As filed with the Securities and Exchange Commission on February 22, 2001
================================================================================
1933 Act File No. 333-49242
1940 Act File No. 811-10197
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
[X] Pre-Effective Amendment No. 2
[ ] Post-Effective Amendment No. __________
and
[x] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[X] Amendment No. 2
Nuveen California Dividend Advantage Municipal Fund 2
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 Cynthia G. Cobden
Bell, Boyd & Lloyd LLC Morgan, Lewis & Bockius LLP Simpson Thacher & Bartlett
70 W. Madison St. 1800 M Street, N.W. 425 Lexington, Avenue
Chicago, IL 60602 Washington, D.C. 20036 New York, NY 10017
Approximate Date of Proposed Public Offering:
As soon as practicable after the effective date of this Registration Statement
____________________________
If any of the securities being registered on this form are offered on a
delayed or continuous basis in reliance on Rule 415 under the Securities Act of
1933, other than securities offered in connection with a dividend reinvestment
plan, check the following box. [_]
It is proposed that this filing will become effective (check appropriate
box)
[X] when declared effective pursuant to section 8(c)
____________________________
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
=====================================================================================================================
Proposed Maximum
Title of Securities Amount Proposed Maximum Aggregate Offering Amount of
Being Registered Being Registered Offering Price Per Unit Price(1) Registration Fee(2)
------------------------------------------------------------------------------------------------------------------------
Common Shares, $.01 per value 3,000,000 Shares $15.00 $45,000,000 $11,250
========================================================================================================================
(1) Estimated solely for the purpose of calculating the registration fee.
(2) $375 of which previously has been paid.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such dates as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED FEBRUARY 22, 2001
PROSPECTUS
3,000,000 Shares
Nuveen California Dividend Advantage
[NUVEEN LOGO] Municipal Fund 2
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 California
income tax; and
. to enhance portfolio value relative to the municipal bond market by
investing in tax-exempt municipal bonds that the Fund's investment adviser
believes are underrated or undervalued or that represent municipal market
sectors that are undervalued.
Portfolio Contents. Under normal market conditions, the Fund will invest its
net assets in a portfolio of municipal bonds that are exempt from regular
federal and California income taxes. Under normal market conditions, the Fund
expects to be fully invested in such tax-exempt municipal bonds. Through March
31, 2002, the Fund may invest in municipal bonds that are exempt from regular
federal income tax but not from California 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.
No Prior History. Because the Fund is newly organized, its common shares have
no history of public trading. Shares of closed-end investment companies
frequently trade at a discount from their net asset value. This risk may be
greater for investors expecting to sell their shares in a relatively short
period after completion of the public offering. The common shares have been
approved for listing on the American Stock Exchange, subject to notice of
issuance. The trading or "ticker" symbol of the common shares is expected to be
"NVX".
----------
Investing in common shares involves certain risks. See "Risks" beginning on
page 17.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
----------
Per Share Total
--------- -------
Public Offering Price $15.00 $
Sales Load $ 0.675 $
Proceeds to the Fund $14.325 $
The underwriters expect to deliver the common shares to purchasers on or
about , 2001.
----------
Salomon Smith Barney Nuveen Investments
A.G. Edwards & Sons, Inc. Prudential Securities
UBS Warburg LLC
Crowell, Weedon & Co. First Union Securities, Inc.
Tucker Anthony Sutro Capital Markets Wedbush Morgan Securities
, 2001
You should read the Prospectus, which contains important information about
the Fund, before deciding whether to invest and retain it for future reference.
A Statement of Additional Information, dated , 2001, containing
additional information about the Fund, has been filed with the Securities and
Exchange Commission and is incorporated by reference in its entirety into this
Prospectus. You may request a free copy of the Statement of Additional
Information, the table of contents of which is on page 35 of this Prospectus,
by calling (800) 257-8787 or by writing to the Fund, or obtain a copy (and
other information regarding the Fund) from the Securities and Exchange
Commission web site (http://www.sec.gov).
The Fund's common shares do not represent a deposit or obligation of, and
are not guaranteed or endorsed by, any bank or other insured depository
institution, and are not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board or any other government agency.
The underwriters named in this Prospectus may purchase up to
additional common shares from the Fund under certain circumstances.
2
You should rely only on the information contained or incorporated by
reference 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 contained in this Prospectus is accurate as of any date other than
the date on the front of this Prospectus.
------------
TABLE OF CONTENTS
Page
----
Prospectus Summary......................................................... 4
Summary of Fund Expenses................................................... 9
The Fund................................................................... 11
Use of Proceeds............................................................ 11
The Fund's Investments..................................................... 11
MuniPreferred Shares and Leverage.......................................... 14
Risks...................................................................... 17
How the Fund Manages Risk.................................................. 20
Management of the Fund..................................................... 22
Net Asset Value............................................................ 23
Distributions.............................................................. 23
Dividend Reinvestment Plan................................................. 24
Description of Shares...................................................... 25
Certain Provisions in the Declaration of Trust............................. 27
Repurchase of Fund Shares; Conversion to Open-End Fund..................... 28
Tax Matters................................................................ 29
Other Matters.............................................................. 31
Underwriting............................................................... 32
Custodian and Transfer Agent............................................... 34
Legal Opinions............................................................. 34
Table of Contents for the Statement of Additional Information.............. 35
------------
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
PROSPECTUS SUMMARY
This is only a summary. You should review the more detailed information
contained in the Prospectus and in the Statement of Additional Information.
The Fund............... Nuveen California Dividend Advantage Municipal Fund 2
(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 California. 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"), A.G. Edwards & Sons, Inc., Prudential
Securities Incorporated, UBS Warburg LLC, Crowell,
Weedon & Co., First Union Securities, Inc., Tucker
Anthony Incorporated and Wedbush Morgan Securities.
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
California income tax and enhance portfolio value
relative to the municipal bond market by investing in
tax-exempt municipal bonds that the Fund's investment
adviser believes are underrated or undervalued or
that represent municipal 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 California income taxes. Under normal market
conditions, the Fund expects to be fully invested in
such tax-exempt municipal bonds. Through March 31,
2002, the Fund may invest in municipal bonds that are
exempt from regular federal income tax but not from
California income tax ("Out of State Bonds"),
provided that no more than 10% of the Fund's
investment income during that time, as measured on
the date of purchase of such bond, may be derived
from Out of State Bonds. The Fund will invest at
least 80% of its net assets in municipal bonds that
at the time of investment are investment grade
quality. Investment grade quality bonds are bonds
rated within the four highest grades (Baa or BBB or
better by Moody's Investor Service, Inc. ("Moody's"),
Standard & Poor's Corporation ("S&P") or Fitch IBCA,
Inc. ("Fitch")), or bonds that are unrated but judged
to be of comparable quality by the Fund's investment
adviser. The Fund may invest up to 20% of its net
assets in municipal bonds that, at the time of
investment, are rated Ba/BB or B by Moody's, S&P or
Fitch or that
4
are unrated but judged to be of comparable quality
by the Fund's investment adviser. Bonds of below
investment grade quality are regarded as having
predominately speculative characteristics with
respect to capacity to pay interest and repay
principal, and are commonly referred to as junk
bonds. The Fund cannot assure you that it will
attain its investment objectives. See "The Fund's
Investments."
Special
Considerations........ If the Fund invests in Out of State Bonds, a portion
of your dividends will be subject to California
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,
distributions of ordinary taxable income (including
any net short-term capital gain) will be taxable to
shareholders as ordinary income, and capital gain
dividends will be subject to capital gains taxes.
See "Tax Matters."
Proposed Offering of
MuniPreferred(R)
Shares............... Subject to market conditions approximately one to
three months after completion of this offering, the
Fund intends to offer preferred shares of
beneficial interest ("MuniPreferred Shares")
representing approximately 35% of the Fund's
capital after their issuance. The issuance of
MuniPreferred Shares will leverage your investment
in Common Shares. Leverage involves special risks.
There is no assurance that the Fund will issue
MuniPreferred Shares or that, if issued, the Fund's
leveraging strategy will be successful. See
"Risks--Leverage Risk." The money the Fund obtains
by selling the MuniPreferred Shares will be
invested in long-term municipal bonds, which
generally will 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 net assets (including assets attributable to
any
5
MuniPreferred Shares that may be outstanding), with
lower fee levels for assets that exceed $125
million. Nuveen Advisory has contractually agreed
to reimburse the Fund for fees and expenses in the
amount of .30% of average daily net assets of the
Fund for the first five full years of the Fund's
operations (through March 31, 2006), and for a
declining amount for an additional five years
(through March 31, 2011). Nuveen Advisory is a
wholly owned subsidiary of Nuveen. See "Management
of the Fund."
Distributions......... Commencing with the Fund's first dividend, the Fund
intends to make regular monthly cash distributions
to you at a level rate based on the projected
performance of the Fund. The Fund's ability to
maintain a level dividend rate will depend on a
number of factors, including dividends payable on
the MuniPreferred Shares. As portfolio and market
conditions change, the rate of dividends on the
Common Shares and the Fund's dividend policy could
change. Over time, the Fund will distribute all of
its net investment income (after it pays accrued
dividends on any outstanding MuniPreferred Shares).
In addition, at least annually, the Fund intends to
distribute net capital gain and taxable ordinary
income, if any, to you so long as the net capital
gain 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 "NVX."
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
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 California Issuers. The Fund's
policy of investing primarily in municipal
obligations of issuers located in California makes
the Fund more susceptible to adverse economic,
political or regulatory occurrences affecting such
issuers.
Leverage Risk. The use of leverage through the
issuance of MuniPreferred Shares creates an
opportunity for increased Common Share net income,
but also creates special risks for Common
Shareholders. There is no assurance that the Fund's
leveraging strategy will be successful. It is
anticipated that MuniPreferred
7
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. See "The Fund's
Investments." In addition, the Fund must satisfy
certain asset diversification rules in order to
qualify as a regulated investment company for
federal income tax purposes.
Anti-takeover Provisions. The Fund's Declaration of
Trust (the "Declaration") includes provisions that
could limit the ability of other entities or
persons to acquire control of the Fund or convert
the Fund to open-end status. The provisions of the
Declaration described above could have the effect
of depriving the Common Shareholders of
opportunities to sell their Common Shares at a
premium over the then current market price of the
Common Shares.
8
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.
Shareholder Transaction Expenses
Sales Load Paid by You (as a percentage of offering
price)............................................... 4.50%
Dividend Reinvestment Plan Fees....................... None(1)
Percentage of Net
Assets Attributable
to Common Shares(2)
-------------------
Annual Expenses
Management Fees......................................... 1.00%
Other Expenses.......................................... .31%
----
Total Annual Expenses................................... 1.31%
Fee and Expense Reimbursement (Years 1-5)............... (.46%)(3)
----
Total Net Annual Expenses (Years 1-5)................... .85%(3)
----
--------
(1) You will be charged a $2.50 service charge and pay brokerage charges if
you direct the Plan Agent to sell your Common Shares held in a dividend
reinvestment account.
(2) Stated as percentages of the Fund's total net assets, and again assuming
the issuance of MuniPreferred Shares in an amount equal to 35% of the
Fund's capital (after their issuance), the Fund's expenses would be
estimated to be as follows:
Percentage
of Total
Net Assets
----------
Annual Expenses
Management Fees................................................. .65%
Other Expenses.................................................. .20%
----
Total Annual Expenses........................................... .85%
Fees and Expense Reimbursement (Years 1-5)...................... (.30%)(3)
----
Total Net Annual Expenses (Years 1-5)........................... .55%(3)
----
(3) Nuveen Advisory has contractually agreed to reimburse the Fund for fees
and expenses in the amount of .30% of average daily net assets for the
first 5 full years of the Fund's operations, .25% of average daily 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 1.31% of average daily net assets attributable to
Common Shares and .85% of average daily net assets. Nuveen has agreed to
pay (i) all organizational expenses and (ii) offering costs (other than
sales load) that exceed $0.03 per Common Share (.20% of offering price).
The purpose of the table above is to help you understand all fees and
expenses that you, as a Common Shareholder, would bear directly or indirectly.
The expenses shown in the table are based on estimated amounts for the Fund's
first year of operations and assume that the Fund issues 6,000,000 Common
Shares. See "Management of the Fund" and "Dividend Reinvestment Plan."
9
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/)
1 Year 3 Years 5 Years 10 Years(/2/)
------ ------- ------- -------------
$53 $71 $90 $160
The example should not be considered a representation of future expenses.
Actual expenses may be higher or lower.
--------
(1) The example assumes that the estimated Other Expenses set forth in the
Annual Expenses table are accurate, that fees and expenses increase as
described in note 2 below and that all dividends and distributions are
reinvested at net asset value. Actual expenses may be greater or less than
those assumed. Moreover, the Fund's actual rate of return may be greater
or less than the hypothetical 5% return shown in the example. The expenses
you would pay, based on the Fund's expenses stated as a percentage of the
Fund's total net assets (assuming the issuance of MuniPreferred Shares in
an amount equal to 35% of the Fund's capital after their issuance) and
otherwise on the assumptions in the example would be: 1 year $50; 3 years
$62; 5 years $74; and 10 years $121.
(2) Assumes reimbursement of fees and expenses of .25% of average daily 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 March 31, 2011. See "Management of
the Fund--Investment Management Agreement."
10
THE FUND
The Fund is a recently organized, non-diversified, closed-end management
investment company registered under the 1940 Act. The Fund was organized as a
Massachusetts business trust on June 1, 1999, pursuant to a Declaration of
Trust governed by the laws of the Commonwealth of Massachusetts. As a newly
organized entity, the Fund has no operating history. The Fund's principal
office is located at 333 West Wacker Drive, Chicago, Illinois 60606, and its
telephone number is (800) 257-8787. The Fund is designed to provide tax
benefits to investors who are residents of California.
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 California
income tax; and
. to enhance portfolio value relative to the municipal bond market by
investing in tax-exempt municipal bonds that Nuveen Advisory believes
are underrated or undervalued or that represent municipal market sectors
that are undervalued.
Underrated municipal bonds are those whose ratings do not, in Nuveen
Advisory's opinion, reflect their true creditworthiness. Undervalued municipal
bonds are bonds that, in Nuveen Advisory's opinion, are worth more than the
value assigned to them in the marketplace. Nuveen Advisory may at times
believe that bonds associated with a particular municipal market sector (for
example, electric utilities), or issued by a particular municipal issuer, are
undervalued. Nuveen Advisory may purchase such a bond for the Fund's portfolio
because it represents a market sector or issuer that Nuveen Advisory considers
undervalued, even if the value of the particular bond appears to be consistent
with the value of similar bonds. Municipal bonds of particular types (e.g.,
hospital bonds, industrial revenue bonds or bonds issued by a particular
municipal issuer) may be undervalued because there is a temporary excess of
supply in that market sector, or because of a general decline in the market
price of municipal bonds of the market sector for reasons that do not apply to
the particular municipal bonds that are considered undervalued. The Fund's
investment in underrated or undervalued municipal bonds will be based on
Nuveen Advisory's belief that their yield is higher than that available on
bonds bearing equivalent levels of interest rate risk, credit risk and other
forms of risk, and that their prices will ultimately rise (relative to the
market) to reflect their true value. The Fund attempts to increase its
portfolio value relative to the municipal bond market by prudent selection of
municipal bonds regardless of the direction the market may move. Any capital
appreciation realized by the Fund will generally result in the distribution of
taxable capital gains to Common Shareholders.
11
Under normal market conditions, the Fund will invest its net assets in a
portfolio of municipal bonds that are exempt from regular federal and
California income taxes. Under normal market conditions, the Fund expects to
be fully invested (at least 95% of its assets) in such tax-exempt municipal
bonds. After the completion of the offering through March 31, 2002, 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 California 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 California. The Fund may also invest in securities of
other open- or closed-end investment companies that invest primarily in
municipal bonds of the types in which the Fund may invest directly. See "--
Other Investment Companies" and "--Initial Portfolio Composition."
The Fund may purchase municipal bonds that are additionally secured by
insurance, bank credit agreements, or escrow accounts. The credit quality of
companies which provide such credit enhancements will affect the value of
those securities. Although the insurance feature reduces certain financial
risks, the premiums for insurance and the higher market price paid for insured
obligations may reduce the Fund's income. Insurance generally will be obtained
from insurers with a claims-paying ability rated Aaa by Moody's or AAA by S&P
or Fitch. The insurance feature does not guarantee the market value of the
insured obligations or the net asset value of the Common Shares.
Upon Nuveen Advisory's recommendation, during temporary defensive periods
and in order to keep the Fund's cash fully invested, including the period
during which the net proceeds of the offering are being invested, the Fund may
invest up to 100% of its net assets in short-term investments including high
quality, short-term securities that may be either tax-exempt or taxable. The
Fund intends to invest in taxable short-term investments only in the event
that suitable tax-exempt short-term investments are not available at
reasonable prices and yields. Investment in taxable short-term investments
would result in a portion of your dividends being subject to regular federal
and California income taxes. For more information, see the Statement of
Additional Information.
The Fund cannot change its investment objectives without the approval of
the holders of a "majority of the outstanding" Common Shares and MuniPreferred
Shares voting together as a single
12
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
gain dividends 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 California, a city in California, or a political subdivision of
such State or city, and pay interest that, in the opinion of bond counsel to
the issuer (or on the basis of other authority believed by Nuveen Advisory to
be reliable), is exempt from regular federal and California income taxes,
although the interest may be subject to the federal alternative minimum tax.
The Fund may invest in municipal bonds issued by United States territories
(such as Puerto Rico or Guam) that are exempt from regular federal and
California income taxes. Through March 31, 2002, 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.
13
When-Issued and Delayed Delivery Transactions
The Fund may buy and sell municipal bonds on a when-issued or delayed
delivery basis, making payment or taking delivery at a later date, normally
within 15 to 45 days of the trade date. This type of transaction may involve
an element of risk because no interest accrues on the bonds prior to
settlement and, since bonds are subject to market fluctuations, the value of
the bonds at time of delivery may be less (or more) than cost. A separate
account of the Fund will be established with its custodian consisting of cash,
cash equivalents, or liquid securities having a market value at all times at
least equal to the amount of the commitment.
Other Investment Companies
The Fund may invest up to 10% of its net assets in securities of other
open- or closed-end investment companies that invest primarily in municipal
bonds of the types in which the Fund may invest directly. The Fund generally
expects to invest in other investment companies either during periods when it
has large amounts of uninvested cash, such as the period shortly after the
Fund receives the proceeds of the offering of its Common Shares or
MuniPreferred Shares, or during periods when there is a shortage of
attractive, high-yielding municipal bonds available in the market. As a
stockholder in an investment company, the Fund will bear its ratable share of
that investment company's expenses, and would remain subject to payment of the
Fund's advisory and administrative fees with respect to assets so invested.
Common Shareholders would therefore be subject to duplicative expenses to the
extent the Fund invests in other investment companies. Nuveen Advisory will
take expenses into account when evaluating the investment merits of an
investment in the investment company relative to available municipal bond
investments. In addition, the securities of other investment companies may
also be leveraged and will therefore be subject to the same leverage risks
described herein. As described in the Prospectus in the section entitled
"Risks," the net asset value and market value of leveraged shares will be more
volatile and the yield to shareholders will tend to fluctuate more than the
yield generated by unleveraged shares.
Initial Portfolio Composition
If current market conditions persist, the Fund expects that approximately
95% of its initial portfolio will consist of investment grade quality
municipal bonds, rated as such at the time of investment, meaning that such
bonds are rated by national rating agencies within the four highest grades or
are unrated but judged to be of comparable quality by Nuveen Advisory
(approximately 50% in Aaa/AAA; 5% in Aa/AA; 25% in A; 15% in Baa/BBB and 5% in
BB or B). The Fund will generally select obligations which may not be redeemed
at the option of the issuer for approximately seven to nine years from the
date of purchase by the Fund. See the Statement of Additional Information
under "Other Investment Policies and Techniques--Portfolio Trading and
Turnover Rate." Subject to market availability, the Fund would likely seek to
invest approximately 5% of its initial portfolio in municipal bonds that are,
at the time of investment, either rated below investment grade or that are
unrated but judged to be of comparable quality by Nuveen Advisory. See "--
Investment Objectives and Policies."
MUNIPREFERRED SHARES AND LEVERAGE
Subject to market conditions, approximately one to three months after the
completion of the offering of the Common Shares, the Fund intends to offer
MuniPreferred Shares representing approximately 35% of the Fund's capital
immediately after the issuance of the MuniPreferred Shares.
14
The MuniPreferred Shares have complete priority upon distribution of assets
over the Common Shares. The issuance of MuniPreferred Shares will leverage the
Common Shares. Leverage involves special risks. There is no assurance that the
Fund's leveraging strategy will be successful. Although the timing and other
terms of the offering of the MuniPreferred Shares will be determined by the
Fund's Board of Trustees, the Fund expects to invest the proceeds of the
MuniPreferred Shares offering in long-term municipal bonds. The MuniPreferred
Shares will pay dividends based on shorter-term rates (which would be
redetermined periodically by an auction process). So long as the Fund's
portfolio is invested in securities that provide a higher rate of return than
the dividend rate of the MuniPreferred Shares (after taking expenses into
consideration), the leverage will cause you to receive a higher current rate
of return than if the Fund were not leveraged.
Changes in the value of the Fund's bond portfolio (including bonds bought
with the proceeds of the MuniPreferred Shares offering) will be borne entirely
by the Common Shareholders. If there is a net decrease (or increase) in the
value of the Fund's investment portfolio, the leverage will decrease (or
increase) the net asset value per Common Share to a greater extent than if the
Fund were not leveraged. During periods in which the Fund is using leverage,
the fees paid to Nuveen Advisory for advisory services will be higher than if
the Fund did not use leverage because the fees paid will be calculated on the
basis of the Fund's total net assets, including the proceeds from the issuance
of MuniPreferred Shares.
For tax purposes, the Fund is currently required to allocate net capital
gain 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 gain or other taxable income is
realized. If net capital gain 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 gain
or other taxable income (resulting in a higher amount of total dividends), but
received a lower amount of tax-exempt income. If the increase in dividend
payments or the special payments to MuniPreferred Shareholders are not
entirely offset by a reduction in the tax liability of, and an increase in the
tax-exempt dividends received by, the Common Shareholders, the advantage of
the Fund's leveraged structure to Common Shareholders will be reduced.
Under the 1940 Act, the Fund is not permitted to issue preferred shares
unless immediately after such issuance the value of the Fund's total net
assets is at least 200% of the liquidation value of the outstanding preferred
shares (i.e., such liquidation value may not exceed 50% of the Fund's total
net assets). In addition, the Fund is not permitted to declare any cash
dividend or other distribution on its Common Shares unless, at the time of
such declaration, the value of the Fund's total net assets is at least 200% of
such liquidation value. If MuniPreferred Shares are issued, the Fund intends,
to the extent possible, to purchase or redeem MuniPreferred Shares from time
to time to the extent necessary in order to maintain coverage of any
MuniPreferred Shares of at least 200%. If the Fund has MuniPreferred Shares
outstanding, two of the Fund's trustees will be elected by the holders of
MuniPreferred Shares, voting separately as a class. The remaining trustees of
the Fund will be elected by holders of Common Shares and MuniPreferred Shares
voting together as a single class. In the event the Fund failed to pay
15
dividends on MuniPreferred Shares for two years, MuniPreferred Shareholders
would be entitled to elect a majority of the trustees of the Fund.
