and
law enforcement amounted to $12,498.6 million, $1,424.4 million and $134.3
million, respectively.
According to the March 8, 1999 Estimating Conference, estimated fiscal year
1998-99 General Revenue plus Working Capital and Budget Stabilization funds
available to the State total $18,795.8 million, a 5.4% increase over 1997-98.
Of the total General Revenue plus Working Capital and Budget Stabilization funds
available to the State, $17,779.5 million is Net Estimated General Revenues,
representing an increase of 5.0% over the previous year's Net Estimated General
Revenues. With effective General Revenues plus Working Capital Fund and Budget
Stabilization appropriations at $18,185.0 million, including a $100.9 million
transfer to the Budget Stabilization Fund, unencumbered reserves at the end of
1998-99 are estimated to be $1,379.6 million. Estimated fiscal year 1999-2000
General Revenue plus Working Capital and Budget Stabilization funds available
total $19,347.0 million, a 2.8% increase over 1998-99. The $18,555.2 million in
Estimated Revenues represents an increase of 4.3% over the previous year's
Estimated Revenues.
The State's sales and use tax currently accounts for the State's single
largest source of tax receipts. Slightly less than 10% of the State's sales and
use tax is designated for local governments and is distributed to the respective
counties in which collected for use by the counties and municipalities therein.
In addition to this distribution, local governments may (by referendum) assess a
0.5% or a 1.0% discretionary sales surtax within their county. Proceeds from
this local optional sales tax are earmarked for funding local infrastructure
programs and acquiring land for public recreation or conservation or protection
of natural resources as provided under applicable Florida law. Certain charter
counties have other tax powers and certain non-consolidated counties with a
population in excess of 800,000 may levy a local option sales tax to fund
indigent health care. Alone, the optional sales tax cannot exceed 0.5% and when
combined with the infrastructure surtax cannot exceed 1.0%. For the fiscal year
ended 1997-98, sales and use tax receipts (exclusive of the tax on gasoline and
special fuels) totaled $11,841.1 million, an increase of 7.3% over fiscal year
1996-97.
The second largest source of State tax receipts is the tax on motor fuels.
However, these revenues are almost entirely dedicated trust funds for specific
purposes and are not included in the State's General Revenue Fund.
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The State imposes an alcoholic beverage, wholesale tax (excise tax) on
beer, wine, and liquor. This tax is one of the State's major tax sources, with
revenues totaling $550 million in fiscal year 1997-98, 1.8% more than in 1996-
97. Ninety-eight percent of the revenues collected from this tax are deposited
into the State's General Revenue Fund.
The State imposes a corporate income tax. All receipts of the corporate
income tax are credited to the General Revenue Fund. For the fiscal year 1997-
98, receipts from this source were $1,395.7 million, an increase of 2.5% from
fiscal year 1996-97.
The State imposes a documentary stamp tax on deeds and other documents
relating to realty, corporate shares, bonds, certificates of indebtedness,
promissory notes, wage assignments, and retail charge accounts. The documentary
stamp tax collections totaled $429.6 million during fiscal year 1997-98, an
23.0% increase from the previous fiscal year.
The State imposes an intangible personal property tax on stocks, bonds,
including bonds secured by liens in Florida real property, notes, governmental
leaseholds, and certain other intangibles not secured by a lien on Florida real
property. The annual rate of tax is 2 mills (a mil is $1.00 of tax per
$1,000.00 of property value). Pursuant to recently enacted legislation, this
rate is to be reduced to 1.5 mils effective January 1, 2000. Second, the State
imposes a non-recurring 2 mil tax on mortgages and other obligations secured by
liens on Florida real property. In fiscal year 1997-98, total intangible
personal property tax collections were $756.0 million, a 25.9% increase from the
prior year.
The State imposes an estate tax on the estate of a decedent for the
privilege of transferring property at death. All receipts of the estate tax are
credited to the General Revenue Fund. For the fiscal year 1997-98, receipts
from this source were $595.0 million, an increase of 8.8% from fiscal year 1996-
97.
Revenue Generating Measures. In 1987, the State Legislature passed a major
revenue enhancement bill resulting in the largest tax increase in State history.
In order to balance the budget, as required by the State's Constitution, a 5%
sales tax was imposed on nearly all services sold or used in the State. However,
the tax was challenged by numerous national groups and repealed, effective
January 1, 1988. At the same time the tax was replaced by a one cent ($01)
increase, from 5% to 6%, in the general sales tax on goods and rentals. The one
cent ($01) increase became effective February 1, 1988. The sales and use tax
currently accounts for the State's single largest source of tax receipts.
On January 12, 1988, the State began its own lottery. State law requires
that lottery revenues by distributed 50% to the public in prizes, 38% for use in
enhancing education, and the balance, 12%, to retailers as commission for their
services and for administration of the lottery. Lottery ticket sales totaled
$2.05 billion in fiscal 1997-98, a $20.0 million decrease in sales from 1996-97,
providing education with $785.2 million.
Litigation. Currently under litigation are several issues relating to
State actions or State taxes that put at risk substantial amounts of General
Revenue Fund monies. Accordingly, there is no assurance that the resolution of
any of such matters, individually or in the aggregate, will
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not have a material adverse effect on the State's financial position. A brief
summary of some of those matters follows.
Nathan M. Hameroff. M.D. et al. v. Agency For Healthcare Administration et
al. The plaintiff challenged the constitutionality of Florida's Public Medical
Assistance Trust Fund annual assessment on net operating revenue of free
standing out-patient facilities offering sophisticated radiology services. The
trial has not been scheduled. If the State is unsuccessful in its action, the
potential refund liability could approximate $70 million.
On August 25, 1997, the top four cigarette manufacturers and the largest
seller of chew and snuff agreed to pay the State $11.3 billion over a period of
25 years to settle a pending lawsuit brought by the State against such parties.
Further, the defendants agreed to ban most outdoor cigarette advertising in the
State.
State Bond Rating. The State maintains a bond rating of Aa and "AA" from
Moody's and S&P, respectively, on the majority of its general obligation bonds,
although the rating of a particular series of revenue bonds relates primarily to
the project, facility or other revenue source from which such series derives
funds for repayment. While these ratings and some of the information presented
above indicate that the State is in satisfactory economic health, there can be
no assurance that there will not be a decline in economic conditions or that
particular Florida municipal bonds purchased by the Fund will not be adversely
affected by any such changes.
Florida Tax Matters
The following is based upon the advice of ________, special Florida counsel
to the Fund.
The following is a general, abbreviated summary of certain provisions of
the applicable Florida 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 actions, and any such change may be retroactive
with respect to transactions of the Fund.
The following is based on the assumptions that the Fund will qualify under
Subchapter M of the Code as a regulated investment company, that it will satisfy
the conditions which will cause distributions of the Fund to qualify as exempt-
interest dividends to shareholders for federal purposes, and that it will
distribute all interest and dividends it receives to the shareholders.
Florida does not impose an income tax on individuals. All corporate
shareholders of the Fund will be subject to Florida income taxation on their
apportioned share of the income characterized as business income of such
shareholder under the Florida Income Tax Code ("Florida Code") realized by the
Fund and distributed to them notwithstanding the tax exempt character of the
interest received from Florida municipal bonds under Section 103(a) of the Code
or any other Federal law, as well as on gains realized from a sale or redemption
of the Common Shares to the extent characterized as business income. Only a
corporate shareholder that has its commercial domicile in Florida will be
taxable under the Florida Code on its respective share of the Fund's capital
gains and interest income that constitute nonbusiness income of such shareholder
and that is distributed to it, and on gains realized from a sale or redemption
of the
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Common Shares that constitute nonbusiness income. Certain trusts, excluding
private and testamentary trusts, may be subject to the Florida corporate income
tax.
Neither the Fund nor the shareholders of the Fund will be subject to the
Florida intangible personal property tax on the Florida municipal bonds or the
Common, respectively, with respect to any calendar year so long as at the close
of the preceding calendar year and on January 1 of the then current year, the
Fund's portfolio assets consisted solely of Florida municipal bonds and other
assets exempt from the Florida intangible personal property tax.
The Common Shares will be subject to Florida estate tax only if owned by
Florida residents, certain natural persons not residents of Florida, or certain
natural persons not residents of the United States. The Florida estate tax is
limited, however, to the amount of the credit allowable under the applicable
Federal Revenue Act (currently Section 2011 and in some cases Section 2102 of
the Code) for state death taxes actually paid to the several states.
For Florida state income tax purposes, the Fund should not be liable for
Florida corporate income tax imposed by the Florida Code so long as the Fund
distributes annually to its shareholders all of its tax-exempt income, net
capital gains, and other income, and has no investment company taxable income as
defined by the Code. However, the Fund should have taxable income for Florida
corporate income tax purposes if it has nexus in Florida and: (a) earns tax-
exempt interest in excess of its distributions of such income; (b) it earns net
long-term capital gain income in excess of its distributions of such income; or
(c) it earns other income in excess of its distributions of such income.
The Common Shares will not be subject to the Florida ad valorem property
tax or Florida sales and use tax.
The foregoing is a general, abbreviated summary of certain of the
provisions of the Florida Code presently in effect as it directly governs the
taxation of shareholders of the Fund. These provisions are subject to change by
legislative or administrative action, and any such change may be retroactive
with respect to Fund transactions. Shareholders are advised to consult with
their own tax advisers for more detailed information concerning Florida tax
matters.
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APPENDIX E-5
Factors Pertaining to Maryland
Maryland has benefited from the expansion in the national economy. The
State's once sluggish economy has shown improvement, although employment and
income growth rates remain at or below neighboring states. Services, wholesale
and retail trade, and government account for most of the State's employment.
Unlike in most states, government employment surpasses manufacturing employment
in Maryland.
The State's unemployment rate, which fell to 4.4% in June 1998 from 5.2% in
June 1997, remains below the national average. Per capita income, which was
$28,969 in 1997, is 113% of the national average.
The State Constitution mandates a balanced budget. Conservative fiscal
policies and recent economic growth have benefited the State's financial
position. For example, the State's statutorily-mandated rainy day fund has
exceeded its required 5% level recently. The rainy day fund has exceeded its
required 5% level recently. The rainy day fund is, however, scheduled to be
drawn down to its 5% level in future years. During its spring 1998 term, the
Maryland legislature voted to accelerate the income tax reduction it passed in
1997; as a result, income taxes will be reduced by 5% in 1998, more than the 2%
reduction originally planned for 1998. the 1988 reduction is part of the total
10% reduction to the State's income tax, which is being phased in through 2002.
Maryland's general obligation debt, which is constitutionally limited to a
maximum term of 15 years, remains moderate. Maryland's general obligation debt
carries triple-A ratings from Moody's, Standard & Poor's, and Fitch.
State Tax Matters
The following is based upon the advice of ________, 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.
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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 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 advisers for more
detailed information concerning Maryland state and local tax matters.
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APPENDIX E-6
Factors Pertaining to Massachusetts
Except to the extent the Massachusetts Municipal Bond Fund and the
Massachusetts Insured Municipal Bond Fund (the "Massachusetts Funds") invest in
temporary investments, the Massachusetts Funds will invest substantially all of
their net assets in Massachusetts Municipal Obligations. The Massachusetts
Funds are therefore susceptible to political, economic or regulatory factors
affecting issuers of Massachusetts Municipal Obligations. The Massachusetts
Funds will invest substantially all of their net assets in Massachusetts
Municipal Obligations. The Massachusetts Funds are therefore susceptible to
political, economic or regulatory facts affecting issuers of Massachusetts
Municipal Obligations. 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 Obligations in the Funds or the ability of particular obligors to
make timely payments of debt service on (or relating to) those obligations.
The Massachusetts economy has fully recovered from the recession of the
early 1990's and has grown at a healthy pace. The strongest in New England, the
State's economy has also performed well relative to the national economy across
several indicators. Unemployment remains below the national average,
registering 2.9% in April 1999 versus the national rate of 4.3% for the same
time period. Per capita income levels remain high at approximately $32,797,
124% of the national average, placing Massachusetts third among the states for
per capita income levels. The State has also registered strong per capita
income growth, oustripping the national growth rate. The State's economy
remains diverse, with construction, financial services, health care and higher
education continuing to make important contributions to the State's economy.
The service sector is the largest sector in the Massachusetts economy, following
by wholesale and retail trade, manufacturing, and government employment.
Recently, employment growth has slowed somewhat, in part because of
tightening labor. The State continues to lose manufacturing employment, but
those losses are being partially offset by gains in the services and
construction sectors. Large public works projects n the Boston area, including
the $10.8 billion Central Artery Project and the $1.0 billion modernization
program at Logan International Airport, have contributed construction jobs.
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 17 Fortune 500 companies located in the State
in 1998, 15 were located in the metropolitan Boston region. While many of the
communities in the eastern portion of the State have benefited from the economic
growth described above, several areas outside the metropolitan Boston region
have
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not participated as fully and continue to be hampered by higher employment,
lower per capita income and stagnant property values.
1998 Fiscal Year Budget. The budget for 1998 provides for total
expenditures and appropriations of approximately $18.8 billion, a 2.8% increase
over FY97 expenditures. The budget incorporates tax cuts valued by the Dept of
Revenue at $61 million and provides for an accelerated pension funding schedule.
Supplemental appropriations have been approved for FY98 in the amount of
approximately $94.0 million, including transfer of $34.8 million to the
Massachusetts Water Pollution Abatement Trust for state revolving fund programs.
Estimated budgeted revenues and other revenue sources are projected to reach
$20.0 billion, up 3.5% over fiscal 1997 level. Tax revenues are projected to
reach $13.2 billion, a mere 2.3% increase over fiscal 1997 level as a result of
tax cuts. A surplus of $116 million is expected at fiscal year end.
Tax law changes effective in FY98 will: increase anticipated revenues by
$19 million from miscellaneous fees to be collected as a result of the
convention center legislation approved on November 17, 1997, reduce tax revenues
by an estimated $25 million as a result of the exemption of military pensions
from state income tax, which was approved by Acting Governor Cellucci on
November 6, 1997, and reduce tax revenues by an estimated $140 million as a
result of a change in sale tax payment schedule.
Under legislation enacted in 1996, Franklin County government terminated on
July 1, 1997. Legislation approved by Governor Weld on July 11, 1997 abolished
Middlesex County government on that day and provided for the abolition of county
government in Hampden and Worcester Counties on July 1, 1998. These Counties'
debt and liabilities will be assumed by the Commonwealth and amortized over a
period of up to 25 years from assessments on the cities and towns within the
County.
On October 20, 1997, Acting Governor Cellucci announced that the Department
of Revenue will issue regulations changing the payment schedules for
approximately 15,000 sales, meals and room occupancy taxpayers that pay over
$25,000 in tax per year. Under the new simplified rules, beginning January 1,
1998, these taxpayers will be required to file a tax return and make a tax
payment on the 20th of each month for taxable sales made during the preceding
month. Under the old rules, affected taxpayers were required to forward tax
payments on the 27th of each month for taxable sales made from the 23rd of the
preceding month to the 22nd of the current month, as well as file a quarterly
tax return. While these new regulations will not affect the amount of tax owed,
the Department of Revenue estimates that the Commonwealth will realize a
reduction in fiscal 1998 revenues of $120 million to $160 million, which has
been incorporated into the January 16, 1998 revenue estimates. This reduction
will be a one-time event.
On November 17, 1997, the Legislature overrode Acting Governor Cellucci's
vote to enact legislation authorizing the Commonwealth to issue special
obligation convention center bonds secured by a pledge of certain taxes related
to tourism and conventions, including a 2.75% convention center financing fee
imposed by the legislation on hotel room occupancy in four Massachusetts cities.
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The fiscal 1998 budget is based on numerous spending and revenue estimates
the achievement of which cannot be assured.
1997 Fiscal Year. Revenues exceeded expenditures for the 7th consecutive
year. Budgeted revenues and other sources totaled $19.3 billion, up 11.6% over
FY96. Total revenues exceeded total expenditures by $281.8 million. Tax
revenues grew 6.8% to $12.9 billion. During the fiscal year, legislation was
enacted and approved to raise statutory ceiling on State's Stabilization (or
Rainy Day) fund from 5% of tax revenues to 5% of total budgetary income. As a
result, the Stabilization fund balance now stands at $799.3 million.
During FY97, the legislature mandated several transfers to be charged to
FY97, including: $229.8 million to a Capital Investment Trust Fund to finance
certain specified capital expenditures, $100 million to the Stabilization Fund
(in addition to the $134.3 million transfer required by state finance law), $128
million to a Caseload Increase Mitigation Fund to finance Dept of Transitional
Assistance programs in the event caseloads increase beyond what is budgeted, and
$20.2 million to the Massachusetts Water Pollution Abatement Trust for state
capitalization grants for the state revolving fund programs.
On March 11, 1997, the Legislature's Committee on Counties approved
legislation that would abolish Middlesex County government immediately upon
final approval of the legislation and transfer its functions to the Commonwealth
The county's debts and liabilities which are in force on July 1, 1997 would be
assumed by the Commonwealth and amortized over a period of up to 25 years from
assessments on the cities and towns within the county. The legislation would
also bar the sale of public property to satisfy judgments against the county.
The legislation is now being considered by the House Committee on Ways and
means.
On March 12, 1997, the Legislature's Committee on Transportation approved
legislation to establish a Metropolitan Highway System, in substantially the
form in which it had been filed by the Governor on January 6, 1997. A provision
in the legislation added by the committee would mandate a new "asset assessment
study" to determine, within one year, whether the Massachusetts Port Authority
could afford to contribute as much as $300 million toward the cost of the Ted
Williams Tunnel/Central Artery project, rather than the $200 million
contribution proposed by the Governor and contemplated by the legislation. The
study is to be conducted by the Executive Office for Administration and Finance,
the State Auditor, the Division of Capital Planning and Operations and the Port
Authority. The legislation approved by the Transportation Committee does not
authorize any additional state spending for the project. The Governor's
proposals for additional spending authorizations are contained in a
transportation bond bill which is still being considered by the committee. The
bill approved by the Transportation Committee has been scheduled in both the
House of Representatives and Senate for expedited debate and enactment on
March 13, 1997.
1996 Fiscal Year. Budgeted revenues and other sources, including non-tax
revenues, collected in fiscal 1996 were approximately $17.328 billion,
approximately $944 million or 5.7% above fiscal 1995 revenues of approximately
$16.387 billion. Fiscal 1996 tax revenue collections were approximately $12.049
billion, approximately $365 million above the Department of Revenue's revised
financial year 1996 tax revenue estimate of $11.684 billion and $886 million, or
7.9% above fiscal 1995 tax revenues of $11.163 billion.
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<PAGE>
Budgeted expenditures and other uses of funds in fiscal 1996 were
approximately $16.881 billion, approximately $630.6 million or 3.9% above fiscal
1995 budgeted expenditures and uses of $16.251 billion. The Commonwealth ended
fiscal 1996 with an operating gain of approximately $446.4 million and an ending
fund balance of approximately $1.172 billion.
On August 8, 1996, the Governor approved legislation making two changes in
the apportionment formula for the business corporations tax payable by certain
mutual fund service corporations. Effective January 1, 1997, the legislation
changes the computation of the sales factor. Instead of sourcing sales from the
state where the seller bears the cost of performing the services relating to the
sale, the corporations will source sales to the state of domicile of the
ultimate consumer of the service. Effective July 1, 1997, the legislation
changes the current three-factor formula to a single sales factor formula, just
as the November, 1995 legislation did for certain federal defense contractors
and, over time, for manufacturing firms. The new law requires the affected
corporations to increase their numbers of employees by 5% per year for five
years, subject to exceptions for adverse economic conditions affecting the stock
market or the amount of assets under their management. The Department of
Revenue estimates that the changes will result in a revenue reduction of
approximately $10 million in fiscal 1997 and approximately $30 million to $53
million on an annualized basis thereafter, starting in fiscal 1998.
On August 9, 1996, the Governor signed legislation providing tax credit to
shippers that pay federal harbor maintenance taxes on cargo passing through
Massachusetts ports. The Department of Revenue estimates that there will be no
impact on revenues in fiscal 1997 as a result of this tax credit, and that the
annualized revenue loss will be approximately $3 million to $4 million,
beginning in fiscal 1998.
The Executive Office for Administration and Finance is currently evaluating
the impact of the federal welfare reform legislation enacted on August 22, 1996
on the Commonwealth's spending and revenue associate with public assistance
programs. Current estimates indicate no fiscal 1997 spending impact associated
with the passage of the federal reform While current estimates also indicate an
$86.3 million increase in federal revenues for the Commonwealth in fiscal 1997,
this has not yet been incorporated into the Commonwealth's estimates for fiscal
1997 federal revenues.
1995 Fiscal Year. Budgeted revenues and other sources, including non-tax
revenues, collected in fiscal 1995 were approximately $16,387 billion,
approximately $837 million, or 5.4% above fiscal 1994 revenues of $15.550
billion. Fiscal 1995 tax revenues collections were approximately $11.163,
billion approximately $12 million above the Department of Revenue's revised
fiscal year 1995 tax revenue estimate of $10.151 billion and $556 million, or
5.2%, above fiscal year tax revenues of $10.607 billion.
Budgeted expenditures and other uses of funds in fiscal 1995 were
approximately $16.251 billion, approximately $728 million, or $4.7%, above
fiscal 1994 budgeted expenditures and uses of $15.523 billion. The Commonwealth
ended fiscal 1995 with an operating gain of $137 million and an ending fund
balance of $726 million.
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Employment. Reversing a trend of relatively low unemployment during the
early and mid 1980's, the Massachusetts unemployment rate beginning in 1990
increased significantly to where the Commonwealth's unemployment rate exceeded
the national unemployment rate. During 1990, the Massachusetts unemployment
rate increased from 4.5% in January to 6.1% in July to 6.7% in August. During
1991, the Massachusetts unemployment rate averaged 9.0% while the average United
States unemployment rate was 6.7%. The Massachusetts unemployment rate during
1997 averaged 8.5% while the average United States unemployment rate was 7.4%.
Since 1993, the average monthly unemployment rate has declined steadily. The
Massachusetts unemployment rate in 1998 was 3.3%, as compared with the United
States unemployment rate of 4.5% for the same period. Other factors which may
significantly and adversely affect the employment rate in the Commonwealth
include reductions in federal government spending on defense-related industries.
Due to this and other considerations, there can be no assurance that
unemployment in the Commonwealth will not increase in the future.
Debt Ratings. From 1989 through 1992, the Commonwealth had experienced a
steady decline in its S&P rating, with its decline beginning in May 1989, when
S&P lowered its rating on the Commonwealth's general obligation bonds and other
Commonwealth obligations from AA+ to AA and continuing a series of further
reductions until March 1992, when the rating was affirmed at BBB.
Debt Ratings. As of June 15, 1999, Moody's, Standard & Poor's, and Fitch
maintained Aa3, AA- and AA- ratings on the State's general obligation debt,
respectively. 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.
There can be no assurance that these ratings will continue.
In recent 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 continuation of, or an increase in, such financial difficulties could result
in declines in the market values of, or default on, existing obligations
including Massachusetts Obligations 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 are marketability of all outstanding bonds
issued by the Commonwealth and its public authorities or municipalities
including the Massachusetts Obligations in the Fund and interest income to the
Fund could be adversely affected.
Total Bond and Note Liabilities. The total general obligation bond
indebtedness of the Commonwealth (including Dedicated Income Tax Debt and
Special Obligation Debt) as of April 1, 1998 was approximately $10.349 billion.
The total bond and note liabilities of the Commonwealth as of April 1, 1998,
including guaranteed bond and contingent liabilities was approximately $14.526
billion.
Debt Service. During the 1980's, capital expenditures were increased
substantially, which has had a short term impact on the cash needs of the
Commonwealth and also accounts for a significant rise in debt services during
that period. In November, 1988, the Executive Office
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for Administration and Finance established an administrative limit on state-
financed capital spending in the Capital Projects Funds of $925 million per
fiscal year. Capital expenditures were $694.1 million, $575.9 million, $760.6
million, $902.2 million, $908.5 million and $956.3 million in fiscal 1992,
fiscal 1993, fiscal 1994, fiscal 1995, fiscal 1996 and fiscal 1997,
respectively. Commonwealth-financed capital expenditures are projected to be
approximately $1.05 billion in fiscal 1998.
The growth of capital expenditures during the 1980's accounts for the
significant rise in annual debt services expenditures since fiscal 1989.
Payments for debt service on Commonwealth general obligation bonds and notes in
fiscal 1992 were $898.3 million, representing a 4.7% decrease from $942.3
million in fiscal 1991, which resulted from a $261 million one-time reduction
achieved through the issuance of refunding bonds in September and October, 1991.
Debt service expenditures for fiscal 1993, fiscal 1994, fiscal 1995, fiscal 1996
and fiscal 1997 were $1.140 billion, $1.149 billion, $1.231 billion, $1.184
billion, and $1.275 billion, respectively, and are projected to be $1.224
billion for fiscal 1998. the amounts noted represent debt service payments on
Commonwealth debt (including Fiscal Recovery Bonds and special obligation
bonds). The amounts noted do not include debt service contract assistance
payments to the Massachusetts Bay Transportation Authority ($302.6 million
projected in fiscal 1998), the Massachusetts Convention Center ($24.6 million
projected in fiscal 1998), the Massachusetts Government Land Bank ($6 million
projected in fiscal 1998) and the Massachusetts Water Pollution Abatement Trust
(up to $46 mm in each fiscal year) and grants to municipalities under the school
building assistance program to defray a portion of the debt service costs on
local school bonds ($187.3 million projected in fiscal 1998).
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 1997 is 5.7%, which is projected to rise to 6.3% in
fiscal 1998.
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. The Commonwealth has
signed consent decrees to continue improving mental health care and programs for
the mentally restarted in order to meet federal standards, including those
governing receipt of federal reimbursements under various programs, and the
parties in those cases have worked cooperatively to resolve the disputed issues.
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 funding
schedule must provide for annual payments in each of the ten years ending fiscal
1998 which are at least equal to the total estimated pay-as-you-go pension costs
in each year. As a result of this requirement, the funding requirements for
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fiscal 1996, 1997 and 1998 are estimates to be increased to approximately $1.007
billion, $1.061 billion and $1.065 billion, respectively.
Litigation. The Commonwealth is engaged in various lawsuits involving
environmental and related laws, including an action brought on behalf of the
U.S. Environmental Protection Agency alleging violations of the Clean Water Act
and seeking to enforce the clean-up of Boston Harbor. The MWRA, successor in
liability to the Metropolitan District Commission, has assumed primary
responsibility for developing and implementing a court-approved plan for the
construction of the treatment facilities necessary to achieve compliance with
federal requirements. Under the Clean Water Act, the Commonwealth may be liable
for costs of compliance in these or any other Clean Water cases if the MWRA or a
municipality is prevented from raising revenues necessary to comply with a
judgment. The MWRA currently projects that the total cost of construction of
the treatment facilities required under the court's order is approximately
$3.142 billion in current dollars, with approximately $901 million to be spent
on or after June 30, 1997.
