As filed with the Securities and Exchange Commission on October 4, 2002
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1933 Act File No. 333-_____
1940 Act File No. 811-21212
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-2
(Check appropriate box or boxes)
[X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[ ] Pre-Effective Amendment No. __
[ ] Post-Effective Amendment No. __
and
[X] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[ ] Amendment No. __
Nuveen Insured California Tax-Free Advantage Municipal Fund
Exact Name of Registrant as Specified in Declaration of Trust
333 West Wacker Drive, Chicago, Illinois 60606
Address of Principal Executive Offices (Number, Street, City, State, Zip Code)
(800) 257-8787
Registrant's Telephone Number, including Area Code
Gifford R. Zimmerman
Vice President and Secretary
333 West Wacker Drive
Chicago, Illinois 60606
Name and Address (Number, Street, City, State, Zip Code) of Agent for Service
Copies of Communications to:
Stacy H. Winick Thomas S. Harman
Bell, Boyd & Lloyd LLC Morgan, Lewis & Bockius LLP
70 W. Madison St. 1800 M Street, N.W
Chicago, IL 60602 Washington, D.C. 20036
Approximate Date of Proposed Public Offering:
As soon as practicable after the effective date of this Registration Statement
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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)
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CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
==================================================================================================================
Proposed Maximum
Title of Securities Being Amount Proposed Maximum Aggregate Offering Amount of
Registered Being Registered Offering Price Per Unit Price (1) Registration Fee
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Common Shares, $0.01 par value 1,000 Shares $15.00 $15,000 $1.38
==================================================================================================================
(1) Estimated solely for the purpose of calculating the registration fee.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such dates as the Commission, acting pursuant to said Section 8(a),
may determine.
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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 , 2002
PROSPECTUS
Shares
[LOGO] Nuveen Logo
Nuveen Insured California Tax-Free
Advantage Municipal Fund
Common Shares
$15.00 per share
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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 income tax, the
alternative minimum tax applicable to individuals, 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.
(continued on following page)
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Investing in common shares involves certain risks. See "Risks" beginning on
page 22.
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.
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Per Share Total
--------- -----
Public Offering Price $15.000 $
Sales Load/(1)/ $ 0.675 $
Estimated Offering Expenses/(2) / $ 0.030 $
Proceeds to the Fund $14.295 $
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(1)Certain underwriters that may also participate in any future offering of
preferred shares of the Fund may receive additional compensation in that
offering based on their participation in this offering. See "Underwriting."
(2)Total expenses of issuance and distribution (other than underwriting
discounts and commissions) are estimated to be $ . Nuveen has agreed
to reimburse offering expenses in excess of $0.03 per share.
The underwriters expect to deliver the common shares to purchasers on or
about , 2002.
-------------
Nuveen Investments
, 2002
Portfolio Contents. Under normal circumstances, the Fund will invest at
least 80% of its net assets in a portfolio of municipal bonds that are exempt
from regular federal income tax, the alternative minimum tax applicable to
individuals, and California income tax and that are covered by insurance
guaranteeing the timely payment of principal and interest therein. Through
, 2003, the Fund may invest in municipal bonds that are exempt from
regular federal income tax and the alternative minimum tax applicable to
individuals 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 may at all times invest up to 20% of its
net assets in uninsured municipal bonds backed by an escrow or trust account
containing sufficient U.S. Government or U.S. Government agency securities to
ensure timely payment of principal and interest, or other municipal bonds that
are investment grade quality. 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 , subject to notice of
issuance. The trading or "ticker" symbol of the common shares is " ".
You should read this 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 , 2002 and as it may be
supplemented, 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 42 of this
Prospectus, by calling (800) 257-8787 or by writing to the Fund, or you may
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.
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TABLE OF CONTENTS
Page
----
Prospectus Summary........................................... 4
Summary of Fund Expenses..................................... 10
The Fund..................................................... 12
Use of Proceeds.............................................. 12
The Fund's Investments....................................... 12
MuniPreferred Shares and Leverage............................ 20
Risks........................................................ 22
How the Fund Manages Risk.................................... 26
Management of the Fund....................................... 27
Net Asset Value.............................................. 29
Distributions................................................ 29
Dividend Reinvestment Plan................................... 30
Description of Shares........................................ 31
Certain Provisions in the Declaration of Trust............... 33
Repurchase of Fund Shares; Conversion to Open-End Fund....... 34
Tax Matters.................................................. 35
Other Matters................................................ 37
Underwriting................................................. 38
Custodian and Transfer Agent................................. 41
Legal Opinions............................................... 41
Table of Contents for the Statement of Additional Information 42
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Until , 2002 (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 elsewhere in this Prospectus and in the Statement of Additional
Information to understand the offering fully.
The Fund.............. Nuveen Insured California Tax-Free Advantage Municipal
Fund (the "Fund") is a newly organized,
non-diversified, closed-end management investment
company. The Fund is designed to provide tax
benefits to investors who are residents of
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 Nuveen
Investments ("Nuveen") and . The common shares
of beneficial interest are called "Common Shares" in
the rest of this Prospectus. You must purchase at
least 100 Common Shares in this offering. 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 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 income
tax, the alternative minimum tax applicable to
individuals 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 circumstances, the Fund will invest at least
80% of its net assets in a portfolio of municipal
bonds that:
. are exempt from regular federal and California
income taxes;
. do not pay interest subject to the federal
alternative minimum tax applicable to
individuals; and
. are covered by insurance guaranteeing the
timely payment of principal and interest
thereon.
This insurance does not protect the market value of
portfolio holdings or the net asset value of the
Fund.
Under normal circumstances, 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 , 2003 (the "Invest-up
Period"), the Fund may invest in municipal bonds
that are exempt from regular federal income tax and
the alternative minimum tax applicable to
individuals 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 may be
derived from investments in Out of State Bonds. The
Fund will not invest in bonds that pay
4
interest subject to the federal alternative minimum
tax applicable to individuals ("AMT Bonds").
The Fund may at all times invest up to 20% of its net
assets in (i) uninsured municipal bonds that are
backed by an escrow or trust account containing
sufficient U.S. Government or U.S. Government agency
securities to ensure timely payment of principal and
interest, or (ii) other municipal bonds that at the
time of investment are investment grade quality. An
investment grade quality bond is a bond rated within
the four highest grades (Baa or BBB or better by
Moody's Investors Service, Inc. ("Moody's"),
Standard & Poor's Corporation, a division of The
McGraw-Hill Companies ("S&P") or Fitch Ratings
("Fitch")) by all nationally recognized statistical
rating organizations (each an "NRSRO") that rate the
bond or a bond that is unrated but judged to be of
comparable quality by the Fund's investment adviser.
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 tax. 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
5
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
MuniPreferred Shares that may be outstanding
(sometimes referred to herein as "Managed Assets")),
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 .32% of average daily Managed Assets of
the Fund for the first five full years of the Fund's
operations (through , 2007), and for a declining
amount for an additional three years (through ,
2010). Nuveen Advisory is a wholly owned subsidiary
of The John Nuveen Company. See "Management of the
Fund."
Distributions......... Commencing with the Fund's first dividend, the Fund
intends to make regular monthly cash distributions
to Common Shareholders at a level rate (stated in
terms of a fixed cents per Common Share dividend
rate) based on the projected performance of the
Fund. The Fund's ability to maintain a level Common
Share 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 , subject to notice of issuance. See
"Description of Shares--Common Shares." The trading
or "ticker" symbol of the Common Shares is " ."
Because of this exchange listing, the Fund may
sometimes be referred to in public communications as
a "closed-end exchange-traded fund" or
"exchange-traded fund."
Custodian............. State Street Bank and Trust Company 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
6
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 have during other periods traded at prices lower
than net asset value. The Fund cannot assure you
that Common Shares will trade at a price higher than
net asset value in the future. Net asset value will
be reduced immediately following the offering by the
sales load and the amount of organization and
offering expenses paid by the Fund. See "Use of
Proceeds." In addition to net asset value, market
price may be affected by such factors as dividend
levels (which are in turn affected by expenses),
call protection, dividend stability, portfolio
credit quality and liquidity and market supply and
demand. See "MuniPreferred Shares and Leverage,"
"Risks," "Description of Shares," "Repurchase of
Fund Shares; Conversion to Open-End Fund" and the
Statement of Additional Information under
"Repurchase of Fund Shares; Conversion to Open-End
Fund." The Common Shares are designed primarily for
long-term investors, and you should not view the
Fund as a vehicle for trading purposes.
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. See "Risks--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.
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. See
"Risks--Concentration Risk."
7
Leverage Risk. The use of leverage through the
issuance of MuniPreferred Shares creates an
opportunity for increased Common Share net income
and returns, but also creates special risks for
Common Shareholders. There is no assurance that the
Fund's leveraging strategy will be successful. It is
anticipated that MuniPreferred dividends will be
based on shorter-term municipal bond rates of return
(which would be redetermined periodically, pursuant
to an auction process), and that the Fund will
invest the proceeds of the MuniPreferred Shares
offering in long-term, typically fixed rate,
municipal bonds. So long as the Fund's municipal
bond portfolio provides a higher rate of return (net
of Fund expenses) than the MuniPreferred dividend
rate, as reset periodically, the leverage will cause
Common Shareholders to receive a higher current rate
of return than if the Fund were not leveraged. If,
however, long and/or short-term rates rise, the
MuniPreferred dividend rate could exceed the rate of
return on long-term bonds held by the Fund that were
acquired during periods of generally lower interest
rates, reducing return to Common Shareholders. In
addition, the Fund will pay (and Common Shareholders
will bear) any costs and expenses relating to the
issuance and ongoing maintenance of MuniPreferred
Shares (for example, distribution related expenses
such as a participation fee paid at what the Fund
expects will be an annual rate of 0.25% of
MuniPreferred Share liquidation preference to
broker-dealers participating in MuniPreferred Share
auctions).
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.
See "Risks--Leverage Risk."
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 if the Fund were a stock fund or
taxable bond fund. The secondary market for
municipal bonds, 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. See
"Risks--Municipal Bond Market Risk."
8
Municipal Bond Insurance. In the event Moody's, S&P
or Fitch (or all of them) should downgrade its
assessment of the claims-paying ability of a
particular insurer, it (or they) could also be
expected to downgrade the ratings assigned to
municipal bonds insured by such insurer, and
municipal bonds insured under Portfolio Insurance
(as defined below) issued by such insurer also would
be of reduced quality in the portfolio of the Fund.
Any such downgrade could have an adverse impact on
the net asset value and market price of the Common
Shares.
In addition, the Fund may be subject to certain
restrictions on investments imposed by guidelines of
the insurance companies issuing Portfolio Insurance.
The Fund does not expect these guidelines to prevent
Nuveen Advisory from managing the Fund's portfolio
in accordance with the Fund's investment objective
and policies.
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 than a "diversified"
fund. As a result, the Fund will be more susceptible
than a diversified fund to any single corporate,
economic, political or regulatory occurrence. See
"The Fund's Investments" and
"Risks--Non-Diversification." Also, the Fund's
policy of generally investing in bonds that are
exempt from the alternative minimum tax applicable
to individuals may prevent the Fund from investing
in certain kinds of bonds and thereby limit the
Fund's ablility to optimally diversify its portfolio.
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. See
"Certain Provisions in the Declaration of Trust" and
"Risks--Anti-Takeover Provisions."
9
SUMMARY OF FUND EXPENSES
The Annual Expenses table below assumes the issuance of MuniPreferred Shares
in an amount equal to 35% of the Fund's capital (after their issuance), and
shows Fund expenses as a percentage of net assets attributable to Common Shares.
Shareholder Transaction Expenses
Sales Load Paid by You (as a percentage of offering price)..................... 4.50%
Offering Expenses Borne by the Fund (as a percentage of offering price)/(1)(2)/ .20%
Dividend Reinvestment Plan Fees................................................ None(3)
Percentage of Net
Assets Attributable
to Common Shares(4)
-------------------
Annual Expenses
Management Fees.......................... %
Other Expenses........................... %
-----
Total Annual Expenses.................... %
Fee and Expense Reimbursement (Years 1-5) (%)(5)
-----
Total Net Annual Expenses (Years 1-5).... %(5)
=====
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(1)Nuveen has agreed to pay offering costs (other than sales load) that exceed
$0.03 per Common Share.
(2)If the Fund offers MuniPreferred Shares, costs of that offering, estimated
to be approximately % of the total amount of the MuniPreferred Share
offering, will effectively be borne by the Common Shareholders and result in
a reduction of the net asset value of the Common Shares. Assuming the
issuance of MuniPreferred Shares in the amount equal to 35% of the Fund's
total capital (after issuance), those offering costs are estimated to be
approximately $ per Common Share ( % of the offering price).
(3)You will be charged a $2.50 service charge and pay brokerage charges if you
direct State Street Bank and Trust Company, as agent for the Common
Shareholders (the "Plan Agent") to sell your Common Shares held in a
dividend reinvestment account.
(4)Stated as percentages of net assets attributable to Common Shares. Assuming
no issuance of MuniPreferred Shares, the Fund's expenses would be estimated
to be as follows:
10
Percentage of Net
Assets Attributable
to Common Shares
-------------------
Annual Expenses
Management Fees....................................................... %
Other Expenses........................................................ %
---
Total Annual Expenses................................................. %
Fees and Expense Reimbursement (Years 1-5)............................ (%)(5)
---
Total Net Annual Expenses (Years 1-5)................................. %(5)
===
(5)Nuveen Advisory has contractually agreed to reimburse the Fund for fees and
expenses in the amount of .32% of average daily Managed Assets for the first
5 full years of the Fund's operations, .24% of average daily Managed Assets
in year 6, .16% in year 7 and .08% in year 8. Assuming the issuance of
MuniPreferred Shares in an amount equal to 35% of the Fund's total assets
(including the amount obtained from leverage) and calculated as a percentage
of net assets attributable to Common Shares, those amounts would be % for
the first 5 years, % in year 6, % in year 7 and % in year 8. Without
the reimbursement, "Total Net Annual Expenses" would be estimated to be
1.38% of average daily net assets attributable to Common Shares (or,
assuming no issuance of MuniPreferred Shares, % of average daily net
assets).
The purpose of the table above is to help you understand all fees and
expenses that you, as a Common Shareholder, would bear directly or indirectly.
The expenses shown in the table are based on estimated amounts for the Fund's
first year of operations and assume that the Fund issues approximately Common
Shares. See "Management of the Fund" and "Dividend Reinvestment Plan."
The following example illustrates the expenses (including the sales load of
$45, estimated offering expenses of this offering of $2 and the estimated
MuniPreferred Share offering costs assuming MuniPreferred Shares are issued
representing 35% of the Fund's total capital (after issuance) of $ ) that you
would pay on a $1,000 investment in Common Shares, assuming (1) total net
annual expenses of % of net assets attributable to Common Shares in years 1
through 5, increasing to % in years 9 and 10 and (2) a 5% annual return:/(1)/
1 Year 3 Years 5 Years 10 Years/(2)/
------ ------- ------- ------------
$ $ $ $
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 Common Share net asset value. Actual expenses may be greater
or less than those assumed. Moreover, the Fund's actual rate of return may
be greater or less than the hypothetical 5% return shown in the example.
(2)Assumes reimbursement of fees and expenses of .24% of average daily Managed
Assets in year 6, .16% in year 7 and .08% in year 8. Nuveen Advisory has not
agreed to reimburse the Fund for any portion of its fees and expenses beyond
, 2010. See footnote 5 above and "Management of the
Fund--Investment Management Agreement."
11
THE FUND
The Fund is a newly organized, non-diversified, closed-end management
investment company registered under the 1940 Act. The Fund was organized as a
Massachusetts business trust on April 9, 2002, pursuant to a Declaration
governed by the laws of the Commonwealth of Massachusetts. As a newly organized
entity, the Fund has no operating history. The Fund's principal office is
located at 333 West Wacker Drive, Chicago, Illinois 60606, and its telephone
number is (800) 257-8787. The Fund is designed to provide tax benefits to
investors who are residents of 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 income tax, the
alternative minimum tax applicable to individuals, 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.
12
Under normal market conditions, the Fund will invest at least 80% of its net
assets in a portfolio of municipal bonds that:
. are exempt from regular federal and California income taxes;
. do not pay interest subject to the federal alternative minimum tax
applicable to individuals; and
. are covered by insurance guaranteeing the timely payment of principal and
interest thereon.
This insurance does not protect the market value of portfolio holdings or the
net asset value of the Fund.
Under normal market conditions, the Fund expects to be fully invested (at
least 95% of its assets) in such tax-exempt municipal bonds except during the
Invest-up Period. During the Invest-up Period, the Fund may invest in Out of
State Bonds, provided that no more than 10% of the Fund's investment income
during that time 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 tax. For more information, see the Statement of Additional
Information. In addition, capital gain dividends will be subject to capital
gains taxes. See "Tax Matters." The Fund will not invest in AMT Bonds.
The Fund may at all times invest up to 20% of its net assets in (i)
uninsured municipal bonds that are backed by an escrow or trust account
containing sufficient U.S. Government or U.S. Government agency securities to
ensure timely payment of principal and interest, or (ii) other municipal bonds
that, at the time of investment, are investment grade quality. Investment grade
quality means that such bonds are rated, at the time of investment, by all
NRSROs that rate the bond 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 foregoing credit quality policy applies 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."
Each insured municipal bond that the Fund acquires will be (1) covered by an
insurance policy applicable to a specific security and obtained by the issuer
of the security or a third party at the time of original issuance ("Original
Issue Insurance"), (2) covered by an insurance policy applicable to a specific
security and obtained by the Fund or a third party subsequent to the time of
original issuance ("Secondary Market Insurance"), or (3) covered by a master
municipal insurance policy purchased by the Fund ("Portfolio Insurance"). The
Fund, as a non-fundamental policy that can be changed by the Board of Trustees,
only will buy Portfolio Insurance from insurers whose claims-paying ability
Moody's rates "Aaa" or S&P or Fitch rates "AAA."
The credit quality of companies that provide insurance on bonds will affect
the value of those bonds. Although the insurance feature reduces certain
financial risks, the premiums for insurance and
13
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.
The Fund may at all times invest up to 20% of its net assets in uninsured
municipal bonds that are entitled to the benefit of an escrow or trust account
that contains securities issued or guaranteed by the U.S. Government or U.S.
Government agencies backed by the full faith and credit of the United States,
and sufficient in amount to ensure the payment of interest and principal on the
original interest payment and maturity dates ("collateralized obligations").
These collateralized obligations generally will not be insured and will
include, but are not limited to, municipal bonds that have been (1) advance
refunded where the proceeds of the refunding have been used to buy U.S.
Government or U.S. Government agency securities that are placed in escrow and
whose interest or maturing principal payments, or both, are sufficient to cover
the remaining scheduled debt service on that municipal bond; or (2) issued
under state or local housing finance programs that use the issuance proceeds to
fund mortgages that are then exchanged for U.S. Government or U.S. Government
agency securities and deposited with a trustee as security for those municipal
bonds. These collaterlized obligations are normally regarded as having the
credit characteristics of the underlying U.S. Government or U.S. Government
agency securities.
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 of Common Shares or MuniPreferred
Shares are being invested, the Fund may deviate from its investment objectives
and policies and 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
income tax, the alternative minimum tax applicable to individuals, and
California income tax. For more information, see the Statement of Additional
Information. Likewise, the Fund may deviate from its normal investment policies
and invest in taxable fixed-income and equity securities of an issuer of
municipal bonds that the Fund already owns for the purpose of acquiring control
of that issuer when Nuveen Advisory determines that such investment should
enable the Fund to better maximize the value of its existing investment. See
"--Miscellaneous Investments."