The Fund may be subject to certain restrictions imposed by guidelines of
one or more rating agencies which may issue ratings for MuniPreferred Shares
issued by the Fund. These guidelines may impose asset coverage or portfolio
composition requirements that are more stringent than those imposed on the
Fund by the 1940 Act. It is not anticipated that these covenants or guidelines
will impede Nuveen Advisory from managing the Fund's portfolio in accordance
with the Fund's investment objectives and policies.
The Fund may also borrow money for repurchase of its shares or as a
temporary measure for extraordinary or emergency purposes, including the
payment of dividends and the settlement of securities transactions which
otherwise might require untimely dispositions of Fund securities.
Assuming that the MuniPreferred Shares will represent approximately 35% of
the Fund's capital and pay dividends at an annual average rate of 3.10%, the
income generated by the Fund's portfolio (net of estimated expenses) must
exceed 1.08% 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 4.95% yield on the Fund's investment
portfolio, net of expenses, and the Fund's currently projected annual
MuniPreferred Share dividend rate of 3.10%. See "Risks" and "MuniPreferred
Shares and Leverage."
Assumed Portfolio Total Return............ (10.00)% (5.00)% 0.00% 5.00% 10.00%
Common Share Total Return................. (17.05)% (9.36)% (1.67)% 6.02% 13.72%
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.
16
RISKS
The net asset value of the Common Shares will fluctuate with and be
affected by, among other things, interest rate risk, credit risk, reinvestment
risk and leverage risk, and an investment in Common Shares will be subject to
market discount risk, inflation risk and municipal bond market risk, each of
which is more fully described below.
Newly Organized. The Fund is a newly organized, non-diversified, closed-end
management investment company and has no operating history.
Market Discount Risk. Shares of closed-end management investment companies
frequently trade at a discount from their net asset value.
Interest Rate Risk. Interest rate risk is the risk that bonds (and the
Fund's net assets) will decline in value because of changes in interest rates.
Generally, municipal bonds will decrease in value when interest rates rise and
increase in value when interest rates decline. This means that the net asset
value of the Common Shares will fluctuate with interest rate changes and the
corresponding changes in the value of the Fund's municipal bond holdings. The
value of the longer-term bonds in which the Fund generally invests fluctuates
more in response to changes in interest rates than does the value of shorter-
term bonds. Conversely, the values of lower-rated and comparable unrated debt
securities are less likely than those of investment grade and comparable
unrated debt securities to fluctuate inversely with changes in interest rates.
Because the Fund will invest primarily in long-term bonds, the Common Share
net asset value and market price per share will fluctuate more in response to
changes in market interest rates than if the Fund invested primarily in
shorter-term bonds. The Fund's use of leverage, as described below, will tend
to increase Common Share interest rate risk.
Credit Risk. Credit risk is the risk that an issuer of a municipal bond
will become unable to meet its obligation to make interest and principal
payments. In general, lower rated municipal bonds carry a greater degree of
risk that the issuer will lose its ability to make interest and principal
payments, which could have a negative impact on the Fund's net asset value or
dividends. The Fund may invest up to 20% of its net assets in municipal bonds
that are rated Ba/BB or B by Moody's, S&P or Fitch or that are unrated but
judged to be of comparable quality by the Fund's investment adviser. Bonds
rated Ba/BB or B are regarded as having predominately speculative
characteristics with respect to capacity to pay interest and repay principal,
and these bonds are commonly referred to as junk bonds. The prices of these
lower grade bonds are more sensitive to negative developments, such as a
decline in the issuer's revenues or a general economic downturn, than are the
prices of higher grade securities.
Concentration Risk. As described above, except to the extent the Fund
invests in temporary investments, the Fund will invest substantially all of
its net assets in California municipal bonds. The Fund is therefore
susceptible to political, economic or regulatory factors affecting issuers of
California municipal bonds. The information set forth below and in the
Statement of Additional Information is derived from sources that are generally
available to investors. The information is intended to give recent historical
description and is not intended to indicate future or continuing trends in the
financial or other positions of California. It should be noted that the
creditworthiness of obligations issued by local California issuers may be
unrelated to the 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.
California's economy is the largest among the 50 states and one of the
largest in the world. The State has a diversified economy with major sectors
in manufacturing, agriculture, services, tourism,
17
international trade and construction. The State has a population of over 34
million, which has been growing at a 1-2% annual rate for several decades.
Gross domestic product of goods and services in the State exceeds $1 trillion.
Personal income was estimated at over $991 billion in 1999. Total employment
is over 15 million.
Since 1994 the California economy has been growing strongly, outpacing the
rest of the nation, with particular strength in high technology manufacturing,
software, exports, services, entertainment and construction. Unemployment is
at its lowest level in three decades. Economic growth remained very strong
through 2000, but is projected to slow in 2001, in response to the national
economic slowdown. California has experienced shortages of and increased
prices for natural gas and electricity, which may also adversely impact the
economy if they result in significant blackouts or other disruptions in power
supplies. In response to the energy difficulties, which have severely weakened
the financial condition of the three investor-owned utility companies serving
most of the State, the State has entered the electricity market to purchase
power on behalf of retail customers. Such purchases will be repaid from
customer payments and long-term revenue bond debt.
The State of California has received significant tax revenues in recent
years, deriving from the strong economy and stock market. General Fund
revenues are estimated at $71.9 billion in FY 1999-2000 and $77 billion in FY
2000-01. Revenue growth is expected to slow compared to the last two years, to
about $79.4 billion in 2001-02, in response to the decline in the stock
markets and slower economic growth; State revenues could be adversely impacted
even more if the economy is weaker than expected in 2001. A large part of the
State's annual budget is mandated by constitutional guarantees (such as for
education funding and debt service) and caseload requirements for health and
welfare programs. State General Obligations bonds are, as of February 1, 2001,
rated "Aa2" by Moody's, "AA" by S&P, and "AA" by Fitch although S&P placed the
ratings on CreditWatch in January, 2001.
Many local government agencies, particularly counties, continue to face
budget constraints due to limited taxing powers and mandated expenditures for
health, welfare and public safety, among other factors. California State and
local governments are limited in their ability to levy and raise property
taxes and other forms of taxes, fees or assessments, and in their ability to
appropriate their tax revenues, by a series of constitutional amendments,
enacted by voter initiative since 1978. Individual local governments may also
have local initiatives which affect their fiscal flexibility.
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. See the Statement of
Additional Information for a further discussion of factors affecting municipal
bonds in California.
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
18
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 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
19
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. See "The Fund's Investments." In addition,
the Fund must satisfy certain asset diversification rules in order to qualify
as a regulated investment company for federal income tax purposes.
HOW THE FUND MANAGES RISK
Investment Limitations
The Fund has adopted certain investment limitations designed to limit
investment risk and maintain portfolio diversification. These limitations are
fundamental and may not be changed without the approval of the holders of a
majority of the outstanding Common Shares and, if issued, MuniPreferred Shares
voting together as a single class, and the approval of the holders of a
majority of the MuniPreferred Shares voting as a separate class. Among other
restrictions, the Fund may not invest more than 25% of total Fund assets in
securities of issuers in any one industry, except that this limitation does
not apply to municipal bonds backed by the assets and revenues of governments
or political subdivisions of governments.
20
The Fund may become subject to guidelines which are more limiting than the
investment restriction set forth above in order to obtain and maintain ratings
from Moody's or S&P on the MuniPreferred Shares that it intends to issue. The
Fund does not anticipate that such guidelines would have a material adverse
effect on the Fund's Common Shareholders or the Fund's ability to achieve its
investment objectives. See "Investment Objectives" in the Statement of
Additional Information for information about these guidelines and a complete
list of the fundamental and non-fundamental investment policies of the Fund.
Quality Investments
The Fund will invest at least 80% of its net assets in bonds of investment
grade quality at the time of investment. Investment grade quality means that
such bonds are rated by national rating agencies within the four highest
grades (Baa or BBB or better by Moody's, S&P or Fitch) or are unrated but
judged to be of comparable quality by Nuveen Advisory.
Limited Issuance of MuniPreferred Shares
Under the 1940 Act, the Fund could issue MuniPreferred Shares having a
total liquidation value (original purchase price of the shares being
liquidated plus any accrued and unpaid dividends) of up to one-half of the
value of the total net assets of the Fund. If the total liquidation value of
the MuniPreferred Shares was ever more than one-half of the value of the
Fund's total net assets, the Fund would not be able to declare dividends on
the Common Shares until the liquidation value, as a percentage of the Fund's
assets, was reduced. The Fund intends to issue MuniPreferred Shares
representing about 35% of the Fund's total capital immediately after the time
of issuance, if the Fund sells all the Common Shares discussed in this
Prospectus. This higher than required margin of net asset value provides a
cushion against later fluctuations in the value of the Fund's portfolio and
will subject Common Shareholders to less income and net asset value volatility
than if the Fund were more leveraged. The Fund intends to purchase or redeem
MuniPreferred Shares, if necessary, to keep the liquidation value of the
MuniPreferred Shares below one-half of the value of the Fund's total net
assets.
Management of Investment Portfolio and Capital Structure to Limit Leverage
Risk
The Fund may take certain actions if short-term interest rates increase or
market conditions otherwise change (or the Fund anticipates such an increase
or change) and the Fund's leverage begins (or is expected) to adversely affect
Common Shareholders. In order to attempt to offset such a negative impact of
leverage on Common Shareholders, the Fund may shorten the average maturity of
its investment portfolio (by investing in short-term, high quality securities)
or may extend the maturity of outstanding MuniPreferred Shares. The Fund may
also attempt to reduce the leverage by redeeming or otherwise purchasing
MuniPreferred Shares. As explained above under "Risks--Leverage Risk," the
success of any such attempt to limit leverage risk depends on Nuveen
Advisory's ability to accurately predict interest rate or other market
changes. Because of the difficulty of making such predictions, the Fund may
never attempt to manage its capital structure in the manner described above.
If market conditions suggest that additional leverage would be beneficial,
the Fund may sell previously unissued MuniPreferred Shares or MuniPreferred
Shares that the Fund previously issued but later repurchased.
Currently, the Fund may not invest in inverse floating rate securities,
which are securities that pay interest at rates that vary inversely with
changes in prevailing short-term tax-exempt interest rates and which represent
a leveraged investment in an underlying municipal bond. This restriction is a
non-fundamental policy of the Fund that may be changed by vote of the Fund's
Board of Trustees.
21
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 "Investment Adviser."
Nuveen Advisory is responsible for execution of specific investment
strategies and day-to-day investment operations. Nuveen Advisory manages the
Fund using a team of analysts and portfolio managers that focus on a specific
group of funds. William M. Fitzgerald is the portfolio manager of the Fund and
will provide daily oversight for, and execution of, the Fund's investment
activities. Mr. Fitzgerald has been the Managing Director of Nuveen Advisory
since 2000. Prior to that time, he was a Vice President of Nuveen Advisory.
Mr. Fitzgerald has been a portfolio manager for Nuveen Advisory since 1990,
and currently manages investments for twelve Nuveen-sponsored investment
companies.
Nuveen Advisory is a wholly owned subsidiary of Nuveen, 333 West Wacker
Drive, Chicago, Illinois 60606. Founded in 1898, Nuveen and its affiliates
have over $61 billion of net assets under management or surveillance. Nuveen
is a subsidiary of The John Nuveen Company which, in turn, is a majority-owned
subsidiary of The St. Paul Companies, Inc., a publicly-traded company which is
principally engaged in providing property-liability insurance through
subsidiaries.
Investment Management Agreement
Pursuant to an investment management agreement between Nuveen Advisory and
the Fund, the Fund has agreed to pay for the services and facilities provided
by Nuveen Advisory an annual management fee, payable on a monthly basis,
according to the following schedule:
Average Daily Net Assets(/1/) Management Fee
----------------------------- --------------
Up to $125 million......................................... .6500%
$125 million to $250 million............................... .6375%
$250 million to $500 million............................... .6250%
$500 million to $1 billion................................. .6125%
$1 billion to $2 billion................................... .6000%
$2 billion and over........................................ .5750%
--------
(1) Including net assets attributable to MuniPreferred Shares.
22
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 issuing any MuniPreferred Share,
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:
Percentage
Reimbursed
(as a percentage
Year Ending of average daily
March 31 net assets)(/1/)
----------- ----------------
2001(/2/)....... 0.30%
2002............ 0.30%
2003............ 0.30%
2004............ 0.30%
2005............ 0.30%
2006............ 0.30%
Percentage
Reimbursed
(as a percentage
Year Ending of average daily
March 31 net assets)(/1/)
----------- ----------------
2007............ 0.25%
2008............ 0.20%
2009............ 0.15%
2010............ 0.10%
2011............ 0.05%
--------
(1) Including net assets attributable to MuniPreferred Shares.
(2) From the commencement of operations.
Nuveen Advisory has not agreed to reimburse the Fund for any portion of its
fees and expenses beyond March 31, 2011.
NET ASSET VALUE
The Fund's net asset value per share is determined as of the close of
regular session 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
23
Fund consists of all interest income accrued on portfolio assets less all
expenses of the Fund. Expenses of the Fund are accrued each day. Over time,
all the net investment income of the Fund will be distributed. At least
annually, the Fund also intends to distribute net capital gain 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, including any capital gain dividends,
on your Common Shares automatically reinvested by The Chase Manhattan Bank, as
agent for the Common Shareholders (the "Plan Agent"), in additional Common
Shares under the Dividend Reinvestment Plan (the "Plan"). You may elect to
participate in the Plan by completing the Dividend Reinvestment Plan
Application Form. If you do not participate, you will receive all
distributions in cash paid by check mailed directly to you by The Chase
Manhattan Bank as dividend paying agent.
If you decide to participate in the Plan, the number of Common Shares you
will receive will be determined as follows:
(1) If Common Shares are trading at or above net asset value at the time
of valuation, the Fund will issue new shares at the then current market
price; or
(2) If Common Shares are trading below net asset value at the time of
valuation, the Plan Agent will receive the dividend or distribution in cash
and will purchase Common Shares in the open market, on the American Stock
Exchange or elsewhere, for the participants' accounts. It is possible that
the market price for the Common Shares may increase before the Plan Agent
has completed its purchases. Therefore, the average purchase price per
share paid by the Plan Agent may exceed the market price at the time of
valuation, resulting in the purchase of fewer shares than if the dividend
or distribution had been paid in Common Shares issued by the Fund. The Plan
Agent will use all dividends and distributions received in cash to purchase
Common Shares in the open market within 30 days of the dividend payment
date. Interest will not be paid on any uninvested cash payments.
You may withdraw from the Plan at any time by giving written notice to the
Plan Agent. If you withdraw or the Plan is terminated, you will receive a
certificate for each whole share in your account under the Plan and you will
receive a cash payment for any fraction of a share in your account. If you
wish, the Plan Agent will sell your shares and send you the proceeds, minus
brokerage commissions and a $2.50 service fee.
24
The Plan Agent maintains all shareholders' accounts in the Plan and gives
written confirmation of all transactions in the accounts, including
information you may need for tax records. Common Shares in your account will
be held by the Plan Agent in non-certificated form. Any proxy you receive will
include all Common Shares you have received under the Plan.
There is no brokerage charge for reinvestment of your dividends or
distributions in Common Shares. However, all participants will pay a pro rata
share of brokerage commissions incurred by the Plan Agent when it makes open
market purchases.
Automatically reinvesting dividends and distributions does not mean that
you do not have to pay income taxes due upon receiving dividends and
distributions.
The Fund reserves the right to amend or terminate the Plan if in the
judgment of the Board of Trustees the change is warranted. There is no direct
service charge to participants in the Plan; however, the Fund reserves the
right to amend the Plan to include a service charge payable by the
participants. Additional information about the Plan may be obtained from The
Chase Manhattan Bank, P.O. Box 5186, Bowling Green Station, New York, NY
10275-0672 (regular mail) or 4 New York Plaza, 6th Floor, New York, NY 10004
(for overnight courier), (800) 257-8787.
DESCRIPTION OF SHARES
Common Shares
The Declaration authorizes the issuance of an unlimited number of Common
Shares, par value $.01 per share. All Common Shares have equal rights to the
payment of dividends and the distribution of assets upon liquidation. Common
Shares will, when issued, be fully paid and, subject to matters discussed in
"Certain Provisions in the Declaration of Trust," non-assessable, and will
have no pre-emptive or conversion rights or rights to cumulative voting.
Whenever MuniPreferred Shares are outstanding, Common Shareholders will not be
entitled to receive any distributions from the Fund unless all accrued
dividends on MuniPreferred Shares have been paid, and unless asset coverage
(as defined in the 1940 Act) with respect to MuniPreferred Shares would be at
least 200% after giving effect to the distributions. See "--MuniPreferred
Shares" below.
The Common Shares have been approved for listing on the American Stock
Exchange, subject to notice of issuance. The Fund intends to hold annual
meetings of shareholders so long as the Common Shares are listed on a national
securities exchange and such meetings are required as a condition to such
listing.
The Fund's net asset value per share generally increases when interest
rates decline, and decreases when interest rates rise, and these changes are
likely to be greater because the Fund intends to have a leveraged capital
structure. Net asset value will be reduced immediately following the offering
by the amount of the sales load and organization and offering expenses paid by
the Fund. Nuveen has agreed to pay (i) all organizational expenses and (ii)
offering costs (other than sales load) that exceed $0.03 per Common Share. See
"Use of Proceeds."
Unlike open-end funds, closed-end funds like the Fund do not continuously
offer shares and do not provide daily redemptions. Rather, if a shareholder
determines to buy additional Common Shares or sell shares already held, the
shareholder may conveniently do so by trading on the exchange through a broker
or otherwise. Shares of closed-end investment companies may frequently trade
on an exchange at prices lower than net asset value. Shares of closed-end
investment companies like the Fund that
25
invest predominately in investment grade municipal bonds have during some
periods traded at prices higher than net asset value and during other periods
have traded at prices lower than net asset value. Because the market value of
the Common Shares may be influenced by such factors as dividend levels (which
are in turn affected by expenses), call protection, dividend stability,
portfolio credit quality, net asset value, relative demand for and supply of
such shares in the market, general market and economic conditions, and other
factors beyond the control of the Fund, the Fund cannot assure you that Common
Shares will trade at a price equal to or higher than net asset value in the
future. The Common Shares are designed primarily for long-term investors, and
investors in the Common Shares should not view the Fund as a vehicle for
trading purposes. See "MuniPreferred Shares and Leverage" and the Statement of
Additional Information under "Repurchase of Fund Shares; Conversion to Open-
End Fund."
MuniPreferred Shares
The Declaration authorizes the issuance of an unlimited number of
MuniPreferred Shares, par value $.01 per share, in one or more classes or
series, with rights as determined by the Board of Trustees, by action of the
Board of Trustees without the approval of the Common Shareholders.
The Fund's Board of Trustees has indicated its intention to authorize an
offering of MuniPreferred Shares (representing approximately 35% of the Fund's
capital immediately after the time the MuniPreferred Shares are issued)
approximately one to three months after completion of the offering of Common
Shares. Any such decision is subject to market conditions and to the Board's
continuing belief that leveraging the Fund's capital structure through the
issuance of MuniPreferred Shares is likely to achieve the benefits to the
Common Shareholders described in this Prospectus. Although the terms of the
MuniPreferred Shares will be determined by the Board of Trustees (subject to
applicable law and the Fund's Declaration) if and when it authorizes a
MuniPreferred Shares offering, the Board has determined that the MuniPreferred
Shares, at least initially, would likely pay cumulative dividends at rates
determined over relatively shorter-term periods (such as 7 days), by providing
for the periodic redetermination of the dividend rate through an auction or
remarketing procedure. The Board of Trustees has indicated that the preference
on distribution, liquidation preference, voting rights and redemption
provisions of the MuniPreferred Shares will likely be as stated below.
Limited Issuance of MuniPreferred Shares. Under the 1940 Act, the Fund
could issue MuniPreferred Shares with an aggregate liquidation value of up to
one-half of the value of the Fund's total net assets, measured immediately
after issuance of the MuniPreferred Shares. "Liquidation value" means the
original purchase price of the shares being liquidated plus any accrued and
unpaid dividends. In addition, the Fund is not permitted to declare any cash
dividend or other distribution on its Common Shares unless the liquidation
value of the MuniPreferred shares is less than one-half of the value of the
Fund's total net assets (determined after deducting the amount of such
dividend or distribution) immediately after the distribution. If the Fund
sells all the Common Shares and MuniPreferred Shares discussed in this
Prospectus, the liquidation value of the MuniPreferred Shares is expected to
be approximately 35% of the value of the Fund's total net assets. The Fund
intends to purchase or redeem MuniPreferred Shares, if necessary, to keep that
fraction below one-half.
Distribution Preference. The MuniPreferred Shares have complete priority
over the Common Shares as to distribution of assets.
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
26
accumulated and unpaid dividends thereon, whether or not earned or declared)
before any distribution of assets is made to holders of Common Shares.
Voting Rights. MuniPreferred Shares are required to be voting shares and to
have equal voting rights with Common Shares. Except as otherwise indicated in
this Prospectus or the Statement of Additional Information and except as
otherwise required by applicable law, holders of MuniPreferred Shares will
vote together with Common Shareholders as a single class.
Holders of MuniPreferred Shares, voting as a separate class, will be
entitled to elect two of the Fund's trustees. The remaining trustees will be
elected by Common Shareholders and holders of MuniPreferred Shares, voting
together as a single class. In the unlikely event that two full years of
accrued dividends are unpaid on the MuniPreferred Shares, the holders of all
outstanding MuniPreferred Shares, voting as a separate class, will be entitled
to elect a majority of the Fund's trustees until all dividends in arrears have
been paid or declared and set apart for payment. In order for the Fund to take
certain actions or enter into certain transactions, a separate class vote of
holders of MuniPreferred Shares will be required, in addition to the single
class vote of the holders of MuniPreferred Shares and Common Shares. See the
Statement of Additional Information under "Description of Shares--
MuniPreferred Shares--Voting Rights."
Redemption, Purchase and Sale of MuniPreferred Shares. The terms of the
MuniPreferred Shares may provide that they are redeemable at certain times, in
whole or in part, at the original purchase price per share plus accumulated
dividends. The terms may also state that the Fund may tender for or purchase
MuniPreferred Shares and resell any shares so tendered. Any redemption or
purchase of MuniPreferred Shares by the Fund will reduce the leverage
applicable to Common Shares, while any resale of shares by the Fund will
increase such leverage. See "MuniPreferred Shares and Leverage."
The discussion above describes the Board of Trustees' present intention
with respect to a possible offering of MuniPreferred Shares. If the Board of
Trustees determines to authorize such an offering, the terms of the
MuniPreferred Shares may be the same as, or different from, the terms
described above, subject to applicable law and the Fund's Declaration.