The Department of Public Welfare has been sued for the alleged unlawful
denial of personal care attendant services to certain disabled Medicaid
recipients. The Superior Court has denied the plaintiff's motion for
preliminary injunction and has also denied the plaintiff's motion for class
certification. If the plaintiffs were to prevail on their claims and the
Commonwealth were required to provide all of the services sought by the
plaintiffs to all similarly situated persons, it would substantially increase
the annual cost to the Commonwealth if these services are eventually required.
The Department of Public Welfare currently estimates this increase to be as much
as $200 million per year.
There are also actions pending in which recipients of human services
benefits, such as welfare recipients, the mentally retarded, the elderly, the
handicapped, children, residents of state hospitals and inmates of corrections
institutions, seek expanded levels of services and benefits and in which
providers of services to such recipients challenge the rates at which they are
reimbursed by the Commonwealth. 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 1995, the Spaulding Rehabilitation Hospital ("Spaulding") filed an
action to enforce an agreement to acquire its property by eminent domain in
connection with the Central Artery/Third Harbor Tunnel Project. On March 131,
1998, the Superior Court entered judgment for the Commonwealth and dismissed the
complaint.
The Commonwealth faces an additional potential liability of approximately
$75 million to $135 million in connection with a taking by the Massachusetts
Highway Department related to there location of Northern Avenue in Boston.
In Massachusetts Wholesalers of Malt Beverages v. Commonwealth (Suffolk
Superior Court No. 90-1523), associations of bottlers challenged the 1990
amendments to the bottle bill which escheat abandoned deposits to the
Commonwealth. Plaintiffs claimed a taking; the Commonwealth argued a legitimate
regulation of abandoned amounts. In March, 1993, the Supreme Judicial Court
upheld the amendments except for the initial funding requirement, which
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the Court upheld severable. In August 1994, the Superior Court ruled that the
Commonwealth is liable for certain amounts (plus interest) as a result of the
Supreme Judicial Court's decision. The actual amount will be determined in
further proceedings. In February, 1996, the Commonwealth settled all remaining
issues with one group of plaintiffs, the Massachusetts Soft Drink Association.
Payments to that group will total approximately $7 million. The Legislature
appropriated the funds necessary for these payments in its final supplemental
budget for fiscal 1996. Litigation with the other group of plaintiffs, the
Massachusetts Wholesalers of Malt Beverages, is still pending. The remaining
potential liability is approximately $50 million.
In the First National Bank of Boston v. Commission of Revenue (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 has now 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 Commonwealth's potential liability is $128
million.
In State Street Bank and Trust Company v. Commissioner of Revenue
(Appellate Tax Board Nos. F215497, F232152, F233019 and F233948), State Street
Bank and Trust Company has raised the same claims as the First National Bank of
Boston, outlined above. State Street Bank also claims that it is entitled to
alternative apportionment under the bank excise tax. The Department of Revenue
estimated that the amount of the abatement could have totaled $158 million. On
February 19, 1998, the cased was settled for $8.7 million.
In National Association of Government Employees v. Commonwealth, the
Superior Court declared that a line item in the Commonwealth's general
appropriations act for fiscal 1994 that increased the state employees'
percentage share of their group health insurance premiums from 10% to 15%
violated the terms of several collective bargaining agreements, and therefore
was invalid under the United States Constitution as regards employees covered by
the agreements. On February 9, 1995, the Supreme Judicial Court vacated the
Superior Court's decision and declared that the fiscal 1994 line item did not
violate the contracts clause. In June, 1995, the United States Supreme Court
denied the plaintiff's writ of certiorari. Several other unions have filed a
companion suit asserting that the premium increase similarly violated other
collective bargaining agreements. The latter suit is in its initial stages.
Prior to the Supreme Judicial Court's decision the Commonwealth's aggregate
liability is estimated to be approximately $32 million.
A variety of other civil suits pending against the Commonwealth may also
affect its future liabilities. There include challenges to the Commonwealth's
allocation of school aid under Section 9C of Chapter 29 of the General Laws and
to adopt a state employee furlough program. No prediction is possible as to the
ultimate outcome of these proceedings.
On March 22, 1995, the Supreme Judicial Court held in Perini Corporation v.
Commission of Revenues that certain deductions from the net worth measure of the
Massachusetts corporate excise tax violate the Commerce Clause of the United
States Constitution. On October 2, 1995, the United States Supreme Court denied
the Commonwealth's petition for writ of certiorari. The Department of Revenue
estimates that tax
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revenues in the amount of $40 to $55 million may be abated as a result of the
Supreme Judicial Court's decision.
On May 13, 1996, the Court entered an order for judgment and memorandum
concerning relief for tax years ending on or after January 1, 1996. A final
ruling was entered on June 6, 1996. The Department of Revenue is continuing to
analyze the final fiscal impact of the ruling, to date, it has paid
approximately $11 million in accordance with the judgment.
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.
Tax Limitation Measures. The State and its cities and towns operate under
certain revenue-raising limitations. Proposition 2 1/2, which was passed by
voters in 1980, restricts the annual increase in property taxes levied by cities
and towns to 2.5% of the prior fiscal year's tax levy plus 2.5% of the value of
new properties and significant improvements to property. Limits on state tax
revenues were approved by voters in 1986. While the State and most of its
municipalities have managed within these constraints in recent years, these
limitations could reduce financial flexibility in the future under different
economic conditions.
Other Tax Measures. To provide revenue to pay debt service on both the
deficit and Medicaid-related borrowings and to fund certain direct Medicaid
expenditures, legislation was enacted imposing an additional tax on certain
types of personal income for 1989 from 5% to 5.375% and for 1990 to 5.75%.
Recent legislation has effectively further increased tax rates to 5.95% for tax
year 1990 to 6.25% for tax year 1991 and returning to 5.95% for tax year 1992
and subsequent tax years. The tax is applicable to all personal income except
income derived from dividends, capital gains, unemployment compensation,
alimony, rent, interest, pensions, annuities and IRA/Keogh distributions. The
income tax rate on other interest (excluding interest on obligations of the
United States and the Commonwealth and its subdivisions), dividends and net
capital gains (after a 50% reduction) was increased from 10% to 12% for tax year
1990 and subsequent years, by recently enacted legislation.
As part of Acting Governor Celluci's fiscal 1999 budget recommendations, he
proposed a reduction in the tax rate on "Part B" personal income (so-called
"earned" income) from the current level of 5.95% to 5% over three calendar
years. The rate would be reduced to 5.6% effective January 1, 1999, 5.3%
effective January 1, 2000 and 5% effective January 1, 2001. The Executive
Office for Administration and Finance estimates that the static revenue impact
of these changes would be a reduction in personal income tax collections of
approximately $206 million in fiscal 1999, $616 million in fiscal 2000, $1.035
billion in fiscal 2001 and $1.292 billion in fiscal 2002, at which time the rate
reduction would be fully implemented. The Acting Governor also proposed a
reduction in the tax rate on "Part A" personal income (so-called "unearned"
income) from 12% to 5% over five years. The Executive Office for Administration
and Finance estimates that the static revenue impact of these changes would be a
reduction in personal income tax collections of approximately $30 million in
fiscal 1999, $101 million in fiscal 2000, $173 million in fiscal 2001, $249
million in fiscal 2002, $327 million in fiscal 2003 and $372 million in fiscal
2004, at which time the rate reduction would be fully implemented. See "1999
FISCAL YEAR." On March 12, 1998 the House of Representatives approved
legislation that
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would reduce the rate on Part A and Part B income, and raise the rate on capital
gains income, to 5.7%, as well as raising the age of the children's exemption to
age 18 and raising the amount of the exemption from $1,200 to $2,400.
Estate Tax Revisions. The fiscal 1993 budget included legislation which
gradually phases out the current Massachusetts estate tax and replaces it with a
"sponge tax" in 1997. The "sponge tax" is based on the maximum amount of the
credit for state taxes allowed for federal estate tax purposes. The estate tax
is phased out by means of annual increases in the basic exemption from the
current $200,000 level. The exemption is increased to $300,000 for 1993,
$400,000 for 1994, $500,000 for 1995 and $600,000 for 1996. In addition, the
legislation included a full marital deduction starting July 1, 1994.
Other Issuers of Massachusetts Obligations. There are a number of state
agencies, instrumentalities and political subdivisions of the Commonwealth that
issue Municipal Obligations, some of which may be conduit revenue obligations
payable from payments from private borrowers. These entities are subject to
various economic risks and uncertainties, and the credit quality of the
securities issued by them may vary considerably from the credit quality of
obligations backed by the full faith and credit of the 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
Obligations.
Massachusetts Tax Matters
The following is based upon the advice of ________, 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
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personal income tax. All other distributions will be subject to the
Massachusetts personal income 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.
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 advisers for more
detailed information concerning Massachusetts state and local tax matters.
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APPENDIX E-7
Factors Pertaining to Michigan
The Fund's concentration on municipal bonds issued by the State of Michigan
(the "State") or its agencies and by local governments in the State 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 Michigan
issuers. Also, the financial strength of local governments in Michigan is not
directly related to the strength of the State, and factors not listed below may
affect individual local governments.
As described above, except to the extent the Fund invests in temporary
investments, the Fund will invest substantially all of its net assets in
Michigan municipal bonds. The Fund is therefore susceptible to political,
economic or regulatory factors affecting issuers of Michigan municipal bonds.
The information set forth below is derived from official statements prepared in
connection with the issuance of Michigan municipal bonds and other 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
the State. This information has not been independently verified.
There can be no assurance that current or future statewide or regional
economic difficulties, and the resulting impact on issuers and other obligors
with respect to the Fund generally, will not adversely affect the market value
of Michigan municipal bonds held in the portfolio of the Fund or the ability of
particular obligors to make timely payments of debt service on (or relating to)
those obligations.
Economy. The State ranks eighth among the 50 states in population and 23rd
in physical size. The State's 1990 census population was about 9.3 million, of
which approximately 71 percent was urban and 29 percent was rural. The State's
estimated population as of July 1, 1998 was about 9.8 million.
The principal sectors of the State's economy are manufacturing of durable
goods (including automobile and office equipment manufacturing), tourism and
agriculture. As reflected in historical employment figures, the State's economy
has lessened its dependence upon durable goods manufacturing. In 1960,
employment in such industry accounted for 33% of the State's workforce. This
figure fell to 14.4% by 1998. Moreover, manufacturing (including auto-related
manufacturing) continues to be an important part of the State's economy. These
industries are highly cyclical. This factor could adversely affect the revenue
streams of the State and its political subdivisions because of its impact on tax
sources, particularly sales taxes, income taxes and single business taxes.
Historically, the average monthly unemployment rate in the State has been
higher than the average figures for the United States. Contrary to that prior
historical trend, however, for each of the last six years, the average monthly
unemployment rates in the State were less than the national averages. For 1996,
1997 and 1998, the average monthly unemployment rates in the State were 4.9%,
4.2% and 3.9%, respectively, as compared to national averages of 5.4%, 4.9%, and
4.5%, respectively.
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Budget. The budget of the State is a complete financial plan and
encompasses the revenues and expenditures, both operating and capital outlay, of
the General Fund and special revenue funds. The budget is prepared on a basis
consistent with generally accepted accounting principles (GAAP). The State's
Fiscal Year begins on October 1 and ends September 30 of the following year.
Under State law, the executive budget recommendations for any fund may not
exceed the estimated revenue thereof, and an itemized statement of estimated
revenues in each operating fund must be contained in an appropriation bill as
passed by the Legislature, the total of which may not be less than the total of
all appropriations made from the fund for that fiscal year. The State
Constitution provides that proposed expenditures from and revenues of any fund
must be in balance and than any prior year's surplus or deficit in any fund must
be included in the succeeding year's budget for that fund.
The State's Constitution limits the amount of total State revenues that may
be raised from taxes and other sources. State revenues (excluding federal aid
and revenues used for payment of principal and interest on general obligation
municipal bonds) in any fiscal year are limited to a specified percentage of
State personal income in the prior calendar year or average of the prior three
calendar years, whichever is greater. The State may raise taxes in excess of
the limit in emergency situations.
The State finances its operations through the State's General Fund and
special revenue funds. The General Fund receives revenues that are not
specifically required to be included in the special revenue funds.
Approximately 56 percent of General Fund revenues are obtained from the payment
of State taxes and approximately 44 percent from federal and non-tax revenue
sources. Tax revenues credited to the General Fund include the State's personal
income tax, single business tax, use tax, and the sales tax. In addition the
State levies various other taxes. Over two-thirds of total General Fund
expenditures are made for education and the State's Family Independence Agency
and Department of Community Health.
The State General Fund-General Purpose budget for the 1998-1999 fiscal
year, which began on October 1, 1998, has been adopted by the State legislature.
This budget projects General Fund/General Purpose revenues of approximately $8.8
billion.
The governor's executive budget for fiscal year 1999-2000 was submitted to
the State legislature on February 11, 1999 and recommended a fiscal year 1999-
2000 General Fund-General Purpose budget of approximately $9.1 billion.
The State maintains a Counter-Cyclical Budget and Economic Stabilization
Fund (the "BSF") which accumulates balances during the years of significant
economic growth and which may be utilized during periods of budgetary
shortfalls. Calculated on an accrual basis, the unreserved ending accrued
balance of the BSF on September 30, 1995 was $987.9 million, $614.5 million on
September 30, 1996, $579.8 million on September 30, 1997 and $1,000.5 million on
September 30, 1998. The balance is net of a reserve for future education
funding of $529.1 million on September 30, 1996 and $572.6 million on
September 30, 1997.
Debt. The State Constitution limits State general obligation debt to (i)
short-term debt for State operating purposes which must be repaid in the same
fiscal year in which it is issued and which cannot exceed 15% of the undedicated
revenues received by the State during the
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preceding fiscal year, (ii) short and long-term debt unlimited in amount for the
purpose of making loans to school districts and (iii) long-term debt for voter-
approved purposes.
The State has issued and has outstanding general obligation full faith and
credit municipal bonds for water resources, environmental protection program,
recreation program and school loan purposes totaling, as of September 30, 1998,
approximately $875 million. In November 1988, the State's voters approved the
issuance of $800 million of general obligation municipal bonds for environmental
protection and recreational purposes; of this amount approximately $174 million
remains to be issued as of September 30, 1998. In addition, in November 1998
the State's voters approved the issuance of $675 million in general obligation
indebtedness for environmental and other purposes.
Other Issuers of Michigan Municipal Bonds. There are a number of state
agencies, instrumentalities and political subdivisions of the State that issued
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 obligations backed by the full faith and credit of
the State.
Ratings. As of May 18, 1999, the State's general obligation municipal
bonds are rated "Aa1" by Moodys, "AA+" by S&P and "AA+" by Fitch IBCA. In
January, 1998, the State received an upgrade from S&P from its prior rating of
"AA". In March, 1998, the State received an upgrade from Moody's from its prior
rating of "Aa2". In April, 1998, the State received an upgrade from Fitch from
its prior rating of "AA".
Litigation. The State is a party to various legal proceedings seeking
damages or injunctive or other relief. In addition to routine litigation,
certain of these proceedings could, if unfavorably resolved from the point of
view of the State, substantially affect state programs or finances. As of May
18, 1999, these lawsuits involved programs generally in the areas or
corrections, tax collection, commerce and budgetary reductions to school
districts and governmental units and court funding. The ultimate disposition of
these proceedings was not determinable as of May 18, 1999.
Property Tax and School Finance Reform. The State Constitution limits the
extent to which municipalities or political subdivisions may levy taxes upon
real and personal property through a process that regulates assessments.
On March 15, 1994, Michigan voters approved a property tax and school
finance reform measure known as Proposal A. Under Proposal A, as approved,
effective May 1, 1994, the State sales and use tax increased from 4% to 6%, the
State income tax decreased from 4.6% to 4.4%, the cigarette tax increased from
$.25 to $.75 per pack and an additional tax of 16% of the wholesale price began
to be imposed on certain other tobacco products. A .75% real estate transfer
tax became effective January 1, 1995. Beginning in 1994, a State property tax
of 6 mills began to be imposed on all real and personal property currently
subject to the general property tax. All local school boards are authorized,
with voter approval, to levy up to the lesser of 18 mills or the number of mills
levied in 1993 for school operating purposes on nonhomestead property and
nonqualified agricultural property. Proposal A contains additional provisions
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<PAGE>
regarding the ability of local school districts to levy taxes, as well as a
limit on assessment increases for each parcel of property, beginning in 1995.
Such increases for each parcel of property are limited to the lesser of 5% or
the rate of inflation. When property is subsequently sold, its assessed value
will revert to the current assessment level of 50% of the true cash value.
Under Proposal A, much of the additional revenue generated by the new taxes will
be dedicated to the State School Aid Fund.
Proposal A and its implementing legislation provides for a system of
financing local school operating costs which relies upon a foundation allowance
amount which may vary by district based upon historical spending levels. State
funding will provide each school district an amount equal to the difference
between their foundation allowance and the revenues generated by their local
property tax levy. Local school districts would also be entitled to levy
supplemental property taxes to generate additional revenue if their foundation
allowance is less than their historical per pupil expenditures. Proposal A and
its implementing legislation also provides for the levy of a limited number of
enhancement mills on regional and local school district bases.
Proposal A shifted significant portions of the cost of local school
operations from local school districts to the State and raised additional State
revenues to fund these additional State expenses. These additional revenues
will be included within the State's constitutional revenue limitations and may
impact the State's ability to raise additional revenues in the future.
Year 2000 Compliance. On October 1, 1997, the State created the Year 2000
Project office to provide guidance, coordinate oversight for applications
software, manage Year 2000 funds, provide monitoring support, quality assurance
and other matters. As of March 31, 1999 the State had validated and tested 97%
of the critical computer applications. The State is currently on schedule to
meet its objectives for Year 2000 compliance. The State currently believes that
it will continue to meet the objectives and time frames set forth for the Year
2000 Project. There can, however, be no assurance that such completion will be
done in a timely manner.
Michigan Tax Matters
The following is based upon the advice of _______, special Michigan counsel
to the Fund.
The following is a general, abbreviated summary of certain provisions of
the applicable Michigan tax law as presently in effect as it directly governs
the taxation of resident individual and corporate Common Shareholders of the
Fund. This summary does not address the taxation of other shareholders nor does
it discuss any local taxes that may be applicable. These provisions are subject
to change by legislative or administrative action, and any such change may be
retroactive with respect to transactions of the Fund.
The following is based on the assumptions that the Fund will qualify under
Subchapter M of the Code as a regulated investment company, that it will satisfy
the conditions which will cause distributions of the Fund to qualify as exempt-
interest dividends to shareholders for federal
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<PAGE>
and California purposes, and that it will distribute all interest and dividends
it receives to the shareholders.
The Fund is not subject to tax under the Michigan personal income tax act,
the Michigan single business tax act, the Michigan city income tax act (which
authorizes the only income tax ordinance that may be adopted by cities in
Michigan), and under the law which authorizes a "first class" school district to
levy an excise tax upon income.
To the extent that an individual (and certain other owners of Fund
shareholders) receives distributions with respect to the Common Shares which are
derived from interest on Michigan municipal bonds, such distributions will be
exempt from Michigan state and local income taxes. For Michigan income tax
purposes, the proportionate share of distributions from the Fund's net
investment income from other than Michigan municipal bonds and from any short-
term or long-term capital gains (whether received in cash or additional shares),
together with any gain or loss realized when shareholder sells or exchanges
shares of the Fund, will be included in Michigan taxable income.
If a shareholder of Common Shares is subject to the Michigan single
business tax (i.e., is engaged in a "business activity" as defined in the
Michigan single business tax act) and receives distributions (other than
distributions derived from interest on Michigan municipal bonds), or the
shareholder sells or exchanges such Common Shares, such event may affect the
adjusted tax base upon which the single business tax is computed. The taxation
of business activities subject to the Michigan single business tax is complex
and shareholders who receive distributions with respect to such Shares held in
connection with such individual, corporate, or partnership business activities
should consult with their tax advisors.
The Common Shares will be subject to the Michigan inheritance tax if owned
by a Michigan decedent at the date of death.
The Michigan intangibles tax was fully repealed as of January 1, 1998.
The foregoing is a general, abbreviated summary of certain of the
provisions of applicable Michigan Revenue and Taxation Code presently in effect
as it directly governs the taxation of shareholders of the Fund. These
provisions 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 with their own tax advisers for
more detailed information concerning Michigan tax matters.
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APPENDIX E-8
Factors Pertaining to New Jersey
The fund is susceptible to political, economic or regulatory factors
affecting issuers of New Jersey municipal bonds. The following provides only a
brief summary of the complex factors affecting the financial situation in New
Jersey and is derived from sources that are generally available to investors and
is believed to be accurate. It is based in part on information obtained from
various state and local agencies in New Jersey. No independent verification has
been made of any of the following information.
New Jersey is the ninth largest state in population and the fifth smallest
in land area. With an area of 1,077 persons per square mile, it is the most
densely populated of all the states. The State's economic base is diversified,
consisting of a variety of manufacturing, construction and service industries,
supplemented by rural areas with selective commercial agriculture.
The State of New Jersey is experiencing strong economic growth and
increasing reserve balances. The services and construction sectors have been
adding jobs. Job creation has lead to strong personal income tax receipts which
have resulted in a series of operating surpluses and a growing Rainy Day Fund.
Lead by growth in personal income taxes and sales tax receipts, New Jersey
estimates finishing Fiscal Year 2000 with an operating surplus of $750 million,
4.0% of revenues. The surplus will be split between the Rainy Day Fund, with a
balance of $634 million, and an unreserved Caneral Fund balance of $113 million.
The State operates on a fiscal year beginning July 1 and ending June 30.
The State closed recent fiscal years with surpluses in the general fund (the
fund into which all State revenues not otherwise restricted by statute are
deposited and from which the appropriations are made) of $442 million in 1996,
$281 million in 1997 and $228 million in 1998. It is estimated that Fiscal Year
1999 ended with a surplus of $311 million.
The State's Fiscal Year 2000 revenue projections are based on moderate
overall economic growth. Total general fund and available revenues are
projected to be $19.1 billion. Of this amount 39.8% is recommended for State
Aid to Local Governments, 28.2% is recommended for Grants-In-Aid, 25.3% is
recommended for Direct State Services, 2.7% is recommended for Debt Service on
State general obligation bonds and 4% is recommended for Capital Construction.
Of these appropriations, the largest recommended State Aid appropriation in the
amount of $6,030.3 million is provided for local elementary and secondary
education programs. The second largest portion of recommended appropriation in
Fiscal Year 2000 is for Grants-in-Aid, totaling $5,391.0 million, which
represents payments to individuals or public or private agencies for benefits to
which a recipient is entitled to by law, or for the provision of services on
behalf of the State. Of this amount the largest amount recommended is for
programs administered by the Department of Human Services. The third largest
portion of recommended appropriations in Fiscal Year 2000 is applied to Direct
State Services which supports the operations of State government's departments,
the Executive Office, several commissions, the State Legislature and the
Judiciary. This amount totals $4,858.5 million for Fiscal Year 2000, of which
the largest amounts are recommended for programs administered by the Department
of Human Services and the Department of Law and Public Safety.
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In addition to payments from bond proceeds, capital construction can also
be funded by appropriation of current revenues on a pay-as-you-go basis. In
Fiscal Year 2000, the amount recommended for this purpose is $771.4 million, of
which $477.8 million is for transportation projects and debt service and is
being credited to the Transportation Fund Account of the General Fund. In
addition, $98.0 million is for open space preservation, $72.2 million is for
hazardous substance remediation and underground tank remediation and $15.0
million is for shore protection. All appropriations for capital projects and
all proposals for State bond authorization are subject to the review and
recommendation of the New Jersey Commission on Capital Budgeting and Planning.
In Fiscal Year 1992 the State initiated a program under which it issued tax
and revenue anticipation notes to aid in providing effective cash flow
management to fund balances which occur in the collection and disbursement of
the General Fund and Property Tax Relief Fund revenues. There are $700 million
of tax and revenue anticipation notes outstanding which notes matured on June
15, 1999. Such tax and revenue anticipation notes do not constitute a general
obligation of the State or a debt or liability within the meaning of the State
constitution. Such notes constitute special obligations of the State payable
solely from monies on deposit in the General Fund and the Property Tax Relief
Fund and legally available for such payment.
The State finances certain capital projects through the sale of the general
obligation bonds of the State. These bonds are backed by the full faith and
credit of the State. Certain state tax revenues and certain other fees are
pledged to meet the principal payments, interest payments, redemption premium
payments, if any, required to fully pay the bonds. As of June 30, 1998, the
State's outstanding general obligation bonded indebtedness totaled $3.6 billion.
The recommended appropriation for the debt service obligation on outstanding
projected indebtedness is $518.7 million for Fiscal Year 2000.
New jobs in service industries are leading the growth in New Jersey's labor
force. The services sector accounts for approximately 30% of total non-
agricultural employment in the State. New Jersey also has an above average
concentration of employment in the transportation and public utilities sector.
This sector accounts for approximately 7% of the non-agricultural work force.
The strong economy has lead to growth in construction jobs, too. The State's
unemployment rate has been declining from its high of 8.4% in 1992 to an April
1999 rate of 4.5%. The national rate for April, 1999 was 4.3%.
The State has implemented a plan to address the Y2K problem. As of
December 31, 1998, the testing, validation and implementation of 75% of all
centrally maintained State systems is complete. The total estimated cost to the
State to achieve year 2000 compliance is $120 million of which approximately $66
million of expenditures has been incurred as of December 31, 1998.
At any given time, there are various numbers of claims and cases pending
against the State, State Agencies and employees, seeking recovery of monetary
damages that are primarily paid out of the fund created pursuant to the New
Jersey Claims Act. The State does not formally estimate its reserve
representing a potential exposure for these claims and cases. The State is
unable to estimate its exposure for these claims and cases.
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<PAGE>
The State routinely receives notices of claims seeking substantial sums of
money. The majority of those claims have historically proven to be of
substantially less value than the amount originally claimed. Under the New
Jersey Tort Claims Act, any tort litigation against the State must be preceded
by a notice of claim, which affords the State the opportunity for a six month
investigation prior to the filing of any suit against it.
In addition, at any given time, there are various numbers of contracts and
other claims against the State and State Agencies, including environmental
claims asserted against the State, among other parties, arising from the alleged
disposal of hazardous waste. Claimants in such matters are seeking recovery of
monetary damages or other relief which, if granted, would require the
expenditure of funds. The State is unable to estimate its exposure for those
claims.