The Fund cannot change its (i) fundamental investment restictions set forth
in the Statement of Additional Information or (ii) policy to invest 80% of its
Managed Assets in a portfolio of municipal bonds that (a) are exempt from
regular federal and California State income taxes and (b) do not pay interest
subject to the federal alternative minimum tax applicable to individuals
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 of the holders of a "majority of the outstanding" MuniPreferred Shares
voting as a separate class. When used with respect to particular shares of the
Fund, a "majority of the outstanding" 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. Other than as
noted above, the investment objectives and policies of the Fund may be changed
by the Board without shareholder action.
14
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 municipality in California, or a political
subdivision or agency or instrumentality of such State or municipality
("California municipal bonds"), 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 income tax, the
alternative minimum tax applicable to individuals and California income 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. During the Invest-up Period, the Fund also may invest
in Out of State Bonds subject to the limitations described under "--Investment
Objectives and Policies." It is a fundamental policy of the Fund that its
investments in municipal bonds whose interest is not taxable under regular
federal and California income tax or the federal alternative minimum tax
applicable to individuals will, under normal circumstances, comprise at least
80% of the Fund's Managed Assets.
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.
Municipal Bond Insurance
Each insured municipal bond the Fund acquires will be covered by Original
Issue Insurance, Secondary Market Insurance or Portfolio Insurance. The Fund
expects initially to emphasize investments in municipal bonds insured under
bond-specific insurance policies (i.e., Original Issue or Secondary Market
Insurance). The Fund may obtain Portfolio Insurance from the insurers described
in Appendix C to the Statement of Additional Information. The Fund, as a
non-fundamental policy that can be changed by the Board of Trustees, will only
obtain policies of Portfolio Insurance issued by insurers whose claims-paying
ability is rated "Aaa" by Moody's or "AAA" by S&P or Fitch. There is no limit
on the percentage of the Fund's assets that may be invested in municipal bonds
insured by any one insurer.
Municipal bonds covered by Original Issue Insurance or Secondary Market
Insurance are themselves typically assigned a rating of "Aaa" or "AAA", as the
case may be, by virtue of the rating of
15
the "Aaa" or "AAA" claims-paying ability of the insurer and would generally be
assigned a lower rating if the ratings were based primarily upon the credit
characteristics of the issuer without regard to the insurance feature. By way
of contrast, the ratings, if any, assigned to municipal bonds insured under
Portfolio Insurance will be based primarily upon the credit characteristics of
the issuer, without regard to the insurance feature, and generally will carry a
rating that is below "Aaa" or "AAA." While in the portfolio of the Fund,
however, a municipal bond backed by Portfolio Insurance will effectively be of
the same credit quality as a municipal bond issued by an issuer of comparable
credit characteristics that is backed by Original Issue Insurance or Secondary
Market Insurance.
The Fund's policy of investing in municipal bonds insured by insurers whose
claims-paying ability is rated "Aaa" or "AAA" applies only at the time of
purchase of a security, and the Fund will not be required to dispose of the
securities in the event Moody's, S&P or Fitch, as the case may be, downgrades
its assessment of the claims-paying ability of a particular insurer or the
credit characteristics of a particular issuer. In this connection, it should be
noted that in the event Moody's, S&P or Fitch (or all of them) should downgrade
its assessment of the claims-paying ability of a particular insurer, it (or
they) could also be expected to downgrade the ratings assigned to municipal
bonds insured by such insurer, and municipal bonds insured under Portfolio
Insurance issued by such insurer also would be of reduced quality in the
portfolio of the Fund. Moody's, S&P and Fitch continually assess the
claims-paying ability of insurers and the credit characteristics of issuers,
and there can be no assurance that they will not downgrade their assessments
subsequent to the time the Fund purchases securities.
The value of municipal bonds covered by Portfolio Insurance that are in
default or in significant risk of default will be determined by separately
establishing a value for the municipal bond and a value for the Portfolio
Insurance.
Original Issue Insurance. Original Issue Insurance is purchased with respect
to a particular issue of municipal bonds by the issuer thereof or a third party
in conjunction with the original issuance of such municipal bonds. Under this
insurance, the insurer unconditionally guarantees to the holder of the
municipal bond the timely payment of principal and interest on such obligations
when and as these payments become due but not paid by the issuer, except that
in the event of the acceleration of the due date of the principal by reason of
mandatory or optional redemption (other than acceleration by reason of a
mandatory sinking fund payment), default or otherwise, the payments guaranteed
may be made in the amounts and at the times as payment of principal would have
been due had there not been any acceleration. The insurer is responsible for
these payments less any amounts received by the holder from any trustee for the
municipal bond issuer or from any other source. Original Issue Insurance does
not guarantee payment on an accelerated basis, the payment of any redemption
premium (except with respect to certain premium payments in the case of certain
small issue industrial development and pollution control municipal bonds), the
value of the Fund's shares, the market value of municipal bonds, or payments of
any tender purchase price upon the tender of the municipal bonds. Original
Issue Insurance also does not insure against nonpayment of principal or
interest on municipal bonds resulting from the insolvency, negligence or any
other act or omission of the trustee or other paying agent for these bonds.
Original Issue Insurance remains in effect as long as the municipal bonds it
covers remain outstanding and the insurer remains in business, regardless of
whether the Fund ultimately disposes of these municipal bonds. Consequently,
Original Issue Insurance may be considered to represent an element of market
value with respect to the municipal bonds so insured, but the exact effect, if
any, of this insurance on the market value cannot be estimated.
16
Secondary Market Insurance. Subsequent to the time of original issuance of a
municipal bond, the Fund or a third party may, upon the payment of a single
premium, purchase insurance on that security. Secondary Market Insurance
generally provides the same type of coverage as Original Issue Insurance and,
as with Original Issue Insurance, Secondary Market Insurance remains in effect
as long as the municipal bonds it covers remain outstanding and the insurer
remains in business, regardless of whether the Fund ultimately disposes of
these municipal bonds.
One of the purposes of acquiring Secondary Market Insurance with respect to
a particular municipal bond would be to enable the Fund to enhance the value of
the security. The Fund, for example, might seek to purchase a particular
municipal bond and obtain Secondary Market Insurance, for it if, in Nuveen
Advisory's opinion, the market value of the security, as insured, less the cost
of the Secondary Market Insurance would exceed the current value of the
security without insurance. Similarly, if the Fund owns but wishes to sell a
municipal bond that is then covered by Portfolio Insurance, the Fund might seek
to obtain Secondary Market Insurance for it if, in Nuveen Advisory's opinion,
the net proceeds of the Fund's sale of the security, as insured, less the cost
of the Secondary Market Insurance would exceed the current value of the
security. In determining whether to insure municipal bonds the Fund owns, an
insurer will apply its own standards, which correspond generally to the
standards it has established for determining the insurability of new issues of
municipal bonds. See "--Original Issue Insurance" above.
Portfolio Insurance. Portfolio Insurance guarantees the payment of principal
and interest on specified eligible municipal bonds purchased by the Fund.
Except as described below, Portfolio Insurance generally provides the same type
of coverage as is provided by Original Issue Insurance or Secondary Market
Insurance. Municipal bonds insured under a Portfolio Insurance policy would
generally not be insured under any other policy. A municipal bond is eligible
for coverage under a policy if it meets certain requirements of the insurer.
Portfolio Insurance is intended to reduce financial risk, but the cost thereof
and compliance with investment restrictions imposed under the policy will
reduce the yield to shareholders of the Fund.
If a municipal bond is already covered by Original Issue Insurance or
Secondary Market Insurance, then the security is not required to be
additionally insured under any Portfolio Insurance that the Fund may purchase.
All premiums respecting municipal bonds covered by Original Issue Insurance or
Secondary Market Insurance are paid in advance by the issuer or other party
obtaining the insurance.
Portfolio Insurance policies are effective only as to municipal bonds owned
by and held by the Fund, and do not cover municipal bonds for which the
contract for purchase fails. A "when-issued" municipal obligation will be
covered under a Portfolio Insurance policy upon the settlement date of the
issue of such "when-issued" municipal bond.
In determining whether to insure municipal bonds held by the Fund, an
insurer will apply its own standards, which correspond generally to the
standards it has established for determining the insurability of new issues of
municipal bonds. See "--Original Issue Insurance" above.
Each Portfolio Insurance policy will be noncancellable and will remain in
effect so long as the Fund is in existence, the municipal bonds covered by the
policy continue to be held by the Fund, and the Fund pays the premiums for the
policy. Each insurer will generally reserve the right at any time upon 90 days'
written notice to the Fund to refuse to insure any additional bonds purchased
by the Fund after
17
the effective date of such notice. The Fund generally will reserve the right to
terminate each policy upon seven days' written notice to an insurer if it
determines that the cost of such policy is not reasonable in relation to the
value of the insurance to the Fund.
Each Portfolio Insurance policy will terminate as to any municipal bond that
has been redeemed from or sold by the Fund on the date of redemption or the
settlement date of sale, and an insurer will not have any liability thereafter
under a policy for any municipal bond, except that if the redemption date or
settlement date occurs after a record date and before the related payment date
for any municipal bond, the policy will terminate for that municipal bond on
the business day immediately following the payment date. Each policy will
terminate as to all municipal bonds covered thereby on the date on which the
last of the covered municipal bonds mature, are redeemed or are sold by the
Fund.
One or more Portfolio Insurance policies may provide the Fund, pursuant to
an irrevocable commitment of the insurer, with the option to exercise the right
to obtain permanent insurance ("Permanent Insurance") for a municipal bond that
is sold by the Fund. The Fund would exercise the right to obtain Permanent
Insurance upon payment of a single, predetermined insurance premium payable
from the sale proceeds of the municipal bond. The Fund expects to exercise the
right to obtain Permanent Insurance for a municipal bond only if, in Nuveen
Advisory's opinion, upon the exercise the net proceeds from the sale of the
municipal bond, as insured, would exceed the proceeds from the sale of the
security without insurance.
The Permanent Insurance premium for each municipal bond is determined based
upon the insurability of each security as of the date of purchase and will not
be increased or decreased for any change in the security's creditworthiness
unless the security is in default as to payment of principal or interest, or
both. If such event occurs, the Permanent Insurance premium will be subject to
an increase predetermined at the date of the Fund's purchase.
The Fund generally intends to retain any insured bonds covered by Portfolio
Insurance that are in default or in significant risk of default and to place a
value on the insurance, which ordinarily will be the difference between the
market value of the defaulted bond and the market value of similar bonds of
minimum investment grade (that is, rated "Baa" or "BBB") that are not in
default. In certain circumstances, however, Nuveen Advisory may determine that
an alternative value for the insurance, such as the difference between the
market value of the defaulted bond and either its par value or the market value
of similar bonds that are not in default or in significant risk of default, is
more appropriate. Except as described above for bonds covered by Portfolio
Insurance that are in default or subject to significant risk of default, the
Fund will not place any value on the Portfolio Insurance in valuing the
municipal bonds it holds.
Because each Portfolio Insurance policy will terminate for municipal bonds
sold by the Fund on the date of sale, in which event the insurer will be liable
only for those payments of principal and interest that are then due and owing
(unless Permanent Insurance is obtained by the Fund), the provision for this
insurance will not enhance the marketability of the Fund's bonds, whether or
not the bonds are in default or in significant risk of default. On the other
hand, because Original Issue Insurance and Secondary Market Insurance generally
will remain in effect as long as the municipal bonds they cover are
outstanding, these insurance policies may enhance the marketability of these
bonds even when they are in default or in significant risk of default, but the
exact effect, if any, on marketability, cannot be estimated. Accordingly, the
Fund may determine to retain or, alternatively, to sell municipal bonds
18
covered by Original Issue Insurance or Secondary Market Insurance that are in
default or in significant risk of default.
Premiums for a Portfolio Insurance policy are paid monthly, and are adjusted
for purchases and sales of municipal bonds covered by the policy during the
month. The yield on the Fund is reduced to the extent of the insurance premiums
it pays.
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, because 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.
Miscellaneous Investments
The Fund, either singly or in conjunction with other funds advised or
subadvised by Nuveen Advisory or an affiliate thereof, may invest in taxable
fixed-income or equity securities for the purposes of acquiring control of an
issuer whose municipal bonds (a) the Fund already owns and (b) have
deteriorated or are expected shortly to deteriorate significantly in credit
quality, provided Nuveen Advisory determines that such investment should enable
the Fund to better maximize its existing investment in such issuer. Investment
in taxable securities would result in a portion of your dividend being subject
to regular federal and California income taxes.
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
section entitled "Risks," the net asset value and market value of leveraged
shares will be more volatile and the yield to Common Shareholders will tend to
fluctuate more than the yield generated by unleveraged shares.
19
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. The MuniPreferred
Shares will 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 dividends 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 asset coverage
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 asset coverage).
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 asset coverage 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
20
order to maintain coverage of any MuniPreferred Shares of at least 200%. If the
Fund has MuniPreferred Shares outstanding, two of the Fund's trustees will be
elected by the holders of MuniPreferred Shares, voting separately as a class.
The remaining trustees of the Fund will be elected by holders of Common Shares
and MuniPreferred Shares voting together as a single class. In the event the
Fund failed to pay dividends on MuniPreferred Shares for two years,
MuniPreferred Shareholders would be entitled to elect a majority of the
trustees of the Fund.
The Fund may be subject to certain restrictions imposed by guidelines of one
or more rating agencies which may issue ratings for MuniPreferred Shares issued
by the Fund. These guidelines may impose asset coverage or portfolio
composition requirements that are more stringent than those imposed on the Fund
by the 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 in the aggregate
approximately 35% of the Fund's capital and pay dividends at an annual average
rate of %, the incremental income generated by the Fund's portfolio (net of
estimated expenses) must exceed % 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, interest or payment rates may vary frequently and may be
significantly higher or lower than the rate assumed 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, and the Fund's currently projected annual
MuniPreferred Share dividend rate of %. 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..... ( )% ( )% ( )% % %
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.
21
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, concentration 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 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. 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.
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 the related information in
the Statement of Additional Information is derived from sources that are
generally available to investors. The information is intended to give a recent
historical description and is not intended to indicate future or continuing
trends in the financial or other positions of 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, 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.
22
Since 1994 the California economy had been growing steadily, outpacing the
rest of the nation, with particular strength in high technology manufacturing,
software, exports, services, entertainment and construction. By late 2000,
unemployment had fallen to its lowest level in three decades. After a strong
fourth quarter of 2000, the economy has slowed in 2001, and is now likely to
weaken further in the aftermath of the economic and societal impact of the
September 11, 2001 terrorist attacks. California has suffered disruptions in
its energy markets due to shortages of and increased prices for electricity and
natural gas. However, expected electricity blackouts during the summer of 2001
did not materialize and the economic impact of the energy situation now appears
less dramatic than was feared earlier in the year.
The State received significant tax revenues in recent years, deriving from
the strong economy and stock market through 2000. Capital gains and stock
option income represented as much as 20% of General Fund revenue in the last
fiscal year. The slowing economy and depressed stock market in 2001,
exacerbated by the as yet unknown impacts of the terrorist attacks, will result
in significantly reduced revenues in fiscal year 2001-02, compared both to the
prior year and to earlier forecasts. 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 September 1, 2001, rated "Aa3" by Moody's,
"A+" by Standard and Poors, and "AA" by Fitch; all three rating agencies
maintain a negative outlook on the State's ratings.
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. The 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 therefore be
more dependent on the analytical abilities of Nuveen Advisory than if the Fund
were a stock fund or taxable bond fund. The secondary market for municipal
bonds 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 or at prices approximating those at which the Fund currently
values them.
23
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.
Municipal Bond Insurance. In the event Moody's, S&P or Fitch (or all of
them) should downgrade its assessment of the claims-paying ability of a
particular insurer, it (or they) could also be expected to downgrade the
ratings assigned to municipal bonds insured by such insurer, and municipal
bonds insured under Portfolio Insurance issued by such insurer also would be of
reduced quality in the portfolio of the Fund. Any such downgrade could have an
adverse impact on the net asset value and market price of the Common Shares.
In addition, the Fund may be subject to certain restrictions on investments
imposed by guidelines of the insurance companies issuing portfolio insurance.
The Fund does not expect these guidelines to prevent Nuveen Advisory from
managing the Fund's portfolio in accordance with the Fund's investment
objectives and policies.
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 (for example, distribution related
expenses such as the participation fee paid at what it expects will be an
annual rate of 0.25% of MuniPreferred Share liquidation preference to
broker-dealers participating in MuniPreferred Share auctions). Accordingly, the
Fund cannot assure you that the issuance of MuniPreferred Shares will result in
a higher yield or return to Common Shareholders.
24
Similarly, any decline in the net asset value of the Fund's investments will
be borne entirely by Common Shareholders. Therefore, if the market value of the
Fund's portfolio declines, the leverage will result in a greater decrease in
net asset value to Common Shareholders than if the Fund were not leveraged.
Such greater net asset value decrease will also tend to cause a greater decline
in the market price for the Common Shares. The Fund might be in danger of
failing to maintain the required 200% asset coverage or of losing its expected
AAA/Aaa ratings on the MuniPreferred Shares or, in an extreme case, the Fund's
current investment income might not be sufficient to meet the dividend
requirements on the MuniPreferred Shares. In order to counteract such an event,
the Fund might need to liquidate investments in order to fund a redemption of
some or all of the MuniPreferred Shares. Liquidation at times of low municipal
bond prices may result in capital loss and may reduce returns to Common
Shareholders.
While the Fund may from time to time consider reducing leverage in response
to actual or anticipated changes in interest rates in an effort to mitigate the
increased volatility of current income and net asset value associated with
leverage, there can be no assurance that the Fund will actually reduce leverage
in the future or that any reduction, if undertaken, will benefit the Common
Shareholders. Changes in the future direction of interest rates are very
difficult to predict accurately. If the Fund were to reduce leverage based on a
prediction about future changes to interest rates, and that prediction turned
out to be incorrect, the reduction in leverage would likely operate to reduce
the income and/or total returns to Common Shareholders relative to the
circumstance where the Fund had not reduced leverage. The Fund may decide that
this risk outweighs the likelihood of achieving the desired reduction to
volatility in income and share price if the prediction were to turn out to be
correct, and determine not to reduce leverage as described above.
The Fund may invest in the securities of other investment companies. Such
securities may also be leveraged and will therefore be subject to the leverage
risks described above. Such additional leverage may in certain market
conditions serve to reduce the net asset value of the Fund's Common Shares and
the returns to Common Shareholders.
Inflation Risk. Inflation risk is the risk that the value of assets or
income from investment will be worth less in the future as inflation decreases
the value of money. As inflation increases, the real value of the Common Shares
and distributions can decline. In addition, during any periods of rising
inflation, MuniPreferred Share dividend rates would likely increase, which
would tend to further reduce returns to Common Shareholders.
Non-Diversification. Because the Fund is classified as "non-diversified"
under the 1940 Act it can invest a greater portion of its assets in obligations
of a single issuer. As a result, the Fund will be more susceptible than a
diversified fund to any single corporate, economic, political or regulatory
occurrence. See "The Fund's Investments." Also, the Fund's policy of generally
investing in bonds that are exempt from the alternative minimum tax applicable
to individuals may prevent the Fund from investing in certain kinds of bonds
and thereby limit the Fund's ability to optimally diversify its portfolio.
Anti-Takeover Provisions. The Fund's 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. These provisions 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.
25
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 outstanding" MuniPreferred Shares voting as a separate class.
When used with respect to particular shares of the Fund, a "majority of the
outstanding" 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. Among other
restrictions, the Fund may not invest more than 25% of total Fund assets in
securities of issuers in any one industry, except that this limitation does not
apply to municipal bonds backed by the assets and revenues of governments or
political subdivisions of governments.
