<PAGE>
As filed with the Securities and Exchange Commission on November 3, 2000
================================================================================
1933 Act File No. 333-
1940 Act File No. 811-09471
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:
Stacy H. Winick Thomas S. Harman Sarah E. Cogan
Bell, Boyd & Lloyd LLC Morgan, Lewis & Bockius LLP Simpson Thacher & Bartlett
70 W. Madison St. 1800 M Street, N.W. 425 Lexington Ave.
Chicago, IL 60602 Washington, D.C. 20036 New York, NY 10017
Approximate Date of Proposed Public Offering:
As soon as practicable after the effective date of this Registration Statement
------------------------
If any of the securities being registered on this form are offered on a
delayed or continuous basis in reliance on Rule 415 under the Securities Act of
1933, other than securities offered in connection with a dividend reinvestment
plan, check the following box. [ ]
It is proposed that this filing will become effective (check appropriate
box)
[X] when declared effective pursuant to section 8(c)
-------------------------
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 $396.00
===================================================================================================================================
</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 Funds; 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 Funds; Portfolio Transactions
Item 19. Control Persons and Principal Holders of
Securities Management of the Funds; Statement of Net Assets
Item 20. Investment Advisory and Other Services Management of the Funds; 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 NOVEMBER 3, 2000
PROSPECTUS
Shares
NUVEEN LOGO Nuveen Maryland Dividend Advantage Municipal Fund
Common Shares
$15.00 per share
----------
Investment Objectives. The Fund is a newly-organized, non-diversified,
closed-end, management investment company. The Fund's investment objectives
are:
. to provide current income exempt from regular federal and 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. Under normal market conditions, the Fund will invest its
net assets in a 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. Through
December 31, 2001, the Fund may invest in municipal bonds that are exempt from
regular federal income tax but not from Maryland income tax, provided that no
more than 10% of the Fund's investment income during that time may be derived
from investments in those bonds. The Fund will invest at least 80% of its net
assets in investment grade quality municipal bonds. The Fund may invest up to
20% of its net assets in municipal bonds that are rated Ba/BB or B or that are
unrated but judged to be of comparable quality by the Fund's investment
adviser. The Fund cannot assure you that it will achieve its investment
objectives.
(continued on following page)
----------
Investing in common shares involves certain risks. See "Risks" beginning on
page 18.
No Prior History. Because the Fund is newly organized, its common shares have
no history of public trading. Shares of closed-end investment companies
frequently trade at a discount from their net asset value. This risk may be
greater for investors expecting to sell their shares in a relatively short
period after completion of the public offering. The common shares have been
approved on the American Stock Exchange, subject to notice of issuance. The
trading or "ticker" symbol of the common shares is expected to be [ ].
----------
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.
----------
<TABLE>
<CAPTION>
Per Share Total
--------- ------------
<S> <C> <C>
Public Offering Price $15.00 $
Sales Load $ 0.675 $
Proceeds to the Fund $14.325 $
</TABLE>
The underwriters are offering the common shares subject to various
conditions. The underwriters expect to deliver the common shares to purchasers
on or about , 2000.
----------
Salomon Smith Barney Nuveen Investments
, 2000
<PAGE>
(continued from previous page)
You should read the Prospectus, which contains important information about
the Fund, before deciding whether to invest and retain it for future
reference. A Statement of Additional Information, dated , 2000,
containing additional information about the Fund, has been filed with the
Securities and Exchange Commission and is incorporated by reference in its
entirety into this Prospectus. You may request a free copy of the Statement of
Additional Information, the table of contents of which is on page 35 of this
Prospectus, by calling (800) 257-8787 or obtain a copy (and other information
regarding the Fund) from the Securities and Exchange Commission web site
(http://www.sec.gov).
The Fund's common shares do not represent a deposit or obligation of, and
are not guaranteed or endorsed by, any bank or other insured depository
institution, and are not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board or any other government agency.
The underwriters named in this Prospectus may purchase up to
additional common shares from the Fund under certain circumstances.
2
<PAGE>
You should rely only on the information contained 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
Prospectus is accurate as of any date other than the date on the front of this
Prospectus.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary......................................................... 4
Summary of Fund Expenses................................................... 10
The Fund................................................................... 12
Use of Proceeds............................................................ 12
The Fund's Investments..................................................... 12
MuniPreferred Shares and Leverage.......................................... 15
Risks...................................................................... 18
How the Fund Manages Risk.................................................. 21
Management of the Fund..................................................... 22
Net Asset Value............................................................ 24
Distributions.............................................................. 24
Dividend Reinvestment Plan................................................. 24
Description of Shares...................................................... 26
Certain Provisions in the Declaration of Trust............................. 28
Repurchase of Fund Shares; Conversion to Open-End Fund..................... 29
Tax Matters................................................................ 30
Other Matters.............................................................. 31
Underwriting............................................................... 32
Custodian and Transfer Agent............................................... 34
Legal Opinions............................................................. 34
Table of Contents for the Statement of Additional Information.............. 35
</TABLE>
------------
Until , 2001 (25 days after the date of this Prospectus), all
dealers that buy, sell or trade the Common Shares, whether or not participating
in this offering, may be required to deliver a prospectus. This is in addition
to the dealers' obligation to deliver a prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.
3
<PAGE>
PROSPECTUS SUMMARY
This is only a summary. You should review the more detailed information
contained in the Prospectus and in the Statement of Additional Information.
The Fund............... Nuveen Maryland Dividend Advantage Municipal Fund (the
"Fund") is a newly organized, non-diversified,
closed-end management investment company. The Fund is
designed to provide tax benefits to investors who are
residents of Maryland. See "The Fund."
The Offering........... The Fund is offering common shares of
beneficial interest at $15.00 per share through a
group of underwriters (the "Underwriters") led by
Salomon Smith Barney Inc., Nuveen Investments
("Nuveen") 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." Nuveen
Investments has agreed to pay (i) all organizational
expenses and (ii) offering costs (other than sales
load) that exceed $0.03 per Common Share.
Investment Objectives.. The Fund's investment objectives are to provide
current income exempt from regular federal and
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. Under normal market conditions, the Fund
will invest its net assets in a 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. Through December 31,
2001, the Fund may invest in municipal bonds that are
exempt from regular federal income tax but not from
Maryland income tax ("Out of State Bonds"), provided
that no more than 10% of the Fund's investment income
during that time, as measured on the date of purchase
of such bond, may be derived from Out of State Bonds.
The Fund will invest at least 80% of its net assets
in municipal bonds that at the time of investment are
investment grade quality. Investment grade quality
bonds are bonds rated within the four highest grades
(Baa or BBB or better by Moody's Investor Service,
Inc. ("Moody's"), Standard & Poor's Corporation
("S&P") or Fitch IBCA, Inc. ("Fitch")), or bonds that
are unrated but judged to be of comparable quality by
the Fund's investment adviser. The Fund may invest up
to 20% of its net assets in municipal bonds that, at
the time of investment, are rated Ba/BB or B by
Moody's, S&P or Fitch or unrated but judged to be of
comparable quality by the Fund's investment adviser.
Bonds of below investment grade quality are
4
<PAGE>
regarded as having predominately speculative
characteristics with respect to capacity to pay
interest and repay principal, and are commonly
referred to as junk bonds. The Fund cannot assure
you that it will attain its investment objectives.
See "The Fund's Investments."
Special If the Fund invests in Out of State Bonds, a portion
Considerations........ of your dividends will be subject to Maryland
income taxes. The Fund expects that a substantial
portion of its investments will pay interest that
is taxable under the federal alternative minimum
tax. If you are, or as a result of investment in
the Fund would become, subject to the federal
alternative minimum tax, the Fund may not be a
suitable investment for you. In addition, capital
gains distributions will be subject to capital
gains taxes. See "Tax Matters."
Proposed Offering of
MuniPreferred(R)
Shares............... Subject to market conditions, approximately one to
three months after completion of this offering, the
Fund intends to offer preferred shares of
beneficial interest ("MuniPreferred Shares")
representing approximately 35% of the Fund's
capital after their issuance. The issuance of
MuniPreferred Shares will leverage your investment
in common shares. Leverage involves special risks.
There is no assurance that the Fund's leveraging
strategy will be successful. See "Risks--Leverage
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
5
<PAGE>
contractually 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, 2005), and for a declining amount for an
additional five years (through [December 31],
2010). Nuveen Advisory is a wholly-owned subsidiary
of Nuveen. See "Management of the Fund."
Distributions......... Commencing with the Fund's first dividend, the Fund
intends to make regular monthly cash distributions
to you at a level rate based on the projected
performance of the Fund. The Fund's ability to
maintain a level dividend rate will depend on a
number of factors, including dividends payable on
the MuniPreferred Shares. As portfolio and market
conditions change, the rate of dividends on the
Common Shares and the Fund's dividend policy could
change. Over time, the Fund will distribute all of
its net investment income (after it pays accrued
dividends on any outstanding MuniPreferred Shares).
In addition, at least annually, the Fund intends to
distribute net realized capital gains and taxable
ordinary income, if any, to you so long as the net
realized capital gains and taxable ordinary income
are not necessary to pay accrued dividends on, or
redeem or liquidate, any MuniPreferred Shares. Your
initial distribution is expected to be declared
approximately 45 days, and paid approximately 60 to
90 days, from the completion of this offering,
depending on market conditions. You may elect to
automatically reinvest some or all of your
distributions in additional Common Shares under the
Fund's Dividend Reinvestment Plan. See
"Distributions" and "Dividend Reinvestment Plan."
Listing............... The Common Shares have been approved for listing on
the American Stock Exchange, subject to notice of
issuance. See "Description of Shares--Common
Shares." The trading or "ticker" symbol of the
Common Shares is expected to be " ."
Custodian............. The Chase Manhattan Bank will serve as custodian of
the Fund's assets. See "Custodian and Transfer
Agent."
Market Price of
Shares................ Shares of closed-end investment companies frequently
trade at prices lower than net asset value. Shares
of closed-end investment companies like the Fund
that invest 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
6
<PAGE>
and market supply and demand. See "MuniPreferred
Shares and Leverage," "Risks," "Description of
Shares," "Repurchase of Fund Shares; Conversion to
Open-End Fund" and the Statement of Additional
Information under "Repurchase of Fund Shares;
Conversion to Open-End Fund." The Common Shares are
designed primarily for long-term investors, and you
should not view the Fund as a vehicle for trading
purposes.
Special Risk
Considerations........
No Operating History. The Fund is a newly organized,
non-diversified, closed-end, management investment
company with no history of operations.
Interest Rate Risk. Generally, when market interest
rates fall, bond prices rise, and vice versa.
Interest rate risk is the risk that the municipal
bonds in the Fund's portfolio will decline in value
because of increases in market interest rates. The
prices of longer-term bonds fluctuate more than
prices of shorter-term bonds as interest rates
change. Conversely, the values of lower-rated and
comparable unrated debt securities are less likely
than those of investment grade and comparable
unrated debt securities to fluctuate inversely with
changes in interest rates. Because the Fund will
invest primarily in long-term bonds, the Common
Share net asset value and market price per share
will fluctuate more in response to changes in
market interest rates than if the Fund invested
primarily in shorter-term bonds. The Fund's use of
leverage, as described below, will tend to increase
Common Share interest rate risk.
Credit Risk. Credit risk is the risk that one or
more municipal bonds in the Fund's portfolio will
decline in price, or fail to pay interest or
principal when due, because the issuer of the bond
experiences a decline in its financial status. The
Fund may invest up to 20% (measured at the time of
investment) of its net assets in municipal bonds
that are rated Ba/BB or B or that are unrated but
judged to be of comparable quality by Nuveen
Advisory. The prices of these lower grade bonds are
more sensitive to negative developments, such as a
decline in the issuer's revenues or a general
economic downturn, than are the prices of higher
grade securities. Municipal bonds of below
investment grade quality are predominately
speculative with respect to the issuer's capacity
to pay interest and repay principal when due, and
therefore involve a greater risk of default.
Concentration in 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
7
<PAGE>
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 acquired during periods of
generally lower interest rates, reducing return to
Common Shareholders. Leverage creates two major
types of risks for Common Shareholders:
. the likelihood of greater volatility of net
asset value and market price of Common Shares,
because changes in the value of the Fund's bond
portfolio (including bonds bought with the
proceeds of the MuniPreferred Shares offering)
are borne entirely by the Common Shareholders;
and
. the possibility either that Common Share income
will fall if the MuniPreferred dividend rate
rises, or that Common Share income will
fluctuate because the MuniPreferred dividend
rate varies.
Municipal Bond Market Risk. The amount of public
information available about the municipal bonds in
the Fund's portfolio is generally less than that
for corporate equities or bonds, and the investment
performance of the Fund may therefore be more
dependent on the analytical abilities of Nuveen
Advisory than would be a stock fund or taxable bond
fund. The secondary market for municipal bonds,
particularly the below investment grade bonds in
which the Fund may invest, also tends to be less
well-developed or liquid than many other securities
markets, which may adversely affect the Fund's
ability to sell its bonds at attractive prices.
Non-Diversification. Because the Fund is classified
as "non-diversified" under the Investment Company
Act of 1940, as amended (the "1940 Act"), it can
invest a greater portion of its assets in
obligations of a single issuer. As a result, the
Fund will be more susceptible than a more widely
diversified fund to any single corporate, economic,
political or regulatory occurrence. [The Fund does
not intend to invest, however, more than 10% of the
value of its assets in municipal bonds of a single
issuer]. See "The Fund's Investments." In addition,
8
<PAGE>
the Fund must satisfy certain asset diversification
rules in order to qualify as a regulated investment
company for federal income tax purposes.
Anti-takeover Provisions. The 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.
9
<PAGE>
SUMMARY OF FUND EXPENSES
The following table assumes the issuance of MuniPreferred Shares in an
amount equal to 35% of the Fund's capital (after their issuance), and shows
Fund expenses both as a percentage of net assets attributable to Common Shares
and as a percentage of total net assets.
<TABLE>
<S> <C> <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
to Common Shares**
--- -------------------
<S> <C> <C>
Annual Expenses
Management Fees..................................... 1.00%
Other Expenses...................................... .31%
--- ----
Total Annual Expenses............................... 1.31%
Fee and Expense Reimbursement (Years 1-5)........... (.46%)***
--- ----
Total Net Annual Expenses (Years 1-5)............... .85%***
--- ----
</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.
** Stated as percentages of the Fund's total net assets, and again assuming
the issuance of MuniPreferred Shares in an amount equal to 35% of the
Fund's capital (after their issuance), the Fund's expenses would be
estimated to be as follows:
<TABLE>
<CAPTION>
Percentage
of Total
Net Assets
----------
<S> <C>
Annual Expenses
Management Fees................................................ .65%
Other Expenses................................................. [.20%]
Leverage-Related Expenses...................................... [ ]
-----
Total Annual Expenses.......................................... .85%
Fees and Expense Reimbursement (Years 1-5)..................... (.30%)***
-----
Total Net Annual Expenses (Years 1-5).......................... .55%***
</TABLE>
*** Nuveen Advisory has contractually agreed to reimburse the Fund for fees
and expenses in the amount of .30% of average daily total net assets for
the first 5 years of the Fund's operations, .25% of average daily total
net assets in year 6, .20% in year 7, .15% in year 8, .10% in year 9 and
.05% in year 10. Without the reimbursement, "Total Net Annual Expenses"
would be estimated to be .85% of average daily total net assets and 1.31%
of average daily total net assets attributable to Common Shares. Nuveen
has agreed to pay (i) all organizational expenses and (ii) offering costs
(other than sales load) that exceed $0.03 per Common Share (.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."
10
<PAGE>
The following example illustrates the expenses (including the sales load of
$45) that you would pay on a $1,000 investment in Common Shares, assuming (1)
total net annual expenses of .85% of net assets attributable to Common Shares
in years 1 through 5, increasing to 1.23% in year 10 and (2) a 5% annual
return:(/1/)
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years(/2/)
------ ------- ------- -------------
<S> <C> <C> <C>
$53 $71 $90 $160
</TABLE>
The example should not be considered a representation of future expenses.
Actual expenses may be higher or lower.
--------
(1) The example assumes that the estimated Other Expenses set forth in the
Annual Expenses table are accurate, that fees and expenses increase as
described in note 2 below and that all dividends and distributions are
reinvested at net asset value. Actual expenses may be greater or less than
those assumed. Moreover, the Fund's actual rate of return may be greater
or less than the hypothetical 5% return shown in the example. The expenses
you would pay, based on the Fund's expenses stated as percentages of the
Fund's total net assets (assuming the issuance of MuniPreferred Shares in
an amount equal to 35% of the Funds' capital after their issuance) and
otherwise on the assumptions in the example would be: 1 year $50; 3 years
$62; 5 years $74; and 10 years $121.
(2) Assumes reimbursement of fees and expenses of .25% of average daily total
net assets in year 6, .20% in year 7, .15% in year 8, .10% in year 9 and
.05% in year 10. Nuveen Advisory has not agreed to reimburse the Fund for
any portion of its fees and expenses beyond [December 31], 2010.