The State is a party in numerous legal proceedings in matters incidental to
the performance of routine governmental operations. Such litigation includes,
but is not limited to, the following: claims regarding violations of numerous
laws allegedly resulting from the existence of chromium contamination in the
State owned Liberty State Park in New Jersey City; challenges to the
constitutionality of annual A-901 hazardous and solid waste licensure renewal
fees collected by the Department of Environmental Protection; claims on behalf
of 17 rural school districts seeking sufficient funds to allow the school
districts to spend at the average of wealthy suburban school districts, to
implement additional programs such as full-day kindergarten, half-day pre-school
programs for three and four year olds, technology, alternative school,
accountability and school-to-work and college transition programs, and to
upgrade school facilities; claims alleging that the State's system of funding
for their schools is violative of the constitutional rights of equal protection
and a thorough and efficient education; claims by insurers licensed or admitted
to write property and casualty insurance in the State alleging that their
assessments are being used to retire debt of the Market Transition Fund; a
purported class action consisting of prisoners with serious mental disorders who
are confined within the facilities of the Department of Corrections alleging
cruel and unusual punishment, violation of the Americans with Disabilities Act
of 1990, discrimination against members of the class, sex discrimination and
violation of due process; cases involving spousal impoverishment provisions of
the Medicare Catastrophic Coverage Act; challenges by 19 New Jersey hospitals to
Medicaid hospital reimbursement since 1995; several cases filed in opposition to
a road and tunnel project in Atlantic City; claims on behalf of providers of
Medicare Part B services to Qualified Medicare Beneficiaries seeking
reimbursement for Medicare co-insurance and deductibles not paid by the State
Camden County solid waste procurement process halted to clarify bid
specifications; a case involving the aware of a contract for the design,
construction, operation and maintenance of the State's enhanced motor vehicle
inspection system; a claim seeking damages in declaratory and injunctive relied
overturning, on State constitutional grounds, the "family cap" provisions of the
State Work First New Jersey Act; and challenges by various hospitals to the $10
per adjusted hospital admission charges imposed by State statute.
As of February 9, 1999, the State's general obligation ratings were Aa1 by
Moody's and AA+ by Standard & Poor's. New Jersey's strong economic growth
during the past seven years and its growing reserves support its strong credit
rating. The State's combined debt burden is above average but is mitigated by
New Jersey's high wealth levels. Although ratings indicate that the State is in
relatively good economic health, there can be no assurance that this will
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<PAGE>
continue or that particular bond issues may not be adversely affected by changes
in the State or local economic or political conditions.
New Jersey Tax Matters
The following is based upon the advice of _________, special New Jersey
counsel to the Fund.
The Fund will qualify as a "qualified investment fund" if, for any calendar
year in which a distribution is paid: (1) the Fund has no investments, other
than interest-bearing obligations, obligations issued at a discount, and cash
and cash items, including receivables, and financial options, futures, forward
contracts, or other similar financial instruments related to interest-bearing
obligations, obligations issued at a discount or bond indexes related thereto;
(2) at the close of each calendar quarter the Fund has not less than 80% of the
aggregate principal amount of all of its investments (excluding financial
options, futures, forward contracts, or other similar financial instruments
related to interest-bearing obligations, obligations issued at a discount or
bond indexes related thereto to the extent such instruments are authorized by
Section 851(b) of the Code, cash and cash items, which cash items shall include
receivables) in New Jersey municipal bonds, United States obligations, or any
other obligations the interest or gains on which is exempt from New Jersey Gross
Income Tax pursuant to New Jersey law or federal law; and (3) the Fund satisfies
the certification and reporting requirements imposed by regulations promulgated
by the New Jersey Division of Taxation. The Fund intends to so qualify.
Individual shareholders of the Fund, including trusts and estates, who are
subject to the New Jersey Gross Income Tax, will not be required to include in
their New Jersey gross income distributions from the Fund which the Fund clearly
identifies as directly attributable to interest or gains from New Jersey
municipal bonds, obligations of the United States or any other obligations the
interest or gains on which is exempt from New Jersey Gross Income Tax under New
Jersey law or federal law, provided that the Fund qualifies as a "qualified
investment fund."
Distributions to individual shareholders, including trusts and estates, who
are subject to the New Jersey Gross Income Tax, attributable interest or gains
on municipal bonds issued by states other than New Jersey, including
municipalities or authorities in such other states, or any other obligations the
interest on which is not exempt from New Jersey Gross Income Tax pursuant to New
Jersey law or federal law, will be included in the New Jersey Gross Income Tax
as New Jersey gross income.
Individual shareholders of the Fund, including trusts and estates, who are
subject to the New Jersey Gross Income Tax, will not be required to include in
gross income net gains attributable to the sale of Fund Shares provided that the
Fund qualifies as a "qualified investment fund." Any loss realized on such sale
may not be utilized to offset gains realized by such shareholder on the sale of
assets the gain on which is subject to the New Jersey Gross Income Tax.
Shares of the Fund may be taxable upon the death of a shareholder who dies
domiciled in New Jersey under the New Jersey Inheritance Tax Law or the New
Jersey Estate Tax Law.
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If a shareholder is a corporation (including an S corporation) subject to
the New Jersey Corporation Business Tax or the New Jersey Corporation Income
Tax, distributions of interest or gains, or both, from the Fund will be
includable in its entire net income for purposes of the New Jersey Corporation
Business Tax or New Jersey Corporation Income Tax, less any interest expense
incurred to carry such investment to the extent such interest expense has not
been deducted in computing federal taxable income. Net gains derived by such
corporation on the redemption or exchange of Fund shares will be included in its
entire net income for purposes of the New Jersey Corporation Business Tax or New
Jersey Corporation Income Tax.
Common Shareholders are advised to consult with their own tax advisers for
more detail information concerning New Jersey tax matters.
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APPENDIX E-9
Factors Pertaining to New York
The following information is a brief summary of factors affecting the
economy of New York City (the "City") or New York State (the "State" or "New
York"). Other factors will affect issuers. The summary is based primarily upon
one or more of the most recently publicly available offering statements relating
to debt offerings of State issuers, however, it has not been updated. The Fund
has not independently verified this information.
The State, some of its agencies, instrumentalities and public authorities
and certain of its municipalities have sometimes faced serious financial
difficulties that could have an adverse effect on the sources of payment for or
the market value of the New York municipal bonds in which the Fund invests.
New York City
General. More than any other municipality, the fiscal health of the City
has a significant effect on the fiscal health of the State. The City's current
financial plan assumes that after noticeable improvements in the City's economy
during calendar years 1997 and 1998, economic growth will slow, with local
employment increasing modestly through fiscal year 2002.
For each of the 1981 through 1998 fiscal years, the City had an operating
surplus, before discretionary transfers, and achieved balanced operating results
as reported in accordance with generally accepted accounting principles ("GAAP")
after discretionary transfers. The City has been required to close substantial
gaps between forecast revenues and forecast expenditures in order to maintain
balanced operating results. There can be no assurance that the City will
continue to maintain balanced operating results as required by State law without
reductions in City services or entitlement programs or tax or other revenue
increases that could adversely affect the City's economic base.
On November 17, 1998, more than five months after the start of the City's
fiscal year, New York City adopted a 1999 fiscal year (July 1, 1998 to June 30,
1999) budget, which provided for $34.7 billion in spending. For fiscal year
1999 an operating surplus of $2.0 billion is projected. On April 22, 1999, the
Mayor outlined his proposed $35.3 billion Executive Budget for fiscal year 2000,
(July 1, 1999 to June 30, 2000). The 1999-2000 budget proposal includes several
tax reductions including residential estate and property tax relief aggregating
an estimated $180 million, sales tax reductions aggregating an estimated $123
million and business tax relief aggregating an estimated $98 million.
On May 17, 1999, the New York State Legislature enacted legislation
repealing the New York City income tax on New York State residents who work, but
do not reside, in New York City. Governor George Pataki has stated that he
would sign the legislation. It is estimated that the repeal would reduce
personal income tax revenues to New York City by over $200 million annually. If
the effect of the legislation is to invalidate the income tax as it remains
applicable to out of state residents who work in New York City through
subsequent judicial determination that the income tax in its revised form
discriminates against out of state residents, the reduction in revenues to New
York City would then aggregate an estimated $360 million, $373 million, $385
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million and $401 million in fiscal years 2000 through 2003, respectively.
Residents of Connecticut and New Jersey have commenced class actions challenging
the constitutionality of the repeal. If this legislation is signed by the
Governor and implemented, it is likely that at least certain of the proposed tax
reductions reflected in the Financial Plan (defined below) will not be
implemented in order to accommodate the cost of the legislation. The Mayor of
the City of New York and the Speaker of the City Council have stated that they
will commence litigation to challenge the legislation.
Pursuant to the laws of the State, the Mayor is responsible for preparing
the City's financial plan, including the City's current financial plan for the
2000 through 2003 fiscal years (the "2000-2003 Financial Plan", "Financial Plan"
or "City Financial Plan"). The City's projections set forth in the City
Financial Plan are based on various assumptions and contingencies that are
uncertain and may not materialize. Changes in major assumptions could
significantly affect the City's ability to balance its budget as required by
State law and to meet annual cash flow and financing requirements.
City's Financing Program. Implementation of the City Financial Plan is
also dependent upon the City's ability to market its securities successfully in
the public credit markets. The City's financing program for years 1999 through
2003 contemplates the issuance of $10.091 billion of general obligation bonds,
$5.340 billion of bonds to be issued by the New York City Transitional Finance
Authority (the "Transitional Finance Authority") and $2.5 billion of bonds to be
issued by a new entity and paid from revenues pursuant to a settlement of
litigation with the four leading cigarette companies. In 1997, the State
enacted the New York City Transitional Finance Authority Act (the "Finance
Authority Act"), which created the Transitional Finance Authority, to assist the
City in keeping the City's indebtedness within the forecast level of the
constitutional restrictions on the amount of debt the City is authorized to
incur. A challenge to the constitutionality of the Finance Authority Act was
unsuccessful with Plaintiff's motion for leave to appeal with the Court of
Appeals adverse judgments in lower trial and appellate courts being was denied
on December 22, 1998. Even with the capacity of the Transitional Finance
Authority, the City may be required temporarily to delay entering into new
contractual commitments at the end of fiscal year 1999 and, without additional
legally authorized borrowing capacity, under projections (current as of December
19, 1998), would reach the limit of its capacity to enter into new contractual
commitments in fiscal year 2000. In addition, the City issues revenue notes and
tax anticipation notes to finance seasonal working capital requirements. The
success of projected public sales of City bonds and notes, New York City
Municipal Water Finance Authority (the "Water Authority") bonds and Transitional
Finance Authority bonds will be subject to prevailing market conditions. The
City's planned capital and operating expenditures are dependent upon the sale of
its general obligation bonds and notes, and the Water Authority and Transitional
Finance Authority bonds.
1998 Fiscal Year. For the 1998 fiscal year (July 1, 1997-June 30, 1998)
the City had an operating surplus, before discretionary and other transfers, and
achieved balanced operating results, after discretionary and other transfers, in
accordance with GAAP. The 1998 fiscal year is the eighteenth year that the City
has achieved an operating surplus, before discretionary and other transfers, and
balanced operating results, after discretionary and other transfers. The most
recent quarterly modification to the City's financial plan for the 1999 fiscal
year projects a balanced budget in accordance with GAAP for the 1999 fiscal
year.
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2000-2003 Financial Plan. On April 22, 1999, the City released the
Financial Plan, which relates to the City and certain entities which receive
funds from the City and which is based on the Executive Budget and Budget
Message for the City's 2000 fiscal year. The Executive Budget and the City
Financial Plan projects revenues and expenditures for the 2000 fiscal year
balanced in accordance with GAAP, and projects budget gaps of $1.7 billion for
each of the 2001, 2002 and 2003 fiscal years.
The City's projected budget gaps for the 2002 and 2003 fiscal years do not
reflect the savings expected to result from prior years' programs to close the
gaps set forth in the City Financial Plan. Thus, for example, recurring savings
anticipated from the actions which the City proposes to take to balance the
fiscal year 2001 budget are not taken into account in projecting the budget gaps
for the 2001 and 2003 fiscal years.
The 2000-2003 Financial Plan includes a proposed discretionary transfer in
the 1999 fiscal year of $2.1 billion to pay debt service due in the fiscal year
2000, for budget stabilization purposes, a proposed discretionary transfer in
fiscal year 2000 to pay debt service due in fiscal year 2001 totaling $429
million and a proposed discretionary transfer in fiscal year 2001 to pay debt
service due in fiscal year 2002 totaling $345 million. In addition, the
Financial Plan reflects enacted and proposed tax reduction programs totaling
$405 million, $557 million, $610 million and $627 million in fiscal years 2000
through 2003, respectively, including the elimination of the City sales tax on
all clothing and a reduction in the City sales tax on building materials and
construction services; and the extension of current tax reductions for owners of
cooperative and condominium apartments; reform of certain business taxes; an
income tax credit for low income wage earners and resident shareholders of
Subchapter S corporations; reduction in the City mortgage recording tax for
first-time homebuyers; and a repeal of the auto use tax and commercial motor
vehicle tax for light trucks and vans, which are subject to State legislation
approval, and the reduction of the commercial rent tax. Legislation which would
repeal part or all of the City non-commercial resident income tax has been
passed by the State Legislature. If this legislation is signed by the Governor,
as expected, it is likely that at least some of the proposed tax reductions
reflected in the Financial Plan will not be implemented in order to accommodate
the costs of the legislation.
Assumptions. The 2000-2003 Financial Plan is based on numerous
assumptions, including the condition of the City's and the regions' economies
and a modest employment recovery and the concomitant receipt of economically
sensitive tax revenues in the amount projected. The 2000-2003 Financial Plan is
subject to various other uncertainties and contingencies relating to, among
other factors, the extent, if any, to which wage increases for City employees
exceed the annual wage costs assumed for the 1999 through 2003 fiscal years;
continuation of projected interest earnings assumptions for pension fund assets
and current assumptions with respect to wages for City employees affecting the
City's required pension fund contributions; the willingness and ability to the
State to provide the aid contemplated by the Financial Plan and to take various
other actions to assist the City; the ability of Health and Hospitals
Corporation, the Board of Education and other such agencies to maintain balanced
budgets; the willingness of the Federal government to provide the amount of
federal aid contemplated in the Financial Plan; the impact on City revenues and
expenditures of Federal and State welfare reform and any future legislation
affecting Medicare or other entitlement programs; the ability of the City to
implement cost reduction initiatives; the success with which the City
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controls expenditures; the impact of conditions in the real estate market on
real estate tax revenues and unanticipated expenditures that may be incurred as
a result of the need to maintain the City's infrastructure. Certain of these
assumptions have been questioned by the City Comptroller and other public
officials.
The Financial Plan assumes (i) approval by the Governor and the State
Legislature of the extension of 14% personal income surcharge, which is
scheduled to expire on December 31, 1999, and which is projected to provide
revenue of $570 million, $585 million, $599 million and $639 million in the 2000
through 2003 fiscal years, respectively; (ii) collection of the projected rent
payments for the City's airports, totaling $355 million, $185 million and $155
million in the 2001 through 2003 fiscal years, respectively, a substantial
portion of which depend on the successful completion of negotiations with The
Port Authority of New York and New Jersey or the enforcement of the City's
rights under the existing leases through pending legal actions; (iii) State and
Federal approval of the State and Federal gap-closing actions proposed by the
City in the Financial Plan; and (iv) receipt of the tobacco settlement finds
providing revenues or expenditure offsets in annual amounts ranging between $250
million and $300 million. In addition, the economic and financial condition of
the City may be affected by various financial, social, economic and political
factors which could have a material adverse affect on the City.
The Financial Plan assumes that after noticeable improvements in the City's
economy during calendar years 1997 and 1998, economic growth will slow, with
local employment increasing modestly during fiscal years 2000 through 2003.
This assumption is based on a slow recovery in the Asian and Latin American
economies starting in fiscal year 2000 and continuing restrictive monetary
policy. However, there can be no assurance that the economic projections
assumed in the Financial Plan will occur or that the tax revenues projected in
the Financial Plan to be received will be received in the amounts anticipated.
Municipal Unions. The Financial Plan reflects the costs of the settlements
and arbitration awards with certain municipal unions and other bargaining units,
which together represent approximately 98% of the City's workforce, and assumes
that the City will reach agreement with its remaining municipal unions under
terms which are generally consistent with such settlements and arbitration
awards. These contracts are approximately five years in length and have a total
cumulative net increase 13%. Assuming the City reaches similar settlements with
its remaining municipal unions, the cost of all settlements for all City-funded
employees, as reflected in the Financial Plan, would total $1.2 billion in the
1999 fiscal year and exceed $2 billion thereafter. The Financial Plan provides
no additional wage increases for City employees after their contracts expire in
fiscal years 2000 and 2001.
Intergovernmental Aid. The City depends on the State for aid both to
enable the City to balance its budget and to meet its cash requirements. There
can be no assurance that there will not be reductions in State aid to the City
from amounts currently projected; or interim appropriations enacted; or that any
such reductions or delays will not have adverse effects on the City's cash flow
or expenditures. In addition, the Federal budget negotiation process could
result in reductions or delays in the receipt of Federal grants which would have
additional adverse effects on the City's cash flow or revenues.
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Y2K. The year 2000 presents potential operational problems for
computerized data files and computer programs which may recognize the year 2000
as 1900, resulting in possible system failures or miscalculations. In November
1996, the City's Year 2000 Project Office was established to develop a project
methodology, coordinate the City's agencies, review plans and oversee
implementation of year 2000 projects. At that time, the City also evaluated the
capabilities of the City's Integrated Financial Management System and Capital
Projects Information System, which are the City's central accounting, budgeting
and payroll systems, identified the potential impact of the year 2000 on these
systems and developed a plan to replace these systems with a new system which is
expected to be year 2000 compliant prior to December 31, 1999. The City has
also performed an assessment of its other mission-critical and high priority
computer systems in connection with making them year 2000 compliant, and the
City's agencies have developed and begun to implement both strategic and
operational plans for non-compliant application systems. In addition, the City
Comptroller is conducting audits of the progress of the City agencies in
achieving year 2000 compliance. While these efforts may involve additional
costs beyond those assumed in the Financial Plan, the City believes, based on
currently available information, that such additional costs will not be
material.
The Mayor's Office of Operations has stated that work has been completed,
and all or part of the necessary testing has been performed, on approximately
65% of the mission-critical and high priority systems of Mayoral agencies. The
City's computer systems may not all be year 2000 compliant in a timely manner
and there could be an adverse impact on City operations or revenues as a result.
The City is in the process of developing contingency plans for all mission-
critical and high priority systems, if such systems are not year 2000 complaint
by pre-determined dates. The City is also in the process of contacting its
significant third party vendors regarding the status of their compliance. Such
compliance is not within the City's control, and therefore the City cannot
assure that there will not be any adverse effects on the City resulting from any
failure of these third parties.
Ratings. As of March 15, 1999, Moody's rated the City's outstanding
general obligation A3, Standard and Poor's rated such bonds A- and Fitch
rated such bonds A. In July 1995, Standard and Poor's revised downwards its
ratings on outstanding general obligations bonds of the City from A- to BBB+.
In July 1998, Standard and Poor's revised its rating of City bonds upward to A-.
Moody's rating of City bonds was revised in February 1998 to A3 from Baal. Such
ratings reflect only the view of Moody's, Standard and Poor's and Fitch, from
which an explanation of the significance of such ratings may be obtained. There
is no assurance that such ratings will continue for any given period of time or
that they will not be revised downward or withdrawn entirely. Any such downward
revision or withdrawal could have an adverse effect on the market prices of City
bonds.
Outstanding Indebtedness. As of March 31, 1999, the City and the Municipal
Assistance Corporation for the City of New York had respectively approximately
$26.97 and $3.83 billion of outstanding long-term debt. As of March 15, 1999,
the Water Authority had approximately $8.6 billion aggregate principal amount of
outstanding bonds, inclusive of subordinate second resolution bonds, and $600
million aggregate principal amount of outstanding commercial paper notes.
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Water, Sewer and Waste. Debt service on Water Authority obligations is
secured by fees and charges collected from the users of the City's water and
sewer system. State and Federal regulations require the City's water supply to
meet certain standards to avoid filtration. The City's water supply now meets
all technical standards and the City has taken the position that increased
regulatory, enforcement and other efforts to protect its water supply will
prevent the need for filtration. On May 6, 1997, the U.S. Environmental
Protection Agency granted the City a filtration avoidance waiver through April
15, 2002 in response to the City's adoption of certain watershed regulations.
The estimated incremental costs to the City of implementing this Watershed
Memorandum of Agreement, beyond investments in the watershed which are planned
independently, is approximately $400 million. The City has estimated that if
filtration of the upstate water supply system is ultimately required, the
construction expenditures required could be between $4 billion and $5 billion.
Legislation has been passed which prohibits the disposal of solid waste in
any landfill located within the City after December 31, 2001. The Financial
Plan includes the estimated costs of phasing out the use of landfills located
within the City. A suit has been commenced against the City by private
individuals under the Resources Conservation and Recovery Act seeking to compel
the City to take certain measures, or alternatively, to close the Fresh Kills
landfill. If as a result of such litigation, the City is required to close the
landfill earlier than required by State legislation, the City could incur
additional costs during the Financial Plan period. Pursuant to Court order, the
City is currently required to recycle 2,100 tons per day of solid waste and is
required to recycle 3,400 tons per day by July 1999 and 4,250 tons per day by
July 2001. The City is currently recycling slightly over 2,100 tons per day of
solid waste. The City may seek to obtain amendments to Local Law No. 19 to
modify this requirement. If the City is unable to obtain such amendment and is
required to fully implement Local Law No. 19, the City may incur substantial
costs.
Litigation. The City is currently a defendant in a significant number of
lawsuits. Such litigation includes, but is not limited to, routine litigation
incidental to the performance of its governmental and other functions, actions
commenced and claims asserted against the City arising out of constitutional
violations, allege torts, alleged breaches of contracts and other alleged
violations of law and condemnation proceedings and other tax and miscellaneous
actions. While the ultimate outcome and fiscal impact, if any, on the
proceedings and claims are not currently predictable, adverse determination in
certain of them might have a material adverse effect upon the City's ability to
carry out the City Financial Plan. As of June 30, 1998, the City estimated that
its potential future liability on account of outstanding claims amounted to
approximately $3.5 billion.
New York State
1999-2000 Fiscal Year. The Governor presented his 1999-2000 Executive
Budget to the Legislature on January 27, 1999. The Executive Budget contains
financial projections for the State's 1998-99 through 2001-02 fiscal years, and
a proposed Capital Program and Financing Plan for the 1999-2000 through 2003-04
fiscal years. The Governor will prepare amendments to his Executive Budget, as
permitted by law. There can be no assurance that the Legislature will enact
into law the Executive Budget as proposed by the Governor, or that the State's
budget projections will not differ materially and adversely from the projections
set forth herein.
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The 1999-2000 State financial plan (the "State Financial Plan") is
projected to have receipts in excess of disbursements on a cash basis in the
General Fund, after accounting for the transfer of available receipts form 1998-
99 to 1999-2000. Total General Fund receipts, including transfers from other
funds are projected to be $38.81 billion, and increase of $2.03 billion over
projected receipts in the current fiscal year. General Fund disbursements,
including transfer to other funds, are recommended to grow by 1.4% to $37.14
billion, an increase of $528 million over 1998-99 [estimates]. State Funds
spending is projected to total $49.33 billion, an increase of over $867 million
or 1.8% from the current year. Under the Governor's recommendations, spending
from All Governmental Funds is also expected to grow by 1.8%, increasing by $1.3
billion to $72.7 billion.
The State is expected to close the 1999-2000 fiscal year with a balance in
the General Fund of $2.36 billion. The balance is comprised of $1.79 billion in
tax reduction reserves, $473 million in the Tax Stabilization Reserve Fund and
$100 million in the Contingency Reserve Fund.
The State economic forecast has been modified for 1999 and 2000 from the
one used in earlier updates of the State Financial Plan. Continued growth is
expected in 1999 and 2000 for employment, wages, and personal income, although
the growth is expected to moderate from the 1998 pace. However, a continuation
of international financial and economic turmoil may result in a sharper slowdown
than currently projected. Personal income is estimated to have grown by 4.9% in
1998, fueled in part by a continued large increase in financial sector bonus
payments at the beginning of the year, and is projected to grow by 4.2% in 1999
and 4.0% in 2000. Increases in bonus payments in 1999 and 2000 are projected to
be modest, a distinct shift from the torrid rate of the last few years. Overall
employment growth is anticipated to grow at a modest rate, reflecting the
slowing growth in the national economy, continued spending restraint in
government, and restructuring in the manufacturing, health care, social service
and banking sectors.
Many uncertainties exist in any forecast of the State economy. Given the
recent volatility in the international economy and domestic financial markets,
such uncertainties are particularly present at this time. The timing and impact
of changes in economic conditions are difficult to estimate with a high degree
of accuracy. Unforeseeable events may occur. The actual rate of change, if
any, of the categories that form the basis of these forecasts may differ
substantially and adversely from the outlook described herein.
Special Considerations. On July 23, 1998, the New York State Comptroller
issued a report which noted that a significant cause for concern is the budget
gaps in the 1999-2000 and 2000-2001 fiscal years, which the State Comptroller
projected at $1.8 billion and $5.5 billion, respectively, after excluding the
uncertain receipt of $250 million of funds from the tobacco settlement assumed
in the State's projections. The State Comptroller also stated that if the
securities industry or economy slows, the size of the gaps would increase.
According to the State Division of the Budget, uncertainties with regard to
the economy present the largest potential risk to budget balance in New York
State. The Executive Budget identified various risks, including either a
financial market or broader economic correction during the State's financial
plan period, which risks are heightened by the relatively lengthy
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expansion currently underway, and the financial turmoil in Asia. In addition,
the Executive Budget noted that a normal forecast error of one percentage point
in the expected growth rate could raise or lower receipts by over $1 billion by
the last year of projection period, and that funding is not included for any
costs associated with new collective bargaining agreements after the expiration
of the current contracts at the end of the 1998-1999 fiscal year. Furthermore,
the securities industry is more important to the New York economy than the
national economy, and a significant deterioration in stock market performance
could ultimately produce adverse changes in wage and employment levels.
Owing to these and other factors, the State may face substantial potential
budget gaps in future years resulting from a significant disparity between tax
revenues from a lower recurring receipts base and the spending required to
maintain State programs at mandated levels. Any such recurring imbalance would
be exacerbated by the use by the State of nonrecurring resources to achieve
budgetary balance in a particular fiscal year. To correct any recurring
budgetary imbalance, the State would need to take significant actions to align
recurring receipts and disbursements in future fiscal years.