The Fund may become subject to guidelines which are more limiting than the
investment restriction set forth above in order to obtain and maintain ratings
from Moody's or S&P on the MuniPreferred Shares that it intends to issue. The
Fund does not anticipate that such guidelines would have a material adverse
effect on the Fund's Common Shareholders or the Fund's ability to achieve its
investment objectives. See "Investment Objectives" in the Statement of
Additional Information for information about these guidelines and a complete
list of the fundamental and non-fundamental investment policies of the Fund.
The Fund seeks to reduce credit risk by buying bonds that are either covered
by insurance or backed by an escrow or trust account, each with the purpose of
ensuring timely payment of principal and interest. However, these municipal
bonds remain subject to market risk.
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 asset
coverage 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 asset coverage,
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. 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 asset coverage.
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
26
success of any such attempt to limit leverage risk depends on Nuveen Advisory's
ability to accurately predict interest rate or other market changes. Because of
the difficulty of making such predictions, the Fund may never attempt to manage
its capital structure in the manner described above.
If market conditions suggest that additional leverage would be beneficial,
the Fund may sell previously unissued MuniPreferred Shares or MuniPreferred
Shares that the Fund previously issued but later repurchased.
Currently, the Fund may not invest in inverse floating rate securities,
which are securities that pay interest at rates that vary inversely with
changes in prevailing short-term tax-exempt interest rates and which represent
a leveraged investment in an underlying municipal bond. This restriction is a
non-fundamental policy of the Fund that may be changed by vote of the Fund's
Board of Trustees.
Hedging Strategies
The Fund may use various investment strategies designed to limit the risk of
bond price fluctuations and to preserve capital. These hedging strategies
include using financial futures contracts, options on financial futures or
options based on either an index of long-term municipal securities or on
taxable debt securities whose prices, in the opinion of Nuveen Advisory,
correlate with the prices of the Fund's investments. Successful implementation
of most hedging strategies would generate taxable income, and the Fund has no
present intention to use these strategies.
MANAGEMENT OF THE FUND
Trustees and Officers
The Board of Trustees is responsible for the management of the Fund,
including supervision of the duties performed by Nuveen Advisory. 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
$ 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 a 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 Nuveen-sponsored investment companies.
Nuveen Advisory is a wholly owned subsidiary of The John Nuveen Company, 333
West Wacker Drive, Chicago, Illinois 60606. Founded in 1898, The John Nuveen
Company and its affiliates had over $ billion of net assets under management
or surveillance as of , 2002. The John Nuveen Company 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.
27
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:
Management
Average Daily Managed Assets 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%
If the Fund utilizes leverage through the issuance of MuniPreferred Shares
in an amount equal to 35% of the Fund's total assets (including the amount
obtained from leverage), the management fee calculated as a percentage of net
assets attributable to Common Shares would be as follows:
Management
Net Assets Attributable to Common Shares Fee
---------------------------------------- ----------
Up to $125 million......................................... 1.0000%
$125 million to $250 million............................... .9808%
$250 million to $500 million............................... .9615%
$500 million to $1 billion................................. .9423%
$1 billion to $2 billion................................... .9231%
$2 billion and over........................................ .8846%
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 Shares, expenses of
preparing, printing and distributing shareholder reports, notices, proxy
statements and reports to governmental agencies, and taxes, if any.
For the first eight full 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
(as a percentage (as a percentage
of Managed of Managed
Year Ending, Assets) Year Ending, Assets)
------------ ---------------- ------------ ----------------
2002/(1)/... .32% 2007........ .32%
2003........ .32% 2008........ .24%
2004........ .32% 2009........ .16%
2005........ .32% 2010........ .08%
2006........ .32%
--------
(1)From the commencement of operations.
28
Nuveen Advisory has not agreed to reimburse the Fund for any portion of its
fees and expenses beyond , 2010.
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 level rate (stated in terms of a
fixed cents per Common Share dividend rate) that reflects the past and
projected performance of the Fund. Distributions can only be made from net
investment income after paying any accrued dividends to MuniPreferred
Shareholders. The Fund's ability to maintain a level dividend rate will depend
on a number of factors, including dividends payable on the MuniPreferred
Shares. The net income of the Fund consists of all interest income accrued on
portfolio assets less all expenses of the Fund. Expenses of the Fund are
accrued each day. Over time, all the net investment income of the Fund will be
distributed. At least annually, the Fund also intends to distribute net capital
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.
29
DIVIDEND REINVESTMENT PLAN
You may elect to have all dividends, including any capital gain dividends,
on your Common Shares automatically reinvested by 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 State Street Bank and Trust
Company as dividend paying agent.
If you decide to participate in the Plan, the number of Common Shares you
will receive will be determined as follows:
(1) If Common Shares are trading at or above net asset value at the time
of valuation, the Fund will issue new shares at the then current market
price; or
(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
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 valuation
date. Interest will not be paid on any uninvested cash payments.
You may withdraw from the Plan at any time by giving written notice to the
Plan Agent. If you withdraw or the Plan is terminated, you will receive a
certificate for each whole share in your account under the Plan and you will
receive a cash payment for any fraction of a share in your account. If you
wish, the Plan Agent will sell your shares and send you the proceeds, minus
brokerage commissions and a $2.50 service fee.
The Plan Agent maintains all shareholders' accounts in the Plan and gives
written confirmation of all transactions in the accounts, including information
you may need for tax records. Common Shares in your account will be held by the
Plan Agent in non-certificated form. Any proxy you receive will include all
Common Shares you have received under the Plan.
There is no brokerage charge for reinvestment of your dividends or
distributions in Common Shares. However, all participants will pay a pro rata
share of brokerage commissions incurred by the Plan Agent when it makes open
market purchases.
Automatically reinvesting dividends and distributions does not mean that you
do not have to pay income taxes due upon receiving dividends and distributions.
The Fund reserves the right to amend or terminate the Plan if 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 State
Street Bank and Trust Company, Attn: Equiserve Nuveen Investments,
P.O. Box 43071, Providence, Rhode Island 02940-3071, (800) 257-8787.
30
DESCRIPTION OF SHARES
Common Shares
The Declaration authorizes the issuance of an unlimited number of Common
Shares. The Common Shares being offered have a par value of $0.01 per share
and, subject to the rights of holders of MuniPreferred Shares, if issued, have
equal rights to the payment of dividends and the distribution of assets upon
liquidation. The Common Shares being offered 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 cash 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
, 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 offering expenses paid by the Fund. Nuveen has
agreed to pay (i) all organizational expenses and (ii) offering costs (other
than sales load) that exceed $0.03 per Common Share. See "Use of Proceeds."
Unlike open-end funds, closed-end funds like the Fund do not continuously
offer shares and do not provide daily redemptions. Rather, if a shareholder
determines to buy additional Common Shares or sell shares already held, the
shareholder may conveniently do so by trading on the exchange through a broker
or otherwise. Shares of closed-end investment companies may frequently trade on
an exchange at prices lower than net asset value. Shares of closed-end
investment companies like the Fund that invest predominately in investment
grade municipal bonds have during some periods traded at prices higher than net
asset value and have during other periods 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 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.
31
The Fund's Board of Trustees has authorized 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. The Board has determined
that the MuniPreferred Shares, at least initially, would pay cumulative
dividends at rates determined weekly 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 be as stated below.
Limited Issuance of MuniPreferred Shares. Under the 1940 Act, the Fund could
issue MuniPreferred Shares with an aggregate liquidation value of up to
one-half of the value of the Fund's total net assets, measured immediately
after issuance of the MuniPreferred Shares. "Liquidation value" means the
original purchase price of the shares being liquidated plus any accrued and
unpaid dividends. In addition, the Fund is not permitted to declare any cash
dividend or other distribution on its Common Shares unless the liquidation
value of the MuniPreferred Shares is less than one-half of the value of the
Fund's total net assets (determined after deducting the amount of such dividend
or distribution) immediately after the distribution. If the Fund sells all the
Common Shares and MuniPreferred Shares discussed in this Prospectus, the
liquidation value of the MuniPreferred Shares is expected to be approximately
35% of the value of the Fund's total net assets. The Fund intends to purchase
or redeem MuniPreferred Shares, if necessary, to keep that fraction below
one-half.
Distribution Preference. The MuniPreferred Shares have complete priority
over the Common Shares as to distribution of assets.
Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Fund, holders of
MuniPreferred Shares will be entitled to receive a preferential liquidating
distribution (expected to equal the original purchase price per share plus
accumulated and unpaid dividends thereon, whether or not earned or declared)
before any distribution of assets is made to Common Shareholders.
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 (following the establishment of
the Fund by an initial trustee, the Declaration provides for a total of no less
than two and no more than twelve 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. Under the 1940 Act, in order
for the Fund to take certain actions or enter into certain transactions (i.e.,
convert to an open-end investment company or effect a reorganization adversely
affecting the MuniPreferred Shares), 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."
32
Redemption, Purchase and Sale of MuniPreferred Shares. The terms of the
MuniPreferred Shares provide that they may be redeemed by the issuer at certain
times, in whole or in part, at the original purchase price per share plus
accumulated dividends. Any redemption or purchase of MuniPreferred Shares by
the Fund will reduce the leverage applicable to Common Shares, while any
issuance 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 an offering of MuniPreferred Shares. 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 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
33
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 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 investment 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 . 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
34
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 investment
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 following discussion of federal income tax matters is based on the
advice of Bell, Boyd & Lloyd LLC, special counsel to the Fund.
The discussions below and in the Statement of Additional Information provide
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 elect to be treated and 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 income tax, the alternative minimum tax applicable to individuals, and
California income tax. 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
federal income tax. Different federal alternative minimum 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 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. 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, among the Common Shares and
MuniPreferred Shares in proportion to total dividends paid to each class for
the year. 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.
35
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 Internal Revenue Service ("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 to the extent of the Fund's earnings and profits. 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 at the close of each quarter of its taxable year. 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 sale or other disposition of Common Shares will result in capital gain
or loss to you if you hold such Common Shares as capital assets. Present law
taxes both long-term and short-term capital gains of corporations at the rates
applicable to ordinary income. For non-corporate taxpayers, however, long-term
capital gains are eligible for reduced rates of taxation.
The Fund may be required to withhold a percentage 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. The
backup withholding percentage will be 30% in 2002 and 2003, 29% in 2004 and
2005, and 28% thereafter until 2011, when the percentage will revert to 31%
unless amended by Congress. 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.
California Tax Matters
The following is based upon the advice of , , special
California counsel to the Fund.
The Fund's regular monthly dividends will not be subject to California
personal income taxes to the extent they are paid out of income earned on
obligations that, when held by individuals, pay interest that is exempt from
taxation by California under California law (e.g., obligations of California
and its political subdivisions) or federal law, so long as at the close of each
quarter of the Fund's taxable year at least 50 percent of the value of the
Fund's total assets consist of such obligations. The portion 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
36
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.
Shareholders are advised to consult with their own tax advisors for more
detailed information concerning California tax matters. Please refer to the
Statement of Additional Information for more detailed information.
OTHER MATTERS
A lawsuit was 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 in the federal district court for the Seventh Circuit
Court of Appeals. The suit was originally brought against Nuveen, Nuveen
Advisory, six Nuveen investment companies (the "leveraged closed-end funds")
managed by Nuveen Advisory and two of the leveraged closed-end funds' former
directors seeking unspecified damages, an injunction and other relief. The suit
also sought certification of a defendant class consisting of all Nuveen-managed
leveraged funds.
The plaintiffs alleged 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 filed motions to dismiss the entire lawsuit asserting that
the claims are without merit and to oppose certification of any classes. On
March 30, 1999, the court entered a memorandum opinion and order (1) granting
the defendants' motion to dismiss all of plaintiffs' counts against the
defendants other than Nuveen Advisory, (2) granting Nuveen Advisory's motion to
dismiss all of plaintiffs' counts against it other than breach of fiduciary
duty under Section 36(b) of the 1940 Act, and (3) denying the plaintiffs'
motion to certify a plaintiff class and a defendant class. No appeal was made
by plaintiffs of this decision, and the remaining Section 36(b) count against
Nuveen Advisory is discussed below.
As to alleged damages, plaintiffs have claimed as damages the portion of all
advisory compensation received by Nuveen Advisory from the funds during the
period from June 21, 1995 to the present that is equal to the proportion of
each of such fund's preferred stock to its total assets. The preferred stock
constitutes approximately one third of the funds' assets so the amount claimed
would equal approximately one third of management fees received by Nuveen
Advisory for managing the funds during this period. Nuveen Advisory believes
that it has no liability and the plaintiffs have suffered no damages and filed
a motion for summary judgment as to both liability and damages.
Plaintiffs filed a motion for partial summary judgment as to liability only.
In a memorandum opinion and order dated September 6, 2001, the federal district
court granted Nuveen Advisory's motion for summary judgment and denied
plaintiffs' motion for partial summary judgment, thereby terminating the
litigation before the court. Plaintiffs appealed this decision on October 8,
2001. In an opinion dated July 8, 2002, the Seventh Circuit Court of Appeals
affirmed the opinion of the district court dismissing the plaintiffs' lawsuit.
Any petition for a writ of certiorari to the United States Supreme Court
seeking to appeal the Seventh Circuit opinion would need to be filed within
ninety days of the Seventh Circuit's July 8, 2002 opinion.
37
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 of
Underwriters Shares
------------ ---------
Nuveen Investments....................................................
========
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 described below 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 Nuveen Investments and
are acting as representatives, propose to offer some of the
Common Shares directly to the public at the public offering price set forth on
the cover page of this Prospectus and some of the Common Shares to certain
dealers at the public offering price less a concession not in excess of $0.45
per Common Share. The sales load the Fund will pay of $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. Certain dealers acting in the capacity of
sub-underwriters may receive additional compensation for acting in such a
capacity. 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
, 2002. 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
38
Underwriter will be obligated, subject to certain conditions, to purchase a
number of additional Common Shares approximately proportionate to such
Underwriter's initial purchase commitment.
The Fund and Nuveen Advisory have agreed that, for a period of 180 days from
the date of this Prospectus, they will not, without the prior written consent
of , on behalf of the Underwriters, dispose of or
hedge any Common Shares or any securities convertible into or exchangeable for
Common Shares. 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
, 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.
Certain Underwriters participating in the Common Share offering may be
invited, some period of time after completion of this offering, to participate
in the offering of the MuniPreferred Shares and will receive compensation for
their participation in that MuniPreferred Share offering. The number of Common
Shares purchased by each Underwriter in this offering may be a factor in
determining (i) whether that Underwriter is selected to participate in the
offering of the MuniPreferred Shares, (ii) the number of MuniPreferred Shares
allocated to that Underwriter in that offering, and (iii) the amount of certain
additional MuniPreferred Share underwriting compensation available to that
Underwriter. The offering costs associated with the issuance of MuniPreferred
Shares are currently estimated to be approximately % of the total amount of
the MuniPreferred Share offering. These costs will effectively be borne by the
Common Shareholders.
In connection with the requirements for listing the Fund's Common Shares on
the , the Underwriters have undertaken to sell lots of
100 or more Common Shares to a minimum of 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 . 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
39
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 on
the at a level above that which might otherwise prevail
in the open market. A "stabilizing bid" is a bid for or purchase of the Common
Shares on behalf of an Underwriter for the purpose of fixing or maintaining the
price of the Common Shares. A "covering transaction" is a bid for or purchase
of the Common Shares on behalf of an Underwriter to reduce a short position
incurred by the Underwriters in connection with the offering. A "penalty bid"
is a contractual arrangement whereby if, during a specified period after the
issuance of the Common Shares, the Underwriters purchase Common Shares in the
open market for the account of the underwriting syndicate and the Common Shares
purchased can be traced to a particular Underwriter or member of the selling
group, the underwriting syndicate may require the Underwriter or selling group
member in question to purchase the Common Shares in question at the cost price
to the syndicate or may recover from (or decline to pay to) the Underwriter or
selling group member in question any or all compensation (including, with
respect to a representative, the applicable syndicate management fee)
applicable to the Common Shares in question. As a result, an Underwriter or
selling group member and, in turn, brokers may lose the fees that they
otherwise would have earned from a sale of the Common Shares if their customer
resells the Common Shares while the penalty bid is in effect. The Underwriters
are not required to engage in any of these activities, and any such activities,
if commenced, may be discontinued at any time.
The underwriting agreement provides that it may be terminated in the
absolute discretion of the representatives without liability on the part of the
Underwriters to the Fund or Nuveen Advisory if, prior to the delivery of and
payment for the Common Shares, (i) trading in the Fund's Common Shares shall
have been suspended by the Securities and Exchange Commission or the
or trading in securities generally on the New York Stock
Exchange or the American Stock Exchange shall have been suspended or limited or
minimum prices for trading in securities generally shall have been established
on either of such Exchanges, (ii) a commercial banking moratorium shall have
been declared by either federal or New York state authorities or (iii) there
shall have occurred any outbreak or escalation of hostilities, declaration by
the United States of a national emergency or war, or other calamity or crisis
the effect of which on financial markets in the United States is such as to
make it, in the sole judgment of the representatives, impracticable or
inadvisable to proceed with the offering or delivery of the Common Shares as
contemplated by the Prospectus (exclusive of any supplement thereto).
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 purchased
Common Shares from the Fund in an amount satisfying the net worth requirements
of Section 14(a) of the 1940 Act. As of the
40
date of this Prospectus, Nuveen Advisory owned 100% of the Fund's outstanding
Common Shares. Nuveen Advisory may be deemed to control the Fund until such
time as it owns less than 25% of the outstanding Common Shares which is
expected to occur as of the completion of the offering of Common Shares.
Nuveen, 333 West Wacker Drive, Chicago, Illinois, 60606, one of the
representatives of the Underwriters, is the parent company of Nuveen Advisory.
The principal business address of is
.
CUSTODIAN AND TRANSFER AGENT
The custodian of the assets of the Fund is State Street Bank and Trust
Company, One Federal Street, Boston, Massachusetts 02110. The Custodian
performs custodial, fund accounting and portfolio accounting services. The
Fund's transfer, shareholder services and dividend paying agent is also State
Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts 02110.
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 . Bell, Boyd & Lloyd
LLC and may rely as to certain matters of
Massachusetts law on the opinion of Bingham McCutchen LLP, Boston,
Massachusetts.
41
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
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--Description of Insurers........................... C-1
Appendix D--Hedging Strategies and Risks...................... D-1
Appendix E--Factors Pertaining to California.................. E-1
Appendix F--Performance Related and Comparative Information... F-1
42
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Shares
Nuveen Insured California Tax-Free Advantage Municipal Fund
Common Shares
--------
PROSPECTUS
, 2002
--------
Nuveen Investments
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
FRH-CA-1002
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
is not soliciting an offer to buy these securities in any state where the offer
or sale is not permitted.
SUBJECT TO COMPLETION, DATED __________, 2002
Nuveen Insured California Tax-Free Advantage Municipal Fund
STATEMENT OF ADDITIONAL INFORMATION
Nuveen Insured California Tax-Free Advantage Municipal Fund (the "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 __________, 2002
(the "Prospectus"). This Statement of Additional Information does not include
all information that a prospective investor should consider before purchasing
Common Shares. 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
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
Description of Insurers (Appendix C) C-1
Hedging Strategies and Risks (Appendix D) D-1
Factors Pertaining to California (Appendix E) E-1
Performance Related and Comparative Information (Appendix F) F-1
This Statement of Additional Information is dated ________, 2002
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 objectives are to provide current income exempt from
regular federal income tax, the alternative minimum tax applicable to
individuals, 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.