CERTAIN PROVISIONS IN THE DECLARATION OF TRUST
Under Massachusetts law, shareholders could, under certain circumstances,
be held personally liable for the obligations of the Fund. However, the
Declaration contains an express disclaimer of shareholder liability for debts
or obligations of the Fund and requires that notice of such limited liability
be given in each agreement, obligation or instrument entered into or executed
by the Fund or the trustees. The Declaration further provides for
indemnification out of the assets and property of the Fund for all loss and
expense of any shareholder held personally liable for the obligations of the
Fund. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which the Fund would be
unable to meet its obligations. The Fund believes that the likelihood of such
circumstances is remote.
The Declaration includes provisions that could limit the ability of other
entities or persons to acquire control of the Fund or to convert the Fund to
open-end status. Specifically, the Declaration 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
27
series or class of the Fund, with any corporation, association, trust or other
organization or a reorganization or recapitalization of the Fund, or a series
or class of the Fund, (3) a sale, lease or transfer of all or substantially
all of the Fund's assets (other than in the regular course of the Fund's
investment activities), (4) in certain circumstances, a termination of the
Fund, or a series or class of the Fund, or (5) a removal of trustees by
shareholders, and then only for cause, unless, with respect to (1) through
(4), such transaction has already been authorized by the affirmative vote of
two-thirds of the total number of trustees fixed in accordance with the
Declaration or the By-laws, in which case the affirmative vote of the holders
of at least a majority of the Fund's Common Shares and MuniPreferred Shares
outstanding at the time, voting together as a single class, is required,
provided, however, that where only a particular class or series is affected
(or, in the case of removing a trustee, when the trustee has been elected by
only one class), only the required vote by the applicable class or series will
be required. Approval of shareholders is not required, however, for any
transaction, whether deemed a merger, consolidation, reorganization or
otherwise whereby the Fund issues Shares in connection with the acquisition of
assets (including those subject to liabilities) from any other investment
company or similar entity. None of the foregoing provisions may be amended
except by the vote of at least two-thirds of the Common Shares and
MuniPreferred Shares, voting together as a single class. In the case of the
conversion of the Fund to an open-end investment company, or in the case of
any of the foregoing transactions constituting a plan of reorganization which
adversely affects the holders of MuniPreferred Shares, the action in question
will also require the affirmative vote of the holders of at least two-thirds
of the Fund's MuniPreferred Shares outstanding at the time, voting as a
separate class, or, if such action has been authorized by the affirmative vote
of two-thirds of the total number of trustees fixed in accordance with the
Declaration or the By-laws, the affirmative vote of the holders of at least a
majority of the Fund's MuniPreferred Shares outstanding at the time, voting as
a separate class. The votes required to approve the conversion of the Fund
from a closed-end to an open-end investment company or to approve transactions
constituting a plan of reorganization which adversely affects the holders of
MuniPreferred Shares are higher than those required by the 1940 Act. The Board
of Trustees believes that the provisions of the Declaration relating to such
higher votes are in the best interest of the Fund and its shareholders. See
the Statement of Additional Information under "Certain Provisions in the
Declaration of Trust."
The provisions of the Declaration described above could have the effect of
depriving the Common Shareholders of opportunities to sell their Common Shares
at a premium over the then current market price of the Common Shares by
discouraging a third party from seeking to obtain control of the Fund in a
tender offer or similar transaction. The overall effect of these provisions is
to render more difficult the accomplishment of a merger or the assumption of
control by a third party. They provide, however, the advantage of potentially
requiring persons seeking control of the Fund to negotiate with its management
regarding the price to be paid and facilitating the continuity of the Fund's
investment objectives and policies. The Board of Trustees of the Fund has
considered the foregoing anti-takeover provisions and concluded that they are
in the best interests of the Fund and its Common Shareholders.
Reference should be made to the Declaration on file with the Securities and
Exchange Commission for the full text of these provisions.
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
28
for and supply of such shares in the market, general market and economic
conditions and other factors. Because shares of closed-end investment
companies may frequently trade at prices lower than net asset value, the
Fund's Board of Trustees has currently determined that, at least annually, it
will consider action that might be taken to reduce or eliminate any material
discount from net asset value in respect of Common Shares, which may include
the repurchase of such shares in the open market or in private transactions,
the making of a tender offer for such shares at net asset value, or the
conversion of the Fund to an open-end investment company. The Fund cannot
assure you that its Board of Trustees will decide to take any of these
actions, or that share repurchases or tender offers will actually reduce
market discount.
If the Fund converted to an open-end company, it would be required to
redeem all MuniPreferred Shares then outstanding (requiring in turn that it
liquidate a portion of its investment portfolio), and the Common Shares would
no longer be listed on the American Stock Exchange. In contrast to a closed-
end investment company, shareholders of an open-end investment company may
require the company to redeem their shares at any time (except in certain
circumstances as authorized by or under the 1940 Act) at their net asset
value, less any redemption charge that is in effect at the time of redemption.
See the Statement of Additional Information under "Certain Provisions in the
Declaration of Trust" for a discussion of the voting requirements applicable
to the conversion of the Fund to an open-end company.
Before deciding whether to take any action if the Common Shares trade below
net asset value, the Board would consider all relevant factors, including the
extent and duration of the discount, the liquidity of the Fund's portfolio,
the impact of any action that might be taken on the Fund or its shareholders,
and market considerations. Based on these considerations, even if the Fund's
shares should trade at a discount, the Board of Trustees may determine that,
in the interest of the Fund and its shareholders, no action should be taken.
See the Statement of Additional Information under "Repurchase of Fund Shares;
Conversion to Open-End Fund" for a further discussion of possible action to
reduce or eliminate such discount to net asset value.
TAX MATTERS
Federal Income Tax Matters
The discussion below and in the Statement of Additional Information
provides general tax information related to an investment in the Common
Shares. Because tax laws are complex and often change, you should consult your
tax advisor about the tax consequences of an investment in the Fund.
The Fund intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"),
and intends to distribute substantially all of its net income and gains to its
shareholders. Therefore, it is not expected that the Fund will be subject to
any federal income tax. The Fund primarily invests in municipal bonds from
issuers located in California or in municipal bonds whose income is otherwise
exempt from regular federal and California income taxes. Thus, substantially
all of the Fund's dividends to you will qualify as "exempt-interest
dividends." A shareholder treats an exempt-interest dividend as interest on
state and local bonds exempt from regular federal income tax. Some or all of
an exempt-interest dividend, however, may be subject to federal alternative
minimum tax imposed on the shareholder. Different federal alternative tax
rules apply to individuals and to corporations.
Although the Fund does not seek to realize taxable income or capital gains,
the Fund may realize and distribute taxable income or capital gains from time
to time as a result of the Fund's normal investment activities. The Fund will
distribute at least annually any ordinary taxable income or net
29
capital gain. Distributions of net short-term capital gain are taxable as
ordinary income. Distributions of net capital gain (the excess of net long-
term capital gain over net short-term capital loss) 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. The Fund will allocate distributions to shareholders
that are treated as tax-exempt interest and as long-term capital gain and
ordinary income, if any, proportionately among the Common Shares and
MuniPreferred Shares. As long as the Fund qualifies as a regulated investment
company, distributions paid by the Fund generally will not be eligible for the
dividends received deduction allowed to corporations.
Each year, you will receive a year-end statement that describes the tax
status of dividends paid to you during the preceding year, including the
source of investment income by state and the portion of income that is subject
to the federal alternative minimum tax. You will receive this statement from
the firm where you purchased your Common Shares if you hold your investment in
street name; the Fund will send you this statement if you hold your shares in
registered form.
The tax status of your dividends is not affected by whether you reinvest
your dividends or receive them in cash.
In order to avoid corporate taxation of its earnings and to pay tax-free
dividends, the Fund must meet certain I.R.S. requirements that govern the
Fund's sources of income, diversification of assets and distribution of
earnings to shareholders. The Fund intends to meet these requirements. If the
Fund failed to do so, the Fund would be required to pay corporate taxes on its
earnings and all your distributions would be taxable as ordinary income. In
particular, in order for the Fund to pay exempt-interest dividends, at least
50% of the value of the Fund's total assets must consist of tax-exempt
obligations. The Fund intends to meet this requirement. If the Fund failed to
do so, it would not be able to pay exempt-interest dividends and your
distributions attributable to interest received by the Fund from any source
would be taxable as ordinary income.
The Fund may be required to withhold 31% of certain of your dividends if
you have not provided the Fund with your correct taxpayer identification
number (normally your Social Security number) and certain certifications, or
if you are otherwise subject to backup withholding. If you receive Social
Security benefits, you should be aware that exempt-interest dividends are
taken into account in calculating the amount of these benefits that may be
subject to federal income tax. If you borrow money to buy Fund shares, you may
not deduct the interest on that loan. Under I.R.S. rules, Fund shares may be
treated as having been bought with borrowed money even if the purchase of the
Fund shares cannot be traced directly to borrowed money.
If you are subject to the federal alternative minimum tax, a portion of
your regular monthly dividends may be taxable.
California Tax Matters
The Fund's regular monthly dividends will not be subject to California
personal income taxes to the extent they are paid out of income earned on
obligations that, when held by individuals, pay interest that is exempt from
taxation by California under California law (e.g., obigations of California
and its political subdivisions) or federal laws, so long as at the close of
each quarter of the Fund's taxable year
30
at least 50 percent of the value of the Fund's total assets consist of such
obligations. The portion of the Fund's monthly dividends that is attributable
to income other than as described in the preceding sentence will be subject to
the California income tax. The Fund expects to earn no or only a minimal
amount of such non-exempt income. You will be subject to California personal
income taxes to the extent the Fund distributes any taxable income or realized
capital gains, or if you sell or exchange Common Shares and realize a capital
gain on the transaction.
Please refer to the Statement of Additional Information for more detailed
information. You are urged to consult your tax advisor.
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
adverse effect on the Fund, its Common Shares, or the ability of Nuveen
Advisory to perform its duties under the investment management agreement.
31
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.
Number
Underwriters of Shares
------------ ---------
Salomon Smith Barney Inc........................................
-------
Nuveen Investments..............................................
-------
A.G. Edwards & Sons, Inc. ......................................
-------
Prudential Securities Incorporated..............................
-------
UBS Warburg LLC.................................................
-------
Crowell, Weedon & Co. ..........................................
-------
First Union Securities, Inc. ...................................
-------
Tucker Anthony Incorporated.....................................
-------
Wedbush Morgan Securities.......................................
-------
Total.........................................................
=======
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,
A.G. Edwards & Sons, Inc., Prudential Securities Incorporated, UBS Warburg
LLC, Crowell, Weedon & Co., First Union Securities, Inc., Tucker Anthony
Incorporated and Wedbush Morgan Securities are acting as representatives,
propose to offer some of the Common Shares directly to the public at the
public offering price set forth on the cover page of this Prospectus and some
of the Common Shares to certain dealers at the public offering price less a
concession not in excess of $0.45 per Common Share. The sales load the Fund
will pay of $0.675 per share is equal to 4.5% of the initial offering price.
The Underwriters may allow, and such dealers may reallow, a concession not in
excess of $0.10 per Common Share on sales to certain other dealers. If all of
the Common Shares are not sold at the initial offering price, the
representatives may change the public offering price and other selling terms.
Investors must pay for any Common Shares purchased on or before ,
2001. In connection with this offering, Nuveen may perform clearing services
without charge for brokers and dealers for whom it regularly provides clearing
services that are participating in the offering as members of the selling
group.
The Fund has granted to the Underwriters an option, exercisable for 45 days
from the date of this Prospectus, to purchase up to additional
Common Shares at the public offering price less the sales load. The
Underwriters may exercise such option solely for the purpose of covering over-
allotments, if any, in connection with this offering. To the extent such
option is exercised, each Underwriter will be obligated, subject to certain
conditions, to purchase a number of additional Common Shares approximately
proportionate to such Underwriter's initial purchase commitment.
32
The Fund and Nuveen Advisory have agreed that, for a period of 180 days
from the date of this Prospectus, they will not, without the prior written
consent of Salomon Smith Barney Inc., on behalf of the Underwriters, dispose
of or hedge any Common Shares or any securities convertible into or
exchangeable for Common Shares. Salomon Smith Barney Inc. in its sole
discretion may release any of the securities subject to these agreements at
any time without notice.
Prior to the offering, there has been no public market for the Common
Shares. Consequently, the initial public offering price for the Common Shares
was determined by negotiation among the Fund, Nuveen Advisory and the
representatives. There can be no assurance, however, that the price at which
the Common Shares will sell in the public market after this offering will not
be lower than the price at which they are sold by the Underwriters or that an
active trading market in the Common Shares will develop and continue after
this offering. The Common Shares have been approved for listing on the
American Stock Exchange, subject to official notice of issuance.
The Fund and Nuveen Advisory have each agreed to indemnify the several
Underwriters or contribute to losses arising out of certain liabilities,
including liabilities under the Securities Act of 1933, as amended.
Nuveen has agreed to pay (i) all organizational expenses and (ii) offering
costs (other than sales load) that exceed $0.03 per share.
In addition, the Fund has agreed to reimburse the Underwriters for certain
expenses incurred by the Underwriters in the offering.
In connection with the requirements for listing the Fund's Common Shares on
the American Stock Exchange, the Underwriters have undertaken to sell lots of
100 or more Common Shares to a minimum of 400 beneficial owners in the United
States. The minimum investment requirement is 100 Common Shares.
Certain Underwriters may make a market in the Common Shares after trading
in the Common Shares has commenced on the American Stock Exchange. No
Underwriter is, however, obligated to conduct market-making activities and any
such activities may be discontinued at any time without notice, at the sole
discretion of the Underwriter. No assurance can be given as to the liquidity
of, or the trading market for, the Common Shares as a result of any market-
making activities undertaken by any Underwriter. This Prospectus is to be used
by any Underwriter in connection with the offering and, during the period in
which a prospectus must be delivered, with offers and sales of the Common
Shares in market-making transactions in the over-the-counter market at
negotiated prices related to prevailing market prices at the time of the sale.
The Underwriters have advised the Fund that, pursuant to Regulation M under
the Securities Exchange Act of 1934, as amended, certain persons participating
in the offering may engage in transactions, including stabilizing bids,
covering transactions or the imposition of penalty bids, which may have the
effect of stabilizing or maintaining the market price of the Common Shares at
a level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for or the purchase of the Common Shares on behalf
of an Underwriter for the purpose of fixing or maintaining the price of the
Common Shares. A "covering transaction" is a bid for or purchase of the Common
Shares on behalf of an Underwriter to reduce a short position incurred by the
Underwriters in connection with the offering. A "penalty bid" is a
contractual arrangement whereby if, during a specified period after the
issuance of the Common Shares, the Underwriters purchase Common Shares
33
in the open market for the account of the underwriting syndicate and the
Common Shares purchased can be traced to a particular Underwriter or member of
the selling group, the underwriting syndicate may require the Underwriter or
selling group member in question to purchase the Common Shares in question at
the cost price to the syndicate or may recover from (or decline to pay to) the
Underwriter or selling group member in question any or all compensation
(including, with respect to a representative, the applicable syndicate
management fee) applicable to the Common Shares in question. As a result, an
Underwriter or selling group member and, in turn, brokers may lose the fees
that they otherwise would have earned from a sale of the Common Shares if
their customer resells the Common Shares while the penalty bid is in effect.
The Underwriters are not required to engage in any of these activities, and
any such activities, if commenced, may be discontinued at any time.
The underwriting agreement provides that it may be terminated in the
absolute discretion of the representatives without liability on the part of
any Underwriter to the Fund or Nuveen Advisory if, prior to delivery of and
payment for the Common Shares, (i) trading in the Common Shares or securities
generally on the New York Stock Exchange, American Stock Exchange, Nasdaq
National Market or the Nasdaq Stock Market shall have been suspended or
materially limited, (ii) additional material governmental restrictions not in
force on the date of the underwriting agreement have been imposed upon trading
in securities generally or a general moratorium on commercial banking
activities in New York shall have been declared by either federal or state
authorities or (iii) any outbreak or material escalation of hostilities or
other international or domestic calamity, crisis or change in political,
financial or economic conditions, occurs, the effect of which is such as to
make it, in the judgment of the representatives, impracticable or inadvisable
to commence or continue the offering of the Common Shares at the offering
price to the public set forth on the cover page of the Prospectus or to
enforce contracts for the resale of the Common Shares by the Underwriters.
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.
Prior to the public offering of Common Shares, Nuveen Advisory will
purchase Common Shares from the Fund in an amount satisfying the net worth
requirements of Section 14(a) of the 1940 Act.
Nuveen, one of the representatives of the Underwriters, is the parent
company of Nuveen Advisory.
The principal business address of Salomon Smith Barney Inc. is 388
Greenwich Street, New York, New York 10013.
CUSTODIAN AND TRANSFER AGENT
The custodian of the assets of the Fund is The Chase Manhattan Bank, 4 New
York Plaza, New York, NY 10004-2413. The Custodian performs custodial, fund
accounting and portfolio accounting services. The Fund's transfer, shareholder
services and dividend paying agent is also The Chase Manhattan Bank.
LEGAL OPINIONS
Certain legal matters in connection with the Common Shares will be passed
upon for the Fund by Bell, Boyd & Lloyd LLC, Chicago, Illinois, and for the
Underwriters by Simpson Thacher & Bartlett. Bell, Boyd & Lloyd LLC and Simpson
Thacher & Bartlett may rely as to certain matters of Massachusetts law on the
opinion of Bingham Dana LLP, Boston, Massachusetts.
34
TABLE OF CONTENTS FOR THE
STATEMENT OF ADDITIONAL INFORMATION
Page
----
Use of Proceeds...................................................... 3
Investment Objectives ............................................... 5
Investment Policies and Techniques................................... 10
Other Investment Policies and Techniques............................. 18
Management of the Fund............................................... 21
Investment Adviser................................................... 27
Portfolio Transactions............................................... 28
Distributions........................................................ 29
Description of Shares................................................ 30
Certain Provisions in the Declaration of Trust....................... 33
Repurchase of Fund Shares; Conversion to Open-End Fund............... 34
Tax Matters.......................................................... 37
Performance Related and Comparative Information...................... 40
Experts.............................................................. 41
Custodian............................................................ 41
Additional Information............................................... 41
Report of Independent Auditors....................................... 43
Financial Statements................................................. 44
Appendices
Appendix A--Ratings of Investments................................. A-1
Appendix B--Taxable Equivalent Yield Tables........................ B-1
Appendix C--Hedging Strategies and Risks........................... C-1
Appendix D--Factors Pertaining to California....................... D-1
Appendix E--Performance Related and Comparative Information........ E-1
35
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
3,000,000 Shares
Nuveen California Dividend Advantage Municipal Fund 2
Common Shares
--------
PROSPECTUS
, 2001
--------
Salomon Smith Barney
Nuveen Investments
A.G. Edwards & Sons, Inc.
Prudential Securities
UBS Warburg LLC
Crowell, Weedon & Co.
First Union Securities, Inc.
Tucker Anthony Sutro
Capital Markets
Wedbush Morgan Securities
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
FRH-CA-2-01
The information in this Statement of Additional Information is not complete
and may be changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
Statement of Additional Information is not an offer to sell these securities and
it is not soliciting an offer to buy these securities in any state where the
offer or sale is not permitted.
SUBJECT TO COMPLETION--DATED February 22, 2001
Nuveen California Dividend Advantage Municipal Fund 2
STATEMENT OF ADDITIONAL INFORMATION
Nuveen California Dividend Advantage Municipal Fund 2 (the "Fund" or the
"California Fund") is a newly organized, non-diversified closed-end management
investment company.
This Statement of Additional Information relating to common shares of the
Fund ("Common Shares") does not constitute a prospectus, but should be read in
conjunction with the Fund's Prospectus relating thereto dated ________ __,
2001 (the "Prospectus"). This Statement of Additional Information does not
include all information that a prospective investor should consider before
purchasing Common Shares, and investors should obtain and read the Fund's
Prospectus prior to purchasing such shares. A copy of the Fund's Prospectus may
be obtained without charge by calling (800) 257-8787. You may also obtain a copy
of the Fund's Prospectus on the Securities and Exchange Commission's web site
(http://www.sec.gov). Capitalized terms used but not defined in this Statement
of Additional Information have the meanings ascribed to them in the
Prospectus.
1
TABLE OF CONTENTS
Page
--------
Use of Proceeds 3
Investment Objectives 5
Investment Policies and Techniques 10
Other Investment Policies and Techniques 18
Management of the Fund 21
Investment Adviser 27
Portfolio Transactions 28
Distributions 29
Description of Shares 30
Certain Provisions in the Declaration of Trust 33
Repurchase of Fund Shares; Conversion to Open-End Fund 34
Tax Matters 37
Performance Related and Comparative Information 40
Experts 41
Custodian 41
Additional Information 41
Report of Independent Auditors 43
Financial Statements 44
Ratings of Investments (Appendix A) A-1
Taxable Equivalent Yield Tables (Appendix B) B-1
Hedging Strategies and Risks (Appendix C) C-1
Factors Pertaining to California (Appendix D) D-1
Performance Related and Comparative Information (Appendix E) E-1
This Statement of Additional Information is dated ________ __, 2001
2
USE OF PROCEEDS
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
For the 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 the Fund's investment
objectives and policies, the net proceeds of the offering will be invested in
high quality, short-term tax-exempt money market securities or in high quality
municipal bonds with relatively low volatility (such as pre-refunded and
intermediate-term bonds), to the extent such securities are available. If
necessary to invest fully the net proceeds of the offering immediately, the Fund
may also purchase, as temporary investments, short-term taxable investments of
the type described under "Investment Policies and Techniques--Investment in
Municipal Bonds--Portfolio Investments," the income on which is subject to
regular federal income tax and securities of other open or closed-end investment
companies that invest primarily in municipal bonds of the type in which the Fund
may invest directly.
4
INVESTMENT OBJECTIVES
The Fund's investment objective is to provide current income exempt from regular
federal and California income tax, and to enhance portfolio value relative to
the municipal bond market by investing in tax-exempt municipal bonds that the
Fund's investment adviser believes are underrated or undervalued or that
represent municipal market sectors that are undervalued.
5
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
6
generally result in the distribution of taxable capital gains to holders of
Common Shares. The Fund's investment objectives are fundamental policies of the
Fund.
The Fund has not established any limit on the percentage of its portfolio
that may be invested in municipal bonds subject to the alternative minimum tax
provisions of federal tax law, and the Fund expects that a substantial portion
of the income it produces will be includable in alternative minimum taxable
income. Common Shares therefore would not ordinarily be a suitable investment
for investors who are subject to the federal alternative minimum tax or who
would become subject to such tax by purchasing Common Shares. The suitability of
an investment in Common Shares will depend upon a comparison of the after-tax
yield likely to be provided from the Fund with that from comparable tax-exempt
investments not subject to the alternative minimum tax, and from comparable
fully taxable investments, in light of each such investor's tax position.
Special considerations apply to corporate investors. See "Tax Matters."
