NUVEEN CALIFORNIA MUNICIPAL ADVANTAGE FUND
N-2/A, 1999-07-06
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<PAGE>   1


      As filed with the Securities and Exchange Commission on July 6, 1999


                                                     1933 Act File No. 333-80563

                                                     1940 Act File No. 811-09161
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
                    U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM N-2

                           (CHECK APPROPRIATE BOXES)

[ ]  REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933


x  PRE-EFFECTIVE AMENDMENT NO. 1


[ ]  POST-EFFECTIVE AMENDMENT NO.
                                     AND/OR

x  REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940


x  AMENDMENT NO. 6


                           NUVEEN CALIFORNIA DIVIDEND
                            ADVANTAGE MUNICIPAL FUND
                Enter Name of Registrant as Specified in Charter

                 333 WEST WACKER DRIVE, CHICAGO, ILLINOIS 60606
  Address of Principal Executive Offices (Number, Street, City, State and Zip
                                     Code)

                                 (312) 917-7700
               Registrant's Telephone Number, including Area Code

            GIFFORD R. ZIMMERMAN, ESQ.-VICE PRESIDENT AND SECRETARY
                             333 WEST WACKER DRIVE
                            CHICAGO, ILLINOIS 60606
Name and Address (Number, Street, City, State and Zip code) of Agent for Service

                          COPIES OF COMMUNICATIONS TO:

<TABLE>
<S>                                <C>                                <C>
       David A. Sturms, Esq              Thomas S. Harman, Esq.             Thomas A. DeCapo, Esq.
 Vedder Price Kaufman & Kammholz      Morgan, Lewis & Bockius LLP           Skadden, Arps, Slate,
      222 N. LaSalle Street               1800 M Street, N.W.                 Meagher & Flom LLP
        Chicago, IL 60601                Washington, D.C. 20036               One Beacon Street
                                                                               Boston, MA 02108
</TABLE>

APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after the
effective date of this Registration Statement

If any of the securities being registered on this Form will be 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.  [ ]

        CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933


<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
                                        AMOUNT          PROPOSED MAXIMUM     PROPOSED MAXIMUM
                                        BEING            OFFERING PRICE     AGGREGATE OFFERING       AMOUNT OF
   TITLE OF SECURITIES BEING          REGISTERED            PER UNIT             PRICE(1)       REGISTRATION FEE(2)
          REGISTERED
- --------------------------------------------------------------------------------------------------------------------
<S>                              <C>                  <C>                  <C>                  <C>
Municipal Auction Rate
  Cumulative Preferred Shares
  Series TH, F.................      6,800 shares           $25,000            $170,000,000           $47,260*
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>



 *  $45,870 has been previously paid.

(1) Estimated solely for purposes of calculating the registration fee pursuant
    to Rule 457 under the Securities Act of 1933.
(2) Transmitted prior to filing.

    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 THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATES AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.

    THE UNDERSIGNED REGISTRANT HEREBY UNDERTAKES THAT: (1) FOR PURPOSES OF
DETERMINING ANY LIABILITY UNDER THE SECURITIES ACT OF 1933, THE INFORMATION
OMITTED FROM THE FORM OF PROSPECTUS FILED AS PART OF THIS REGISTRATION STATEMENT
IN RELIANCE UPON RULE 430A AND CONTAINED IN A FORM OF PROSPECTUS FILED BY THE
REGISTRANT PURSUANT TO RULE 424(b)(1) OR (4) OR 497(h) UNDER THE SECURITIES ACT
SHALL BE DEEMED TO BE PART OF THIS REGISTRATION STATEMENT AS OF THE TIME IT WAS
DECLARED EFFECTIVE. (2) 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 SUCH SECURITIES AT THAT TIME
SHALL BE DEEMED TO BE THE INITIAL BONA FIDE OFFERING THEREOF.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>   2

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 is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.

                             SUBJECT TO COMPLETION

                   PRELIMINARY PROSPECTUS DATED JULY 6, 1999


PROSPECTUS


                                  $170,000,000


              NUVEEN CALIFORNIA DIVIDEND ADVANTAGE MUNICIPAL FUND
    MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED SHARES ("MUNIPREFERRED(R)")

                             3,400 SHARES SERIES TH


                             3,400 SHARES SERIES F

                    LIQUIDATION PREFERENCE $25,000 PER SHARE
                             ---------------------


    Nuveen California Dividend Advantage Municipal Fund (the "Fund") is a
closed-end, diversified management investment company. The Fund's investment
objectives are to provide current income exempt from regular Federal and
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 represent municipal
market sectors that are undervalued. The Fund will invest its net assets in a
diversified portfolio of municipal bonds that are exempt from regular Federal
and California income tax. Under normal market conditions, the Fund expects to
be fully invested in such tax-exempt municipal bonds. The Fund will invest at
least 80% of its net assets in investment grade quality municipal bonds.
Investment grade quality bonds are those rated by national rating agencies with
the four highest grades (Baa or BBB or better), or bonds that are unrated but
judged to be of comparable quality by the Fund's investment adviser. Bonds rated
below investment grade are regarded as having predominately speculative
characteristics with respect to capacity to pay interest and repay principal,
and are commonly referred to as junk bonds. No assurance can be given that the
Fund's investment objectives will be achieved. In addition, capital gains
distributions will be subject to capital gains taxes.



    The Fund's principal office is located at 333 West Wacker Drive, Chicago,
Illinois 60606, and its telephone number is (312) 917-7700. Investors are
advised to read this Prospectus, which sets forth concisely the information
about the Fund that a prospective investor ought to know before investing, and
retain it for future reference. A Statement of Additional Information dated
          , 1999 containing additional information regarding the Fund has been
filed with the Securities and Exchange Commission and is hereby incorporated by
reference in its entirety into this Prospectus. A copy of the Statement of
Additional Information, the table of contents of which appears on page 32 of
this Prospectus, may be obtained without charge by calling the Fund at (800)
257-8787. In addition, the Securities and Exchange Commission maintains a web
site (http://www.sec.gov) that contains the Statement of Additional Information,
material incorporated by reference, and other information filed electronically
with the Commission.



    The Fund is offering 3,400 shares of Series TH MuniPreferred and 3,400
shares of Series F MuniPreferred. The shares are referred to in this Prospectus
as "MuniPreferred." The MuniPreferred have a liquidation preference of $25,000
per share, plus any accumulated, unpaid dividends. The MuniPreferred also has
priority over the Fund's common shares as to distribution of assets as described
in this Prospectus. The dividend rate for the initial dividend rate periods will
be     % and     % for MuniPreferred Series TH and Series F, respectively. The
initial rate period for each series of MuniPreferred is the period from the date
of issuance through:                       , 1999 for Series TH and
          , 1999 for Series F. For subsequent rate periods, MuniPreferred shares
pay dividends based on a rate set at auction, usually held weekly. Prospective
purchasers should carefully review the auction procedures described in the
Prospectus and should note: (1) a buy order (called a "bid order") or sell order
is a commitment to buy or sell MuniPreferred shares based on the results of an
auction; (2) auctions will be conducted by telephone; and (3) purchases and
sales will be settled on the next business day after the auction. MuniPreferred
shares are not listed on an exchange. You may only buy or sell MuniPreferred
shares through an order placed at an auction with or through a broker-dealer
that has entered into an agreement with the auction agent and the Fund, or in a
secondary market maintained by certain broker-dealers. These broker-dealers are
not required to maintain this market, and it may not provide you with liquidity.



    Dividends on shares of MuniPreferred, to the extent payable from tax-exempt
income earned on the Fund's investments, will be exempt from regular Federal
income tax in the hands of owners of such shares. All or a portion of the Fund's
dividends may be subject to the Federal alternative minimum tax. The Fund is
required to allocate net capital gains and other taxable income, if any,
proportionately between common and preferred shares, based on the percentage of
total dividends distributed to each class for that year. The Fund, in the case
of the ordinary seven day rate periods or special rate periods of no more than
28 days, will give notice of the amount of any income taxable for federal income
tax purposed to be included in a dividend on share of MuniPreferred in advance
of the related auction and may give advance notice to MuniPreferred shareholders
during longer rate periods.

                             ---------------------


    Neither the Securities and Exchange Commission ("SEC") nor any state
securities commission has approved or disapproved these securities or determined
if this prospectus is truthful or complete. Any representation to the contrary
is a criminal offense.


(R) Registered trademark of John Nuveen & Co. Incorporated


<TABLE>
<CAPTION>
                                                                 PER SHARE            TOTAL
                                                              ----------------   ----------------
<S>                                                           <C>                <C>
Public Offering Price                                         $         25,000   $    170,000,000
                                                              ----------------   ----------------
Sales Load                                                    $                  $
                                                              ----------------   ----------------
Proceeds to Fund (before expenses)                            $                  $
                                                              ================   ================
</TABLE>


    Offering expenses payable by the Fund are estimated to be $        . The
Fund and Nuveen Advisory Corp. have agreed to indemnify the several Underwriters
against certain liabilities, including liabilities under the Securities Act of
1933, as amended, and the Investment Company Act of 1940, as amended.
                             ---------------------

    The Underwriters are offering the shares of the MuniPreferred subject to
various conditions. It is expected that the shares of MuniPreferred will be
delivered to the Underwriters through the facilities of The Depository Trust
Company on or about           , 1999.
                             ---------------------

SALOMON SMITH BARNEY


           A.G. EDWARDS & SONS, INC.


                      DEUTSCHE BANC ALEX. BROWN


                               GOLDMAN, SACHS & CO.


                                        JOHN NUVEEN & CO. INCORPORATED


                                               PAINEWEBBER INCORPORATED


                                                      PRUDENTIAL SECURITIES


    YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS.
NEITHER THE FUND NOR THE UNDERWRITERS HAVE AUTHORIZED ANYONE TO PROVIDE YOU WITH
DIFFERENT INFORMATION. THE FUND IS NOT MAKING AN OFFER OF THESE SECURITIES IN
ANY STATE WHERE THE OFFER IS NOT PERMITTED. YOU SHOULD NOT ASSUME THAT THE
INFORMATION PROVIDED BY THIS PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN
THE DATE ON THE FRONT OF THIS PROSPECTUS.
<PAGE>   3

                               PROSPECTUS SUMMARY

     The following information is qualified in its entirety by reference to the
more detailed information included elsewhere in this Prospectus and the Fund's
Statement Establishing and Fixing the Rights and Preferences of Municipal
Auction Rate Cumulative Preferred Shares (the "Statement") attached as Appendix
A to the Statement of Additional Information. Capitalized terms used but not
defined in this Prospectus shall have the meanings given to such terms in the
Statement.

THE FUND


     Nuveen California Dividend Advantage Municipal Fund (the "Fund") is a
closed-end, diversified management investment company. See "The Fund." The
Fund's common shares, $.01 par value ("Common Shares"), are traded on the New
York Stock Exchange under the symbol "NAC." See "Description of Common Shares."
As of June 28, 1999, the Fund had 22,556,982 Common Shares outstanding and net
assets of $317,446,637.


INVESTMENT OBJECTIVES

     The Fund's investment objectives are to provide current income exempt from
regular Federal and California income tax and enhance portfolio value relative
to the municipal bond market by investing in tax-exempt municipal bonds that the
Fund's investment adviser believes are underrated or undervalued or that
represent municipal markets that are undervalued. The Fund will invest its net
assets in a diversified portfolio of municipal bonds that are exempt from
regular Federal income tax. Under normal market conditions, the Fund expects to
be fully invested in such tax-exempt municipal bonds. The Fund will invest at
least 80% of its net assets in municipal bonds that at the time of investment
are investment grade quality. Investment grade quality bonds are bonds rated
within the four highest grades (Baa or BBB or better by Moody's Investor
Service, Inc. ("Moody's"), Standard & Poors Corporation ("S&P") or Fitch IBCA,
Inc. ("Fitch")), or bonds that are unrated but judged to be of comparable
quality by the Fund's investment adviser. The Fund may invest up to 20% of its
net assets in municipal bonds that, at the time of investment, are rated Ba/BB
or B by Moody's, S&P or Fitch or unrated but judged to be of comparable quality
by the Fund's investment adviser. Bonds of below investment grade quality are
regarded as having predominant speculative characteristics with respect to
capacity to pay interest and repay principal, and are commonly referred to as
junk bonds. The Fund cannot assure you that it will attain its investment
objectives. See "The Fund's Investments."