11
<PAGE>
THE FUND
The Fund is a recently organized, non-diversified, closed-end management
investment company registered under the Investment Company Act of 1940, as
amended (the "1940 Act"). The Fund was organized as a Massachusetts business
trust on 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 $0.03 per Common Share. The
Fund will invest the net proceeds of the offering in accordance with the
Fund's investment objectives and policies as stated below. It is presently
anticipated that the Fund will be able to invest substantially all of the net
proceeds in municipal bonds that meet those investment objectives and policies
within three months after the completion of the offering. Pending such
investment, it is anticipated that the proceeds will be invested in short-
term, tax-exempt securities.
THE FUND'S INVESTMENTS
Investment Objectives and Policies
The Fund's investment objectives are:
. to provide current income exempt from regular federal and 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.
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<PAGE>
Under normal market conditions, the Fund will invest its net assets in a
portfolio of municipal bonds that are exempt from regular federal and 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.
After the completion of the offering through December 31, 2001, the Fund may
invest in Out of State Bonds, provided that no more than 10% of the Fund's
investment income during that time, as measured on the date of purchase of
such bond, may be derived from Out of State Bonds. The Fund will purchase Out
of State Bonds if other suitable investments are not available. Investment in
Out of State Bonds would result in a portion of your dividends being subject
to Maryland income taxes. For more information, see the Statement of
Additional Information. The Fund will invest at least 80% of its net assets in
investment grade quality municipal bonds. Investment grade quality means that
such bonds are rated, at the time of investment, within the four highest
grades (Baa or BBB or better by Moody's, S&P or Fitch) or are unrated but
judged to be of comparable quality by Nuveen Advisory. The Fund may invest up
to 20% of its net assets in municipal bonds that are rated, at the time of
investment, Ba/BB or B by Moody's, S&P or Fitch or that are unrated but judged
to be of comparable quality by Nuveen Advisory. Bonds of below investment
grade quality (Ba/BB or below) are commonly referred to as junk bonds. Bonds
of below investment grade quality are regarded as having predominately
speculative characteristics with respect to capacity to pay interest and repay
principal. The foregoing credit quality policies apply only at the time a
security is purchased, and the Fund is not required to dispose of a security
in the event that a rating agency downgrades its assessment of the credit
characteristics of a particular issue. In determining whether to retain or
sell such a security, Nuveen Advisory may consider such factors as Nuveen
Advisory's assessment of the credit quality of the issuer of such security,
the price at which such security could be sold and the rating, if any,
assigned to such security by other rating agencies. A general description of
Moody's, S&P's and Fitch's ratings of municipal bonds is set forth in Appendix
A to the Statement of Additional Information. See "Municipal Bonds" below for
a general description of the economic and credit characteristics of municipal
issuers in 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
13
<PAGE>
class, and of the holders of a "majority of the outstanding" MuniPreferred
Shares voting as a separate class. A "majority of the outstanding" Common
Shares means (i) 67% or more of the shares present at a meeting, if the
holders of more than 50% of the shares are present or represented by proxy, or
(ii) more than 50% of the shares, whichever is less. See "Description of
Shares--MuniPreferred Shares--Voting Rights" and the Statement of Additional
Information under "Description of Shares--MuniPreferred Shares--Voting Rights"
for additional information with respect to the voting rights of holders of
MuniPreferred Shares.
If you are, or as a result of investment in the Fund would become, subject
to the federal alternative minimum tax, the Fund may not be a suitable
investment for you because the Fund expects that a substantial portion of its
investments will pay interest that is taxable under the federal alternative
minimum tax. Special rules apply to corporate holders. In addition, capital
gains distributions will be subject to capital gains taxes. See "Tax Matters."
Municipal Bonds
Municipal bonds are either general obligation or revenue bonds and
typically are issued to finance public projects (such as roads or public
buildings), to pay general operating expenses, or to refinance outstanding
debt. Municipal bonds may also be issued for private activities, such as
housing, medical and educational facility construction, or for privately owned
industrial development and pollution control projects. General obligation
bonds are backed by the full faith and credit, or taxing authority, of the
issuer and may be repaid from any revenue source; revenue bonds may be repaid
only from the revenues of a specific facility or source. The Fund also may
purchase municipal bonds that represent lease obligations. These carry special
risks because the issuer of the bonds may not be obligated to appropriate
money annually to make payments under the lease. In order to reduce this risk,
the Fund will only purchase municipal bonds representing lease obligations
where Nuveen Advisory believes the issuer has a strong incentive to continue
making appropriations until maturity.
The municipal bonds in which the Fund will invest are generally issued by
the State of 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 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. Through December 31, 2001, the Fund also may invest in Out of State Bonds
subject to the limitations described under "--Investment Objectives and
Policies."
The yields on municipal bonds depend on a variety of factors, including
prevailing interest rates and the condition of the general money market and
the municipal bond market, the size of a particular offering, the maturity of
the obligation and the rating of the issue. The market value of municipal
bonds will vary with changes in interest rate levels and as a result of
changing evaluations of the ability of their issuers to meet interest and
principal payments.
The Fund will primarily invest in municipal bonds with long-term maturities
in order to maintain a weighted average maturity of 15-30 years, but the
weighted average maturity of obligations held by the Fund may be shortened,
depending on market conditions.
14
<PAGE>
When-Issued and Delayed Delivery Transactions
The Fund may buy and sell municipal bonds on a when-issued or delayed
delivery basis, making payment or taking delivery at a later date, normally
within 15 to 45 days of the trade date. This type of transaction may involve
an element of risk because no interest accrues on the bonds prior to
settlement and, since bonds are subject to market fluctuations, the value of
the bonds at time of delivery may be less (or more) than cost. A separate
account of the Fund will be established with its custodian consisting of cash,
cash equivalents, or liquid securities having a market value at all times at
least equal to the amount of the commitment.
Other Investment Companies
The Fund may invest up to 10% of its net assets in securities of other
open- or closed-end investment companies that invest primarily in municipal
bonds of the types in which the Fund may invest directly. The Fund generally
expects to invest in other investment companies either during periods when it
has large amounts of uninvested cash, such as the period shortly after the
Fund receives the proceeds of the offering of its Common Shares or
MuniPreferred Shares, or during periods when there is a shortage of
attractive, high-yielding municipal bonds available in the market. As a
stockholder in an investment company, the Fund will bear its ratable share of
that investment company's expenses, and would remain subject to payment of the
Fund's advisory and administrative fees with respect to assets so invested.
Common Shareholders would therefore be subject to duplicative expenses to the
extent the Fund invests in other investment companies. Nuveen Advisory will
take expenses into account when evaluating the investment merits of an
investment in the investment company relative to available municipal bond
investments. In addition, the securities of other investment companies may
also be leveraged and will therefore be subject to the same leverage risks
described herein. As described in the Prospectus in the section entitled
"Risks," the net asset value and market value of leveraged shares will be more
volatile and the yield to shareholders will tend to fluctuate more than the
yield generated by unleveraged shares.
Initial Portfolio Composition
If current market conditions persist, the Fund expects that approximately
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 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 "Other
Investment Policies and Techniques--Portfolio Trading and Turnover Rate."
Subject to market availability, the Fund would likely seek to invest
approximately 5% of its initial portfolio in municipal bonds that are, at the
time of investment, either rated below investment grade or that are unrated
but judged to be of comparable quality by Nuveen Advisory. See "--Investment
Objectives and Policies."
MUNIPREFERRED SHARES AND LEVERAGE
Subject to market conditions, approximately one to three months after the
completion of the offering of the Common Shares, the Fund intends to offer
MuniPreferred Shares representing approximately 35% of the Fund's capital
immediately after the issuance of the MuniPreferred Shares.
15
<PAGE>
The MuniPreferred Shares have complete priority upon distribution of assets
over the Common Shares. The issuance of MuniPreferred Shares will leverage the
Common Shares. Leverage involves special risks. There is no assurance that the
Fund's leveraging strategy will be successful. Although the timing and other
terms of the offering 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.
Changes in the value of the Fund's bond portfolio (including bonds bought
with the proceeds of the MuniPreferred Shares offering) will be borne entirely
by the Common Shareholders. If there is a net decrease (or increase) in the
value of the Fund's investment portfolio, the leverage will decrease (or
increase) the net asset value per Common Share to a greater extent than if the
Fund were not leveraged. During periods in which the Fund is using leverage,
the fees paid to Nuveen Advisory for advisory services will be higher than if
the Fund did not use leverage because the fees paid will be calculated on the
basis of the Fund's total net assets, including the proceeds from the issuance
of MuniPreferred Shares.
For tax purposes, the Fund is currently required to allocate net capital
gains and other taxable income, if any, between the Common Shares and
MuniPreferred Shares in proportion to total distributions paid to each class
for the year in which the net capital gains or other taxable income is
realized. If net capital gains or other taxable income is allocated to
MuniPreferred Shares (instead of solely tax-exempt income), the Fund will
likely have to pay higher total dividends to MuniPreferred Shareholders or
make special payments to MuniPreferred Shareholders to compensate them for the
increased tax liability. This would reduce the total amount of dividends paid
to the Common Shareholders, but would increase the portion of the dividend
that is tax-exempt. On an after-tax basis, Common Shareholders may still be
better off than if they had been allocated all of the Fund's net capital gains
or other taxable income (resulting in a higher amount of total dividends), but
received a lower amount of tax-exempt income. If the increase in dividend
payments or the special payments to MuniPreferred Shareholders are not
entirely offset by a reduction in the tax liability of, and an increase in the
tax-exempt dividends received by, the Common Shareholders, the advantage of
the Fund's leveraged structure to Common Shareholders will be reduced.
Under the 1940 Act, the Fund is not permitted to issue preferred shares
unless immediately after such issuance the value of the Fund's total net
assets is at least 200% of the liquidation value of the outstanding preferred
shares (i.e., such liquidation value may not exceed 50% of the Fund's total
net assets). In addition, the Fund is not permitted to declare any cash
dividend or other distribution on its Common Shares unless, at the time of
such declaration, the value of the Fund's total net assets is at least 200% of
such liquidation value. If MuniPreferred Shares are issued, the Fund intends,
to the extent possible, to purchase or redeem MuniPreferred Shares from time
to time to the extent necessary in order to maintain coverage of any
MuniPreferred Shares of at least 200%. If the Fund has MuniPreferred Shares
outstanding, two of the Fund's trustees will be elected by the holders of
MuniPreferred Shares, voting separately as a class. The remaining trustees of
the Fund will be elected by holders of Common Shares and MuniPreferred Shares
voting together as a single class. In the event the Fund failed to pay
dividends on MuniPreferred Shares for two years, MuniPreferred Shareholders
would be entitled to elect a majority of the trustees of the Fund.
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<PAGE>
The Fund may be subject to certain restrictions imposed by guidelines of
one or more rating agencies which may issue ratings for MuniPreferred Shares
issued by the Fund. These guidelines may impose asset coverage or portfolio
composition requirements that are more stringent than those imposed on the
Fund by the 1940 Act. It is not anticipated that these covenants or guidelines
will impede Nuveen Advisory from managing the Fund's portfolio in accordance
with the Fund's investment objectives and policies.
The Fund may also borrow money 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.
17
<PAGE>
RISKS
The net asset value of the Common Shares will fluctuate with and be
affected by, among other things, interest rate risk, credit risk, reinvestment
risk and leverage risk, and an investment in Common Shares will be subject to
market discount risk, inflation risk and municipal bond market risk, each of
which is more fully described below.
Newly Organized. The Fund is a newly organized, non-diversified, closed-
end, management investment company and has no operating history.
Market Discount Risk. Shares of closed-end management investment companies
frequently trade at a discount from their net asset value.
Interest Rate Risk. Interest rate risk is the risk that bonds (and the
Fund's net assets) will decline in value because of changes in interest rates.
Generally, municipal bonds will decrease in value when interest rates rise and
increase in value when interest rates decline. This means that the net asset
value of the Common Shares will fluctuate with interest rate changes and the
corresponding changes in the value of the Fund's municipal bond holdings. The
value of the longer-term bonds in which the Fund generally invests fluctuate
more in response to changes in interest rates than does the value of shorter-
term bonds. Conversely, the values of lower-rated and comparable unrated debt
securities are less likely than those of investment grade and comparable
unrated debt securities to fluctuate inversely with changes in interest rates.
Because the Fund will invest primarily in long-term bonds, the Common Share
net asset value and market price per share will fluctuate more in response to
changes in market interest rates than if the Fund invested primarily in
shorter-term bonds. The Fund's use of leverage, as described below, will tend
to increase Common Share interest rate risk.
Credit Risk. Credit risk is the risk that an issuer of a municipal bond
will become unable to meet its obligation to make interest and principal
payments. In general, lower rated municipal bonds carry a greater degree of
risk that the issuer will lose its ability to make interest and principal
payments, which could have a negative impact on the Fund's net asset value or
dividends. The Fund may invest up to 20% of its net assets in municipal bonds
that are rated Ba/BB or B by Moody's, S&P or Fitch or that are unrated but
judged to be of comparable quality by the Fund's investment adviser. Bonds
rated Ba/BB or B are regarded as having predominately speculative
characteristics with respect to capacity to pay interest and repay principal,
and these bonds are commonly referred to as junk bonds. The prices of these
lower grade bonds are more sensitive to negative developments, such as a
decline in the issuer's revenues or a general economic downturn, than are the
prices of higher grade securities.
Concentration Risk.
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.
18
<PAGE>
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.
Municipal Bond Market Risk. Investing in the municipal bond market involves
certain risks. The amount of public information available about the municipal
bonds in the Fund's portfolio is generally less than that for corporate
equities or bonds, and the investment performance of the Fund may therefore be
more dependent on the analytical abilities of Nuveen Advisory than would be a
stock fund or taxable bond fund. The secondary market for municipal bonds,
particularly the below investment grade bonds in which the Fund may invest,
also tends to be less well-developed or liquid than many other securities
markets, which may adversely affect the Fund's ability to sell its bonds at
attractive prices.
The ability of municipal issuers to make timely payments of interest and
principal may be diminished during general economic downturns and as
governmental cost burdens are reallocated among Federal, state and local
governments. In addition, laws enacted in the future by Congress or state
legislatures or referenda could extend the time for payment of principal
and/or interest, or impose other constraints on enforcement of such
obligations, or on the ability of municipalities to levy taxes. Issuers of
municipal securities might seek protection under the bankruptcy laws. In the
event of bankruptcy of such an issuer, the Fund could experience delays in
collecting principal and interest and the Fund may not, in all circumstances,
be able to collect all principal and interest to which it is entitled. To
enforce its rights in the event of a default in the payment of interest or
repayment of principal, or both, the Fund may take possession of and manage
the assets securing the issuer's obligations on such securities, which may
increase the Fund's operating expenses. Any income derived from the Fund's
ownership or operation of such assets may not be tax-exempt.
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
19
<PAGE>
when both long-term and short-term municipal rates rise. In addition, the Fund
will pay (and Common Shareholders will bear) any costs and expenses relating
to the issuance and ongoing maintenance of the MuniPreferred Shares.
Accordingly, the Fund cannot assure you that the issuance of MuniPreferred
Shares will result in a higher yield or return to Common Shareholders.
Similarly, any decline in the net asset value of the Fund's investments
will be borne entirely by Common Shareholders. Therefore, if the market value
of the Fund's portfolio declines, the leverage will result in a greater
decrease in net asset value to Common Shareholders than if the Fund were not
leveraged. Such greater net asset value decrease will also tend to cause a
greater decline in the market price for the Common Shares. The Fund might be
in danger of failing to maintain the required 200% asset coverage or of losing
its expected AAA/aaa ratings on the MuniPreferred Shares or, in an extreme
case, the Fund's current investment income might not be sufficient to meet the
dividend requirements on the MuniPreferred Shares. In order to counteract such
an event, the Fund might need to liquidate investments in order to fund a
redemption of some or all of the MuniPreferred Shares. Liquidation at times of
low municipal bond prices may result in capital loss and may reduce returns to
Common Shareholders.
While the Fund may from time to time consider reducing leverage in response
to actual or anticipated changes in interest rates in an effort to mitigate
the increased volatility of current income and net asset value associated with
leverage, there can be no assurance that the Fund will actually reduce
leverage in the future or that any reduction, if undertaken, will benefit the
Common Shareholders. Changes in the future direction of interest rates are
very difficult to predict accurately. If the Fund were to reduce leverage
based on a prediction about future changes to interest rates, and that
prediction turned out to be incorrect, the reduction in leverage would likely
operate to reduce the income and/or total returns to Common Shareholders
relative to the circumstance where the Fund had not reduced leverage. The Fund
may decide that this risk outweighs the likelihood of achieving the desired
reduction to volatility in income and share price if the prediction were to
turn out to be correct, and determine not to reduce leverage as described
above.