Under normal circumstances, the Fund will invest at least 80% of its net
assets in a portfolio of municipal bonds that:
. are exempt from regular federal and California income taxes;
. do not pay interest subject to the federal alternative minimum tax
applicable to individuals; and
. are covered by insurance guaranteeing the timely payment of principal
and interest thereon.
This insurance does not protect the market value of portfolio holdings or the
net asset value of the Fund.
After the completion of the offering through __________________, 2003 (the
"Invest-up Period"), the Fund may invest in municipal bonds that are exempt from
regular federal income tax and the alternative minimum tax applicable to
individuals 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 may be
derived from investments in Out of State Bonds. The Fund will not invest in
bonds that pay interest subject to the federal alternative minimum tax
applicable to individuals ("AMT Bonds"). It is a fundamental policy of the Fund
that its investments in municipal bonds whose interest is not taxable under
regular federal income tax, the alternative minimum income tax applicable to
individuals, and California income tax will, under normal circumstances,
comprise at least 80% of the Fund's Managed Assets. The Fund will notify
shareholders at least 60 days prior to any change in its policy to invest 80% of
its Managed Assets in bonds that are covered by insurance guaranteeing the
timely payment of principal and interest thereon.
The Fund may at all times invest up to 20% of its net assets in (i)
uninsured municipal bonds that are backed by an escrow or trust account
containing sufficient U.S. Government or U.S. Government agency securities to
ensure timely payment of principal and interest, or (ii) other municipal bonds
that at the time of investment are investment grade quality. Investment grade
quality bonds are bonds rated by all NRSROs that rate the bond 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.
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) Under normal circumstances, invest less than 80% of the Fund's net
assets (plus any borrowings for investment purposes) in investments the
income from which is exempt from regular federal income tax, the
alternative minimum income tax applicable to individuals, and California
income tax;
(2) 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;
(3) 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);
(4) 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;
(5) 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
(6) 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;
(7) 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);
(8) 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; and
(9) 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 5% 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 (9)
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 Managed Assets in the aggregate in shares of other investment
companies and only up to 5% of its Managed 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 will 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, except that the Fund, either singly or in conjunction with other
funds advised or subadvised by Nuveen Advisory or an affiliate thereof, may
invest in taxable fixed-income or equity securities for the purpose of
acquiring control of an issuer whose municipal bonds (a) the Fund already
owns and (b) have deteriorated or are expected shortly to deteriorate
significantly in credit quality, provided Nuveen Advisory determines that
such investment should enable the Fund to better maximize the value of its
existing investment in such issuer.
(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
Under normal circumstances, the Fund will invest at least 80% of its
Managed Assets in a portfolio of municipal bonds that (i) are exempt from
regular federal and California income taxes; (ii) do not pay interest subject to
the federal alternative income tax applicable to individuals and (iii) are
covered by insurance guaranteeing the timely payment of principal and interest
thereon. This insurance does not protect the market value of portfolio holdings
or the net asset value of the Fund.
During the Invest-up Period, the Fund may invest in Out of State Bonds,
provided that no more than 10% of the Fund's investment income during that time
may be derived from Out of State Bonds. The Fund will not invest in AMT Bonds.
The Fund may at all times invest up to 20% of its net assets in (i)
uninsured municipal bonds that are backed by an escrow or trust account
containing sufficient U.S. Government or U.S. Government agency securities to
ensure timely payment of principal and interest, or (ii) other municipal bonds
that at the time of investment are investment grade quality. Investment grade
quality bonds are bonds rated by all NRSROs that rate the bond 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.
Under normal circumstances, 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.
10
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.
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.
Each insured municipal bond that the Fund holds will either be (1) covered
by an insurance policy applicable to a specific security and obtained by the
issuer of the security or a third party at the time of original issuance
("Original Issue Insurance"), (2) covered by an insurance policy applicable to a
specific security and obtained by the Fund and/or a third party subsequent to
the time of original issuance ("Secondary Market Insurance"), or (3) covered by
a master municipal insurance policy purchased by the Fund ("Portfolio
Insurance"). The Fund, as a non-fundamental policy that can be changed by the
Board of Trustees, will only buy Portfolio Insurance from insurers whose
claims-paying ability Moody's rates "Aaa" or S&P or Fitch rates "AAA."
Information about the various municipal bond insurers with whom the Fund
intends to maintain specific insurance policies for particular municipal bonds
or policies of Portfolio Insurance is set forth in Appendix C hereto.
The Fund may at all times invest up to 20% of its net assets in uninsured
municipal bonds that are entitled to the benefit of an escrow or trust account
that contains securities issued or guaranteed by the U.S. Government or U.S.
Government agencies, backed by the full faith and credit of the United States,
and sufficient in amount to ensure the payment of interest and principal on the
original interest payment and maturity dates ("collateralized obligations").
These collateralized obligations generally will not be insured and will include,
but are not limited to municipal bonds that have been (1) advance refunded where
the proceeds of the refunding have been used to buy U.S. Government or U.S.
Government agency securities that are placed in escrow and whose interest or
maturing principal payments, or both, are sufficient to cover the remaining
scheduled debt service on that municipal bond; or (2) issued under state or
local housing finance programs that use the issuance proceeds to fund mortgages
that are then exchanged for U.S. Government or U.S. Government agency securities
and deposited with a trustee as security for those municipal bonds. These
collateralized obligations are normally regarded as having the credit
characteristics of the underlying U.S. Government or U.S. Government agency
securities.
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 will not invest in AMT Bonds.
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 of Common Shares or MuniPreferred Shares
are being invested, the Fund may deviate from its investment objectives and
policies and invest up to 100% of its Managed 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.
Likewise, the Fund may deviate from its normal investment policies and invest in
taxable fixed-income and equity securities of an issuer of municipal bonds that
the Fund already owns for the purpose of acquiring control of that issuer when
Nuveen Advisory determines that such investment should enable the Fund to better
maximize the value of its existing investment.
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.
Additional Information on Municipal Bond Insurance
Original Issue Insurance. If interest or principal on a municipal bond is
due, but the issuer fails to pay it, the insurer will make payments in the
amount due to the fiscal agent no later than one business day after the insurer
has been notified of the issuer's nonpayment. The fiscal agent will pay the
amount due to the Fund after the fiscal agent receives evidence of the Fund's
right to receive payment of the principal and/or interest, and evidence that all
of the rights of payment due shall thereupon vest in the insurer. When the
insurer pays the Fund the payment due from the issuer, the insurer will succeed
to the Fund's rights to that payment.
Portfolio Insurance. Each portfolio insurance policy will be noncancellable
and will remain in effect so long as the Fund is in existence, the Fund
continues to own the municipal bonds covered by the policy, and the Fund pays
the premiums for the policy. Each insurer generally will reserve the right at
any time upon 90 days' written notice to the Fund to refuse to insure any
additional bonds the Fund buys after the effective date of the notice. The
Fund's Board of Trustees will generally reserve the right to terminate each
policy upon seven day's written notice to an insurer if it determines that the
cost of the policy is not reasonable in relation to the value of the insurance
to the Fund.
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 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 Fund's
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 measures)
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 of 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 short-term 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 D to this
Statement of Additional Information.
Factors Pertaining to California
Factors pertaining to California are set forth in Appendix E.
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 be resold only 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 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.
Miscellaneous Investments
The Fund, either singly or in conjunction with other funds advised or
subadvised by Nuveen Advisory or an affiliate thereof, may (1) invest in taxable
fixed-income or equity securities, and (2) invest for the purposes of acquiring
control of an issuer whose municipal bonds (a) the Fund already owns and (b)
have deteriorated or are expected shortly to deteriorate significantly in credit
quality, provided Nuveen Advisory determines that such investment should enable
the Fund to better maximize its existing investment in such issuer. Investment
in taxable securities would result in a portion of your dividend being subject
to regular federal and California income taxes.
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. When held to its maturity, its return
comes from the difference between the purchase price and its maturity value. 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 and may be more speculative
than such securities. 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. 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, their principal occupations and other affiliations during the past
five years, the number of portfolios each oversees and other directorships they
hold are set forth below.
Name, Birthdate Positions and Principal Occupations Number of
--------------- ------------- --------------------- ---------
and Address Offices with the Including Other Directorships Portfolios in
----------- ---------------- ----------------------------- -------------
Fund and Year During Past Five Years Fund Complex
------------- ---------------------- ------------
First Elected Overseen by
------------- -----------
or Appointed Trustee
------------ -------
Trustee who is an interested person of the Fund:
-----------------------------------------------
Timothy R. Schwertfeger* Chairman of the Chairman and Director (since 1996) of The 130
3/28/49 Board, President John Nuveen Company, Nuveen Investments, Nuveen
333 West Wacker Drive and Trustee Advisory Corp. and Nuveen Institutional
Chicago, IL 60606 2002 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
1997) of Nuveen Asset Management Inc.;
Director (since 1996) of Institutional Capital
Corporation; Chairman and Director (since 1999)
of
* Mr. Schwertfeger is an "interested person" of the Fund, as defined in the
Investment Company Act of 1940, because he is an officer and director of
Nuveen Advisory.
21
Name, Birthdate Positions and Principal Occupations Number of
--------------- ------------- --------------------- ---------
and Address Offices with the Including Other Directorships Portfolios in
----------- ---------------- ----------------------------- -------------
Fund and Year During Past Five Years Fund Complex
------------- ---------------------- ------------
First Elected Overseen by
------------- -----------
or Appointed Trustee
------------ -------
Rittenhouse Financial Services Inc.; Chief
Executive Officer (since 1999) of Nuveen
Senior Loan Asset Management Inc.
Trustees who are not interested persons of the Fund:
---------------------------------------------------
Robert P. Bremner Trustee Private Investor and Management Consultant. 112
8/22/40 2002
3725 Huntington Street,
N.W.
Washington, D.C. 20015
Lawrence H. Brown** Trustee Retired (August 1989) as Senior Vice President 112
7/29/34 2002 of The Northern Trust Company.
201 Michigan Avenue
Highwood, IL 60040
Anne E. Impellizzeri Trustee Retired, formerly, Executive Director (since 112
1/26/33 2002 1998) of Manitoga (Center for Russel Wright's
3 West 29th Street Design with Nature); formerly, President and
New York, NY 10001 Executive Officer of Blanton-Peale Institutes
Chief of Religion and Health (since 1990); prior
thereto, Vice President, Metropolitan Life
Insurance Co.
Peter R. Sawers Trustee Adjunct Professor of Business and Economics, 112
4/3/33 2002 University of Dubuque, Iowa; formerly
22 The Landmark (1991-2000) Adjunct Professor, Lake Forest
Northfield, IL 60093 Graduate School of Management, Lake Forest,
Illinois; prior thereto, Executive Director,
Towers Perrin Australia, a management consulting
firm; Chartered Financial Analyst; Certified
Management Consultant.
William J. Schneider*** Trustee Senior Partner and Chief Operating Officer, 112
9/24/44 2002 Miller-Valentine Group, Vice President,
4000 Miller-Valentine Ct. Miller-Valentine Realty, a development and
P. O. Box 744 contract company; Chair, Miami Valley Hospital;
Dayton, OH 45401 Chair, Miami Valley Economic Development
Coalition; formerly, Member, Community Advisory
Board, National City Bank, Dayton, Ohio and
Business Advisory Council, Cleveland Federal
Reserve Bank.
Judith M. Stockdale Trustee Executive Director, Gaylord and Dorothy 112
12/29/47 2002 Donnelley Foundation (since 1994); prior
35 E. Wacker Drive thereto, Executive Director, Great Lakes
Suite 2600 Protection Fund (from 1990 to 1994).
Chicago, IL 60601
** As a result of his ownership of fixed-income securities issued by __________
_____________________, one of the principal underwriters of the Fund, the Fund
believes that Mr. Brown may be deemed to be an interested person for as long as
_________________________ serves as principal underwriter to the Fund and,
therefore, for purposes of this offering he is being treated as an interested
person. Mr. Brown owns less than 1% of such securities outstanding and has
abstained from voting on any items involving the appointment of _______________
_________________________ as principal underwriter to the Fund.
*** As a result of his ownership of securities issued by the parent
company of __________________________, one of the principal underwriters of the
Fund, the Fund believes that Mr. Schneider may be deemed to be an interested
person for as long as _________________________ serves as principal underwriter
to the Fund and, therefore, for purposes of this offering he is being treated as
an interested person. Mr. Schneider owns less than 1% of such securities
outstanding.
22
Name, Birthdate Positions and Principal Occupations Number of
--------------- ------------- ---------------------------- ---------
and Address Offices with the Including Other Directorships Portfolios in
----------- ---------------- ----------------------------- -------------
Fund and Year During Past Five Years Fund Complex
------------- ---------------------- ------------
First Elected Overseen by
------------- -----------
or Appointed Officer
------------ -------
Officers of the Fund:
--------------------
Michael T. Atkinson Vice President and Vice President (since January 2002), formerly, 130
2/3/66 Assistant Secretary Assistant Vice President (since 2000),
333 W. Wacker Drive 2002 previously, Associate of Nuveen Investments.
Chicago, IL 60606
Paul L. Brennan Vice President Vice President (since January 2002), formerly, 126
11/10/66 2002 Assistant Vice President (since 1997), of Nuveen
333 W. Wacker Drive Advisory Corp.; prior thereto, portfolio
Chicago, IL 60606 manager of Flagship Financial Inc.;
Chartered Financial Analyst and Certified
Public Accountant.
Peter H. D'Arrigo Vice President and Vice President of Nuveen Investments (since 130
11/28/67 Treasurer 1999), prior thereto, Assistant Vice
333 W. Wacker Drive 2002 President (from 1997); Vice President and
Chicago, IL 60606 Treasurer (since 1999) of Nuveen Senior Loan
Asset Management Inc.; Chartered Financial
Analyst.
Susan M. DeSanto Vice President Vice President of Nuveen Advisory Corp. (since 130
9/8/54 2002 2001); previously, Vice President of Van Kampen
333 W. Wacker Drive Investment Advisory Corp. (since 1998); prior
Chicago, IL 60606 thereto, Assistant Vice President of Van Kampen
Investment Advisory Corp. (since 1994).
Jessica R. Droeger Vice President and Vice President (since January 2002) and 130
9/24/64 Assistant Secretary Assistant General Counsel (since 1998);
333 W. Wacker Drive 2002 formerly, Assistant Vice President (since
Chicago, IL 60606 1998) of Nuveen Investments; Vice President
(since May 2002), formerly Assistant Vice
President and Assistant Secretary (since 1998)
of Nuveen Advisory Corp. and Nuveen
Institutional Advisory Corp.; prior
thereto, Associate at the law firm D'Ancona
Partners LLC.
Lorna C. Ferguson Vice President Vice President of Nuveen Investments; Vice 130
10/24/45 2002 President (since 1998) of Nuveen
333 W. Wacker Drive Advisory Corp. and Nuveen Institutional
Chicago, IL 60606 Advisory Corp.
William M. Fitzgerald Vice President Managing Director (since 2002) of Nuveen 130
3/2/64 2002 Investments; Managing Director (since 2001),
333 W. Wacker Drive formerly Vice President of Nuveen Advisory Corp.
Chicago, IL 60606 and Nuveen Institutional Advisory Corp. (since
1995); Chartered Financial Analyst.
Stephen D. Foy Vice President and Vice President of Nuveen Investments and 130
5/31/54 Controller The John Nuveen Company; Vice President
333 W. Wacker Drive 2002 (since 1999) of Nuveen Senior Loan Management
Chicago, IL 60606 Inc.; Certified Public Accountant.
J. Thomas Futrell Vice President Vice President of Nuveen Advisory Corp.; 126
7/5/55 2002 Chartered Financial Analyst.
333 W. Wacker Drive
Chicago, IL 60606
23
Name, Birthdate Positions and Principal Occupations Number of
--------------- ------------- --------------------- ---------
and Address Offices with the Including Other Directorships Portfolios in
----------- ---------------- ----------------------------- -------------
Fund and Year During Past Five Years Fund Complex
------------- ---------------------- ------------
First Elected Overseen by
------------- -----------
or Appointed Officer
------------ -------
Richard A. Huber Vice President Vice President of Nuveen Institutional Advisory 126
3/26/63 2002 Corp. (since 1998) and Nuveen Advisory
333 W. Wacker Drive Corp. (since 1997); prior thereto, Vice
Chicago, IL 60606 President and Portfolio Manager of Flagship
Financial, Inc.
Steven J. Krupa Vice President Vice President of Nuveen Advisory Corp. 126
8/21/57 2002
333 W. Wacker Drive
Chicago, IL 60606
David J. Lamb Vice President Vice President (since 2000) of Nuveen 130
3/22/63 2002 Investments, previously Assistant Vice
333 W. Wacker Drive President (since 1999); prior thereto,
Chicago, IL 60606 Associate of Nuveen Investments; Certified
Public Accountant.
Tina M. Lazar Vice President Vice President (since 1999), previously, 130
8/27/61 2002 Assistant Vice President (since 1993) of
333 W. Wacker Drive Nuveen Investments.
Chicago, IL 60606
Larry W. Martin Vice President and Vice President, Assistant Secretary and 130
7/27/51 Assistant Secretary Assistant General Counsel of Nuveen
333 W. Wacker Drive 2002 Investments; Vice President and Assistant
Chicago, IL 60606 Secretary of Nuveen Advisory Corp. and Nuveen
Institutional Advisory Corp.; Assistant
Secretary of The John Nuveen Company and (since
1997) Nuveen Asset Management Inc.;
Vice President and Assistant Secretary (since
1999) of Nuveen Senior Loan Asset
Management Inc.
Edward F. Neild, IV Vice President Managing Director (since 2002) of Nuveen 130
7/7/65 2002 Investments; Managing Director (since 1997),
333 W. Wacker Drive formerly Vice President (since 1996) of Nuveen
Chicago, IL 60606 Advisory Corp. and Nuveen Institutional Advisory
Corp.; Chartered Financial Analyst.
Thomas J. O'Shaughnessy Vice President Vice President (since January 2002), 126
9/4/60 2002 formerly, Assistant Vice President (since 1998),
333 W. Wacker Drive of Nuveen Advisory Corp.; prior thereto,
Chicago, IL 60606 portfolio manager.
24
Name, Birthdate Positions and Principal Occupations Number of
--------------- ------------- --------------------- ---------
and Address Offices with the Including Other Directorships Portfolios in
----------- ---------------- ----------------------------- -------------
Fund and Year During Past Five Years Fund Complex
------------- ---------------------- ------------
First Elected Overseen by
------------- -----------
or Appointed Officer
------------ -------
Thomas C. Spalding Vice President Vice President of Nuveen Advisory Corp. and 126
7/31/51 2002 Nuveen Institutional Advisory Corp.; Chartered
333 W. Wacker Drive Financial Analyst.
Chicago, IL 60606
Gifford R. Zimmerman Vice President and Managing Director (since 2002), Assistant 130
9/9/56 Secretary Secretary and Associate General Counsel,
333 W. Wacker Drive 2002 formerly, Vice President and Assistant General
Chicago, IL 60606 Counsel of Nuveen Investments; Managing
Director (since 2002), General Counsel and
Assistant Secretary, formerly, Vice President
of Nuveen Advisory Corp. and Nuveen Institutional
Advisory Corp.; Managing Director (since 2002),
Assistant Secretary, formerly, Vice President
(since 1999) of Nuveen Senior Loan Asset Management Inc.;
Managing Director (since 2002), Assistant Secretary
and Associate General Counsel, formerly, Vice President
(since 2000), of Nuveen Asset Management Inc.;
Vice President and Assistant Secretary of The John
Nuveen Company (since 1994); Chartered Financial Analyst.
The Board of Trustees has five standing committees: the executive
committee, the audit committee, the nominating and governance committee, the
dividend committee and the valuation committee. Because the Fund is newly
organized, none of the committees have met during the Fund's last fiscal year.