Y2K. New York State is currently addressing "Year 2000" data processing
compliance issues. In 1996, the State created the Office of Technology to help
address the statewide technology issues, including the Year 2000 issue. OFT has
estimated that investments of at least $140 million will be required to bring
approximately 350 State mission-critical and high-priority computer systems not
otherwise scheduled for replacement into Year 2000 compliance. In fiscal year
1998-99, the State allocated over $117 million in centralized Year 2000 funding,
and in fiscal year 1999-2000 the State is planning to spend an additional $19
million for this purpose. As of December 1998, the State had completed 93% of
overall compliance effort for its mission-critical systems. As of December
1998, the State had completed 70% of overall compliance effort on the high-
priority systems. Compliance testing is expected to be completed by the end of
calendar year 1999.
Ratings. As of March 15, 1999, Moody's had given the State's general
obligation bonds a rating of A2, Standard and Poor's had given the bonds a
rating of A and Fitch had rated such bonds A+. Such ratings reflect only the
view of Moody's, Standard and Poor's and Fitch from which an explanation of the
significance of such ratings may be obtained. There is no assurance that such
ratings will continue for any given period of time or that they will not be
revised downward or withdrawn entirely. Any such downward revision or
withdrawal could have an adverse effect on the market prices of State bonds.
Litigation. The State is currently a defendant in a significant number of
lawsuits. Such litigation includes, but is not limited to, claims asserted
against the State arising from alleged torts, alleged breaches of contracts,
condemnation proceedings and other alleged violations of State and Federal laws.
State programs are frequently challenged on State and Federal constitutional
grounds. Adverse developments in legal proceedings or the initiation of new
proceedings could affect the ability of the State to maintain a balanced State
Financial Plan in any given fiscal year. There can be no assurance that an
adverse decision in one or more legal proceedings would not exceed the amount
the State reserves for the payment of judgments or materially impair the State's
financial operations. With respect to pending and threatened litigation, the
State has reported liabilities of $872 million for awarded and anticipated
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unfavorable judgments, of which $90 million is expected to be paid within the
1998-99 fiscal year. The remainder, $782 million, is reported as a long-term
obligation of the State and represents an increase of $552 million from the
prior year.
Other Localities. Certain localities in addition to the City could have
financial problems leading to requests for additional State assistance during
the State's 1998-1999 fiscal year and thereafter. The potential impact on the
State of such actions by localities is not included in the projections of the
State receipts and disbursements in the State's 1998-1999 fiscal year.
Fiscal difficulties experienced by the City of Yonkers ("Yonkers") resulted
in the creation of the Financial Control Board for Yonkers (the "Yonkers Board")
by the State in 1984. The Yonkers Board is charged with oversight of the fiscal
affairs of Yonkers. Future actions taken by the Governor or the State
Legislature to assist Yonkers could result in allocation of State resources in
amounts that cannot yet be determined.
New York Tax Matters
The following is based upon the advice of ________, special New York
counsel to the Fund.
The following is a general, abbreviated summary of certain provisions of
the applicable New York tax law as presently in effect as it directly governs
the taxation of New York resident individual, corporate, and unincorporated
business shareholders of the Fund. This summary does not address the taxation
of other shareholders nor does it discuss any local taxes, other than New York
City 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's distributions to qualify as exempt-interest dividends to shareholders,
and that it will distribute all interest and dividends received to the Fund's
shareholders. The Fund will be subject to the New York State franchise tax and
the New York City general corporation tax only if it has a sufficient nexus with
New York State or New York City. If it is subject to such taxes, it does not
expect to pay a material amount of either tax. Distributions by the Fund that
are attributable to interest on any obligation of New York and its political
subdivisions or to interest on obligations of U.S. territories and possessions
that are exempt from state taxation under federal law will not be subject to the
New York State personal income tax or the New York City personal income or
unincorporated business taxes. All other distributions, including distributions
attributable to interest on obligations of the United States or its
instrumentalities and distributions attributable to capital gains, will be
subject to the New York State personal income tax and the New York City personal
income and unincorporated business taxes.
All distributions from the Fund, regardless of source, will increase the
taxable base of shareholders subject to the New York State Corporation franchise
tax or the New York City general corporation tax. Gain from the sale, exchange,
or other disposition of Common Shares will be subject to the New York State
personal income and franchise taxes and the New York City personal income,
unincorporated business, and general corporation taxes. Common Shares may be
subject to New York State estate tax if owned by a New York decedent at the time
of
E-9-9
<PAGE>
death. Common Shares will not be subject to property taxes imposed by New York
State or City. Interest on indebtedness incurred to purchase, or continued to
carry, Common Shares generally will not be deductible for New York personal
income tax purposes.
E-9-10
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APPENDIX E-10
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. 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 3.0% in June 1998, below the national
average of 4.5% in June 1998 and down from the State's 3.6% rate in June 1997.
Per capita income in 1997 was $23,345, approximately 91% of the national
average.
The State has implemented sound financial policies and maintains low debt
levels. Its 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 1992-1997. Moody's, S&P,
and Fitch all rate the State AAA.
North Carolina Tax Matters
The following is based upon the advice of ________, 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.
E-10-1
<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 inheritance tax and
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 advisers for more
detailed information concerning North Carolina and local tax matters.
E-10-2
<PAGE>
APPENDIX E-11
Factors Pertaining to Ohio
As described above, the Fund will invest most of its net assets in
securities issued by or on behalf (or in certificates of participation in lease-
purchase obligations of) the State of Ohio (the "State"), political subdivisions
of the State, or agencies or instrumentalities of the State or its political
subdivisions (Ohio Obligations). The Fund is therefore susceptible to general
or particular economic, political or regulatory factors that may affect issuers
of Ohio Obligations. The following information constitutes only a brief summary
of some of the many complex factors that may have an effect. The information
does not apply to "conduit" obligations on which the public issuer itself has no
financial responsibility. This information is derived from official statements
of certain Ohio issuers published in connection with their issuance of
securities and from other publicly available information, and is believed to be
accurate. No independent verification has been made of any of the following
information.
Generally, the creditworthiness of Ohio Obligations of local issuers is
unrelated to that of obligations of the State itself, and the State has no
responsibility to make payments on those local obligations.
There may be specific factors that at particular times apply in connection
with investment in particular Ohio Obligations or in those obligations or
particular Ohio issuers. It is possible that the investment may be in
particular Ohio Obligations, or in those of particular issuers, as to which
those factors apply. However, the information below is intended only as a
general summary, and is not intended as a discussion of any specific factors
that may affect any particular obligation or issuer.
Ohio is the seventh most populous state. The 1990 Census count of
10,847,000 indicated a 0.5% population increase from 1980. The Census estimate
for 1997 is 11,186,000.
While diversifying more into the service and other non-manufacturing areas,
the Ohio economy continues to rely in part on durable good manufacturing largely
concentrated in motor vehicles and equipment, steel, rubber products and
household appliances. As a result, general economic activity, as in many other
industrially-developed states, tends to be more cyclical than in some other
states and in the nation as a whole. Agriculture is an important segment of the
economy, with over half the State's area devoted to farming and approximately
16% of total employment in agribusiness.
In prior years, the State's overall unemployment rate was commonly somewhat
higher than the national figure. For example, the reported 1990 average monthly
State rate was 5.7%, compared to the 5.5% national figure. However, in recent
years the State rates were below the national rates (4.2% versus 4.5% in 1998).
The unemployment rate and its effects vary among geographic areas of the State.
There can be no assurance that future national, regional or state-wide
economic difficulties, and the resulting impact on State or local government
finances generally, will not adversely affect the market value of Ohio
Obligations held in the Fund or the ability of particular
E-11-1
<PAGE>
obligors to make timely payments of debt service on (or lease payments relating
to) those Obligations.
The State operates on the basis of a fiscal biennium for its appropriations
and expenditures, and is precluded by law from ending its July 1 to June 30
fiscal year (FY) or fiscal biennium in a deficit position. Most State
operations are financed through the General Revenue Fund ("GRF"), for which the
personal income and sales-use taxes are the major sources. Growth and depletion
of GRF ending fund balances show a consistent pattern related to national
economic conditions, with the ending FY balance reduced during less favorable
and increased during more favorable economic periods. The State has well-
established procedures for, and has timely taken, necessary actions to ensure
resource/expenditure balances during less favorable economic periods. Those
procedures included general and selected reductions in appropriations spending.
The 1992-93 biennium presented significant challenges to State finances,
successfully addressed. To allow time to resolve certain budget differences an
interim appropriations act was enacted effective July 1, 1991; it included GRF
debt service and lease rental appropriations for the entire biennium, while
continuing most other appropriations for a month. Pursuant to the general
appropriations act for the entire biennium, passed on July 11, 1991, $200
million was transferred from the Budget Stabilization Fund ("BSF", a cash and
budgetary management fund) to the GRF in FY 1992.
Based on updated results and forecasts in the course of that FY, both in
light of a continuing uncertain nationwide economic situation, there was
projected and then timely addressed an FY 1992 imbalance in GRF resources and
expenditures. In response, the Governor ordered most State agencies to reduce
GRF spending in the last six months of FY 1992 by a total of approximately $184
million; the $100.4 million BSF balance and additional amounts from certain
other funds were transferred late in the FY to the GRF, and adjustments were
made in the timing of certain tax payments.
A significant GRF shortfall (approximately $520 million) was then projected
for FY 1993. It was addressed by appropriate legislative and administrative
actions, including the Governor's ordering $300 million in selected GRF spending
reductions and subsequent executive and legislative action (a combination of tax
revisions and additional spending reductions). The June 30, 1993 ending GRF
fund balance was approximately $111 million, of which, as a first step to
replenishment, $21 million was deposited in the BSF.
None of the spending reductions were applied to appropriations needed for
debt service or lease rentals relating to any State obligations.
The 1994-95 biennium presented a more affirmative financial picture. Based
on June 30, 1994 balances, an additional $260 million was deposited in the BSF.
The biennium ended June 30, 1995 with a GRF ending fund balance of $928 million,
of which $535.2 million was transferred into the BSF. The significant GRF fund
balance, after leaving the GRF an unreserved and undesignated balance of $70
million, was transferred to the BSF and other funds including school assistance
funds and, in anticipation was possible federal program changes, a human
services stabilization fund.
E-11-2
<PAGE>
From a higher than forecast 1996-97 mid-biennium GRF fund balance, $100
million was transferred for elementary and secondary school computer network
purposes and $30 million to a new State transportation infrastructure fund.
Approximately $400.8 million served as a basis for temporary 1996 personal
income tax reductions aggregating that amount. The 1996-97 biennium-ending GRF
fund balance was $834.9 million. Of that, $250 million went to school building
construction and renovation, $94 million to the school computer network, $44.2
million for school textbooks and instructional materials and a distance learning
program, and $34 million to the BSF, and the $263 million balance to a State
income tax reduction fund.
The GRF appropriations act for the 1998-99 biennium was passed on June 25,
1997 and promptly signed (after selective vetos) by the Governor. All necessary
GRF appropriations for State debt service and lease rental payments then project
for the biennium were included in that act (and one included in the pending
House-passed appropriation bill for FY 2000-01). Subsequent legislation
increased the fiscal year 1999 GRF appropriation level for elementary and
secondary education, with the increase funded in part by mandated small
percentage reductions in State appropriations for various State agencies and
institutions. Expressly exempt from those reductions are all appropriations for
debt service, including lease rental payments.
The BSF had a May 19, 1999 balance of over $906 million.
The State's incurrence or assumption of debt without a vote of the people
is, with limited exceptions, prohibited by current State constitutional
provisions. The State may incur debt, limited in amount to $750,000, to cover
casual deficits or failures in revenues or to meet expenses not otherwise
provided for. The Constitution expressly precludes the State from assuming the
debts of any local government or corporation. (An exception is made in both
cases for any debt incurred to repel invasion, suppress insurrection or defend
the State in war.)
By 15 constitutional amendments approved from 1921 to date (the latest
adopted in 1995) Ohio voters authorized the incurrence of State debt and pledge
of taxes or excises to its payment. At May 19, 1999, almost $1.11 billion
(excluding certain highway bonds payable primarily from highway use receipts) of
this debt was outstanding. The only such State debt at that date still
authorized to be incurred were portions of the highway bonds, and the following:
(a) up to $100 million of obligations for coal research and development may be
outstanding at any one time ($23.9 million outstanding); (b) $240 million of
obligations previously authorized for local infrastructure improvements, no more
than $120 million of which may be issued in any calendar year (over $1 billion
outstanding) and (c) up to $200 million in general obligation bonds for parks,
recreation and natural resources purposes which may be outstanding at any one
time ($82.7 million outstanding - with an additional $30 million scheduled for
sale on June 3, with no more than $50 million to be issued in any one year).
The electors in 1995 approved a constitutional amendment extending the
local infrastructure bond program (authorizing an additional $1.2 billion of
State full faith and credit obligations to be issued over 10 years for the
purpose), an authorizing additional highway bonds (expected to be payable
primarily from highway use receipts). The latter supersedes the prior $500
million outstanding authorization, and authorizes not more than $1.2 billion to
be outstanding at any time and not more than $220 million to be issued in a
fiscal year.
E-11-3
<PAGE>
The Constitution also authorizes the issuance of State obligations for
certain purposes, the owners of which do not have the right to have excises or
taxes levied to pay debt service. Those special obligations include obligations
issued by the Ohio Public Facilities Commission and the Ohio Building Authority,
and certain obligations issued by the State Treasurer, over $5.3 billion of
which were outstanding at May 19, 1999.
The General Assembly has placed on the November 1999 general election
ballot a proposed constitutional amendment relating to State debt. If approved
by the voters, it will authorize State general obligation debt to pay costs of
facilities for a system of common schools throughout the State and facilities
for state supported and assisted institutions of higher education. That, and
other debt represented by direct obligations of the State (such as that
authorized by the Ohio Public Facilities Commission and Ohio Building Authority,
and some authorized by the Treasurer), may not be issued if future FY total debt
service on those direct obligations to be paid from the GRF or net lottery
proceeds exceeds 5% of total estimated revenues of the State for the GRF and
from net State lottery proceeds during the FY of issuance.
Aggregate FY 1998 rental payments under various capital lease and lease
purchase agreements were approximately $9.1 million. In recent years, State
agencies have also participated in transportation and office building projects
that may have some local as well as State use and benefit, in connection with
which the State enters into lease purchase agreements with terms ranging from 7
to 20 years. Certificates of participation, or special obligation bonds of the
State or a local agency, are issued that represent fractionalized interests in
or are payable from the State's anticipated payments. The State estimates
highest future FY payments under those agreements (as of May 19, 1999) to be
approximately $25.8 million (of which $22 million is payable from sources other
than the GRF, such as federal highway money distributions). State payments
under all those agreements are subject to biennial appropriations, with the
lease terms being two years subject to renewal if appropriations are made.
A 1990 constitutional amendment authorizes greater State and political
subdivision participation (including financing) in the provision of housing.
The General Assembly may for that purpose authorize the issuance of State
obligations secured by a pledge of all or such portion as it authorizes of State
revenues or receipts (but not by a pledge of the State's full faith and credit).
A 1994 constitutional amendment pledges the full faith and credit and
taxing power of the State to meeting certain guarantees under the State's
tuition credit program which provides for purchase of tuition credits, for the
benefit of State residents, guaranteed to cover a specified amount when applied
to the cost of higher education tuition. (A 1965 constitutional provision that
authorized student loan guarantees payable from available State moneys has never
been implemented, apart from a "guarantee fund" approach funded essentially from
program revenues.)
State and local agencies issue obligations that are payable from revenues
from or relating to certain facilities (but not from taxes). By judicial
interpretation, these obligations are not "debt" within constitutional
provisions. In general, payment obligations under lease-purchase agreements of
Ohio public agencies (in which certificates of participation may be issued) are
E-11-4
<PAGE>
limited in duration to the agency's fiscal period, and are renewable only upon
appropriations being made available for the subsequent fiscal period.
Local school districts in Ohio receive a major portion (state-wide
aggregate approximately 46% in recent years) of their operating moneys from
State subsidies, but are dependent on local property taxes, and in 123 districts
(as of May 19, 1999) from voter-authorized income taxes, for significant
portions of their budgets. Litigation, similar to that in other states, has
been pending questioning the constitutionality of Ohio's system of school
funding. The Ohio Supreme Court has concluded that aspects of the system
(including basic operating assistance and the loan program referred to below)
are unconstitutional, and ordered the State to provide for and fund a system
complying with the Ohio Constitution, staying its order to permit time for
responsive corrective actions. After a further hearing, the trial court has
decided that steps taken to date by the State to enhance school funding have not
met the requirements of the Supreme Court decision; the State has filed a notice
of appeal with the Supreme Court and the trial court has issued a stay, pending
appeal, of the implementation of much of its order. A small number of the
State's 612 local school districts have in any year required special assistance
to avoid year-end deficits. A program has provided for school district cash
need borrowing directly from commercial lenders, with diversion of State subsidy
distributions to repayment if needed. Recent borrowings under this program
totaled $71.1 million for 29 districts in FY 1995 (including $29.5 million for
one), $87.2 million for 20 districts in FY 1996 (including $42.1 million for
one), $113.2 million for 12 districts in FY 1997 (including $90 million to one
for restructuring its prior loans), and $23.4 million for 10 districts in FY
1998.
Ohio's 943 incorporated cities and villages rely primarily on property and
municipal income taxes for their operations. With other subdivisions, they also
receive local government support and property tax relief moneys distributed by
the State.
For those few municipalities and school districts that one occasion have
faced significant financial problems, there are statutory procedures for a joint
State/local commission to monitor the fiscal affairs and for development of a
financial plan to eliminate deficits and cure any defaults. (Similar procedures
have recently been extended to counties and townships.) Since inception for
municipalities in 1979, these "fiscal emergency" procedures have been applied to
26 cities and villages; for 20 of them the fiscal situation was resolved and the
procedures terminated (two cities are in preliminary "fiscal watch" status). As
of May 19, 1999, a school district "fiscal emergency" provision was applied to
nine districts, and 10 were on preliminary "fiscal watch" status.
At present the State itself does not levy ad valorem taxes on real or
tangible personal property. Those taxes are levied by political subdivisions
and other local taxing districts. The Constitution has since 1934 limited to 1%
of true value in money the amount of the aggregate levy (including a levy for
unvoted general obligations) of property taxes by all overlapping subdivisions,
without a vote of the electors or a municipal charter provision, and statutes
limit the amount of that aggregate levy to 10 mills per $1 of assessed valuation
(commonly referred to as the "ten-mill limitation"). Voted general obligations
of subdivisions are payable from property taxes that are unlimited as to the
amount or rate.
E-11-5
<PAGE>
Ohio Tax Matters
The following is based upon the advice of _______, special Ohio to the
Fund.
The Fund is not subject to the Ohio personal income tax, school district or
municipal income taxes in Ohio. The Fund is not subject to the Ohio corporation
franchise tax, or the Ohio dealers in intangibles tax, provided that, if there
is a sufficient nexus between the State of Ohio and such entity that would
enable the State to tax such entity, then such entity shall be exempt from such
taxes only if it timely complies with the annual filing requirement of Section
5733.09 of the Ohio Revised Code. The Ohio Tax Commissioner has waived this
annual filing requirement for every year since 1990, the first tax year to which
such requirement applied.
Provided that the Fund continues to qualify as a regulated investment
company under the Code, and that at all times at least 50% of the value of the
total assets of the Fund consists of obligations issued by or on behalf of Ohio,
political subdivisions thereof or agencies or instrumentalities of Ohio or its
political subdivisions ("Ohio Obligations"), or similar obligations of other
states or their subdivisions (the "RIC and 50% value tests"), (i) distributions
with respect to shares of the Fund ("Distributions") will be exempt from Ohio
personal income tax and municipal and school district income taxes in Ohio, and
will be excluded from the net income base of the Ohio corporation franchise tax
to the extent such Distributions are properly attributable to interest payments
on Ohio Obligations, and (ii) Distributions of profit made on the sale,
exchange, or other disposition of Ohio Obligations, including Distributions of
"capital gain dividends," as defined in the Code, properly attributable to the
sale, exchange, or other disposition of Ohio Obligations, will be exempt from
Ohio personal income tax, and municipal and school district income taxes in
Ohio, and will be excluded from the net income base of the Ohio corporation
franchise tax.
Assuming the RIC and 50% value tests are satisfied, Distributions that are
properly attributable to interest on obligations of the United States or its
territories or possessions (including obligations issued by the governments of
the Commonwealth of Puerto Rico, the United States Virgin Islands or Guam
("Territorial Obligations")) or of any authority, commission, or instrumentality
of the United States that is exempt from state income taxes under the laws of
the United States will be exempt from Ohio personal income tax and municipal and
school district taxes in Ohio, and, provided, in the case of Territorial
Obligations, such interest is excluded from gross income for federal income tax
purposes, will be excluded from the net income base of the Ohio corporation
franchise tax.
Distributions property attributable to proceeds paid under insurance
policies, if any, to the Fund representing maturing interest on defaulted Ohio
Obligations or Territorial Obligations held by the Fund that is excluded from
gross income for federal income tax purposes will be exempt from the Ohio
personal income tax, and municipal and school district income taxes in Ohio and
the net income base of the Ohio corporation franchise tax.
However, other Distributions will generally not be exempt from Ohio
personal income tax and municipal and school district income taxes in Ohio, and
shares of the Fund will not be excluded from the net worth base of the Ohio
corporation franchise tax.
E-11-6
<PAGE>
The value of shares of the Fund is included in the value of the gross
estate of decedents domiciled in Ohio for purposes of the Ohio estate tax. The
value of shares of the Fund may be included in the value of the gross estate of
decedents not domiciled in Ohio for purposes of Ohio estate tax only if the
shares were employed in carrying on business in Ohio.
The foregoing is a general, abbreviated summary of certain of the
provisions of, and administrative interpretations of, the Ohio Revised Code
presently in effect as they directly govern the tax consequences of investment
in the Fund. These provisions are subject to change by legislative or
administrative action, and any such change may be retroactive with respect to
Fund transactions. You are urged to consult with your own tax adviser for more
detailed information concerning Ohio tax matters.
E-11-7
<PAGE>
APPENDIX E-12
Factors Pertaining to Pennsylvania
As described in this Statement of Additional Information, except during
temporary defensive periods, the Fund will invest substantially all of its net
assets in Pennsylvania municipal bonds. The Fund is therefore susceptible to
political, economic or regulatory factors affecting issuers of Pennsylvania
municipal bonds. There can be no assurance that the Commonwealth will not
experience a decline in economic conditions or that portions of the Pennsylvania
municipal bonds purchased by the Fund will not be affected by such a decline.
Without intending to be complete, the following briefly summarizes some of
these difficulties and the current financial situation, as well as some of the
complex factors affecting the financial situation in 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 the Commonwealth. No
independent verification has been made of the following information.
State Economy. The Commonwealth of Pennsylvania is one of the most
populous states, ranking fifth behind California, New York, Texas and Florida.
Pennsylvania is an established yet growing state with a diversified economy. It
is the headquarters for many major corporations. Pennsylvania had been
historically identified as a heavy industry state. That reputation has changed
over the last thirty years as the coal, steel and railroad industries declined
and the Commonwealth's business environment readjusted to reflect a more
diversified industrial base. This economic readjustment was a direct result of
a long-term shift in jobs, investment and workers away from the northeast part
of the nation. Currently, the major sources of growth in Pennsylvania are in
the service sector, including trade, medical and the health services, education
and financial institutions.
Pennsylvania's agricultural industries remain an important component of the
Commonwealth's economic structure, accounting for more than $3.6 billion in crop
and livestock products annually. Agribusiness and food-related industries
support $39 billion in economic activity annually. Over 51,000 farms form the
backbone of the State's agricultural economy. Farmland in Pennsylvania includes
over four million acres of harvested cropland and four million acres of pasture
and farm woodlands - nearly one-third of the Commonwealth's total land area.
Agricultural diversity in the Commonwealth is demonstrated by the fact that
Pennsylvania ranks among the top ten states in the production of a number of
agricultural products.
Employment within the Commonwealth increased steadily from 1984 to 1990.
From 1990 to 1992, employment in the Commonwealth declined 1.8%. From 1992 to
1998, employment increased 4.1%. The growth in employment experienced in the
Commonwealth during such periods is slightly higher that the growth in
employment in the Middle Atlantic region of the United States. Non-
manufacturing employment in the Commonwealth has increased steadily since 1980
to its 1998 level of 82.8% of total Commonwealth employment. Manufacturing,
which contributed 17.1% of 1998 non-agricultural employment, has fallen behind
both the services sector and the trade sector as the largest single source of
employment within the Commonwealth. In 1998, the services sector accounted for
32.3% of all non-agricultural employment in the Commonwealth while the trade
sector accounted for 22.4%.
E-12-1
<PAGE>
Economic strengths and weakness vary in different parts of the
Commonwealth. In general, heavy industry and manufacturing have been facing
increasing competition from foreign producers. During 1998, the annual average
unemployment rate in the Commonwealth was 4.6%, compared to 4.5% for the United
States. For March 1999, the unadjusted unemployment rate was 4.8% in the
Commonwealth and 4.4% in the United States, while the seasonally adjusted
unemployment rate for the Commonwealth was 4.4% and for the United States was
4.2%.
State Budget. The Commonwealth operates under an annual budget that is
formulated and submitted for legislative approval by the Governor each February.
The Pennsylvania Constitution requires that the Governor's budget proposal
consist of three parts: (i) a balanced operating budget setting forth proposed
expenditures and estimated revenues from all sources and, if estimated revenues
and available surplus are less than proposed expenditures, recommending specific
additional sources of revenue sufficient to pay the deficiency; (ii) a capital
budget setting forth proposed expenditures to be financed from the proceeds of
obligations of the Commonwealth or its agencies or from operating funds; and
(iii) a financial plan for not less than the succeeding five fiscal years, that
includes for each year projected operating expenditures and estimated revenues
and projected expenditures for capital projects. The General Assembly may add,
change or delete any items in the budget prepared by the Governor, but the
Governor retains veto power over the individual appropriations passed by the
legislature. The Commonwealth's fiscal year begins on July 1 and ends on June
30.
All funds received by the Commonwealth are subject to appropriation in
specific amounts by the General Assembly or by executive authorization by the
Governor. Total appropriations enacted by the General Assembly may not exceed
the ensuing year's estimated revenues, plus (less) the unappropriated fund
balance (deficit) of the preceding year, except for constitutionally authorized
debt service payments. Appropriations from the principal operating funds of the
Commonwealth (the General Fund, the Motor License Fund and the State Lottery
Fund) are generally made for one fiscal year and are returned to the
unappropriated surplus of the fund if not spent or encumbered by the end of the
fiscal year. The Constitution specifies that a surplus of operating funds at
the end of a fiscal year must be appropriated for the ensuing year.