The Fund may invest in the securities of other investment companies. Such
securities may also be leveraged and will therefore be subject to the leverage
risks described above. Such additional leverage may in certain market
conditions serve to reduce the net asset value of the Fund's Common Shares and
the returns to Common Shareholders.
Inflation Risk. Inflation risk is the risk that the value of assets or
income from investment will be worth less in the future as inflation decreases
the value of money. As inflation increases, the real value of the Common
Shares and distributions can decline. In addition, during any periods of
rising inflation, MuniPreferred Share dividend rates would likely increase,
which would tend to further reduce returns to Common Shareholders.
Non-Diversification. Because the Fund is classified as "non-diversified"
under the 1940 Act it can invest a greater portion of its assets in
obligations of a single issuer. As a result, the Fund will be more susceptible
than a more widely diversified fund to any single corporate, economic,
political or regulatory occurrence. [The Fund does not intend to invest,
however, more than 10% of the value of its assets in municipal bonds of a
single issuer.] See "The Fund's Investments." In addition, the Fund must
satisfy certain asset diversification rules in order to qualify as a regulated
investment company for federal income tax purposes.
20
<PAGE>
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.
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.
21
<PAGE>
Management of Investment Portfolio and Capital Structure to Limit Leverage
Risk
The Fund may take certain actions if short-term interest rates increase or
market conditions otherwise change (or the Fund anticipates such an increase
or change) and the Fund's leverage begins (or is expected) to adversely affect
Common Shareholders. In order to attempt to offset such a negative impact of
leverage on Common Shareholders, the Fund may shorten the average maturity of
its investment portfolio (by investing in short-term, high quality securities)
or may extend the maturity of outstanding MuniPreferred Shares. The Fund may
also attempt to reduce the leverage by redeeming or otherwise purchasing
MuniPreferred Shares. As explained above under "Risks--Leverage Risk," the
success of any such attempt to limit leverage risk depends on Nuveen
Advisory's ability to accurately predict interest rate or other market
changes. Because of the difficulty of making such predictions, the Fund may
never attempt to manage its capital structure in the manner described above.
If market conditions suggest that additional leverage would be beneficial,
the Fund may sell previously unissued MuniPreferred Shares or MuniPreferred
Shares that the Fund previously issued but later repurchased.
Currently, the Fund may not invest in inverse floating rate securities,
which are securities that pay interest at rates that vary inversely with
changes in prevailing short-term tax-exempt interest rates and which represent
a leveraged investment in an underlying municipal bond. This restriction is a
non-fundamental policy of the Fund that may be changed by vote of the Fund's
Board of Trustees.
Hedging Strategies
The Fund may use various investment strategies designed to limit the risk
of bond price fluctuations and to preserve capital. These hedging strategies
include using financial futures contracts, options on financial futures or
options based on either an index of long-term municipal securities or on
taxable debt securities whose prices, in the opinion of Nuveen Advisory,
correlate with the prices of the Fund's investments. Successful implementation
of most hedging strategies would generate taxable income, and the Fund has no
present intention to use these strategies.
MANAGEMENT OF THE FUND
Trustees and Officers
The Board of Trustees is responsible for the management of the Fund,
including supervision of the duties performed by Nuveen Advisory. There are
seven trustees of the Fund, one of whom is an "interested person" (as defined
in the 1940 Act) and six of whom are not "interested persons." The 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."
22
<PAGE>
Overall investment management strategy and operating policies for the Fund
are set by the Investment Management Committee of 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 agency and
dividend disbursing expenses, legal fees, expenses of independent auditors,
expenses of repurchasing shares, expenses of preparing, printing and
distributing shareholder reports, notices, proxy statements and reports to
governmental agencies, and taxes, if any.
For the first ten years of the Fund's operation, Nuveen Advisory has
contractually agreed to reimburse the Fund for fees and expenses in the
amounts, and for the time periods, set forth below:
<TABLE>
<CAPTION>
Percentage
Reimbursed
(as a percentage
Year Ending of average daily
[Dec. 31], net assets)
----------- ----------------
<S> <C>
2000*........... 0.30%
2001............ 0.30%
2002............ 0.30%
2003............ 0.30%
2004............ 0.30%
2005............ 0.30%
</TABLE>
<TABLE>
<CAPTION>
Percentage
Reimbursed
(as a percentage
Year Ending of average daily
[Dec. 31], net assets)
----------- ----------------
<S> <C>
2006............ 0.25%
2007............ 0.20%
2008............ 0.15%
2009............ 0.10%
2010............ 0.05%
</TABLE>
--------
*From the commencement of operations.
23
<PAGE>
Nuveen Advisory has not agreed to reimburse the Fund for any portion of its
fees and expenses beyond [December 31], 2010.
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 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
24
<PAGE>
"Plan Agent"), in additional Common Shares under the Dividend Reinvestment
Plan (the "Plan"). You may elect to participate in the Plan by completing the
Dividend Reinvestment Plan Application Form. If you do not participate, you
will receive all distributions in cash paid by check mailed directly to you by
The Chase Manhattan Bank as dividend paying agent.
If you decide to participate in the Plan, the number of Common Shares you
will receive will be determined as follows:
(1) If Common Shares are trading at or above net asset value at the time
of valuation, the Fund will issue new shares at the then current market
price; or
(2) If Common Shares are trading below net asset value at the time of
valuation, the Plan Agent will receive the dividend or distribution in cash
and will purchase Common Shares in the open market, on the American Stock
Exchange or elsewhere, for the participants' accounts. It is possible that
the market price for the Common Shares may increase before the Plan Agent
has completed its purchases. Therefore, the average purchase price per
share paid by the Plan Agent may exceed the market price at the time of
valuation, resulting in the purchase of fewer shares than if the dividend
or distribution had been paid in Common Shares issued by the Fund. The Plan
Agent will use all dividends and distributions received in cash to purchase
Common Shares in the open market within 30 days of the dividend payment
date. Interest will not be paid on any uninvested cash payments.
You may withdraw from the Plan at any time by giving written notice to the
Plan Agent. If you withdraw or the Plan is terminated, you will receive a
certificate for each whole share in your account under the Plan and you will
receive a cash payment for any fraction of a share in your account. If you
wish, the Plan Agent will sell your shares and send you the proceeds, minus
brokerage commissions and a $2.50 service fee.
The Plan Agent maintains all shareholders' accounts in the Plan and gives
written confirmation of all transactions in the accounts, including
information you may need for tax records. Common Shares in your account will
be held by the Plan Agent in non-certificated form. Any proxy you receive will
include all Common Shares you have received under the Plan.
There is no brokerage charge for reinvestment of your dividends or
distributions in Common Shares. However, all participants will pay a pro rata
share of brokerage commissions incurred by the Plan Agent when it makes open
market purchases.
Automatically reinvesting dividends and distributions does not mean that
you do not have to pay income taxes due upon receiving dividends and
distributions.
The Fund reserves the right to amend or terminate the Plan if change seems
desirable to the Board of Trustees. There is no direct service charge to
participants in the Plan; however, the Fund reserves the right to amend the
Plan to include a service charge payable by the participants. Additional
information about the Plan may be obtained from 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.
25
<PAGE>
DESCRIPTION OF SHARES
Common Shares
The Declaration authorizes the issuance of an unlimited number of Common
Shares, par value $.01 per share. All Common Shares have equal rights to the
payment of dividends and the distribution of assets upon liquidation. Common
Shares will, when issued, be fully paid and, subject to matters discussed in
"Certain Provisions in the Declaration of Trust," non-assessable, and will
have no pre-emptive or conversion rights or rights to cumulative voting.
Whenever MuniPreferred Shares are outstanding, Common Shareholders will not be
entitled to receive any distributions from the Fund unless all accrued
dividends on MuniPreferred Shares have been paid, and unless asset coverage
(as defined in the 1940 Act) with respect to MuniPreferred Shares would be at
least 200% after giving effect to the distributions. See "--MuniPreferred
Shares" below.
The Common Shares have been approved for listing on the American Stock
Exchange, subject to notice of issuance. The Fund intends to hold annual
meetings of shareholders so long as the Common Shares are listed on a national
securities exchange and such meetings are required as a condition to such
listing.
The Fund's net asset value per share generally increases when interest
rates decline, and decreases when interest rates rise, and these changes are
likely to be greater because the Fund intends to have a leveraged capital
structure. Net asset value will be reduced immediately following the offering
by the amount of the sales load and organization and offering expenses paid by
the Fund. Nuveen has agreed to pay (i) all organizational expenses and (ii)
offering costs (other than sales load) that exceed $0.03 per Common Share. See
"Use of Proceeds."
Unlike open-end funds, closed-end funds like the Fund do not continuously
offer shares and do not provide daily redemptions. Rather, if a shareholder
determines to buy additional Common Shares or sell shares already held, the
shareholder may conveniently do so by trading on the exchange through a broker
or otherwise. Shares of closed-end investment companies may frequently trade
on an exchange at prices lower than net asset value. Shares of closed-end
investment companies like the Fund that invest predominately in investment
grade municipal bonds have during some periods traded at prices higher than
net asset value and during other periods have traded at prices lower than net
asset value. Because the market value of the Common Shares may be influenced
by such factors as dividend levels (which are in turn affected by expenses),
call protection, dividend stability, portfolio credit quality, net asset
value, relative demand for and supply of such shares in the market, general
market and economic conditions, and other factors beyond the control of the
Fund, the Fund cannot assure you that Common Shares will trade at a price
equal to or higher than net asset value in the future. The Common Shares are
designed primarily for long-term investors, and investors in the Common Shares
should not view the Fund as a vehicle for trading purposes. See "MuniPreferred
Shares and Leverage" and the Statement of Additional Information under
"Repurchase of Fund Shares; Conversion to Open-End Fund."
MuniPreferred Shares
The Declaration authorizes the issuance of an unlimited number of
MuniPreferred Shares, par value $.01 per share, in one or more classes or
series, with rights as determined by the Board of Trustees, by action of the
Board of Trustees without the approval of the Common Shareholders.
26
<PAGE>
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.
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."
27
<PAGE>
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 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
28
<PAGE>
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, dividend stability, portfolio
credit quality, relative demand for and supply of such shares in the market,
general market and economic conditions and other factors. Because shares of
closed-end investment companies may frequently trade at prices lower than net
asset value, the Fund's Board of Trustees has currently determined that, at
least annually, it will consider action that might be taken to reduce or
eliminate any material discount from net asset value in respect of Common
Shares, which may include the repurchase of such shares in the open market or
in private transactions, the making of a tender offer for such shares at net
asset value, or the conversion of the Fund to an open-end investment company.
The Fund cannot assure you that its Board of Trustees will decide to take any
of these actions, or that share repurchases or tender offers will actually
reduce market discount.
If the Fund converted to an open-end company, it would be required to
redeem all MuniPreferred Shares then outstanding (requiring in turn that it
liquidate a portion of its investment portfolio), and the Common Shares would
no longer be listed on the American Stock Exchange. In contrast to a closed-
end investment company, shareholders of an open-end investment company may
require the company to redeem their shares at any time (except in certain
circumstances as authorized by or under the 1940 Act) at their net asset
value, less any redemption charge that is in effect at the time of redemption.
See the Statement of Additional Information under "Certain Provisions in the
Declaration of Trust" for a discussion of the voting requirements applicable
to the conversion of the Fund to an open-end company.
29
<PAGE>
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 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.
30
<PAGE>
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.
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.
Discovery is underway on that single claim. While the Fund cannot assure you
that the litigation will be decided in Nuveen Advisory's favor, Nuveen
Advisory believes a decision, if any, against it would have no material effect
on the Fund, its Common Shares, or the ability of Nuveen Advisory to perform
its duties under the investment management agreement.
31
<PAGE>
UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement
dated the date hereof, each Underwriter named below has severally agreed to
purchase, and the Fund has agreed to sell to such Underwriter, the number of
Common Shares set forth opposite the name of such Underwriter.
<TABLE>
<CAPTION>
Number
of
Name Shares
---- -------
<S> <C>
Salomon Smith Barney Inc................................................
-------
Nuveen Investments......................................................
-------
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 Salomon Smith Barney Inc., Nuveen Investments
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 sales load the Fund will pay of $.675
per share is equal to 4.5% of the initial offering price. The Underwriters may
allow, and such dealers may reallow, a concession not in excess of $0.10 per
Common Share on sales to certain other dealers. If all of the Common Shares
are not sold at the initial offering price, the representatives may change the
public offering price and other selling terms. Investors must pay for any
Common Shares purchased on or before , 2000. 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 over-
allotments, if any, in connection with this offering. To the extent such
option is exercised, each Underwriter will be obligated, subject to certain
conditions, to purchase a number of additional Common Shares approximately
proportionate to such Underwriter's initial purchase commitment.
The Fund and Nuveen Advisory have agreed that, for a period of 180 days
from the date of this Prospectus, they will not, without the prior written
consent of Salomon Smith Barney Inc., on behalf of the Underwriters, dispose
of or hedge any Common Shares or any securities convertible into or
exchangeable for Common Shares. Salomon Smith Barney Inc. in its sole
discretion may release any of the securities subject to these agreements at
any time without notice.
Prior to the offering, there has been no public market for the Common
Shares. Consequently, the initial public offering price for the Common Shares
was determined by negotiation among the Fund,
32
<PAGE>
Nuveen Advisory and the representatives. There can be no assurance, however,
that the price at which the Common Shares will sell in the public market after
this offering will not be lower than the price at which they are sold by the
Underwriters or that an active trading market in the Common Shares will
develop and continue after this offering. The Common Shares have been approved
for listing on the American Stock Exchange, subject to official notice of
issuance.
The Fund and Nuveen Advisory have each agreed to indemnify the several
Underwriters or contribute to losses arising out of certain liabilities,
including liabilities under the Securities Act.
Nuveen has agreed to pay (i) all organizational expenses and (ii) offering
costs (other than sales load) that exceed $0.03 per share.
In connection with the requirements for listing the Fund's Common Shares on
the American Stock Exchange, the Underwriters have undertaken to sell lots of
100 or more Common Shares to a minimum of 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 American Stock Exchange. No
Underwriter is, however, obligated to conduct market-making activities and any
such activities may be discontinued at any time without notice, at the sole
discretion of the Underwriter. No assurance can be given as to the liquidity
of, or the trading market for, the Common Shares as a result of any market-
making activities undertaken by any Underwriter. This Prospectus is to be used
by any Underwriter in connection with the offering and, during the period in
which a prospectus must be delivered, with offers and sales of the Common
Shares in market-making transactions in the over-the-counter market at
negotiated prices related to prevailing market prices at the time of the sale.
The Underwriters have advised the Fund that, pursuant to Regulation M under
the Securities Exchange Act of 1934, as amended, certain persons participating
in the offering may engage in transactions, including stabilizing bids,
covering transactions or the imposition of penalty bids, which may have the
effect of stabilizing or maintaining the market price of the Common Shares at
a level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for or the purchase of the Common Shares on behalf
of an Underwriter for the purpose of fixing or maintaining the price of the
Common Shares. A "covering transaction" is a bid for or purchase of the Common
Shares on behalf of an Underwriter to reduce a short position incurred by the
Underwriters in connection with the offering. A "penalty bid" is a
contractual arrangement whereby if, during a specified period after the
issuance of the Common Shares, the Underwriters purchase Common Shares in the
open market for the account of the underwriting syndicate and the Common
Shares purchased can be traced to a particular Underwriter or member of the
selling group, the underwriting syndicate may require the Underwriter or
selling group member in question to purchase the Common Shares in question at
the cost price to the syndicate or may recover from (or decline to pay to) the
Underwriter or selling group member in question any or all compensation
(including, with respect to a representative, the applicable syndicate
management fee) applicable to the Common Shares in question. As a result, an
Underwriter or selling group member and, in turn, brokers may lose the fees
that they otherwise would have earned from a sale of the Common Shares if
their customer resells the Common Shares while the penalty bid is in effect.
The Underwriters are not required to engage in any of these activities, and
any such activities, if commenced, may be discontinued at any time.
33
<PAGE>
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.
The Fund anticipates that from time to time the representatives of the
Underwriters and certain other Underwriters may act as brokers or dealers in
connection with the execution of the Fund's portfolio transactions after they
have ceased to be Underwriters and, subject to certain restrictions, may act
as brokers while they are Underwriters.
Nuveen, one of the representatives of the Underwriters, is the parent
company of Nuveen Advisory.
CUSTODIAN AND TRANSFER AGENT
The custodian of the assets of the Fund is The Chase Manhattan Bank, 4 New
York Plaza, New York, NY 10004-2413. The Custodian performs custodial, fund
accounting and portfolio accounting services. The Fund's transfer, shareholder
services and dividend paying agent is also The Chase Manhattan Bank.
LEGAL OPINIONS
Certain legal matters in connection with the Common Shares will be passed
upon for the Fund by Bell, Boyd & Lloyd LLC, Chicago, Illinois, and for the
Underwriters by Simpson Thacher & Bartlett, New York, New York. Bell, Boyd &
Lloyd LLC and Simpson Thacher & Bartlett may rely as to certain matters of
Massachusetts law on the opinion of Bingham Dana LLP, Boston, Massachusetts,
and as to certain matters of Maryland law on the opinion of
.