Investment Restrictions
Except as described below, the Fund, as a fundamental policy, may not,
without the approval of the holders of a majority of the outstanding Common
Shares and, if issued, MuniPreferred Shares (as hereinafter defined) voting
together as a single class, and of the holders of a majority of the outstanding
MuniPreferred Shares voting as a separate class:
(1) Issue senior securities, as defined in the Investment Company Act
of 1940, other than MuniPreferred Shares, except to the extent permitted
under the Investment Company Act of 1940 and except as otherwise described
in the Prospectus;
(2) Borrow money, except from banks for temporary or emergency
purposes or for repurchase of its shares, and then only in an amount not
exceeding one-third of the value of the Fund's total assets (including the
amount borrowed) less the Fund's liabilities (other than borrowings);
(3) Act as underwriter of another issuer's securities, except to the
extent that the Fund may be deemed to be an underwriter within the meaning
of the Securities Act of 1933 in connection with the purchase and sale of
portfolio securities;
(4) Invest more than 25% of its total assets in securities of issuers
in any one industry; provided, however, that such limitation shall not
apply to municipal bonds other than those municipal bonds backed only by
the assets and revenues of non-governmental users;
7
(5) Purchase or sell real estate, but this shall not prevent the Fund
from investing in municipal bonds secured by real estate or interests
therein or foreclosing upon and selling such security;
(6) Purchase or sell physical commodities unless acquired as a result
of ownership of securities or other instruments (but this shall not prevent
the Fund from purchasing or selling options, futures contracts, derivative
instruments or from investing in securities or other instruments backed by
physical commodities);
(7) Make loans, other than by entering into repurchase agreements and
through the purchase of municipal bonds or short-term investments in
accordance with its investment objectives, policies and limitations;
(8) Purchase any securities (other than obligations issued or
guaranteed by the United States Government or by its agencies or
instrumentalities), if as a result more than 10% of the Fund's total assets
would then be invested in securities of a single issuer or if as a result
the Fund would hold more than 10% of the outstanding voting securities of
any single issuer; provided that, with respect to 50% of the Fund's assets,
the Fund may invest up to 25% of its assets in the securities of any one
issuer.
For purposes of the foregoing and "Description of Shares--MuniPreferred
Shares--Voting Rights" below, "majority of the outstanding," when used with
respect to particular shares of the Fund, means (i) 67% or more of the shares
present at a meeting, if the holders of more than 50% of the shares are present
or represented by proxy, or (ii) more than 50% of the shares, whichever is
less.
For the purpose of applying the limitation set forth in subparagraph (8)
above, an issuer shall be deemed the sole issuer of a security when its assets
and revenues are separate from other governmental entities and its securities
are backed only by its assets and revenues. Similarly, in the case of a non-
governmental 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, the 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, the Fund will bear its ratable share
of
8
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 the Fund invests in other investment companies. In
addition, the securities of other investment companies may also be leveraged and
will therefore be subject to the same leverage risks described herein. As
described in the Prospectus in the section entitled "Risks", the net asset value
and market value of leveraged shares will be more volatile and the yield to
shareholders will tend to fluctuate more than the yield generated by unleveraged
shares.
In addition to the foregoing fundamental investment policies, the Fund is
also subject to the following non-fundamental restrictions and policies, which
may be changed by the Board of Trustees. The Fund may not:
(1) Sell securities short, unless the Fund owns or has the right to
obtain securities equivalent in kind and amount to the securities sold at
no added cost, and provided that transactions in options, futures
contracts, options on futures contracts, or other derivative instruments
are not deemed to constitute selling securities short.
(2) Purchase securities of open-end or closed-end investment companies
except in compliance with the Investment Company Act of 1940 or any
exemptive relief obtained thereunder.
(3) Enter into futures contracts or related options or forward
contracts, if more than 30% of the Fund's net assets would be represented
by futures contracts or more than 5% of the Fund's net assets would be
committed to initial margin deposits and premiums on futures contracts and
related options.
(4) Purchase securities when borrowings exceed 5% of its total assets
if and so long as MuniPreferred Shares are outstanding.
(5) Purchase securities of companies for the purpose of exercising
control.
(6) Invest in inverse floating rate securities (which are securities
that pay interest at rates that vary inversely with changes in prevailing
short-term tax-exempt interest rates and which represent a leveraged
investment in an underlying municipal bond).
The restrictions and other limitations set forth above will apply only at
the time of purchase of securities and will not be considered violated unless an
excess or deficiency occurs or exists immediately after and as a result of an
acquisition of securities.
The Fund intends to apply for ratings for its preferred shares (called
"MuniPreferred Shares" herein) from Moody's and/or S&P. In order to obtain and
maintain the required ratings, the Fund may be required to comply with
investment quality, diversification and other guidelines established by Moody's
or S&P. Such guidelines will likely be more restrictive than the restrictions
set forth above. The Fund does not anticipate that such guidelines would have a
material
9
adverse effect on its Common Shareholders or its ability to achieve its
investment objectives. The Fund presently anticipates that any MuniPreferred
Shares that it intends to issue would be initially given the highest ratings by
Moody's ("Aaa") or by S&P ("AAA"), but no assurance can be given that such
ratings will be obtained. No minimum rating is required for the issuance of
MuniPreferred Shares by the Fund. Moody's and S&P receive fees in connection
with their ratings issuances.
INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the discussion of the Fund's
investment objectives, policies, and techniques that are described in the Fund's
Prospectus.
Investment in Municipal Bonds
Portfolio Investments
The California Fund will invest its net assets in a portfolio of municipal
bonds that are exempt from regular federal and California income tax.
Under normal market conditions, and except for the temporary investments
described below, the Fund expects to be fully invested (at least 95% of its
assets) in such tax-exempt municipal bonds described above. Through March 31,
2002, the Fund may invest in municipal bonds that are exempt from regular
federal income tax but not from the Fund's particular state 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 bonds, 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
10
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. 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 Nuveen Advisory. Bonds of below investment grade quality (Ba/BB or below) are
commonly referred to as junk bonds. Issuers of bonds rated Ba/BB or B are
regarded as having current capacity to make principal and interest payments but
are subject to business, financial or economic conditions which could adversely
affect such payment capacity. Municipal bonds rated Baa or BBB are considered
"investment grade" securities; municipal bonds rated Baa are considered medium
grade obligations which lack outstanding investment characteristics and have
speculative characteristics, while municipal bonds rated BBB are regarded as
having adequate capacity to pay principal and interest. Municipal bonds rated
AAA in which the 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 the Fund may have greater difficulty selling its
portfolio securities. The Fund will be more dependent on Nuveen Advisory's
research and analysis when investing in these securities.
A general description of Moody's, S&P's and Fitch's ratings of municipal
bonds is set forth in Appendix A hereto. The ratings of Moody's, S&P and Fitch
represent their opinions as to the quality of the municipal bonds they rate. It
should be emphasized, however, that ratings are general and are not absolute
standards of quality. Consequently, municipal bonds with the same maturity,
coupon and rating may have different yields while obligations of the same
maturity and coupon with different ratings may have the same yield.
11
The Fund will primarily invest in municipal bonds with long-term maturities
in order to maintain a weighted average maturity of 15-30 years, but the average
weighted maturity of obligations held by the Fund may be shortened, depending on
market conditions. As a result, the Fund's portfolio at any given time may
include both long-term and intermediate-term municipal bonds. Moreover, during
temporary defensive periods (e.g., times when, in Nuveen Advisory's opinion,
temporary imbalances of supply and demand or other temporary dislocations in the
tax-exempt bond market adversely affect the price at which long-term or
intermediate-term municipal bonds are available), and in order to keep the
Fund's cash fully invested, including the period during which the net proceeds
of the offering are being invested, the 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 the Fund may invest
directly. 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. 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. The 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 the Fund may include certificates of deposit issued by U.S. banks with assets
of at least $1 billion, or commercial paper or corporate notes, bonds or
debentures with a remaining maturity of one year or less, or repurchase
agreements. See "Other Investment Policies and Techniques--Repurchase
Agreements." To the extent the Fund invests
12
in taxable investments, the Fund will not at such times be in a position to
achieve its investment objective of tax-exempt income.
The foregoing policies as to ratings of portfolio investments will apply
only at the time of the purchase of a security, and the Fund will not be
required to dispose of securities in the event Moody's, S&P or Fitch downgrades
its assessment of the credit characteristics of a particular issuer.
Nuveen Advisory seeks to enhance portfolio value relative to the municipal
bond market by investing in tax-exempt municipal bonds that it believes are
underrated or undervalued or that represent municipal market sectors that are
undervalued. Underrated municipal bonds are those whose ratings do not, in
Nuveen Advisory's opinion, reflect their true creditworthiness. Undervalued
municipal bonds are bonds that, in Nuveen Advisory's opinion, are worth more
than the value assigned to them in the marketplace. Nuveen Advisory may at times
believe that bonds associated with a particular municipal market sector (for
example, electric utilities), or issued by a particular municipal issuer, are
undervalued. Nuveen Advisory may purchase such a bond for the Fund's portfolio
because it represents a market sector or issuer that Nuveen Advisory considers
undervalued, even if the value of the particular bond is consistent with the
value of similar bonds. Municipal bonds of particular types or purposes (e.g.,
hospital bonds, industrial revenue bonds or bonds issued by a particular
municipal issuer) may be undervalued because there is a temporary excess of
supply in that market sector, or because of a general decline in the market
price of municipal bonds of the market sector for reasons that do not apply to
the particular municipal bonds that are considered undervalued. The Fund's
investment in underrated or undervalued municipal bonds will be based on Nuveen
Advisory's belief that their yield is higher than that available on bonds
bearing equivalent levels of interest rate risk, credit risk and other forms of
risk, and that their prices will ultimately rise (relative to the market) to
reflect their true value.
The Fund has not established any limit on the percentage of its portfolio
investments that may be invested in municipal bonds subject to the federal
alternative minimum tax provisions of federal tax law, and the 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
the 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, the Fund's ability to
recover under the lease in the event of non-appropriation or default will be
limited solely to the repossession of the leased property, without recourse to
the general credit of the lessee, and disposition or releasing of the property
might prove difficult. In order to reduce this risk, the Fund will only
13
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 the Fund's cash fully invested, including the period during
which the net proceeds of the offering are being invested, the Fund may invest
up to 100% of its net assets in short-term investments including high quality,
short-term securities that may be either tax-exempt or taxable. To the extent
the Fund invests in taxable short-term investments, the Fund will not at such
times be in a position to achieve that portion of its investment objective of
seeking current income exempt from 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.
The 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.
14
Short-Term Investments
Short-Term Taxable Fixed Income Securities
For temporary defensive purposes or to keep cash on hand fully invested,
the Fund may invest up to 100% of its net assets in cash equivalents and short-
term taxable fixed-income securities, although the Fund intends to invest in
taxable short-term investments only in the event that suitable tax-exempt short-
term investments are not available at reasonable prices and yields. Short-term
taxable fixed income investments are defined to include, without limitation, the
following:
(1) U.S. government securities, including bills, notes and bonds
differing as to maturity and rates of interest that are either issued or
guaranteed by the U.S. Treasury or by U.S. government agencies or
instrumentalities. U.S. government agency securities include securities
issued by (a) the Federal Housing Administration, Farmers Home
Administration, Export-Import Bank of the United States, Small Business
Administration, and the Government National Mortgage Association, whose
securities are supported by the full faith and credit of the United States;
(b) the Federal Home Loan Banks, Federal Intermediate Credit Banks, and the
Tennessee Valley Authority, whose securities are supported by the right of
the agency to borrow from the U.S. Treasury; (c) the Federal National
Mortgage Association, whose securities are supported by the discretionary
authority of the U.S. government to purchase certain obligations of the
agency or instrumentality; and (d) the Student Loan Marketing Association,
whose securities are supported only by its credit. While the U.S.
government provides financial support to such U.S. government-sponsored
agencies or instrumentalities, no assurance can be given that it always
will do so since it is not so obligated by law. The U.S. government, its
agencies, and instrumentalities do not guarantee the market value of their
securities. Consequently, the value of such securities may fluctuate.
(2) Certificates of Deposit issued against funds deposited in a bank
or a savings and loan association. Such certificates are for a definite
period of time, earn a specified rate of return, and are normally
negotiable. The issuer of a certificate of deposit agrees to pay the amount
deposited plus interest to the bearer of the certificate on the 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 the Fund may not be fully insured.
(3) Repurchase agreements, which involve purchases of debt
securities. At the time the Fund purchases securities pursuant to a
repurchase agreement, it simultaneously agrees to resell and redeliver such
securities to the seller, who also simultaneously agrees to buy back the
securities at a fixed price and time. This assures a predetermined yield
for the Fund during its holding period, since the resale price is always
greater than the purchase price and reflects an agreed-upon market rate.
Such actions afford an opportunity for the Fund to invest
15
temporarily available cash. The Fund may enter into repurchase agreements
only with respect to obligations of the U.S. government, its agencies or
instrumentalities; certificates of deposit; or bankers' acceptances in
which the Fund may invest. Repurchase agreements may be considered loans to
the seller, collateralized by the underlying securities. The risk to the
Fund is limited to the ability of the seller to pay the agreed-upon sum on
the repurchase date; in the event of default, the repurchase agreement
provides that the Fund is entitled to sell the underlying collateral. If
the value of the collateral declines after the agreement is entered into,
and if the seller defaults under a repurchase agreement when the value of
the underlying collateral is less than the repurchase price, the Fund could
incur a loss of both principal and interest. The investment adviser
monitors the value of the collateral at the time the action is entered into
and at all times during the term of the repurchase agreement. The
investment adviser does so in an effort to determine that the value of the
collateral always equals or exceeds the agreed-upon repurchase price to be
paid to the Fund. If the seller were to be subject to a federal bankruptcy
proceeding, the ability of the Fund to liquidate the collateral could be
delayed or impaired because of certain provisions of the bankruptcy laws.
(4) Commercial paper, which consists of short-term unsecured
promissory notes, including variable rate master demand notes issued by
corporations to finance their current operations. Master demand notes are
direct lending arrangements between the Fund and a corporation. There is no
secondary market for such notes. However, they are redeemable by the Fund
at any time. Nuveen Advisory will consider the financial condition of the
corporation (e.g., earning power, cash flow, and other liquidity ratios)
and will continuously monitor the corporation's ability to meet all of its
financial obligations, because the Fund's liquidity might be impaired if
the corporation were unable to pay principal and interest on demand.
Investments in commercial paper will be limited to commercial paper rated
in the 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.
16
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
The 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
17
financial futures and index futures as well as related put and call options on
such instruments. Both parties entering into an index or financial futures
contract are required to post an initial deposit of 1% to 5% of the total
contract price. Typically, option holders enter into offsetting closing
transactions to enable settlement in cash rather than take delivery of the
position in the future of the underlying security. The Fund will only sell
covered futures contracts, which means that the Fund segregates assets equal to
the amount of the obligations.
These transactions present certain risks. In particular, the imperfect
correlation between price movements in the futures contract and price movements
in the securities being hedged creates the possibility that losses on the hedge
by a Fund may be greater than gains in the value of the securities in the Fund's
portfolio. In addition, futures and options markets may not be liquid in all
circumstances. As a result, in volatile markets, the Fund may not be able to
close out the transaction without incurring losses substantially greater than
the initial deposit. Finally, the potential deposit requirements in futures
contracts create an ongoing greater potential financial risk than do options
transactions, where the exposure is limited to the cost of the initial premium.
Losses due to hedging transactions will reduce yield. Net gains, if any, from
hedging and other portfolio transactions will be distributed as taxable
distributions to shareholders. The Fund will not make any investment (whether an
initial premium or deposit or a subsequent deposit) other than as necessary to
close a prior investment if, immediately after such investment, the sum of the
amount of its premiums and deposits would exceed 5% of the Fund's net assets.
The Fund will invest in these instruments only in markets believed by Nuveen
Advisory to be active and sufficiently liquid. Successful implementation of most
hedging strategies would generate taxable income, and the Fund has no present
intention to use these strategies. For further information regarding these
investment strategies and risks presented thereby, see Appendix C to this
Statement of Additional Information.
Factors Pertaining to California
Factors pertaining to California are set forth in Appendix D.
OTHER INVESTMENT POLICIES AND TECHNIQUES
Illiquid Securities
The Fund may invest in illiquid securities (i.e., securities that are not
readily marketable), including, but not limited to, restricted securities
(securities the disposition of which is restricted under the federal securities
laws), securities that may only be resold pursuant to Rule 144A under the
Securities Act of 1933, as amended (the "Securities Act"); and repurchase
agreements with maturities in excess of seven days.
18
Restricted securities may be sold only in privately negotiated transactions
or in a public offering with respect to which a registration statement is in
effect under the Securities Act. Where registration is required, the Fund may be
obligated to pay all or part of the registration expenses and a considerable
period may elapse between the time of the decision to sell and the time the Fund
may be permitted to sell a security under an effective registration statement.
If, during such a period, adverse market conditions were to develop, the Fund
might obtain a less favorable price than that which prevailed when it decided to
sell. Illiquid securities will be priced at a fair value as determined in good
faith by the Board of Trustees or its delegate.
Portfolio Trading and Turnover Rate
Portfolio trading may be undertaken to accomplish the investment objectives
of the Fund in relation to actual and anticipated movements in interest rates.
In addition, a security may be sold and another of comparable quality purchased
at approximately the same time to take advantage of what Nuveen Advisory
believes to be a temporary price disparity between the two securities. Temporary
price disparities between two comparable securities may result from supply and
demand imbalances where, for example, a temporary oversupply of certain bonds
may cause a temporarily low price for such bonds, as compared with other bonds
of like quality and characteristics. The Fund may also engage to a limited
extent in short-term trading consistent with its investment objectives.
Securities may be sold in anticipation of a market decline (a rise in interest
rates) or purchased in anticipation of a market rise (a decline in interest
rates) and later sold, but the Fund will not engage in trading solely to
recognize a gain.
Subject to the foregoing, the Fund will attempt to achieve its investment
objectives by prudent selection of municipal bonds with a view to holding them
for investment. While there can be no assurance thereof, the Fund anticipates
that its annual portfolio turnover rate will generally not exceed 100%. However,
the rate of turnover will not be a limiting factor when the Fund deems it
desirable to sell or purchase securities. Therefore, depending upon market
conditions, the annual portfolio turnover rate of the Fund may exceed 100% in
particular years.
Other Investment Companies
The Fund may invest in securities of other open or closed-end investment
companies that invest primarily in municipal bonds of the types in which the
Fund may invest directly. The Fund generally expects to invest in other
investment companies either during periods when it has large amounts of
uninvested cash, such as the period shortly after the Fund receives the proceeds
of the offering of its Common Shares or MuniPreferred Shares, or during periods
when there is a shortage of attractive, high-yielding municipal bonds available
in the market. As a stockholder in an investment company, the Fund will bear its
ratable share of that investment company's expenses and would remain subject to
payment of the Fund's management, advisory and administrative fees with respect
to assets so invested. Common Shareholders would therefore be subject to
duplicative expenses to the extent the Fund invests in other investment
companies. Nuveen Advisory will take expenses into account when evaluating the
investment merits of an investment in the investment company relative to
available municipal bond investments. In addition, the securities of other
investment companies may also be leveraged and will therefore be subject to the
same leverage risks described herein. As described in the Fund's Prospectus in
the section entitled "Risks," the net asset value and market value of leveraged
shares will be more
19
volatile and the yield to shareholders will tend to fluctuate more than the
yield generated by unleveraged shares.
When-Issued and Delayed Delivery Transactions
The Fund may buy and sell municipal bonds on a when-issued or delayed
delivery basis, making payment or taking delivery at a later date, normally
within 15-45 days of the trade date. On such transactions the payment obligation
and the interest rate are fixed at the time the buyer enters into the
commitment. Beginning on the date the Fund enters into a commitment to purchase
securities on a when-issued or delayed delivery basis, the Fund is required
under rules of the Securities and Exchange Commission to maintain in a separate
account liquid assets, consisting of cash, cash equivalents or liquid securities
having a market value at all times of at least equal to the amount of the
commitment. Income generated by any such assets which provide taxable income for
federal income tax purposes is includable in the taxable income of the Fund. The
Fund may enter into contracts to purchase municipal bonds on a forward basis
(i.e., where settlement will occur more than 60 days from the date of the
transaction) only to the extent that the Fund specifically collateralizes such
obligations with a security that is expected to be called or mature within sixty
days before or after the settlement date of the forward transaction. The
commitment to purchase securities on a when-issued, delayed delivery or forward
basis may involve an element of risk because no interest accrues on the bonds
prior to settlement and at the time of delivery the market value may be less
than cost.
Repurchase Agreements
As temporary investments, the Fund may invest in repurchase agreements. A
repurchase agreement is a contractual agreement whereby the seller of securities
(U.S. Government securities or municipal bonds) agrees to repurchase the same
security at a specified price on a future date agreed upon by the parties. The
agreed-upon repurchase price determines the yield during the Fund's holding
period. Repurchase agreements are considered to be loans collateralized by the
underlying security that is the subject of the repurchase contract. Income
generated from transactions in repurchase agreements will be taxable. See "Tax
Matters" for information relating to the allocation of taxable income between
Common Shares and MuniPreferred Shares, if any. The Fund will only enter into
repurchase agreements with registered securities dealers or domestic banks that,
in the opinion of Nuveen Advisory, present minimal credit risk. The risk to the
Fund is limited to the ability of the issuer to pay the agreed-upon repurchase
price on the delivery date; however, although the value of the underlying
collateral at the time the transaction is entered into always equals or exceeds
the agreed-upon repurchase price, if the value of the collateral declines there
is a risk of loss of both principal and interest. In the event of default, the
collateral may be sold but the Fund might incur a loss if the value of the
collateral declines, and might incur disposition costs or experience delays in
connection with liquidating the collateral. In addition, if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization upon the collateral by the Fund may be delayed or limited. Nuveen
Advisory will monitor the value of the collateral at the time the transaction is
entered into and at all times subsequent during the term of the repurchase
agreement in an effort to determine that such value always equals or exceeds the
agreed-upon repurchase price. In the event the value of the collateral declines
below the repurchase price, Nuveen Advisory will
20
demand additional collateral from the issuer to increase the value of the
collateral to at least that of the repurchase price, including interest.
Zero Coupon Bonds
The Fund may invest in zero coupon bonds. A zero coupon bond is a bond
that does not pay interest for its entire life. The market prices of zero coupon
bonds are affected to a greater extent by changes in prevailing levels of
interest rates and thereby tend to be more volatile in price than securities
that pay interest periodically. In addition, because the Fund accrues income
with respect to these securities prior to the receipt of such interest, it may
have to dispose of portfolio securities under disadvantageous circumstances in
order to obtain cash needed to pay income dividends in amounts necessary to
avoid unfavorable tax consequences.
MANAGEMENT OF THE FUND
Trustees and Officers
The management of the Fund, including general supervision of the duties
performed for the Fund under the Management Agreement, is the responsibility of
the Board of Trustees of the Fund. The number of trustees of the Fund is
currently set at seven, one of whom is an "interested" person (as the term
"interested" persons is defined in the Investment Company Act of 1940) and six
of whom are not "interested" persons. None of the trustees who are not
"interested" persons of the 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 the Fund and their principal occupations and other
affiliations during the past five years are set forth below, with those trustees
who are "interested" persons of the Fund indicated by an asterisk.