Pennsylvania uses the "fund" method of accounting for receipts and
disbursements. For purposes of government accounting, a "fund" is an
independent fiscal and accounting entity with a self-balancing set of accounts,
recording cash and/or other resources together with all related liabilities and
equities that are segregated for the purpose of carrying on specific activities
or attaining certain objectives in accordance with the fund's special
regulations, restrictions or limitations. In the Commonwealth, over 150 funds
have been established by legislative enactment or in certain cases by
administrative action for the purpose of recording the receipt and disbursement
of money's received by the Commonwealth. Annual budgets are adopted each fiscal
year for the principal operating funds of the Commonwealth and several other
special revenue funds. Expenditures and encumbrances against these funds may
only be made pursuant to appropriation measures enacted by the General Assembly
and approved by the Governor. The General Fund, the Commonwealth's largest
fund, receives all tax revenues, non-tax revenues and federal grants and
entitlements that are not specified by law to be deposited elsewhere. The
majority of the Commonwealth's operating and administrative expenses are payable
from the General Fund Debt service on all bond indebtedness of the Commonwealth,
except that issued
E-12-2
<PAGE>
for highway purposes or for the benefit of other special revenue funds, is
payable from the General Fund.
Financial information for the principal operation funds of the Commonwealth
are maintained on a budgetary basis of accounting, which is used for the purpose
of ensuring compliance with the enacted operating budget. The Commonwealth also
prepares annual financial statements in accordance with generally accepted
accounting principles ("GAAP"). Budgetary basis financial reports are based on
a modified cash basis of accounting as opposed to a modified accrual basis of
accounting prescribed by GAAP. Financial information is adjusted at fiscal
year-end to reflect appropriate accruals for financial reporting in conformity
with GAAP.
Financial Condition and Results of Operations. The period from fiscal year
1993 through fiscal 1997 was a time of steady, modest economic growth and low
rates of inflation in the Commonwealth. These economic conditions, together
with tax reductions in the several years following the tax rate increases and
tax base expansions enacted in fiscal 1991 for the General Fund, produced tax
revenue gains averaging 4.1 percent per year during the period. Total revenues
during this same period increased at a 4.7 percent average rate.
Intergovernmental revenue recorded the largest percentage gain during this
period, averaging 8.1 percent. Expenditures and other uses during the fiscal
1993 through fiscal 1997 period rose at a 3.8 percent rate, led by an average
13.8 percent annual increase for protection of persons and property program
costs. This high rate of increase reflects the cost to acquire, staff and
operate expanded prison facilities to house a greater population. Public health
and welfare program costs expanded an average 5.4 percent annually during this
period, the second largest rate of increase for program categories. At the
close of fiscal 1997, the fund balance for the governmental fund type totaled
$2,900.9 million, an increase of $914.6 million.
Financial Results for Recent Fiscal Years (GAAP Basis). During the five
year period from fiscal 1993 through fiscal 1997, revenues and other sources
increased by an average 4.7 percent annually. Tax revenues during this same
period increased by an annual average of 4.1 percent. Intergovernmental
revenues, at an 8.5 percent annual average rate of increase, were the revenue
source with the largest rate of growth over the five-year period.
Expenditures and other uses during the fiscal 1993 through fiscal 1997
period rose at an average annual rate of 4.9 percent. Program costs for
protection of persons and property increased an average 13.8 percent annually,
the largest growth rate of all programs. Public health and welfare program
costs increased at a 5.7 percent annual average rate during the period. Efforts
to control costs for various social programs and the presence of favorable
economic conditions have helped restrain these costs.
The general fund balance at June 30, 1998 totaled $1,958.9 million. The
general fund balance at June 30, 1997 totaled $1,364.9 million, an increase of
$729.7 million over the $635.2 million balance at June 30, 1996.
Fiscal 1996 Financial Results (Budgetary Basis). The unappropriated
surplus for Commonwealth revenues (prior to transfers to Tax Stabilization
Reserve Fund) at the close of the 1996 fiscal year for the General Fund was
$183.8 million, $65.5 million above estimate. Fiscal 1996 was the fifth
consecutive fiscal year the Commonwealth reported an increase in the fiscal
year-
E-12-3
<PAGE>
end unappropriated balance. Expenditures from Commonwealth revenues for the
fiscal year, including $113.0 million of supplemental appropriations but
excluding pooled financing expenditures, totaled $16,074.7 million. Expenditures
exceeded available revenues and lapses by $253.2 million. The difference was
funded from a planned partial drawdown of the $437.0 million fiscal year
adjusted beginning unappropriated surplus.
Commonwealth revenues (prior to tax refunds) for the 1996 fiscal year
increased by $113.9 million over the prior fiscal year to $16,338.5 million
representing a growth rate of 0.7 percent. The Commonwealth has estimated that
tax changes enacted for the 1996 fiscal year reduced Commonwealth revenues by
$283.4 million representing 1.7 percentage points of fiscal 1996 growth in
Commonwealth revenues. The most significant tax changes enacted for the 1996
fiscal year were (i) the reduction of the corporate net income tax rate to 9.99
percent; (ii) double weighing of the sales factor of the corporate net income
apportionment calculation; (iii) an increase in the maximum annual allowance for
a net operating loss deduction from $0.5 million to $ 1.0 million; (iv) an
increase in the basic exemption amount for the capital stock and franchise tax;
(v) the repeal of the tax on annuities; and (vi) the elimination of inheritance
tax on transfers of certain property to surviving spouses.
Fiscal 1997 Financial Results (Budgetary Basis). The unappropriated
balance of Commonwealth revenues increased during the 1997 fiscal year by $432.9
million. Higher than estimated revenues and slightly lower expenditures than
budgeted caused the increase. The unappropriated balance rose from an adjusted
amount of $158.5 million at the beginning of fiscal 1997, to $591.4 million
(prior to reserves for transfer to the Tax Stabilization Reserve Fund) at the
close of the fiscal year. Transfers to the Tax Stabilization Reserve Fund for
fiscal 1997 operations are expected to be $88.7 million, which represents the
normal fifteen percent of the ending unappropriated balance, plus an additional
$100 million authorized by the General Assembly when it enacted the fiscal 1998
budget.
Commonwealth revenues (prior to tax refunds) during the 1997 fiscal year
totaled $17,320.6 million, $576.1 (3.4 percent) above the estimate made at the
time the budget was enacted. Revenue from taxes was the largest contributor to
higher than estimated receipts. Tax revenue in fiscal 1997 grew 6.1 percent
over tax revenues in fiscal 1996. This rate of increase was not adjusted for
legislated tax reductions that affected receipts during both of those fiscal
years and therefor understates the actual underlying rate of growth of tax
revenue during fiscal 1997. Receipts from the personal income tax produced the
largest single component of higher revenues for the fiscal year. Personal
income collections were $236.3 million over estimate representing a 6.9 percent
increase over fiscal 1996 receipts. Receipts of the sales and use tax were
$185.6 million over estimate representing a 6.2 percent increase. Collections
of corporate taxes, led by the capital stock and franchise and the gross receipt
taxes, also exceeded their estimates for the fiscal year. Non-tax revenues were
$19.8 million (5.8 percent) over estimate mostly due to higher than anticipated
interest earnings.
Expenditures from Commonwealth revenues (excluding pooled financing
expenditures) during fiscal 1997 totaled $16,347.7 million and were close to the
estimate made in February 1997 with the presentation of the Governor's fiscal
1998 budget request. Total expenditures represent an increase over fiscal 1996
expenditures of 1.7 percent.
E-12-4
<PAGE>
Fiscal 1998 Financial Results (Budgetary Basis). Operations during the
1998 fiscal year increased the unappropriated balance of commonwealth revenues
during that period by $86.4 million to $488.7 million at June 30, 1998 (prior to
reserves for transfer to the Tax Stabilization Reserve Fund). Higher than
estimated revenues, offset in part by increased reserves for tax refunds, and
slightly lower expenditures than budgeted were responsible for the increase.
Transfers to the Tax Stabilization Reserve Fund for fiscal 1998 operations will
total $223.3 million consisting of $73.3 million representing the required
transfer of fifteen percent of the ending unappropriated surplus balance, plus
an additional $150 million authorized by the General Assembly when it enacted
the fiscal 1999 budget. With these transfers, the balance in the Tax
Stabilization Reserve Fund will exceed $664 million and represents 3.7 percent
of fiscal 1998 revenues.
Commonwealth revenues (prior to tax refunds) during the 1998 fiscal year
totaled $18,123.2 million, $676.1 million (3.9 percent) above the estimate made
at the time the budget was enacted. Tax revenue received in fiscal 1998 grew
4.8 percent over tax revenues received during fiscal 1997. This rate of
increase includes the effect of legislated tax reductions that affected receipts
during both fiscal years and therefore understates the actual underlying rate of
growth of tax revenue during fiscal 1998. Receipts from the personal income tax
produced the largest single component of higher revenues during fiscal 1998.
Personal income tax collections were $416.6 million over estimate representing
an 8.5 percent increase over fiscal 1997 receipts. Receipts of the sales and
use tax were $6.2 million over estimate representing a 1.9 percent increase.
Collections of all corporate taxes exceeded their estimate for the fiscal year,
led by the capital stock and franchise tax and the corporate net income tax
which were over estimate by 7.8 percent and 2.7 percent, respectively. Non-tax
revenues were $27.5 million (8.6 percent) over estimate, mostly due to greater
than anticipated interest earnings for the fiscal year.
Expenditures from all fiscal 1998 appropriations of Commonwealth revenues
totaled $17,229.8 million (excluding pooled financing expenditures and net of
current year lapses). This amount represents an increase of 4.5 percent over
fiscal 1997 appropriation expenditures.
Fiscal 1999 Budget. The budget for fiscal 1999 was enacted in April 1998 at
which time the official revenue estimate for the 1999 fiscal year was
established at $18,456.6 million. The official revenue estimate is based on an
economic forecast for national gross domestic product, on a year-over-year
basis, to slow from an estimated annualized 3.9 percent rate in the fourth
quarter of 1997 to a projected 1.8 percent annualized growth rate by the second
quarter of 1999. The forecast of slowing economic activity is based on the
expectation that consumers will reduce their pace of spending, particularly on
motor vehicles, housing and other durable goods. Business is also expected to
trim its spending on fixed investments. Foreign demand for domestic goods is
expected to decline in reaction to economic difficulties in Asia and Latin
America, while an economic recovery in Europe is expected to proceed slowly.
The underlying growth rate, excluding any effect of scheduled or proposed tax
changes, for the General Fund fiscal 1999 official revenue estimate is 3.0
percent over actual fiscal 1998 revenues. When adjusted to include the
estimated effect of enacted tax changes, fiscal 1999 Commonwealth revenues are
projected to increase by 1.66 percent over actual Commonwealth revenues for
fiscal 1998.
Appropriations enacted for fiscal 1999 are 4.1 percent ($705.1 million)
above the appropriations enacted for fiscal 1998 (including supplemental
appropriations). Major increases
E-12-5
<PAGE>
in expenditures budgeted for fiscal 1999 include: (i) $249.5 million in direct
support of local school district education costs (local school districts will
also benefit from an estimated $104 million of reduced contributions by school
districts to their worker's retirement costs from a reduced employer
contribution rate); (ii) $60.4 million for higher education, including
scholarship grants; (iii) $56.5 million to fund the correctional system
including $21 million to operate a new correctional facility; (iv) $121.1
million for long-term care medial assistance costs; (v) $14.4 million for
technology and Year 2000 investments; (vi) $55.9 million to fund the first
year's cost of a July 1, 1998 annuitant cost of living increase for state and
school district employees and (vii) $20 million to replace bond funding for
equipment loans for volunteer fire and rescue companies. The balance of the
increase is spread over many departments and program operations.
The enacted fiscal 1999 budget assumes the draw down of the $265.4 million
beginning budgetary balance by approximately $144 million to an estimated
closing balance, prior to transfer of the required portion to the Tax
Stabilization Reserve Fund, of $124.3 million. The amount of the anticipated
draw down does not consider the availability of appropriation lapses normally
occurring during a fiscal year that are used to fund supplemental appropriations
or increase unappropriated surplus.
Debt Limits and Outstanding Debt. The Pennsylvania Constitution permits
the issuance of the following types of debt: (i) debt to suppress insurrection
or rehabilitate areas affected by disaster; (ii) electorate approved debt; (iii)
debt for capital projects subject to an aggregate outstanding debt limit of 1.75
times the annual average tax revenues of the preceding five fiscal years; and
(iv) tax anticipation notes payable in the fiscal year of issuance.
Under the Pennsylvania Fiscal Code, the Auditor General is required to
certify to the Governor and the General Assembly certain information regarding
the Commonwealth's indebtedness. According to the August 26, 1999 Auditor
General certificate, the average annual tax revenues deposited in all funds in
the five fiscal years ended August 26, 1998 was approximately $20.4 billion,
and, therefore, the net debt limitation for the 1999 fiscal year is $32.0
billion. Outstanding net debt totaled $3.7 billion at June 30, 1998
approximately equal to the net debt at June 30, 1997. At August 26, 1998, the
amount of debt authorized by law to be issued, but not yet incurred, was $22.7
billion.
Debt Ratings. All outstanding general obligation bonds of the Commonwealth
are rated AA by S&P and Aa3 by Moody's.
City of Philadelphia. The City of Philadelphia (the "City" or
"Philadelphia") is the largest city in the Commonwealth, with an estimated
population of 1,585,577 according to the 1990 Census. Philadelphia experienced
a series of general fund deficits for fiscal years 1988 through 1992 which
culminated in serious financial difficulties for the City. In its 1992
Comprehensive Annual Financial Report, Philadelphia reported a cumulative
general fund deficit of $71.4 million for fiscal year 1992.
In June 1991, the Pennsylvania legislature established the Pennsylvania
Intergovernmental Cooperation Authority ("PICA"), a five-member board to assist
Philadelphia in remedying fiscal emergencies. PICA is designed to provide
assistance through the issuance of funding debt and to
E-12-6
<PAGE>
make factual findings and recommendations to Philadelphia concerning its
budgetary and fiscal affairs. The legislation empowered PICA to issue notes and
bonds on behalf of Philadelphia, and also authorized Philadelphia to levy a one-
percent sales tax the proceeds of which would be used to pay off the bonds. In
return for PICA's fiscal assistance, Philadelphia is required, among other
things, to establish five-year financial plans that include balanced annual
budgets. Under the legislation, if Philadelphia does not comply with such
requirements, PICA may withhold bond revenues and certain state funding. At this
time, the City is operating under a five-year fiscal plan approved by PICA on
June 9, 1998. As of November 25, 1998, PICA has issued approximately $1,761.7
million of its Special Tax Revenue Bonds. The financial assistance has included
the refunding of certain city general obligation bonds, funding of capital
projects and the liquidation of the City's Cumulative General Fund balance
deficit as of June 30, 1992 of $224.9 million.
No further PICA bonds are to be issued by PICA for the purpose of financing
a capital project or deficit as the authority for such bond sales expired on
December 31, 1994. PICA's authority to issue debt for the purpose of financing
a cash flow deficit expired on December 31, 1996. Its ability to refund
existing outstanding debt is unrestricted. PICA had $1,055.0 million in Special
Tax Revenue Bonds outstanding as of June 30, 1998.
The audited General Fund balance of the City as of June 30, 1995, 1996 and
1997 showed a surplus of approximately $80.5 million, $118.5 million and $128.8
million, respectively.
S&P's rating on Philadelphia's general obligation bonds is "BBB." Moody's
rating is currently "Baa2."
Litigation. The Commonwealth is a party to numerous lawsuits in which an
adverse final decision could materially affect the Commonwealth's governmental
operations and consequently its ability to pay debt service on its obligations.
The Commonwealth also faces tort claims made possible by the limited waiver of
sovereign immunity effected by Act 152, approved September 28, 1978, as amended.
Under Act 152, damages for any loss are limited to $250,000 per person and $1
million for each accident.
Year 2000 Planning. A well-established standard in the computer industry
governing traditional programming practices is expected to result in many
current computer systems being unable to recognize dates beyond the year 1999.
As a result, computers worldwide may begin to malfunction by producing erroneous
data or failing completely as the year 2000 draws near. The Governor has made
fixing the year 2000 problem a top priority for Pennsylvania state agencies. At
the Governor's direction, Pennsylvania has begun an aggressive program to make
its computer systems year 2000-compatible and to identify potential problems
with entities outside state government with which the Commonwealth does business
or exchanges data.
An initial assessment of state agencies' computer resources was completed in
June, 1996. This overview assessment was used to develop the Governor's Year
2000 Action Plan, which tracks state agencies' computer programs through a
three-step process of correction, testing, and implementation. Under this
action plan, 45,937 mission-critical and non mission-critical computer programs
used by state agencies are scheduled for corrective measures to ensure they will
be year 2000-compatible. Mission-critical computer programs are those which
impact the health, safety and welfare of the Commonwealth and its citizens, and
for which failure to be year 2000 compliant
E-12-7
<PAGE>
could have a material and adverse impact upon operations of the Commonwealth.
The projected cost of the Commonwealth's year 2000 modification work is $39.5
million and is being paid from appropriations from current revenues.
Pennsylvania Tax Matters
The following is based upon the advice of ______, special Pennsylvania
counsel to the Fund.
Shares of the Fund are not subject to any of the personal property taxes
presently in effect in Pennsylvania to the extent of that proportion of the Fund
represented by Pennsylvania municipal bonds. The taxes referred to above
include the County Personal Property Tax, the additional personal property taxes
imposed on Pittsburgh residents by the School District of Pittsburgh and by the
City of Pittsburgh. Shares of the Fund may be taxable under the Pennsylvania
inheritance and estate taxes.
The proportion of interest income representing interest income from
Pennsylvania municipal bonds distributable to shareholders of the Fund is not
taxable under the Pennsylvania Personal Income Tax or under the Corporate Net
Income Tax, nor will such interest be taxable under the Philadelphia School
District Investment Income tax imposed on Philadelphia resident individuals.
The disposition by the Fund of a Pennsylvania municipal bond issued before
February 1, 1994 (whether by sale, exchange, redemption or payment at maturity)
will not constitute a taxable event to a shareholder under the Pennsylvania
Personal Income Tax. The disposition of Pennsylvania municipal bonds issued on
or after February 1, 1994 are taxable. Further, although there is no published
authority on the subject, special Pennsylvania counsel is of the opinion that
(i) a shareholder of the Fund will not have a taxable event under the
Pennsylvania state and local income taxes referred to in the preceding paragraph
(other than the Corporate Net Income Tax) upon the redemption or sale of Common
Shares to the extent that the Fund is then composed of Pennsylvania municipal
bonds issued before February 1, 1994 and (ii) the disposition by the Fund of a
Pennsylvania municipal bond (whether by sale, exchange, redemption or payment at
maturity) will not constitute a taxable event to a shareholder under the
Corporate Net Income Tax for those obligations issued before February 1, 1994 or
the Philadelphia School District Investment Income Tax. (The School District
tax has no application to gain on the disposition of property held by the
taxpayer for more than six months.)
The Fund is not subject to the Pennsylvania Corporate Net Income Tax or
Capital Stock/Franchise Tax.
If a shareholder is a business subject to the Pennsylvania Capital
Stock/Franchise Tax, the value of shares of the Fund owned by such shareholder
and income derived from their ownership may be taken into account in determining
the "capital stock value" of such shareholder.
The foregoing is a general, abbreviated summary of certain of the
provisions of the Pennsylvania statutes and administrative interpretations
presently in effect governing the taxation
E-12-8
<PAGE>
of shareholders of the Fund. These provisions are subject to change by
legislative or administrative action, and any such change may be retroactive
with respect to Fund transactions. Shareholders are advised to consult with
their own tax advisers for more detailed information concerning Florida tax
matters.
E-12-9
<PAGE>
APPENDIX E-13
Factors Pertaining to Virginia
The Trust is susceptible to political, economic or regulatory factors
affecting issuers of Virginia 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 effect the market value of Virginia
Bonds held in the portfolio of the Trust or the ability of particular obligors
to make timely payments of debt service on (or relating to) those obligations.
As national economic growth continues the recovery that began at the end of
the 1990-91 recession, Virginia's economy remains strong and continues to
outpace the nation in many measures of economic growth. The Virginia economy
surpasses national growth rates in personal income, total wages and salaries,
total nonagricultural employment and retail sales. Moreover, Virginia's
unemployment rate for FY 1998 remained lower than the nation's.
The Commonwealth's unemployment rate for FY 1998 is 3.4 percent, down from
4.3 percent for FY 1997 and is the lowest rate since 1974. During the 19902,
Virginia consistently has had a lower rate of employment than the nation. The
average difference between Virginia's unemployment rate and that of the United
States has been 1.2 percentage points. Even though the nation's employment rate
declined to 4.7 percent, the differential increased to 1.3 percentage points in
FY 1998.
Virginia nonagricultural wage and salary employment grew by approximately
89,500 jobs in FY 1998, a 2.8 percent increase compared with 2.7 percent for the
nation. The services sector grew by 57,100 jobs, accounting for 64 percent of
Virginia's job growth. The majority of these jobs were added in high technology
services subsectors. Also, the retail trade sector added 10,400 jobs and
construction workers accounted for an increase of another 7,000 jobs reflecting
the strength of the Commonwealth's retail sales and housing markets. Adding
4,000 jobs, the manufacturing sector posted a gain in employment for the second
time since FY 1995.
Although federal and state civilian employment declined by 9,000 jobs, most
of this loss was offset by an addition of 8,800 jobs in local government. While
total civilian government employment remains the second largest employment
sector in Virginia, it continues to be outperformed by all other major sectors.
Employment in finance, insurance and real estate grew at a rate of 2.5
percent despite job losses associated with heavy merger and acquisition activity
in the Commonwealth's banking and financing industries. After decreases in FY
1996 and FY 1997, banking sector jobs increased 1.0 percent.
E-13-1
<PAGE>
In order to attract new workers, companies in Virginia have been raising
wages and salaries. The year-to-year quarterly growth rates have been greater
for wages and salaries than the growth rates in nonagricultural employment in
each of the past twelve quarters. Total Virginia wages and salaries growth at
7.7 percent, compared with 7.3 percent growth for the United States marking the
second straight fiscal year that Virginia's wages and salaries grew at a pace
equal to or greater than that of the nation. Also, Virginia real wages and
salaries grew at 6.3 percent, while in the United States real wages and salaries
grew at 5.9 percent.
The growth rate in payroll per job for total nonagricultural employment is
estimated to be 5.0 percent in Virginia for FY 1998, exceeding the 4.3 percent
estimated U.S. growth rate. Mining continues to have the highest payroll per
job and retail trade the lowest. While Virginia's average FY 1998 payroll for
total nonagricultural jobs is still below the national average, the gap has
narrowed since FY 1997. 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 trade and finance, insurance and real estate.
Virginia personal income grew to an estimated $183 billion in FY 1998, a
6.0 percent pace that is slightly above the national growth rate of 5.9 percent.
Virginia real personal income grew at a 4.7 percent pace while in the United
States it grew at a 4.6 percent rate.
Increases in income translated into increases in spending. Virginia retail
sales grew by $2.7 billion to reach $58.4 billion in FY 1998. This increase
amounts to a 4.9 percent growth rate for the Commonwealth while national retail
sales grew by 4.6 percent. Although this marks the second straight fiscal year
that Virginia has outpaced the nation, retail sales growth has slowed from its
5.3 percent pace in FY 1997.
Another indication of a strong Virginia economy is the growth of new and
multifamily homes, with building permits increasing 6.6 percent, a rebound from
a 3.8 percent decrease in FY 1997.
Virginia's foreign exports to the world surpassed $11 billion in calendar
year 1997, which ranks Virginia 17th among all states. Exports account for
about 5 percent of Virginia's gross state product. However, sagging Asian
markets have begun to slow export growth in the United States. Also, cheaper
Asian imports caused by the stronger dollar have increased competition in
domestic markets. Given that approximately 20 percent of Virginia's exports are
to Japan and South Korea, it is likely that Virginia will experience some of the
impact of the Asian crisis.
Virginia, along with the nation, has experienced a significant and
sustained period of economic growth since the 1990-91 recession. During FY
1998, Virginia continued to outpace national growth rates in most measures of
economic activity. While Virginia's labor market has remained tight, residents
have received benefits from increased job growth and higher real wages and
salaries. Concerns over the economic impact of the Asian crisis in Virginia
during the next fiscal year should be tempered by the relatively small share of
gross state product that could be affected and the strength of other sectors in
Virginia's economic base.
E-13-2
<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, 1998, fiscal year, the General Fund
of the Commonwealth had an ending fund balance, computed on a budgetary cash
basis, of $1,444.2 million, of which $1,411.2 million was in required reserves
or designated for appropriations, leaving an undesignated, unreserved fund
balance of $33.0 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, 1998, was $1,011.4 million, compared with a General Fund balance of $491.8
million at the end of the fiscal year ended June 30, 1997.
As of June 30, 1998, total debt of the Commonwealth aggregated $11.7
billion. Of that amount, $3.7 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, 1998. Of the amount, $567.4 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,
1998, would permit an additional total of approximately $7.6 billion of bonds
secured by revenue-producing projects and approximately $7.6 billion of Section
9(b) general obligation bonds for capital projects, with not more than
approximately $2.0 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 ________, 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
E-13-3
<PAGE>
shareholders, and that it will distribute all interest and dividends 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 ("Virginia Obligations") or to income derived
from or on the sale and exchange of, obligations of the United States and its
territories, possessions or instrumentalities that are exempt from state
taxation under federal law ("Federal Obligations") 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.
If a shareholder receives a distribution consisting in part of taxable
income, then the entire distribution will be taxed unless the shareholder
substantiates the portion which is exempt from taxation.
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 advisers for more
detailed information concerning Virginia state and local tax matters.
E-13-4
<PAGE>
APPENDIX F
[TO COME]
<PAGE>
Nuveen Insured Dividend Advantage Municipal Fund ________ Common Shares
Nuveen Arizona Dividend Advantage Municipal Fund ________ Common Shares
Nuveen Insured California Dividend Advantage Municipal Fund ______ Common Shares
Nuveen Connecticut Dividend Advantage Municipal Fund ________ Common Shares
Nuveen Florida Dividend Advantage Municipal Fund ________ Common Shares
Nuveen Maryland Dividend Advantage Municipal Fund ________ Common Shares
Nuveen Massachusetts Dividend Advantage Municipal Fund ________ Common Shares
Nuveen Michigan Dividend Advantage Municipal Fund ________ Common Shares
Nuveen New Jersey Dividend Advantage Municipal Fund ________ Common Shares
Nuveen Insured New York Dividend Advantage Municipal Fund ________ Common Shares
Nuveen North Carolina Dividend Advantage Municipal Fund ________ Common Shares
Nuveen Ohio Dividend Advantage Municipal Fund ________ Common Shares
Nuveen Pennsylvania Dividend Advantage Municipal Fund ________ Common Shares
Nuveen Virginia Dividend Advantage Municipal Fund ________ Common Shares
-------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
-------------------------------------------
September __, 1999
<PAGE>
PART C - OTHER INFORMATION
Item 24: Financial Statements and Exhibits
1. Financial Statements:
Registrant has not conducted any business as of the date of this filing,
other than in connection with its organization. Financial Statements indicating
that the Registrant has met the net worth requirements of Section 14(a) of the
1940 Act will be filed by pre-effective amendment to this registration
statement.