34
<PAGE>
TABLE OF CONTENTS FOR THE
STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
Use of Proceeds...................................................... 3
Investment Objectives................................................ 4
Investment Policies and Techniques................................... 10
Other Investment Policies and Techniques............................. 18
Management of the Funds.............................................. 21
Investment Adviser................................................... 27
Portfolio Transactions............................................... 28
Distributions........................................................ 29
Description of Shares................................................ 30
Certain Provisions in the Declaration of Trust....................... 33
Repurchase of Fund Shares; Conversion to Open-End Fund............... 34
Tax Matters.......................................................... 37
Performance Related and Comparative Information...................... 40
Experts.............................................................. 41
Additional Information............................................... 41
Report of Independent Auditors....................................... 42
Financial Statements................................................. 42
Appendices........................................................... A-1
</TABLE>
35
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Shares
Nuveen Maryland Dividend Advantage
Municipal Fund
Common Shares
--------
PROSPECTUS
, 2000
--------
Salomon Smith Barney
Nuveen Investments
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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 NOVEMBER 3, 2000
Nuveen Arizona Dividend Advantage Municipal Fund
Nuveen California Dividend Advantage Municipal Fund 2
Nuveen Connecticut Dividend Advantage Municipal Fund
Nuveen Maryland Dividend Advantage Municipal Fund
Nuveen Massachusetts Dividend Advantage Municipal Fund
Nuveen Missouri Dividend Advantage Municipal Fund
Nuveen North Carolina Dividend Advantage Municipal Fund
Nuveen Virginia Dividend Advantage Municipal Fund
STATEMENT OF ADDITIONAL INFORMATION
Each of Nuveen Arizona Dividend Advantage Municipal Fund (a "Fund" or the
"Arizona Fund"), Nuveen California Dividend Advantage Municipal Fund 2 (a "Fund"
or the "California Fund"), Nuveen Connecticut Dividend Advantage Municipal Fund
(a "Fund" or the "Connecticut Fund"), Nuveen Maryland Dividend Advantage
Municipal Fund (a "Fund" or the "Maryland Fund"), Nuveen Massachusetts Dividend
Advantage Municipal Fund (a "Fund" or the "Massachusetts Fund"), Nuveen
Misssouri Dividend Advantage Municipal Fund (a "Fund" or the "Missouri Fund"),
Nuveen North Carolina Dividend Advantage Municipal Fund (a "Fund" or the "North
Carolina Fund") and Nuveen Virginia Dividend Advantage Municipal Fund (a "Fund"
or the "Virginia Fund") (collectively, the "Funds") is a newly organized, non-
diversified closed-end management investment company.
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 ___________
__, 2000 (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 4
Investment Policies and Techniques 10
Other Investment Policies and Techniques 18
Management of the Funds 21
Investment Adviser 27
Portfolio Transactions 28
Distributions 29
Description of Shares 30
Certain Provisions in the Declaration of Trust 33
Repurchase of Fund Shares; Conversion to Open-End Fund 34
Tax Matters 37
Performance Related and Comparative Information 40
Experts 41
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
Hedging Strategies and Risks (Appendix C) C-1
State-Specific Disclosure (Appendix D) D-1
Additional Performance Related and Comparative Information
(Appendix E) E-1
</TABLE>
This Statement of Additional Information is dated ___________ __, 2000
2
<PAGE>
USE OF PROCEEDS
Arizona Fund - The net proceeds of the offering of Common Shares of the
Fund will be approximately: $_______ ($_______ if the Underwriters exercise the
over-allotment option in full) after payment of organization and offering costs.
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.
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.
Missouri Fund - The net proceeds of the offering of Common Shares of the
Fund will be approximately: $_______ ($_______ if the Underwriters exercise the
over-allotment option in full) after payment of organization and offering costs.
North Carolina Fund - The net proceeds of the offering of Common Shares of
the Fund will be approximately: $_______ ($_______ if the Underwriters exercise
the over-allotment option in full) after payment of organization and offering
costs.
3
<PAGE>
Virginia Fund - The net proceeds of the offering of Common Shares of the
Fund will be approximately: $_______ ($_______ if the Underwriters exercise the
over-allotment option in full) after payment of organization and offering costs.
For each Fund, Nuveen Advisory has agreed to pay (i) all organizational
expenses and (ii) offering costs (other than sales load) that exceed $0.03 per
Common Share.
Pending investment in municipal bonds that meet a Fund's investment
objectives and policies, the net proceeds of the offering will be invested in
high quality, short-term tax-exempt money market securities or in high quality
municipal bonds with relatively low volatility (such as pre-refunded and
intermediate-term bonds), to the extent such securities are available. If
necessary to invest fully the net proceeds of the offering immediately, a Fund
may also purchase, as temporary investments, short-term taxable investments of
the type described under "Investment Objectives and Policies--Portfolio
Investments," the income on which is subject to regular Federal income tax and
securities of other open or closed-end investment companies that invest
primarily in municipal bonds of the type in which a Fund may invest directly.
INVESTMENT OBJECTIVES
Each Fund's investment objective is set forth below:
Arizona Fund - to provide current income exempt from regular federal and
Arizona income tax, and to enhance portfolio value relative to the municipal
bond market by investing in
4
<PAGE>
tax-exempt municipal bonds that the Fund's investment adviser believes are
underrated or undervalued or that represent municipal market sectors that are
undervalued.
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.
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.
Missouri Fund - to provide current income exempt from regular federal and
Missouri income tax, and to enhance portfolio value relative to the municipal
bond market by investing in tax-exempt municipal bonds that the Fund's
investment adviser believes are underrated or undervalued or that represent
municipal market sectors that are undervalued.
North Carolina Fund - to provide current income exempt from regular federal
and North Carolina income tax, and to enhance portfolio value relative to the
municipal bond market by investing in tax-exempt municipal bonds that the Fund's
investment adviser believes are underrated or undervalued or that represent
municipal market sectors that are undervalued.
Virginia Fund - to provide current income exempt from regular federal and
Virginia income tax, and to enhance portfolio value relative to the municipal
bond market by investing in tax-exempt municipal bonds that the Fund's
investment adviser believes are underrated or undervalued or that represent
municipal market sectors that are undervalued.
5
<PAGE>
A Fund's investment in underrated or undervalued municipal bonds will be
based on Nuveen Advisory's belief that their yield is higher than that available
on bonds bearing equivalent levels of interest rate risk, credit risk and other
forms of risk, and that their prices will ultimately rise (relative to the
market) to reflect their true value. Each Fund attempts to increase its
portfolio value relative to the municipal bond market by prudent selection of
municipal bonds regardless of the direction the market may move. Any capital
appreciation realized by a Fund will
6
<PAGE>
generally result in the distribution of taxable capital gains to holders of
Common Shares. Each Fund's investment objectives are fundamental policies of the
Fund.
No Fund has established any limit on the percentage of its portfolio that
may be invested in municipal bonds subject to the alternative minimum tax
provisions of federal tax law, and each Fund expects that a substantial portion
of the income it produces will be includable in alternative minimum taxable
income. Common Shares therefore would not ordinarily be a suitable investment
for investors who are subject to the federal alternative minimum tax or who
would become subject to such tax by purchasing Common Shares. The suitability
of an investment in Common Shares will depend upon a comparison of the after-tax
yield likely to be provided from a Fund with that from comparable tax-exempt
investments not subject to the alternative minimum tax, and from comparable
fully taxable investments, in light of each such investor's tax position.
Special considerations apply to corporate investors. See "Tax Matters."
Investment Restrictions
Except as described below, each Fund, as a fundamental policy, may not,
without the approval of the holders of a majority of the outstanding Common
Shares and MuniPreferred Shares (as hereinafter defined) voting together as a
single class, and of the holders of a majority of the outstanding MuniPreferred
Shares voting as a separate class:
(1) Issue senior securities, as defined in the Investment Company Act
of 1940, other than MuniPreferred Shares, except to the extent permitted
under the Investment Company Act of 1940 and except as otherwise described
in the Prospectus;
(2) Borrow money, except from banks for temporary or emergency
purposes or for repurchase of its shares, and then only in an amount not
exceeding one-third of the value of the Fund's total assets (including the
amount borrowed) less the Fund's liabilities (other than borrowings);
(3) Act as underwriter of another issuer's securities, except to the
extent that the Fund may be deemed to be an underwriter within the meaning
of the Securities Act of 1933 in connection with the purchase and sale of
portfolio securities;
(4) Invest more than 25% of its total assets in securities of issuers
in any one industry; provided, however, that such limitation shall not
apply to municipal bonds other than those municipal bonds backed only by
the assets and revenues of non-governmental users;
7
<PAGE>
(5) Purchase or sell real estate, but this shall not prevent the Fund
from investing in municipal bonds secured by real estate or interests
therein or foreclosing upon and selling such security;
(6) Purchase or sell physical commodities unless acquired as a result
of ownership of securities or other instruments (but this shall not prevent
the Fund from purchasing or selling options, futures contracts, derivative
instruments or from investing in securities or other instruments backed by
physical commodities);
(7) Make loans, other than by entering into repurchase agreements and
through the purchase of municipal bonds or short-term investments in
accordance with its investment objectives, policies and limitations;
(8) [Purchase any securities (other than obligations issued or by the
United States Government or by its agencies or instrumentalities), if as a
result more than 10% of the Fund's total assets would then be invested in
securities of a single issuer or if as a result the Fund would hold more
than 10% of the outstanding voting securities of any single issuer;
provided that, with respect to 50% of the Fund's assets, the Fund may
invest up to 25% of its assets in the securities of any one issuer.]
For purposes of the foregoing and "Description of Shares--MuniPreferred
Shares--Voting Rights" below, "majority of the outstanding," when used with
respect to particular shares of a Fund, means (i) 67% or more of the shares
present at a meeting, if the holders of more than 50% of the shares are present
or represented by proxy, or (ii) more than 50% of the shares, whichever is less.
For the purpose of applying the limitation set forth in subparagraph (8)
above, an issuer shall be deemed the sole issuer of a security when its assets
and revenues are separate from other governmental entities and its securities
are backed only by its assets and revenues. Similarly, in the case of a non-
governmental issuer, such as an industrial corporation or a privately owned or
operated hospital, if the security is backed only by the assets and revenues of
the non-governmental issuer, then such non-governmental issuer would be deemed
to be the sole issuer. Where a security is also backed by the enforceable
obligation of a superior or unrelated governmental or other entity (other than a
bond insurer), it shall also be included in the computation of securities owned
that are issued by such governmental or other entity. Where a security is
guaranteed by a governmental entity or some other facility, such as a bank
guarantee or letter of credit, such a guarantee or letter of credit would be
considered a separate security and would be treated as an issue of such
government, other entity or bank. When a municipal bond is insured by bond
insurance, it shall not be considered a security that is issued or guaranteed by
the insurer; instead, the issuer of such municipal bond will be determined in
accordance with the principles set forth above. The foregoing restrictions do
not limit the percentage of the Fund's assets that may be invested in municipal
bonds insured by any given insurer.
Under the Investment Company Act of 1940, a Fund may invest only up to 10%
of its total assets in the aggregate in shares of other investment companies and
only up to 5% of its total assets in any one investment company, provided the
investment does not represent more than 3% of the voting stock of the acquired
investment company at the time such shares are purchased. As a stockholder in
any investment company, a Fund will bear its ratable share of
8
<PAGE>
that investment company's expenses, and would remain subject to payment of the
Fund's management, advisory and administrative fees with respect to assets so
invested. Holders of Common Shares would therefore be subject to duplicative
expenses to the extent a Fund invests in other investment companies. In
addition, the securities of other investment companies may also be leveraged and
will therefore be subject to the same leverage risks described herein. As
described in the Prospectus in the section entitled "Risks", the net asset value
and market value of leveraged shares will be more volatile and the yield to
shareholders will tend to fluctuate more than the yield generated by unleveraged
shares.
In addition to the foregoing fundamental investment policies, each Fund is
also subject to the following non-fundamental restrictions and policies, which
may be changed by the Board of Trustees. A Fund may not:
(1) Sell securities short, unless the Fund owns or has the right to
obtain securities equivalent in kind and amount to the securities sold at
no added cost, and provided that transactions in options, futures
contracts, options on futures contracts, or other derivative instruments
are not deemed to constitute selling securities short.
(2) Purchase securities of open-end or closed-end investment companies
except in compliance with the Investment Company Act of 1940 or any
exemptive relief obtained thereunder.
(3) Enter into futures contracts or related options or forward
contracts, if more than 30% of the Fund's net assets would be represented
by futures contracts or more than 5% of the Fund's net assets would be
committed to initial margin deposits and premiums on futures contracts and
related options.
(4) Purchase securities when borrowings exceed 5% of its total assets
if and so long as MuniPreferred Shares are outstanding.
(5) Purchase securities of companies for the purpose of exercising
control.
(6) Invest in inverse floating rate securities (which are securities
that pay interest at rates that vary inversely with changes in prevailing
short-term tax-exempt interest rates and which represent a leveraged
investment in an underlying municipal bond).
The restrictions and other limitations set forth above will apply only at
the time of purchase of securities and will not be considered violated unless an
excess or deficiency occurs or exists immediately after and as a result of an
acquisition of securities.
Each Fund intends to apply for ratings for its preferred shares (called
"MuniPreferred Shares" herein) from Moody's and/or S&P. In order to obtain and
maintain the required ratings, a Fund may be required to comply with investment
quality, diversification and other guidelines established by Moody's or S&P.
Such guidelines will likely be more restrictive than the restrictions set forth
above. No Fund anticipates that such guidelines would have a material
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adverse effect on its Common Shareholders or its ability to achieve its
investment objectives. Each Fund presently anticipates that any MuniPreferred
Shares that it intends to issue would be initially given the highest ratings by
Moody's ("Aaa") or by S&P ("AAA"), but no assurance can be given that such
ratings will be obtained. No minimum rating is required for the issuance of
MuniPreferred Shares by a Fund. Moody's and S&P receive fees in connection with
their ratings issuances.
INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the discussion of each Fund's
investment objectives, policies, and techniques that are described in the Funds'
respective Prospectuses.
Investment in Municipal Bonds
Portfolio Investments
The Arizona Fund will invest its net assets in a portfolio of municipal
bonds that are exempt from regular federal and Arizona income tax. The
California Fund will invest its net assets in a portfolio of municipal bonds
that are exempt from regular federal and California income tax. The Connecticut
Fund will invest its net assets in a portfolio of municipal bonds that are
exempt from regular federal and Connecticut income tax. The Maryland Fund will
invest its net assets in a portfolio of municipal bonds that are exempt from
regular federal and Maryland income tax. The Massachusetts Fund will invest its
net assets in a portfolio of municipal bonds that are exempt from regular
federal and Massachusetts income tax. The Missouri Fund will invest its net
assets in a portfolio of municipal bonds that are exempt from regular federal
and Missouri income tax. The North Carolina Fund will invest its net assets in a
portfolio of municipal bonds that are exempt from regular federal and North
Carolina income tax. The Virginia Fund will invest its net assets in a portfolio
of municipal bonds that are exempt from regular federal and Virginia income tax.
Under normal market conditions, and except for the temporary investments
described below, each Fund expects to be fully invested (at least 95% of its
assets) in such tax-exempt municipal bonds described above.
Each Fund will invest at least 80% of its net assets in municipal bonds
that at the time of investment are investment grade quality. Investment
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grade quality bonds are bonds rated within the four highest grades (Baa or BBB
or better by Moody's, S&P or Fitch) or bonds that are unrated but judged to be
of comparable quality by Nuveen Advisory. A Fund may invest up to 20% of its net
assets in municipal bonds that, at the time of investment, are rated Ba/BB or B
by Moody's, S&P or Fitch or unrated but judged to be of comparable quality by
Nuveen Advisory. Bonds of below investment grade quality (Ba/BB or below) are
commonly referred to as junk bonds. Issuers of bonds rated Ba/BB or B are
regarded as having current capacity to make principal and interest payments but
are subject to business, financial or economic conditions which could adversely
affect such payment capacity. The foregoing policies are fundamental policies of
each Fund. Municipal bonds rated Baa or BBB are considered "investment grade"
securities; municipal bonds rated Baa are considered medium grade obligations
which lack outstanding investment characteristics and have speculative
characteristics, while municipal bonds rated BBB are regarded as having adequate
capacity to pay principal and interest. Municipal bonds rated AAA in which a
Fund may invest may have been so rated on the basis of the existence of
insurance guaranteeing the timely payment, when due, of all principal and
interest. Municipal bonds rated below investment grade quality are obligations
of issuers that are considered predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal according to the terms of
the obligation and, therefore, carry greater investment risk, including the
possibility of issuer default and bankruptcy and increased market price
volatility. Municipal bonds rated below investment grade tend to be less
marketable than higher-quality bonds because the market for them is less broad.