INVESTMENT ADVISER

     Nuveen Advisory Corp. ("Nuveen Advisory" or the "Adviser") acts as the
Fund's investment adviser. The Adviser is a wholly-owned subsidiary of John
Nuveen & Co. Incorporated, an investment banking firm that has engaged in the
underwriting and distribution of tax-exempt securities throughout its history.
See "Management of the Fund" and "Underwriting."

THE OFFERING


     The Fund is offering 3,400 shares of Series TH MuniPreferred and 3,400
shares of Series F MuniPreferred, each at a purchase price of $25,000 per share.
However, the offering of each series is independent of the offering of each
other series, and no offering is contingent upon the closing of any other
offering. Certain information presented in this Prospectus assumes that each
offering is made and effected as contemplated, but there can be no assurance
that this will be the case. Shares of MuniPreferred are being offered by the
Underwriters listed under "Underwriting." Except as otherwise described below,
the rights and preferences of each series of MuniPreferred are identical.


                                        1
<PAGE>   4


RISK FACTORS SUMMARY


     Risk is inherent in all investing. Therefore, before investing you should
consider certain risks carefully when you invest in the Fund. The primary risks
of investing in MuniPreferred shares are:

     - if an auction fails you may not be able to sell some or all of your
      shares;

     - because of the nature of the market for MuniPreferred shares, you may
      receive less than the price you paid for your shares if you sell them
      outside of the auction, especially when market interest rates are rising;

     - a rating agency could downgrade MuniPreferred shares, which could affect
      liquidity;


     - the Fund may be forced to redeem your shares to meet regulatory or rating
      agency requirements or may voluntarily redeem your shares in certain
      circumstances;



     - in extraordinary circumstances the Fund may not earn sufficient income
      from its investments to pay dividends;



     - if long-term interest rates rise, the value of the Fund's investment
      portfolio will decline, reducing the asset coverage for the MuniPreferred
      shares; and



     - if an issuer of a municipal bond in which the Fund invests defaults,
      there may be a negative impact on the income and asset value of the Fund's
      portfolio.


For additional general risks of investing in the Fund, see "Risk Factors" below.

TRADING MARKET


     MuniPreferred shares are not listed on an exchange. Instead, you may buy or
sell MuniPreferred shares at an auction that normally is held weekly, by
submitting orders to a broker-dealer that has entered into an agreement with the
auction agent and the Fund (a "Broker-Dealer"), or to a broker-dealer that has
entered into a separate agreement with a Broker-Dealer. In addition to the
auctions, Broker-Dealers and other broker-dealers may maintain a secondary
trading market in MuniPreferred shares outside of auctions, but may discontinue
this activity at any time. There is no assurance that a secondary market will
provide shareholders with liquidity. You may transfer shares outside of auctions
only to or through a Broker-Dealer; or a broker-dealer that has entered into a
separate agreement with a Broker-Dealer.


     The table below shows the first auction date for each Series of
MuniPreferred and the day on which each subsequent auction will normally be held
for each Series of MuniPreferred. The first auction date for each Series of
MuniPreferred will be the business day before the dividend payment date for the
initial rate period for each Series of MuniPreferred. The start date for
subsequent rate periods normally will be the business day following the dividend
payment date unless the then-current rate period is a special rate period, or
the day that normally would be the auction date or the first day of the
subsequent rate period is not a business day.

<TABLE>
<CAPTION>
                  SERIES                     FIRST AUCTION DATE*   SUBSEQUENT AUCTION
                  ------                     -------------------   ------------------
<S>                                          <C>                   <C>
TH.........................................
F..........................................
</TABLE>

- ------------
* All dates are 1999.

DIVIDENDS AND RATE PERIODS

     The table below shows the dividend rate for the initial rate period on each
Series of MuniPreferred offered in this Prospectus. For subsequent rate periods,
MuniPreferred shares will pay dividends based on a rate set at auctions,
normally held weekly. In most instances dividends are also paid weekly, on the
day following the end of the rate period. The rate set at auction will not
exceed the Maximum Rate. See "Description of MuniPreferred -- Dividends and
Dividend Periods -- General."

                                        2
<PAGE>   5

     The table below also shows for each Series of MuniPreferred the date from
which dividends on the MuniPreferred shares will accumulate at the initial rate,
the dividend payment date for the initial rate period and the day on which
dividends will normally be paid. If the day on which dividends otherwise would
be paid is not a business day, then your dividends will be paid on the first
business day that falls after that day.

     Finally, the table below shows number of days of the initial rate period
for each Series of MuniPreferred. Subsequent rate periods generally will be
seven days. The dividend payment date for special rate periods of more than 28
days will be set out in the notice designating a special rate period. See
"Description of MuniPreferred -- Dividends and Dividend Periods -- Designation
of Special Rate Periods."

<TABLE>
<CAPTION>
                                                   DATE OF       DIVIDEND PAYMENT    SUBSEQUENT       NUMBER OF
                                               ACCUMULATION AT   DATE FOR INITIAL     DIVIDEND     DAYS OF INITIAL
       SERIES          INITIAL DIVIDEND RATE    INITIAL RATE*      RATE PERIOD*     PAYMENT DAY      RATE PERIOD
       ------          ---------------------   ---------------   ----------------   ------------   ---------------
<S>                    <C>                     <C>               <C>                <C>            <C>
TH...................            %
F....................            %
</TABLE>

- ------------
* All dates are 1999.

TAXATION


     Because under normal circumstances the Fund will invest substantially all
of its assets in municipal bonds that pay interest exempt from regular Federal
income tax, the income you receive will ordinarily be similarly exempt. Your
income may be subject to state and local taxes. All or a portion of the income
from these bonds will be subject to the Federal alternative minimum tax, so
MuniPreferred shares may not be a suitable investment if you are subject to this
tax or would become subject to such tax by investing in MuniPreferred shares.
Taxable income or gain earned by the Fund will be allocated proportionately to
holders of MuniPreferred shares and Common Shares, based on the percentage of
total dividends paid to each class for that year. Accordingly, certain specified
MuniPreferred dividends may be subject to income tax on income or gains
attributed to the Fund. The Fund intends to notify shareholders, before any
applicable auction for a rate period of 28 days or less, of the amount of any
taxable income and gain to be paid for the period relating to that auction. For
longer periods, the Fund may notify shareholders. In certain circumstances, the
Fund will make shareholders whole for taxes owing on dividends paid to
shareholders that include taxable income and gain. See "Tax Matters."


RATINGS

     Shares of each series of MuniPreferred will be issued with a rating of
"Aaa" from Moody's Investors Service, Inc. ("Moody's") and "AAA" from Standard &
Poor's Corporation ("S&P"). Because the Fund is required to maintain at least
one of these ratings, it must own portfolio securities of a sufficient value and
with adequate credit quality to meet the rating agencies' guidelines. See
"Description of MuniPreferred -- Rating Agency Guidelines."

REDEMPTION


     Although the Fund does not ordinarily redeem MuniPreferred shares, it may
be required to redeem shares if, for example, the Fund does not meet an asset
coverage ratio required by law or to correct a failure to meet a rating agency
guideline in a timely manner. The Fund voluntarily may redeem MuniPreferred
shares in certain conditions. See "Description of MuniPreferred -- Redemption"
and "Description of MuniPreferred -- Rating Agency Guidelines."


LIQUIDATION PREFERENCE

     The liquidation preference of the shares of each series of MuniPreferred
will be $25,000 per share plus accumulated but unpaid dividends, if any,
thereon. See "Description of MuniPreferred -- Liquidation."

                                        3
<PAGE>   6

VOTING RIGHTS

     The holders of Preferred Shares, including MuniPreferred, voting as a
separate class, have the right to elect at least two trustees at all times and
to elect a majority of the trustees in the event two years' dividends on the
Preferred Shares are unpaid. In each case, the remaining trustees will be
elected by holders of shares of Common Shares and shares of Preferred Shares,
including MuniPreferred, voting together as a single class. The holders of
shares of Preferred Shares, including MuniPreferred, will vote as a separate
class or classes on certain other matters as required under the Declaration of
Trust, the Investment Company Act of 1940 (the "1940 Act") and Massachusetts
law. See "Description of MuniPreferred -- Voting Rights" and "Certain Provisions
in the Declaration of Trust."

                              FINANCIAL HIGHLIGHTS

                                  (UNAUDITED)



     Information contained in the table below under the headings "Per Share
Operating Performance" and "Ratios/Supplemental Data" shows the unaudited
operating performance of the Fund from the commencement of the Fund's operations
on May 26, 1999 until June 28, 1999. Since the Fund was recently organized and
commenced operations on May 26, 1999, the table covers less than five weeks of
operations, during which a substantial portion of the Fund's portfolio was held
in temporary investments pending investment in municipal bonds that meet the
Fund's investment objectives and policies. Accordingly, the information
presented may not provide a meaningful picture of the Fund's operating
performances.



<TABLE>
<S>                                                           <C>
Per Share Operating Performance:
  Net Asset Value, Beginning of Period......................  $  14.33
                                                              --------
     Net Investment Income..................................       .04
     Net Gains or Losses on Securities (Both Realized and
      Unrealized)...........................................      (.28)
                                                              --------
          Total From Investment Operations..................      (.24)
                                                              --------

  Organization and Offering Costs...........................      (.02)
                                                              --------
  Net Asset Value, End of Period............................  $  14.07
                                                              ========
  Per Share Market Value, End of Period.....................  $15.0625
  Total Return on Net Asset Value...........................     (1.81)%
  Total Investment Return on Market Value...................       .42%

Ratios/Supplemental Data:
  Net Assets, End of Period (In Thousands)..................  $317,447
  Ratio of Expenses to Average Net Assets Before
     Reimbursement..........................................       .70%*
  Ratio of Net Investment Income to Average Net Assets
     Before Reimbursement...................................      3.09%*
  Ratio of Expenses to Average Net Assets After
     Reimbursement..........................................       .40%*
  Ratio of Net Investment Income to Average Net Assets After
     Reimbursement..........................................      3.39%*
  Portfolio Turnover Rate...................................        --%
</TABLE>


- ------------
* Annualized

                                        4
<PAGE>   7

                                    THE FUND


     Nuveen California Dividend Advantage Municipal Fund, Inc. (the "Fund") is a
recently organized closed-end, diversified management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"). The Fund was organized as a Massachusetts business trust on December 1,
1998 pursuant to a Declaration of Trust governed by the laws of the Commonwealth
of Massachusetts (the "Declaration"). In                , 1999, the Fund issued
an aggregate of                common shares of beneficial interest, par value
$.01 per share ("Common Shares"), pursuant to the initial public offering
thereof and commenced its operations. On June 18, 1999 and July 6, 1999, the
Fund issued an additional 1,500,000 Common Shares and 795,000 Common Shares,
respectively, in connection with the partial exercises by the Underwriters of
the over-allotment option. The Fund's Common Shares are traded on the New York
Stock Exchange (the "Exchange") under the symbol "NAC." The Fund's principal
office is located at 333 West Wacker Drive, Chicago, Illinois 60606, and its
telephone number is (800) 257-8787.



     The following provides information about the Fund's outstanding shares as
of June 28, 1999:



<TABLE>
<CAPTION>
                                                                AMOUNT HELD BY THE
                                                                 FUND OR FOR ITS
TITLE OF CLASS                              AMOUNT AUTHORIZED        ACCOUNT         AMOUNT OUTSTANDING
- --------------                              -----------------   ------------------   ------------------
<S>                                         <C>                 <C>                  <C>
Common....................................    Unlimited             0                    22,556,982
MuniPreferred.............................    Unlimited             0                             0
  Series TH...............................     10,000               0                             0
  Series F................................     10,000               0                             0
</TABLE>


                                USE OF PROCEEDS


     The net proceeds of this offering will be approximately $168,043,740 after
payment of the sales load and estimated offering costs.



     The net proceeds of the offering will be invested in accordance with the
Fund's investment objective 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 that objective and these policies at or
shortly (within six to eight weeks) after the completion of the offering. To the
extent that all of the proceeds cannot be so invested, pending such investment,
they will be invested in: other open- or closed-end investment companies that
invest primarily in municipal bonds of the types in which the Fund may invest
directly; 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 securities). If necessary to invest fully the
net proceeds of the offerings immediately, the Fund may also purchase, as
temporary investments, short-term taxable investments of the type described in
the Statement of Additional Information under "Investment Objective and
Policies -- Portfolio Investments," the income on which is subject to regular
Federal income tax.