The executive committee met once prior to the commencement of the Fund's
operations.
Peter R. Sawers and Timothy R. Schwertfeger, Chair, 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 audit committee monitors the accounting and reporting policies and
practices of the Funds, the quality and integrity of the financial statements of
the Funds, compliance by the Funds with legal and regulatory requirements and
the independence and performance of the external and internal auditors. The
members of the audit committee are William J. Schneider, Chair, Robert P.
Bremner, Lawrence H. Brown, Anne E. Impellizzeri, Peter R. Sawers and Judith M.
Stockdale.
The nominating and governance committee is responsible for Board selection
and tenure; selection and review of committees; and Board education and
operations. In addition, the committee monitors performance of legal counsel and
other service providers; periodically reviews and makes recommendations about
any appropriate changes to trustee compensation; and has the resources and
authority to discharge its responsibilities--including retaining special counsel
and other experts or consultants at the expense of the Fund. In the event of a
vacancy on the Board, the nominating and governance committee receives
suggestions from various sources as to suitable candidates. Suggestions should
be sent in writing to Lorna Ferguson, Vice President for Board Relations, Nuveen
Investments, 333 West Wacker Drive, Chicago, IL 60606. The nominating and
governance committee sets appropriate standards and requirements for nominations
for new trustees and reserves the right to interview all candidates and to make
the final selection of any new trustees. The members of the nominating and
governance committee are Anne E. Impellizzeri, Chair, Robert P. Bremner,
Lawrence H. Brown, Peter R. Sawers, William J. Schneider and Judith M.
Stockdale.
The dividend committee is authorized to declare distributions on the Fund's
shares including, but not limited to regular and special dividends, capital
gains and ordinary income distributions. The members of the dividend committee
are Timothy R. Schwertfeger, Chair, and Lawrence H. Brown.
The valuation committee oversees the Fund's Pricing Procedures including,
but not limited to, the review and approval of fair value pricing determinations
made by Nuveen's Valuation Group. The members of the valuation committee are
Judith M. Stockdale and Lawrence H. Brown.
The trustees of the Fund are also directors or trustees, as the case may
be, of 30 Nuveen open-end funds and 82 Nuveen closed-end funds advised by Nuveen
Advisory Corp. Mr. Schwertfeger is a director or trustee, as the case may be, of
18 Nuveen open-end and closed-end funds advised by Nuveen Institutional Advisory
Corp. None of the independent trustees, nor any of their immediate family
members, 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 the dollar range of equity securities
beneficially owned by each trustee as of December 31, 2001:
Aggregate Dollar Range of
Equity Securities in All
Registered Investment
Dollar Range of Equity Companies Overseen by
Securities in the Trustee in Family of
Name of Trustee Fund Investment Companies
--------------- ---------------------- -------------------------
Robert P. Bremner $ 0 over $100,000
-------------------------------------------------------------------------------
Lawrence H. Brown $ 0 over $100,000
-------------------------------------------------------------------------------
Anne E. Impellizzeri $ 0 over $100,000
-------------------------------------------------------------------------------
Peter R. Sawers $ 0 over $100,000
-------------------------------------------------------------------------------
William J. Schneider $ 0 over $100,000
-------------------------------------------------------------------------------
Timothy R. Schwertfeger $ 0 over $100,000
-------------------------------------------------------------------------------
Judith M. Stockdale $ 0 over $100,000
-------------------------------------------------------------------------------
No trustee who is not an interested person of the Fund owns beneficially
or of record, any security of Nuveen Advisory, Nuveen or any person (other than
a registered investment company) directly or indirectly controlling, controlled
by or under common control with Nuveen Advisory or Nuveen.
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.
The Fund has a deferred compensation plan (the "Plan") that permits any trustee
who is not an "interested person" of the Fund to elect to defer receipt of all
or a portion of his or her compensation as a trustee. The deferred compensation
of a participating trustee is credited to a book reserve account of the Trust
when the compensation would otherwise have been paid to the trustee. The value
of the trustee's deferral account at any time is equal to the value that the
account would have had if contributions to the account had been invested and
reinvested in shares of one or more of the eligible Nuveen funds. At the time
for commencing distributions from a trustee's deferral account, the trustee may
elect to receive distributions in a lump sum or over a period of five years. The
Fund will not be liable for any other fund's obligations to make distributions
under the Plan.
Amount of Total
Estimated Aggregate Total Compensation Compensation that
Compensation From from Fund and Has Been
Name of Trustee the Fund* Fund Complex** Deferred
--------------- ------------------ ------------------ -----------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Robert P. Bremner $74 $ 72,500 $ 8,280
--------------------------------------------------------------------------------
Lawrence H. Brown $76 $ 78,500 $ 0
--------------------------------------------------------------------------------
Anne E. Impellizzeri $74 $ 72,500 $55,200
--------------------------------------------------------------------------------
Peter R. Sawers $74 $ 73,000 $54,788
--------------------------------------------------------------------------------
William J. Schneider $74 $ 72,500 $55,200
--------------------------------------------------------------------------------
Judith M. Stockdale $74 $ 72,500 $13,800
--------------------------------------------------------------------------------
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 compensation paid to the trustees for the one year period
ending 12/31/01 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 The John Nuveen Company.
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 The John Nuveen Company.
Founded in 1898, The John Nuveen Company brings over a century of expertise to
the municipal bond market. According to data from Thomson Wealth Management,
Nuveen is the leading sponsor of exchange-traded municipal bond funds as
measured by number of funds (87) and fund assets under management ($33 billion)
as of August 31, 2002. Overall, The John Nuveen Company and its affiliates had
over $83 billion in assets under management or surveillance as of August 31,
2002. The John Nuveen Company is approximately 77% 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.
The John Nuveen Company, through Nuveen Investments, provides high-quality
investment services that are essential to building balanced core investment
portfolios. Nuveen Investments serves financial advisors, and their
high-net-worth clients, as well as a growing number of institutional clients.
The Company today markets its capabilities under four distinct brands: Nuveen,
NWQ, Rittenhouse and Symphony. In total, the Company now manages approximately
$74 billion in assets. The John Nuveen Company is listed on The New York Stock
Exchange and trades under the symbol "JNC".
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 Managed Assets 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%
If the Fund utilizes leverage through the issuance of MuniPreferred Shares
in an amount equal to 35% of the Fund's total assets (including the amount
obtained from leverage), the management fee calculated as a percentage of net
assets attributable to Common Shares would be as follows:
Net Assets Attributable to Common Shares Management Fee
---------------------------------------- --------------
Up to $125 million............................................. 1.0000%
$125 million to $250 million................................... .9808%
$250 million to $500 million................................... .9615%
$500 million to $1 billion..................................... .9423%
$1 billion to $2 billion....................................... .9231%
$2 billion and over............................................ .8846%
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 MuniPreferred Shares,
expenses of preparing, printing and distributing shareholder reports, notices,
proxy statements and reports to governmental agencies and taxes, if any. All
fees and expenses are accrued daily and deducted before payment of dividends to
investors.
For the first eight full 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
Managed Assets) Managed Assets)
----------- ------------------- ----------- -------------------
2002(1) .32% 2008 .24%
2003 .32% 2009 .16%
2004 .32% 2010 .08%
2005 .32%
2006 .32%
2007 .32%
-----------------------
(1) 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 ____________,
2010.
Unless earlier terminated as described below, the Fund's investment
management agreement with Nuveen Advisory (the "management agreement") will
remain in effect until ______, 2003. The management agreement continues in
effect from year to year so long as such continuation is approved at least
annually by (1) the Board of Trustees or the vote of a majority of the
outstanding voting securities of the Fund, and (2) a majority of the trustees
who are not interested persons of any party to the investment management
agreement, cast in person at a meeting called for the purpose of voting on such
approval. The investment management agreement may be terminated at any time,
without penalty, by either the Fund or Nuveen Advisory upon 60 days written
notice, and is automatically terminated in the event of its assignment as
defined in the 1940 Act.
The management agreement has been approved by a majority of the independent
trustees of the Fund and the sole shareholder of the Fund. The independent
trustees have determined that the terms of the Fund's management agreement are
fair and reasonable and that the agreement is in the Fund's best interests. The
independent trustees believe that the management agreement will enable the Fund
to obtain high quality investment management services at a cost that they deem
appropriate, reasonable, and in the best interests of the Fund and its
shareholders. In making such determination, the independent trustees met
independently from the interested trustee of the Fund and any officers of Nuveen
Advisory and its affiliates. The independent trustees also relied upon the
assistance of counsel to the independent trustees.
In evaluating the investment management agreement, the independent trustees
reviewed materials furnished by Nuveen Advisory, including information regarding
Nuveen Advisory, its affiliates and its personnel, operations and financial
condition. The independent trustees discussed with representatives of Nuveen
Advisory the Fund's operations and Nuveen Advisory's ability to provide advisory
and other services to the Fund. The independent trustees also reviewed, among
other things, the nature and quality of services to be provided by Nuveen
Advisory, the proposed fees to be charged by Nuveen Advisory for investment
management services, the profitability to Nuveen Advisory of its relationship
with the Fund, fall-out benefits to Nuveen Advisory from that relationship,
economies of scale achieved by Nuveen Advisory, the experience of the investment
advisory and other personnel providing services to the Fund, the historical
quality of the services provided by Nuveen Advisory and comparative fees and
expense ratios of investment companies with similar objectives and strategies
managed by other investment advisers, and other factors that the independent
trustees deemed relevant.
The Fund, Nuveen Advisory, Nuveen, _____________________ 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 of the Fund, Nuveen Advisory and Nuveen 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.
On occasion, the Fund may clear portfolio transactions through Nuveen. 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.
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 that 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 dividends 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. The Common Shares being offered have a
par value of $0.01 per share and, subject to the rights of holders of
MuniPreferred Shares, if issued, have equal rights as to the payment of
dividends and the distribution of assets upon liquidation of the Fund. The
Common Shares being offered 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 cash
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 _________________,
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 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 authorized 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. The Board has stated that the
initial series of MuniPreferred Shares would pay cumulative dividends at rates
determined weekly 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 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 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 an offering of MuniPreferred Shares. 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 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 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
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), the required vote only 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 ______________________, 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 ________________________,(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 .
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) 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 and may have
other collateral tax consequences. The Fund will not invest in AMT Bonds. See
"Investment Policies and Techniques." Different alternative minimum tax rules
apply to individuals and to corporations. Taxpayers that may be subject to the
alternative minimum tax 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. Taxable distributions will not be eligible for the dividends
received deduction allowed to corporations. Distributions by the Fund to Common
Shareholders that do not constitute ordinary income dividends, capital gain
dividends or exempt-interest 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 dividends 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 sale 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 amounts 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 is taxed at a
maximum rate of 20%, while short-term capital gain and other ordinary income is
taxed at a maximum
38
rate of 38.6% in 2002 and 2003, 37.6% in 2004 and 2005, and 35% thereafter until
2011, when the maximum rate on ordinary income will revert to 39.6% unless
amended by Congress. The maximum long-term capital gain rate is 18% for capital
assets that are 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 a percentage 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. The backup
withholding percentage will be 30% in 2002 and 2003, 29% in 2004 and 2005, and
28% thereafter until 2011, when the percentage will revert to 31% unless amended
by Congress. 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 E.
40
EXPERTS
The Financial Statements of the Fund as of , 2002, appearing in
this Statement of Additional Information have been audited by
, 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. provides accounting and auditing services to the
Fund.
CUSTODIAN
The custodian of the assets of the Fund is State Street Bank and Trust
Company, One Federal Street, Boston, Massachusetts 02110. 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 Insured California Tax-Free Advantage Municipal Fund
[TO COME]
43
NUVEEN INSURED CALIFORNIA TAX-FREE ADVANTAGE MUNICIPAL FUND
FINANCIAL STATEMENTS
Nuveen Insured California Tax-Free Advantage Municipal Fund
Statement of Assets and Liabilities
[TO COME]
44
APPENDIX A
Ratings of Investments
Standard & Poor's Corporation--A brief description of the applicable Standard &
Poor's Corporation, a division of The McGraw-Hill Companies ("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 its
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.
A-2
C
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', `A', `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 Ratings--A brief description of the applicable Fitch Ratings
("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 Rating Watch 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 2002 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%
-------------------------------------------------------------------------------
10.00% 4.44% 5.00% 5.56% 6.11% 6.67% 7.22%
15.00% 4.71% 5.29% 5.88% 6.47% 7.06% 7.65%
27.00% 5.48% 6.16% 6.85% 7.53% 8.22% 8.90%
30.00% 5.71% 6.43% 7.14% 7.86% 8.57% 9.29%
35.00% 6.15% 6.92% 7.69% 8.46% 9.23% 10.00%
38.60% 6.51% 7.33% 8.14% 8.96% 9.77% 10.59%
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 tax rates, 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*
--------------- --------------- ----------- --------- ------------
$ 6,000-27,050 $ 12,000-45,200 15.00% 6.00% 20.1%
27,050-65,550 45,200-109,250 27.50% 9.30% 34.2%
65,550-136,750 109,250-166,500 30.50% 9.30% 37.0%
136,750-297,350 166,500-297,350 35.50% 9.30% 41.5%
Over 297,350 Over 297,350 39.10% 9.30% 44.8%
0.50% 1.00% 1.50% 2.00% 2.50% 3.00%
----- ----- ----- ----- ----- -----
0.63% 1.25% 1.88% 2.50% 3.13% 3.75%
0.76% 1.52% 2.28% 3.04% 3.80% 4.56%
0.79% 1.59% 2.38% 3.17% 3.97% 4.76%
0.85% 1.71% 2.56% 3.42% 4.27% 5.13%
0.91% 1.81% 2.72% 3.62% 4.53% 5.43%
----------------
* The combined tax rates shown reflect the fact that state tax payments are
currently deductible for federal tax purposes. 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 alternative minimum taxes or 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
DESCRIPTION OF INSURERS
Set forth below is information about the various municipal bond insurers
with whom the Fund intends to maintain specific insurance policies for
particular municipal bonds or policies of portfolio insurance. The information
in this Appendix is based on information supplied by the insurers, and the Fund
cannot verify its accuracy and completeness.
AMBAC ASSURANCE CORPORATION ("AMBAC ASSURANCE")
Payment Pursuant to Financial Guaranty Insurance Policy
Ambac Assurance has made a commitment to issue a financial guaranty insurance
policy (the "Financial Guaranty Insurance Policy") relating to the bonds
effective as of the date of issuance of the bonds. Under the terms of the
Financial Guaranty Insurance Policy, Ambac Assurance will pay to The Bank of New
York, in New York, New York or any successor thereto (the "Insurance Trustee")
that portion of the principal of and interest on the bonds which shall become
Due for Payment but shall be unpaid by reason of Nonpayment by the Obligor (as
such terms are defined in the Financial Guaranty Insurance Policy). Ambac
Assurance will make such payments to the Insurance Trustee on the later of the
date on which such principal and interest becomes Due for Payment or within one
business day following the date on which Ambac Assurance shall have received
notice of Nonpayment from the Trustee/Paying Agent. The insurance will
extend for the term of the bonds and, once issued, cannot be canceled by Ambac
Assurance.
The Financial Guaranty Insurance Policy will insure payment only on stated
maturity dates and on mandatory sinking fund installment dates, in the case of
principal, and on stated dates for payment, in the case of interest. If the
bonds become subject to mandatory redemption and insufficient funds are
available for redemption of all outstanding bonds, Ambac Assurance will remain
obligated to pay principal of and interest on outstanding bonds on the
originally scheduled interest and principal payment dates including mandatory
sinking fund redemption dates. In the event of any acceleration of the principal
of the bonds, the insured payments will be made at such times and in such
amounts as would have been made had there not been an acceleration.
In the event the Bond Registrar has notice that any payment of principal of
or interest on a bond which has become Due for Payment and which is made to a
Holder by or on behalf of the Obligor has been deemed a preferential transfer
and theretofore recovered from its registered owner pursuant to the United
States Bankruptcy Code in accordance with a final, nonappealable order of a
court of competent jurisdiction, such registered owner will be entitled to
payment from Ambac Assurance to the extent of such recovery if sufficient funds
are not otherwise available.
The Financial Guaranty Insurance Policy does not insure any risk other than
Nonpayment, as defined in the Policy. Specifically, the Financial Guaranty
Insurance Policy does not cover:
1. payment on acceleration, as a result of a call for redemption
(other than mandatory sinking fund redemption) or as a result of any other
advancement of maturity.
2. payment of any redemption, prepayment or acceleration premium.
3. nonpayment of principal or interest caused by the insolvency or
negligence of any Trustee or Paying Agent, if any.
If it becomes necessary to call upon the Financial Guaranty Insurance
Policy, payment of principal requires surrender of bonds to the Insurance
Trustee together with an appropriate instrument of assignment so as to permit
ownership of such bonds to be registered in the name of Ambac Assurance to the
extent of the payment under the Financial Guaranty Insurance Policy. Payment of
interest pursuant to the Financial Guaranty Insurance Policy requires proof of
Holder entitlement to interest payments and an appropriate assignment of the
Holder's right to payment to Ambac Assurance.
Upon payment of the insurance benefits, Ambac Assurance will become the
owner of the bond, appurtenant coupon, if any, or right to payment of principal
or interest on such bond and will be fully subrogated to the surrendering
Holder's rights to payment.
Ambac Assurance
Ambac Assurance Corporation ("Ambac Assurance") is a Wisconsin-domiciled
stock insurance corporation regulated by the Office of the Commissioner of
Insurance of the State of Wisconsin and licensed to do business in 50 states,
the District of Columbia, the Territory of Guam and the Commonwealth of Puerto
Rico, with admitted assets of approximately $5,587,000,000 (unaudited) and
statutory capital of approximately $3,453,000,000 (unaudited) as of June 30,
2002. Statutory capital consists of Ambac Assurance's policyholders' surplus and
statutory contingency reserve. Standard & Poor's Credit Markets Services, a
division of The McGraw-Hill Companies, Moody's Investors Service and Fitch, Inc.
have each assigned a triple-A financial strength rating to Ambac Assurance.
Ambac Assurance has obtained a ruling from the Internal Revenue Service to the
effect that the insuring of an obligation to Ambac Assurance will not affect the
treatment for federal income tax purposes of interest on such obligation and
that insurance proceeds representing maturing interest paid by Ambac Assurance
under policy provisions substantially identical to those contained in its
municipal bond insurance policy shall be treated for federal income tax purposes
in the same manner as if such payments were made by the issuer of the bonds.
Ambac Assurance makes no representation regarding the bonds or the
advisability of investing in the bonds and makes no representation regarding,
nor has it participated in the preparation of, the Prospectus and Statement of
Additional Information, other than the information supplied by Ambac Assurance
and presented under this heading "Ambac Assurance Corporation."
Available Information
The parent company of Ambac Assurance, Ambac Financial Group, Inc. (the
"Company"), is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "SEC"). These reports, proxy statements
and other information may be inspected and copied at the SEC's public reference
facilities at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the
SEC at 1-800-SEC-0330 for further information on the public reference room. The
SEC maintains an internet site at http://www.sec.gov that contains reports,
proxy and information statements and other information regarding companies that
file electronically with the SEC, including the Company. In addition, the
aforementioned material may also be inspected at the offices of the New York
Stock Exchange, Inc. (the "NYSE") at 20 Broad Street, New York, New York 10005.
Copies of Ambac Assurance's financial statements prepared in accordance
with statutory accounting standards are available from Ambac Assurance. The
address of Ambac Assurance's administrative offices and its telephone number are
One State Street Plaza, 19th Floor, New York, New York 10004 and (212) 668-0340.