Name and Address Birthdate Positions and Principal Occupations During
---------------- --------- ------------- ----------------------------
Offices with the Past Five Years
---------------- ---------------
Fund
----
Timothy R. Schwertfeger* 3/28/49 Chairman of the Chairman and Director (since July 1996) of The John Nuveen Company,
333 West Wacker Drive Board, President Nuveen Investments, Nuveen Advisory Corp. and Nuveen Institutional
Chicago, IL 60606 and Trustee Advisory Corp.; prior thereto, Executive Vice President and Director
of The John Nuveen Company and Nuveen Investments; Director (since
1992) and Chairman (since 1996) of Nuveen Advisory Corp. and Nuveen
Institutional Advisory Corp.; Chairman and Director (since January
1997) of Nuveen Asset Management, Inc.; Director (since 1996) of
Institutional Capital Corporation; Chairman and Director of
21
Name and Address Birthdate Positions and Principal Occupations During
---------------- --------- ------------- ----------------------------
Offices with the Past Five Years
---------------- ---------------
Fund
----
Rittenhouse Financial Services Inc. (since 1999); Chief Executive
Officer (since September 1999) of Nuveen Senior Loan Asset Management
Inc.
Robert P. Bremner 8/22/40 Trustee Private Investor and Management Consultant.
3725 Huntington Street,
N.W.
Washington, D.C. 20015
Lawrence H. Brown 7/29/34 Trustee Retired (August 1989) as Senior Vice President of The Northern Trust
201 Michigan Avenue Company
Highwood, IL 60040
Anne E. Impellizzeri 1/26/33 Trustee Executive Director (since 1998) of Manitoga (Center for Russel
3 West 29th Street Wright's Design with Nature), formerly President and Chief Executive
New York, NY 10001 Officer of Blanton-Peale Institutes of Religion and Health (since
December 1990); prior thereto, Vice President, Metropolitan Life
Insurance Co.
Peter R. Sawers 4/3/33 Trustee Adjunct Professor of Business and Economics, University of Dubuque,
22 The Landmark Iowa; formerly (1991-2000) Adjunct Professor, Lake Forest Graduate
Northfield, IL 60093 School of Management, Lake Forest, Illinois; prior thereto, Executive
Director, Towers Perrin Australia; Chartered Financial Analyst;
Certified Management Consultant.
William J. Schneider 9/24/44 Trustee Senior Partner and Chief Operating Officer, Miller-Valentine Partners,
4000 Miller-Valentine Ct. Vice President, Miller-Valentine Group, a development and contract
P. O. Box 744 company; Member Community Advisory Board, National City Bank, Dayton,
Dayton, OH 45401 Ohio; Business Advisory Council, Cleveland Federal Reserve Bank.
Judith M. Stockdale 12/29/47 Trustee Executive Director, Gaylord and Dorothy Donnelley Foundation (since
35 E. Wacker Drive 1994); prior thereto, Executive Director, Great Lakes Protection Fund
Suite 2600 (from 1990 to 1994).
Chicago, IL 60601
Alan G. Berkshire 12/28/60 Vice President and Senior Vice President and General Counsel (since September 1997) and
333 W. Wacker Drive Assistant Secretary Secretary (since May 1998) of The
Chicago, IL 60606
22
Name and Address Birthdate Positions and Principal Occupations During
---------------- --------- ------------- ----------------------------
Offices with the Past Five Years
---------------- ---------------
Fund
----
John Nuveen Company, Nuveen
Investments, Nuveen Advisory Corp.
and Nuveen Institutional Advisory
Corp., Senior Vice President and
Secretary (since September 1999) of
Nuveen Senior Loan Management Inc.;
prior thereto, Partner in the law firm
of Kirkland & Ellis.
Peter H. D'Arrigo 11/28/67 Vice President and Vice President of Nuveen Investments
333 W. Wacker Drive Treasurer (since January 1999), prior thereto,
Chicago, IL 60606 Assistant Vice President (from January
1997); formerly, Associate of Nuveen
Investments; Vice President and
Treasurer (since September 1999) of
Nuveen Senior Loan Asset Management
Inc.; Chartered Financial Analyst.
Michael S. Davern 6/26/57 Vice President Vice President of Nuveen Advisory
333 W. Wacker Drive Corp. (Since January 1997); prior
Chicago, IL 60606 thereto, Vice President and Portfolio
Manager of Flagship Financial.
Lorna C. Ferguson 10/24/45 Vice President Vice President of Nuveen Investments;
333 W. Wacker Drive Vice President (since January 1998) of
Chicago, IL 60606 Nuveen Advisory Corp. and Nuveen
Institutional Advisory Corp.
William M. Fitzgerald 3/2/64 Vice President Vice President of Nuveen Advisory
333 W. Wacker Drive Corp. (since December 1995);
Chicago, IL 60606 Assistant Vice President of Nuveen
Advisory Corp. (from September 1992
to December 1995), prior thereto,
Assistant Portfolio Manager of Nuveen
Advisory Corp.; Chartered Financial
Analyst.
Stephen D. Foy 5/31/54 Vice President and Vice President of Nuveen Investments
333 W. Wacker Drive Controller and (since May 1998) The John Nuveen
Chicago, IL 60606 Company, Vice President (since
September 1999) of Nuveen Senior Loan
Management Inc.; Certified Public
Accountant.
J. Thomas Futrell 7/5/55 Vice President Vice President of Nuveen Advisory
333 W. Wacker Drive Corp.; Chartered Financial Analyst.
23
Name and Address Birthdate Positions and Principal Occupations During
---------------- --------- ------------- ----------------------------
Offices with the Past Five Years
---------------- ---------------
Fund
----
Chicago, IL 60606
Richard A. Huber 3/26/63 Vice President Vice President of Nuveen Institutional
333 W. Wacker Drive Advisory Corp. (since March 1998) and
Chicago, IL 60606 Nuveen Advisory Corp. (since January
1997); prior thereto, Vice President
and Portfolio Manager of Flagship
Financial, Inc.
Steven J. Krupa 8/21/57 Vice President Vice President of Nuveen Advisory
333 W. Wacker Drive Corp.
Chicago, IL 60606
David J. Lamb 3/22/63 Vice President Vice President (since March 2000) of Nuveen
Investments, previously Assistant Vice
President (since January 1999), prior thereto,
Associate of Nuveen Investments; Certified
Public Accountant
Larry W. Martin 7/27/51 Vice President and Vice President, Assistant Secretary
333 W. Wacker Drive Assistant Secretary and Assistant General Counsel of
Chicago, IL 60606 Nuveen Investments; Vice President and
Assistant Secretary of Nuveen Advisory
Corp. and Nuveen Institutional Advisory
Corp.; Assistant Secretary of the John
Nuveen Company and (since January 1997)
Nuveen Asset Management, Inc.; Vice
President and Assistant Secretary
(since September 1999) of Nuveen Senior
Loan Asset Management Inc.
Edward F. Neild, IV 7/7/65 Vice President Vice President (since September 1996),
333 W. Wacker Drive previously Assistant Vice President
Chicago, IL 60606 (since December 1993) of Nuveen
Advisory Corp., Portfolio Manager
prior thereto; Vice President (since
September 1996), previously Assistant
Vice President (since May 1995) of
Nuveen Institutional Advisory Corp.,
Portfolio Manager prior thereto;
Chartered Financial Analyst.
Stephen S. Peterson 9/20/57 Vice President Vice President (since September 1997),
333 W. Wacker Drive previously Assistant Vice President
Chicago, IL 60606 (since September 1996), Portfolio
Manager, prior thereto,
24
Name and Address Birthdate Positions and Principal Occupations During
---------------- --------- ------------- ----------------------------
Offices with the Past Five Years
---------------- ---------------
Fund
----
of Nuveen Advisory Corp.; Chartered
Financial Analyst.
Thomas C. Spalding, Jr. 7/31/51 Vice President Vice President of Nuveen Advisory
333 W. Wacker Drive Corp. and Nuveen Institutional
Chicago, IL 60606 Advisory Corp.; Chartered Financial
Analyst.
Gifford R. Zimmerman 9/9/56 Vice President and Vice President, Assistant Secretary
333 W. Wacker Drive Secretary and Associate General Counsel, formerly
Chicago, IL 60606 Assistant General Counsel, of Nuveen
Investments; Vice President and
Assistant Secretary of Nuveen Advisory
Corp. and Nuveen Institutional Advisory
Corp.; Vice President and Assistant
Secretary of The John Nuveen Company
(since May 1994); Vice President and
Assistant Secretary (since September
1999) of Nuveen Senior Loan Asset
Management Inc.; Chartered Financial
Analyst.
Peter R. Sawers and Timothy R. Schwertfeger serve as members of the
Executive Committee of the Board of Trustees of the Fund. The Executive
Committee, which meets between regular meetings of the Board of Trustees, is
authorized to exercise all of the powers of the Board of Trustees.
The trustees of the Fund are also directors or trustees, as the case may
be, of 35 Nuveen open-end funds and 54 Nuveen closed-end funds advised by Nuveen
Advisory Corp. Mr. Schwertfeger is a director or trustee, as the case may be, of
13 Nuveen open-end and closed-end funds advised by Nuveen Institutional Advisory
Corp. and two funds advised by Nuveen Senior Loan Asset Management Inc. None of
the independent trustees has ever been a director, officer, or employee of, or a
consultant to, Nuveen Advisory, Nuveen or their affiliates.
25
The Common Shareholders of the 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 the 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 the
Fund projected during the Fund's first full fiscal year after commencement of
operation. The Fund does not have a retirement or pension plan. The officers and
trustees affiliated with Nuveen serve without any compensation from the Fund.
Amount of Total
Total Compensation Compensation that
California from Fund and Has Been
Name of Trustee Fund* Fund Complex** Deferred
--------------------- -------------------- -------------------- ------------------
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
Robert P. Bremner $120 $71,000 $ 8,368
----------------------------------------------------------------------------------------------
Lawrence H. Brown $126 $75,250 $ 0
----------------------------------------------------------------------------------------------
Anne E. Impellizzeri $120 $71,000 $55,784
----------------------------------------------------------------------------------------------
Peter R. Sawers $120 $71,000 $55,784
----------------------------------------------------------------------------------------------
William J. Schneider $120 $69,000 $54,216
----------------------------------------------------------------------------------------------
Judith M. Stockdale $120 $71,000 $13,946
----------------------------------------------------------------------------------------------
26
--------------------
* Based on the estimated compensation to be earned by the independent
trustees for the period from inception through the end of the 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.
The Fund has no employees. Its officers are compensated by Nuveen Advisory
or Nuveen.
INVESTMENT ADVISER
Nuveen Advisory acts as investment adviser to the Fund, with
responsibility for the overall management of the Fund. Its address is 333 West
Wacker Drive, Chicago, Illinois 60606. Nuveen Advisory is also responsible for
managing the Fund's business affairs and providing day-to-day administrative
services to the Fund. For additional information regarding the management
services performed by Nuveen Advisory, see "Management of the Fund" in the
Fund's Prospectus.
Nuveen Advisory is a wholly owned subsidiary of Nuveen, which is also a co-
managing underwriter of the Fund's shares. Nuveen is sponsor of the Nuveen
Defined Portfolios, registered unit investment trusts, is the principal
underwriter for the Nuveen Mutual Funds, and has served as co-managing
underwriter for the shares of the Nuveen Exchange-Traded Funds. Over 1,300,000
individuals have invested to date in Nuveen's funds and trusts. Founded in 1898,
Nuveen brings over a century of expertise to the municipal bond market.
According to data from Strategic Insight, Nuveen is the leading sponsor of
exchange-traded municipal bond funds as measured by number of funds (59) and
fund assets under management ($27 billion). Overall, Nuveen and its affiliates
have over $61 billion in assets under management or surveillance. Nuveen is a
subsidiary of The John Nuveen Company which, in turn, is approximately 78% owned
by The St. Paul Companies, Inc. ("St. Paul"). St. Paul is a publicly-traded
company
27
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
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:
Average Daily Net Assets(1) Management Fee
----------------------------- ------------------
Up to $125 million .6500%
$125 million to $250 million .6375%
$250 million to $500 million .6250%
$500 million to $1 billion .6125%
$1 billion to $2 billion .6000%
$2 billion and over .5750%
(1) Including net assets attributable to MuniPreferred Shares.
All fees and expenses are accrued daily and deducted before payment of
dividends to investors. The investment management agreement has been approved by
a majority of the disinterested trustees of the Fund and the sole shareholder of
the Fund.
For the first ten years of the Fund's operation, Nuveen Advisory has
contractually agreed to reimburse the Fund for fees and expenses in the amounts,
and for the time periods, set forth below:
Percentage Percentage
Reimbursed Reimbursed
Year Ending (as a percentage of Year Ending (as a percentage of
March 31, daily net assets)(1) March 31, daily net assets)(1)
------------- ------------------- ------------- -------------------
2001(2) .30% 2007 .25%
2002 .30% 2008 .20%
2003 .30% 2009 .15%
2004 .30% 2010 .10%
2005 .30% 2011 .05%
2006 .30%
-----------------------
(1) Including net assets attributable to MuniPreferred Shares.
(2) From the commencement of operations.
Reducing Fund expenses in this manner will tend to increase the amount of
income available for the Common Shareholders. Nuveen Advisory has not agreed to
reimburse the Fund for any portion of its fees and expenses beyond March 31,
2011.
The Fund, Nuveen Advisory, Nuveen, Salomon Smith Barney Inc. and other
related entities have adopted codes of ethics which essentially prohibit certain
of their personnel, including the Nuveen fund portfolio manager, from engaging
in personal investments which compete or interfere with, or attempt to take
advantage of a client's, including the Fund's, anticipated or actual portfolio
transactions, and are designed to assure that the interests of clients,
including Fund shareholders, are placed before the interests of personnel in
connection with personal investment transactions. Text-only versions of the
codes of ethics can be viewed online or downloaded from the EDGAR Database on
the SEC's internet web site at www.sec.gov. You may also review and copy those
documents by visiting the SEC's Public Reference Room in Washington, DC.
Information on the operation of the Public Reference Room may be obtained by
calling the SEC at 202-942-8090. In addition, copies of the codes of ethics may
be obtained, after mailing the appropriate duplicating fee, by writing to the
SEC's Public Reference Section, 450 5th Street, N.W., Washington, DC 20549-0102
or by e-mail request at publicinfo@sec.gov.
PORTFOLIO TRANSACTIONS
Nuveen Advisory is responsible for decisions to buy and sell securities for
the Fund and for the placement of the Fund's securities business, the
negotiation of the prices to be paid for principal trades and the allocation of
its transactions among various dealer firms. Portfolio securities will normally
be purchased directly from an underwriter or in the over-the-counter market from
the principal dealers in such securities, unless it appears that a better price
or
28
execution may be obtained through other means. Portfolio securities will not
be purchased from Nuveen or its affiliates except in compliance with the 1940
Act.
The Fund expects that substantially all portfolio transactions will be
effected on a principal (as opposed to an agency) basis and, accordingly, does
not expect to pay any brokerage commissions. Purchases from underwriters will
include a commission or concession paid by the issuer to the underwriter, and
purchases from dealers will include the spread between the bid and asked price.
It is the policy of Nuveen Advisory to seek the best execution under the
circumstances of each trade. Nuveen Advisory evaluates price as the primary
consideration, with the financial condition, reputation and responsiveness of
the dealer considered secondary in determining best execution. Given the best
execution obtainable, it will be Nuveen Advisory's practice to select dealers
which, in addition, furnish research information (primarily credit analyses of
issuers and general economic reports) and statistical and other services to
Nuveen Advisory. It is not possible to place a dollar value on information and
statistical and other services received from dealers. Since it is only
supplementary to Nuveen Advisory's own research efforts, the receipt of research
information is not expected to reduce significantly Nuveen Advisory's expenses.
While Nuveen Advisory will be primarily responsible for the placement of the
business of the Fund, the policies and practices of Nuveen Advisory in this
regard must be consistent with the foregoing and will, at all times, be subject
to review by the Board of Trustees of the Fund.
Nuveen Advisory may manage other investment accounts and investment
companies for other clients which have investment objectives similar to those of
the Fund. Subject to applicable laws and regulations, Nuveen Advisory seeks to
allocate portfolio transactions equitably whenever concurrent decisions are made
to purchase or sell securities by the Fund and another advisory account. In
making such allocations the main factors to be considered will be the respective
investment objectives, the relative size of portfolio holdings of the same or
comparable securities, the availability of cash for investment and the size of
investment commitments generally held. While this procedure could have a
detrimental effect on the price or amount of the securities available to the
Fund from time to time, it is the opinion of the Board of Trustees that the
benefits available from Nuveen Advisory's organization will outweigh any
disadvantage that may arise from exposure to simultaneous transactions.
Under the 1940 Act, the Fund may not purchase portfolio securities from any
underwriting syndicate of which Nuveen is a member except under certain limited
conditions set forth in Rule 10f-3. The rule sets forth requirements relating
to, among other things, the terms of an issue of municipal bonds purchased by
the Fund, the amount of municipal bonds which may be purchased in any one issue
and the assets of the Fund that may be invested in a particular issue. In
addition, purchases of securities made pursuant to the terms of the Rule must be
approved at least quarterly by the Board of Trustees of the Fund, including a
majority of the members thereof who are not interested persons of the Fund.
DISTRIBUTIONS
As described in the 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 the Fund to maintain a
29
more stable monthly distribution, the Fund will initially (prior to its first
distribution), and may from time to time thereafter, distribute less than the
entire amount of net investment income earned in a particular period. Such
undistributed net investment income would be available to supplement future
distributions, including distributions which might otherwise have been reduced
by a decrease in the Fund's monthly net income due to fluctuations in investment
income or expenses, or due to an increase in the dividend rate on the Fund's
outstanding MuniPreferred Shares. As a result, the distributions paid by the
Fund for any particular period may be more or less than the amount of net
investment income actually earned by the Fund during such period. Undistributed
net investment income will be added to the Fund's net asset value and,
correspondingly, distributions from undistributed net investment income will be
deducted from the Fund's net asset value.
For tax purposes, the Fund is currently required to allocate net capital
gain and other taxable income, if any, between Common Shares and MuniPreferred
Shares in proportion to total distributions paid to each class for the year in
which such net capital gain 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 the Fund's
Prospectus under "MuniPreferred Shares and Leverage."
While any MuniPreferred Shares are outstanding, the Fund may not declare
any cash dividend or other distribution on its Common Shares unless at the time
of such declaration (1) all accumulated dividends on the MuniPreferred Shares
have been paid and (2) the net asset value of the Fund's portfolio (determined
after deducting the amount of such dividend or other distribution) is at least
200% of the liquidation value of any outstanding MuniPreferred Shares. This
latter limitation on the Fund's ability to make distributions on its Common
Shares could under certain circumstances impair the ability of the Fund to
maintain its qualification for taxation as a regulated investment company. See
"Tax Matters."
DESCRIPTION OF SHARES
Common Shares
The Fund's Declaration of Trust (the "Declaration") authorizes the issuance
of an unlimited number of Common Shares, par value $.01 per share. All Common
Shares of the Fund have equal rights as to the payment of dividends and the
distribution of assets upon liquidation of the 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 the Fund's
MuniPreferred Shares are outstanding, Common Shareholders will not be entitled
to receive any distributions from the Fund unless all accrued dividends on
MuniPreferred Shares have been paid, and unless asset coverage (as defined in
the 1940 Act) with respect to MuniPreferred Shares would be at least 200% after
giving effect to such distributions. See "MuniPreferred Shares" below.
The Common Shares have been approved for listing on the 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.
30
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 the Fund's Common Shares will be determined by factors beyond the
control of the Fund, the Fund cannot predict whether the Common Shares will
trade at, below, or above net asset value or at, below or above the initial
public offering price. Accordingly, the Common Shares are designed primarily for
long-term investors, and investors in the Common Shares should not view the Fund
as a vehicle for trading purposes. See "Repurchase of Fund Shares; Conversion to
Open-End Fund" and the 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 the Fund, by
action of the Board of Trustees without the approval of the Common Shareholders.
The Fund's Board of Trustees has indicated its intention to authorize an
offering of MuniPreferred Shares (representing approximately 35% of the Fund's
capital immediately after the time the MuniPreferred Shares are issued) within
approximately one to three months after completion of the offering of Common
Shares, subject to market conditions and to the Board's continuing belief that
leveraging the Fund's capital structure through the issuance of MuniPreferred
Shares is likely to achieve the benefits to the Common Shareholders described in
this Statement of Additional Information. Although the terms of the
MuniPreferred Shares, including their dividend rate, voting rights, liquidation
preference and redemption provisions, will be determined by the Board of
Trustees (subject to applicable law and the Fund's Declaration) if and when it
authorizes a MuniPreferred Shares offering, the Board has stated that the
initial series of MuniPreferred Shares would likely pay cumulative dividends at
relatively shorter-term periods (such as 7 days); by providing for the periodic
redetermination of the dividend rate through an auction or remarketing
procedure. The Board of Trustees of the 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
Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Fund, holders of
MuniPreferred Shares will be entitled to receive a preferential liquidating
distribution (expected to equal the original purchase price per share plus
accumulated and unpaid dividends thereon, whether or not earned or declared)
before any distribution of assets is made to holders of Common Shares. After
payment of the full amount of the liquidating distribution to which they are
entitled, holders of MuniPreferred Shares will not be entitled to any further
participation in any distribution of assets by the Fund. A consolidation or
merger of the Fund with or into any Massachusetts business trust or corporation
or a sale of all or substantially all of the assets of the Fund shall not be
deemed to be a liquidation, dissolution or winding up of the Fund.
Voting Rights. In connection with any issuance of MuniPreferred Shares, the
Fund must comply with Section 18(i) of the 1940 Act which requires, among other
things, that MuniPreferred Shares be voting shares and have equal voting rights
with Common Shares. Except as otherwise indicated in this Statement of
Additional Information and except as otherwise required by applicable law,
holders of MuniPreferred Shares will vote together with Common Shareholders as a
single class.
In connection with the election of the Fund's trustees, holders of
MuniPreferred Shares, voting as a separate class, will be entitled to elect two
of the Fund's trustees, and the remaining trustees shall be elected by Common
Shareholders and holders of MuniPreferred Shares, voting together as a single
class. In addition, if at any time dividends on the Fund's outstanding
MuniPreferred Shares shall be unpaid in an amount equal to two full years'
dividends thereon, the holders of all outstanding MuniPreferred Shares, voting
as a separate class, will be entitled to elect a majority of the Fund's trustees
until all dividends in arrears have been paid or declared and set apart for
payment.
The affirmative vote of the holders of a majority of the 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 the Fund's MuniPreferred Shares
outstanding at the time, voting as a separate class, will be required to approve
any conversion of the Fund from a closed-end to an open-end investment company
and (2) the affirmative vote of the holders of at least two-thirds of the
outstanding MuniPreferred Shares, voting as a separate class, shall be required
to approve any plan of reorganization (as such term is used in the 1940 Act)
adversely affecting such shares, provided however, that such separate class vote
shall be a majority vote if the action in question has previously been approved,
adopted or authorized by the affirmative vote of two-thirds of the total number
of Trustees fixed in accordance with the Declaration or the By-laws. The
affirmative vote of the holders of a majority of the outstanding MuniPreferred
Shares, voting as a separate class, shall be required to approve any action not
described in the preceding sentence requiring a vote of security holders under
Section 13(a) of the 1940 Act including, among other things, changes in 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
above shall in each case be in addition to any separate vote of the
requisite percentage of Common Shares and MuniPreferred Shares necessary to
authorize the action in question.