                                        5
<PAGE>   8

                                 CAPITALIZATION
                                  (UNAUDITED)


     The following table sets forth the capitalization of the Fund as of June
28, 1999, and as adjusted to give effect to the issuance of the shares of
MuniPreferred offered hereby.



<TABLE>
<CAPTION>
                                                                 ACTUAL      AS ADJUSTED
                                                              ------------   ------------
<S>                                                           <C>            <C>
Shareholders' Equity:
  Preferred Shares, $25,000 stated value per share, at
     liquidation value; unlimited shares authorized (no
     shares issued; 6,800 shares issued, as adjusted,
     respectively)..........................................  $         --   $170,000,000
  Common Shares, $.01 par value per share; unlimited shares
     authorized, 22,556,982 shares outstanding*.............       225,570        225,570
  Paid-in surplus...........................................   322,452,201    320,495,441
  Balance of undistributed net investment income............       931,234        931,234
  Accumulated net realized gain (loss) from investment
     transactions...........................................            --             --
  Net unrealized appreciation (depreciation) of
     investments............................................    (6,162,368)    (6,162,368)
                                                              ------------   ------------
  Net assets................................................  $317,446,637   $485,489,877
                                                              ============   ============
</TABLE>


- ------------
* None of these outstanding shares are held by or for the account of the Fund.

                             PORTFOLIO COMPOSITION


     As of June 28, 1999, approximately 95.95% of the market value of the Fund's
portfolio was invested in long-term municipal bonds and approximately 4.05% of
the market value of the Fund's portfolio was invested in short-term municipal
bonds. The following table sets forth certain information with respect to the
composition of the Fund's investment portfolio as of June 28, 1999.



<TABLE>
<CAPTION>
    CREDIT RATING         VALUE       PERCENT
- ---------------------  ------------   -------
<S>                    <C>            <C>
Aaa/AAA*               $199,769,435    59.98%
Aa/AA                    22,799,825     6.85
A/A                      37,440,540    11.24
Baa/BBB                  42,160,170    12.65
Unrated                  17,418,615     5.23
Short-term               13,500,000     4.05
                       ------------   ------
TOTAL                  $333,088,585   100.00%
                       ============   ======
</TABLE>


- ------------

*  Includes securities that are backed by an escrow or trust containing
   sufficient U.S. Government Securities to ensure the timely payment of
   principal and interest.


                                        6
<PAGE>   9

                             THE FUND'S INVESTMENTS

INVESTMENT OBJECTIVE AND POLICIES

     The Fund's investment objectives are:

     - to provide current income exempt from regular Federal and California
      income tax; and


     - to enhance portfolio value relative to the municipal bond market by
      investing in tax-exempt municipal bonds that Nuveen Advisory believes are
      underrated or undervalued or that represent municipal market sectors that
      are undervalued.


     Underrated municipal bonds are those whose ratings do not, in Nuveen
Advisory's opinion, reflect their true creditworthiness. Undervalued municipal
bonds are bonds that, in Nuveen Advisory's opinion, are worth more than the
value assigned to them in the marketplace. Nuveen Advisory may at times believe
that bonds associated with a particular municipal market sector (for example,
electric utilities), or issued by a particular municipal issuer, are
undervalued. Nuveen Advisory may purchase such a bond for the Fund's portfolio
because it represents a market sector or issuer that Nuveen Advisory considers
undervalued, even if the value of the particular bond appears to be consistent
with the value of similar bonds. Municipal bonds of particular types (e.g.,
hospital bonds, industrial revenue bonds or bonds issued by a particular
municipal issuer) may be undervalued because there is a temporary excess of
supply in that market sector, or because of a general decline in the market
price of municipal bonds of the market sector for reasons that do not apply to
the particular municipal bonds that are considered undervalued. The Fund's
investment in underrated or undervalued municipal bonds will be based on Nuveen
Advisory's belief that their yield is higher than that available on bonds
bearing equivalent levels of interest rate risk, credit risk and other forms of
risk, and that their prices will ultimately rise (relative to the market) to
reflect their true value. The Fund attempts to increase its portfolio value
relative to the municipal bond market by prudent selection of municipal bonds
regardless of the direction the market may move. Any capital appreciation
realized by the Fund will generally result in the distribution of taxable
capital gains to holders of Common Shares.

     The Fund will invest its net assets in a diversified portfolio of municipal
bonds that are exempt from regular Federal and California income tax. Under
normal market conditions, the Fund expects to be fully invested (at least 95% of
its assets) in such tax-exempt municipal bonds. The Fund will invest at least
80% of its net assets in investment grade quality municipal bonds. Investment
grade quality means that such bonds are rated, at the time of investment, within
the four highest grades (Baa or BBB or better by Moody's, S&P or Fitch) or are
unrated but judged to be of comparable quality by Nuveen Advisory. The Fund may
invest up to 20% of its net assets in municipal bonds that are rated, at the
time of investment, Ba/BB or B by Moody's, S&P or Fitch or that are unrated but
judged to be of comparable quality by Nuveen Advisory. Bonds of below investment
grade quality (Ba/BB or below) are commonly referred to as junk bonds. Bonds of
below investment grade quality are regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal.
The foregoing credit quality policies apply only at the time a security is
purchased, and the Fund is not required to dispose of a security in the event
that a rating agency downgrades its assessment of the credit characteristics of
a particular issue. In determining whether to retain or sell such a security,
Nuveen Advisory may consider such factors as Nuveen Advisory's assessment of the
credit quality of the issuer of such security, the price at which such security
could be sold and the rating, if any, assigned to such security by other rating
agencies. A general description of Moody's, S&P's and Fitch's ratings of
municipal bonds is set forth in Appendix B to the Statement of Additional
Information. See "Municipal Bonds -- Special Considerations Relating to
California Municipal Bonds" below for a general description of the economic and
credit characteristics of municipal issuers in California. The Fund may also
invest in securities of other open- or closed-end investment companies that
invest primarily in municipal bonds of the types in which the Fund may invest
directly. See "-- Other Investment Companies" and "-- Initial Portfolio
Composition."

     The Fund may purchase municipal bonds that are additionally secured by
insurance, bank credit agreements, or escrow accounts. The credit quality of
companies which provide such credit enhancements will affect the value of those
securities. Although the insurance feature reduces certain financial risks, the
                                        7
<PAGE>   10

premiums for insurance and the higher market price paid for insured obligations
may reduce the Fund's income. Insurance generally will be obtained from insurers
with a claims-paying ability rated Aaa by Moody's or AAA by S&P or Fitch. The
insurance feature does not guarantee the market value of the insured obligations
or the net asset value of the Common Shares.

     Upon Nuveen Advisory's recommendation, during temporary defensive periods
and in order to keep the Fund's cash fully invested, including the period during
which the net proceeds of the offering are being invested, the Fund may invest
up to 100% of its net assets in short-term investments including high quality,
short-term securities that may be either tax-exempt or taxable. The Fund intends
to invest in taxable short-term investments only in the event that suitable
tax-exempt short-term investments are not available at reasonable prices and
yields. Investment in taxable short-term investments would result in a portion
of your dividends being subject to regular Federal income taxes. For more
information, see the Statement of Additional Information.

     The Fund cannot change its investment objectives without the approval of
the holders of a "majority of the outstanding" Common Shares and MuniPreferred
Shares voting together as a single class, and of the holders of a "majority of
the outstanding" MuniPreferred Shares voting as a separate class. A "majority of
the outstanding," 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
MuniPreferred -- Voting Rights" for additional information with respect to the
voting rights of holders of MuniPreferred Shares.

     If you are, or as a result of investment in the Fund would become, subject
to the Federal alternative minimum tax, the Fund may not be a suitable
investment for you because the Fund expects that a substantial portion of its
investments will pay interest that is taxable under the Federal alternative
minimum tax. Special rules apply to corporate holders. In addition, capital
gains distributions will be subject to capital gains taxes. See "Tax Matters."

MUNICIPAL BONDS

     General. Municipal bonds are either general obligation or revenue bonds and
typically are issued to finance public projects (such as roads or public
buildings), to pay general operating expenses, or to refinance outstanding debt.
Municipal bonds may also be issued for private activities, such as housing,
medical and educational facility construction, or for privately owned industrial
development and pollution control projects. General obligation bonds are backed
by the full faith and credit, or taxing authority, of the issuer and may be
repaid from any revenue source; revenue bonds may be repaid only from the
revenues of a specific facility or source. The Fund also may purchase municipal
bonds that represent lease obligations. These carry special risks because the
issuer of the bonds may not be obligated to appropriate money annually to make
payments under the lease. In order to reduce this risk, the Fund will only
purchase municipal bonds representing lease obligations where Nuveen Advisory
believes the issuer has a strong incentive to continue making appropriations
until maturity.

     The municipal bonds in which the Fund will invest are generally issued by
the State of California, a city in California, or a political subdivision of
such State or city, and pay interest that, in the opinion of bond counsel to the
issuer (or on the basis of other authority believed by Nuveen Advisory to be
reliable), is exempt from regular Federal and California income tax, although
the interest may be subject to the Federal alternative minimum tax. The Fund may
also invest in municipal bonds issued by United States territories (such as
Puerto Rico or Guam) that are exempt from regular federal and California income
tax.

     The yields on municipal bonds are dependent 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.

                                        8
<PAGE>   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
weighted average maturity of obligations held by the Fund may be shortened,
depending on market conditions.

     Special Considerations Relating to California Municipal Bonds. The
following information provides only a brief summary of the complex factors
affecting the financial situation in California (the "State") and is derived
from sources that are generally available to investors and is believed to be
accurate. It is based in part on information obtained from various State and
local agencies in California. Additional information regarding the factors
affecting the financial situation in California may be found in "Investment
Objective and Policies -- Factors Pertaining to California" in the Statement of
Additional Information. It should be noted that the creditworthiness of the
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.

     Because the Fund primarily purchases municipal bonds issued by California
state and local government agencies, shareholders may be exposed to additional
risks. In particular, the performance of the Fund is susceptible to various
statutory, political and economic factors unique to California. Some of these
factors, including the State budget process, the State's economy, and voter
initiatives, may weaken or jeopardize the ability of California municipal bond
issuers to pay principal or interest on their bonds. As a result, the value of
the Fund's assets may fluctuate more widely in value than those of a fund
investing in municipal bonds from a number of different states.

     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 $900 billion in 1998. Total employment is over 15 million.

     In the early 1990's, the State suffered a severe recession, with the worst
economic, fiscal and budget conditions since the 1930's. Manufacturing
(particularly aerospace), construction and financial services were all severely
affected, with the bulk of the job losses in Southern California. The economy
started into recovery in 1994, and has been growing strongly since that time,
outpacing the national economy. While the international economic problems in
Asia and other areas since mid-1997 have hurt some sectors of the California
economy, such as manufacturing and agriculture, which traditionally export to
those nations, these effects have apparently been offset by increased exports in
Latin America and other nations, and strong activity in computer hardware and
software (fueled by "Year 2000" preparations) and construction, among other
areas. The California economy shows continued strength overall through 1999, but
projections are for slower growth in the year 2000 and beyond.

     The State of California has received significant tax revenues in recent
years, deriving from the strong economy and stock market. General Fund revenues
are estimated at $57.9 billion in FY 1998-99 and $63.0 billion in FY 1999-00. 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 Obligation bonds are, as of May,
1999, rated "Aa3" by Moody's, "A+" by Standard & Poor's, and "AA-" by Fitch
IBCA.

     Many local government agencies, particularly counties, continue to face
budget constraints due to limited taxing powers and mandated expenditures for
health, welfare and public safety, among other factors. California State and
local governments are limited in their ability to levy and raise property taxes
and other forms of taxes, fees or assessments, and in their ability to
appropriate their tax revenues, by a series of constitutional amendments enacted
by voter initiative since 1978. Individual local governments may also have local
initiatives which affect their fiscal flexibility.

     For more information, about the State, see "Investment Objective and
Policies -- Factors Pertaining to California" in the Statement of Additional
Information.