2. Exhibits:
a. 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. Form of Investment Management Agreement between Registrant and Nuveen
Advisory Corp. dated __________.*
h. Form of Underwriting 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 Form of Expense Reimbursement Agreement between Registrant and Nuveen
Advisory Corp.*
C-1
<PAGE>
l.1 Opinion and consent of Bell, Boyd & Lloyd.*
l.2 Opinion and consent of Bingham Dana LLP.*
m. None.
n. Consent of Ernst & Young LLP.*
o. None.
p. Subscription Agreement of Nuveen Advisory Corp. dated _______, 1999.*
q. None.
r. None.
s. Power of Attorney of Timothy R. Schwertfeger.
___________________
* 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>
<CAPTION>
<S> <C>
Securities and Exchange Commission fees $ 417
National Association of Securities Dealers, Inc. fees 650
Printing and engraving expenses *
Legal Fees *
New York Stock Exchange listing fees *
Accounting expenses *
Blue Sky filing fees and expenses *
Transfer agent fees *
Miscellaneous expenses *
---------
Total *
</TABLE>
C-2
<PAGE>
- ------------
*To be completed by amendment. Expenses may be reduced pursuant to the
agreement of John Nuveen & Co. Incorporated to pay (i) all Registrant's
organizational expenses and (ii) offering costs (other than the sales load) that
exceed $.02 per Common Share.
Item 27: Persons Controlled by or under Common Control with Registrant
Not applicable.
Item 28: Number of Holders of Securities
At July 16, 1999
<TABLE>
<CAPTION>
Number of
Title of Class Record Holders
-------------- --------------
<S> <C>
Common Shares, $.01 par value 0
</TABLE>
Item 29: Indemnification
Section 4 of Article XII of the Registrant's Declaration of Trust provides
as follows:
Subject to the exceptions and limitations contained in this Section 4,
every person who is, or has been, a Trustee, officer, employee or agent of the
Trust, including persons who serve at the request of the Trust as directors,
trustees, officers, employees or agents of another organization in which the
Trust has an interest as a shareholder, creditor or otherwise (hereinafter
referred to as a "Covered Person"), shall be indemnified by the Trust to the
fullest extent permitted by law against liability and against all expenses
reasonably incurred or paid by him in connection with any claim, action, suit or
proceeding in which he becomes involved as a party or otherwise by virtue of his
being or having been such a Trustee, director, officer, employee or agent and
against amounts paid or incurred by him in settlement thereof.
No indemnification shall be provided hereunder to a Covered Person:
(a) against any liability to the Trust or its Shareholders by reason of a final
adjudication by the court or other body before which the proceeding was
brought that he engaged in willful misfeasance, bad faith, gross negligence
or reckless disregard of the duties involved in the 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, as such Disinterested Trustee,
anyone who has been exempted from being an Interested Person by any rule,
regulation or order of the Commission), and (y) against whom none of such
actions, suits or other proceedings or another action, suit or other proceeding
on the same or similar grounds is then or has been pending.
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 Washington Premium Income
Municipal Fund, Nuveen Connecticut Premium Income Municipal Fund, Nuveen Georgia
Premium Income Municipal Fund, Nuveen Missouri Premium Income Municipal Fund,
Nuveen North Carolina Premium Income Municipal Fund, Nuveen California Premium
Income Municipal Fund, Nuveen Insured Premium Income Municipal Fund 2, Nuveen
New York Dividend Advantage Municipal Fund, Nuveen California Dividend Advantage
Municipal Fund and Nuveen 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,
maintains all general and subsidiary ledgers, journals, trial balances, records
of all portfolio purchases and sales, and all other required records not
maintained by Nuveen Advisory Corp.
Item 32: Management Services
Not applicable.
C-6
<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 16th day of
July, 1999.
NUVEEN MARYLAND 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 July 16, 1999
- -------------------- (Principal Financial and
Stephen D. Foy Accounting Officer)
Timothy R. Schwertfeger Chairman of the Board and
Trustee (Principal Executive By: /s/ Gifford R. Zimmerman
Officer) ------------------------
Gifford R. Zimmerman
Attorney-In-Fact
July 16, 1999
</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
<TABLE>
<CAPTION>
<S> <C>
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. Form of Investment Management Agreement between Registrant and Nuveen
Advisory Corp. dated __________.*
h. Form of Underwriting 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 Form of Expense Reimbursement Agreement between Registrant and Nuveen
Advisory Corp.*
l.1 Opinion and consent of Bell, Boyd & Lloyd.*
l.2 Opinion and consent of Bingham Dana LLP.*
m. None.
n. Consent of Ernst & Young LLP.*
o. None.
p. Subscription Agreement of Nuveen Advisory Corp. dated _______, 1999.*
q. None.
r. None.
s. Power of Attorney of Timothy R. Schwertfeger.
</TABLE>
___________________
* To be filed by amendment.
<PAGE>
DECLARATION OF TRUST
--------------------
OF
--
NUVEEN MARYLAND DIVIDEND ADVANTAGE MUNICIPAL FUND
-------------------------------------------------
DECLARATION OF TRUST made this 1st day of June 1999 by the initial Trustee
hereunder.
WHEREAS, the Trustee desires to establish a trust fund for the purposes of
carrying on the business of a management investment company; and
WHEREAS, in furtherance of such purposes, the Trustee and any successor
Trustees elected in accordance with Article V hereof are acquiring and may
hereafter acquire assets and properties which they will hold and manage as
trustees of a Massachusetts business trust with transferable shares in
accordance with the provisions hereinafter set forth;
NOW, THEREFORE, the Trustees and any successor Trustees elected in
accordance with Article V hereof hereby declare that they will hold all cash,
securities and other assets and properties, which they may from time to time
acquire in any manner as Trustees hereunder, IN TRUST, that they will manage and
dispose of the same upon the following terms and conditions for the pro rata
benefit of the holders from time to time of shares of beneficial interest in
this Trust as hereinafter set forth.
ARTICLE I
---------
NAME AND DEFINITIONS
--------------------
Section 1. Name. This Trust shall be known as the "Nuveen Maryland Dividend
Advantage Municipal Fund," and the Trustees shall conduct the business of the
Trust under that name or any other name as they may from time to time determine.
Section 2. Definitions. Whenever used herein, unless otherwise required by the
context or specifically provided:
(a) The "Trust" refers to the Massachusetts voluntary association
established by this Declaration of Trust, as amended from time to time, pursuant
to Massachusetts General Laws, Chapter 182;
(b) "Trustee" or "Trustees" refers to each signatory to this
Declaration of Trust so long as such signatory shall continue in office in
<PAGE>
-2-
accordance with the terms hereof, and all other individuals who at the time in
question have been duly elected or appointed and qualified in accordance with
Article V hereof and are then in office;
(c) "Shares" mean the shares of beneficial interest described in
Article IV hereof and include fractions of Shares as well as whole Shares;
(d) "Shareholder" means a record owner of Shares;
(e) The "1940 Act" refers to the Investment Company Act of 1940 (and
any successor statute) and the Rules and Regulations thereunder, all as amended
from time to time;
(f) The terms "Affiliated Person", "Assignment", "Commission",
"Interested Person", "Principal Underwriter" and "vote of a majority of the
outstanding voting securities" shall have the meanings given them in the 1940
Act;
(g) "Declaration of Trust" or "Declaration" shall mean this
Declaration of Trust as amended or restated from time to time; and
(h) "By-Laws" shall mean the By-laws of the Trust as amended from time
to time.
ARTICLE II
----------
NATURE AND PURPOSE OF TRUST
---------------------------
The Trust is a voluntary association (commonly known as a business trust)
of the type referred to in Chapter 182 of the General Laws of the Commonwealth
of Massachusetts. The Trust is not intended to be, shall not be deemed to be,
and shall not be treated as, a general or a limited partnership, joint venture,
corporation or joint stock company, nor shall the Trustees or Shareholders or
any of them for any purpose be deemed to be, or be treated in any way whatsoever
as though they were, liable or responsible hereunder as partners or joint
venturers. The purpose of the Trust is to engage in, operate and carry on the
business of a closed-end management investment company and to do any and all
acts or things as are necessary, convenient, appropriate incidental or customary
in connection therewith, including, without limitation, the following:
to hold, invest, and reinvest its funds, and in connection therewith
to hold part of all of its funds in cash, and to purchase or otherwise
sell, assign, negotiate, transfer, exchange or otherwise dispose of or turn
to account or realize upon securities and other
<PAGE>
-3-
negotiable or non-negotiable instruments, obligations and evidences of
indebtedness created or issued by any person, firms, associations,
corporations, syndicates, combinations, and other negotiable or non-
negotiable instruments, obligation and evidences of indebtedness; and to
exercise, as owner or holder of any securities or other instruments, all
rights, powers, and privileges in respect thereof; and to do any and all
acts and things for the preservation, protection and improvement of any and
all such securities or other instruments, and, in general, to conduct the
business of a closed-end investment company as that term is defined in the
1940 Act; and
To engage in any lawful act or activity for which business trusts may
be organized under Massachusetts law.
The Trust set forth in this instrument shall be deemed made in the
Commonwealth of Massachusetts, and it is created under and is to be
governed by and construed and administered according to the laws of said
Commonwealth. The Trust shall be of the type commonly called a business
trust, and without limiting the provisions hereof, the Trust may exercise
all powers which are ordinarily exercised by such a trust. No provision of
this Declaration shall be effective to require a waiver of compliance with
any provision of the Securities Act of 1933, as amended, or the 1940 Act,
or of any valid rule, regulation or order of the Commission thereunder.
The enumeration herewith of the objects and purposes of the Trust
shall be construed as powers as well as objects and purposes and shall not
be deemed to exclude by inference any powers, objects or purposes which the
Trust may lawfully pursue or exercise.
ARTICLE III
-----------
REGISTERED AGENT; PRINCIPAL PLACE OF BUSINESS
---------------------------------------------
The name of the registered agent of the Trust is CT Corporation System at 2
Oliver Street, Boston, Massachusetts. The principal place of business of the
Trust is 333 West Wacker Drive, Chicago, Illinois 60606. The Trustees may,
without the approval of Shareholders, change the registered agent of the Trust
and the principal place of business of the Trust.
<PAGE>
-4-
ARTICLE IV
----------
BENEFICIAL INTEREST
-------------------
Section 1. Shares of Beneficial Interest. The beneficial interest in the Trust
shall be divided into such transferable Shares of beneficial interest, of such
classes or series, and of such designations and par values (if any), and with
such rights, preferences, privileges and restrictions as shall be determined by
the Trustees in their sole discretion, without Shareholder approval, from time
to time. The number of Shares is unlimited and each Share shall be fully paid
and nonassessable. There shall be no cumulative voting. Subject to any
provision in a Statement (as defined in Section 2 below) to the contrary, the
Trustees shall have full power and authority, in their sole discretion and
without obtaining any prior authorization or vote of the Shareholders of the
Trust or of the Shareholders of any series or class of Shares, to create and
establish (and to change in any manner) Shares or any series or classes thereof
with such preferences, voting powers, rights and privileges as the Trustees may
from time to time determine; to divide or combine the Shares or the Shares of
any series or classes thereof into a greater or lesser number including, without
limitation, such a division or combination accomplished by means of a stock
split or a reverse stock split, without thereby changing their proportionate
beneficial interest in the Trust; to classify or reclassify any issued Shares
into one or more series or classes of Shares; to abolish any one or more series
or classes of Shares; and to take such other action with respect to the Shares
as the Trustees may deem desirable. The Shares shall initially be divided into
two classes, a class of an unlimited number of common Shares, $0.01 par value
(the "Common Shares"), and a class of an unlimited number of preferred Shares,
$0.01 par value (the "Preferred Shares"), each having the powers, preferences,
rights, qualifications, limitations and restrictions described below:
(a) Preferred Shares. The Preferred Shares shall be issued from time to
time in one or more classes or series with such distinctive serial designations
and (i) may have such voting powers, full or limited; (ii) may be subject to
redemption at such time or times and at such price or prices; (iii) may be
entitled to receive dividends (which may be cumulative or noncumulative) at such
rate or rates, on such conditions, and at such times, and payable in preference
to, or in such relation to, the dividends payable on any other class or classes
of Shares; (iv) may have such rights upon the termination of, or upon any
distribution of the assets of, the Trust; (v) may be made convertible into, or
exchangeable for, Shares of any other class or classes or of any other series of
the same or any other class or classes of Shares of the Trust, at such price or
prices or at such rates of exchange and
<PAGE>
-5-
with such adjustments; and (vi) shall have such other relative, participating,
optional or other special rights, qualifications, limitations or restrictions
thereof, all as shall hereafter be stated and expressed in the resolution or
resolutions providing for the issue of such Preferred Shares from time to time
adopted by the Trustees (or a Committee thereof) in accordance with Section 2 of
this Article IV. Any of such matters may be made dependent upon facts
ascertainable outside this Declaration of Trust, or outside the resolution or
resolutions providing for the issue of such Preferred Shares.
(b) Common Shares.
(i) Subject to the rights of the holders of the Preferred Shares, in
the event of the termination of the Trust the holders of the Common Shares
shall be entitled to receive pro rata the net distributable assets of the
Trust.
(ii) The holders of the Common Shares shall not, as such holders, have
any right to acquire, purchase or subscribe for any Common Shares or
securities of the Trust which it may hereafter issue or sell, other than
such right, if any, as the Trustees in their discretion may determine.
(iii) Subject to the rights of the holders of the Preferred Shares,
dividends or other distributions, when, as and if declared by the Trustees,
shall be shared equally by the holders of Common Shares on a share for
share basis. The Trustees may direct that any dividends or other
distributions or any portion thereof as declared and distributed shall be
paid in cash to the holder, or, alternatively, may direct that any such
dividends be reinvested in full and fractional Shares of the Trust [if such
holder elects to have them reinvested.]
(iv) The Trustees may hold as treasury shares (of the same or some
other series), reissue for such consideration and on such terms as they may
determine, or cancel any Common Shares of any series reacquired by the
Trust at their discretion from time to time. Shares shall not entitle the
Shareholder to any title in or to the whole or any part of the Trust.
(v) Common Shares may be issued from time to time, without the vote of
the Shareholders (or, if the Trustees in their sole discretion deem
advisable, with a vote of Shareholders), either for cash or for such other
consideration (which may be in any one or more instances a certain
specified consideration or certain specified considerations) and on such
terms as the Trustees, from time to time, may deem advisable, and the Trust
may in such manner acquire other assets (including the
<PAGE>
-6-
acquisition of assets subject to, and in connection with the assumption of
liabilities).
(vi) The Trust may issue Common Shares in fractional denominations to
the same extent as its whole Shares, and Shares in fractional denominations
shall be Common Shares having proportionately to the respective fractions
represented thereby all the rights of whole Shares, including, without
limitation, the right to vote, the right to receive dividends and
distributions and the right to participate upon termination of the Trust,
but excluding the right to receive a certificate representing fractional
Shares.
Section 2. Establishment of Class or Series of Shares. The establishment and
designation of any class or series of Shares, including any Preferred Shares
issued hereunder, shall be effective upon the adoption of a resolution by the
initial Trustee, or by a majority of the Trustees then in office (or a Committee
thereof) setting forth such establishment and designation and the relative
rights and preferences of the Shares of such class or series as set forth in a
written statement either executed by the President or a Vice President of the
Trust, or executed by a majority of the Trustees then in office (the
"Statement"). At any time that there are no Shares outstanding of any particular
class or series previously established and designated, the Trustees (or a
Committee thereof) may by a majority vote abolish that class or series and the
establishment and designation thereof. Notwithstanding any provision of this
Declaration of Trust to the contrary, no such Statement establishing and
designating any class or series of Shares shall constitute an amendment to or a
part of this Declaration of Trust.
Section 3. Ownership Of Shares. The ownership and transfer of Shares shall be
recorded on the books of the Trust or its transfer or similar agent. No
certificates certifying the ownership of Preferred Shares shall be issued except
as the Trustees may otherwise determine from time to time. The Trustees may
make such rules as they consider appropriate for the issuance of Share
certificates, transfer of Shares and similar matters. The record books of the
Trust, as kept by the Trust or any transfer or similar agent of the Trust, shall
be conclusive as to who are the holders of the Shares and as to the number of
Shares held from time to time by each Shareholder.
Section 4. No Preemptive Rights, Etc. The holders of Shares of any class or
series shall not, as such holders, have any right to acquire, purchase or
subscribe for any Shares or securities of the Trust which it may hereafter issue
or sell, other than such right, if any, as the Trustees in their discretion may
determine. The holders of Shares of any class or series shall have no appraisal
rights with respect to their Shares and, except as otherwise
<PAGE>
-7-
determined by resolution of the Trustees in their sole discretion, shall have no
exchange or conversion rights with respect to their Shares.
Section 5. Status of Shares and Limitation of Personal Liability. Shares shall
be deemed to be personal property giving only the rights provided in this
instrument. Every Shareholder by virtue of having become a Shareholder shall be
held to have expressly assented and agreed to the terms of this Declaration of
Trust and to have become a party thereto. The death of a Shareholder during the
continuance of the Trust shall not operate to terminate the same nor entitle the
representative of any deceased Shareholder to an accounting or to take any
action in court or elsewhere against the Trust or the Trustees, but only to the
rights of said decedent under this Trust. Ownership of property shall not
entitle the Shareholder to any title in or to the whole or any part of the Trust
Property or right to call for a partition or division of the same or for an
accounting. Neither the Trustees, nor any officer, employee or agent of the
Trust shall have any power to bind any Shareholder personally or to call upon
any Shareholder for the payment of any sum of money or assessment whatsoever
other than such as the Shareholder may at any time personally agree to pay by
way of subscription for any Shares or otherwise.
ARTICLE V
---------
THE TRUSTEES
------------
Section 1. Management of the Trust. The business and affairs of the Trust
shall be managed by the Trustees, and they shall have all powers necessary and
desirable to carry out that responsibility.
Section 2. Qualification and Number. Each Trustee shall be a natural person.
A Trustee need not be a shareholder, a citizen of the United States, or a
resident of the Commonwealth of Massachusetts. By the vote or consent of the
initial Trustee, or by a majority of the Trustees as may subsequently then be in
office, the initial Trustee or any subsequent Trustees may fix the number of
Trustees at a number not less than two (2) nor more than twelve (12) and may
fill the vacancies created by any such increase in the number of Trustees.
Except as determined from time to time by resolution of the Trustees, no
decrease in the number of Trustees shall have the effect of removing any Trustee
from office prior to the expiration of his term, but the number of Trustees may
be decreased in conjunction with the removal of a Trustee pursuant to Section 4
of Article V.
Section 3. Term and Election. Each Trustee shall hold office until the next
meeting of Shareholders called for the purpose of considering the election or
re-election of such Trustee or of a successor to such Trustee, and until his
successor is elected and qualified, and any Trustee who is appointed
<PAGE>
-8-
by the Trustees in the interim to fill a vacancy as provided hereunder shall
have the same remaining term as that of his predecessor, if any, or such term as
the Trustees may determine. Any vacancy resulting from a newly created
Trusteeship or the death, resignation, retirement, removal, or incapacity of a
Trustee may be filled by the affirmative vote or consent of a majority of the
Trustees then in office.
Section 4. Resignation and Removal. Any Trustee may resign his trust or retire
as a Trustee (without need for prior or subsequent accounting except in the
event of removal) by an instrument in writing signed by him and delivered or
mailed to the Chairman, if any, the President or the Secretary and such
resignation or retirement shall be effective upon such delivery, or at a later
date according to the terms of the instrument. Any Trustee may be removed from
office only for "Cause" (as hereinafter defined) and only (i) by action of at
least sixty-six and two-thirds percent (66 2/3%) of the outstanding Shares of
the class or classes of Shares that elected such Trustee, or (ii) by written
instrument, signed by at least sixty-six and two-thirds percent (66 2/3%) of the
remaining Trustees, specifying the date when such removal shall become
effective. "Cause" shall require willful misconduct, dishonesty, fraud or a
felony conviction.
Section 5. Vacancies. The death, declination, resignation, retirement,
removal, or incapacity, of the Trustees, or any one of them, shall not operate
to annul the Trust or to revoke any existing agency created pursuant to the
terms of this Declaration of Trust. Whenever a vacancy in the number of
Trustees shall occur, until such vacancy is filled as provided herein, or the
number of Trustees as fixed is reduced, the Trustees in office, regardless of
their number, shall have all the powers granted to the Trustees, and during the
period during which any such vacancy shall occur, only the Trustees then in
office shall be counted for the purposes of the existence of a quorum or any
action to be taken by such Trustees.
Section 6. Ownership of Assets of the Trust. The assets of the Trust shall be
held separate and apart from any assets now or hereafter held in any capacity
other than as Trustee hereunder by the Trustees or any successor Trustees. All
of the assets of the Trust shall at all times be considered as automatically
vested in the Trustees as shall be from time to time in office. Upon the
resignation, retirement, removal, incapacity or death of a Trustee, such Trustee
shall automatically cease to have any right, title or interest in any of the
Trust property, and the right, title and interest of such Trustee in the Trust
property shall vest automatically in the remaining Trustees. Such vesting and
cessation of title shall be effective without the execution or delivery of any
conveyancing or other instruments. No Shareholder shall be
<PAGE>
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deemed to have a severable ownership in any individual asset of the Trust or any
right of partition or possession thereof.
Section 7. Voting Requirements. In addition to the voting requirements imposed
by law or by any other provision of this Declaration of Trust, the provisions
set forth in this Article V may not be amended, altered or repealed in any
respect, nor may any provision inconsistent with this Article V be adopted,
unless such action is approved by the affirmative vote of the holders of at
least sixty-six and two-thirds percent (66 2/3%) of the outstanding Common
Shares and outstanding Preferred Shares, voting together as a single class. In
the event the holders of Common Shares or the holders of Preferred Shares, as
the case may be, are required by law or by any other provision of this
Declaration of Trust to approve such an action by a class vote of such holders,
such action must be approved by the holders of at least sixty-six and two-thirds
percent (66 2/3%) of such holders or such lower percentage as may be required by
law or by any other provision of this Declaration of Trust.
ARTICLE VI
----------
POWERS OF TRUSTEES
------------------
Section 1. Powers. The Trustees in all instances shall have full, absolute and
exclusive power, control and authority over the Trust assets and the business
and affairs of the Trust to the same extent as if the Trustees were the sole and
absolute owners thereof in their own right. The Trustees shall have full power
and authority to do any and all acts and to make and execute any and all
contracts and instruments that they may consider necessary or appropriate in
connection with the management of the Trust. The enumeration of any specific
power herein shall not be construed as limiting the aforesaid powers. In
construing the provisions of this Declaration of Trust, there shall be a
presumption in favor of the grant of power and authority to the Trustees.
Subject to any applicable limitation in this Declaration or any Statement
relating to the issuance of Preferred Shares, the Trustees shall have power and
authority:
(a) To invest and reinvest in, to buy or otherwise acquire, to hold, for
investment or otherwise, to sell or otherwise dispose of, to lend or to pledge,
to trade in or deal in securities or interests of all kinds, however evidenced,
or obligations of all kinds, however evidenced, or rights, warrants, or
contracts to acquire such securities, interests, or obligations, of any private
or public company, corporation, association, general or limited partnership,
trust or other enterprise or organization, foreign or domestic, or issued or
guaranteed by any national or state government, foreign or domestic, or their
agencies, instrumentalities or subdivisions (including but not limited to,
<PAGE>
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bonds, debentures, bills, time notes and all other evidences of indebtedness);
negotiable or non-negotiable instruments; any and all options and futures
contracts; derivatives or structured securities; government securities and money
market instruments (including but not limited to, bank certificates of deposit,
finance paper, commercial paper, bankers acceptances, and all kinds of
repurchase agreements) and, without limitation, all kinds and types of financial
instruments;
(b) To adopt By-Laws not inconsistent with this Declaration of Trust
providing for the conduct of the business of the Trust and to amend and repeal
them to the extent that they do not reserve that right to the Shareholders;
(c) To elect and remove such officers and appoint and terminate such
agents as they consider appropriate;
(d) To employ one or more banks or trust companies as custodian of any
assets of the Trust subject to any conditions set forth in this Declaration of
Trust or in the By-Laws;
(e) To retain one or more transfer agents and shareholder servicing
agents;
(f) To provide for the distribution of interests of the Trust either
through a principal underwriter in the manner hereinafter provided for or by the
Trust itself or both;
(g) To set record dates for any purposes;
(h) To delegate such authority as they consider desirable to any officers
of the Trust and to any investment adviser, investment subadviser, transfer
agent, custodian or underwriter or other independent contractor of agent;
(i) Subject to Article IX, Section 1 hereof, to merge, or consolidate the
Trust with any other corporation, association, trust or other organization; or
to sell, convey, transfer, or lease all or substantially all of the assets of
the Trust;
(j) To vote or give assent, or exercise any rights of ownership, with
respect to stock or other securities or property; and to execute and deliver
proxies or powers of attorney to such person or persons as the Trustees shall
deem proper, granting to such person or persons such power and discretion with
relation to securities or property as the Trustees shall deem proper;
<PAGE>
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(k) To exercise powers and rights of subscription or otherwise which in
any manner arise out of ownership of securities;
(l) To hold any security or property in a form not indicating any trust,
whether in bearer, unregistered or other negotiable form; or either in their or
the Trust's name or in the name of a custodian or a nominee or nominees;
(m) To authorize the issuance from time to time of one or more classes or
series of Shares, and to issue, sell, repurchase, retire, cancel, acquire, hold,
resell, reissue, dispose of, transfer and otherwise deal in Shares and in any
options, warrants or other rights to purchase Shares or any other interests in
the Trust other than Shares;
(n) To set apart, from time to time, out of any funds of the Trust a
reserve or reserves for any proper purpose, and to abolish any such reserve;
(o) To consent to or participate in any plan for the reorganization,
consolidation or merger of any corporation or issuer, any security or property
of which is held in the Trust; to consent to any contract, lease, mortgage,
purchase, or sale of property by such corporation or issuer, and to pay calls or
subscriptions with respect to any security held in the Trust;
(p) To compromise, arbitrate, or otherwise adjust claims in favor of or
against the Trust or any matter in controversy including, but not limited to,
claims for taxes;
(q) To make distributions of income and of capital gains to shareholders;
(r) To borrow money and to pledge, mortgage, or hypothecate the assets of
the Trust;
(s) To establish, from time to time, a minimum total investment for
shareholders, and to require the redemption of the Shares of any shareholders
whose investment is less than such minimum upon such terms as shall be
established by the Trustees;
(t) To join with other security holders in acting through a committee,
depositary, voting trustee or otherwise, and in that connection to deposit any
security with, or transfer any security to, any such committee, depositary or
trustee, and to delegate to them such power and authority with relation to any
security (whether or not so deposited or transferred) as the Trustees shall deem
proper, and to agree to pay, and to pay, such portion of
<PAGE>
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the expenses and compensation of such committee, depositary or trustee as the
Trustees shall deem proper;
(u) To purchase and pay for out of Trust property such insurance as they
may deem necessary or appropriate for the conduct of the business of the Trust,
including, without limitation, insurance policies insuring the assets of the
Trust and payment of distributions and principal on its portfolio investments,
and insurance policies insuring the Shareholders, Trustees, officers, employees,
agents, investment advisers or managers, principal underwriters, or independent
contractors of the Trust individually against all claims and liabilities of
every nature arising by reason of holding, being or having held any such office
or position, or by reason of any action alleged to have been taken or omitted by
any such person as Shareholder, Trustee, officer, employee, agent, investment
adviser or manager, principal underwriter, or independent contractor, whether or
not any such action may be determined to constitute negligence, and whether or
not the Trust would have the power to indemnify such person against such
liability; and
(v) To pay pensions for faithful service, as deemed appropriate by the
Trustees, and to adopt, establish and carry out pension, profit-sharing, share
bonus, share purchase, savings, thrift and other retirement, incentive and
benefit plans, trusts and provisions, including the purchasing of life insurance
and annuity contracts as a means of providing such retirement and other
benefits, for any or all of the Trustees, officers, employees and agents of the
Trust.