The market for unrated municipal bonds is even narrower. During periods of thin
trading in these markets, the spread between bid and asked prices is likely to
increase significantly and a Fund may have greater difficulty selling its
portfolio securities. A Fund will be more dependent on Nuveen Advisory's
research and analysis when investing in these securities.
A general description of Moody's, S&P's and Fitch's ratings of municipal
bonds is set forth in Appendix A hereto. The ratings of Moody's, S&P and Fitch
represent their opinions as to the quality of the municipal bonds they rate. It
should be emphasized, however, that ratings are general and are not absolute
standards of quality. Consequently, municipal bonds with the same maturity,
coupon and rating may have different yields while obligations of the same
maturity and coupon with different ratings may have the same yield.
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Each Fund will primarily invest in municipal bonds with long-term
maturities in order to maintain a weighted average maturity of 15-30 years, but
the average weighted maturity of obligations held by a Fund may be shortened,
depending on market conditions. As a result, a Fund's portfolio at any given
time may include both long-term and intermediate-term municipal bonds. Moreover,
during temporary defensive periods (e.g., times when, in Nuveen Advisory's
opinion, temporary imbalances of supply and demand or other temporary
dislocations in the tax-exempt bond market adversely affect the price at which
long-term or intermediate-term municipal bonds are available), and in order to
keep a Fund's cash fully invested, including the period during which the net
proceeds of the offering are being invested, a Fund may invest any percentage of
its net assets in short-term investments including high quality, short-term
securities that may be either tax-exempt or taxable and up to 10% of its net
assets in securities of other open or closed-end investment companies that
invest primarily in municipal bonds of the type in which a Fund may invest
directly. Each Fund intends to invest in taxable short-term investments only in
the event that suitable tax-exempt short-term investments are not available at
reasonable prices and yields. Tax-exempt short-term investments include various
obligations issued by state and local governmental issuers, such as tax-exempt
notes (bond anticipation notes, tax anticipation notes and revenue anticipation
notes or other such municipal bonds maturing in three years or less from the
date of issuance) and municipal commercial paper. Each Fund will invest only in
taxable short-term investments which are U.S. Government securities or
securities rated within the highest grade by Moody's, S&P or Fitch, and which
mature within one year from the date of purchase or carry a variable or floating
rate of interest. See Appendix A for a general description of Moody's, S&P's and
Fitch's ratings of securities in such categories. Taxable short-term investments
of a Fund may include certificates of deposit issued by U.S. banks with assets
of at least $1 billion, or commercial paper or corporate notes, bonds or
debentures with a remaining maturity of one year or less, or repurchase
agreements. See "Repurchase Agreements." To the extent a Fund invests
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in taxable investments, a Fund will not at such times be in a position to
achieve its investment objective of tax-exempt income.
The foregoing policies as to ratings of portfolio investments will apply
only at the time of the purchase of a security, and a Fund will not be required
to dispose of securities in the event Moody's, S&P or Fitch downgrades its
assessment of the credit characteristics of a particular issuer.
Nuveen Advisory seeks to enhance portfolio value relative to the municipal
bond market by investing in tax-exempt municipal bonds that it believes are
underrated or undervalued or that represent municipal market sectors that are
undervalued. Underrated municipal bonds are those whose ratings do not, in
Nuveen Advisory's opinion, reflect their true creditworthiness. Undervalued
municipal bonds are bonds that, in Nuveen Advisory's opinion, are worth more
than the value assigned to them in the marketplace. Nuveen Advisory may at times
believe that bonds associated with a particular municipal market sector (for
example, electric utilities), or issued by a particular municipal issuer, are
undervalued. Nuveen Advisory may purchase such a bond for the Fund's portfolio
because it represents a market sector or issuer that Nuveen Advisory considers
undervalued, even if the value of the particular bond is consistent with the
value of similar bonds. Municipal bonds of particular types or purposes (e.g.,
hospital bonds, industrial revenue bonds or bonds issued by a particular
municipal issuer) may be undervalued because there is a temporary excess of
supply in that market sector, or because of a general decline in the market
price of municipal bonds of the market sector for reasons that do not apply to
the particular municipal bonds that are considered undervalued. A Fund's
investment in underrated or undervalued municipal bonds will be based on Nuveen
Advisory's belief that their yield is higher than that available on bonds
bearing equivalent levels of interest rate risk, credit risk and other forms of
risk, and that their prices will ultimately rise (relative to the market) to
reflect their true value.
No Fund has established any limit on the percentage of its portfolio
investments that may be invested in municipal bonds subject to the federal
alternative minimum tax provisions of federal tax law, and each Fund expects
that a substantial portion of the current income it produces will be includable
in alternative minimum taxable income. Special considerations apply to corporate
investors. See "Tax Matters."
Also included within the general category of municipal bonds described in
a Fund's Prospectus are participations in lease obligations or installment
purchase contract obligations (hereinafter collectively called "Municipal Lease
Obligations") of municipal authorities or entities. Although a Municipal Lease
Obligation does not constitute a general obligation of the municipality for
which the municipality's taxing power is pledged, a Municipal Lease Obligation
is ordinarily backed by the municipality's covenant to budget for, appropriate
and make the payments due under the Municipal Lease Obligation. However, certain
Municipal Lease Obligations contain "non-appropriation" clauses which provide
that the municipality has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis. In the case of a "non-appropriation" lease, a Fund's ability to
recover under the lease in the event of non-appropriation or default will be
limited solely to the repossession of the leased property, without recourse to
the general credit of the lessee, and disposition or releasing of the property
might prove difficult. In order to reduce this risk, a Fund will only
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purchase Municipal Lease Obligations where Nuveen Advisory believes the issuer
has a strong incentive to continue making appropriations until maturity.
Upon Nuveen Advisory's recommendation, during temporary defensive periods
and in order to keep a Fund's cash fully invested, including the period during
which the net proceeds of the offering are being invested, a Fund may invest up
to 100% of its net assets in short-term investments including high quality,
short-term securities that may be either tax-exempt or taxable. To the extent a
Fund invests in taxable short-term investments, a Fund will not at such times be
in a position to achieve that portion of its investment objective of seeking
current income exempt from regular federal income tax. For further information,
see, "Short-Term Investments" below.
Obligations of issuers of municipal bonds are subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors, such as the Bankruptcy Reform Act of 1978. In addition, the
obligations of such issuers may become subject to the laws enacted in the future
by Congress, state legislatures or referenda extending the time for payment of
principal or interest, or both, or imposing other constraints upon enforcement
of such obligations or upon municipalities to levy taxes. There is also the
possibility that, as a result of legislation or other conditions, the power or
ability of any issuer to pay, when due, the principal of and interest on its
municipal bonds may be materially affected.
Each Fund also may invest up to 10% of its net assets in securities of
other open or closed-end investment companies that invest primarily in municipal
bonds of the type in which the Fund may invest directly. The Fund will generally
select obligations which may not be redeemed at the option of the issuer for
approximately seven to nine years.
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Short-Term Investments
Short-Term Taxable Fixed Income Securities
For temporary defensive purposes or to keep cash on hand fully invested, a
Fund may invest up to 100% of its total assets in cash equivalents and short-
term taxable fixed-income securities, although each Fund intends to invest in
taxable short-term investments only in the event that suitable tax-exempt short-
term investments are not available at reasonable prices and yields. Short- term
taxable fixed income investments are defined to include, without limitation, the
following:
(1) U.S. government securities, including bills, notes and bonds
differing as to maturity and rates of interest that are either issued or
guaranteed by the U.S. Treasury or by U.S. government agencies or
instrumentalities. U.S. government agency securities include securities
issued by (a) the Federal Housing Administration, Farmers Home
Administration, Export-Import Bank of the United States, Small Business
Administration, and the Government National Mortgage Association, whose
securities are supported by the full faith and credit of the United States;
(b) 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 C to this
Statement of Additional Information.
Factors Pertaining to Specific States
Factors pertaining to Arizona are set forth in Appendix D-1; factors
pertaining to California are set forth in Appendix D-2; factors pertaining to
Connecticut are set forth in Appendix D-3; factors pertaining to Maryland are
set forth in Appendix D-4; factors pertaining to Massachusetts are set forth in
Appendix D-5; factors pertaining to Missouri are set forth in Appendix D-6;
factors pertaining to North Carolina are set forth in Appendix D-7; and factors
pertaining to Virginia are set forth in Appendix D-8.
OTHER INVESTMENT POLICIES AND TECHNIQUES
Illiquid Securities
A Fund may invest in illiquid securities (i.e., securities that are not
readily marketable), including, but not limited to, restricted securities
(securities the disposition of which is restricted under the federal securities
laws), securities that may only be resold pursuant to Rule 144A under the
Securities Act of 1933, as amended (the "Securities Act"); and repurchase
agreements with maturities in excess of seven days.
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Restricted securities may be sold only in privately negotiated transactions
or in a public offering with respect to which a registration statement is in
effect under the Securities Act. Where registration is required, the Fund may
be obligated to pay all or part of the registration expenses and a considerable
period may elapse between the time of the decision to sell and the time a Fund
may be permitted to sell a security under an effective registration statement.
If, during such a period, adverse market conditions were to develop, a Fund
might obtain a less favorable price than that which prevailed when it decided to
sell. Illiquid securities will be priced at a fair value as determined in good
faith by the Board of Trustees or its delegate.
Portfolio Trading and Turnover Rate
Portfolio trading may be undertaken to accomplish the investment objectives
of a Fund in relation to actual and anticipated movements in interest rates. In
addition, a security may be sold and another of comparable quality purchased at
approximately the same time to take advantage of what Nuveen Advisory believes
to be a temporary price disparity between the two securities. Temporary price
disparities between two comparable securities may result from supply and demand
imbalances where, for example, a temporary oversupply of certain bonds may cause
a temporarily low price for such bonds, as compared with other bonds of like
quality and characteristics. A Fund may also engage to a limited extent in
short-term trading consistent with its investment objectives. Securities may be
sold in anticipation of a market decline (a rise in interest rates) or purchased
in anticipation of a market rise (a decline in interest rates) and later sold,
but the Fund will not engage in trading solely to recognize a gain.
Subject to the foregoing, a Fund will attempt to achieve its investment
objectives by prudent selection of municipal bonds with a view to holding them
for investment. While there can be no assurance thereof, each Fund anticipates
that its annual portfolio turnover rate will generally not exceed 100%.
However, the rate of turnover will not be a limiting factor when a Fund deems it
desirable to sell or purchase securities. Therefore, depending upon market
conditions, the annual portfolio turnover rate of a Fund may exceed 100% in
particular years.
Other Investment Companies
Each Fund may invest in securities of other open or closed-end investment
companies that invest primarily in municipal bonds of the types in which the
Fund may invest directly. A Fund generally expects to invest in other
investment companies either during periods when it has large amounts of
uninvested cash, such as the period shortly after the Fund receives the proceeds
of the offering of its Common Shares or MuniPreferred Shares, or during periods
when there is a shortage of attractive, high-yielding municipal bonds available
in the market. As a stockholder in an investment company, a Fund will bear its
ratable share of that investment company's expenses and would remain subject to
payment of a Fund's management, advisory and administrative fees with respect to
assets so invested. Common Shareholders would therefore be subject to
duplicative expenses to the extent a Fund invests in other investment companies.
Nuveen Advisory will take expenses into account when evaluating the investment
merits of an investment in the investment company relative to available
municipal bond investments. In addition, the securities of other investment
companies may also be leveraged and will therefore be subject to the same
leverage risks described herein. As described in each Fund's Prospectus in the
section entitled "Risks," the net asset value and market value of leveraged
shares will be more
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volatile and the yield to shareholders will tend to fluctuate more than the
yield generated by unleveraged shares.
When-Issued and Delayed Delivery Transactions
Each Fund may buy and sell municipal bonds on a when-issued or delayed
delivery basis, making payment or taking delivery at a later date, normally
within 15-45 days of the trade date. On such transactions the payment obligation
and the interest rate are fixed at the time the buyer enters into the
commitment. Beginning on the date a Fund enters into a commitment to purchase
securities on a when-issued or delayed delivery basis, a Fund is required under
rules of the Securities and Exchange Commission to maintain in a separate
account liquid assets, consisting of cash, cash equivalents or liquid securities
having a market value at all times of at least equal to the amount of the
commitment. Income generated by any such assets which provide taxable income for
federal income tax purposes is includable in the taxable income of a Fund. A
Fund may enter into contracts to purchase municipal bonds on a forward basis
(i.e., where settlement will occur more than 60 days from the date of the
transaction) only to the extent that a Fund specifically collateralizes such
obligations with a security that is expected to be called or mature within sixty
days before or after the settlement date of the forward transaction. The
commitment to purchase securities on a when-issued, delayed delivery or forward
basis may involve an element of risk because no interest accrues on the bonds
prior to settlement and at the time of delivery the market value may be less
than cost.
Repurchase Agreements
As temporary investments, each Fund may invest in repurchase agreements. A
repurchase agreement is a contractual agreement whereby the seller of securities
(U.S. Government securities or municipal bonds) agrees to repurchase the same
security at a specified price on a future date agreed upon by the parties. The
agreed-upon repurchase price determines the yield during a Fund's holding
period. Repurchase agreements are considered to be loans collateralized by the
underlying security that is the subject of the repurchase contract. Income
generated from transactions in repurchase agreements will be taxable. See "Tax
Matters" for information relating to the allocation of taxable income between
Common Shares and MuniPreferred Shares, if any. A Fund will only enter into
repurchase agreements with registered securities dealers or domestic banks that,
in the opinion of Nuveen Advisory, present minimal credit risk. The risk to a
Fund is limited to the ability of the issuer to pay the agreed-upon repurchase
price on the delivery date; however, although the value of the underlying
collateral at the time the transaction is entered into always equals or exceeds
the agreed-upon repurchase price, if the value of the collateral declines there
is a risk of loss of both principal and interest. In the event of default, the
collateral may be sold but a Fund might incur a loss if the value of the
collateral declines, and might incur disposition costs or experience delays in
connection with liquidating the collateral. In addition, if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization upon the collateral by a Fund may be delayed or limited. Nuveen
Advisory will monitor the value of the collateral at the time the transaction is
entered into and at all times subsequent during the term of the repurchase
agreement in an effort to determine that such value always equals or exceeds the
agreed-upon repurchase price. In the event the value of the collateral declines
below the repurchase price, Nuveen Advisory will
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demand additional collateral from the issuer to increase the value of the
collateral to at least that of the repurchase price, including interest.
Zero Coupon Bonds
Each Fund may invest in zero coupon bonds. A zero coupon bond is a bond
that does not pay interest for its entire life. The market prices of zero coupon
bonds are affected to a greater extent by changes in prevailing levels of
interest rates and thereby tend to be more volatile in price than securities
that pay interest periodically. In addition, because a Fund accrues income with
respect to these securities prior to the receipt of such interest, it may have
to dispose of portfolio securities under disadvantageous circumstances in order
to obtain cash needed to pay income dividends in amounts necessary to avoid
unfavorable tax consequences.
MANAGEMENT OF THE FUNDS
Trustees and Officers
The management of each Fund, including general supervision of the duties
performed for a Fund under the Management Agreement, is the responsibility of
the Board of Trustees of that Fund. The number of trustees of each
Fund is currently set at seven, one of whom is an "interested" person (as the
term "interested" persons is defined in the Investment Company Act of 1940) and
six of whom are not "interested" persons. None of the trustees who are not
"interested" persons of a Fund has ever been a director or employee of, or
consultant to, Nuveen or its affiliates. The names and business addresses of the
trustees and officers of a Fund and their principal occupations and other
affiliations during the past five years are set forth below, with those trustees
who are "interested" persons of a Fund indicated by an asterisk.
[to be updated by Nuveen]
<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* 51 Chairman of the Chairman since July 1, 1996 of The
333 West Wacker Drive Board, President John Nuveen Company, Nuveen
Chicago, IL 60606 and Trustee Investments, Nuveen Advisory Corp.
and Nuveen Institutional Advisory
Corp.; prior thereto, Executive Vice
President and Director of The John
Nuveen Company and Nuveen Investments;
Director of Nuveen Advisory Corp.
(since 1992) 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); Chief Executive Officer
(since September 1999) of Nuveen
Senior Loan Asset Management Inc.
Robert P. Bremner 60 Trustee Private Investor and Management
3725 Huntington Street, Consultant.
N.W.
Washington, D.C. 20015
Lawrence H. Brown 66 Trustee Retired (August 1989) as Senior Vice
201 Michigan Avenue President of The Northern Trust
Highwood, IL 60040 Company
Anne E. Impellizzeri 67 Trustee President and Chief Executive Officer
3 West 29th Street of Blanton-Peale Institutes of
New York, NY 10001 Religion and Health (since December
1990).
Peter R. Sawers 67 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.
William J. Schneider 56 Trustee Senior Partner and Chief Operating
4000 Miller-Valentine Ct. Officer, Miller-Valentine Partners,
P. O. Box 744 Vice President, Miller-Valentine
Dayton, OH 45401 Group, a development and contract
company; Member Community Advisory
Board, National City Bank, Dayton,
Ohio.