                                        9
<PAGE>   12

WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS

     The Fund may buy and sell municipal bonds on a when-issued or delayed
delivery basis, making payment or taking delivery at a later date, normally
within 15 to 45 days of the trade date. This type of transaction may involve an
element of risk because no interest accrues on the bonds prior to settlement
and, since bonds are subject to market fluctuations, the value of the bonds at
the time of delivery may be less (or more) than cost. A separate account of the
Fund will be established with its custodian consisting of cash, cash
equivalents, or liquid securities having a market value at all times at least
equal to the amount of the commitment.

OTHER INVESTMENT COMPANIES

     The Fund may invest up to 10% of its net assets in securities of other
open- or closed-end investment companies that invest primarily in municipal
bonds of the types in which the Fund may invest directly. The Fund generally
expects to invest in other investment companies either during periods when it
has large amounts of uninvested cash, such as the period shortly after the Fund
receives the proceeds of the offering of its Common Shares or MuniPreferred
Shares, or during periods when there is a shortage of attractive, high-yielding
municipal bonds available in the market. As a shareholder in an investment
company, the Fund will bear its ratable share of that investment company's
expenses, and would remain subject to payment of the Fund's management, advisory
and administrative fees with respect to assets so invested. Common Shareholders
would therefore be subject to duplicative expenses to the extent the Fund
invests in other investment companies. Nuveen Advisory will take expenses into
account when evaluating the investment merits of an investment in the investment
company relative to available municipal bond investments. In addition, the
securities of other investment companies may also be leveraged and will
therefore be subject to the same leverage risks described herein. As described
in the Prospectus in the section entitled "Risks," the net asset value and
market value of leveraged shares will be more volatile and the yield to
shareholders will tend to fluctuate more than the yield generated by unleveraged
shares.

INITIAL PORTFOLIO COMPOSITION

     If current market conditions persist, the Fund expects that approximately
85% of its initial portfolio will consist of investment grade quality municipal
bonds, rated as such at the time of investment, meaning that such bonds are
rated by national rating agencies within the four highest grades of the
investment grade category or are unrated but judged to be of comparable quality
by Nuveen Advisory (approximately 50% in Aaa/AAA; 15% in A; and 20% in Baa/BBB).
The Fund will generally select obligations which may not be redeemed at the
option of the issuer for approximately seven to nine years from the date of
purchase by the Fund. See the Statement of Additional Information under "Other
Investment Policies and Techniques -- Portfolio Trading and Turnover Rate."
Subject to market availability, the Fund would likely seek to invest
approximately 15% of its initial portfolio in municipal bonds that are, at the
time of investment, either rated below investment grade or that are unrated but
judged to be of comparable quality by Nuveen Advisory. See "-- Investment
Objectives and Policies."

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 Preferred Shares including shares of MuniPreferred, voting together
as a single class, and of the holders of a majority of the outstanding Preferred
Shares, including shares of MuniPreferred, voting as a separate class:

          1. Issue senior securities, as defined in the Investment Company Act
     of 1940, other than MuniPreferred shares, except to the extent permitted
     under the Investment Company Act of 1940 and except as otherwise described
     in the Prospectus;

          2. Borrow money, except from banks for temporary or emergency purposes
     or for repurchase of its shares, and then only in an amount not exceeding
     one-third of the value of the Fund's total assets (including the amount
     borrowed) less the Fund's liabilities (other than borrowings);

                                       10
<PAGE>   13

          3. Act as underwriter of another issuer's securities, except to the
     extent that the Fund may be deemed to be an underwriter within the meaning
     of the Securities Act of 1933 in connection with the purchase and sale of
     portfolio securities;

          4. Invest more than 25% of its total assets in securities of issuers
     in any one industry; provided, however, that such limitation shall not
     apply to municipal bonds other than those municipal bonds backed only by
     the assets and revenues of non-governmental users;

          5. Purchase or sell real estate, but this shall not prevent the Fund
     from investing in municipal bonds secured by real estate or interests
     therein or foreclosing upon and selling such security;

          6. Purchase or sell physical commodities unless acquired as a result
     of ownership of securities or other instruments (but this shall not prevent
     the Fund from purchasing or selling options, futures contracts, derivative
     instruments or from investing in securities or other instruments backed by
     physical commodities);

          7. Make loans, other than by entering into repurchase agreements and
     through the purchase of municipal bonds or short-term investments in
     accordance with its investment objectives, policies and limitations;

          8. Invest more than 5% of its total assets in securities of any one
     issuer, except that this limitation shall not apply to bonds issued by the
     United States Government, its agencies and instrumentalities or to the
     investment of 25% of its total assets.

     See "Investment Objective and Policies -- Investment Restrictions" in the
Statement of Additional Information for a description of additional fundamental
and non-fundamental policies of the Fund.

                                  RISK FACTORS

     Risk is inherent in all investing. Investing in any investment company
security involves risk, including the risk that you may receive little or no
return on your investment or even that you may lose part or all of your
investment. Therefore, before investing you should consider carefully the
following risks that you assume when you invest in MuniPreferred shares.

INTEREST RATE RISK

     The Fund issues MuniPreferred shares, which pay dividends based on
short-term interest rates, and uses the proceeds to buy municipal bonds, which
pay interest based on long-term yields. Long-term municipal bond yields are
typically, although not always, higher than short-term interest rates. Both
long-term and short-term interest rates may fluctuate. If short-term interest
rates rise, MuniPreferred rates may rise so that the amount of dividends paid to
MuniPreferred shareholders exceeds the income from the portfolio securities
purchased with the proceeds from the sale of MuniPreferred shares. Because
income from the Fund's entire investment portfolio (not just the portion of the
portfolio purchased with the proceeds of the MuniPreferred share offering) is
available to pay MuniPreferred dividends, however, MuniPreferred dividend rates
would need to greatly exceed the Fund's net portfolio income before the Fund's
ability to pay MuniPreferred dividends would be jeopardized. If long-term rates
rise, the value of the Fund's investment portfolio will decline, reducing the
amount of assets serving as asset coverage for the MuniPreferred shares.

AUCTION RISK

     You may not be able to sell your MuniPreferred shares at an auction if the
auction fails; that is, if there are more MuniPreferred shares offered for sale
than there are buyers for those shares. The Fund believes this event is
unlikely. Also, if you place hold orders (orders to retain MuniPreferred shares)
at an auction only at a specified rate, and that bid rate exceeds the rate set
at the auction, you will not retain your MuniPreferred shares. Finally, if you
buy shares or elect to retain shares without specifying a rate below which you
would not wish to continue to hold those shares, and the auction sets a
below-market rate, you may receive a lower rate

                                       11
<PAGE>   14

of return on your shares than the market rate. See "Description of
MuniPreferred" and "The Auction -- Auction Procedures."

SECONDARY MARKET RISK

     If you try to sell your MuniPreferred shares between auctions, you may not
be able to sell any or all of your shares, or you may not be able to sell them
for $25,000 per share or $25,000 per share plus accumulated dividends. If the
Fund has designated a special rate period (a rate period of more than 7 days),
changes in interest rates could affect the price you would receive if you sold
your shares in the secondary market. Broker-dealers that maintain a secondary
trading market for MuniPreferred shares are not required to maintain this
market, and the Fund is not required to redeem shares either if an auction or an
attempted secondary market sale fails because of a lack of buyers. MuniPreferred
shares are not registered on a stock exchange or the NASDAQ stock market. If you
sell your MuniPreferred shares to a broker-dealer between auctions, you may
receive less than the price you paid for them, especially when market interest
rates have risen since the last auction. Accrued MuniPreferred dividends,
however, should at least partially compensate for the increased market interest
rates.

RATINGS AND ASSET COVERAGE RISK

     While Moody's and S&P assign ratings of "Aaa" or "AAA" to MuniPreferred
shares, the ratings do not eliminate or necessarily mitigate the risks of
investing in MuniPreferred shares. A rating agency could downgrade MuniPreferred
shares, which may make your shares less liquid at an auction or in the secondary
market, though probably with higher resulting dividend rates. If a rating agency
downgrades MuniPreferred shares, the Fund will alter its portfolio or redeem
MuniPreferred shares. The Fund may voluntarily redeem MuniPreferred shares under
certain circumstances. See "Description of MuniPreferred -- Asset Maintenance
and Rating Agency Guidelines" for a description of the asset maintenance tests
the Fund must meet.

INFLATION RISK

     Inflation is the reduction in the purchasing power of money resulting from
the increase in the price of goods and services. Inflation risk is the risk that
the inflation adjusted (or "real") value of your MuniPreferred investment or the
income from that investment will be worth less in the future. As inflation
occurs, the real value of the MuniPreferred shares and distributions declines.
In an inflationary period, however, it is expected that, through the auction
process, MuniPreferred dividend rates would increase, tending to offset this
risk.

CREDIT RISK

     Credit risk is the risk that an issuer of a municipal bond will become
unable to meet its obligation to make interest and principal payments. In
general, lower rated municipal bonds carry a greater degree of credit risk. If
rating agencies lower their ratings of municipal bonds in the Fund's portfolio,
the value of those bonds could decline, which could jeopardize the rating
agencies' ratings of the MuniPreferred. Because the primary source of income for
the Fund is the interest and principal payments on the municipal bonds in which
it invests, any default by an issuer of a municipal bond could have a negative
impact on the Fund's ability to pay dividends on the MuniPreferred shares and
could result in the redemption of some or all of the MuniPreferred shares. In
addition, the Fund may invest up to 20% of its net assets in municipal bonds
that are rated Ba/BB or B by Moody's, S&P or Fitch or that are unrated but
judged to be of comparable quality by Nuveen Advisory. Bonds rated Ba/BB or B
are regarded as having predominately speculative characteristics with respect to
capacity to pay interest and repay principal, and these bonds are commonly
referred to as "junk bonds." The prices of these bonds are more sensitive to
negative developments, such as a decline in the issuer's revenues or a general
economic downturn, than are the prices of higher grade securities.

CONCENTRATION IN 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.

                                       12
<PAGE>   15

INCOME RISK

     The Fund's income is based primarily on the interest it earns from its
investments, which can vary widely over the short- and long-term. If interest
rates drop, the Fund's income available over time to make dividend payments with
respect to the MuniPreferred could drop as well if the Fund purchases securities
with lower interest coupons. This risk is magnified when prevailing short-term
interest rates increase and the Fund holds residual interest municipal bonds.

CALL RISK

     If interest rates fall, it is possible that issuers of callable bonds with
higher interest coupons will "call" (or prepay) their bonds before their
maturity date. If a call were exercised by the issuer during a period of
declining interest rates, the Fund is likely to replace such called security
with a lower yielding security.

YEAR 2000 RISK

     Nuveen Advisory relies on computer systems to manage the Fund's
investments, process shareholder transactions, and maintain shareholder
accounts. Because of the way computers historically have stored dates, some of
these systems currently may not be able to process activity occurring in the
year 2000. Nuveen Advisory is working with the Fund's service providers to adapt
their systems to address this "Year 2000" issue. Although there can be no
absolute assurance, Nuveen Advisory and the Fund expect that the necessary work
will be completed on a timely basis. In addition, Year 2000 issues may affect
the ability of municipal issuers to meet their interest and principal payment
obligations to their bond holders, and may adversely affect the bonds' credit
ratings and values. It is generally conceded that municipal issuers may have
greater Year 2000 risks than other issuers. Nuveen Advisory is requesting
information from municipal issuers so that Nuveen Advisory can take the issuers'
Year 2000 readiness, if make available, into account in making investment
decisions. There can be no assurance that issuers will provide this information
to Nuveen Advisory, or that issuers will begin or complete the work necessary to
address any Year 2000 issues on a timely basis.

                             MANAGEMENT OF THE FUND

TRUSTEES AND OFFICERS

     The Board of Trustees is responsible for the management of the Fund,
including supervision of the duties performed by Nuveen Advisory. There are
seven trustees of the Fund, one of whom is an "interested person" (as defined in
the 1940 Act) and six of whom are not "interested persons." The names and
business addresses of the trustees and officers of the Fund and their principal
occupations and other affiliations during the past five years are set forth
under "Management of the Fund" in the Statement of Additional Information.

INVESTMENT ADVISER

     Nuveen Advisory, 333 West Wacker Drive, Chicago, Illinois 60606, serves as
the investment adviser to the Fund. In this capacity, Nuveen Advisory is
responsible for the selection and on-going monitoring of the Fund's investment
portfolio, managing the Fund's business affairs and providing certain clerical,
bookkeeping and administrative services. Nuveen Advisory serves as investment
adviser to investment portfolios with more than $35 billion in assets under
management. See the Statement of Additional Information under "Management of the
Fund -- Investment Adviser."