The foregoing voting provisions will not apply with respect to the Fund's
MuniPreferred Shares if, at or prior to the time when a vote is required, such
shares shall have been (1) redeemed or (2) called for redemption and sufficient
funds shall have been deposited in trust to effect such redemption.
Redemption, Purchase and Sale of MuniPreferred Shares by the Fund. The
terms of the MuniPreferred Shares may provide that they are redeemable at
certain times, in whole or in part, at the original purchase price per share
plus accumulated dividends, that the Fund may tender for or purchase
MuniPreferred Shares and that the Fund may subsequently resell any shares so
tendered for or purchased. Any redemption or purchase of MuniPreferred Shares by
the Fund will reduce the leverage applicable to Common Shares, while any resale
of shares by the Fund will increase such leverage.
The discussion above describes the 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 the Fund's Declaration.
CERTAIN PROVISIONS IN THE DECLARATION OF TRUST
Under Massachusetts law, shareholders could, under certain circumstances,
be held personally liable for the obligations of the Fund. However, the
Declaration contains an express disclaimer of shareholder liability for debts or
obligations of the Fund and requires that notice of such limited liability be
given in each agreement, obligation or instrument entered into or executed by
the Fund or the trustees. The Declaration further provides for indemnification
out of the assets and property of the Fund for all loss and expense of any
shareholder held personally liable for the obligations of the Fund. Thus, the
risk of a shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which the Fund would be unable to meet
its obligations. The Fund believes that the likelihood of such circumstances is
very remote.
The Declaration includes provisions that could limit the ability of other
entities or persons to acquire control of the Fund. Specifically, the
Declaration requires a vote by holders of at least two-thirds of the Common
Shares and MuniPreferred Shares, voting together as a single class, except as
described below, to authorize (1) a conversion of the Fund from a closed-end to
an open-end investment company, (2) a merger or consolidation of the Fund, or a
series or class of the Fund, with any corporation, association, trust or other
organization or a reorganization or recapitalization of the Fund, or a series or
class of the Fund, (3) a sale, lease or transfer of all or substantially all of
the Fund's assets (other than in the regular course of the Fund's investment
activities), (4) in certain circumstances, a termination of the Fund, or a
series or class of the Fund or (5) removal of trustees, and then only for cause,
unless, 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
33
outstanding at the time, voting together as a single class, is required,
provided, however, that where only a particular class or series is affected (or,
in the case of removing a trustee, when the trustee has been elected by only one
class), only the required vote by the applicable class or series will be
required. Approval of shareholders is not required, however, for any
transaction, whether deemed a merger, consolidation, reorganization or otherwise
whereby the Fund issues shares in connection with the acquisition of assets
(including those subject to liabilities) from any other investment company or
similar entity. None of the foregoing provisions may be amended except by the
vote of at least two-thirds of the Common Shares and MuniPreferred Shares,
voting together as a single class. In the case of the conversion of the Fund to
an open-end investment company, or in the case of any of the foregoing
transactions constituting a plan of reorganization which adversely affects the
holders of MuniPreferred Shares, the action in question will also require the
affirmative vote of the holders of at least two-thirds of the Fund's
MuniPreferred Shares outstanding at the time, voting as a separate class, or, if
such action has been authorized by the affirmative vote of two-thirds of the
total number of trustees fixed in accordance with the Declaration or the By-
laws, the affirmative vote of the holders of at least a majority of the Fund's
MuniPreferred Shares outstanding at the time, voting as a separate class. The
votes required to approve the conversion of the Fund from a closed-end to an
open-end investment company or to approve transactions constituting a plan of
reorganization which adversely affects the holders of MuniPreferred Shares are
higher than those required by the 1940 Act. The Board of Trustees believes that
the provisions of the Declaration relating to such higher votes are in the best
interest of the Fund and its shareholders.
The provisions of the Declaration described above could have the effect of
depriving the Common Shareholders of opportunities to sell their Common Shares
at a premium over market value by discouraging a third party from seeking to
obtain control of the Fund in a tender offer or similar transaction. The overall
effect of these provisions is to render more difficult the accomplishment of a
merger or the assumption of control by a third party. They provide, however, the
advantage of potentially requiring persons seeking control of a Fund to
negotiate with its management regarding the price to be paid and facilitating
the continuity of the Fund's investment objectives and policies. The Board of
Trustees of the Fund has considered the foregoing anti-takeover provisions and
concluded that they are in the best interests of the Fund and its Common
Shareholders.
Reference should be made to the Declaration on file with the Securities and
Exchange Commission for the full text of these provisions.
The Declaration provides that the obligations of the Fund are not binding
upon the trustees of the Fund individually, but only upon the assets and
property of the Fund, and that the trustees shall not be liable for errors of
judgment or mistakes of fact or law. Nothing in the Declaration, however,
protects a trustee against any liability to which he would otherwise be subject
by reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office.
REPURCHASE OF 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
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
34
conditions and other factors. Because shares of a closed-end investment company
may frequently trade at prices lower than net asset value, the Fund's Board of
Trustees has currently determined that, at least annually, it will consider
action that might be taken to reduce or eliminate any material discount from net
asset value in respect of Common Shares, which may include the repurchase of
such shares in the open market or in private transactions, the making of a
tender offer for such shares at net asset value, or the conversion of the Fund
to an open-end investment company. There can be no assurance, however, that the
Board of Trustees will decide to take any of these actions, or that share
repurchases or tender offers, if undertaken, will reduce market discount.
Notwithstanding the foregoing, at any time when the Fund's MuniPreferred
Shares are outstanding, the Fund may not purchase, redeem or otherwise acquire
any of its Common Shares unless (1) all accrued MuniPreferred Shares dividends
have been paid and (2) at the time of such purchase, redemption or acquisition,
the net asset value of the Fund's portfolio (determined after deducting the
acquisition price of the Common Shares) is at least 200% of the liquidation
value of the outstanding MuniPreferred Shares (expected to equal the original
purchase price per share plus any accrued and unpaid dividends thereon). The
staff of the Securities and Exchange Commission currently requires that any
tender offer made by a closed-end investment company for its shares must be at a
price equal to the net asset value of such shares on the close of business on
the last day of the tender offer. Any service fees incurred in connection with
any tender offer made by the Fund will be borne by the Fund and will not reduce
the stated consideration to be paid to tendering shareholders.
Subject to its investment limitations, the Fund may borrow to finance the
repurchase of shares or to make a tender offer. Interest on any borrowings to
finance share repurchase transactions or the accumulation of cash by the Fund in
anticipation of share repurchases or tenders will reduce the Fund's net income.
Any share repurchase, tender offer or borrowing that might be approved by the
Board of Trustees would have to comply with the Securities Exchange Act of 1934,
as amended, and the 1940 Act and the rules and regulations thereunder.
Although the decision to take action in response to a discount from net
asset value will be made by the Board of the Fund at the time it considers such
issue, it is the Board's present policy, which may be changed by the Board, not
to authorize repurchases of Common Shares or a tender offer for such shares if
(1) such transactions, if consummated, would (a) result in the delisting of the
Common Shares from the American Stock Exchange, or (b) impair the Fund's status
as a regulated investment company under the Internal Revenue Code of 1986, as
amended (the "Code") (which would make the Fund a taxable entity, causing the
Fund's income to be taxed at the corporate level in addition to the taxation of
shareholders who receive dividends from the Fund) or as a registered closed-end
investment company under the 1940 Act; (2) the Fund would not be able to
liquidate portfolio securities in an orderly manner and consistent with the
Fund's investment objectives and policies in order to repurchase shares; or (3)
there is, in the Board's judgment, any (a) material legal action or proceeding
instituted or threatened challenging such transactions or otherwise materially
adversely affecting the Fund, (b) general suspension of or limitation on prices
for trading securities on the 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 the Fund or the issuers of its portfolio securities by
Federal or state authorities on the extension of credit by lending institutions
or on the exchange of
35
foreign currency, (e) commencement of war, armed hostilities or other
international or national calamity directly or indirectly involving the United
States, or (f) other event or condition which would have a material adverse
effect (including any adverse tax effect) on the Fund or its shareholders if
shares were repurchased. The Board of Trustees of the 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 the Fund's Common Shares and MuniPreferred Shares
outstanding at the time, voting together as a single class, and of the holders
of at least two-thirds of the Fund's MuniPreferred Shares outstanding at the
time, voting as a separate class, provided however, that such separate class
vote shall be a majority vote if the action in question has previously been
approved, adopted or authorized by the affirmative vote of two-thirds of the
total number of trustees fixed in accordance with the Declaration or By-laws.
See the Prospectus under "Certain Provisions in the Declaration of Trust" for a
discussion of voting requirements applicable to conversion of the Fund to an
open-end company. If the Fund converted to an open-end company, it would be
required to redeem all MuniPreferred Shares then outstanding, and the Fund's
Common Shares would no longer be listed on the 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 the
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 the Fund of its shares at prices below net asset value
will result in an increase in the net asset value of those shares that remain
outstanding. However, there can be no assurance that share repurchases or
tenders at or below net asset value will result in the Fund's shares trading at
a price equal to their net asset value. Nevertheless, the fact that the Fund's
shares may be the subject of repurchase or tender offers at net asset value from
time to time, or that the Fund may be converted to an open-end company, may
reduce any spread between market price and net asset value that might otherwise
exist.
In addition, a purchase by the Fund of its Common Shares will decrease the
Fund's total assets which would likely have the effect of increasing the Fund's
expense ratio. Any purchase by the Fund of its Common Shares at a time when
MuniPreferred Shares are outstanding will increase the leverage applicable to
the outstanding Common Shares then remaining. See the Fund's Prospectus under
"Risks--Concentration Risk" and "Risks--Leverage Risk."
Before deciding whether to take any action if the Fund's Common Shares
trade below net asset value, the Board of the 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 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.
36
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 the Fund.
The Fund intends to qualify under Subchapter M of the Code, for tax
treatment as a regulated investment company and to satisfy certain conditions
which will enable interest from municipal obligations, which is exempt from
regular federal income taxes in the hands of the Fund, to qualify as "exempt-
interest dividends" when distributed to the Fund's shareholders. In order to
qualify for tax treatment as a regulated investment company, the Fund must
satisfy certain requirements relating to the source of its income,
diversification of its assets, and distributions of its income to shareholders.
First, the Fund must derive at least 90% of its annual gross income (including
tax-exempt interest) from dividends, interest, payments with respect to
securities loans, gains from the sale or other disposition of stock or
securities or foreign currencies, or other income (including but not limited to
gains from options, futures and forward contracts) derived with respect to its
business of investing in such stock, securities or currencies (the "90% gross
income test"). Second, the Fund must diversify its holdings so that, at the
close of each quarter of its taxable year, (i) at least 50% of the value of its
total assets is comprised of cash, cash items, United States Government
securities, securities of other regulated investment companies and other
securities limited in respect of any one issuer to an amount not greater in
value than 5% of the value of the Fund's total assets and to not more than 10%
of the outstanding voting securities of such issuer, and (ii) not more than 25%
of the value of its total assets is invested in the securities of any one issuer
(other than United States Government securities and securities of other
regulated investment companies) or two or more issuers controlled by the Fund
and engaged in the same, similar or related trades or businesses.
As a regulated investment company, the Fund will not be subject to federal
income tax in any taxable year with respect to "net investment income" (i.e.,
its "investment company taxable income," as that term is defined in the Code,
determined without reference to the deduction for dividends paid) and "net
capital gain" (i.e., the excess of the Fund's net long-term capital gain over
its net short-term capital loss), provided that it distributes at least 90% of
the sum of (i) its investment company taxable income (which includes dividends,
taxable interest, taxable original issue discount and market discount income,
income from securities lending, net short-term capital gain in excess of net
long-term capital loss, and any other taxable income other than net capital gain
and is reduced by deductible expenses) and (ii) its net tax-exempt interest (the
excess of its gross tax-exempt interest income over certain disallowed
deductions). The Fund may retain for investment its net capital gain. However,
if the Fund retains any net capital gain or any investment company taxable
income, it will be subject to tax at regular corporate rates on the amount
retained. If the Fund retains any net capital gain, it may designate the
retained amount as undistributed capital gains in a notice to its shareholders
who, if subject to federal income tax on long-term capital gains, (i) will be
required to include in income for federal income tax purposes, as long-term
capital gain, their share of such undistributed amount, and (ii) will be
entitled to credit their proportionate shares of the tax paid by the Fund on
such undistributed amount against their federal income tax liabilities, if any,
and to claim refunds to the extent the credit exceeds such liabilities. For
federal income tax purposes, the tax basis of shares owned by a shareholder of
the Fund will be increased by an amount equal under current law to the
difference between the amount of undistributed capital gains included in the
shareholder's gross income and the tax deemed paid by the shareholder under
clause (ii) of the preceding sentence. The
37
Fund intends to distribute at least annually to its shareholders all or
substantially all of its net tax-exempt interest and any investment company
taxable income and net capital gain.
Treasury regulations permit a regulated investment company, in determining
its investment company taxable income and net capital gain, to elect (unless it
has made a taxable year election for excise tax purposes as discussed below) to
treat all or part of any net capital loss, any net long-term capital loss or any
net foreign currency loss incurred after October 31 as if it had been incurred
in the succeeding year.
The Fund intends to qualify to pay "exempt-interest dividends" by
satisfying the requirement that at the close of each quarter of the Fund's
taxable year at least 50% of the value of its total assets consist of tax-exempt
municipal obligations. Distributions from the Fund will constitute exempt-
interest dividends to the extent of its tax-exempt interest income (net of
expenses and amortized bond premium). Exempt-interest dividends distributed to
Common Shareholders are excluded from gross income for federal income tax
purposes, although they are required to be reported on the Common Shareholders'
federal income tax returns. Gain from the sale or redemption of Common Shares,
however, will be taxable to the Common Shareholders as capital gain (provided
such Common Shares were held as capital assets) even though the increase in
value of such Common Shares is attributable to tax-exempt interest income. In
addition, gain realized by the Fund from the disposition of a tax-exempt
municipal obligation that was purchased at a price less than the principal
amount of the bond will be taxable to the Fund's shareholders as ordinary income
to the extent of accrued market discount. Under the Code, interest on
indebtedness incurred or continued to purchase or carry Common Shares, which
interest is deemed to relate to exempt-interest dividends, will not be
deductible by Common Shareholders for federal income tax purposes. Moreover,
while exempt-interest dividends are excluded from gross income for federal
income tax purposes, they may be subject to alternative minimum tax ("AMT") and
may have other collateral tax consequences. Taxpayers that may be subject to the
AMT should consult their advisers before investing in Common Shares.
Distributions by the Fund of net interest received from certain taxable
temporary investments (such as certificates of deposit, commercial paper and
obligations of the U.S. Government, its agencies and instrumentalities) and net
short-term capital gain realized by the Fund, if any, will be taxable to Common
Shareholders as ordinary income whether received in cash or additional shares.
Any net long-term capital gain realized by the Fund and distributed to Common
Shareholders in cash or additional shares will be taxable to Common Shareholders
as long-term capital gain regardless of the length of time investors have owned
shares of the Fund. Distributions by the Fund to Common Shareholders that do not
constitute ordinary income dividends or capital gain dividends will be treated
as a return of capital to the extent of (and in reduction of) the Common
Shareholder's tax basis in his or her shares. Any excess will be treated as gain
from the sale of his or her shares, as discussed below.
The Internal Revenue Service's position in a published revenue ruling
indicates that the Fund is required to designate distributions paid with respect
to its Common Shares and its MuniPreferred Shares as consisting of a portion of
each type of income distributed by the Fund. The portion of each type of income
deemed received by the holders of each class of shares will be equal to the
portion of total Fund distributions received by such class. Thus, the Fund will
designate dividends paid as exempt-interest dividends in a manner that allocates
such dividends between the holders of the Common Shares and the holders of
MuniPreferred Shares, in proportion to the total dividends paid to each such
class during or with respect to the taxable year, or otherwise as required by
applicable law. Capital gain dividends and ordinary income dividends will
similarly be allocated between the two classes.
If the Fund engages in hedging transactions involving financial futures and
options, these transactions will be subject to special tax rules, the effect of
which may be to accelerate income to the Fund, defer the Fund's losses, cause
adjustments in the holding periods of the Fund's securities, convert long-term
capital gains into short-term capital gains and convert short-term capital
losses into long-term capital losses. These rules could therefore affect the
amount, timing and character of distributions to Common Shareholders.
Prior to purchasing shares in the Fund, an investor should carefully
consider the impact of dividends or distributions which are expected to be or
have been declared, but not paid. Any dividend or distribution declared shortly
after a purchase of such shares prior to the record date will have the effect of
reducing the per share net asset value by the per share amount of the dividend
or distribution.
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to shareholders of
record on a specified date in one of those months and paid during the following
January, will be treated as having been distributed by the Fund (and received by
the shareholders) on December 31.
The redemption or exchange of Common Shares normally will result in capital
gain or loss to the Common Shareholders who hold their Common Shares as capital
assets. However, any loss on the sale or exchange of a Common Share that has
been held for six months or less will be disallowed to the extent of any
distribution of exempt-interest dividends received with respect to such Common
Share. Generally, a Common Shareholder's gain or loss will be long-term gain or
loss if the shares have been held for more than one year. If a shareholder sells
or otherwise disposes of Common Shares before holding them for more than six
months, however, any loss on the sale or other disposition of such Common Shares
shall be treated as a long-term capital loss to the extent of any capital gain
dividends received by the Common Shareholder (or credited to the Common
Shareholder as an undistributed capital gain) with respect to such Common
Shares. Present law taxes both long- and short-term capital gains of
corporations at the rates applicable to ordinary income. For non-corporate
taxpayers, however, net capital gain (i.e., the excess of net long-term capital
gain over net short-term capital loss) with respect to securities will be taxed
at a maximum rate of 20%, while short-term capital gain and other ordinary
income will be taxed at a maximum
38
rate of 39.6%. The maximum long-term capital gain rate will decrease from 20%
to 18% for capital assets that have been held for more than five years and whose
holding periods begin after December 31, 2000. Because of the limitations on
itemized deductions and the deduction for personal exemptions applicable to
higher income taxpayers, the effective tax rate may be higher in certain
circumstances.
All or a portion of a sales charge paid in purchasing Common Shares cannot
be taken into account for purposes of determining gain or loss on the redemption
or exchange of such shares within 90 days after their purchase to the extent
shares of the Fund or another fund are subsequently acquired without payment of
a sales charge pursuant to a reinvestment right. Any disregarded portion of such
charge will result in an increase in the Common Shareholder's tax basis in the
shares subsequently acquired. In addition, no loss will be allowed on the
redemption or exchange of Common Shares if the Common Shareholder purchases
other shares of the Fund (whether through reinvestment of distributions or
otherwise) or the Common Shareholder acquires or enters into a contract or
option to acquire securities that are substantially identical to shares of the
Fund within a period of 61 days beginning 30 days before and ending 30 days
after such redemption or exchange. If disallowed, the loss will be reflected in
an adjustment to the basis of the shares acquired.
In order to avoid a 4% federal excise tax, the Fund must distribute or be
deemed to have distributed by December 31 of each calendar year at least 98% of
its taxable ordinary income for such year, at least 98% of its capital gain net
income (the excess of its realized capital gains over its realized capital
losses, generally computed on the basis of the one-year period ending on October
31 of such year) and 100% of any taxable ordinary income and any excess of
realized capital gains over realized capital losses for the prior year that was
not distributed during such year and on which the Fund paid no federal income
tax. For purposes of the excise tax, a regulated investment company may reduce
its capital gain net income (but not below its net capital gain) by the amount
of any net ordinary loss for the calendar year. The Fund intends to make timely
distributions in compliance with these requirements and consequently it is
anticipated that it generally will not be required to pay the excise tax.
If in any year the Fund should fail to qualify under Subchapter M for tax
treatment as a regulated investment company, the Fund would incur a regular
corporate federal income tax upon its income for that year, and distributions to
its Common Shareholders would be taxable to Common Shareholders as ordinary
dividend income for federal income tax purposes to the extent of the Fund's
earnings and profits.
The Fund is required in certain circumstances to withhold 31% of taxable
dividends and certain other payments paid to non-corporate holders of shares who
have not furnished to the Fund their correct taxpayer identification numbers (in
the case of individuals, their Social Security number) and certain
certifications, or who are otherwise subject to backup withholding. Backup
withholding is not an additional tax and any amounts withheld may be credited
against the shareholder's federal income tax liability.
The foregoing is a general and abbreviated summary of the provisions of the
Code and Treasury Regulations presently in effect as they directly govern the
taxation of the Fund and its Common Shareholders. For complete provisions,
reference should be made to the pertinent Code sections and Treasury
Regulations. The Code and Treasury Regulations are subject to change by
legislative or administrative action, and any such change may be retroactive
with respect to Fund transactions. Common Shareholders are advised to consult
their own tax
39
advisors for more detailed information concerning the federal taxation of the
Fund and the income tax consequences to its Common Shareholders.
State Tax Matters
Tax matters pertaining to California are set forth in Appendix D.
PERFORMANCE RELATED AND COMPARATIVE INFORMATION
The 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. California municipal bonds can provide double tax-
free income (exempt from both regular federal and state income taxes) for
residents of California. Because the Fund expects that a substantial portion of
its investments will pay interest that is taxable under the federal alternative
minimum tax, the Fund may not be a suitable investment for shareholders that are
subject to the federal alternative minimum tax.
The Fund may quote certain performance-related information and may compare
certain aspects of its portfolio and structure to other substantially similar
closed-end funds as categorized by Lipper, Inc. ("Lipper"), Morningstar Inc. or
other independent services. Comparison of the Fund to an alternative investment
should be made with consideration of differences in features and expected
performance. The Fund may obtain data from sources or reporting services, such
as Bloomberg Financial ("Bloomberg") and Lipper, that the Fund believes to be
generally accurate.
Past performance is not indicative of future results. At the time Common
Shareholders sell their shares, they may be worth more or less than their
original investment.
See Appendix E for additional performance related and comparative
information.
40
EXPERTS
The Statement of Net Assets of the Fund as of ____________ appearing in
this Statement of Additional Information has been audited by Ernst & Young LLP,
233 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 the Fund.
CUSTODIAN
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.
ADDITIONAL INFORMATION
A Registration Statement on Form N-2, including amendments thereto,
relating to the shares of the Fund offered hereby, has been filed by the Fund
with the Securities and Exchange Commission (the "Commission"), Washington, D.C.
The Fund's Prospectus and this Statement of Additional Information do not
contain all of the information set forth in the Registration Statement,
including any exhibits and schedules thereto. For further information with
respect to the Fund and the shares offered hereby, reference is made to the
Fund's Registration Statement. Statements contained in the Fund's Prospectus and
this Statement of Additional Information as to the contents of any contract or
other document referred to are not
41
necessarily complete and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference. Copies of
the Registration Statement may be inspected without charge at the Commission's
principal office in Washington, D.C., and copies of all or any part thereof may
be obtained from the Commission upon the payment of certain fees prescribed by
the Commission.