Any determination made by or pursuant to the direction of the Trustees in
good faith and consistent with the provisions of this Declaration of Trust shall
be final and conclusive and shall be binding upon the Trust and every holder at
any time of Shares, including, but not limited to the following matters: the
amount of the assets, obligations, liabilities and expenses of the Trust; the
amount of the net income of the Trust from dividends, capital gains, interest or
other sources for any period and the amount of assets at any time legally
available for the payment of dividends or distributions; the amount, purpose,
time of creation, increase or decrease, alteration or cancellation of any
reserves or charges and the propriety thereof (whether or not any obligation or
liability for which such reserves or charges were created shall have been paid
or discharged); the market value, or any quoted price to be applied in
determining the market value, of any security or any other asset owned or held
by the Trust; the fair value of any security for which quoted prices are not
readily available, or of any other asset owned or held by the Trust; the number
of Shares of the Trust issued or issuable; the net asset value per Share; any
matter relating to the acquisition, holding and depositing of securities and
other assets by the Trust; any question as to
<PAGE>
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whether any transaction constitutes a purchase of securities on margin, a short
sale of securities, a borrowing, or an underwriting of the sale of, or
participation in any underwriting or selling group in connection with the public
distribution of, any securities, and any matter relating to the issue, sale,
redemption, repurchase, and/or other acquisition or disposition of Shares of the
Trust. No provision of this Declaration of Trust shall be effective to protect
or purport to protect any Trustee or officer of the Trust against any liability
to the Trust or to its security holders 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.
Section 2. Manner of Acting, By-Laws. The By-Laws shall make provision from
time to time for the manner in which the Trustees may take action, including,
without limitation, at meetings within or without Massachusetts, including
meetings held by means of a conference telephone or other communications
equipment, or by written consents, the quorum and notice, if any, that shall be
required for any meeting or other action, and the delegation of some or all of
the power and authority of the Trustees to any one or more committees which they
may appoint from their own number, and terminate, from time to time.
ARTICLE VII
-----------
EXPENSES OF THE TRUST
---------------------
The Trustees shall have the power to reimburse themselves from the Trust
property for their expenses and disbursements, to pay reasonable compensation to
themselves from the Trust property, and to incur and pay out of the Trust
property any other expenses which in the opinion of the Trustees are necessary
or incidental to carry out any of the purposes of this Declaration of Trust, or
to exercise any of the powers of the Trustees hereunder.
ARTICLE VIII
------------
INVESTMENT ADVISER, PRINCIPAL UNDERWRITERS AND
----------------------------------------------
TRANSFER AGE
------------
Section 1. Investment Adviser. The Trust may enter into a written contract
with one or more persons (which term shall include any firm corporation, trust
or association), hereinafter referred to as the "Investment Adviser", to act as
investment adviser to the Trust and as such to perform
<PAGE>
-14-
such functions as the Trustees may deem reasonable and proper, including,
without limitation, investment advisory, management, research, valuation of
assets, clerical and administrative functions. Any such contract shall be
subject to the approval of those persons required by the 1940 Act to approve
such contract, and shall be terminable at any time upon not more than 60 days'
notice by resolution of the Trustees or by vote of a majority of the outstanding
voting shares.
Subject to the provisions of Section 4 of this Article VIII, any such
contract may be made with any firm or corporation in which any Trustee of the
Trust may be interested. The compensation of the Investment Adviser may be
based upon a percentage of the net proceeds of the initial public offering of
the Shares after payment of underwriting discounts and organization and offering
costs, a percentage of the income or gross realized or unrealized gain of the
Trust, or a combination thereof, or otherwise, as may be provided in such
contract.
Upon the termination of any contract with Nuveen Advisory Corp., or any
corporation affiliated with John Nuveen & Co. Incorporated, acting as investment
adviser or manager, the Trustees are hereby authorized to promptly change the
name of the Trust to a name which does not include "Nuveen" or any approximation
or abbreviation thereof.
The Trustees may, subject to applicable requirements of the 1940 Act,
including those relating to shareholder approval, authorize the investment
adviser to employ one or more subadvisers from time to time to perform such of
the acts and services of the investment adviser, and upon such terms and
conditions, as may be agreed upon between the investment adviser and subadviser.
Section 2. Principal Underwriter. The Trust may enter into a written contract
or contracts with an underwriter or underwriters or distributor or distributors
whereby the Trust may either agree to sell Shares to the other party or parties
to the contract or appoint such other party or parties its sales agent or agents
for such Shares. Any such contract may provide that the Trust shall pay such
other party or parties such amounts as the Trustees may in their discretion deem
reasonable and proper, and may also provide that such other party or parties may
enter into selected dealer agreements with registered securities dealers to
further the purpose of the distribution of the Shares. Subject to the
provisions of Section 4 of this Article VIII, any such contract may be made with
any firm or corporation, including, without limitation, the Investment Adviser
or an affiliate of the Investment Advisor, or any firm or corporation in which
any Trustee of the Trust or the Investment Adviser may be interested.
<PAGE>
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Section 3. Transfer Agent. The Trustees may in their discretion from time to
time enter into one or more transfer agency and shareholder service contract(s,)
whereby the other party shall undertake, to furnish the Trustees with transfer
agency and shareholder services. The contract shall be on such terms and
conditions as the Trustees may in their discretion determine not inconsistent
with the provisions of this Declaration or Trust or of the By-Laws. Such
services may be provided by one or more entities.
Section 4. Parties To Contract. Any contract of the character described in
Sections 1 and 2 of this Article VIII or in Article X hereof may be entered into
with any corporation, firm, partnership, trust or association, including,
without limitation, the investment adviser, any investment subadviser or an
affiliate of the investment adviser or investment subadviser, although one or
more of the Trustees or officers of the Trust may be an officer, director,
trustee, shareholder, or member of such other party to the contract, or
otherwise interested in such contract and no such contract shall be invalidated
or rendered voidable by reason of the existence of any such relationship, nor
shall any person holding such relationship be liable merely by reason of such
relationship for any loss or expense to the Trust under or by reason of said
contract or accountable for any profit realized directly or indirectly
therefrom, provided that the contract when entered into was not inconsistent
with the provisions of this Article VIII, Article X, or the By-Laws. The same
person (including a firm, corporation, partnership, trust or association) may be
the other party to contracts entered into pursuant to Sections 1, 2 and 3 above
or Article X, and any individual may be financially interested or otherwise
affiliated with persons who are parties to any or all of the contracts mentioned
in this Section 4.
ARTICLE IX
----------
SHAREHOLDERS' VOTING POWERS AND MEETINGS
----------------------------------------
Section 1. Voting Powers. The Shareholders shall have power to vote only: (a)
for the election or removal of Trustees as provided in Article V, (b) with
respect to any investment advisory or management contract as provided in Article
VIII, Sections 1 and 5, (c) with respect to any termination of the Trust or any
series or class thereof to the extent and as provided in Article XIII, Section
1, (d) with respect to any amendment of this Declaration of Trust to the extent
and as provided in Article XIII, Section 4, (e) with respect to a merger or
consolidation of the Trust or any series or class thereof with any corporation,
association, trust or other organization or a reorganization or recapitalization
of the Trust or class or series thereof, or a sale, lease or transfer of all or
substantially all of the assets of the Trust or any series thereof (other than
in the regular course of the Trust's investment activities)
<PAGE>
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to the extent and as provided in this Article IX, Section 1, (f) to the same
extent as the shareholders of a Massachusetts business corporation as to whether
or not a court action, proceeding or claim should be brought or maintained
derivatively or as a class action on behalf of the Trust or the shareholders,
provided, however, that a shareholder of a particular class or series shall not
be entitled to bring any derivative or class action on behalf of any other class
or series of the Trust, and (g) with respect to such additional matters relating
to the Trust as may be required by law, the 1940 Act, this Declaration of Trust,
the By-Laws of the Trust, any Statement relating to the issuance of classes or
series of shares, or any registration of the Trust with the Commission or any
State, or otherwise as the Trustees may consider necessary or desirable.
The affirmative vote of the holders of at least sixty-six and two-thirds
percent (66-2/3%) of the outstanding Common Shares and outstanding Preferred
Shares, voting as a single class, shall be required to approve, adopt or
authorize (i) a conversion of the Trust from a closed-end investment company to
an open-end investment company, (ii) a merger or consolidation of the Trust or a
series or class of the Trust with any corporation, association, Trust or other
organization or a reorganization or recapitalization of the Trust or a series of
class of the Trust, (iii) a sale, lease or transfer of all or substantially all
of the assets of the Trust (other than in the regular course of the Trust's
investment activities), or (iv) a termination of the Trust or a class or a
series of the Trust (other than a termination by the Trustees as provided for in
Section 1 of Article XIII hereof), unless in each and every case such action
has previously been approved, adopted or authorized by the affirmative vote of
two-thirds of the total number of Trustees fixed in accordance with this
Declaration of Trust or the By-Laws, in which case the affirmative vote of the
holders of at least a majority of the outstanding Common Shares and outstanding
Preferred Shares, voting as a single class, shall be required, provided however,
that where only a particular class or series is effected, only the required vote
by the applicable class or series shall be required, and provided further that
except as may otherwise be required by law, in the case of the conversion of the
Trust from a closed-end investment company to an open-end investment company, or
in the case of any of the foregoing transactions constituting a plan or
reorganization (as such term is used in the 1940 Act) which adversely affects
the Preferred Shares within the meaning of Section 18(a)(2)(D) of the 1940 Act,
approval, adoption or authorization of the action in question will also require
the affirmative vote of the holders of sixty-six and two-thirds percent (66-
2/3%) of the Preferred Shares 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 this
<PAGE>
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Declaration of Trust or the By-Laws. Nothing contained herein shall be construed
as requiring approval of Shareholders for any transaction, whether deemed a
merger, consolidation, reorganization or otherwise whereby the Trust issues
Shares in connection with the acquisition of assets (including those subject to
liabilities) from any other investment company or similar entity).
In addition to the voting requirements imposed by law or by any other
provision of this Declaration of Trust, the provisions set forth in this Article
IX may not be amended, altered or repealed in any respect, nor may any provision
inconsistent with this Article IX be adopted, unless such action is approved by
the affirmative vote of the holders or at least sixty-six and two-thirds percent
(66-2/3%) of the outstanding Common Shares and outstanding Preferred Shares,
voting as a single class. In the event the holders of Common Shares or the
holders of Shares of Preferred Shares, as the case may be, are required by law
to approve such an action by a class vote of such holders, such action must be
approved by the, holders of at least sixty-six and two-thirds percent (66-2/3%)
of (such holders or such lower percentage as may be required by law. Any series
of a class which is adversely affected in a manner different from other series
of the same class shall together with any other series of the same class
adversely affected in the same manner, be treated as a separate class under this
Section 1.
Section 2. Meetings. Meetings of the Shareholders may be called and held from
time to time for the purpose of taking action upon any matter requiring the vote
or authority of the Shareholders as herein provided or upon any other matter
deemed by the Trustees to be necessary or desirable. Meetings of the
Shareholders shall be held at such place within the United States as shall be
fixed by the Trustees, and stated in the notice of the meeting. Meetings of the
Shareholders may be called by the Trustees and shall be called by the Trustees
upon the written request of Shareholders owning at least one-tenth of the
outstanding Shares entitled to vote. Shareholders shall be entitled to at least
ten days' written notice of any meeting, except where the meeting is an
adjourned meeting and the date, time and place of the meeting were announced at
the time of the adjournment.
Section 3. Quorum and Action. (a) The Trustees shall set in the By-Laws the
quorum required for the transaction of business by the Shareholders at a
meeting, which quorum shall in no event be less than thirty percent (30%) of the
Shares entitled to vote at such meeting. If a quorum is present when a duly
called or held meeting is convened, the Shareholders present may continue to
transact business until adjournment, even though the withdrawal of a number of
Shareholders originally present
<PAGE>
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leaves less than the proportion or number otherwise required for a quorum.
Notwithstanding the foregoing, when holders of Preferred Shares are entitled to
elect any of the Trustees by class vote of such holders, the holders of 33 1/3%
of such Shares entitled to vote at a meeting shall constitute a quorum for the
purpose of such an election.
(b) The Shareholders shall take action by the affirmative vote of the
holders of a majority, except in the case of the election of Trustees which
shall only require a plurality, of the Shares present in person or by proxy and
entitled to vote at a meeting of Shareholders at which a quorum is present,
except as may be otherwise required by, any provision of this Declaration of
Trust, any resolution of the Trustees which authorizes the issuance of Preferred
Shares, or the By-Laws.
Section 4. Voting. Each whole Share shall be entitled to one vote as to any
matter on which it is entitled to vote and each fractional Share shall be
entitled to a proportionate fractional vote, except that Shares held in the
treasury of the Trust shall not be voted. There shall be no cumulative voting
in the election of Trustees or on any other matter submitted to a vote of the
Shareholders. Shares may be voted in person or by proxy. Until Shares are
issued, the Trustees may exercise all rights of Shareholders and may take any
action required or permitted by law, this Declaration of Trust or the By-Laws of
the Trust to be taken by Shareholders.
Section 5. Action by Written Consent in Lieu of Meeting of Shareholders. Any
action required or permitted to be taken at a meeting of the Shareholders may be
taken without a meeting by written action signed by all of the Shareholders
entitled to vote on that action. The written action is effective when it has
been signed by all of those Shareholders, unless a different effective time is
provided in the written action.
ARTICLE X
---------
CUSTODIAN
---------
All securities and cash of the Trust shall be held by one or more
custodians and subcustodians, each meeting the requirements for a custodian
contained in the 1940 Act, or shall otherwise be held in accordance with the
1940 Act. The Trustees may also authorize the custodian to employ one or more
sub-custodians from time to time to perform such of the acts and services of the
custodian, and upon such terms and conditions, as may be agreed upon between the
custodian and such sub-custodians, and approved by the Trustees, provided that
in every case such sub-custodian shall meet the requirements for a custodian
contained in the 1940 Act and the rules and
<PAGE>
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regulations thereunder and in any applicable state Securities or blue sky laws.
ARTICLE XI
----------
DISTRIBUTIONS
-------------
The Trustees may in their sole discretion from time to time declare and pay
such dividends and distributions to shareholders as they may deem necessary or
desirable, after providing for actual and accrued expenses and liabilities
(including such reserves as the Trustees may establish) determined in accordance
with this Declaration of Trust and good accounting practices.
ARTICLE XII
-----------
LIMITATION OF LIABILITY AND INDEMNIFICATION
Section 1. Limitation of Liability. No personal liability for any debt or
obligation of the Trust shall attach to any Trustee of the Trust. Without
limiting the foregoing, a Trustee shall not be responsible for or liable in any
event for any neglect or wrongdoing of any officer, agent, employee, investment
adviser, subadviser, principal underwriter or custodian of the Trust, nor shall
any Trustee be responsible or liable for the act or omission of any other
Trustee. Nothing contained herein shall protect any Trustee against any
liability to which such Trustee 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.
Every note, bond, contract, instrument, certificate, Share or undertaking
and every other act or thing whatsoever executed or done by or on behalf of the
Trust or the Trustees or any of them in connection with the Trust shall be
conclusively deemed to have been executed or done only in or with respect to
their or his capacity as Trustees or Trustee and neither such Trustees or
Trustee nor the Shareholders shall be personally liable thereon.
Every note, bond, contract, instrument, certificate or undertaking made or
issued by the Trustees or by any officers or officer shall give notice that this
Declaration of Trust is on file with the Secretary of State of the Commonwealth
of Massachusetts, shall recite that the same was executed or made by or on
behalf of the Trust by them as Trustees or Trustee or as officers or officer and
not individually and that the obligations of such instrument are not binding
upon any of them or the Shareholders individually but are binding only upon the
assets and property of the Trust, and may contain such further recitals as they
or he may deem appropriate,
<PAGE>
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but the omission thereof shall not operate to bind any Trustees or Trustee or
officers or officer or Shareholders or Shareholder individually.
All persons extending credit to, contracting with or having any claim
against the Trust shall look only to the assets of the Trust for payment under
such credit, contract or claim; and neither the Shareholders nor the Trustees,
nor any of the Trust's officers, employees or agents, whether past, present or
future, shall be personally liable therefor.
Section 2. Trustees' Good Faith Action, Expert Advice, No Bond or Surety. The
exercise by the Trustees of their powers and discretions hereunder shall be
binding upon everyone interested. A Trustee shall be liable only for his own
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of the office of Trustee, and for nothing else,
and shall not be liable for errors of judgment or mistakes of fact or law. The
Trustees may take advice of counsel or other experts with respect to the meaning
and operation of this Declaration of Trust and their duties as Trustees
hereunder, and shall be under no liability for any act or omission in accordance
with such advice or for failing to follow such advice. In discharging their
duties, the Trustees, when acting in good faith, shall be entitled to rely upon
the books of account of the Trust and upon written reports made to the Trustees
by any officer appointed by them, any independent public accountant and (with
respect to the subject matter of the contract involved) any officer, partner or
responsible employee of any other party to any contract entered into hereunder.
The Trustees shall not be required to give any bond as such, nor any surety if a
bond is required.
Section 3. Liability of Third Persons Dealing with Trustees. No person
dealing with the Trustees shall be bound to make any inquiry concerning the
validity of any transaction made or to be made by the Trustees or to see to the
application of any payments made or property transferred to the Trust or upon
its order.
Section 4. Indemnification. 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
<PAGE>
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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) 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
<PAGE>
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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.
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.
Section 5. Shareholders. No personal liability for any debt or obligation of
the Trust shall attach to any Shareholder or former Shareholder of the Trust.
In case any Shareholder or former Shareholder of the Trust shall be held to be
personally liable solely by reason of his being or having been a Shareholder and
not because of his acts or omissions, or for some other reason, the Shareholder
or former Shareholder (or his heirs, executors, administrators or other legal
representatives or in the case of a corporation or other entity, its corporate
or other general successor) shall be entitled out of the assets of the Trust to
be held harmless from and indemnified against all loss and expense arising from
such liability; provided, however, there shall be no liability or obligation of
the Trust arising hereunder to reimburse any Shareholder for taxes paid by
reason of such Shareholder's ownership of any Share or for losses suffered by
reason of any changes in value of any Trust assets. The Trust shall, upon
request by the Shareholder or former Shareholder, assume the defense of any
claim made against the Shareholder for any act or obligation of the Trust and
satisfy any judgment thereon.
<PAGE>
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ARTICLE XIII
------------
MISCELLANEOUS
-------------
Section 1. Termination of Trust. (a) Unless terminated as provided herein, the
Trust shall continue, without limitation of time. Except as may be set forth in
any Statement relating to the issuance of Shares, the Trust, or any class or
series thereof may be terminated at any time by the Trustees by written notice
to the Shareholders without a vote of the shareholders of the Trust, or the
class or series as the case may be, or by the affirmative vote of the
shareholders entitled to vote at least sixty-six and two-thirds percent (66
2/3%) of the outstanding Common Shares and Preferred Shares, voting as a single
class, in the case of the termination of the Trust, or by the effected class or
series as the case may be in the event of the termination of a class or series,
unless such action has previously been approved, adopted or authorized by the
affirmative vote of two-thirds of the total number of Trustees fixed in
accordance with this Declaration of Trust or the By-Laws, in which case the
affirmative vote of the holders of at least a majority of the outstanding Common
Shares and Preferred Shares, voting as a single class or the applicable class or
series as the case may be, shall be required.
Upon termination of the Trust or any series or class thereof, after paying
or otherwise providing for all charges, taxes, expenses and liabilities, whether
due or accrued or anticipated, as may be determined by the Trustees, the Trust
shall, in accordance with such procedures as the Trustees consider appropriate,
reduce the remaining assets of the Trust or the applicable series or class to
distributable form in cash or other securities, or any combination thereof, and
distribute the proceeds to the holders of Preferred Shares in the manner set
forth by resolution of the Trustees, and to the holders of Common Shares held by
such holders on the date of termination in the event of a termination of the
Trust, or to Shareholders of the applicable series or class, as the case may be.
Section 2. Filing of Copies, References, Headings. The original or a copy of
this instrument, each amendment hereto and any Statement authorized by Article
III, Section 2 hereof shall be kept in the office of the Trust where it may be
inspected by any Shareholder. A copy of this Declaration and of each amendment
and Statement shall be filed by the Trustees with the Secretary of State of the
Commonwealth of Massachusetts, as well as any other governmental office where
such filing may from time to time be required, provided, however, that the
failure to so file will not invalidate this Declaration or an properly
authorized amendment or Statement. Anyone dealing with the Trust may rely on a
certificate by an officer or Trustee of the Trust as to whether or not any such
amendments
<PAGE>
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have been made or Statements authorized and as to any matters in connection with
the Trust hereunder, and with the same effect as if it were the original, may
rely on a copy certified by an officer or Trustee of the Trust to be a copy of
this instrument or of any such amendments or Statements. In this instrument or
in any such amendment, references to this instrument, and all expressions like
"herein," "hereof" and "hereunder," shall be deemed to refer to this instrument
as a whole and as amended or affected by any such amendment. Headings are placed
herein for convenience of reference only, and in case of any conflict, the text
of this instrument, rather than the headings, shall control. This instrument may
be executed in any number of counterparts, each of which shall be deemed an
original.
Section 3. Trustees May Resolve Ambiguities. The Trustees may construe any of
the provisions of this Declaration insofar as the same may appear to be
ambiguous or inconsistent with any other provisions hereof, and any such
construction hereof by the Trustees in good faith shall be conclusive as to the
meaning to be given to such provisions.
Section 4. Amendments. Except as otherwise specifically provided in this
Declaration of Trust, this Declaration of Trust may be amended at any time by
vote of a majority of the then Trustees with the consent of shareholders holding
more than fifty percent (50%) of Shares entitled to vote. In addition,
notwithstanding any other provision to the contrary contained in this
Declaration of Trust, the Trustees may amend this Declaration of Trust without
the vote or consent of shareholders (i) at any time if the Trustees deem it
necessary in order for the Trust or any series or class thereby to meet the
requirements of applicable Federal or State laws or regulations, or the
requirements of the regulated investment company provisions of the Internal
Revenue Code, (ii) change the name of the Trust or to supply any omission, cure
any ambiguity or cure, correct or supplement any defective or inconsistent
provision contained herein, or (iii) for any reason at any time before a
registration statement under the Securities Act of 1933, as amended, covering
the initial public offering of Shares has become effective. A certification in
recordable form signed by a majority of the Trustees or by the Secretary or any
Assistant Secretary of the Trust setting forth such amendment and reciting that
it was duly adopted by the shareholders or by the Trustees as aforesaid or a
copy of the Declaration, as amended, in recordable form, and executed by a
majority of the Trustees or certified by the Secretary or any Assistant
Secretary of the Trust, shall be conclusive evidence of such amendment when
lodged among the records of the Trust.
<PAGE>
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IN WITNESS WHEREOF, the undersigned, being the initial Trustee of the
Trust, has, executed this instrument as of the date first written above.
/s/Timothy R. Schwertfeger
-------------------------------------
Timothy R. Schwertfeger, Trustee
333 West Wacker Drive
Chicago, IL 60606
<PAGE>
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STATE OF ILLINOIS )
) SS.
COUNTY OF COOK )
Then personally appeared the above-named Timothy R. Schwertfeger known to
me to be the Trustee of the Trust, who acknowledged the foregoing instrument to
be his free act and deed, before me this 1st day of June 1999.
/s/ Sharon Burnath
--------------------
-------- Notary Public
| SEAL |
-------- My Commission Expires: 11/23/02
--------
<PAGE>
BY-LAWS
OF
NUVEEN MARYLAND DIVIDEND ADVANTAGE MUNICIPAL FUND
ARTICLE I
DECLARATION OF TRUST
AND
OFFICES
Section 1.1. Declaration of Trust. These By-Laws shall be subject to the
Declaration of Trust, as from time to time in effect (the "Declaration of
Trust"), of Nuveen Maryland Dividend Advantage Municipal Fund, the Massachusetts
business trust established by the Declaration of Trust (the "Trust").
Section 1.2. Registered Agent. The registered agent of the Trust in the
Commonwealth of Massachusetts shall be CT Corporation System, 2 Oliver Street,
Boston, Massachusetts, or such other agent as may be fixed by the Board of
Trustees.
Section 1.3. Other Offices. The Trust may have such other offices and
places of business within or without the Commonwealth of Massachusetts as the
Board of Trustees shall determine.
ARTICLE II
SHAREHOLDERS
Section 2.1. Place of Meetings. Meetings of the Shareholders may be held
at such place or places within or without the Commonwealth of Massachusetts as
shall be fixed by the Board of Trustees and stated in the notice of the meeting.