     Overall investment management strategy and operating policies for the Fund
are set by the Investment Management Committee of John Nuveen & Co. Incorporated
("Nuveen"), subject to the ultimate oversight and supervision of the Board of
Trustees. Nuveen Advisory places orders for the purchase and sale of portfolio
securities for the Fund. Consistent with Rule 10f-3 under the 1940 Act,
portfolio securities may be purchased from Nuveen or its affiliates. The
Investment Management Committee is comprised of several principal executive
officers and portfolio managers of Nuveen and Nuveen Advisory. Day to day
operations and execution of specific investment strategies is the responsibility
of Nuveen Advisory. Since      , 1999, the Fund's commencement of operations,
Nuveen Advisory has managed the Fund using a team of analysts and
                                       13
<PAGE>   16

portfolio managers that focus on a specific group of funds. William M.
Fitzgerald has been the portfolio manager of the Fund and will provide daily
oversight for, and execution of, the Fund's investment activities. Mr.
Fitzgerald currently manages eleven closed-end municipal bond funds for Nuveen
Advisory with assets aggregating more than $.5 billion. He is a Chartered
Financial Analyst and a Vice President of Nuveen Advisory.

     Nuveen Advisory is a wholly-owned subsidiary of Nuveen, 333 West Wacker
Drive, Chicago, Illinois 60606. Founded in 1898, Nuveen and its affiliates have
over $60 billion of net assets under management or surveillance. Nuveen is a
subsidiary of The John Nuveen Company which, in turn, is a majority-owned
subsidiary of The St. Paul Companies, Inc., a publicly-traded company which is
principally engaged in providing property-liability insurance through
subsidiaries.

INVESTMENT MANAGEMENT AGREEMENT

     Pursuant to an investment management agreement between Nuveen Advisory and
the Fund, the Fund has agreed to pay an annual management fee for the services
and facilities provided by Nuveen Advisory, payable on a monthly basis,
according to the following schedule:

<TABLE>
<CAPTION>
                  DAILY TOTAL NET ASSETS*                     MANAGEMENT FEE
                  -----------------------                     --------------
<S>                                                           <C>
For the first $125 million..................................      .6500%
For the next $125 million...................................      .6375%
For the next $250 million...................................      .6250%
For the next $500 million...................................      .6125%
For the next $1 billion.....................................      .6000%
For assets over $2 billion..................................      .5750%
</TABLE>

- ------------
* Including net assets attributable to MuniPreferred shares.

     In addition to the fee of Nuveen Advisory, the Fund pays all other costs
and expenses of its operations, including compensation of its trustees (other
than those affiliated with Nuveen Advisory), custodian, transfer and dividend
disbursing expenses, legal fees, expenses of independent auditors, expenses of
repurchasing shares, expenses of preparing, printing and distributing
shareholder reports, notices, proxy statements and reports to governmental
agencies, and taxes, if any.

     For the first ten years of the Fund's operation, Nuveen Advisory has agreed
to reimburse the Fund for fees and expenses in the amounts, and for the time
periods, set forth below:

<TABLE>
<CAPTION>
                            PERCENTAGE
                            REIMBURSED
                              (AS A
                            PERCENTAGE
                            OF AVERAGE
       YEAR ENDING          DAILY NET
         JULY 31,            ASSETS)
       -----------          ----------
<S>                         <C>
  1999*...................     .30%
  2000....................     .30%
  2001....................     .30%
  2002....................     .30%
  2003....................     .30%
  2004....................     .30%
</TABLE>

<TABLE>
<CAPTION>
                            PERCENTAGE
                            REIMBURSED
                              (AS A
                            PERCENTAGE
                            OF AVERAGE
       YEAR ENDING          DAILY NET
         JULY 31,            ASSETS)
       -----------          ----------
<S>                         <C>
  2005....................     .25%
  2006....................     .20%
  2007....................     .15%
  2008....................     .10%
  2009....................     .05%
</TABLE>

- ------------
* From the commencement of operations.

     Nuveen Advisory has not agreed to reimburse the Fund for any portion of its
fees and expenses beyond July 31, 2009.

                                       14
<PAGE>   17

LEGAL PROCEEDINGS

     A lawsuit brought in June, 1996 (Green et al. v. Nuveen Advisory Corp., et
al.) by certain individual common shareholders of six leveraged closed-end funds
sponsored by Nuveen is currently pending in federal district court. The
plaintiffs allege that the leveraged closed-end funds engaged in certain
practices that violated various provisions of the 1940 Act and common law. The
plaintiffs also alleged, among other things, breaches of fiduciary duty by the
funds' trustees 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 cases.

     The defendants are vigorously defending the case and filed motions to
dismiss the entire lawsuit asserting that the claims are without merit and to
oppose certification of any classes. By opinion dated March 30, 1999, the court
granted most of the defendants' motion to dismiss and denied plaintiffs' motion
to certify defendant and plaintiff classes. The court dismissed all claims
against the funds, the funds' trustees and Nuveen. The court dismissed these
claims without prejudice (which means that the plaintiffs can re-file the claims
if they can correct the defect that led to the claim being dismissed) on the
ground that the claims should have been brought as derivative claims on behalf
of the funds. The only remaining claim is brought under Section 36(b) of the
1940 Act against Nuveen Advisory, and relates solely to advisory fees Nuveen
Advisory received from the six relevant funds. While the Fund cannot assure that
the litigation will be decided in Nuveen Advisory's favor, Nuveen Advisory
believes a decision, if any, against the defendants would have no material
effect on the Fund, its Common Shares or the ability of Nuveen Advisory to
perform its duties under the investment management agreement.

                          DESCRIPTION OF MUNIPREFERRED

     The following is a brief description of the terms of the shares of
MuniPreferred. This description does not purport to be complete and is subject
to and qualified in its entirety by reference to the more detailed description
of the shares of MuniPreferred in the Fund's Statement Establishing and Fixing
the Rights and Preferences of Municipal Auction Rate Cumulative Preferred Shares
(the "Statement") attached as Appendix A to the Statement of Additional
Information.

GENERAL


     The Fund's Declaration authorizes the issuance of an unlimited number of
preferred shares, par value $.01 per share, in one or more classes or series,
with rights as determined by the Board of Trustees without the approval of
common shareholders. The Statement currently authorizes the issuance of shares
of MuniPreferred as follows: Series TH -- 10,000 and Series F -- 10,000. All
shares of MuniPreferred will have a liquidation preference of $25,000 per share
plus an amount equal to accumulated but unpaid dividends (whether or not earned
or declared).



     The shares of MuniPreferred of each series will rank on parity with shares
of any other series of MuniPreferred, and with shares of any other series of
preferred shares of the Fund, as to the payment of dividends and the
distribution of assets upon liquidation. All shares of MuniPreferred carry one
vote per share on all matters on which such shares are entitled to be voted.
Shares of MuniPreferred are, when issued, fully paid and non-assessable and have
no preemptive, conversion or rights to cumulative voting.


DIVIDENDS AND DIVIDEND PERIODS

     General.  The initial Rate Period of shares of a series of MuniPreferred of
a particular series will be a period consisting of (a)        days in the case
of Series TH and (b)        days in the case of Series F. Any Subsequent Rate
Period of shares of a series of MuniPreferred will be a Minimum Rate Period (7
Rate Period Days), unless the Fund, subject to certain conditions, designates
such Subsequent Rate Period as a Special Rate Period. See "-- Designation of
Special Rate Periods" below.

                                       15
<PAGE>   18

     Dividends on shares of each series of MuniPreferred shall be payable, when,
as and if declared by the Board out of funds legally available therefor in
accordance with the Declaration, including the Statement, and applicable law, on
shares of (a) MuniPreferred, Series TH, on        , and thereafter on each and
(b) MuniPreferred, Series F, on        , and thereafter on each provided,
however, that (i) if the Monday or the Tuesday on which dividends would
otherwise be payable as set forth above is not a Business Day, then such
dividends shall be payable on such shares on the first Business Day that falls
after such Monday or Tuesday, as the case may be; (ii) if the Wednesday,
Thursday or Friday on which dividends would otherwise be payable as set forth
above is not a Business Day, then such dividends shall be payable on such shares
on the first Business Day that falls prior to such Wednesday, Thursday or
Friday, as the case may be; and (iii) the Fund may specify different Dividend
Payment Dates in respect of any Special Rate Period of more than 28 Rate Period
Days.

     The amount of dividends per share payable on shares of a series of
MuniPreferred on any date on which dividends shall be payable on shares of such
series shall be computed by multiplying the Applicable Rate for shares of such
series in effect for such Dividend Period or Dividend Periods or part thereof
for which dividends have not been paid by a fraction, the numerator of which
shall be the number of days in such Dividend Period or Dividend Periods or part
thereof and the denominator of which shall be 365 if such Dividend Period
consists of 7 Rate Period Days and 360 for all other Dividend Periods, and
applying the rate obtained against $25,000.

     Dividends will be paid through the Securities Depository on each Dividend
Payment Date in accordance with its normal procedures, which currently provide
for it to distribute dividends in next-day funds to Agent Members, who in turn
are expected to distribute such dividend payments to the persons for whom they
are acting as agents. Each of the current Broker-Dealers, however, has indicated
to the Fund that such Broker-Dealer or the Agent Member designated by such
Broker-Dealer will make such dividend payments available in same-day funds on
each Dividend Payment Date to customers that use such Broker-Dealer or its
designee as Agent Member.

     Dividends on shares of each series of MuniPreferred will accumulate from
the Date of Original Issue thereof. The dividend rate for shares of
MuniPreferred of a particular series for the initial Rate Period for such shares
shall be      % and      % per annum for Series TH and F, respectively. For each
Subsequent Rate Period of shares of MuniPreferred of a particular series, the
dividend rate for such shares will be the Applicable Rate for such shares that
the Auction Agent advises the Fund results from an Auction, except as provided
below. The Applicable Rate that results from an Auction for shares of any series
of MuniPreferred will not be greater than the Maximum Rate for shares of such
series, which is:

          (a) in the case of any Auction Date which is not the Auction Date
     immediately prior to the first day of any proposed Special Rate Period, the
     product of (i) the Reference Rate on such Auction Date for the next Rate
     Period of shares of such series and (ii) the Rate Multiple on such Auction
     Date, unless shares of such series have or had a Special Rate Period (other
     than a Special Rate Period of 28 Rate Period Days or fewer) and an Auction
     at which Sufficient Clearing Bids existed has not yet occurred for a
     Minimum Rate Period of shares of such series after such Special Rate
     Period, in which case the higher of:

             (A) the dividend rate on shares of such series for the then-ending
        Rate Period; and

             (B) the product of (x) the higher of (I) the Reference Rate on such
        Auction Date for a Rate Period equal in length to the then-ending Rate
        Period of shares of such series, if such then-ending Rate Period was 364
        Rate Period Days or fewer, or the Treasury Note Rate on such Auction
        Date for a Rate Period equal in length to the then-ending Rate Period of
        shares of such series, if such then-ending Rate Period was more than 364
        Rate Period Days, and (II) the Reference Rate on such Auction Date for a
        Rate Period equal in length to such Special Rate Period of shares of
        such series, if such Special Rate Period was 364 Rate Period Days or
        fewer, or the Treasury Note Rate on such Auction Date for a Rate Period
        equal in length to such Special Rate Period, if such Special Rate Period
        was more than 364 Rate Period Days and (y) the Rate Multiple on such
        Auction Date; or

                                       16
<PAGE>   19

          (b) in the case of any Auction Date which is the Auction Date
     immediately prior to the first day of any proposed Special Rate Period, the
     product of (i) the highest of (x) the Reference Rate on such Auction Date
     for a Rate Period equal in length to the then-ending Rate Period of shares
     of such series, if such then-ending Rate Period was 364 Rate Period Days or
     fewer, or the Treasury Note Rate on such Auction Date for a Rate Period
     equal in length to the then-ending Rate Period of shares of such series, if
     such then-ending Rate Period was more than 364 Rate Period Days, (y) the
     Reference Rate on such Auction Date for the Special Rate Period for which
     the Auction is being held if such Special Rate Period is 364 Rate Period
     Days or fewer or the Treasury Note Rate on such Auction Date for the
     Special Rate Period for which the Auction is being held if such Special
     Rate Period is more than 364 Rate Period Days, and (z) the Reference Rate
     on such Auction Date for Minimum Rate Periods and (ii) the Rate Multiple on
     such Auction Date.