Incorporation of Certain Documents by Reference
The following documents filed by the Company with the Commission (File
No. 1-10777) are incorporated by reference in this Statement of Additional
Information:
1) The Company's Current Report on Form 8-K dated January 23, 2002 and
filed on January 25, 2002;
2) The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2001 and filed on March 26, 2002;
3) The Company's Current Report on Form 8-K dated April 17, 2002 and
filed on April 18, 2002;
4) The Company's Quarterly Report on Form 10-Q for the fiscal quarterly
period ended March 31, 2002 and filed on May 13, 2002;
5) The Company's Current Report on Form 8-K dated July 17, 2002 and filed
on July 19, 2002;
6) The Company's Current Report on Form 8-K dated August 14, 2002 and
filed on August 14, 2002; and
7) The Company's Quarterly Report on Form 10-Q for the fiscal quarterly
period ended June 30, 2002 and filed on August 14, 2002;
All documents subsequently filed by the Company pursuant to the
requirements of the Exchange Act after the date of this Statement of Additional
Information will be available for inspection in the same manner as described
above in "Available Information".
FINANCIAL SECURITY ASSURANCE INC. ("FINANCIAL SECURITY")
Bond Insurance Policy
---------------------
Concurrently with the issuance of the bonds, Financial Security Assurance
Inc. ("Financial Security") will issue its Municipal Bond Insurance Policy for
the bonds (the "Policy"). The Policy guarantees the scheduled payment of
principal of and interest on the bonds when due.
The Policy is not covered by any insurance security or guaranty fund
established under New York, California, Connecticut or Florida insurance law.
Financial Security Assurance Inc.
---------------------------------
Financial Security is a New York domiciled insurance company and a wholly
owned subsidiary of Financial Security Assurance Holdings Ltd. ("Holdings").
Holdings is an indirect subsidiary of Dexia, S.A., a publicly held Belgian
corporation. Dexia, S.A., through its bank subsidiaries, is primarily engaged in
the business of public finance in France, Belgium and other European countries.
No shareholder of Holdings or Financial Security is liable for the obligations
of Financial Security.
At June 30, 2002, Financial Security's total policyholders' surplus and
contingency reserves were approximately $1,710,044,000 and its total unearned
premium reserve was approximately $898,579,000 in accordance with statutory
accounting principles. At June 30, 2002, Financial Security's total
shareholders' equity was approximately $1,817,013,000 and its total net unearned
premium reserve was approximately $744,499,000 in accordance with generally
accepted accounting principles.
The financial statements included as exhibits to the annual and quarterly
reports filed by Holdings with the Securities and Exchange Commission are hereby
incorporated herein by reference. Also incorporated herein by reference are any
such financial statements so filed from the date of this Statement of Additional
Information until the termination of the offering of the bonds. Copies of
materials incorporated by reference will be provided upon request to Financial
Security Assurance Inc.: 350 Park Avenue, New York, New York 10022, Attention:
Communications Department (telephone (212) 826-0100).
The policy does not protect investors against changes in market value of
the bonds, which market value may be impaired as a result of changes in
prevailing interest rates, changes in applicable ratings or other causes.
Financial Security makes no representation regarding the bonds or the
advisability of investing in the bonds. Financial Security makes no
representation regarding the Prospectus or Statement of Additional Information,
nor has it participated in the preparation thereof, except that Financial
Security has provided to the Fund the information presented under this caption
for inclusion in the Statement of Additional Information.
C-1
MBIA INSURANCE CORPORATION ("MBIA")
The MBIA Insurance Corporation Insurance Policy
The following information has been furnished by MBIA Insurance Corporation
("MBIA") for use in this Statement of Additional Information.
MBIA's policy unconditionally and irrevocably guarantees the full and
complete payment required to be made by or on behalf of the Issuer to the Paying
Agent or its successor of an amount equal to (i) the principal of (either at the
stated maturity or by an advancement of maturity pursuant to a mandatory sinking
fund payment) and interest on, the bonds as such payments shall become due but
shall not be so paid (except that in the event of any acceleration of the due
date of such principal by reason of mandatory or optional redemption or
acceleration resulting from default or otherwise, other than any advancement of
maturity pursuant to a mandatory sinking fund payment, the payments guaranteed
by MBIA's policy shall be made in such amounts and at such times as such
payments of principal would have been due had there not been any such
acceleration); and (ii) the reimbursement of any such payment which is
subsequently recovered from any owner of the bonds pursuant to a final judgment
by a court of competent jurisdiction that such payment constitutes an avoidable
preference to such owner within the meaning of any applicable bankruptcy law
(a "Preference").
MBIA's policy does not insure against loss of any prepayment premium which
may at any time be payable with respect to any bonds. MBIA's policy does not,
under any circumstance, insure against loss relating to: (i) optional or
mandatory redemptions (other than mandatory sinking fund redemptions); (ii) any
payments to be made on an accelerated basis; (iii) payments on the purchase
price of bonds upon tender by an owner thereof; or (iv) any Preference relating
to (i) through (iii) above. MBIA's policy also does not insure against
nonpayment of principal of or interest on the bonds resulting from the
insolvency, negligence or any other act or omission of the Paying Agent or any
other paying agent for the bonds.
Upon receipt of telephonic or telegraphic notice, such notice subsequently
confirmed in writing by registered or certified mail, or upon receipt of written
notice by registered or certified mail, by MBIA from the Paying Agent or any
owner of a bond the payment of an insured amount for which is then due, that
such required payment has not been made, MBIA on the due date of such payment or
within one business day after receipt of notice of such nonpayment, whichever is
later, will make a deposit of funds, in an account with State Street Bank and
Trust Company, N.A., in New York, New York, or its successor, sufficient for the
payment of any such insured amounts which are then due. Upon presentment and
surrender of such bonds or presentment of such other proof of ownership of the
bonds, together with any appropriate instruments of assignment to evidence the
assignment of the insured amounts due to the bonds as are paid by MBIA, and
appropriate instruments to effect the appointment of MBIA as agent for such
owners of the bonds in any legal proceeding related to payment of insured
amounts on the bonds, such instruments being in a form satisfactory to State
Street Bank and Trust Company, N.A., State Street Bank and Trust Company, N.A.
shall disburse to such owners or the Paying Agent payment of the insured amounts
due on such bonds, less any amount held by the Paying Agent for the payment of
such insured amounts and legally available therefor.
MBIA
MBIA Insurance Corporation ("MBIA") is the principal operating subsidiary
of MBIA Inc., a New York Stock Exchange listed company (the "Company"). The
Company is not obligated to pay the debts of or claims against MBIA. MBIA is
domiciled in the State of New York and licensed to do business in and subject to
regulation under the laws of all 50 states, the District of Columbia, the
Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands,
the Virgin Islands of the United States and the Territory of Guam. MBIA has
three branches, one in the Republic of France, one in the Republic of Singapore
and one in the Kingdom of Spain. New York has laws prescribing minimum capital
requirements, limiting classes and concentrations of investments and requiring
the approval of policy rates and forms. State laws also regulate the amount of
both the aggregate and individual risks that may be insured, the payment of
dividends by MBIA, changes in control and transactions among affiliates.
Additionally, MBIA is required to maintain contingency reserves on its
liabilities in certain amounts and for certain periods of time.
MBIA does not accept any responsibility for the accuracy or completeness of
this Prospectus or Statement of Additional Information or any information or
disclosure contained herein, or omitted herefrom, other than with respect to the
accuracy of the information regarding the policy and MBIA set forth under the
heading "MBIA Insurance Corporation". Additionally, MBIA makes no representation
regarding the bonds or the advisability of investing in the bonds.
The Financial Guarantee Insurance Policies are not covered by the
Property/Casualty Insurance Security Fund specified in Article 76 of the New
York Insurance Law.
MBIA Information
The following documents filed by the Company with the Securities and
Exchange Commission (the "SEC") are incorporated herein by reference:
(1) The Company's Annual Report on Form 10-K for the year ended December 31,
2001; and
(2) The Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 2002.
Any documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act of 1934, as amended, after the date of this Statement
of Additional Information and prior to the termination of the offering of the
securities offered hereby shall be deemed to be incorporated by reference in
this Statement of Additional Information and to be a part hereof. Any statement
contained in a document incorporated or deemed to be incorporated by reference
herein, or contained in this Statement of Additional Information, shall be
deemed to be modified or superseded for purposes of this Statement of Additional
Information to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Statement of Additional Information.
The Company files annual, quarterly and special reports, information
statements and other information with the SEC under File No. 1-9583. Copies of
the SEC filings (including (1) the Company's Annual Report on Form 10-K for the
year ended December 31, 2001, and (2) the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 2002), are available (i) over the Internet
at the SEC's web site at http://www.sec.gov; (ii) at the SEC's public reference
room in Washington D.C.; (iii) over the Internet at the Company's web site at
http://www.mbia.com; and (iv) at no cost, upon request to MBIA Insurance
Corporation, 113 King Street, Armonk, New York 10504. The telephone number of
MBIA is (914) 273-4545.
As of December 31, 2001, MBIA had admitted assets of $8.5 billion
(audited), total liabilities of $5.6 billion (audited), and total capital and
surplus of $2.9 billion (audited) determined in accordance with statutory
accounting practices prescribed or permitted by insurance regulaltory
authorities. As of June 30, 2002, MBIA had admitted assets of $8.7 billion
(unaudited), total liabilities of $5.7 billion (unaudited), and total capital
and surplus of $3.0 billion (unaudited) determined in accordance with statutory
accounting practices prescribed or permitted by insurance regulatory
authorities.
Financial Strength Ratings of MBIA
Moody's Investors Service, Inc. rates the financial strength of MBIA "Aaa."
Standard & Poor's, a division of The McGraw-Hill Companies, Inc. rates the
financial strength of MBIA "AAA."
Fitch Ratings. rates the financial strength of MBIA "AAA."
Each rating of MBIA should be evaluated independently. The ratings reflect
the respective rating agency's current assessment of the creditworthiness of
MBIA and its ability to pay claims on its policies of insurance. Any further
explanation as to the significance of the above ratings may be obtained only
from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the bonds,
and such ratings may be subject to revision or withdrawal at any time by the
rating agencies. Any downward revision or withdrawal of any of the above ratings
may have an adverse effect on the market price of the bonds. MBIA does not
guaranty the market price of the bonds nor does it guaranty that the ratings on
the bonds will not be revised or withdrawn.
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FINANCIAL GUARANTY INSURANCE COMPANY ("FINANCIAL GUARANTY")
Concurrently with the issuance of the Bonds, Financial Guaranty Insurance
Company ("Financial Guaranty") will issue its Municipal Bond New Issue Insurance
Policy (the "Policy") for the Bonds described in the Policy (as used under this
heading, the "Bonds"). The Policy unconditionally guarantees the payment of that
portion of the principal or accreted value (if applicable) of and interest on
the Bonds which has become due for payment, but shall be unpaid by reason of
nonpayment by the issuer of the Bonds (the "Issuer"). Financial Guaranty will
make such payments to State Street Bank and Trust Company, N.A., or its
successor as its agent (the "Fiscal Agent"), on the later of the date on which
such principal, accreted value or interest (as applicable) is due or on the
business day next following the day on which Financial Guaranty shall have
received telephonic or telegraphic notice, subsequently confirmed in writing, or
written notice by registered or certified mail, from an owner of Bonds or the
Paying Agent of the nonpayment of such amount by the Issuer. The Fiscal Agent
will disburse such amount due on any Bond to its owner upon receipt by the
Fiscal Agent of evidence satisfactory to the Fiscal Agent of the owner's right
to receive payment of the principal, accreted value or interest (as applicable)
due for payment and evidence, including any appropriate instruments of
assignment, that all of such owner's rights to payment of such principal,
accreted value or interest (as applicable) shall be vested in Financial
Guaranty. The term "nonpayment" in respect of a Bond includes any payment of
principal, accreted value or interest (as applicable) made to an owner of a Bond
which has been recovered from such owner pursuant to the United States
Bankruptcy Code by a trustee in bankruptcy in accordance with a final,
nonappealable order of a court having competent jurisdiction.
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The Policy is non-cancellable and the premium will be fully paid at the
time of delivery of the Bonds. The Policy covers failure to pay principal or
accreted value (if applicable) of the Bonds on their respective stated maturity
dates or dates on which the same shall have been duly called for mandatory
sinking fund redemption, and not on any other date on which the Bonds may have
been otherwise called for redemption, accelerated or advanced in maturity, and
covers the failure to pay an installment of interest on the stated date for its
payment.
Generally, in connection with its insurance of an issue of municipal
securities, Financial Guaranty requires, among other things, (i) that it be
granted the power to exercise any rights granted to the holders of such
securities upon the occurrence of an event of default, without the consent of
such holders, and that such holders may not exercise such rights without
Financial Guaranty's consent, in each case so long as Financial Guaranty has not
failed to comply with its payment obligations under its insurance policy; and
(ii) that any amendment or supplement to or other modification of the principal
legal documents be subject to Financial Guaranty's consent. The specific rights,
if any, granted to Financial Guaranty in connection with its insurance of the
Bonds are set forth in the prospectus. Reference should be made as well to such
description for a discussion of the circumstances, if any, under which the Fund
will provide additional or substitute credit enhancement, and related matters.
The Policy is not covered by the Property/Casualty Insurance Security Fund
specified in Article 76 of the New York Insurance Law or by the Florida
Insurance Guaranty Association (Florida Insurance Code, (SS) 631.50 et seq.).
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Financial Guaranty is a wholly-owned subsidiary of FGIC Corporation (the
"Corporation"), a Delaware holding company. The Corporation is a subsidiary of
General Electric Capital Corporation ("GE Capital"). Neither the Corporation nor
GE Capital is obligated to pay the debts of or the claims against Financial
Guaranty. Financial Guaranty is a monoline financial guaranty insurer domiciled
in the State of New York and subject to regulation by the State of New York
Insurance Department. As of March 31, 2002, the total capital and surplus of
Financial Guaranty was approximately $1.03 billion. Financial Guaranty prepares
financial statements on the basis of both statutory accounting principles and
generally accepted accounting principles. Copies of such financial statements
may be obtained by writing to Financial Guaranty at 125 Park Avenue, New York,
New York 10017, Attention: Communications Department (telephone number:
212-312-3000) or to the New York State Insurance Department at 25 Beaver Street,
New York, New York 10004-2319, Attention: Financial Condition Property/Casualty
Bureau (telephone number: 212-480-5187).
RATINGS
The above municipal bond insurers have insurance claims-paying ability
ratings of AAA from S&P and Aaa from Moody's. Financial Guaranty also has an
insurance claims-paying ability rating of AAA from Fitch. An S&P insurance
claims-paying ability rating is an assessment of an operating insurance
company's financial capacity to meet obligations under an insurance policy in
accordance with its terms. An insurer with an insurance claims-paying ability
rating of AAA has the highest rating assigned by S&P. Capacity to honor
insurance contracts is adjudged by S&P to be extremely strong and highly likely
to remain so over a long period of time. A Moody's insurance claims-paying
ability rating is an opinion of the ability of an insurance company to repay
punctually senior policyholder obligations and claims. An insurer with an
insurance claims-paying ability rating of Aaa is adjudged by Moody's to be of
the best quality. In the opinion of Moody's, the policy obligations of an
insurance company with an insurance claims-paying ability rating of Aaa carry
the smallest degree of credit risk and, while the financial strength of these
companies is likely to change, such changes as can be visualized are most
unlikely to impair the company's fundamentally strong position.
An insurance claims-paying ability rating by S&P or Moody's does not
constitute an opinion on any specific contract in that such an opinion can only
be rendered upon the review of the specific insurance contract. Furthermore, an
insurance claims-paying ability rating does not take into account deductibles,
surrender or cancellation penalties or the timeliness of payment, nor does it
address the ability of a company to meet nonpolicy obligations (i.e., debt
contracts).
The assignment of ratings by S&P or Moody's to debt issues that are fully
or partially supported by insurance policies, contracts or guarantees is a
separate process from the determination of claims-paying ability ratings. The
likelihood of a timely flow of funds from the insurer to the trustee for the
bondholders is a key element in the rating determination for such debt issues.
S&P's and Moody's ratings are not recommendations to buy, sell or hold the
municipal bonds insured by policies issued by AMBAC Assurance, Financial
Security, MBIA or Financial Guaranty and such ratings may be subject to revision
or withdrawal at any time by the rating
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agencies. Any downward revision or withdrawal of either or both ratings may have
an adverse effect on the market price of the municipal bonds insured by policies
issued by AMBAC Assurance, Financial Security, MBIA or Financial Guaranty.
S&P's ratings of AMBAC Assurance, Financial Security, MBIA and Financial
Guaranty should be evaluated independent of Moody's ratings. Any further
explanation as to the significance of the ratings may be obtained only from the
applicable rating agency. See Appendix A for more information about ratings by
Moody's and S&P.
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APPENDIX D
HEDGING STRATEGIES AND RISKS
Set forth below is additional information regarding the various defensive
hedging techniques.
Futures and Index Transactions
Financial Futures
A financial future is an agreement between two parties to buy and sell a
security for a set price on a future date. They have been designed by boards of
trade which have been designated "contracts markets" by the Commodity Futures
Trading Commission ("CFTC").
The purchase of financial futures is for the purpose of hedging 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.
D-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 a 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.
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APPENDIX E
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
improved significantly starting in 1995. After several years of very strong
growth, the State's financial condition has started to worsen since the start of
2001. As of October, 2001, the stock market and the State's economy both appear
to be weaker than predicted, with further unknown impacts following the
September 11, 2001 terrorist attacks in New York and Washington D.C. These
developments will have a corresponding negative impact on State finances,
although the magnitude cannot presently be estimated. 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 further, 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 $1,095 billion in 2000,
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. Since that
time California's economy has outpaced the national average, with strong growth
in virtually all sectors, particularly in high technology
E-1
manufacturing and services, including computer software and other services,
entertainment, tourism, and construction, and also with very strong growth in
exports. Through the end of 2000, unemployment in the State was under 5%, its
lowest level in three decades. Following the strongest growth in a decade in
1999 and 2000, the State's economy grew much more slowly in 2001, as the State
finally showed the impact of the nationwide economic slowdown, coupled with a
cyclical downturn in the high technology sector (including Internet-related
businesses). International trade has also slowed since the start of 2001. All
previous economic projections were made out of date by the terrorist attacks on
September 11, 2001. With the national economy apparently in a recession,
combined with weakness in many foreign economies which are trading partners,
California's economy can be expected to perform more weakly than previously
projected, although its depth and diversity may permit it to recover sooner than
other regions. This will result in weaker State revenues than previously
projected.
Widely publicized difficulties in California's energy supplies had been
seen in early 2001 to pose some risks to the economy, but during the summer
there were no electricity blackouts or shortages of natural gas. Although energy
prices have risen from the levels of two years ago, they have now appeared to
stabilize. Energy difficulties are mitigated by the fact that California's
economy is very energy-efficient. U.S. Department of Energy statistics for 1999
revealed that California ranked 50th of the 50 states in energy expenditures as
a percentage of state domestic product.
RECENT DEVELOPMENTS 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 to some degree for several years. Energy usage in the State
had been rising sharply with the strong economy, but no new large power
generating plants had been built since the 1980's. Until early this year, the
three major investor-owned utilities in the State ("IOUs") purchased 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
could charge their residential and small business customers were 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 impossible for the two largest IOUs to
continue to purchase power after mid-January, 2001, when they defaulted on
paying certain of their obligations. On April 6, 2001, the largest IOU, Pacific
Gas & Electric Company, filed for voluntary protection under the federal
Bankruptcy Code. The second-largest IOU, Southern California Edison Company
("SCE"), continues in default of various obligations. However, in October, 2001,
SCE announced the settlement of a lawsuit with the California Public Utilities
Commission ("CPUC") over the rates which SCE could charge its customers; this
settlement is expected to allow SCE to regain financial stability and SCE
thereby hopes to avoid bankruptcy.