Section 2.2. Regular Meeting. Regular meetings of the Shareholders for
the election of Trustees and the transaction of such other business as may
properly come before the meeting shall be held on an annual or other less
frequent periodic basis at such date and time as the Board of Trustees by
resolution shall designate, except as otherwise required by applicable law.
<PAGE>
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Section 2.3. Special Meeting. Special meetings of the Shareholders for
any purpose or purposes may be called by the Chairman of the Board, the
President or two or more Trustees, and must be called at the written request
stating the purpose or purposes of the meeting, of Shareholders entitled to cast
at least l0 percent of all the votes entitled to be cast at the meeting.
Section 2.4. Notice of Meetings. Notice stating the time and place of the
meeting and in the case of a special meeting the purpose or purposes thereof and
by whom called, shall be delivered to each Shareholder not less than ten nor
more than sixty days prior to the meeting, except where the meeting is an
adjourned meeting and the date, time and place of the meeting were announced at
the time of the adjournment.
Section 2.5. Quorum and Action. (a) The holders of a majority of the
voting power of the shares of beneficial interest of the Trust (the "Shares")
entitled to vote at a meeting are a quorum for the transaction of business. If
a quorum is present when a duly called or held meeting is convened, the
Shareholders present may continue to transact business until adjournment, even
though the withdrawal of a number of Shareholders originally present leaves less
than the proportion or number otherwise required for a quorum. Notwithstanding
the foregoing, when the holders of Preferred Shares are entitled to elect any of
the Trust's Trustees by class vote of such holders, the holders of 33 1/3% of
the Shares entitled to vote at a meeting shall constitute a quorum for the
purpose of such an election.
(b) The Shareholders shall take action by the affirmative vote of the
holders of a majority, except in the case of the election of Trustees which
shall only require a plurality, of the voting power of the Shares present and
entitled to vote at a meeting of Shareholders at which a quorum is present,
except as may be otherwise required by the Investment Company Act of 1940, as
amended (the "1940 Act"), the Declaration of Trust or any resolution of the
Trustees which authorizes the issuance of Preferred Shares.
Section 2.6. Voting. At each meeting of the Shareholders, every holder
of Shares then entitled to vote may vote in person or by proxy and, except as
otherwise provided by the 1940 Act, the Declaration of Trust or any resolution
of the Trustees which authorizes the issuance of Preferred Shares, shall have
one vote for each Share registered in his name.
Section 2.7. Proxy Representation. A Shareholder may cast or authorize
the casting of a vote by filing a written appointment of a proxy
<PAGE>
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with an officer of the Trust at or before the meeting at which the appointment
is to be effective. The placing of a Shareholder's name on a proxy pursuant to
telephonic or electronically transmitted instructions obtained pursuant to
procedures which are reasonably designed to verify that such instructions have
been authorized by such Shareholder, shall constitute execution of such proxy by
or on behalf of such Shareholder. The appointment of a proxy is valid for eleven
months, unless a longer period is expressly provided in the appointment. No
appointment is irrevocable unless the appointment is coupled with an interest in
the Shares or in the Trust. Any copy, facsimile telecommunication or other
reliable reproduction of a proxy may be substituted for or used in lieu of the
original proxy for any and all purposes for which the original proxy could be
used, provided that such copy, facsimile telecommunication or other reproduction
shall be a complete reproduction of the entire original proxy.
Section 2.8. Adjourned Meetings. Any meeting of Shareholders may, by
announcement thereat, be adjourned to a designated time and place by the vote of
the holders of a majority of the Shares present and entitled to vote thereat
even though less than a quorum is so present. An adjourned meeting may
reconvene as designed, and when a quorum is present any business may be
transacted which might have been transacted at the meeting as originally called.
Section 2.9. Action by Written Consent in Lieu of Meeting of Shareholders.
See Section 6.3 of these By-Laws.
ARTICLE III
TRUSTEES
Section 3.1. Qualifications and Number: Vacancies. Each Trustee shall be
a natural person. A Trustee need not be a Shareholder, a citizen of the United
States, or a resident of the Commonwealth of Massachusetts. The number of
Trustees of the Trust, their term and election and the filling of vacancies,
shall be as provided in the Declaration of Trust.
Section 3.2. Powers. The business and affairs of the Trust shall be
managed under the direction of the Board of Trustees. All powers of the Trust
may be exercised by or under the authority of the Board of Trustees, except
those conferred on or reserved to the Shareholders by statute, the Declaration
of Trust or these By-Laws.
<PAGE>
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Section 3.3. Investment Policies. It shall be the duty of the Board of
Trustees to ensure that the purchase, sale, retention and disposal of portfolio
securities and the other investment practices of the Trust are at all times
consistent with the investment objectives, policies and restrictions with
respect to securities investments and otherwise of the Trust filed from time to
time with the Securities and Exchange Commission and as required by the 1940
Act, unless such duty is delegated to an investment adviser pursuant to a
written contract, as provided in the Declaration of Trust. The Trustees,
however, may delegate the duty of management of the assets of the Trust and may
delegate such other of their powers and duties to the Executive Committee or any
other committee, or to an individual or corporate investment adviser to act as
investment adviser or subadviser pursuant to a written contract.
Section 3.4. Meetings. Regular meetings of the Trustees may be held
without notice at such times as the Trustees shall fix. Special meetings of the
Trustees may be called by the Chairman of the Board or the President, and shall
be called at the written request of two or more Trustees. Unless waived by each
Trustee, three days' notice of special meetings shall be given to each Trustee
in person, by mail, by telephone, or by telegram or cable, or by any other means
that reasonably may be expected to provide similar notice. Notice of special
meetings need not state the purpose or purposes thereof. Meetings of the
Trustees may be held at any place within or outside the Commonwealth of
Massachusetts. A conference among Trustees by any means of communication through
which the Trustees may simultaneously hear each other during the conference
constitutes a meeting of the Trustees or of a committee of the Trustees, if the
notice requirements have been met (or waived) and if the number of Trustees
participating in the conference would be sufficient to constitute a quorum at
such meeting. Participation in such meeting by that means constitutes presence
in person at the meeting.
Section 3.5. Quorum and Action. A majority of the Trustees currently
holding office, or in the case of a meeting of a committee of the Trustees, a
majority of the members of such committee, shall constitute a quorum for the
transaction of business at any meeting. If a quorum is present when a duly
called or held meeting is convened, the Trustees present may continue to
transact business until adjournment, even though the withdrawal of a number of
Trustees originally present leaves less than the proportion or number otherwise
required for a quorum. At any duly held meeting at which a quorum is present,
the affirmative vote of the majority of the Trustees present shall be the act of
the Trustees or the committee, as the case may be, on any question, except where
the act
<PAGE>
-5-
of a greater number is required by these By-Laws or by the Declaration
of Trust.
Section 3.6. Action by Written Consent in Lieu of Meetings of Trustees.
See Section 6.3 of these By-Laws.
Section 3.7. Committees. The Trustees, by resolution adopted by the
affirmative vote of a majority of the Trustees, may designate from their members
an Executive Committee, an Audit Committee (whose function shall be to advise
the Trustees as to the selection of and review of the work of the independent
public accountants of the Trust) and any other committee or committees, each
such committee to consist of two or more Trustees and to have such powers and
authority (to the extent permitted by law) as may be provided in such
resolution. Any such committee may be terminated at any time by the affirmative
vote of a majority of the Trustees.
ARTICLE IV
OFFICERS
Section 4.1. Number and Qualifications. The officers of the Trust shall
include a Chairman of the Board, a President, a Controller, one or more Vice
Presidents (one of whom may be designated Executive Vice President), a
Treasurer, and a Secretary. Any two or more offices may be held by the same
person. Unless otherwise determined by the Trustees, each officer shall be
appointed by the Trustees for a term which shall continue until the meeting of
the Trustees following the next regular meeting of Shareholders and until his
successor shall have been duly elected and qualified, or until his death, or
until he shall have resigned or have been removed, as hereinafter provided in
these By-Laws. The Trustees may from time to time elect, or delegate to the
Chairman of the Board or the President, or both, the power to appoint, such
officers (including one or more Assistant Vice Presidents, one or more Assistant
Treasurers and one or more Assistant Secretaries) and such agents as may be
necessary or desirable for the business of the Trust. Such other officers shall
hold office for such terms as may be prescribed by the Trustees or by the
appointing authority.
Section 4.2. Resignations. Any officer of the Trust may resign at any
time by giving written notice of his resignation to the Trustees, the Chairman
of the Board, the President or the Secretary. Any such resignation shall take
effect at the time specified therein or, if the time when it shall become
effective shall not be specified therein, immediately
<PAGE>
-6-
upon its receipt, and, unless otherwise specified therein, the acceptance of
such resignation shall not be necessary to make it effective.
Section 4.3. Removal. An officer may be removed at any time, with or
without cause, by a resolution approved by the affirmative vote of a majority of
the Trustees present at a duly convened meeting of the Trustees.
Section 4.4. Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification or any other cause, may be filled for the
unexpired portion of the term by the Trustees, or in the manner determined by
the Trustees.
Section 4.5. The Chairman of the Board. The Chairman of the Board shall
be elected from among the Trustees. He shall be the chief executive officer of
the Trust and shall:
(a) have general active management of the business of the Trust;
(b) when present, preside at all meetings of the Trustees and of the
Shareholders;
(c) see that all orders and resolutions of the Trustees are carried
into effect;
(d) sign and deliver in the name of the Trust any deeds, mortgages,
bonds, contracts or other instruments pertaining to the business of the
Trust, except in cases in which the authority to sign and deliver is
required by law to be exercised by another person or is expressly delegated
by the Declaration of Trust or By-Laws or by the Trustees to some other
officer or agent of the Trust; and
(e) maintain records of and, whenever necessary, certify all
proceedings of the Trustees and the Shareholders.
The Chairman of the Board shall be authorized to do or cause to be done all
things necessary or appropriate, including preparation, execution and filing of
any documents, to effectuate the registration from time to time of the Common
Shares or Preferred Shares of the Trust with the Securities and Exchange
Commission pursuant to the Securities Act of 1933, as amended. He shall perform
all duties incident to the office of Chairman of the Board and such other duties
as from time to time may be assigned to him by the Trustees or by these By-Laws.
<PAGE>
-7-
Section 4.6. The President. The President shall be the chief operating
officer of the Trust and, subject to the Chairman of the Board, he shall have
general authority over and general management and control of the business and
affairs of the Trust. In general, he shall discharge all duties incident to the
office of the chief operating officer of the Trust and such other duties as may
be prescribed by the Trustees and the Chairman of the Board from time to time.
In the absence of the Chairman of the Board or in the event of his disability,
or inability to act or to continue to act, the President shall perform the
duties of the Chairman of the Board and when so acting shall have all the powers
of, and be subject to all the restrictions upon, the Chairman of the Board.
Section 4.7. Executive Vice-President. In the case of the absence or
inability to act of the President and the Chairman of the Board, the Executive
Vice-President shall perform the duties of the President and when so acting
shall have all the powers of, and be subject to all the restrictions upon, the
President. The Executive Vice-President shall perform all duties incident to
the office of Executive Vice-President and such other duties as from time to
time may be assigned to him by the Trustees, the President or these By-Laws.
Section 4.8. Vice Presidents. Each Vice-President shall perform all such
duties as from time to time may be assigned to him by the Trustees, the Chairman
of the Board or the President.
Section 4.9. Controller. The Controller shall:
(a) keep accurate financial records for the Trust;
(b) render to the Chairman of the Board, the President and the
Trustees, whenever requested, an account of all transactions by and of the
financial condition of the Trust; and
(c) in general, perform all the duties incident to the office of
Controller and such other duties as from time to time may be assigned to
him by the Trustees, the Chairman of the Board or the President.
Section 4.10. Treasurer. The Treasurer shall:
(a) have charge and custody of, and be responsible for, all the funds
and securities of the Trust, except those which the Trust has placed in the
custody of a bank or trust company pursuant to a
<PAGE>
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written agreement designating such bank or trust company as custodian of
the property of the Trust, as required by Section 6.6 of these By-Laws;
(b) deposit all money, drafts, and checks in the name of and to the
credit of the Trust in the banks and depositories designated by the
Trustees;
(c) endorse for deposit all notes, checks, and drafts received by the
Trust making proper vouchers therefor:
(d) disburse corporate funds and issue checks and drafts in the name
of the Trust, as ordered by the Trustees; and
(e) in general, perform all the duties incident to the office of
Treasurer and such other duties as from time to time may be assigned to him
by the Trustees, the Chairman of the Board or the President.
Section 4.11. Secretary. The Secretary shall:
(a) keep or cause to be kept in one or more books provided for the
purpose, the minutes of all meetings of the Trustees, the committees of the
Trustees and the Shareholders;
(b) see that all notices are duly given in accordance with the
provisions of these By-Laws and as required by statute;
(c) be custodian of the records of the Trust;
(d) see that the books, reports, statements, certificates and other
documents and records required by statute to be kept and filed are properly
kept and filed; and
(e) in general, perform all the duties incident to the office of
Secretary and such other duties as from time to time may be assigned to him
by the Trustees, the Chairman of the Board or the President.
Section 4.12. Salaries. The salaries of all officers shall be fixed by the
Trustees and the Trustees have the authority by majority vote to reimburse
expenses and to establish reasonable compensation of all Trustees for services
to the Trust as Trustees, officers, or otherwise.
<PAGE>
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ARTICLE V
SHARES
Section 5.1. Share Certificates. Each owner of Common Shares of the Trust
shall be entitled upon request to have a certificate, in such form as shall be
approved by the Trustees, representing the number of Common Shares of the Trust
owned by him. Certificates representing fractional Common Shares shall not be
issued. The certificates representing Common Shares shall be signed in the name
of the Trust by the Chairman of the Board, the President, the Executive Vice
President or a Vice President and by the Secretary, an Assistant Secretary, the
Treasurer or an Assistant Treasurer (which signatures may be either manual or
facsimile, engraved or printed). In case any officer who shall have signed such
certificate shall have ceased to be such officer before such certificates shall
be issued, they may nevertheless be issued by the Trust with the same effect as
if such officer were still in office at the date of their issuance. No
certificates representing Preferred Shares shall be issued except as the
Trustees may otherwise authorize.
Section 5.2. Books and Records; Inspection. The Trust shall keep at its
principal executive office, or at another place or places within the United
States determined by the Trustees, a share register not more than one year old,
containing the names and addresses of the shareholders and the number of Shares
held by each Shareholder. The Trust shall also keep, at its principal executive
office, or at another place or places within the United States determined by the
Trustees, a record of the dates on which certificates representing Shares were
issued.
Section 5.3. Share Transfers. Upon compliance with any provisions
restricting the transferability of Shares that may be set forth in the
Declaration of Trust, these By-Laws, or any resolution or written agreement in
respect thereof, transfers of Shares of the Trust shall be made only on the
books of the Trust by the registered holder thereof, or by his attorney
thereunto authorized by power of attorney duly executed and filed with an
officer of the Trust, or with a transfer agent or a registrar and on surrender
of any certificate or certificates for such Shares properly endorsed and the
payment of all taxes thereon. Except as may be otherwise provided by law or
these By-Laws, the person in whose name Shares stand on the books of the Trust
shall be deemed the owner thereof for all purposes as regards the Trust;
provided that whenever any transfer of Shares shall be made for collateral
security, and not absolutely, such fact, if known to an officer of the Trust,
shall be so expressed in the entry of transfer.
<PAGE>
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Section 5.4. Regulations. The Trustees may make such additional rules and
regulations, not inconsistent with these By-Laws, as they may deem expedient
concerning the issue, certification, transfer and registration of Shares of the
Trust. They may appoint, or authorize any officer or officers to appoint, one
or more transfer agents or one or more transfer clerks and one or more
registrars and may require all certificates for Shares to bear the signature or
signatures of any of them.
Section 5.5. Lost, Destroyed or Mutilated Certificates. The holder of any
certificate representing Shares of the Trust shall immediately notify the Trust
of any loss, destruction or mutilation of such certificate, and the Trust may
issue a new certificate in the place of any certificate theretofore issued by it
which the owner thereof shall allege to have been lost or destroyed or which
shall have been mutilated, and the Trustees may, in their discretion, require
such owner or his legal representatives to give to the Trust a bond in such sum,
limited or unlimited, and in such form and with such surety or sureties as the
Trustees in their absolute discretion shall determine, to indemnify the Trust
against any claim that may be made against it on account of the alleged loss or
destruction of any such certificate, or the issuance of a new certificate.
Anything herein to the contrary notwithstanding, the Trustees, in their absolute
discretion, may refuse to issue any such new certificate, except as otherwise
required by law.
Section 5.6. Record Date; Certification of Beneficial Owner. (a) The
Trustees may fix a date not more than sixty (60) days before the date of a
meeting of Shareholders as the date for the determination of the holders of
Shares entitled to notice of and entitled to vote at the meeting or any
adjournment thereof.
(b) The Trustees may fix a date for determining Shareholders entitled to
receive payment of any dividend or distribution or allotment of any rights or
entitled to exercise any rights in respect of any change, conversion or exchange
of Shares.
(c) In the absence of such fixed record date, (i) the date for
determination of Shareholders entitled to notice of and entitled to vote at a
meeting of Shareholders shall be the later of the close of business on the day
on which notice of the meeting is mailed or the thirtieth day before the
meeting, and (ii) the date for determining Shareholders entitled to receive
payment of any dividend or distribution or an allotment of any rights or
entitled to exercise any rights in respect of any change,
<PAGE>
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conversion or exchange of Shares shall be the close of business on the day on
which the resolution of the Trustees is adopted.
(c) A resolution approved by the affirmative vote of a majority of the
Trustees present may establish a procedure whereby a Shareholder may certify in
writing to the Trust that all or a portion of the Shares registered in the name
of the Shareholder are held for the account of one or more beneficial owners.
Upon receipt by the Trust of the writing, the persons specified as beneficial
owners, rather than the actual Shareholders, are deemed the Shareholders for the
purposes specified in the writing.
ARTICLE VI
MISCELLANEOUS
Section 6.1. Fiscal Year. The fiscal year of the Trust shall be as fixed
by the Trustees of the Trust.
Section 6.2. Notice and Waiver of Notice. (a) Any notice of a meeting
required to be given under these By-Laws to Shareholders or Trustees, or both,
may be waived by any such person (i) orally or in writing signed by such person
before, at or after the meeting or (ii) by attendance at the meeting in person
or, in the case of a Shareholder, by proxy.
(b) Except as otherwise specifically provided herein, all notices required
by these By-Laws shall be printed or written, and shall be delivered either
personally, by telecopy, telegraph or cable, or by mail or courier or delivery
service, and, if mailed, shall be deemed to be delivered when deposited in the
United States mail, postage prepaid, addressed to the Shareholder or Trustee at
his address as it appears on the records of the Trust.
Section 6.3. Action by Written Consent in Lieu of Meeting. (a) An action
required or permitted to be taken at a meeting of the Shareholders may be taken
without a meeting by written action signed by all of the Shareholders entitled
to vote on that action. The written action is effective when it has been signed
by all of those Shareholders, unless a different effective time is provided in
the written action.
(b) An action which requires Shareholder approval and which is required or
permitted to be taken at a meeting of Trustees may be taken by written action
signed by all of the Trustees. An action which does not
<PAGE>
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require Shareholder approval and which is required or permitted to be taken at a
meeting of the Trustees or a Committee of the Trustees may be taken by written
action signed by the number of Trustees that would be required to take the same
action at a meeting of the Trustees or Committee, as the case may be, at which
all Trustees were present. The written action is effective when signed by the
required number of Trustees, unless a different effective time is provided in
the written action. When written action is taken by less than all Trustees, all
Trustees shall be notified immediately of this text and effective date.
Section 6.4. Reports to Shareholders. The books of account of the Trust
shall be examined by an independent firm of public accountants at the close of
each annual period of the Trust and at such other times, if any, as may be
directed by the Trustees. A report to the Shareholders based upon such
examination shall be mailed to each Shareholder of the Trust of record at his
address as the same appears on the books of the Trust. Each such report shall
show the assets and liabilities of the Trust as of the annual or other period
covered by the report and the securities in which the funds of the Trust were
then invested; such report shall also show the Trust's income and expenses for
the period from the end of the Trust's preceding fiscal year to the close of the
annual or other period covered by the report and any other information required
by the 1940 Act, and shall set forth such other matters as the Trustees or such
independent firm of public accountants shall determine.
Section 6.5. Approval of Firm of Independent Public Accountants. At any
regular meeting of the Shareholders of the Trust there may be submitted, for
ratification or rejection, the name of the firm of independent public
accountants which has been selected for the fiscal year in which such meeting is
held by a majority of those members of the Trustees who are not investment
advisers of, or affiliated persons of an investment adviser of, or officers or
employees of, the Trust, as such terms are defined in the 1940 Act.
Section 6.6. Custodian. All securities and cash of the Trust shall be
held by a custodian meeting the requirements for a custodian contained in the
1940 Act and the rules and regulations thereunder and in any applicable state
securities or blue sky laws. The Trust shall enter into a written contract with
the custodian regarding the powers, duties and compensation of the custodian
with respect to the cash and securities of the Trust held by the custodian. Said
contract and all amendments thereto shall be approved by the Trustees of the
Trust. The Trust shall upon the resignation or inability to serve of the
custodian obtain a
<PAGE>
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successor custodian and require that the cash and securities owned by the Trust
be delivered to the successor custodian.
Section 6.7. Prohibited Transactions. No officer or Trustee of the Trust
or of its investment adviser shall deal for or on behalf of the Trust with
himself, as principal or agent, or with any corporation or partnership in which
he has a financial interest. This prohibition shall not prevent: (a) officers
or Trustees of the Trust from having a financial interest in the Trust, its
principal underwriter or its investment adviser; (b) the purchase of securities
for the portfolio of the Trust or the sale of securities owned by the Trust
through a securities dealer, one or more of whose partners, officers or
directors is an officer or Trustee of the Trust, provided such transactions are
handled in the capacity of broker only and provided commission charged do not
exceed customary brokerage charges for such service; (c) the purchase or sale of
securities for the portfolio of the Trust pursuant to a rule under the 1940 Act
or pursuant to an exemptive order of the Securities and Exchange Commission; or
(d) the employment of legal counsel, registrar, transfer agent, dividend
disbursing agent, or custodian having a partner, officer or director who is an
officer or Trustee of the Trust, provided only customary fees are charged for
services rendered to or for the benefit of the Trust.
Section 6.8. Bonds. The Trustees may require any officer, agent or
employee of the Trust to give a bond to the Trust, conditioned upon the faithful
discharge of his duties, with one or more sureties and in such amount as may be
satisfactory to the Trustee. The Trustees shall, in any event, require the
Trust to provide and maintain a bond issued by a reputable fidelity insurance
company, authorized to do business in the place where the bond is issued,
against larceny and embezzlement, covering each officer and employee of the
Trust, who may singly, or jointly with others, have access to securities or
funds of the Trust, either directly or through authority to draw upon such funds
or to direct generally the disposition of such securities, such bond or bonds to
be in such reasonable form and amount as a majority of the Trustees who are not
"interested persons" of the Trust as defined in the 1940 Act shall approve not
less than once every twelve months, with due consideration to all relevant
factors including, but not limited to, the value of the aggregate assets of the
Trust to which any such officer or employee may have access, the type and terms
of the arrangements made for the custody and safekeeping of such assets, and the
nature of the securities in the Trust's portfolio, and as meet all requirements
which the Securities and Exchange Commission may prescribe by order, rule or
regulation.
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ARTICLE VII
AMENDMENTS
Section 7.1. These By-Laws may be amended or repealed, or new By-Laws may
be adopted, by the Trustees at any meeting thereof provided that notice of such
meeting shall have been given if required by these By-Laws, which notice, if
required, shall state that amendment or repeal of the By-Laws or adoption of
new By-Laws, is one of the purposes of such meeting, or by action of the
Trustees by written consent in lieu of a meeting.
<PAGE>
NUVEEN ARIZONA DIVIDEND ADVANTAGE MUNICIPAL FUND
NUVEEN CONNECTICUT DIVIDEND ADVANTAGE MUNICIPAL FUND
NUVEEN INSURED DIVIDEND ADVANTAGE MUNICIPAL FUND
NUVEEN INSURED CALIFORNIA DIVIDEND ADVANTAGE MUNICIPAL FUND
NUVEEN INSURED NEW YORK DIVIDEND ADVANTAGE MUNICIPAL FUND
NUVEEN FLORIDA DIVIDEND ADVANTAGE MUNICIPAL FUND
NUVEEN MARYLAND DIVIDEND ADVANTAGE MUNICIPAL FUND
NUVEEN MASSACHUSETTS DIVIDEND ADVANTAGE MUNICIPAL FUND
NUVEEN MICHIGAN DIVIDEND ADVANTAGE MUNICIPAL FUND
NUVEEN NEW JERSEY DIVIDEND ADVANTAGE MUNICIPAL FUND
NUVEEN NORTH CAROLINA DIVIDEND ADVANTAGE MUNICIPAL FUND
NUVEEN OHIO DIVIDEND ADVANTAGE MUNICIPAL FUND
NUVEEN PENNSYLVANIA DIVIDEND ADVANTAGE MUNICIPAL FUND
NUVEEN VIRGINIA DIVIDEND ADVANTAGE MUNICIPAL FUND
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a trustee of the above-
referenced organizations, hereby constitutes and appoints ALAN G. BERKSHIRE,
LARRY W. MARTIN and GIFFORD R. ZIMMERMAN, and each of them (with full power to
each of them to act alone) his true and lawful attorney-in-fact and agent, for
him on his behalf and in Registration Statements on Form N-2 under the
Securities Act of l933 and the Investment Company Act of l940, including any
amendment or amendments thereto, with all exhibits, and any and all other
documents required to be filed with any regulatory authority, federal or state,
relating to the registration thereof, or the issuance of shares thereof, without
limitation, granting unto said attorneys, and each of them, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises in order to effectuate the same as fully to
all intents and purposes as he might or could do if personally present, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned trustee of the above-referenced
organizations has hereunto set his hand this 16th day of July, 1999.
/s/ Timothy R. Schwertfeger
---------------------------
Timothy R. Schwertfeger
STATE OF ILLINOIS )
)SS
COUNTY OF COOK )
On this 16th day of July, 1999, personally appeared before me, a Notary Public
in and for said County and State, the person named above who is known to me to
be the person whose name and signature is affixed to the foregoing Power of
Attorney and who acknowledged the same to be his voluntary act and deed for the
intent and purposes therein set forth.
"OFFICIAL SEAL"
Virginia L. Corcoran /s/ Virginia L. Corcoran
Notary Public, State of Illinois ------------------------
My Commission Expires: 10/27/01 Notary Public