     If an Auction for any Subsequent Rate Period of shares of any series of
MuniPreferred is not held for any reason other than as described below, the
dividend rate on shares of such series for such Subsequent Rate Period will be
the Maximum Rate for shares of such series on the Auction Date for such
Subsequent Rate Period.

     If the Fund fails to pay in a timely manner to the Auction Agent the full
amount of any dividend on, or the redemption price of, any shares of any series
of MuniPreferred during any Rate Period thereof (other than any Special Rate
Period of more than 364 Rate Period Days or any Rate Period succeeding any
Special Rate Period of more than 364 Rate Period Days during which such a
failure occurred that has not been cured), but, prior to 12:00 Noon on the third
Business Day next succeeding the date such failure occurred, such failure shall
have been cured and the Fund shall have paid a late charge, as described more
fully in the Statement, no Auction will be held in respect of shares of such
series for the first Subsequent Rate Period thereof thereafter and the dividend
rate for shares of such series for such Subsequent Rate Period will be the
Maximum Rate for shares of such series on the Auction Date for such Subsequent
Rate Period.

     If the Fund fails to pay in a timely manner to the Auction Agent the full
amount of any dividend on, or the redemption price of, any shares of any series
of MuniPreferred during any Rate Period thereof (other than any Special Rate
Period of more than 364 Rate Period Days or any Rate Period succeeding any
Special Rate Period of more than 364 Rate Period Days during which such a
failure occurred that has not been cured), and, prior to 12:00 Noon on the third
Business Day next succeeding the date on which such failure occurred, such
failure shall not have been cured or the Fund shall not have paid a late charge,
as described more fully in the Statement, no Auction will be held in respect of
shares of such series for the first Subsequent Rate Period thereof thereafter
(or for any Rate Period thereof thereafter to and including the Rate Period
during which such failure is so cured and such late charge so paid) (such late
charge to be paid only in the event Moody's is rating such shares at the time
the Fund cures such failure), and the dividend rate for shares of such series
for each such Subsequent Rate Period shall be a rate per annum equal to the
Maximum Rate for shares of such series on the Auction Date for such Subsequent
Rate Period (but with the prevailing rating for shares of such series, for
purposes of determining such Maximum Rate, being deemed to be "Below
'ba3'/BB-").

     If the Fund fails to pay in a timely manner to the Auction Agent the full
amount of any dividend on, or the redemption price of, any shares of any series
of MuniPreferred during a Special Rate Period thereof of more than 364 Rate
Period Days, or during any Rate Period thereof succeeding any Special Rate
Period of more than 364 Rate Period Days during which such a failure occurred
that has not been cured, and such failure shall not have been cured or the Fund
shall not have paid a late charge, as described more fully in the Statement, no
Auction will be held in respect of shares of such series for such Subsequent
Rate Period thereof (or for any Rate Period thereof thereafter to and including
the Rate Period during which such failure is so cured and such late charge so
paid) (such late charge to be paid only in the event Moody's is rating such
shares at the time the Fund cures such failure), and the dividend rate for
shares of such series for each such Subsequent Rate Period shall be a rate per
annum equal to the Maximum Rate for shares of such series on the Auction Date
for each such Subsequent Rate Period (but with the prevailing rating for shares
of such series, for purposes of determining such Maximum Rate, being deemed to
be "Below 'ba3'/BB-").

                                       17
<PAGE>   20

     A failure to pay dividends on or the redemption price of shares of any
series of MuniPreferred shall have been cured with respect to any Rate Period
thereof if, within the respective time periods described in the Statement, the
Fund shall have paid to the Auction Agent (a) all accumulated and unpaid
dividends on the shares of such series and (b) without duplication, the
redemption price for shares, if any, of such series for which notice of
redemption has been mailed by the Fund; provided, however, that the foregoing
clause (b) shall not apply to the Fund's failure to pay the redemption price in
respect of shares of MuniPreferred when the related notice of redemption
provides that redemption of such shares is subject to one or more conditions
precedent and any such condition precedent shall not have been satisfied at the
time or times and in the manner specified in such notice of redemption.

     Gross-up Payments.  Holders of shares of MuniPreferred are entitled to
receive, when, as and if declared by the Board, out of funds legally available
therefor in accordance with the Declaration of Trust, including the Statement,
and applicable law, dividends in an amount equal to the aggregate Gross-up
Payments in accordance with the following:

     If, in the case of any Minimum Rate Period or any Special Rate Period of 28
Rate Period Days or fewer, the Fund allocates any net capital gains or other
income taxable for Federal income tax purposes to a dividend paid on shares of
MuniPreferred without having given advance notice thereof to the Auction Agent
as described below under "The Auction -- Auction Procedures" (a "Taxable
Allocation") solely by reason of the fact that such allocation is made
retroactively as a result of the redemption of all or a portion of the
outstanding shares of MuniPreferred or the liquidation of the Fund, the Fund
will, prior to the end of the calendar year in which such dividend was paid,
provide notice thereof to the Auction Agent and direct the Fund's dividend
disbursing agent to send such notice with a Gross-up Payment to each holder of
shares (initially Cede & Co., as nominee of the Securities Depository) that was
entitled to such dividend payment during such calendar year at such holder's
address as the same appears or last appeared on the stock books of the Fund.

     If, in the case of any Special Rate Period of more than 28 Rate Period
Days, the Fund makes a Taxable Allocation to a dividend paid on shares of
MuniPreferred, the Fund shall, prior to the end of the calendar year in which
such dividend was paid, provide notice thereof to the Auction Agent and direct
the Fund's dividend disbursing agent to send such notice with a Gross-up Payment
to each holder of shares that was entitled to such dividend payment during such
calendar year at such holder's address as the same appears or last appeared on
the stock books of the Fund.

     A "Gross-up Payment" means payment to a holder of shares of MuniPreferred
of an amount which, when taken together with the aggregate amount of Taxable
Allocations made to such holder to which such Gross-up Payment relates, would
cause such holder's dividends in dollars (after Federal income tax consequences)
from the aggregate of such Taxable Allocations and the related Gross-up Payment
to be equal to the dollar amount of the dividends which would have been received
by such holder if the amount of the aggregate Taxable Allocations would have
been excludable from the gross income of such holder. Such Gross-up Payment
shall be calculated: (a) without consideration being given to the time value of
money; (b) assuming that no holder of shares of MuniPreferred is subject to the
Federal alternative minimum tax with respect to dividends received from the
Fund; and (c) assuming that each Taxable Allocation and each Gross-up Payment
(except to the extent such Gross-up Payment is designated as an exempt-interest
dividend under Section 852(b)(5) of the Internal Revenue Code or successor
provisions) would be taxable in the hands of each holder of shares of
MuniPreferred at the maximum marginal combined regular Federal and California
personal income tax rate applicable to ordinary income (taking into account the
Federal tax deductibility of state and local taxes paid or incurred) or net
capital gains, as applicable, or the maximum marginal regular Federal corporate
income tax rate applicable to ordinary income or net capital gains, as
applicable, whichever is greater, in effect at the time such Gross-up Payment is
made.

     Restrictions on Dividends and Other Distributions.  Except as otherwise
described herein, for so long as any shares of MuniPreferred are outstanding,
the Fund may not declare, pay or set apart for payment any dividend or other
distribution (other than a dividend or distribution paid in, or in options,
warrants or rights to subscribe for or purchase, its shares of Common Shares) in
respect of its Common Shares or call for

                                       18
<PAGE>   21

redemption, redeem, purchase or otherwise acquire for consideration any of
Common Shares (except by conversion into or exchange for shares of the Fund
ranking junior to the shares of MuniPreferred as to the payment of dividends and
the distribution of assets upon liquidation), unless (a) full cumulative
dividends on shares of each series of MuniPreferred through its most recently
ended Dividend Period shall have been paid or shall have been declared and
sufficient funds for the payment thereof deposited with the Auction Agent; (b)
the Fund shall have redeemed the full number of shares of MuniPreferred required
to be redeemed by any provision for mandatory redemption pertaining thereto; and
(c) immediately after such transaction the Discounted Value of the Fund's
portfolio would at least equal the MuniPreferred Basic Maintenance Amount in
accordance with guidelines of the rating agency or agencies then rating the
shares of MuniPreferred.

     Except as set forth in the next sentence, no dividends shall be declared or
paid or set apart for payment on the shares of any class or series of Fund
shares ranking, as to the payment of dividends, on a parity with shares of
MuniPreferred for any period unless full cumulative dividends have been or
contemporaneously are declared and paid on the shares of each series of
MuniPreferred through its most recent Dividend Payment Date. When dividends are
not paid in full upon the shares of each series of MuniPreferred through its
most recent Dividend Payment Date or upon the shares of any other class or
series of shares ranking on a parity as to the payment of dividends with shares
of MuniPreferred through their most recent respective dividend payment dates,
all dividends declared upon shares of MuniPreferred and any such other class or
series of shares ranking on a parity as to the payment of dividends with shares
of MuniPreferred shall be declared pro rata so that the amount of dividends
declared per share on shares of MuniPreferred and such other class or series of
shares shall in all cases bear to each other the same ratio that accumulated
dividends per share on the shares of MuniPreferred and such other class or
series of shares bear to each other.

     Designation of Special Rate Periods.  The Fund, at its option, may
designate any succeeding Subsequent Rate Period of shares of a series of
MuniPreferred as a Special Rate Period consisting of a specified number of Rate
Period Days evenly divisible by seven and not more than 1,820 (approximately 5
years), subject to certain adjustments. A designation of a Special Rate Period
shall be effective only if, among other things, (a) the Fund shall have given
certain notices to the Auction Agent, (b) an Auction for shares of such series
shall have been held on the Auction Date immediately preceding the first day of
such proposed Special Rate Period and Sufficient Clearing Bids for shares of
such series shall have existed in such Auction and (c) if the Fund shall have
mailed a notice of redemption with respect to any shares of such series, the
redemption price with respect to such shares shall have been deposited with the
Auction Agent.

REDEMPTION

     Mandatory Redemption.  In the event the Fund does not timely cure a failure
to maintain (a) a Discounted Value of its portfolio equal to the MuniPreferred
Basic Maintenance Amount or (b) the 1940 Act MuniPreferred Asset Coverage, in
each case in accordance with the requirements of the rating agency or agencies
then rating the shares of MuniPreferred, shares of MuniPreferred will be subject
to mandatory redemption on a date specified by the Board out of funds legally
available therefor in accordance with the Declaration of Trust, including the
Statement, and applicable law, at the redemption price of $25,000 per share plus
an amount equal to accumulated but unpaid dividends thereon (whether or not
earned or declared) to (but not including) the date fixed for redemption. Any
such redemption will be limited to the number of shares of MuniPreferred
necessary to restore the required Discounted Value or the 1940 Act MuniPreferred
Asset Coverage, as the case may be.

     Optional Redemption.  Shares of MuniPreferred of each series are
redeemable, at the option of the Fund:

          (a) as a whole or from time to time in part, on the second Business
     Day preceding any Dividend Payment Date for shares of such series, out of
     funds legally available therefor in accordance with the Declaration of
     Trust, including the Statement, and applicable law, at the redemption price
     of $25,000 per share plus an amount equal to accumulated but unpaid
     dividends thereon (whether or not earned or declared) to (but not
     including) the date fixed for redemption; provided, however, that (i)
     shares of such series may not be redeemed in part if after such partial
     redemption fewer than 500 shares of such series

                                       19
<PAGE>   22

     would remain outstanding and (ii) the notice establishing a Special Rate
     Period of shares of such series, as delivered to the Auction Agent and
     filed with the Secretary of the Fund, may provide that shares of such
     series shall not be redeemable during the whole or any part of such Special
     Rate Period (except as provided in clause (b) below) or shall be redeemable
     during the whole or any part of such Special Rate Period only upon payment
     of such redemption premium or premiums as shall be specified therein; and

          (b) as a whole but not in part, out of funds legally available
     therefor in accordance with the Declaration of Trust, including the
     Statement, and applicable law, on the first day following any Dividend
     Period thereof included in a Rate Period of more than 364 Rate Period Days
     if, on the date of determination of the Applicable Rate for shares of such
     series for such Rate Period, such Applicable Rate equaled or exceeded on
     such date of determination the Treasury Note Rate for such Rate Period, at
     a redemption price of $25,000 per share plus an amount equal to accumulated
     but unpaid dividends thereon (whether or not earned or declared) to (but
     not including) the date fixed for redemption.