Judith M. Stockdale 52 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 39 Vice President and Senior Vice President and General
333 W. Wacker Drive Assistant Secretary Counsel (since September 1997) and
Chicago, IL 60606 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, Nuveen
Investments, Nuveen Advisory Corp.
and Nuveen Institutional Advisory
Corp., Senior Vice President and
Secretary (since September 1999) of
Nuveen Senior Loan Management Inc.;
prior thereto, Partner in the law firm
of Kirkland & Ellis.
Peter H. D'Arrigo 32 Vice President and Vice President of Nuveen Investments
333 W. Wacker Drive Treasurer (since January 1999), prior thereto,
Chicago, IL 60606 Assistant Vice President (from January
1997); formerly, Associate of Nuveen
Investments; Vice President and
Treasurer (since September 1999) of
Nuveen Senior Loan Asset Management
Inc.; Chartered Financial Analyst.
Michael S. Davern 43 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 55 Vice President Vice President of Nuveen Investments;
333 W. Wacker Drive Vice President (since January 1998) of
Chicago, IL 60606 Nuveen Advisory Corp. and Nuveen
Institutional Advisory Corp.
William M. Fitzgerald 36 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 46 Vice President and Vice President of Nuveen Investments
333 W. Wacker Drive Controller and (since May 1998) The John Nuveen
Chicago, IL 60606 Company, Vice President (since
September 1999) of Nuveen Senior Loan
Management Inc.; Certified Public
Accountant.
J. Thomas Futrell 45 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 37 Vice President Vice President of Nuveen Institutional
333 W. Wacker Drive Advisory Corp. (since March 1998) and
Chicago, IL 60606 Nuveen Advisory Corp. (since January
1997); prior thereto, Vice President
and Portfolio Manager of Flagship
Financial, Inc.
Steven J. Krupa 43 Vice President Vice President of Nuveen Advisory
333 W. Wacker Drive Corp.
Chicago, IL 60606
Larry W. Martin 49 Vice President and Vice President, Assistant Secretary
333 W. Wacker Drive Assistant Secretary and Assistant General Counsel of
Chicago, IL 60606 Nuveen Investments; Vice President and
Assistant Secretary of Nuveen Advisory
Corp. and Nuveen Institutional Advisory
Corp.; Assistant Secretary of the John
Nuveen Company and (since January 1997)
Nuveen Asset Management, Inc.; Vice
President and Assistant Secretary
(since September 1999) of Nuveen Senior
Loan Asset Management Inc.
Edward F. Neild, IV 35 Vice President Vice President (since September 1996),
333 W. Wacker Drive previously Assistant Vice President
Chicago, IL 60606 (since December 1993) of Nuveen
Advisory Corp., Portfolio Manager
prior thereto; Vice President (since
September 1996), previously Assistant
Vice President (since May 1995) of
Nuveen Institutional Advisory Corp.,
Portfolio Manager prior thereto;
Chartered Financial Analyst.
Stephen S. Peterson 43 Vice President Vice President (since September 1997),
333 W. Wacker Drive previously Assistant Vice President
Chicago, IL 60606 (since September 1996), Portfolio
Manager prior thereto
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Name and Address Age Positions and Principal Occupations During
---------------- --- ------------- ----------------------------
Offices with a Past Five Years
-------------- ---------------
Fund
----
<S> <C> <C> <C>
of Nuveen Advisory Corp.; Chartered
Financial Analyst.
Thomas C. Spalding, Jr. 49 Vice President Vice President of Nuveen Advisory
333 W. Wacker Drive Corp. and Nuveen Institutional
Chicago, IL 60606 Advisory Corp.; Chartered Financial
Analyst.
Gifford R. Zimmerman 44 Vice President and Vice President, Assistant Secretary
333 W. Wacker Drive Secretary and Associate General Counsel, formerly
Chicago, IL 60606 Assistant General Counsel, of Nuveen
Investments; Vice President and
Assistant Secretary of Nuveen Advisory
Corp. and Nuveen Institutional Advisory
Corp.; Vice President and Assistant
Secretary of The John Nuveen Company
(since May 1994); Vice President and
Assistant Secretary (since September
1999) of Nuveen Senior Loan Asset
Management Inc.; Chartered Financial
Analyst.
</TABLE>
Peter R. Sawers and Timothy R. Schwertfeger serve as members of the
Executive Committee of the Board of Trustees of each Fund. The Executive
Committee, which meets between regular meetings of the Board of Trustees, is
authorized to exercise all of the powers of the Board of Trustees.
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>
Arizona California Connecticut Maryland
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
-------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
Massachusetts Missouri North Carolina Virginia
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>
--------------------
* Based on the estimated compensation to be earned by the independent
trustees for the period from inception through the end of that Fund's first full
fiscal year for services to the Fund.
**Based on the estimated compensation paid to the trustees for the one year
period ending 12/31/00 for services to the open-end and closed-end funds advised
by Nuveen Advisory.
(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
contractually agreed to reimburse the Fund for fees and expenses in the amounts,
and for the time periods, set forth below:
<TABLE>
<CAPTION>
Year Ending Percentage Year Ending Percentage
Dec. 31, Reimbursed Dec. 31, Reimbursed
------------- ------------ ------------- -------------
<S> <C> <C> <C>
2000* .30% 2006 0.25%
2001 .30% 2007 0.20%
2002 .30% 2008 0.15%
2003 .30% 2009 0.10%
2004 .30% 2010 0.05%
2005 .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 December 31,
2010.
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 American Stock
Exchange, subject to notice of issuance. Each Fund intends to hold annual
meetings of shareholders so long as the Common Shares are listed on a national
securities exchange and such meetings are required as a condition to such
listing.
30
<PAGE>
Shares of closed-end investment companies may frequently trade at prices
lower than net asset value. Shares of closed-end investment companies like the
Fund that invest predominately in investment grade municipal bonds have during
some periods traded at prices higher than net asset value and during other
periods have traded at prices lower than net asset value. There can be no
assurance that Common Shares or shares of other municipal funds will trade at a
price higher than net asset value in the future. Net asset value will be
reduced immediately following the offering after payment of the sales load and
organization and offering expenses. Net asset value generally increases when
interest rates decline, and decreases when interest rates rise, and these
changes are likely to be greater in the case of a fund having a leveraged
capital structure. Whether investors will realize gains or losses upon the sale
of Common Shares will not depend upon a Fund's net asset value but will depend
entirely upon whether the market price of the Common Shares at the time of sale
is above or below the original purchase price for the shares. Since the market
price of a Fund's Common Shares will be determined by factors beyond the control
of a Fund, a Fund cannot predict whether the Common Shares will trade at, below,
or above net asset value or at, below or above the initial public offering
price. Accordingly, the Common Shares are designed primarily for long-term
investors, and investors in the Common Shares should not view a Fund as a
vehicle for trading purposes. See "Repurchase of Fund Shares; Conversion to
Open-End Fund" and a Fund's Prospectus under "MuniPreferred Shares and Leverage"
and "The Fund's Investments--Municipal Bonds."
MuniPreferred Shares
The Declaration authorizes the issuance of an unlimited number of
MuniPreferred Shares, par value $.01 per share, in one or more classes or
series, with rights as determined by the Board of Trustees of a Fund, by action
of the Board of Trustees without the approval of the Common Shareholders.
Each Fund's Board of Trustees has indicated its intention to authorize an
offering of MuniPreferred Shares (representing approximately 35% of a Fund's
capital immediately after the time the MuniPreferred Shares are issued) within
approximately one to three months after completion of the offering of Common
Shares, subject to market conditions and to the Board's continuing belief that
leveraging a Fund's capital structure through the issuance of MuniPreferred
Shares is likely to achieve the benefits to the Common Shareholders described in
this Statement of Additional Information. Although the terms of the
MuniPreferred Shares, including their dividend rate, voting rights, liquidation
preference and redemption provisions, will be determined by the Board of
Trustees (subject to applicable law and a Fund's Declaration) if and when it
authorizes a MuniPreferred Shares offering, each Board has stated that the
initial series of MuniPreferred Shares would likely pay cumulative dividends at
relatively shorter-term periods (such as 7 days); by providing for the periodic
redetermination of the dividend rate through an auction or remarketing
procedure. The Board of Trustees of each Fund has indicated that the
liquidation preference, preference on distribution, voting rights and redemption
provisions of the MuniPreferred Shares will likely be as stated below.
Limited Issuance of MuniPreferred Shares. Under the 1940 Act, the Fund
could issue MuniPreferred Shares with an aggregate liquidation value of up to
one-half of the value of the Fund's total net assets, measured immediately after
issuance of the MuniPreferred Shares. "Liquidation value" means the original
purchase price of the shares being liquidated plus any accrued and unpaid
dividends. In addition, the Fund is not permitted to declare any cash dividend
or other distribution on its Common Shares unless the liquidation value of the
MuniPreferred shares is less than one-half of the value of the Fund's total net
assets (determined after deducting the amount of such dividend or distribution)
immediately after the distribution. If the Fund sells all the Common Shares and
MuniPreferred Shares discussed in this Prospectus, the liquidation value of the
MuniPreferred Shares is expected to be approximately 35% of the value of the
Fund's total net assets. The Fund intends to purchase or redeem MuniPreferred
Shares, if necessary, to keep that fraction below one-half.
Distribution Preference. The MuniPreferred Shares have complete priority
over the Common Shares as to distribution of assets.
31
<PAGE>
Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of a Fund, holders of
MuniPreferred Shares will be entitled to receive a preferential liquidating
distribution (expected to equal the original purchase price per share plus
accumulated and unpaid dividends thereon, whether or not earned or declared)
before any distribution of assets is made to holders of Common Shares. After
payment of the full amount of the liquidating distribution to which they are
entitled, holders of MuniPreferred Shares will not be entitled to any further
participation in any distribution of assets by a Fund. A consolidation or
merger of a Fund with or into any Massachusetts business trust or corporation or
a sale of all or substantially all of the assets of a Fund shall not be deemed
to be a liquidation, dissolution or winding up of a Fund.
Voting Rights. In connection with any issuance of MuniPreferred Shares, a
Fund must comply with Section 18(i) of the 1940 Act which requires, among other
things, that MuniPreferred Shares be voting shares and have equal voting rights
with Common Shares. Except as otherwise indicated in this Statement of
Additional Information and except as otherwise required by applicable law,
holders of MuniPreferred Shares will vote together with Common Shareholders as a
single class.
In connection with the election of a Fund's trustees, holders of
MuniPreferred Shares, voting as a separate class, will be entitled to elect two
of a Fund's trustees, and the remaining trustees shall be elected by Common
Shareholders and holders of MuniPreferred Shares, voting together as a single
class. In addition, if at any time dividends on a Fund's outstanding
MuniPreferred Shares shall be unpaid in an amount equal to two full years'
dividends thereon, the holders of all outstanding MuniPreferred Shares, voting
as a separate class, will be entitled to elect a majority of a Fund's trustees
until all dividends in arrears have been paid or declared and set apart for
payment.
The affirmative vote of the holders of a majority of a Fund's outstanding
MuniPreferred Shares of any class or series, as the case may be, voting as a
separate class, will be required to, among other things (1) take certain actions
which would affect the preferences, rights, or powers of such class or series or
(2) authorize or issue any class or series ranking prior to the MuniPreferred
Shares. Except as may otherwise be required by law, (1) the affirmative vote of
the holders of at least two-thirds of a Fund's MuniPreferred Shares outstanding
at the time, voting as a separate class, will be required to approve any
conversion of a Fund from a closed-end to an open-end investment company and (2)
the affirmative vote of the holders of at least two-thirds of the outstanding
MuniPreferred Shares, voting as a separate class, shall be required to approve
any plan of reorganization (as such term is used in the 1940 Act) adversely
affecting such shares, provided however, that such separate class vote shall be
a majority vote if the action in question has previously been approved, adopted
or authorized by the affirmative vote of two-thirds of the total number of
Trustees fixed in accordance with the Declaration or the By-laws. The
affirmative vote of the holders of a majority of the outstanding MuniPreferred
Shares, voting as a separate class, shall be required to approve any action not
described in the preceding sentence requiring a vote of security holders under
Section 13(a) of the 1940 Act including, among other things, changes in a Fund's
investment objectives or changes in the investment restrictions described as
fundamental policies under "Investment Objectives and Policies--Investment
Restrictions." The class or series vote of holders of MuniPreferred Shares
described
32
<PAGE>
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 American Stock Exchange, or (b) impair a Fund's status as
a regulated investment company under the Code (which would make a Fund a taxable
entity, causing a Fund's income to be taxed at the corporate level in addition
to the taxation of shareholders who receive dividends from a Fund) or as a
registered closed-end investment company under the 1940 Act; (2) a Fund would
not be able to liquidate portfolio securities in an orderly manner and
consistent with a Fund's investment objectives and policies in order to
repurchase shares; or (3) there is, in the Board's judgment, any (a) material
legal action or proceeding instituted or threatened challenging such
transactions or otherwise materially adversely affecting a Fund, (b) general
suspension of or limitation on prices for trading securities on the American
Stock Exchange, (c) declaration of a banking moratorium by Federal or state
authorities or any suspension of payment by United States or state banks in
which the Fund invests, (d) material limitation affecting a Fund or the issuers
of its portfolio securities by Federal or state authorities on the extension of
credit by lending institutions or on the exchange of
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foreign currency, (e) commencement of war, armed hostilities or other
international or national calamity directly or indirectly involving the United
States, or (f) other event or condition which would have a material adverse
effect (including any adverse tax effect) on a Fund or its shareholders if
shares were repurchased. The Board of Trustees of each Fund may in the future
modify these conditions in light of experience.
Conversion to an open-end company would require the approval of the holders
of at least two-thirds of a Fund's Common Shares and MuniPreferred Shares
outstanding at the time, voting together as a single class, and of the holders
of at least two-thirds of a Fund's MuniPreferred Shares outstanding at the time,
voting as a separate class, provided however, that such separate class vote
shall be a majority vote if the action in question has previously been approved,
adopted or authorized by the affirmative vote of two-thirds of the total number
of trustees fixed in accordance with the Declaration or By-laws. See the
Prospectus under "Description of Shares--Certain Provisions in the Declaration
of Trust" for a discussion of voting requirements applicable to conversion of a
Fund to an open-end company. If a Fund converted to an open-end company, it
would be required to redeem all MuniPreferred Shares then outstanding, and a
Fund's Common Shares would no longer be listed on the American Stock Exchange.
Shareholders of an open-end investment company may require the company to redeem
their shares on any business day (except in certain circumstances as authorized
by or under the 1940 Act) at their net asset value, less such redemption charge,
if any, as might be in effect at the time of redemption. In order to avoid
maintaining large cash positions or liquidating favorable investments to meet
redemptions, open-end companies typically engage in a continuous offering of
their shares. Open-end companies are thus subject to periodic asset in-flows and
out-flows that can complicate portfolio management. The Board of Trustees of
each Fund may at any time propose conversion of the Fund to an open-end company
depending upon their judgment as to the advisability of such action in light of
circumstances then prevailing.
The repurchase by a Fund of its shares at prices below net asset value will
result in an increase in the net asset value of those shares that remain
outstanding. However, there can be no assurance that share repurchases or
tenders at or below net asset value will result in a Fund's shares trading at a
price equal to their net asset value. Nevertheless, the fact that a Fund's
shares may be the subject of repurchase or tender offers at net asset value from
time to time, or that a Fund may be converted to an open-end company, may reduce
any spread between market price and net asset value that might otherwise exist.
In addition, a purchase by a Fund of its Common Shares will decrease the
Fund's total assets which would likely have the effect of increasing the Fund's
expense ratio. Any purchase by a Fund of its Common Shares at a time when
MuniPreferred Shares are outstanding will increase the leverage applicable to
the outstanding Common Shares then remaining. See each Fund's Prospectus under
"Risks--Concentration Risk" and "Risks--Leverage Risk."
Before deciding whether to take any action if a Fund's Common Shares trade
below net asset value, the Board of that Fund would consider all relevant
factors, including the extent and duration of the discount, the liquidity of the
Fund's portfolio, the impact of any action that might be taken on the Fund or
its shareholders and market considerations. Based on these considerations, even
if a Fund's shares should trade at a discount, the Board of Trustees may
determine that, in the interest of the Fund and its shareholders, no action
should be taken.
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TAX MATTERS
Federal Income Tax Matters
The following discussion of federal income tax matters is based upon the
advice of Bell, Boyd & Lloyd LLC, special counsel to each Fund.
Each Fund intends to qualify under Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code"), for tax treatment as a regulated
investment company. 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. However, any loss on the sale or
exchange of a Common Share that has been held for six months or less will be
disallowed to the extent an exempt-interest dividend has been paid with respect
to such Common Share. Generally, a Common Shareholder's gain or loss will be
long-term gain or loss if the shares have been held for more than one year.