42
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholder
Nuveen California Dividend Advantage Municipal Fund 2
[To Come]
43
NUVEEN CALIFORNIA DIVIDEND ADVANTAGE MUNICIPAL FUND 2
FINANCIAL STATEMENTS
[To Come]
44
APPENDIX A
Ratings of Investments
Standard & Poor's Corporation--A brief description of the applicable Standard &
Poor's Corporation ("Standard & Poor's" or "S&P") rating symbols and their
meanings (as published by S&P) follows:
A Standard & Poor's issue credit rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial obligation,
a specific class of financial obligations, or a specific financial program. It
takes into consideration the creditworthiness of guarantors, insurers, or other
forms of credit enhancement on the obligation. The issue credit rating is not a
recommendation to purchase, sell, or hold a financial obligation, inasmuch as it
does not comment as to market price or suitability for a particular investor.
Issue credit ratings are based on current information furnished by the obligors
or obtained by Standard & Poor's from other sources it considers reliable.
Standard & Poor's does not perform an audit in connection with any credit rating
and may, on occasion, rely on unaudited financial information. Credit ratings
may be changed, suspended, or withdrawn as a result of changes in, or
unavailability of, such information, or based on other circumstances.
Issue credit ratings can be either long term or short term. Short-term ratings
are generally assigned to those obligations considered short term in the
relevant market. In the U.S., for example, that means obligations with an
original maturity of no more than 365 days - including commercial paper.
Short-term ratings are also used to indicate the creditworthiness of an obligor
with respect to put features on long-term obligations. The result is a dual
rating, in which the short-term ratings address the put feature, in addition to
the usual long-term rating. Medium-term notes are assigned long-term ratings.
Long-term Issue Credit Ratings
Issue credit ratings are based in varying degrees, on the following
considerations:
1. Likelihood of payment - capacity and willingness of the obligor
to meet its financial commitment on an obligation in accordance
with the terms of the obligation;
2. Nature of and provisions of the obligation; and
3. Protection afforded by, and relative position of, the obligation
in the event of bankruptcy, reorganization, or other arrangement
under the laws of bankruptcy and other laws affecting creditors'
rights.
The issue ratings definitions are expressed in terms of default risk. As such,
they pertain to senior obligations of an entity. Junior obligations are
typically rated lower than senior obligations, to reflect the lower priority in
bankruptcy, as noted above.
AAA
An obligation rated 'AAA' has the highest rating assigned by Standard & Poor's.
The obligor's capacity to meet its financial
A-1
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
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
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
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
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
-- 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
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
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 does not rate the issuer or issue in question.
`Withdrawn': A rating is withdrawn when Fitch 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
APPENDIX B
TAXABLE EQUIVALENT YIELD TABLES
The taxable equivalent yield is the current yield you would need to earn on
a taxable investment in order to equal a stated tax-free yield on a municipal
investment. To assist you to more easily compare municipal investments like
the Fund with taxable alternative investments, the table below presents the
taxable equivalent yields for a range of hypothetical tax-free yields assuming
the stated marginal Federal tax rates for 2001 listed below:
Taxable Equivalent of Tax-Free Yields
Tax Free Yields
Tax Rate 4.00% 4.50% 5.00% 5.50% 6.00% 6.50%
-------------------------------------------------------------------------------
15.0% 4.71% 5.29% 5.88% 6.47% 7.06% 7.65%
28.0% 5.56% 6.25% 6.94% 7.64% 8.33% 9.03%
31.0% 5.80% 6.52% 7.25% 7.97% 8.70% 9.42%
36.0% 6.25% 7.03% 7.81% 8.59% 9.38% 10.16%
39.6% 6.62% 7.45% 8.28% 9.11% 9.93% 10.76%
B-1
CALIFORNIA
The following tables show the approximate taxable yields for individuals
that are equivalent to tax-free yields under combined Federal and California
state taxes, using published 2001 marginal Federal tax rates and marginal
California tax rates currently available and scheduled to be in effect.
Single Return Joint Return Federal Tax State Tax Combined Tax
Bracket Bracket Rate Rate* Rate*
--------------- --------------- ----------- --------- ------------
$0-27,050 $0-45,200 15.00% 6.00% 20.10%
27,050-65,550 45,200-109,250 28.00% 9.30% 34.70%
65,550-136,750 109,250-166,500 31.00% 9.30% 37.40%
136,750-297,350 166,500-297,350 36.00% 9.30% 42.00%
Over 297,350 Over 297,350 39.60% 9.30% 45.20%
4.00% 4.50% 5.00% 5.50% 6.00% 6.50%
----- ----- ----- ----- ----- -----
5.01% 5.63% 6.26% 6.88% 7.51% 8.14%
6.13% 6.89% 7.66% 8.42% 9.19% 9.95%
6.39% 7.19% 7.99% 8.79% 9.58% 10.38%
6.90% 7.76% 8.62% 9.48% 10.34% 11.21%
7.30% 8.21% 9.12% 10.04% 10.95% 11.86%
----------------
* The combined state and Federal tax rates shown reflect the fact that state tax
payments are currently deductible for Federal tax purposes. The State tax
brackets used are those for 2000. The 2001 brackets will be adjusted to take
into account changes in the California Consumer Price Index. These adjustments
have not yet been released. Please note that the table does not reflect (i)
any federal or state limitations on the amounts of allowable itemized
deductions, phase-outs of personal or dependent exemption credits or other
allowable credits, (ii) any local taxes imposed, or (iii) any taxes other than
personal income taxes. The table assumes that federal taxable income is equal
to state income subject to tax, and in cases where more than one state rate
falls within a federal bracket, the highest state rate corresponding to the
highest income within that federal bracket is used. The numbers in the
Combined Tax Rate column are rounded to the nearest one-tenth of one percent.
B-2
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 the Fund's
existing or anticipated holdings of long-term debt securities. When the Fund
purchases a financial future, it deposits in cash or securities an "initial
margin" of between 1% and 5% of the contract amount. Thereafter, the Fund's
account is either credited or debited on a daily basis in correlation with the
fluctuation in price of the underlying future or other requirements imposed by
the exchange in order to maintain an orderly market. The Fund must make
additional payments to cover debits to its account and has the right to withdraw
credits in excess of the liquidity, the Fund may close out its position at any
time prior to expiration of the financial future by taking an opposite position.
At closing a final determination of debits and credits is made, additional cash
is paid by or to the Fund to settle the final determination and the Fund
realizes a loss or gain depending on whether on a net basis it made or received
such payments.
The sale of financial futures is for the purpose of hedging the Fund's
existing or anticipated holdings of long-term debt securities. For example, if
the Fund owns long-term bonds and interest rates were expected to increase, it
might sell financial futures. If interest rates did increase, the value of
long-term bonds in the Fund's portfolio would decline, but the value of the
Fund's financial futures would be expected to increase at approximately the same
rate thereby keeping the net asset value of the Fund from declining as much as
it otherwise would have.
Among the risks associated with the use of financial futures by the Fund as
a hedging device, perhaps the most significant is the imperfect correlation
between movements in the price of the financial futures and movements in the
price of the debt securities which are the subject of the hedge.
Thus, if the price of the financial future moves less or more than the
price of the securities which are the subject of the hedge, the hedge will not
be fully effective. To compensate for this imperfect correlation, the Fund may
enter into financial futures in a greater dollar amount than the dollar amount
of the securities being hedged if the historical volatility of the prices of
such securities has been greater than the historical volatility of the financial
futures. Conversely, the Fund may enter into fewer financial futures if the
historical volatility of the price of the securities being hedged is less than
the historical volatility of the financial futures.
C-1
The market prices of financial futures may also be affected by factors
other than interest rates. One of these factors is the possibility that rapid
changes in the volume of closing transactions, whether due to volatile markets
or movements by speculators, would temporarily distort the normal relationship
between the markets in the financial future and the chosen debt securities. In
these circumstances as well as in periods of rapid and large price movements.
The Fund might find it difficult or impossible to close out a particular
transaction.
Options on Financial Futures
The Fund may also purchase put or call options on financial futures which
are traded on a U.S. Exchange or board of trade and enter into closing
transactions with respect to such options to terminate an existing position.
Currently, options can be purchased with respect to financial futures on U.S.
Treasury Bonds on The Chicago Board of Trade. The purchase of put options on
financial futures is analogous to the purchase of put options by the 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 Fund. There is no guarantee that such closing
transactions can be effected.
Index Contracts
Index Futures
A tax-exempt bond index which assigns relative values to the tax-exempt
bonds included in the index is traded on the Chicago Board of Trade. The index
fluctuates with changes in the market values of all tax-exempt bonds included
rather than a single bond. An index future is a bilateral agreement pursuant to
which two parties agree to take or make delivery of an amount of cash-rather
than any security-equal to specified dollar amount times the difference between
the index value at the close of the last trading day of the contract and the
price at which the index future was originally written. Thus, an index future
is similar to traditional financial futures except that settlement is made in
cash.
Index Options
The Fund may also purchase put or call options on U.S. Government or tax-
exempt bond index futures and enter into closing transactions with respect to
such options to terminate an existing position. Options on index futures are
similar to options on debt instruments except that an option on an index future
gives the purchaser the right, in return for the premium paid, to assume a
position in an index contract rather than an underlying security at a specified
exercise price at any time during the period of the option. Upon exercise of
the option, the delivery of the futures position by the writer of the option to
the holder of the option will be accompanied by delivery of the accumulated
balance of the writer's futures margin account which represents the amount by
which the market price of the index futures contract, at exercise, is less than
the exercise price of the option on the index future.
Bond index futures and options transactions would be subject to risks
similar to transactions in financial futures and options thereon as described
above. No series will enter into transactions in index or financial futures or
related options unless and until, in the Adviser's opinion, the market for such
instruments has developed sufficiently.
C-2
APPENDIX D
Factors Pertaining to California
The information set forth below is derived from sources that are
generally available to investors. The information is intended to give recent
historical description and is not intended to indicate future or continuing
trends in the financial or other positions of California. It should be noted
that the creditworthiness of obligations issued by local California issuers may
be unrelated to the creditworthiness of obligations issued by the State of
California, and there is no obligation on the part of the State to make payment
on such local obligations in the event of default.
General
During the early 1990's, California experienced significant financial
difficulties, which reduced its credit standing, but the State's finances have
improved significantly starting in 1995, 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 over 34 million represents
about 12-1/2% of the total United States population and grew by 26% in the
1980s, more than double the national rate. Population growth slowed to less than
1% annually in 1994 and 1995, but rose to almost 2% in the final years of the
1990's. The bulk of population growth in the State is due to births and foreign
immigration.
Total personal income in the State, at an estimated $991 billion in
1999, 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. Recovery did not
begin in California until 1994, later than the rest of the nation, but since
that time California's economy has outpaced the national average. By mid-2000,
unemployment in the State was under 5%, its lowest level in three decades.
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 and other services, entertainment,
tourism, and nonresidential construction. Residential construction has
increased since the lows of the early 1990's but is lower than during the
previous expansion in the 1980's. Exports have been very strong, especially to
Asia, Latin America and Canada. Following the strongest growth in a decade in
1999 and 2000, the State's economy is projected to grow more slowly in 2001. The
nationwide economic slowdown was not felt strongly in California (which had 90%
of new job growth in the nation in the fourth quarter of 2000), but may affect
the economy in 2001. Widely publicized difficulties in California's energy
supplies pose some risks to the economy, especially if there are prolonged
blackouts or shortages of natural gas, but these factors, and the impact of
rising energy prices, are mitigated by the fact that California's economy is
very energy-efficient. U.S. Department of Energy statistics for 1997 revealed
that California ranked 49th of the 50 states in energy expenditures as a
D-1
percentage of state domestic product. Nevertheless, slower than expected
economic growth, or significant interruptions in energy supplies, could
adversely affect the State's revenues.
Recent Development Regarding Energy
California has experienced difficulties with the supply and price of
electricity and natural gas in much of the State since mid-2000, which are
likely to continue for several years. Energy usage in the State has been rising
sharply with the strong economy, but no new power generating plants have been
built since the 1980's. The three major investor-owned utilities in the State
("IOUs") have been purchasing electricity to meet their needs above their own
generating capacity and contracted supplies at fluctuating short-term and spot
market rates, while the retail prices they can charge their residential and
small business customers have been capped at specified levels. Starting in mid-
2000, power purchase costs exceeded retail charges, and the IOUs incurred
substantial losses and accumulated large debts to continue to purchase power for
their customers. As a result, the credit ratings of the IOUs have deteriorated,
making it difficult to continue to purchase power. The two largest IOUs have
reported they are in default in paying certain of their obligations, and may be
forced into bankruptcy.
In mid-January 2001, there were rolling electricity blackouts in northern
California affecting millions of customers. The Governor declared a state of
emergency under State law on January 17, 2001, and ordered the State's
Department of Water Resources ("DWR") to begin purchasing electricity for resale
to retail end use customers, to fill the gap in supplies resulting from the
inability of the IOUs to continue to purchase power. DWR also started to enter
into long-term power supply contracts to reduce reliance on short-term and spot
markets. DWR's purchases are initially being funded by advances from the State's
General Fund; about $1.2 billion was expended in the first month. DWR is
entitled to repayment from a portion of retail end use customer's payments,
remitted through the IOUs, but these amounts will not equal the power purchase
costs. The balance is intended to be funded from the issuance of up to $10
billion of revenue bonds, expected to be issued by mid-2001. Pending
implementation of these repayment mechanisms, the State has sufficient cash
reserves and available internal borrowings to fund DWR power purchases for many
months. The revenue bonds will be repaid from a dedicated revenue stream derived
from customer payments. DWR has the legal power to set retail rates at a
sufficient level to recover all its costs. These bonds will not be backed in any
way by the faith and credit or taxing power of the State.
The State is intensifying programs for energy conservation, load management
and improved energy efficiency in government, businesses and homes. Approval for
construction of new power generating facilities, especially smaller and
"peaking" power facilities, has been accelerated. A number of new larger power
plants are under construction and in permitting phase, and will come on line in
2001-2003. As noted, the State is seeking longer term power supply contracts at
lower costs. The combination of these elements is expected to lower wholesale
electricity costs in the future and promote the financial recovery of the IOUs.
Natural gas prices in California have been increasing significantly as a
result of limited pipeline capacity into the State, and nationwide price
increases. The prices nationally may remain high for some time until additional
supplies are produced, as natural gas prices are not regulated. One of the
State's IOUs also supplies natural gas, and its credit difficulties have
impaired its ability
D-2
to obtain supplies. Significant interruption in natural gas supplies could
adversely affect the economy, including generation of electricity, much of which
is fueled by natural gas.
A number of additional plans are under consideration by the State
Legislature, including the authorization of State agencies authorities to own,
build or purchase power generation or transmission facilities and assist energy
conservation efforts. Plans are also being considered to assist the IOUs repay
their debts incurred in purchasing power; these may include a State purchase of
their transmission facilities, funded also with revenue bonds. A number of
lawsuits are pending dealing with many aspects of the energy situation in
California, including disputes over the rates which the California Public
Utilities Commission may charge retail customers, financial responsibility for
purchases of power by the IOUs, and various antitrust and fraud claims against
energy suppliers.
Constitutional Limitations on Taxes, Other Charges and Appropriations
Limitation on Property Taxes. Certain California Municipal
Obligations may be obligations of issuers which rely in whole or in part,
directly or indirectly, on ad valorem property taxes as a source of revenue. The
taxing powers of California local governments and districts are limited by
Article XIIIA of the California Constitution, enacted by the voters in 1978 and
commonly known as "Proposition 13." Briefly, Article XIIIA limits to 1% of full
cash value of the rate of ad valorem property taxes on real property and
generally restricts the reassessment of property to 2% per year, except under
new construction or change of ownership (subject to a number of exemptions).
Taxing entities may, however, raise ad valorem taxes above the 1% limit to pay
debt service on voter-approved bonded indebtedness.
Under Article XIIIA, the basic 1% ad valorem tax levy is applied
against the assessed value of property as of the owner's date of acquisition (or
as of March 1, 1975, if acquired earlier), subject to certain adjustments. This
system has resulted in widely varying amounts of tax on similarly situated
properties. Several lawsuits were 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."
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.
D-3
Article XIIID contains several new provisions making it generally more
difficult for local agencies to levy and maintain "assessments" for municipal
services and programs. Article XIIID also contains several new provisions
affecting "fees" and "charges", defined for purposes of Article XIIID to mean
"any levy other than an ad valorem tax, a special tax, or an assessment, imposed
by a [local government] upon a parcel or upon a person as an incident of
property ownership, including a user fee or charge for a property related
service." All new and existing property related fees and charges must conform to
requirements prohibiting, among other things, fees and charges which generate
revenues exceeding the funds required to provide 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 affected.
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 to comply with mandates of courts or the federal government, (3)
appropriations for certain capital outlay projects, (4) appropriations by the
State of post-1989 increases in gasoline taxes and vehicle weight fees, and (5)
appropriations made in certain cases of emergency.
D-4
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.
"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 in the early 1990's because of the recession, few governments have been
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. For the last ten years, appropriations subject to limitation have
been under the State's limit. However, because of extraordinary revenue receipts
in fiscal year 1999-2000, State appropriations were estimated to be about $700
million above the limit. No refund will occur unless the State also exceeds its
limit in fiscal year 2000-01; the State Department of Finance estimates the
State will be about $3.6 billion below its appropriation limit in fiscal year
2000-01.
Because of the complex nature of Articles XIIIA, XIIIB, XIIIC and
XIIID of the California Constitution, the ambiguities and possible
inconsistencies in their terms, and the impossibility of predicting future
appropriations or changes in population and cost of living, and the probability
of continuing legal challenges, it is not currently possible to determine fully
the impact of these Articles on California municipal obligations or on the
ability of the State or local governments to pay debt service on such California
municipal obligations. It is not possible, at the present time, to predict the
outcome of any pending litigation with respect to the ultimate scope, impact or
constitutionality of these Articles or the impact of any such determinations
upon State agencies or local governments, or upon their ability to pay debt
service on their obligations. Further initiatives or legislative changes in laws
or the California Constitution may also affect the ability of the State or local
issuers to repay their obligations.
Obligations of the State of California
Under the California Constitution, debt service on outstanding general
obligation bonds is the second charge to the General Fund after support of the
public school system and public institutions of higher education. As of February
1, 2001, the State had outstanding approximately $22.6 billion of long-term
general obligation bonds, plus $800 million of general obligation commercial
paper which will be refunded by long-term bonds in the future, and $6.7 billion
of lease-purchase debt supported by the State General Fund. The State also had
about $14.9 billion of authorized and unissued long-term general obligation
bonds and lease-purchase debt. In FY 1999-2000, debt service on general
obligation bonds and lease purchase debt was approximately 3.7% of General Fund
revenues.
Recent Financial Results
The principal sources of General Fund revenues in 1999-2000 were the
California personal income tax (55 percent of total revenues), the sales tax (29
percent), bank and corporation taxes (9 percent), and the gross premium tax on
insurance (2 percent). An estimated 20% of personal income tax receipts (10% of
total General Fund) is derived from capital gains realizations
D-5
and stock option income. While these sources have been extraordinarily strong in
the past few years, they are particularly volatile. The State has taken account
of the recent drop in stock market levels and reduced its estimated receipts
from these revenues in the future.
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.
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 percent).
Recent Budgets. The State suffered a severe economic recession from
1990-94 during which the State experienced substantial revenue shortfalls and
accumulated a budget deficit of about $2.8 billion. With the economic recovery
which began in 1994, the State's financial condition improved markedly in the
years from fiscal year 1995-96 onward, 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 economy grew strongly during the second half of the 1990's, and as
a result, the General Fund took in substantially greater tax revenues (around
$2.2 billion in 1995-96, $1.6 billion in 1996-97, $2.4 billion in 1997-98, $1.7
billion in 1998-99 and $8.2 billion in 1999-2000) 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. In 1998-99 and
1999-2000, significant new spending programs were also enacted, particularly for
education. 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 $8.7 billion at June 30, 2000.
The growth in General Fund revenues since the end of the recession
resulted in significant increases in State funding for local school districts
under Proposition 98. From the recession level of about $4,200 per pupil, annual
State funding has increased to over $6,700 per pupil in FY 2000-01. A
significant amount of the new moneys have been directed to specific educational
reforms, including reduction of class sizes in many grade levels. The improved
budget condition also allowed annual increases in support for higher education
in the State, permitting increased enrollment and reduction of student fees.
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. Generally, health and
welfare costs have been contained even during the recent period of economic
D-6
recovery, with the first real increases (after inflation) in welfare support
levels occurring in 1999-2000 and additional increases in 2000-01.
One of the most important elements of recent Budget Acts was agreement
on substantial tax cuts. The largest of these was a phased-in cut in the Vehicle
License Fee (an annual tax on the value of cars registered in the State, the
"VLF"). Starting on January 1, 1999, the VLF was reduced by 25 percent, which
was increased to a 35% reduction effective January 1, 2000 and a 67.5% reduction
effective January 1, 2001. Under pre-existing law, VLF funds are automatically
transferred to cities and counties, so the new legislation provided for the
General Fund to make up the reductions. The full 67.5% percent VLF cut will be
offset by about $2.6 billion in General Fund money in FY 2000-01, and $3.6
billion for fiscal year 2001-02. Other tax cuts included 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.
Fiscal Year 2000-01 Budget. By the spring of 2000, as the fiscal year
2000-01 budget was being enacted, the Administration released updated revenue
and expenditure projections for 1999-2000 and 2000-01. These reports showed that
the State's very strong economy together with the strong stock market, resulted
in extraordinary growth in revenues, particular personal income taxes. The
Administration revised its revenue estimates for 1999-2000 upward to $71.2
billion, an increase of $8.2 billion above the original Budget Act estimate.
Expenditures were projected to increase to about $67.2 billion. The
Administration's projected balance in the SFEU at June 30, 2000 increased from
about $880 million at the time of the original Budget Act to over $8.7 billion.
As noted above under "Constitutional Limitations on Taxes, Other Charges and
Appropriations," the extraordinary and rapid growth of State revenues placed the
State $700 million over its Constitutional appropriations limit in fiscal year
1999-2000.
The Administration estimated over $12 billion additional revenue for
fiscal years 1999-2000 and 2000-01, compared to initial estimates made in
January 2000. The 2000-01 Budget Act (the "2000 Budget Act") was signed on June
30, 2000. The spending plan assumed General Fund revenues and transfers of $73.9
billion, and appropriated $78.8 billion (the difference coming from the SFEU
surplus generated in fiscal year 1999-2000). To avoid pressures on future
budgets, the Administration devoted about $7.0 billion of the new spending on
one-time expenditures and investments.
The Administration estimated that the SFEU would have a balance of
$1.781 billion at June 30, 2001. The Governor also held back $500 million as a
set-aside for litigation costs, which have been spent. Because of the State's
strong cash position, the Administration announced the State would not undertake
any revenue anticipation note borrowing in 2000-01.