     Notwithstanding the foregoing, if any dividends on shares of a series of
MuniPreferred (whether or not earned or declared) are in arrears, no shares of
such series shall be redeemed unless all outstanding shares of such series are
simultaneously redeemed, and the Fund shall not purchase or otherwise acquire
any shares of such series; provided, however, that the foregoing shall not
prevent the purchase or acquisition of all outstanding shares of such series
pursuant to the successful completion of an otherwise lawful purchase or
exchange offer made on the same terms to, and accepted by, holders of all
outstanding shares of such series.

LIQUIDATION

     Subject to the rights of holders of any series or class or classes of
shares ranking on a parity with shares of MuniPreferred with respect to the
distribution of assets upon liquidation of the Fund, upon a liquidation of the
Fund, whether voluntary or involuntary, the holders of shares of MuniPreferred
then outstanding will be entitled to receive and to be paid out of the assets of
the Fund available for distribution to its shareholders, before any payment or
distribution shall be made on the Common Shares, an amount equal to the
liquidation preference with respect to such shares ($25,000 per share), plus an
amount equal to all dividends thereon (whether or not earned or declared)
accumulated but unpaid to (but not including) the date of final distribution in
same-day funds, together with any applicable Gross-up Payments in connection
with the liquidation of the Fund. After the payment to the holders of shares of
MuniPreferred of the full preferential amounts provided for as described herein,
the holders of shares of MuniPreferred as such shall have no right or claim to
any of the remaining assets of the Fund.

     Neither the sale of all or substantially all the property or business of
the Fund, nor the merger or consolidation of the Fund into or with any other
corporation nor the merger or consolidation of any other corporation into or
with the Fund, shall be a liquidation, whether voluntary or involuntary, for the
purposes of the foregoing paragraph.

RATING AGENCY GUIDELINES AND ASSET COVERAGE

     The Fund is required under Moody's and S&P guidelines to maintain assets
having in the aggregate a Discounted Value at least equal to the MuniPreferred
Basic Maintenance Amount. Moody's and S&P have each established separate
guidelines for determining Discounted Value. To the extent any particular
portfolio holding does not satisfy the applicable rating agency's guidelines,
all or a portion of such holding's value will not be included in the calculation
of Discounted Value (as defined by such rating agency). The Moody's and S&P
guidelines do not impose any limitations on the percentage of the Fund's assets
that may be invested in holdings not eligible for inclusion in the calculation
of the Discounted Value of the Fund's portfolio. The amount of such assets
included in the portfolio at any time may vary depending upon the rating,
diversification and other characteristics of the eligible assets included in the
portfolio, although it is not anticipated that in the normal course of business
the value of such assets would exceed 20% of the Fund's total assets. The
MuniPreferred Basic Maintenance Amount includes the sum of (a) the aggregate
liquidation preference of shares of MuniPreferred then outstanding and (b)
certain accrued and projected payment obligations of the Fund.

                                       20
<PAGE>   23


     The Fund is also required under rating agency guidelines to maintain, with
respect to shares of MuniPreferred, as of the last Business Day of each month in
which any such shares are outstanding, asset coverage of at least 200% with
respect to senior securities which are shares, including MuniPreferred (or such
other asset coverage as may in the future be specified in or under the 1940 Act
as the minimum asset coverage for senior securities which are shares of a
closed-end investment company as a condition of declaring dividends on its
common shares) ("1940 Act MuniPreferred Asset Coverage"). Based on the
composition of the portfolio of the Fund and market conditions as of June 28,
1999, 1940 Act MuniPreferred Asset Coverage with respect to shares of
MuniPreferred, assuming the issuance on the date thereof of all shares of
MuniPreferred offered hereby and giving effect to the deduction of sales load
and offering costs related thereto estimated at $1,786,260, would have been
computed as follows:



<TABLE>
<C>                                                          <C>   <S>               <C>   <C>
           Value of Fund assets less liabilities
            not constituting senior securities                     $485,489,877
- -----------------------------------------------------------   =    ---------------    =     286%
     Senior securities representing indebtedness plus              $170,000,000
     liquidation value of the shares of MuniPreferred
</TABLE>


     In the event the Fund does not timely cure a failure to maintain (a) a
Discounted Value of its portfolio equal to the MuniPreferred Basic Maintenance
Amount or (b) the 1940 Act MuniPreferred Asset Coverage, in each case in
accordance with the requirements of the rating agency or agencies then rating
the shares of MuniPreferred, the Fund will be required to redeem shares of
MuniPreferred as described under "Redemption -- Mandatory Redemption" above.

     The Fund may, but is not required to, adopt any modifications to the
guidelines that may hereafter be established by Moody's or S&P. Failure to adopt
any such modifications, however, may result in a change in the ratings described
above or a withdrawal of ratings altogether. In addition, any rating agency
providing a rating for the shares of MuniPreferred may, at any time, change or
withdraw any such rating. The Board may, without shareholder approval, amend,
alter or repeal any or all of the definitions and related provisions which have
been adopted by the Fund pursuant to the rating agency guidelines in the event
the Fund receives written confirmation from Moody's or S&P, or both, as
appropriate, that any such amendment, alteration or repeal would not impair the
ratings then assigned by Moody's and S&P to shares of MuniPreferred.


     As recently described by Moody's and S&P, a preferred stock rating is an
assessment of the capacity and willingness of an issuer to pay preferred stock
obligations. The ratings on the shares of MuniPreferred are not recommendations
to purchase, hold or sell those shares, inasmuch as the ratings do not comment
as to market price or suitability for a particular investor. The rating agency
guidelines described above also do not address the likelihood that an owner of
shares of MuniPreferred will be able to sell such shares in an Auction or
otherwise. The ratings are based on current information furnished to Moody's and
S&P by the Fund and the Adviser and information obtained from other sources. The
ratings may be changed, suspended or withdrawn as a result of changes in, or the
unavailability of, such information. The Common Shares have not been rated by a
nationally recognized statistical rating organization.


     A rating agency's guidelines will apply to shares of MuniPreferred only so
long as such rating agency is rating such shares. The Fund will pay certain fees
to Moody's or S&P, or both, for rating shares of MuniPreferred.

VOTING RIGHTS

     Except as otherwise provided in this Prospectus and in the Statement of
Additional Information or as otherwise required by law, holders of shares of
MuniPreferred will have equal voting rights with holders of Common Shares and
any Preferred Shares (one vote per share) and will vote together with holders of
Common Shares and any Preferred Shares as a single class.

     In connection with the election of the Fund's trustees, holders of
outstanding Preferred Shares, including MuniPreferred, voting as a separate
class, are entitled to elect two of the Fund's trustees, and the remaining
trustees are elected by holders of Common Shares and Preferred Shares, including
MuniPreferred, voting together as a single class. In addition, if at any time
dividends (whether or not earned or declared) on outstanding Preferred Shares,
including MuniPreferred, shall be due and unpaid in an amount equal to two
                                       21
<PAGE>   24

full years' dividends thereon, and sufficient cash or specified securities shall
not have been deposited with the Auction Agent for the payment of such
dividends, then, as the sole remedy of holders of outstanding Preferred Shares,
including MuniPreferred, the number of trustees constituting the Board shall be
automatically increased by the smallest number that, when added to the two
trustees elected exclusively by the holders of Preferred Shares, including
shares of MuniPreferred, as described above, would constitute a majority of the
Board as so increased by such smallest number, and at a special meeting of
shareholders which will be called and held as soon as practicable, and at all
subsequent meetings at which trustees are to be elected, the holders of
Preferred Shares, including shares of MuniPreferred, voting as a separate class,
will be entitled to elect the smallest number of additional trustees that,
together with the two trustees which such holders will be in any event entitled
to elect, constitutes a majority of the total number of trustees of the Fund as
so increased. The terms of office of the persons who are trustees at the time of
that election will continue. If the Fund thereafter shall pay, or declare and
set apart for payment, in full, all dividends payable on all outstanding
Preferred Shares, including MuniPreferred, the voting rights stated in the
second preceding sentence shall cease, and the terms of office of all of the
additional trustees elected by the holders of Preferred Shares, including
MuniPreferred (but not of the trustees with respect to whose election the
holders of Common Shares were entitled to vote or the two trustees the holders
of Preferred Shares have the right to elect in any event), will terminate
automatically.

     So long as any shares of MuniPreferred are outstanding, the Fund will not,
without the affirmative vote or consent of the holders of at least a majority of
the shares of MuniPreferred outstanding at the time (voting as a separate
class):

          (a) authorize, create or issue any class or series of stock ranking
     prior to or on a parity with shares of MuniPreferred with respect to the
     payment of dividends or the distribution of assets upon liquidation, or
     authorize, create or issue additional shares of any series of MuniPreferred
     (except that, notwithstanding the foregoing, but subject to certain rating
     agency approvals, the Board, without the vote or consent of the holders of
     MuniPreferred, may from time to time authorize and create, and the Fund may
     from time to time issue, additional shares of any series of MuniPreferred
     or classes or series of Preferred Shares ranking on a parity with shares of
     MuniPreferred with respect to the payment of dividends and the distribution
     of assets upon liquidation; provided, however, that if Moody's or S&P is
     not then rating the shares of MuniPreferred, the aggregate liquidation
     preference of all Preferred Stock of the Fund outstanding after any such
     issuance, exclusive of accumulated and unpaid dividends, may not exceed
     $          or

          (b) amend, alter or repeal the provisions of the Declaration of Trust,
     including the Statement, whether by merger, consolidation or otherwise, so
     as to affect any preference, right or power of such shares of MuniPreferred
     or the holders thereof;

provided, however, that (i) none of the actions permitted by the exception to
(a) above will be deemed to affect such preferences, rights or powers, (ii) a
division of a share of MuniPreferred will be deemed to affect such preferences,
rights or powers only if the terms of such division adversely affect the holders
of shares of MuniPreferred and (iii) the authorization, creation and issuance of
classes or series of stock ranking junior to shares of MuniPreferred with
respect to the payment of dividends and the distribution of assets upon
liquidation will be deemed to affect such preferences, rights or powers only if
Moody's or S&P is then rating shares of MuniPreferred and such issuance would,
at the time thereof, cause the Fund not to satisfy the 1940 Act MuniPreferred
Asset Coverage or the MuniPreferred Basic Maintenance Amount. So long as any
shares of MuniPreferred are outstanding, the Fund shall not, without the
affirmative vote or consent of the holders of at least 66 2/3% of the shares of
MuniPreferred outstanding at the time, voting as a separate class, file a
voluntary application for relief under Federal bankruptcy law or any similar
application under state law for so long as the Fund is solvent and does not
foresee becoming insolvent.

     If any action set forth above would adversely affect the rights of one or
more series (the "Affected Series") of MuniPreferred in a manner different from
any other series of MuniPreferred, the Fund will not approve any such action
without the affirmative vote or consent of the Holders of at least a majority of
the shares of each such Affected Series outstanding at the time, in person or by
proxy, either in writing or at a

                                       22
<PAGE>   25

meeting (each such Affected Series voting as a separate class). The Board may,
without shareholder approval, amend, alter or repeal any or all of the
definitions and related provisions which have been adopted by the Fund pursuant
to the rating agency guidelines in the event the Fund receives written
confirmation from Moody's or S&P, or both, as appropriate, that any such
amendment, alteration or repeal would not impair the ratings then assigned by
Moody's and S&P to shares of MuniPreferred. Unless a higher percentage is
provided for in the Declaration of Trust (see "Certain Provisions in the
Declaration of Trust"), (A) the affirmative vote of the holders of at least a
majority of the Preferred Shares, including MuniPreferred, outstanding at the
time, voting as a separate class, shall be required to approve any conversion of
the Fund from a closed-end to an open-end investment company and (B) the
affirmative vote of the holders of a majority of the outstanding Preferred
Shares, including MuniPreferred, 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. The affirmative vote of the holders of a
majority of the outstanding Preferred Shares, including MuniPreferred, voting as
a separate class, shall be required to approve any action not described in the
preceding sentence requiring a vote of security holders of the Fund under
Section 13(a) of the 1940 Act.

     The foregoing voting provisions will not apply with respect to shares of
MuniPreferred if, at or prior to the time when a vote is required, such shares
shall have been (i) redeemed or (ii) called for redemption and sufficient funds
shall have been deposited in trust to effect such redemption.