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%. The maximum long-term capital gains rate will decrease from 20%
to 18% for capital assets that have been held for more than five years and whose
holding periods begin after December 31, 2000. Because of the limitations on
itemized deductions and the deduction for personal exemptions applicable to
higher income taxpayers, the effective tax rate may be higher in certain
circumstances.
All or a portion of a sales charge paid in purchasing Common Shares cannot
be taken into account for purposes of determining gain or loss on the redemption
or exchange of such shares within 90 days after their purchase to the extent
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 D-1; tax
matters pertaining to California are set forth in Appendix D-2; tax matters
pertaining to Connecticut are set forth in Appendix D-3; tax matters pertaining
to Maryland are set forth in Appendix D-4; tax matters pertaining to
Massachusetts are set forth in Appendix D-5; tax matters pertaining to Missouri
are set forth in Appendix D-6; tax matters pertaining to North Carolina are set
forth in Apppendix D-7; and tax matters pertaining to Virginia are set forth in
Appendix D-8.
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, Maryland,
Massachusetts, Missouri, North Carolina and Virginia municipal bonds can provide
double tax-free income (exempt from both regular federal and state income taxes)
for residents of those states. Because a Fund expects that a substantial portion
of its investments will pay interest that is taxable under the federal
alternative minimum tax, the Fund may not be a suitable investment for
shareholders that are subject to the federal alternative minimum tax.
A Fund may quote certain performance-related information and may compare
certain aspects of its portfolio and structure to other substantially similar
closed-end funds as categorized by Lipper, Inc. ("Lipper"), Morningstar or other
independent services. Comparison of a Fund to an alternative investment should
be made with consideration of differences in features and expected performance.
A Fund may obtain data from sources or reporting services, such as Bloomberg
Financial ("Bloomberg") and Lipper, that a Fund believes to be generally
accurate.
Past performance is not indicative of future results. At the time Common
Shareholders sell their shares, they may be worth more or less than their
original investment.
See Appendix E for additional performance related and comparative information.
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EXPERTS
The Statement of Net Assets of each Fund as of _________________ appearing
in this Statement of Additional Information has been audited by Ernst & Young
LLP, 223 South Wacker Drive, Chicago, Illinois 60606, independent auditors, as
set forth in their report thereon appearing elsewhere herein, and is included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing. Ernst & Young LLP provides accounting and auditing
services to each Fund.
ADDITIONAL INFORMATION
Registration Statements on Form N-2, including amendments thereto, relating
to the shares of each Fund offered hereby, have been filed by each Fund with the
Securities and Exchange Commission (the "Commission"), Washington, D.C. Each
Fund's Prospectus and this Statement of Additional Information do not contain
all of the information set forth in the Registration Statements, including any
exhibits and schedules thereto. For further information with respect to a Fund
and the shares offered hereby, reference is made to that Fund's Registration
Statement. Statements contained in a Fund's Prospectus and this Statement of
Additional Information as to the contents of any contract or other document
referred to are not
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necessarily complete and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statements,
each such statement being qualified in all respects by such reference. Copies of
the Registration Statements may be inspected without charge at the Commission's
principal office in Washington, D.C., and copies of all or any part thereof may
be obtained from the Commission upon the payment of certain fees prescribed by
the Commission.
REPORT OF INDEPENDENT AUDITORS
To the Board of Trustees and Shareholder
Nuveen Arizona Dividend Advantage Municipal Fund
[TO COME]
NUVEEN ARIZONA DIVIDEND ADVANTAGE MUNICIPAL FUND
FINANCIAL STATEMENTS
[TO COME]
REPORT OF INDEPENDENT AUDITORS
To the Board of Trustees and Shareholder
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
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Nuveen Connecticut Dividend Advantage Municipal Fund
[TO COME]
NUVEEN CONNECTICUT DIVIDEND ADVANTAGE MUNICIPAL FUND
FINANCIAL STATEMENTS
[TO COME]
REPORT OF INDEPENDENT AUDITORS
To the Board of Trustees and Shareholder
Nuveen Maryland Dividend Advantage Municipal Fund
[TO COME]
NUVEEN MARYLAND DIVIDEND ADVANTAGE MUNICIPAL FUND
FINANCIAL STATEMENTS
[TO COME]
REPORT OF INDEPENDENT AUDITORS
To the Board of Trustees and Shareholder
Nuveen Massachusetts Dividend Advantage Municipal Fund
[TO COME]
NUVEEN MASSACHUSETTS DIVIDEND ADVANTAGE MUNICIPAL FUND
FINANCIAL STATEMENTS
[TO COME]
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REPORT OF INDEPENDENT AUDITORS
To the Board of Trustees and Shareholder
Nuveen Missouri Dividend Advantage Municipal Fund
[TO COME]
NUVEEN MISSOURI 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]
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<PAGE>
NUVEEN NORTH CAROLINA DIVIDEND ADVANTAGE MUNICIPAL FUND
FINANCIAL STATEMENTS
[TO COME]
REPORT OF INDEPENDENT AUDITORS
To the Board of Trustees and Shareholder
Nuveen Virginia Dividend Advantage Municipal Fund
[TO COME]
NUVEEN VIRGINIA DIVIDEND ADVANTAGE MUNICIPAL FUND
FINANCIAL STATEMENTS
[TO COME]
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APPENDIX A
Ratings of Investments
Standard & Poor's Corporation--A brief description of the applicable Standard &
Poor's Corporation ("S&P") rating symbols and their meanings (as published by
S&P) follows:
A Standard & Poor's issue credit rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial obligation,
a specific class of financial obligations, or a specific financial program. It
takes into consideration the creditworthiness of guarantors, insurers, or other
forms of credit enhancement on the obligation. The issue credit rating is not a
recommendation to purchase, sell, or hold a financial obligation, inasmuch as it
does not comment as to market price or suitability for a particular investor.
Issue credit ratings are based on current information furnished by the obligors
or obtained by Standard & Poor's from other sources it considers reliable.
Standard & Poor's does not perform an audit in connection with any credit rating
and may, on occasion, rely on unaudited financial information. Credit ratings
may be changed, suspended, or withdrawn as a result of changes in, or
unavailability of, such information, or based on other circumstances.
Issue credit ratings can be either long term or short term. Short-term ratings
are generally assigned to those obligations considered short term in the
relevant market. In the U.S., for example, that means obligations with an
original maturity of no more than 365 days - including commercial paper.
Short-term ratings are also used to indicate the creditworthiness of an obligor
with respect to put features on long-term obligations. The result is a dual
rating, in which the short-term ratings address the put feature, in addition to
the usual long-term rating. Medium-term notes are assigned long-term ratings.
Long-term Issue Credit Ratings
Issue credit ratings are based in varying degrees, on the following
considerations:
1. Likelihood of payment - capacity and willingness of the obligor
to meet its financial commitment on an obligation in accordance
with the terms of the obligation;
2. Nature of and provisions of the obligation; and
3. Protection afforded by, and relative position of, the obligation
in the event of bankruptcy, reorganization, or other arrangement
under the laws of bankruptcy and other laws affecting creditors'
rights.
The issue ratings definitions are expressed in terms of default risk. As such,
they pertain to senior obligations of an entity. Junior obligations are
typically rated lower than senior obligations, to reflect the lower priority in
bankruptcy, as noted above.
AAA
An obligation rated 'AAA' has the highest rating assigned by Standard & Poor's.
The obligor's capacity to meet its financial
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commitment on the obligation is extremely strong.
AA
An obligation rated `AA' differs from the highest-rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
A
An obligation rated `A' is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet it
financial commitment on the obligation is still strong.
BBB
An obligation rated `BBB' exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to
lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
BB, B, CCC, CC, And C
Obligations rated `BB', `B', `CCC', `CC', and `C' are regarded as having
significant speculative characteristics. `BB' indicates the least degree of
speculation and `C' the highest. While such obligations will likely have
some quality and protective characteristics, these may be outweighed by
large uncertainties or major exposures to adverse conditions.
BB
An obligation rated `BB' is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions, which
could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
B
An obligation rated `B' is more vulnerable to nonpayment than obligations
rated `BB', but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or
economic conditions will likely impair the obligor's capacity or
willingness to meet its financial commitment on the obligation.
CCC
An obligation rated `CCC' is currently vulnerable to nonpayment and is
dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation. In the
event of adverse business, financial, or economic conditions, the obligor
is not likely to have the capacity to meet its financial commitment on the
obligation.
CC
An obligation rated `CC' is currently highly vulnerable to nonpayment.
C
A-2
<PAGE>
The `C' rating may be used to cover a situation where a bankruptcy petition has
been filed or similar action has been taken, but payments on this obligation are
being continued.
D
An obligation rated `D' is in payment default. The `D' rating category is
used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The `D' rating also will be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.
Plus (+) or minus (-) The ratings from `AA' to `CCC' may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
c The `c' subscript is used to provide additional information to investors
that the bank may terminate its obligation to purchase tendered bonds if
the long-term credit rating of the issuer is below an investment-grade
level and/or the issuer's bonds are deemed taxable.
p The letter `p' indicates that the rating is provisional. A provisional
rating assumes the successful completion of the project financed by the
debt being rated and indicates that payment of debt service requirements is
largely or entirely dependent upon the successful, timely completion of the
project. This rating, however, while addressing credit quality subsequent
to completion of the project, makes no comment on the likelihood of or the
risk of default upon failure of such completion. The investor should
exercise his own judgment with respect to such likelihood and risk.
* Continuance of the ratings is contingent upon Standard & Poor's receipt of
an executed copy of the escrow agreement or closing documentation
confirming investments and cash flows.
r The `r' highlights derivative, hybrid, and certain other obligations that
Standard & Poor's believes may experience high volatility or high
variability in expected returns as a result of noncredit risks. Examples of
such obligations are securities with principal or interest return indexed
to equities, commodities, or currencies; certain swaps and options; and
interest-only and principal-only mortgage securities. The absence of an `r'
symbol should not be taken as an indication that an obligation will exhibit
no volatility or variability in total return.
N.R. Not rated.
Debt obligations of issuers outside the United States and its territories
are rated on the same basis as domestic corporate and municipal issues. The
ratings measure the creditworthiness of the obligor but do not take into
account currency exchange and related uncertainties.
Bond Investment Quality Standards Under present commercial bank regulations
issued by the Comptroller of the Currency, bonds rated in the top four
categories (`AAA', `AA', `BBB', commonly known as investment-grade ratings)
generally are regarded as eligible for bank investment. Also, the laws of
various states governing legal investments impose certain rating or other
standards for obligations eligible for investment by savings banks, trust
companies, insurance companies, and fiduciaries in general.
Short-Term Issue Credit Ratings
Notes
A Standard & Poor's note ratings reflects the liquidity factors and market
access risks unique to notes. Notes due in three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment:
. Amortization schedule -- the larger the final maturity relative to other
maturities, the more likely it will be treated as a note; and
. Source of payment -- the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note.
Note rating symbols are as follows:
SP-1 Strong capacity to pay principal and interest. An issue determined to
possess a very strong capacity to pay debt service is given a plus (+)
designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of
the notes.
SP-3 Speculative capacity to pay principal and interest.
A-3
<PAGE>
A note rating is not a recommendation to purchase, sell, or hold a security
inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in or unavailability of such
information or based on other circumstances.
Commercial Paper
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into several categories, ranging from `A-1' for the highest
quality obligations to `D' for the lowest. These categories are as follows:
A-1 A short-term obligation rated `A-1' is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial commitment
on the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's capacity
to meet its financial commitment on these obligations is extremely strong.
A-2 A short-term obligation rated `A-2' is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to
meet its financial commitment on the obligation is satisfactory.
A-3 A short-term obligation rated `A-3' exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity of the obligor to meet its
financial commitment on the obligation.
B A short-term obligation rated `B' is regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet
its financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet
its financial commitment on the obligation.
C A short-term obligation rated `C' is currently vulnerable to nonpayment and
is dependent upon favorable business, financial, and economic conditions
for the obligor to meet its financial commitment on the obligation.
D A short-term obligation rated `D' is in payment default. The `D' rating
category is used when payments on an obligation are not made on the date
due even if the applicable grace period has not expired, unless Standard &
Poor's believes that such payments will be made during such grace period.
The `D' rating also will be used upon the filing of a bankruptcy petition
or the taking of a similar action if payments on an obligation are
jeopardized.
A commercial rating is not a recommendation to purchase, sell, or hold a
security inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in or unavailability of such
information or based on other circumstances.
A-4
<PAGE>
Moody's Investors Service, Inc.--A brief description of the applicable Moody's
Investors Service, Inc. ("Moody's") rating symbols and their meanings (as
published by Moody's) follows:
Municipal Bonds
Aaa Bonds which are rated `Aaa' are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
Aa Bonds which are rated `Aa' are judged to be of high quality by all
standards. Together with the `Aaa' group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in `Aaa' securities or
fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long-term risks appear somewhat
larger than in `Aaa' securities.
A Bonds which are rated `A' possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa Bonds which are rated `Baa' are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba Bonds which are rated `Ba' are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B Bonds which are rated `B' generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
Caa Bonds which are rated `Caa' are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds which are rated `Ca' represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds which are rated `C' are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
A-5
<PAGE>
Issues that are secured by escrowed funds held in trust, reinvested in direct,
non-callable U.S. government obligations or non-callable obligations
unconditionally guaranteed by the U.S. Government or Resolution Funding
Corporation are identified with a # (hatchmark) symbol, e.g., #Aaa.
Con. (...): Bonds for which the security depends upon the completion of some
act or the fulfillment of some condition are rated conditionally.
These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation
experience, (c) rentals which begin when facilities are completed,
or (d) payments to which some other limiting condition attaches.
The parenthetical rating denotes probable credit stature upon
completion of construction or elimination of the basis of the
condition.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic
rating classification from Aa through Caa. The modifier 1 indicates
that the obligation ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates a ranking in the lower end of that generic
rating category.
Short-Term Loans
MIG 1/VMIG 1 This designation denotes superior credit quality. Excellent
protection is afforded by established cash flows, highly reliable
liquidity support, or demonstrated broad-based access to the
market for refinancing.
MIG 2/VMIG 2 This designation denotes strong credit quality. Margins of
protection are ample, although not as large as in the preceding
group.
MIG 3/VMIG 3 This designation denotes acceptable credit quality. Liquidity and
cash-flow protection may be narrow, and market access for
refinancing is likely to be less well-established.
SG This designation denotes speculative-grade credit quality. Debt
instruments in this category may lack sufficient margins of
protection.
Commercial Paper
Issuers rated Prime-1 (or related supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will normally be evidenced by the following characteristics:
-- Leading market positions in well-established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structures with moderate reliance on debt
and ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
A-6
<PAGE>
-- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or related supporting institutions) have an acceptable
ability for repayment of senior short-term debt obligations. The effect of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating categories.
Fitch IBCA, Inc.--A brief description of the applicable Fitch IBCA, Inc.
("Fitch") ratings symbols and meanings (as published by Fitch) follows:
Long-Term Credit Ratings
Investment Grade
AAA Highest credit quality. `AAA' ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong
capacity for timely payment of financial commitments. This capacity is
highly unlikely to be adversely affected by foreseeable events.
AA Very high credit quality. `AA' ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A High credit quality. `A' ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher
ratings.
BBB Good credit quality. `BBB' ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances
and in economic conditions are more likely to impair this capacity. This
is the lowest investment-grade category.
Speculative Grade
BB Speculative. `BB' ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change over
time; however, business or
A-7
<PAGE>
financial alternatives may be available to allow financial commitments to
be met. Securities rated in this category are not investment grade.
B Highly speculative. `B' ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent
upon a sustained, favorable business and economic environment.
CCC, CC, C High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A `CC' rating indicates that default of
some kind appears probable. `C' ratings signal imminent default.
DDD, DD, and D Default. The ratings of obligations in this category are based on
their prospects for achieving partial or full recovery in a reorganization
or liquidation of the obligor. While expected recovery values are highly
speculative and cannot be estimated with any precision, the following serve
as general guidelines. `DDD' obligations have the highest potential for
recovery, around 90%-100% of outstanding amounts and accrued interest. `DD'
indicates potential recoveries in the range of 50%-90%, and `D' the lowest
recovery potential, i.e., below 50%. Entities rated in this category have
defaulted on some or all of their obligations. Entities rated `DDD' have
the highest prospect for resumption of performance or continued operation
with or without a formal reorganization process. Entities rated `DD' and
`D' are generally undergoing a formal reorganization or liquidation
process; those rated `DD' are likely to satisfy a higher portion of their
outstanding obligations, while entities rated `D' have a poor prospect for
repaying all obligations.
Short-Term Credit Ratings
A short-term rating has a time horizon of less than 12 months for most
obligations, or up to three years for U.S. public finance securities, and thus
places greater emphasis on the liquidity necessary to meet financial commitments
in a timely manner.