In mid-January 2001, there were rolling electricity blackouts in northern
E-2
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. The DWR also started to
enter into long-term power supply contracts to reduce reliance on short-term and
spot markets. DWR's purchases were initially funded primarily by unsecured,
interest-bearing loans from the State's General Fund ("State Loans"). DWR is
also receiving repayment from a portion of retail end use customers' payments,
remitted through the IOUs, but these amounts will cover only a small portion of
the power purchase costs. Effective June 26, 2001, the DWR entered into an
Interim Loan Agreement with several banks totaling $4.1 billion, ("Interim
Loans"), which moneys are being used since that date to fund power purchases.
The Interim Loans are repayable only from end use customer payments or other
debt sales, and are not an obligation of the State General Fund. As of October
31, 2001, DWR had committed approximately $11.5 billion for power purchases,
funded from $6.1 billion in State Loans, $2.7 billion in customer payments and a
net $2.7 billion from the Interim Loans ($1.4 billion of Interim Loan proceeds
remain available to fund future power purchases).
The State Loans, the Interim Loans and the balance of energy purchase
costs, are intended to be funded from the issuance of up to $13 billion of DWR
revenue bonds authorized by legislation. DWR has requested approval of several
orders by the CPUC to implement the revenue bond sale. As of the end of October,
2001, the CPUC had voted against one such order, and another order implementing
DWR's "revenue requirement" to be collected from customer rates was in process.
The CPUC did approve an order eliminating the right of retail customers to
contract directly with generators for energy. As a result of these delays in
CPUC action, and the expectation that once various orders are completed, the
IOUs or other parties may file appeals, the schedule for issuance of the revenue
bonds is unknown at this time, but will not be earlier than sometime in 2002.
The DWR revenue bonds will be repaid from a dedicated revenue stream derived
from customer payments; they will not be backed in any way by faith and credit
or taxing power of the State. The DWR has the legal power to set retail rates at
a sufficient level to recover all its costs including debt service (its "revenue
requirement"), although the implementation of the revenue requirement must be
approved by the CPUC. Pending issuance of the DWR revenue bonds, DWR projects it
will have enough funds available from existing resources and customer revenues
to continue its power purchases and repay its obligations (including principal
payments on the Interim Loans to begin in April 2002, if the revenue bonds have
not been sold), assuming the CPUC approves its revenue requirements. In March,
2001 the CPUC approved substantial rate increases (averaging about 40%) for
customers of the two largest IOUs, and a smaller rate increase was approved in
September, 2001 for the third IOU. Proceedings are pending before the CPUC to
divide these additional revenues between the DWR's requested revenue
requirements and the IOUs. The IOUs are likely to challenge any final CPUC
orders setting aside the DWR revenue requirements. Although recently enacted
legislation provides for expedited appeals of these CPUC orders, if a challenge
occurs, sale of the revenue bonds to repay the State Loans and the Interim Loans
may be delayed. The IOUs are challenging other aspects of recent CPUC decisions
concerning rates and other
E-3
matters affecting the IOUs.
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 has entered into a number of longer term power
supply contracts, thereby reducing the risks of reliance on the spot markets.
The combination of these elements is expected to lower wholesale electricity
costs in the future and promote the financial recovery of the IOUs.
Despite fears of significant disruptions during the summer of 2001, the
combination of cooler weather, significant conservation efforts, absence of
major unplanned power plant outages, and completion of several new power plants
has permitted the State to avoid any blackouts since early May, and spot market
power costs have decreased significantly, lessening the cost of the DWR power
purchase program. Natural gas prices have also decreased.
A number of lawsuits are pending dealing with many aspects of the energy
situation in California, including disputes over the rates which the CPUC may
charge retail customers, financial responsibility for purchases of power by the
IOUs, obligations and rights of independent power producers holding power sales
contracts with the IOUs, and various antitrust, fraud and refund 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
E-4
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.
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 certainty 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
E-5
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.
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. Because of extraordinary revenue receipts in
fiscal year 1999-2000, State appropriations were estimated to be about $975
million above the limit. However, since the State was $2.1 billion below its
limit in fiscal year 2000-01, resulting in no excess over the two-year period,
no refunds will be made. The State Department of Finance estimates the State
will be about $9.8 billion below its appropriation limit in fiscal year 2001-02.
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
E-6
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
September 1, 2001, the State had outstanding approximately $23.2 billion of
long-term general obligation bonds, plus approximately $764 million of general
obligation commercial paper and $6.4 billion of lease-purchase debt supported by
the State General Fund. The State issued $1 billion of general obligation bonds
in October, 2001, which refunded outstanding commercial paper notes. The State
also had about $13.9 billion of authorized and unissued long-term general
obligation bonds (prior to the October sale) and lease-purchase debt. In FY
2000-01, debt service on general obligation bonds and lease purchase debt was
approximately 3.8% of General Fund revenues. State voters will have $2.8 billion
of new general bond authorizations on the ballot in March, 2002.
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). Very preliminary estimates for 2000-01 indicate that
up to 23% of total General Fund revenue was derived from capital gains
realizations and stock option income. While these sources have been
extraordinarily strong in the past few years, they are particularly volatile.
In preparing the 2001-02 budget, the State took account of the recent drop in
stock market levels and reduced its estimated receipts from these revenues as
compared to the prior year. However, as of October, 2001, stock market levels
were considerably below the levels used in the forecast, and it is now expected
that revenue from capital gains and stock options will fall below projections.
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).
E-7
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, $8.2 billion in 1999-2000 and $4.1 billion in 2000-01) 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 through 2000-01, significant new spending programs were also
enacted, particularly for education, new capital outlay projects were funded
from current receipts, and significant tax reductions were enacted. 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 and $6.3 billion at June 30, 2001.
However, the SFEU balance at June 30, 2001 includes as an asset the $6.1 billion
loan to the DWR for power purchases (see "Recent Developments Regarding Energy"
above), and the General Fund's available cash at that date was considerably
less.
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
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
E-8
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 2001-02 Budget. On January 10, 2001, the Governor released his
proposed Budget for fiscal year 2001-02 (the "Governor's Budget"). On May 14,
2001, the Administration released updated estimates and budgetary proposals (the
"May Revision"). The May Revision revealed that the weakening economy and, most
particularly the sharp drop in the stock market, especially for technology-
related companies, cutting into capital gains and option income, would have a
severe impact on revenues in 2001-02, with both personal income taxes and
corporate taxes projected to decline from 2000-01 levels. This drop would
require cuts in proposed spending, even with the application of much of the
carryover surplus from the SFEU.
General Fund revenues in fiscal year 2001-02 were projected to drop to
$75.1 billion, a decline of almost 4 percent from the prior year. Even this
estimate is likely to be reduced by the time of the next projections in January
2002 based on the weakened economic activity and stock market performance
evident by September, 2001.
The 2001-02 Budget Act (the "2001 Budget Act") was signed on July 26, 2001.
The 2001 Budget Act included $78.8 billion in General Fund expenditures, a
reduction of $1.3 billion from the previous year. The excess of expenditures
over revenues is to be funded by using a part of the budget reserve from the
prior year, and assumes that the General Fund will be repaid in full for
advances made to purchase energy (see "Recent Developments Regarding Energy"
above). The Governor vetoed about $500 million of General Fund expenditures from
the 2001 Budget Act as adopted by the Legislature, to leave an estimated budget
reserve in the SFEU at June 30, 2002 of $2.6 billion. By October 2001, revenue
shortfalls totaling almost $1 billion and some $110 million in additional
spending bills enacted after the 2001 Budget Act have reduced the projected
reserve, in the absence of offsetting reduction in expenditures, which may also
have occurred but have not yet been analyzed. The 2001 Budget Act also included
expenditures of $21.3 billion from Special Funds and $3.2 billion from bond
funds.
The State sold a record $5.7 billion in revenue anticipation notes for the
2001-02 fiscal year, to offset cash flow shortfalls during the fiscal year. The
State's cash position has been adversely affected by the $6.1 billion advances
made by the General Fund to pay for electricity purchases in the first half of
2001. The State projects that it will be able to repay the revenue anticipation
notes at June 28, 2002 even if the DWR revenue bonds have not been sold (see
"Recent Developments Regarding Energy" above). If, however, the State's cash
position (including available internal borrowings from State special funds) is
lower than projected, the State has other short term borrowings alternatives to
assure access to sufficient cash resources to pay all its obligations.
E-9
One of the major disputes which delayed passage of the 2001 Budget Act past
the July 1 start of the fiscal year related to tax provisions. Under existing
law, since the budget reserve was expected to fall below 4% in 2001-02, the
0.25% reduction in the State sales tax which went into effect on January 1, 2001
was scheduled to be reversed on January 1, 2002, providing over $500 million of
revenues for the 2001-02 fiscal year. A compromise was reached which allows the
0.25% sales tax reinstatement to occur in 2002, but reduces the "trigger" for
sales tax reductions in future years to a 3% budget reserve test from the
present 4%. Certain other tax relief measures for senior citizens and rural and
agricultural areas were included in the Budget Act, totaling about $122 million.
The 2001 Budget Act provides full funding for K-14 education, and certain
additional funding for low-performing schools, child care and other programs.
Funding for higher education was increased, but less than in previous years. No
fee increases for higher education will be imposed. Health care, social services
and prisons are funded for all expected caseload and inflation increases.
Assistance to local governments was reduced from the previous year.
The 2001 Budget Act was able to sustain the reduced revenues without major
program reductions because a large part of the 2000-01 Budget Act was for
one-time spending, which did not have to be continued. The Budget Act has much
less one-time spending for capital outlay. The 2001 Budget Act also extends for
two years the six-year transportation funding program implemented in 2000-01,
and uses a total of $2.3 billion of those funds for General Fund purposes in
2001-02 and 2002-03, to be repaid in 2006-08. The shortfall in funding will be
made up by temporary loans from other transportation accounts, so that it is not
expected any projects will be delayed. Part of a compromise to permit this
deferral was agreement to place a constitutional amendment on the next statewide
ballot to permanently dedicate all sales taxes on gasoline and related fuels to
transportation programs.
In anticipation of reduced revenues in the 2001-02 fiscal year, the
Governor in October, 2001 announced a hiring freeze for State agencies, and
requested State agencies to find up to 10% in cost reductions in the current
year. He also asked State agencies to prepare budget proposals for the 2002-03
fiscal year with up to a 15% cut from current levels. However, this cut would
not apply to public safety of K-12 education programs.
Although the State's strong economy has produced record revenues to the
State government in recent years, the State's budget faces several years of
significant constraints due to weaker economic conditions, and it 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.
E-10
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, through the end of 2000, the three major rating agencies raised
their ratings of California's general obligation bonds as high as "AA"from
Standard & Poor's, "Aa2" from Moody's and "AA" from Fitch. As of October 1,
2001, Standard & Poor's had reduced California's senior ratings to "A+" and
Moody's had reduced its ratings to "Aa3" and both agencies maintained the
State's credit ratings on watch with negative implications. As of that date,
Fitch had placed California's ratings on watch with negative implications.
There can be no assurance that current 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.
E-11
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. The recent economic
slowdown in the State, with its corresponding reduction in State and local
revenues, will put additional pressure on local government finances in the
coming years.
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
E-12
State or a municipality, are not considered "indebtedness" requiring voter
approval. Such leases, however, are subject to "abatement" in the event the
facility being leased is unavailable for beneficial use and occupancy by the
municipality during the term of the lease. Abatement is not a default, and there
may be no remedies available to the holders of the certificates evidencing the
lease obligation in the event abatement occurs. The most common cases of
abatement are failure to complete construction of the facility before the end of
the period during which lease payments have been capitalized and uninsured
casualty losses to the facility (e.g., due to earthquake). In the event
abatement occurs with respect to a lease obligation, lease payments may be
interrupted (if all available insurance proceeds and reserves are exhausted) and
the certificates may not be paid when due. Although litigation is brought from
time to time which challenges the constitutionality of such lease arrangements,
the California Supreme Court issued a ruling in August, 1998 which reconfirmed
the legality of these financing methods.
OTHER CONSIDERATIONS
The repayment of industrial development securities secured by real property
may be affected by California laws limiting foreclosure rights of creditors.
Securities backed by health care and hospital revenues may be affected by
changes in State regulations governing cost reimbursements to health care
providers under Medi-Cal (the State's Medicaid program), including risks related
to the policy of awarding exclusive contracts to certain hospitals.
Limitations on ad valorem property taxes may particularly affect "tax
allocation" bonds issued by California redevelopment agencies. Such bonds are
secured solely by the increase in assessed valuation of a redevelopment project
area after the start of redevelopment activity. In the event that assessed
values in the redevelopment project decline (e.g., because of a major natural
disaster such as an earthquake), the tax increment revenue may be insufficient
to make principal and interest payments on these bonds. Both Moody's and S&P
suspended ratings on California tax allocation bonds after the enactment of
Articles XIIIA and XIIIB, and only resumed such ratings on a selective basis.
Proposition 87, approved by California voters in 1988, requires that all
revenues produced by a tax rate increase go directly to the taxing entity which
increased such tax rate to repay that entity's general obligation indebtedness.
As a result, redevelopment agencies (which, typically, are the issuers of tax
allocation securities) no longer receive an increase in tax increment when taxes
on property in the project area are increased to repay voter-approved bonded
indebtedness.
The effect of these various constitutional and statutory changes upon the
ability of California municipal securities issuers to pay interest and principal
on their obligations remains unclear. Furthermore, other measures affecting the
taxing or spending authority of California or its political subdivisions may be
approved or enacted in the future. Legislation has been or may be introduced
which would modify existing taxes or other revenue-raising measures or which
either would further limit or, alternatively, would
E-13
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 or property tax assessment reductions.
Compensatory financial assistance could be constrained by the inability of (i)
an issuer to have obtained earthquake insurance coverage rates; (ii) an insurer
to perform on its contracts of insurance in the event of widespread losses; or
(iii) the federal or State government to appropriate sufficient funds within
their respective budget limitations.
CALIFORNIA TAX MATTERS
The following is based upon the advice of , special California
counsel to the Fund. The following is a general, abbreviated summary of certain
provisions of the applicable California tax law as presently in effect as it
directly governs the taxation of resident individual and corporate Common
Shareholders of the Fund. This summary does not address the taxation of other
shareholders nor does it discuss any local taxes that may be applicable. These
provisions are subject to change by legislative or administrative action, and
any such change may be retroactive with respect to transactions of the Fund.
The following is based on the assumptions that the Fund will qualify under
Subchapter M of the Code as a regulated investment company, that it will satisfy
the conditions which will cause distributions of the Fund to qualify as
exempt-interest dividends to shareholders for federal and California purposes,
and that it will distribute all interest and dividends it receives to the
shareholders.
The Fund will be subject to the California corporate franchise and
corporation income tax only if it has a sufficient nexus with California. If it
is subject to the California franchise or corporation income tax, the Fund does
not expect to pay a material amount of such tax.
If at the close of each quarter of the Fund's taxable year at least 50% of
the value of its total assets consists of obligations that, when held by
individuals, pay interest that is
E-14
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 advisors for
more detailed information concerning California tax matters.
E-15
APPENDIX F
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 regular federal and state income taxes) for residents of that
state.
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. According to Thomson Wealth Management, Nuveen is the leading sponsor
of municipal closed-end exchange-traded bond funds measured by the number of
funds (87) and fund assets under management ($33 billion) as of August 31, 2002.
F-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.
Features of Nuveen Municipal Closed-End ETFs
Monthly Dividends*
Enhanced income potential through leverage*
Automatic dividend reinvestment*
Exchange listing
Widespread price visibility
Convenient intra-day trading*
Professional management
Low minimum investment
*As outlined elsewhere in this SAI, share prices will fluctuate. Systematic
reinvestment does not ensure a profit, nor does it protect you against a loss in
a declining market.
Municipal Bond/Equity Portfolios May
Provide Attractive Returns and Reduced Risk
Nuveen research shows that, over the past 20 years, a portfolio of 20% municipal
bonds and 80% equities produced 99% of the annual after-tax return of an
all-equity portfolio with measurably less risk.
These conclusions are based on research done by Nuveen Investments using the
following portfolio assumptions: Municipal bonds are represented by the Lehman
Brothers Long Municipal Index. Treasury Bonds are represented by Lehman Brothers
Long Treasury Index. Equities are the S&P 500 stocks as tracked by the Ibbotson
Associates Large Company Stock Index. It is not possible to invest directly in
any of these indexes. Hypothetical portfolios using varying percentages of
municipal bonds or Treasury bonds and equities, in each case totaling 100%, were
constructed, and the investment results and volatility determined, for every
year from 1982 through 2001.
All investment income generated by the portfolio was considered to be reinvested
annually, along with the after-tax proceeds of an arbitrarily assumed 20%
annualized turnover rate. The allocation between the two assets was allowed to
fluctuate within a 5% band around its target before rebalancing. No provision
was made for investment fees or commissions. Investment income was taxed at the
historically appropriate rate for an individual with $100,000 in taxable income
in 2001 dollars. Net capital gains taxes, if any, were deducted at the rate
appropriate for the period. At the end of 2001, the portfolios were fully
liquidated to recognize the existing tax liability.
This study was based on historical data gathered from sources Nuveen Investments
considers to be reliable and consistent. The results produced by this study in
no way should be considered representative of the past performance of any actual
investment product or predictive of future investment expectations and
performance for the municipal market or any actual investment products.
In particular, municipal bond rates during the early portion of the 20-year
period covered by this research were higher than current municipal rates, and
returns for municipal bonds going forward will likely be less than those shown
in the chart.
20 Yr. Horizon Data Tables 1-Balanced Portfolios with Large Cap Equities
After-Tax Returns
[GRAPH APPEARS HERE]
Bond Long Municipals Long Treasuries Long Corporates
Portion Risk Return Risk Return Risk Return
0% 15.29% 11.94% 15.29% 11.94% 15.29% 11.94%
5% 14.65% 11.94% 14.67% 11.82% 14.67% 11.81%
10% 14.03% 11.89% 14.06% 11.66% 14.06% 11.65%
15% 13.42% 11.85% 13.48% 11.50% 13.47% 11.49%
20% 12.81% 11.79% 12.91% 11.33% 12.88% 11.31%
25% 12.22% 11.74% 12.37% 11.16% 12.31% 11.14%
30% 11.64% 11.67% 11.85% 10.98% 11.74% 10.96%
35% 11.08% 11.61% 11.36% 10.79% 11.20% 10.77%
40% 10.55% 11.54% 10.90% 10.60% 10.68% 10.58%
45% 10.04% 11.46% 10.49% 10.40% 10.18% 10.39%
50% 9.56% 11.38% 10.12% 10.20% 9.72% 10.19%
55% 9.12% 11.30% 9.80% 10.00% 9.29% 9.99%
60% 8.72% 11.21% 9.53% 9.79% 8.89% 9.79%
65% 8.37% 11.12% 9.33% 9.58% 8.54% 9.58%
70% 8.07% 11.03% 9.19% 9.37% 8.24% 9.38%
75% 7.83% 10.94% 9.11% 9.15% 8.00% 9.17%
80% 7.65% 10.84% 9.10% 8.94% 7.81% 8.96%
85% 7.54% 10.74% 9.16% 8.72% 7.68% 8.75%
90% 7.50% 10.64% 9.28% 8.50% 7.62% 8.54%
95% 7.53% 10.54% 9.46% 8.28% 7.63% 8.34%
100% 7.63% 10.43% 9.70% 8.05% 7.70% 8.11%
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.