The largest program in the 2000 Budget Act is aid to K-12 school
districts, which increased by $3.0 billion above 1999-2000 levels. There was
also a large increase in funding for the public higher education systems, and
for health and welfare programs. New investments were made for capital outlay,
including $2.0 billion General Fund support for transportation projects, to
supplement gasoline taxes normally used for those purposes, part of a six-year
$6.9 billion transportation package. A total of about $1.5 billion was devoted
to tax relief, including the additional VLF reduction described above under
"Recent Budgets." The Legislature also enacted a one-time tax relief package for
senior citizen homeowners and renters was valued at about $150
D-7
million, a personal income tax credit for credentialed teachers ($218 million)
and a refundable tax credit for child care expenses ($195 million). The 2000
Budget Act included a $200 million unrestricted grant to cities and counties, as
well as about $200 million in funding to support various local law enforcement
programs.
Although, as noted, the Administration projected a budget reserve in
the SFEU of about $1.78 billion on June 30, 2001, the General Fund fund balance
on that date also reflects $350 million 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 2000-01 Budget Act contained a $350 million
appropriation from the General Fund toward this settlement.
Reports since the FY 2000-01 Budget Act was enacted showed that
revenues were significantly higher than projected through the first half of the
fiscal year. As a result, the State will reduce its sales tax by 0.25% for at
least one year, starting January 1, 2001. This will result in about $1.15
billion in lower revenues during calendar year 2001.
On January 10, 2001, the Governor released his proposed Budget for
fiscal year 2001-02 (the "Governor's Budget"). The Governor's Budget estimated
that General Fund revenues in fiscal year 2000-01 would be about $76.9 billion,
$3.0 billion above the estimates when the 2000-01 Budget Act was signed.
Expenditures for 2000-01 were estimated to be about $79.7 billion, $0.9 billion
above the original spending plan. The Governor's Budget revised the estimate for
the SFEU, the budget reserve, at June 30, 2001 from $1.78 billion to $5.85
billion. As noted above, however, the State is currently expending some of these
funds for energy purchases, although the advances are expected to be repaid.
The Governor's Budget projects General Fund revenues in fiscal year
2001-02 of $79.4 billion, a 3.3 percent increase over the current year. This
estimate assumes slower economic growth in 2001-02 than in the previous year,
and assumes lower stock option income and the effect of the lower sales tax. A
more current estimate of fiscal year 2001-02 revenues will be made in May 2001
before the final budget is adopted. Estimates may be reduced if economic
activity is more strongly affected by the energy situation or the national
economic slowdown. The Governor's Budget proposes $82.9 billion in expenditures,
a 3.9 percent increase over the prior year, utilizing a portion of the expected
surplus. The Governor's Budget proposes to fund reserves of $2.4 billion, of
which $500 million will be a set-aside for unplanned litigation costs. The final
2001-02 budget is expected to be adopted by July 1, 2001 after further
deliberation by the Legislature and the Governor.
Although the State's strong economy is producing record revenues to
the State government, the State's budget continues to be marked by mandated
spending on education, a large 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.
D-8
Bond Rating
The ratings on California's long-term general obligation bonds were
reduced in the early 1990's from "AAA" levels which had existed prior to the
recession. After 1996, the three major rating agencies raised their ratings of
California's general obligation bonds, which as of February 1, 2001 were
assigned ratings of "AA" from Standard & Poor's, "Aa2" from Moody's and "AA"
from Fitch. In January 2001, Standard & Poor's placed California's senior
ratings on Credit Watch with negative implications as a result of the energy
situation.
There can be no assurance that such ratings will be maintained in the
future. It should be noted that the creditworthiness of obligations issued by
local California issuers may be unrelated to creditworthiness of obligations
issued by the State of California, and that there is no obligation on the part
of the State to make payment on such local obligations in the event of default.
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. If the State eventually loses any of these cases, the final
remedies may not have to be implemented in one year.
Obligations of Other Issuers
Other Issuers of California Municipal Obligations. There are a number
of State agencies, instrumentalities and political subdivisions of the State
that issue Municipal Obligations, some of which may be conduit revenue
obligations payable from payments from private borrowers. These entities are
subject to various economic risks and uncertainties, and the credit quality of
the securities issued by them may vary considerably from the credit quality of
obligations backed by the full faith and credit of the State.
State Assistance. Property tax revenues received by local governments
declined more than 50% following passage of Proposition 13. Subsequently, the
California Legislature enacted measures to provide for the redistribution of the
State's General Fund surplus to local agencies, the reallocation of certain
State revenues to local agencies and the assumption of certain governmental
functions by the State to assist municipal issuers to raise revenues. Total
local assistance from the State's General Fund was budgeted at approximately 75%
of General Fund expenditures in recent years, including the effect of
implementing reductions in certain aid programs. To reduce State General Fund
support for school districts, the 1992-93 and 1993-94 Budget Acts caused local
governments to transfer $3.9 billion of property tax revenues to school
districts, representing loss of the post-Proposition 13 "bailout" aid. Local
governments have in return received greater revenues and greater flexibility to
operate health and welfare programs.
D-9
In 1997, a new program provided for the State to substantially take
over funding for local trial courts (saving cities and counties some $400
million annually). For the last several years, the State has also provided $100
million annually to support local law enforcement costs. In 2000-01, the State
provided $200 million in unrestricted grants to cities and counties.
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 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
D-10
proceeds and reserves are exhausted) and the certificates may not be paid when
due. Although litigation is brought from time to time which challenges the
constitutionality of such lease arrangements, the California Supreme Court
issued a ruling in August, 1998 which reconfirmed the legality of these
financing methods.
Other Considerations
The repayment of industrial development securities secured by real
property may be affected by California laws limiting foreclosure rights of
creditors. Securities backed by health care and hospital revenues may be
affected by changes in State regulations governing cost reimbursements to health
care providers under Medi-Cal (the State's Medicaid program), including risks
related to the policy of awarding exclusive contracts to certain hospitals.
Limitations on ad valorem property taxes may particularly affect "tax
allocation" bonds issued by California redevelopment agencies. Such bonds are
secured solely by the increase in assessed valuation of a redevelopment project
area after the start of redevelopment activity. In the event that assessed
values in the redevelopment project decline (e.g., because of a major natural
disaster such as an earthquake), the tax increment revenue may be insufficient
to make principal and interest payments on these bonds. Both Moody's and S&P
suspended ratings on California tax allocation bonds after the enactment of
Articles XIIIA and XIIIB, and only resumed such ratings on a selective basis.
Proposition 87, approved by California voters in 1988, requires that
all revenues produced by a tax rate increase go directly to the taxing entity
which increased such tax rate to repay that entity's general obligation
indebtedness. As a result, redevelopment agencies (which, typically, are the
issuers of tax allocation securities) no longer receive an increase in tax
increment when taxes on property in the project area are increased to repay
voter-approved bonded indebtedness.
The effect of these various constitutional and statutory changes upon
the ability of California municipal securities issuers to pay interest and
principal on their obligations remains unclear. Furthermore, other measures
affecting the taxing or spending authority of California or its political
subdivisions may be approved or enacted in the future. Legislation has been or
may be introduced which would modify existing taxes or other revenue-raising
measures or which either would further limit or, alternatively, would increase
the abilities of state and local governments to impose new taxes or increase
existing taxes. It is not possible, at present, to predict the extent to which
any such legislation will be enacted. Nor is it possible, at present, to
determine the impact of any such legislation on California Municipal Obligations
in which the Fund may invest, future allocations of state revenues to local
governments or the abilities of state or local governments to pay the interest
on, or repay the principal of, such California Municipal Obligations.
Substantially all of California is within an active geologic region
subject to major seismic activity. Northern California in 1989 and Southern
California in 1994 experienced major earthquakes causing billions of dollars in
damages. The federal government provided more than $13 billion in aid for both
earthquakes, and neither event has had 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
D-11
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.
D-12
California Tax Matters
The following is based upon the advice of Orrick, Herrington & Sutcliffe
LLP, 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 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.
D-13
APPENDIX E
PERFORMANCE RELATED AND COMPARATIVE INFORMATION
The Fund may be a suitable investment for a shareholder that is thinking of
adding bond investments to his portfolio to balance the appreciated stocks that
the shareholder is holding. Municipal bonds can provide double, tax-free income
(exempt from both regular federal and state income taxes) for residents of that
state. Because the Fund expects that a substantial portion of its investments
will pay interest that is taxable under the federal alternative minimum tax, the
Fund may not be a suitable investment for shareholders that are subject to the
federal alternative minimum tax.
The Fund may quote certain performance-related information and may compare
certain aspects of its portfolio and structure to other substantially similar
closed-end funds as categorized by Lipper, Inc. ("Lipper"), Morningstar or other
independent services. Comparison of the Fund to an alternative investment should
be made with consideration of differences in features and expected performance.
The Fund may obtain data from sources or reporting services, such as Bloomberg
Financial ("Bloomberg") and Lipper, that the Fund believes to be generally
accurate.
E-1
Past performance is not indicative of future results. At the time Common
Shareholders sell their shares, they may be worth more or less than their
original investment.
Higher Dividends Often Correlate with Higher Share Prices Scatter chart appears
here (share prices of all state closed-end municipal bond funds):
Annualized Share Price
Dividend (Adjusted to $15 IPO)
---------- ---------------------
0.78756 15.12
0.738 13.32
0.68496 12.62
0.75 15.4125
0.69 13.42
0.7908 14.16
0.804 14.73
0.918 16.06
0.906 16.75
0.774 14.655
0.894 15.76
0.768 14
0.942 16.48
0.912 16.32
0.87 15.56
0.639 13.41
0.882 15.71
0.84 15.2
0.918 16.99
0.87 13.09
0.792 13.8
0.78 13.59
0.8628 14.94
0.705 12.25
0.792 13.5
0.8406 13.725
0.9 14.085
0.75 14.08
0.74496 13.05
0.9 15.14
0.9 14.1875
0.675 11.6375
1.0875 18.1375
1.30618 20.89888
1.125 20.415
1.08 19.08
1.1016 19.185
0.75 12.87
0.7488 12.88
0.7584 12.72
0.7992 13.485
0.78 13.17
0.8568 14.11
0.8136 13.86
0.798 12.82
0.846 14.76
0.834 14.36
0.84 14.35
0.864 14.5
0.804 14
0.774 13.65
0.876 14.85
0.798 13.72
0.918 15.15
0.912 14.81
0.864 14.44
0.768 12.58
0.738 11.8
0.8925 14.375
0.906 13.53
0.708 12.37
0.774 14.2
0.66 11.125
0.792 13.575
0.78 13.31
0.9 15.37
0.822 14.21
0.72 12.04
0.858 12.68
0.876 14.99
0.738 13.37
0.7308 14.19
0.66 12.05
0.6792 12.95
0.67476 13.56
0.7884 14.45
0.8052 15.02
0.918 15.55
0.81 15.32
0.768 14.5
0.852 15.78
0.81756 14
0.72 13.125
0.675 12.25
0.69 13.27
0.78 14.83
0.765 14.04
0.87 15.25
0.714 13.45
0.792 14.69
0.84 14.61
0.96 16.34
0.675 12.44
0.67308 12.32
0.7644 13.7
0.684 12.95
0.816 15.74
0.816 15.95
0.768 15.18
0.816 15.2
0.78 15.19
0.738 14.44
0.75 14.81
0.9 16.95
0.858 14.57
0.804 15.91
0.828 14.92
0.816 15.85
0.696 13.6
0.76164 15.13
0.735 14.55
0.8172 13.99
0.663 12.29
0.792 13.42
0.912 15.14
0.78 13.63
0.9 15.76
0.882 15.5
0.71976 13.36
0.9 15.61
0.8184 14.3
Municipal Bond/Equity Portfolios Can
Provide Portfolio Benefits
Standard Deviation Average Annual
Bond Portion (Risk) After-tax Return
------------ ------------------ ----------------
0% 14.91% 12.16%
5% 14.39% 12.06%
10% 13.88% 11.95%
15% 13.37% 11.85%
20% 12.88% 11.74%
25% 12.40% 11.63%
30% 11.94% 11.52%
35% 11.48% 11.40%
40% 11.05% 11.29%
45% 10.64% 11.15%
50% 10.25% 11.04%
55% 9.88% 10.92%
60% 9.55% 10.79%
65% 9.25% 10.66%
70% 8.99% 10.53%
75% 8.78% 10.39%
80% 8.62% 10.25%
85% 8.53% 10.11%
90% 8.50% 9.96%
95% 8.55% 9.81%
100% 8.68% 9.65%
Market price is affected by many factors, including market interest rates,
income tax rates, the common shares' net asset value and dividend stability, the
portfolio's duration, call protection and credit quality, analyst
recommendations, and other market factors. Any of these factors individually or
collectively may, at any given time, be as or more important to market price
than annualized dividend rates. A positive correlation does not necessarily mean
that higher dividends cause or result in higher market prices, and you should
not assume that any particular level of dividends will result in any particular
market price. In addition, the positive correlation between dividends and market
price of this group of funds does not necessarily mean that every fund in the
group exhibits a positive correlation between dividend and market price, and it
is possible that the Fund may not exhibit such a correlation. There can be no
assurance that the correlation suggested by the above data will continue in the
future.
E-2
Nuveen California Dividend Advantage Municipal Fund 2 3,000,000 Common Shares
------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
------------------------------------------
________________, 2001
PART C - OTHER INFORMATION
Item 24: Financial Statements and Exhibits
1. Financial Statements:
Registrant has not conducted any business as of the date of this filing,
other than in connection with its organization. Financial Statements indicating
that the Registrant has met the net worth requirements of Section 14(a) of the
1940 Act will be filed by pre-effective amendment to this registration
statement.
2. Exhibits:
a. Declaration of Trust dated June 1, 1999. Filed on November 3, 2000 as
Exhibit a to Registrant's Registration Statement on Form N-2 (File No.
333-49242) and incorporated herein by reference.*
b. By-Laws of Registrant. Filed on November 3, 2000 as Exhibit b to
Registrant's Registration Statement on Form N-2 (File No. 333-49242) and
incorporated herein by reference.*
c. None.
d. Form of Share Certificate.
e. Terms and Conditions of the Dividend Reinvestment Plan.
f. None.
g. Form of Investment Management Agreement between Registrant and Nuveen
Advisory Corp. dated ________.
h.1 Form of Underwriting Agreement.**
h.2 Form of Master Selected Dealer Agreement.**
h.3 Form of Master Agreement among Underwriters.**
h.4 Form of Salomon Smith Barney Letter Agreement.**
i. Nuveen Open-End and Closed-End Funds Deferred Compensation Plan for
Independent Directors and Trustees.
j. Form of 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
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. Form of Subscription Agreement of Nuveen Advisory Corp. dated _______,
2001.
q. None.
r.1 Code of Ethics of Nuveen Advisory Corp. Filed on January 5, 2001 as Exhibit
r to Pre-effective Amendment no. 1 to Registrant's Registration Statement
on Form N-2 (333-49242) and incorporated herein by reference.*
r.2 Code of Ethics of Salomon Smith Barney.
s. Powers of Attorney.
___________________
* Previously filed.
**To be filed by amendment.
Item 25: Marketing Arrangements
See Sections 2, 3 and 5(n) of the Underwriting Agreement to be filed as Exhibit
h.1 to this Registration Statement.
See the Introductory Paragraph of the Form of Master Selected Dealer Agreement
to be filed as Exhibit h.2 to this Registration Statement.
See Introductory Paragraphs and Sections 1, 3, 5, 6 and 7 of the Form of Master
Agreement Among Underwriters to be filed as Exhibit h.3 to this Registration
Statement.
See Paragraph e of the Form of Letter Agreement between Nuveen and the
Underwriters to be filed as Exhibit h.4 to this Registration Statement.
Item 26: Other Expenses of Issuance and Distribution
Securities and Exchange Commission fees $11,250
National Association of Securities Dealers, Inc. fees 5,000
Printing and engraving expenses *
Legal Fees *
American Stock Exchange listing fees *
Accounting expenses *
Blue Sky filing fees and expenses *
Transfer agent fees *
Miscellaneous expenses *
-------
Total *
=======
C-2
------------
*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 $0.03 per Common Share.
Item 27: Persons Controlled by or under Common Control with Registrant
Not applicable.
Item 28: Number of Holders of Securities
At February 22, 2001
Number of
Title of Class Record Holders
-------------- --------------
Common Shares, $.01 par value 0
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
(c) in the event of a settlement or other disposition not involving a final
adjudication (as provided in paragraph (a) or (b)) and resulting in a
payment by a Covered Person, unless there has been either a determination
that such Covered Person did not engage in willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the
conduct of his office by the court or other body approving the settlement
or other disposition or a reasonable determination, based on a review of
readily available facts (as opposed to a full trial-type inquiry), that he
did not engage in such conduct:
(i) by a vote of a majority of the Disinterested Trustees acting on
the matter (provided that a majority of the Disinterested Trustees
then in office act on the matter); or
(ii) by written opinion of independent legal counsel.
The rights of indemnification herein provided may be insured against by
policies maintained by the Trust, shall be severable, shall not affect any other
rights to which any Covered Person may now or hereafter be entitled, shall
continue as to a person who has ceased to be such a Covered Person and shall
inure to the benefit of the heirs, executors and administrators of such a
person. Nothing contained herein shall affect any rights to indemnification to
which Trust personnel other than Covered Persons may be entitled by contract or
otherwise under law.
Expenses of preparation and presentation of a defense to any claim, action,
suit or proceeding subject to a claim for indemnification under this Section 4
shall be advanced by the Trust prior to final disposition thereof upon receipt
of an undertaking by or on behalf of the recipient to repay such amount if it is
ultimately determined that he is not entitled to indemnification under this
Section 4, provided that either:
(a) such undertaking is secured by a surety bond or some other appropriate
security or the Trust shall be insured against losses arising out of any
such advances; or
(b) a majority of the Disinterested Trustees acting on the matter
(provided that a majority of the Disinterested Trustees then in office act
on the matter) or independent legal counsel in a written opinion shall
determine, based upon a review of the readily available facts (as opposed
to a full trial-type inquiry), that there is reason to believe that the
recipient ultimately will be found entitled to indemnification.
As used in this Section 4, a "Disinterested Trustee" is one (x) who is not
an Interested Person of the Trust (including anyone, as such Disinterested
Trustee, who has been exempted from being an Interested Person by any rule,
regulation or order of the Commission), and (y) against whom none of such
actions, suits or other proceedings or another action, suit or other proceeding
on the same or similar grounds is then or has been pending.
C-4
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 to be 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 Multistate Trust I, Nuveen
Multistate Trust II, Nuveen Multistate Trust III, Nuveen Multistate Trust IV,
Nuveen 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
Nuveen California Quality Income Municipal Fund, Inc., Nuveen New York Quality
Income Municipal Fund, Inc., Nuveen Premier Municipal Income Fund, Inc., Nuveen
Premier Insured Municipal Income Fund, Inc., Nuveen Insured California Premium
Income Municipal Fund, Inc., Nuveen Insured New York Premium Income Municipal
Fund, Inc., Nuveen Premium Income Municipal Fund 2, Inc., Nuveen Select
Maturities Municipal Fund, Nuveen Arizona Premium Income Municipal Fund, Inc.,
Nuveen Insured Florida Premium Income Municipal Fund, Nuveen Michigan Premium
Income Municipal Fund, Inc., Nuveen New Jersey Premium Income Municipal Fund,
Inc., Nuveen Premium Income Municipal Fund 4, Inc., Nuveen Insured California
Premium Income Municipal Fund 2, Inc., Nuveen Insured New York Premium Income
Municipal Fund 2, Nuveen New Jersey Premium Income Municipal Fund 2, Nuveen
Pennsylvania Premium Income Municipal Fund 2, Nuveen Maryland Premium Income
Municipal Fund, Nuveen Massachusetts Premium Income Municipal Fund, Nuveen
Virginia Premium Income Municipal Fund, Nuveen Connecticut Premium Income
Municipal Fund, Nuveen Georgia Premium Income Municipal Fund, Nuveen Missouri
Premium Income Municipal Fund, Nuveen North Carolina Premium Income Municipal
Fund, Nuveen California Premium Income Municipal Fund, Nuveen Insured Premium
Income Municipal Fund 2, Nuveen New York Dividend Advantage Municipal Fund,
Nuveen California Dividend Advantage Municipal Fund, Nuveen Dividend Advantage
Municipal Fund, Nuveen Arizona Dividend Advantage Municipal Fund, Nuveen
Connecticut Dividend Advantage Municipal Fund, Nuveen North Carolina Dividend
Advantage Municipal Fund, Nuveen Virginia Dividend Advantage Municipal Fund,
Nuveen Massachusetts Dividend Advantage Municipal Fund and Nuveen Maryland
Dividend Advantage Municipal Fund. Nuveen Advisory Corp. has no other clients or
business at the present time. For a description of other business, profession,
vocation or employment of a substantial nature in which any director or officer
of the investment adviser has engaged during the last two years for his account
or in the capacity of director, officer, employee, partner or trustee, see the
descriptions under "Management of the Fund" in Part A of this Registration
Statement.
Item 31: Location of Accounts and Records
Nuveen Advisory Corp., 333 West Wacker Drive, Chicago, Illinois 60606,
maintains the Declaration of Trust, By-Laws, minutes of trustees and
shareholders meetings and contracts of the Registrant and all advisory material
of the investment adviser.
The Chase Manhattan Bank, 4 New York Plaza, New York, New York 10004-2413,
all general and subsidiary ledgers, journals, trial balances, records of all
portfolio purchases and sales, and all other required records not maintained by
Nuveen Advisory Corp.
Item 32: Management Services
Not applicable.
C-6
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
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 22nd day of
February, 2001.
NUVEEN CALIFORNIA DIVIDEND
ADVANTAGE MUNICIPAL FUND 2
/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.
Signature Title Date
--------- ----- ----
/s/ Stephen D. Foy Vice President and Controller February 22, 2001
-------------------- (Principal Financial and
Stephen D. Foy Accounting Officer)
Chairman of the Board and
Timothy R. Schwertfeger* Trustee (Principal Executive
Officer)
Robert P. Bremner* Trustee
Lawrence H. Brown* Trustee
Anne E. Impellizzeri* Trustee
Peter R. Sawers* Trustee
William J. Schneider* Trustee
Judith M. Stockdale* Trustee
By: /s/ Gifford R. Zimmerman
--------------------------
Gifford R. Zimmerman
Attorney-In-Fact
February 22, 2001
*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.
INDEX TO EXHIBITS
a. Declaration of Trust dated June 1, 1999.*
b. By-Laws of Registrant.*
c. None.
d. None.
e. Terms and Conditions of the Dividend Reinvestment Plan.
f. None.
g. Form of Investment Management Agreement between Registrant and Nuveen
Advisory Corp. dated ________.
h.1 Form of Underwriting Agreement.**
h.2 Form of Master Selected Dealer Agreement.**
h.3 Form of Master Agreement among Underwriters.**
h.4 Form of Salomon Smith Barney Letter Agreement.**
i. Nuveen Open-End and Closed-End Funds Deferred Compensation Plan for
Independent Directors and Trustees.
j. Form of 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. Form of Subscription Agreement of Nuveen Advisory Corp.
dated _____________, 2001.
q. None.
r.1 Code of Ethics of Nuveen Advisory Corp.*
r.2 Code of Ethics of Salomon Smith Barney.
s. Powers of Attorney.
___________________
* Previously filed.
** To be filed by amendment.