F1 Highest credit quality. Indicates the strongest capacity for timely payment
of financial commitments; may have an added "+" to denote any exceptionally
strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as in the
case of the higher ratings.
F3 Fair credit quality. The capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could result in
a reduction to non-investment grade.
B Speculative. Minimal capacity for timely payment of financial commitments,
plus vulnerability to near-term adverse changes in financial and economic
conditions.
A-8
<PAGE>
C High default risk. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon a sustained, favorable
business and economic environment.
D Default. Denotes actual or imminent payment default.
Notes:
"+" or "-" may be appended to a rating to denote relative status within major
rating categories. Such suffixes are not added to the `AAA' long-term rating
category, to categories below `CCC', or to short-term ratings other than `F1'.
`NR' indicates that Fitch IBCA does not rate the issuer or issue in question.
`Withdrawn': A rating is withdrawn when Fitch IBCA deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
Rating Watch: Ratings are placed on RatingWatch to notify investors that there
is a reasonable probability of a rating change and the likely direction of such
change. These are designated as "Positive", indicating a potential upgrade,
"Negative", for a potential downgrade, or "Evolving", if ratings may be raised,
lowered or maintained. Rating Watch is typically resolved over a relatively
short period.
A Rating Outlook indicates the direction a rating is likely to move over a one
to two year period. Outlooks may be positive, stable, or negative. A positive or
negative Rating Outlook does not imply a rating change is inevitable. Similarly,
companies whose outlooks are `stable' could be downgraded before an outlook
moves to positive or negative if circumstances warrant such an action.
Occasionally, Fitch may be unable to identify the fundamental trend. In these
cases, the Rating Outlook may be described as evolving.
A-9
<PAGE>
APPENDIX B
TAXABLE EQUIVALENT YIELD 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 [1999]. 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 [1999]. 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 [1999]. 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 [1999]. 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 [1999]. 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.
MISSOURI
<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 Missouri-specific notes from local counsel.] The State Tax Rates
are those for [1999]. 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-4
<PAGE>
NORTH CAROLINA
<TABLE>
<CAPTION>
Federal State Combined
Tax Tax Tax
Single Return Bracket Joint Return Bracket Rate Rate* Rate*
--------------------- -------------------- ------- ----- --------
<S> <C> <C> <C> <C>
</TABLE>
---------------------
* [Insert any North Carolina-specific notes from local counsel.] The State Tax
Rates are those for [1999]. Please note that the table does not reflect (i) any
federal or state limitations on the amounts of allowable itemized deductions,
phase-outs of personal or dependent exemption credits or other allowable
credits, (ii) any local taxes imposed, or (iii) any taxes other than personal
income taxes. The table assumes that federal taxable income is equal to state
income subject to tax, and in cases where more than one state rate falls within
a federal bracket, the highest state rate corresponding to the highest income
within that federal bracket is used.
B-5
<PAGE>
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-6
<PAGE>
* [Insert any Virginia-specific notes from local counsel.] The State Tax Rates
are those for [1999]. 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-7
<PAGE>
APPENDIX C
HEDGING STRATEGIES AND RISKS
Set forth below is additional information regarding the various defensive
hedging techniques.
Futures and Index Transactions
Financial Futures
A financial future is an agreement between two parties to buy and sell a
security for a set price on a future date. They have been designed by boards of
trade which have been designated "contracts markets" by the Commodity Futures
Trading Commission ("CFTC").
The purchase of financial futures is for the purpose of hedging a Fund's
existing or anticipated holdings of long-term debt securities. When a Fund
purchases a financial future, it deposits in cash or securities an "initial
margin" of between 1% and 5% of the contract amount. Thereafter, the Fund's
account is either credited or debited on a daily basis in correlation with the
fluctuation in price of the underlying future or other requirements imposed by
the exchange in order to maintain an orderly market. A Fund must make
additional payments to cover debits to its account and has the right to withdraw
credits in excess of the liquidity, a Fund may close out its position at any
time prior to expiration of the financial future by taking an opposite position.
At closing a final determination of debits and credits is made, additional cash
is paid by or to a Fund to settle the final determination and a Fund realizes a
loss or gain depending on whether on a net basis it made or received such
payments.
The sale of financial futures is for the purpose of hedging a Fund's
existing or anticipated holdings of long-term debt securities. For example, if
a Fund owns long-term bonds and interest rates were expected to increase, it
might sell financial futures. If interest rates did increase, the value of
long-term bonds in a Fund's portfolio would decline, but the value of a Fund's
financial futures would be expected to increase at approximately the same rate
thereby keeping the net asset value of a Fund from declining as much as it
otherwise would have.
Among the risks associated with the use of financial futures by a Funds as
a hedging device, perhaps the most significant is the imperfect correlation
between movements in the price of the financial futures and movements in the
price of the debt securities which are the subject of the hedge.
Thus, if the price of the financial future moves less or more than the
price of the securities which are the subject of the hedge, the hedge will not
be fully effective. To compensate for this imperfect correlation, a Fund may
enter into financial futures in a greater dollar amount than the dollar amount
of the securities being hedged if the historical volatility of the prices of
such securities has been greater than the historical volatility of the financial
futures. Conversely, a Fund may enter into fewer financial futures if the
historical volatility of the price of the securities being hedged is less than
the historical volatility of the financial futures.
C-1
<PAGE>
The market prices of financial futures may also be affected by factors
other than interest rates. One of these factors is the possibility that rapid
changes in the volume of closing transactions, whether due to volatile markets
or movements by speculators, would temporarily distort the normal relationship
between the markets in the financial future and the chosen debt securities. In
these circumstances as well as in periods of rapid and large price movements. A
Fund might find it difficult or impossible to close out a particular
transaction.
Options on Financial Futures
Each Fund may also purchase put or call options on financial futures which
are traded on a U.S. Exchange or board of trade and enter into closing
transactions with respect to such options to terminate an existing position.
Currently, options can be purchased with respect to financial futures on U.S.
Treasury Bonds on The Chicago Board of Trade. The purchase of put options on
financial futures is analogous to the purchase of put options by a Fund on its
portfolio securities to hedge against the risk of rising interest rates. As
with options on debt securities, the holder of an option may terminate his
position by selling an option of the same Fund. There is no guarantee that such
closing transactions can be effected.
Index Contracts
Index Futures
A tax-exempt bond index which assigns relative values to the tax-exempt
bonds included in the index is traded on the Chicago Board of Trade. The index
fluctuates with changes in the market values of all tax-exempt bonds included
rather than a single bond. An index future is a bilateral agreement pursuant to
which two parties agree to take or make delivery of an amount of cash-rather
than any security-equal to specified dollar amount times the difference between
the index value at the close of the last trading day of the contract and the
price at which the index future was originally written. Thus, an index future
is similar to traditional financial futures except that settlement is made in
cash.
Index Options
Each Fund may also purchase put or call options on U.S. Government or tax-
exempt bond index futures and enter into closing transactions with respect to
such options to terminate an existing position. Options on index futures are
similar to options on debt instruments except that an option on an index future
gives the purchaser the right, in return for the premium paid, to assume a
position in an index contract rather than an underlying security at a specified
exercise price at any time during the period of the option. Upon exercise of
the option, the delivery of the futures position by the writer of the option to
the holder of the option will be accompanied by delivery of the accumulated
balance of the writer's futures margin account which represents the amount by
which the market price of the index futures contract, at exercise, is less than
the exercise price of the option on the index future.
Bond index futures and options transactions would be subject to risks
similar to transactions in financial futures and options thereon as described
above. No series will enter into transactions in index or financial futures or
related options unless and until, in the Adviser's opinion, the market for such
instruments has developed sufficiently.
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APPENDIX D-1
Factors Pertaining to Arizona
As described above, except to the extent the Fund invests in temporary
investments, the Fund will invest substantially all of its net assets in Arizona
municipal bonds. The Fund is therefore susceptible to political, economic or
regulatory factors affecting issuers of Arizona municipal bonds. The
information set forth below is derived from sources that are generally available
to investors. The information is provided as general information intended to
give a recent historical description and is not intended to indicate future or
continuing trends in the financial or other positions of Arizona.
General Economic Conditions. Progressing from its traditional reliance on
a cyclical construction industry, Arizona's economic base is maturing and
diversifying. One of the nation's leaders in employment growth, Arizona has
been among the top five employment growth states 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 D-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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<PAGE>
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 D-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 D-4
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 D-5
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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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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<PAGE>
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 D-6
Factors Pertaining to Missouri
[TO COME]
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Missouri Tax Matters
The following is based upon the advice of _______, special Missouri counsel
to the Fund.
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APPENDIX D-7
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.
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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.
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APPENDIX D-8
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.
D-8-1
<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.
D-8-2
<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
D-8-3
<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.
D-8-4
<PAGE>
APPENDIX E
PERFORMANCE RELATED AND COMPARATIVE INFORMATION
A Fund may be a suitable investment for a shareholder that is thinking of
adding bond investments to his portfolio to balance the appreciated stocks that
the shareholder is holding. Municipal bonds can provide double, tax-free
income (exempt from both regular federal and state income taxes) for residents
of that state. Because each Fund expects that a substantial portion of its
investments will pay interest that is taxable under the federal alternative
minimum tax, the Fund may not be a suitable investment for shareholders that are
subject to the federal alternative minimum tax.
Each Fund may quote certain performance-related information and may compare
certain aspects of its portfolio and structure to other substantially similar
closed-end funds as categorized by Lipper, Inc. ("Lipper"), Morningstar or other
independent services. Comparison of a Fund to an alternative investment should
be made with consideration of differences in features and expected performance.
A Fund may obtain data from sources or reporting services, such as Bloomberg
Financial ("Bloomberg") and Lipper, that the Fund believes to be generally
accurate.
E-1
<PAGE>
Past performance is not indicative of future results. At the time Common
Shareholders sell their shares, they may be worth more or less than their
original investment.
Higher Dividends Often Correlate with Higher share Prices
[Scatter chart appears here (share prices of similar closed-end funds):
<TABLE>
<CAPTION>
Annualized 20-Oct-00
Dividend Closing Price
---------- -------------
<S> <C>
0.768 14.38
0.869 13.63
0.816 13.88
0.684 11
0.492 8.25
0.600 11.56
0.720 13.69
0.840 13.38
0.720 12.06
0.804 13.69
0.768 12.44
0.768 12.94
0.792 12.19
0.792 13.13
0.684 11.13
0.804 12.94
0.816 13.81
0.516 9
0.780 13.38
0.948 15.19
0.924 14.69
0.768 12.5
0.816 14.13
0.780 14.06
0.756 13.44
0.744 13.19
0.840 14.06
0.804 13.88
0.924 14.81
0.816 14.31
0.948 15.44
0.912 14.88
0.792 13.5
0.876 14.5
0.792 13.75
0.773 13.63
0.840 14
0.996 16
0.456 8
0.828 13.94
0.888 14.75]
</TABLE>
Market price is affected by many factors, including market interest rates,
income tax rates, the common shares' net asset value and dividend stability, the
portfolio's duration, call protection and credit quality, analyst
recommendations, and other market factors. Any of these factors individually or
collectively may, at any given time, be as or more important to market price
than annualized dividend rates. A positive correlation does not necessarily mean
that higher dividends cause or result in higher market prices, and you should
not assume that any particular level of dividends will result in any particular
market price. In addition, the positive correlation between dividends and market
price of this group of funds does not necessarily mean that every fund in the
group exhibits a positive correlation between dividend and market price, and it
is possible that the Fund may not exhibit such a correlation. There can be no
asssurance that the correlation suggested by the above data will continue in the
future.
E-2
<PAGE>
Nuveen Arizona Dividend Advantage Municipal Fund ________ Common Shares
Nuveen California Dividend Advantage Municipal Fund 2 ______ Common Shares
Nuveen Connecticut Dividend Advantage Municipal Fund ________ Common Shares
Nuveen Maryland Dividend Advantage Municipal Fund ________ Common Shares
Nuveen Massachusetts Dividend Advantage Municipal Fund ________ Common Shares
Nuveen Missouri Dividend Advantage Municipal Fund ________ Common Shares
Nuveen North Carolina Dividend Advantage Municipal Fund ________ Common Shares
Nuveen Virginia Dividend Advantage Municipal Fund ________ Common Shares
-------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
-------------------------------------------
___________, 2000
<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 LLC.*
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. Powers of Attorney.
___________________
* 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 $ 396
National Association of Securities Dealers, Inc. fees *
Printing and engraving expenses *
Legal Fees *
American Stock Exchange listing fees *
Accounting expenses *
Blue Sky filing fees and expenses *
Transfer agent fees *
Miscellaneous expenses *
---------
Total *
</TABLE>
C-2
<PAGE>
------------
*To be completed by amendment. Expenses may be reduced pursuant to the
contractual agreement of Nuveen Investments to pay (i) all Registrant's
organizational expenses and (ii) offering costs (other than the
sales load) that exceed $.03 per Common Share.
Item 27: Persons Controlled by or under Common Control with Registrant
Not applicable.
Item 28: Number of Holders of Securities
At November __, 2000
<TABLE>
<CAPTION>
Number of
Title of Class Record Holders
-------------- --------------
<S> <C>
Common Shares, $.01 par value 0
</TABLE>
Item 29: Indemnification
Section 4 of Article XII of the Registrant's Declaration of Trust provides
as follows:
Subject to the exceptions and limitations contained in this Section 4,
every person who is, or has been, a Trustee, officer, employee or agent of the
Trust, including persons who serve at the request of the Trust as directors,
trustees, officers, employees or agents of another organization in which the
Trust has an interest as a shareholder, creditor or otherwise (hereinafter
referred to as a "Covered Person"), shall be indemnified by the Trust to the
fullest extent permitted by law against liability and against all expenses
reasonably incurred or paid by him in connection with any claim, action, suit or
proceeding in which he becomes involved as a party or otherwise by virtue of his
being or having been such a Trustee, director, officer, employee or agent and
against amounts paid or incurred by him in settlement thereof.
No indemnification shall be provided hereunder to a Covered Person:
(a) against any liability to the Trust or its Shareholders by reason of a final
adjudication by the court or other body before which the proceeding was
brought that he engaged in willful misfeasance, bad faith, gross negligence
or reckless disregard of the duties involved in the conduct of his office;
(b) with respect to any matter as to which he shall have been finally
adjudicated not to have acted in good faith in the reasonable belief that
his action was in the best interests of the Trust; or
C-3
<PAGE>
(c) in the event of a settlement or other disposition not involving a final
adjudication (as provided in paragraph (a) or (b)) and resulting in a
payment by a Covered Person, unless there has been either a determination
that such Covered Person did not engage in willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the
conduct of his office by the court or other body approving the settlement
or other disposition or a reasonable determination, based on a review of
readily available facts (as opposed to a full trial-type inquiry), that he
did not engage in such conduct:
(i) by a vote of a majority of the Disinterested Trustees acting on
the matter (provided that a majority of the Disinterested Trustees
then in office act on the matter); or
(ii) by written opinion of independent legal counsel.
The rights of indemnification herein provided may be insured against by
policies maintained by the Trust, shall be severable, shall not affect any other
rights to which any Covered Person may now or hereafter be entitled, shall
continue as to a person who has ceased to be such a Covered Person and shall
inure to the benefit of the heirs, executors and administrators of such a
person. Nothing contained herein shall affect any rights to indemnification to
which Trust personnel other than Covered Persons may be entitled by contract or
otherwise under law.
Expenses of preparation and presentation of a defense to any claim, action,
suit or proceeding subject to a claim for indemnification under this Section 4
shall be advanced by the Trust prior to final disposition thereof upon receipt
of an undertaking by or on behalf of the recipient to repay such amount if it is
ultimately determined that he is not entitled to indemnification under this
Section 4, provided that either:
(a) such undertaking is secured by a surety bond or some other appropriate
security or the Trust shall be insured against losses arising out of any
such advances; or
(b) a majority of the Disinterested Trustees acting on the matter (provided
that a majority of the Disinterested Trustees then in office act on the
matter) or independent legal counsel in a written opinion shall determine,
based upon a review of the readily available facts (as opposed to a full
trial-type inquiry), that there is reason to believe that the recipient
ultimately will be found entitled to indemnification.
As used in this Section 4, a "Disinterested Trustee" is one (x) who is not
an Interested Person of the Trust (including, 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 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 3 day of
November, 2000.
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 November 3, 2000
-------------------- (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
November 3, 2000
Robert P. Bremmer Trustee
Lawrence H. Brown Trustee
Anne E. Impellizzeri Trustee
Peter R. Sawers Trustee
William J. Schneider Trustee
Judith M. Stockdale Trustee
</TABLE>
Original powers of attorney authorizing Alan G. Berkshire and Gifford R.
Zimmerman, among others, to execute this Registration Statement, and Amendments
thereto, for each of the trustees of Registrant on whose behalf this
Registration Statement is filed, have been executed and filed as an exhibit.
<PAGE>
INDEX TO EXHIBITS
<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 LLC.*
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. Powers of Attorney.
</TABLE>
___________________
* To be filed by amendment.