On Average, Nuveen Funds Have Traded at Greater Premiums or Smaller Discounts
than Competing Funds
[Graph Appears Here]
25-Jul-97 0.038522115
8-Aug-97 0.035379787
15-Aug-97 0.03273153
22-Aug-97 0.04029108
29-Aug-97 0.037233259
5-Sep-97 0.041429825
12-Sep-97 0.042412528
19-Sep-97 0.042494317
26-Sep-97 0.043137061
3-Oct-97 0.041079948
10-Oct-97 0.036549511
17-Oct-97 0.037820911
24-Oct-97 0.036572942
31-Oct-97 0.036296244
7-Nov-97 0.036971035
14-Nov-97 0.037746733
21-Nov-97 0.036235724
28-Nov-97 0.034928058
5-Dec-97 0.03759602
12-Dec-97 0.03694678
19-Dec-97 0.039660897
26-Dec-97 0.039236665
2-Jan-98 0.039619687
9-Jan-98 0.044366773
16-Jan-98 0.038933121
23-Jan-98 0.037478394
30-Jan-98 0.040981632
6-Feb-98 0.044253503
13-Feb-98 0.048217687
20-Feb-98 0.045418904
27-Feb-98 0.045606483
6-Mar-98 0.05044092
13-Mar-98 0.053888158
20-Mar-98 0.054673246
27-Mar-98 0.053675439
3-Apr-98 0.055637624
9-Apr-98 0.052235894
17-Apr-98 0.054192034
24-Apr-98 0.050518374
8-May-98 0.049896385
15-May-98 0.051353821
22-May-98 0.051483104
29-May-98 0.045881903
5-Jun-98 0.055602496
12-Jun-98 0.055573296
19-Jun-98 0.053353468
26-Jun-98 0.050081479
2-Jul-98 0.050875309
10-Jul-98 0.05453185
17-Jul-98 0.049196788
24-Jul-98 0.048390204
31-Jul-98 0.051474744
7-Aug-98 0.049411162
14-Aug-98 0.049813964
21-Aug-98 0.05188779
28-Aug-98 0.051906354
4-Sep-98 0.050087127
11-Sep-98 0.04917935
18-Sep-98 0.046593528
25-Sep-98 0.047709123
2-Oct-98 0.057751133
9-Oct-98 0.054570175
16-Oct-98 0.056760965
23-Oct-98 0.048675439
30-Oct-98 0.049666667
6-Nov-98 0.046473684
20-Nov-98 0.043697368
27-Nov-98 0.042625
4-Dec-98 0.048682018
11-Dec-98 0.047938596
18-Dec-98 0.045574561
24-Dec-98 0.044484649
8-Jan-99 0.040269737
15-Jan-99 0.032574561
22-Jan-99 0.032019737
29-Jan-99 0.032486842
5-Feb-99 0.042296053
12-Feb-99 0.042750239
19-Feb-99 0.043902073
26-Feb-99 0.044498884
5-Mar-99 0.04725933
19-Mar-99 0.054052316
26-Mar-99 0.053597122
1-Apr-99 0.058263788
9-Apr-99 0.049830129
16-Apr-99 0.059694926
23-Apr-99 0.060500788
30-Apr-99 0.059889169
7-May-99 0.057512974
14-May-99 0.056063872
21-May-99 0.051220927
28-May-99 0.05302889
4-Jun-99 0.05539521
11-Jun-99 0.057811171
18-Jun-99 0.06445
25-Jun-99 0.067863095
2-Jul-99 0.068096429
9-Jul-99 0.071166667
16-Jul-99 0.076167857
23-Jul-99 0.081947619
30-Jul-99 0.082119048
6-Aug-99 0.077934884
20-Aug-99 0.07645155
27-Aug-99 0.074089922
3-Sep-99 0.074571839
10-Sep-99 0.076186207
17-Sep-99 0.069099425
24-Sep-99 0.070118571
1-Oct-99 0.055396667
8-Oct-99 0.063321841
15-Oct-99 0.060172669
22-Oct-99 0.057560767
29-Oct-99 0.056708398
5-Nov-99 0.057400231
12-Nov-99 0.052517238
19-Nov-99 0.052458398
26-Nov-99 0.050856895
10-Dec-99 0.029167111
17-Dec-99 0.022930972
23-Dec-99 0.031247988
31-Dec-99 0.030041852
7-Jan-00 0.034098191
14-Jan-00 0.02985598
21-Jan-00 0.030763375
28-Jan-00 0.036890351
4-Feb-00 0.043249219
11-Feb-00 0.042941578
18-Feb-00 0.037741596
25-Feb-00 0.037772843
3-Mar-00 0.031488401
10-Mar-00 0.035108011
17-Mar-00 0.040553742
24-Mar-00 0.046507843
31-Mar-00 0.0504471
7-Apr-00 0.047919915
14-Apr-00 0.045770233
20-Apr-00 0.041533157
28-Apr-00 0.041838665
5-May-00 0.046265678
12-May-00 0.042325106
19-May-00 0.046130932
26-May-00 0.04666536
2-Jun-00 0.047785911
9-Jun-00 0.049809534
16-Jun-00 0.048623199
23-Jun-00 0.044137394
30-Jun-00 0.040320869
7-Jul-00 0.045994597
14-Jul-00 0.038319492
21-Jul-00 0.037719386
28-Jul-00 0.042682839
4-Aug-00 0.044612288
11-Aug-00 0.042435805
18-Aug-00 0.037838661
25-Aug-00 0.040834263
1-Sep-00 0.043817958
8-Sep-00 0.042935636
15-Sep-00 0.038175499
22-Sep-00 0.041251663
29-Sep-00 0.040976185
6-Oct-00 0.04203186
13-Oct-00 0.031649968
20-Oct-00 0.034736966
27-Oct-00 0.044490667
3-Nov-00 0.052386183
17-Nov-00 0.053132482
24-Nov-00 0.054112744
1-Dec-00 0.023133662
8-Dec-00 0.048791139
15-Dec-00 0.051525316
22-Dec-00 0.048712615
29-Dec-00 0.051922656
5-Jan-01 0.058615104
12-Jan-01 0.056114246
19-Jan-01 0.054739501
26-Jan-01 0.055520134
2-Feb-01 0.058139048
9-Feb-01 0.051868149
16-Feb-01 0.051985582
23-Feb-01 0.054773168
2-Mar-01 0.037264033
9-Mar-01 0.056907458
16-Mar-01 0.05181887
23-Mar-01 0.046485198
30-Mar-01 0.051052429
6-Apr-01 0.053114011
12-Apr-01 0.057032542
20-Apr-01 0.057815266
27-Apr-01 0.058606757
4-May-01 0.073973346
11-May-01 0.047453979
18-May-01 0.072847939
25-May-01 0.068227804
1-Jun-01 0.071706711
8-Jun-01 0.071167402
15-Jun-01 0.062091156
22-Jun-01 0.072736735
29-Jun-01 0.060622449
6-Jul-01 0.075916
13-Jul-01 0.061898
20-Jul-01 0.073488
27-Jul-01 0.072848
3-Aug-01 0.072396
10-Aug-01 0.071645
17-Aug-01 0.069541
24_Aug-01 0.067018
31-Aug-01 0.056737
7-Sep-01 0.061211
10-Sep-01 0.0605
21-Sep-01 0.055704
28-Sep-01 0.054845
5-Oct-01 0.057874
12-Oct-01 0.053677
19-Oct-01 0.053425
26-Oct-01 0.056936
2-Nov-01 0.055613
9-Nov-01 0.053192
16-Nov-01 0.051534
23-Nov-01 0.056095
30-Nov-01 0.057148
7-Dec-01 0.061395
14-Dec-01 0.064372
21-Dec-01 0.057279
28-Dec-01 0.055627
4-Jan-02 0.051193
11-Jan-02 0.053965
18-Jan-02 0.053611
25-Jan-02 0.039327
1-Feb-02 0.034753
8-Feb-02 0.057732
15-Feb-02 0.054999
22-Feb-02 0.054658
1-Mar-02 0.054265
8-Mar-02 0.060019
15-Mar-02 0.060412
22-Mar-02 0.056865
28-Mar-02 0.054582
5-Apr-02 0.048424
12-Apr-02 0.048736
19-Apr-02 0.049366
26-Apr-02 0.050541
3-May-02 0.056629
10-May-02 0.056496
17-May-02 0.058598
24-May-02 0.055657
31-May-02 0.055425
7-Jun-02 0.056835
14-Jun-02 0.055105
21-Jun-02 0.055471
28-Jun-02 0.054866
5-Jul-02 0.054265
12-Jul-02 0.053863
19-Jul-02 0.048931
26-Jul-02 0.047383
This chart shows the week-by-week difference between the average premium or
discount for all Nuveen municipal closed-end funds and all non-Nuveen municipal
closed-end funds as reported by Lipper for the five-year period from July 25,
1997 through July 26, 2002. The weekly averages include all Nuveen and
non-Nuveen funds in existence during that week over the course of this
measurement period. As of July 26, 2002, there were 87 Nuveen funds and 144
non-Nuveen funds included in the Lipper database. Past trading history is no
guarantee of future results, and is no guarantee of how these new Funds may
trade.
F-2
Nuveen Insured California Tax-Free Advantage Municipal Fund Common Shares
------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
------------------------------------------
__________, 2002
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 the Registration
Statement.
2. Exhibits:
a. Declaration of Trust dated July 29, 2002.
b. By-Laws of Registrant.
c. None.
d. Form of Share Certificate.*
e. Terms and Conditions of the Dividend Reinvestment Plan.*
f. None.
g. Investment Management Agreement between Registrant and Nuveen Advisory
Corp. dated , 2002.*
h.1 Form of Underwriting Agreement.*
h.2 Form of Master Selected Dealer Agreement.*
h.3 Form of Nuveen Master Selected Dealer Agreement.*
h.4 Form of Master Agreement Among Underwriters.*
h.5 Form of Dealer Letter Agreement.*
i. Nuveen Open-End and Closed-End Funds Deferred Compensation Plan for
Independent Directors and Trustees.*
j. Master Custodian Agreement between Registrant and State Street
Bank and Trust Company dated August 19, 2002.*
k.1 Transfer Agency and Service Agreement between Registrant and State Street
Bank and Trust Company dated ___________, 2002.*
k.2 Expense Reimbursement Agreement between Registrant and Nuveen Advisory
Corp. dated , 2002.*
C-1
l.1 Opinion and consent of Bell, Boyd & Lloyd LLC.*
l.2 Opinion and consent of Bingham McCutchen LLP.*
m. None.
n. Consent of Auditors.*
o. None.
p. Subscription Agreement of Nuveen Advisory Corp. dated , 2002.*
q. None.
r. Code of Ethics of Nuveen Advisory Corp.*
s. Powers of Attorney.
___________________
* To be filed by amendment.
Item 25: Marketing Arrangements
See Sections 2, 3 and 5(n) of the Form of Underwriting Agreement to be filed as
Exhibit h.1 to this Registration Statement.
See the Introductory Paragraph and Sections 2 and 3(d) of the Salomon Smith
Barney Form of Master Selected Dealer Agreement to be filed as Exhibit h.2 to
this Registration Statement and the Introductory Paragraph and Sections 2 and 3
of the Form of Nuveen Master Selected Dealer Agreement to be filed as Exhibit
h.3 to this Registration Statement.
See Introductory Paragraph and Sections 1, 2, 3.1, 3.2, 3.4-3.8, 4.1, 4.2,
5.1-5.4,6.1, 10.9 and 10.10 of the Form of Master Agreement Among Underwriters
to be filed as Exhibit h.4 to this Registration Statement.
See Paragraph e of the Form of Dealer Letter Agreement between Nuveen and the
Underwriters to be filed as Exhibit h.5 to this Registration Statement.
Item 26: Other Expenses of Issuance and Distribution
Securities and Exchange Commission fees $ 1.38
National Association of Securities Dealers, Inc. fees 501.50
Printing and engraving expenses *
Legal Fees *
listing fees *
Accounting expenses *
Blue Sky filing fees and expenses *
Underwriters' Reimbursement *
Miscellaneous expenses *
----------
Total $ *
==========
C-2
------------
*To be completed by amendment. Nuveen Advisory has contractually agreed to
reimburse the Fund for fees and expenses in the amount of .32% of average daily
Managed Assets for the first 5 full years of the Fund's operations, .24% of
average daily Managed Assets in year 6, .16% in year 7 and .08% in year 8.
Without the reimbursement, "Total Net Annual Expenses" would be estimated to be
% of average daily net assets attributable to Common Shares. Nuveen has
agreed to pay (i) all organizational expenses and (ii) offering costs (other
than sales load) that exceed $0.03 per Common Share (.20% of offering price).
Item 27: Persons Controlled by or under Common Control with Registrant
Not applicable.
Item 28: Number of Holders of Securities
At October 4, 2002
Number of
Title of Class Record Holders
-------------- --------------
Common Shares, $0.01 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
Directors and officers and Errors and Omission policies in the aggregate amount
of $50,000,000 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). The policy has a
$500,000 deductible, which does not apply to individual trustees or officers.
Section 8 of the Underwriting Agreement to be filed as Exhibit h.1 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.
Insofar as indemnification for liability arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
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
and Nuveen Municipal Trust. 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 Michigan 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 Michigan Premium Income Municipal Fund 2, Nuveen
Pennsylvania Premium Income Municipal Fund 2, Nuveen Maryland Premium Income
Municipal Fund, Nuveen Massachusetts Premium Income Municipal Fund, Nuveen
Virginia Premium Income Municipal Fund, Nuveen Connecticut Premium Income
Municipal Fund, Nuveen Georgia Premium Income Municipal Fund, Nuveen Missouri
Premium Income Municipal Fund, Nuveen North Carolina Premium Income Municipal
Fund, Nuveen California Premium Income Municipal Fund, Nuveen Insured Premium
Income Municipal Fund 2, Nuveen New York Dividend Advantage Municipal Fund,
Nuveen California Dividend Advantage Municipal Fund, Nuveen Dividend Advantage
Municipal Fund, Nuveen Arizona Dividend Advantage Municipal Fund, Nuveen
Connecticut Dividend Advantage Municipal Fund, Nuveen Maryland Dividend
Advantage Municipal Fund, Nuveen Massachusetts Dividend Advantage Municipal
Fund, Nuveen North Carolina Dividend Advantage Municipal Fund, Nuveen Virginia
Dividend Advantage Municipal Fund, Nuveen Dividend Advantage Municipal Fund 2,
Nuveen California Dividend Advantage Municipal Fund 2, Nuveen New York Dividend
Advantage Municipal Fund 2, Nuveen New Jersey Dividend Advantage Municipal Fund,
Nuveen Ohio Dividend Advantage Municipal Fund, Nuveen Pennsylvania Dividend
Advantage Municipal Fund, Nuveen Dividend Advantage Municipal Fund 3, Nuveen
California Dividend Advantage Muncipal Fund 3, Nuveen Georgia Dividend Advantage
Municipal Fund, Nuveen Maryland Dividend Advantage Municipal Fund 2, Nuveen
Michigan Dividend Advantage Municipal Fund, Nuveen Ohio Dividend Advantage
Municipal Fund 2, Nuveen North Carolina Dividend Advantage Municipal Fund 2,
Nuveen Virginia Dividend Advantage Municipal Fund 2, Nuveen Insured Dividend
Advantage Municipal Fund, Nuveen Insured California Dividend Advantage Municipal
Fund, Nuveen Insured New York Dividend Advantage Municipal Fund, Nuveen Arizona
Dividend Advantage Municipal Fund 2, Nuveen Connecticut Dividend Advantage
Municipal Fund 2, Nuveen New Jersey Dividend Advantage Municipal Fund 2, Nuveen
Pennsylvania Dividend Advantage Municipal Fund 2 and Nuveen Ohio Dividend
Advantage Municipal Fund 3.
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. Such
information for the remaining senior officers of Nuveen Advisory Corp. appears
below:
Other Business Profession, Vocation or
Name and Position with NAC Employment During Past Two Years
-------------------------- --------------------------------------
John P. Amboian, President.................... President, formerly Executive Vice President
of The John Nuveen Company, Nuveen Investments,
Nuveen Institutional Advisory Corp., Nuveen Asset
Management, Inc. and Nuveen Senior Loan Asset
Management, Inc. and Executive Vice President
and Director of Rittenhouse Financial Services, Inc.
Alan G. Berkshire, Senior Vice President,
Secretary and General Counsel................. Senior Vice President and General Counsel (since
1997) and Secretary (since 1998) of The John Nuveen
Company, Nuveen Investments, and Nuveen Institutional
Advisory Corp. Senior Vice President and Secretary
(since 1999) of Nuveen Senior Loan Asset Management
Inc., prior thereto, Partner in the law firm of
Kirkland & Ellis.
Margaret E. Wilson, Senior Vice President,
Finance....................................... Senior Vice President, Finance, of the John Nuveen
Company, Nuveen Investments and Nuveen Institutional
Advisory Corp. and Senior Vice President and Controller
of Nuveen Senior Loan Asset Management, Inc.;
formerly CFO of Sara Lee Corp., Bakery Division.
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.
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, maintains all general and subsidiary ledgers, journals,
trial balances, records of all portfolio purchases and sales, and all other
required records not maintained by Nuveen Advisory Corp.
Item 32: Management Services
Not applicable.
C-6
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 4th day of
October, 2002.
NUVEEN INSURED CALIFORNIA TAX-FREE
ADVANTAGE MUNICIPAL FUND
/s/ Gifford R. Zimmerman
________________________________________
Gifford R. Zimmerman, Vice President and
Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
Signature Title Date
--------- ----- ----
/s/ Stephen D. Foy Vice President and Controller October 4, 2002
-------------------- (Principal Financial and
Stephen D. Foy Accounting Officer)
Chairman of the Board and
Timothy R. Schwertfeger* Trustee (Principal Executive By: /s/ Gifford R. Zimmerman
Officer) --------------------------
Gifford R. Zimmerman
Attorney-In-Fact
October 4, 2002
Robert P. Bremner* Trustee
Lawrence H. Brown* Trustee
Anne E. Impellizzeri* Trustee
Peter R. Sawers* Trustee
William J. Schneider* Trustee
Judith M. Stockdale* Trustee
*Original powers of attorney authorizing Jessica R. Droeger 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 July 29, 2002.
b. By-Laws of Registrant.
c. None.
d. Form of Share Certificate.*
e. Terms and Conditions of the Dividend Reinvestment Plan.*
f. None.
g. Investment Management Agreement between Registrant and Nuveen
Advisory Corp. dated ______, 2002.*
h.1 Form of Underwriting Agreement.*
h.2 Form of Master Selected Dealer Agreement.*
h.3 Form of Nuveen Master Selected Dealer Agreement.*
h.4 Form of __ Master Agreement Among Underwriters.*
h.5 Form of Dealer Letter Agreement.*
i. Nuveen Open-End and Closed-End Funds Deferred Compensation Plan for
Independent Directors and Trustees.*
j. Master Custodian Agreement between Registrant and State Street
Bank and Trust Company dated ________, 2002.*
k.1 Transfer Agency and Service Agreement between Registrant and State Street
Bank and Trust Company dated ________, 2002.*
k.2 Expense Reimbursement Agreement between Registrant and Nuveen
Advisory Corp. dated ________, 2002.*
l.1 Opinion and consent of Bell, Boyd & Lloyd LLC.*
l.2 Opinion and consent of Bingham McCutchen LLP.*
m. None.
n. Consent of Auditors.*
o. None.
p. Subscription Agreement of Nuveen Advisory Corp. dated ________, 2002.*
q. None
r. Code of Ethics of Nuveen Advisory Corp.*
s. Powers of Attorney.
___________________
* To be filed by amendment