                                  THE AUCTION

GENERAL

     The Statement provides that, except as otherwise described herein, the
Applicable Rate for the shares of each series of MuniPreferred, including the
shares of New MuniPreferred to be issued in this offering, for each Rate Period
of shares of such series after the Initial Rate Period thereof shall be equal to
the rate per annum that the Auction Agent advises has resulted on the Business
Day preceding the first day of such Subsequent Rate Period (an "Auction Date")
from implementation of the auction procedures (the "Auction Procedures") set
forth in the Statement and summarized below, in which persons determine to hold
or offer to sell or, based on dividend rates bid by them, offer to purchase or
sell shares of such series. Each periodic implementation of the Auction
Procedures is referred to herein as an "Auction." See the Statement for a more
complete description of the Auction process.

     Auction Agency Agreement. The Fund has entered into an Auction Agency
Agreement (the "Auction Agency Agreement") with the Auction Agent (currently,
Bankers Trust Company) which provides, among other things, that the Auction
Agent will follow the Auction Procedures for purposes of determining the
Applicable Rate for shares of each series of MuniPreferred so long as the
Applicable Rate for shares of such series is to be based on the results of an
Auction.

     The Auction Agent may terminate the Auction Agency Agreement upon notice to
the Fund on a date no earlier than 45 days after such notice. If the Auction
Agent should resign, the Fund will use its best efforts to enter into an
agreement with a successor Auction Agent containing substantially the same terms
and conditions as the Auction Agency Agreement. The Fund may remove the Auction
Agent provided that prior to such removal the Fund shall have entered into such
an agreement with a successor Auction Agent.

     Broker-Dealer Agreements. Each Auction requires the participation of one or
more Broker-Dealers. The Auction Agent has entered into agreements
(collectively, the "Broker-Dealer Agreements") with several Broker-Dealers
selected by the Fund, which provide for the participation of those
Broker-Dealers in Auctions for shares of MuniPreferred.

     The Auction Agent after each Auction for shares of MuniPreferred will pay
to each Broker-Dealer, from funds provided by the Fund, a service charge at the
annual rate of 1/4 of 1% in the case of any Auction immediately preceding a Rate
Period of less than one year, or a percentage agreed to by the Fund and the
Broker-Dealers in the case of any Auction immediately preceding a Rate Period of
one year or longer, of the purchase price of shares of MuniPreferred placed by
such Broker-Dealer at such Auction. For the purposes of the preceding sentence,
shares of MuniPreferred will be placed by a Broker-Dealer if such shares were
(a) the
                                       23
<PAGE>   26

subject of Hold Orders deemed to have been submitted to the Auction Agent by the
Broker-Dealer and were acquired by such Broker-Dealer for its own account or
were acquired by such Broker-Dealer for its customers who are Beneficial Owners
or (b) the subject of an Order submitted by such Broker-Dealer that is (i) a
Submitted Bid of an Existing Holder that resulted in such Existing Holder
continuing to hold such shares as a result of the Auction or (ii) a Submitted
Bid of a Potential Holder that resulted in such Potential Holder purchasing such
shares as a result of the Auction or (iii) a valid Hold Order.

     The Fund may request the Auction Agent to terminate one or more
Broker-Dealer Agreements at any time, provided that at least one Broker-Dealer
Agreement is in effect after such termination.

AUCTION PROCEDURES

     Prior to the Submission Deadline on each Auction Date for shares of a
series of MuniPreferred, each customer of a Broker-Dealer who is listed on the
records of that Broker-Dealer (or, if applicable, the Auction Agent) as a holder
of shares of such series (a "Beneficial Owner") may submit orders ("Orders")
with respect to shares of such series to that Broker-Dealer as follows:

     - Hold Order -- indicating its desire to hold shares of such series without
       regard to the Applicable Rate for shares of such series for the next Rate
       Period thereof.

     - Bid -- indicating its desire to sell shares of such series at $25,000 per
      share if the Applicable Rate for shares of such series for the next Rate
      Period thereof is less than the rate specified in such Bid (also known as
      a hold-at-a-rate order).

     - Sell Order -- indicating its desire to sell shares of such series at
      $25,000 per share without regard to the Applicable Rate for shares of such
      series for the next Rate Period thereof.

     A Beneficial Owner may submit different types of Orders to its
Broker-Dealer with respect to shares of a series of MuniPreferred then held by
such Beneficial Owner. A Beneficial Owner of shares of such series that submits
a Bid with respect to shares of such series to its Broker-Dealer having a rate
higher than the Maximum Rate for shares of such series on the Auction Date
therefor will be treated as having submitted a Sell Order with respect to such
shares to its Broker-Dealer. A Beneficial Owner of shares of such series that
fails to submit an Order with respect to such shares to its Broker-Dealer will
be deemed to have submitted a Hold Order with respect to such shares of such
series to its Broker-Dealer; provided however, that if a Beneficial Owner of
shares of such series fails to submit an Order with respect to shares of such
series to its Broker-Dealer for an Auction relating to a Rate Period of more
than 28 Rate Period Days, such Beneficial Owner will be deemed to have submitted
a Sell Order with respect to such shares to its Broker-Dealer. A Sell Order
shall constitute an irrevocable offer to sell the shares of MuniPreferred
subject thereto. A Beneficial Owner that offers to become the Beneficial Owner
of additional shares of MuniPreferred is, for purposes of such offer, a
Potential Beneficial Owner as discussed below.

     A customer of a Broker-Dealer that is not a Beneficial Owner of shares of a
series of MuniPreferred but that wishes to purchase shares of such series, or
that is a Beneficial Owner of shares of such series that wishes to purchase
additional shares of such series (in each case, a "Potential Beneficial Owner"),
may submit Bids to its Broker-Dealer in which it offers to purchase shares of
such series at $25,000 per share if the Applicable Rate for shares of such
series for the next Rate Period thereof is not less than the rate specified in
such Bid. A Bid placed by a Potential Beneficial Owner of shares of such series
specifying a rate higher than the Maximum Rate for shares of such series on the
Auction Date therefor will not be accepted.

     The Broker-Dealers in turn will submit the Orders of their respective
customers who are Beneficial Owners and Potential Beneficial Owners to the
Auction Agent, designating themselves (unless otherwise permitted by the Fund)
as Existing Holders in respect of shares subject to Orders submitted or deemed
submitted to them by Beneficial Owners and as Potential Holders in respect of
shares subject to Orders submitted to them by Potential Beneficial Owners.
However, neither the Fund nor the Auction Agent will be responsible for a
Broker-Dealer's failure to comply with the foregoing. Any Order placed with the
Auction Agent by a Broker-Dealer as or on behalf of an Existing Holder or a
Potential Holder will be treated in the same manner as an Order placed with a
Broker-Dealer by a Beneficial Owner or Potential Beneficial Owner.
                                       24
<PAGE>   27

Similarly, any failure by a Broker-Dealer to submit to the Auction Agent an
Order in respect of any shares of MuniPreferred held by it or customers who are
Beneficial Owners will be treated in the same manner as a Beneficial Owner's
failure to submit to its Broker-Dealer an Order in respect of shares of
MuniPreferred held by it. A Broker-Dealer may also submit Orders to the Auction
Agent for its own account as an Existing Holder or Potential Holder, provided it
is not an affiliate of the Fund.

     If Sufficient Clearing Bids for shares of a series of MuniPreferred exist
(that is, the number of shares of such series subject to Bids submitted or
deemed submitted to the Auction Agent by Broker-Dealers as or on behalf of
Potential Holders with rates equal to or lower than the Maximum Rate for shares
of such series is at least equal to the number of shares of such series subject
to Sell Orders submitted or deemed submitted to the Auction Agent by
Broker-Dealers as or on behalf of Existing Holders), the Applicable Rate for
shares of such series for the next succeeding Rate Period thereof will be the
lowest rate specified in the Submitted Bids which, taking into account such rate
and all lower rates bid by Broker-Dealers as or on behalf of Existing Holders
and Potential Holders, would result in Existing Holders and Potential Holders
owning a the shares of such series available for purchase in the Auction. If
Sufficient Clearing Bids for shares of a series of MuniPreferred do not exist,
the Applicable Rate for shares of such series for the next succeeding Rate
Period thereof will be the Maximum Rate for shares of such series on the Auction
Date therefor. In such event, Beneficial Owners of shares of such series that
have submitted or are deemed to have submitted Sell Orders may not be able to
sell in such Auction all shares of such series subject to such Sell Orders. If
Broker-Dealers submit or are deemed to have submitted to the Auction Agent Hold
Orders with respect to all Existing Holders of shares of a series of
MuniPreferred, the Applicable Rate for shares of such series for the next
succeeding Rate Period thereof will be the All Hold Order Rate.

     The Auction Procedures include a pro rata allocation of shares for purchase
and sale, which may result in an Existing Holder continuing to hold or selling,
or a Potential Holder purchasing, a number of shares of a series of
MuniPreferred that is fewer than the number of shares of such series specified
in its Order. To the extent the allocation procedures have that result,
Broker-Dealers that have designated themselves as Existing Holders or Potential
Holders in respect of customer Orders will be required to make appropriate pro
rata allocations among their respective customers.

     Settlement of purchases and sales will be made on the next Business Day
(also a Dividend Payment Date) after the Auction Date through the Securities
Depository. Purchasers will make payment through their Agent Members in same-day
funds to the Securities Depository against delivery to their respective Agent
Members. The Securities Depository will make payment to the sellers' Agent
Members in accordance with the Securities Depository's normal procedures, which
now provide for payment against delivery by their Agent Members in same-day
funds.

     The Auctions for shares of MuniPreferred, Series TH and Series F will
normally be held every      and      , respectively, and each Subsequent Rate
Period of shares of such series will normally begin on the following      and
     , respectively.

     Whenever the Fund intends to include any net capital gains or other income
taxable for Federal income tax purposes in any dividend on shares of
MuniPreferred, the Fund shall, in the case of Minimum Rate Periods or Special
Rate Periods of 28 Rate Period Days or fewer, and may, in the case of any other
Special Rate Period, notify the Auction Agent of the amount to be so included
not later than the Dividend Payment Date next preceding the Auction Date on
which the Applicable Rate for such dividend is to be established. Whenever the
Auction Agent receives such notice from the Fund, it will be required in turn to
notify each Broker-Dealer, who, on or prior to such Auction Date, in accordance
with its Broker-Dealer Agreement, will be required to notify its customers who
are Beneficial Owners and Potential Beneficial Owners believed by it to be
interested in submitting an Order in the Auction to be held on such Auction
Date.

SECONDARY MARKET TRADING AND TRANSFER OF MUNIPREFERRED

     The Broker-Dealers are expected to maintain a secondary trading market in
shares of MuniPreferred outside of Auctions, but are not obligated to do so, and
may discontinue such activity at any time. There can be no assurance that such
secondary trading market in shares of MuniPreferred will provide owners with
                                       25
<PAGE>   28

liquidity of investment. The shares of MuniPreferred are not registered on any
stock exchange or on the Nasdaq Stock Market. Investors who purchase shares in
an Auction for a Special Rate Period should note that because the dividend rate
on such shares will be fixed for the length of such Rate Period, the value of
the shares may fluctuate in response to changes in interest rates, and may be
more or less than their original cost if sold on the open market in advance of
the next Auction therefor, depending upon market conditions.

     A Beneficial Owner or an Existing Holder may sell, transfer or otherwise
dispose of shares of MuniPreferred only in whole shares and only (1) pursuant to
a Bid or Sell Order placed with the Auction Agent in accordance with the Auction
Procedures, (2) to a Broker-Dealer or (3) to such other persons as may be
permitted by the Fund; provided, however, that (a) a sale, transfer or other
disposition of shares of MuniPreferred from a customer of a Broker-Dealer who is
listed on the records of that Broker-Dealer as the holder of such shares to that
Broker-Dealer or another customer of that Broker-Dealer shall not be deemed to
be a sale, transfer or other disposition for purposes of the foregoing if such
Broker-Dealer remains the Existing Holder of the shares so sold, transferred or
disposed of immediately after such sale, transfer or disposition and (b) in the
case of all transfers other than pursuant to Auctions, the Broker-Dealer (or
other person, if permitted by the Fund) to whom such transfer is made shall
advise the Auction Agent of such transfer.

                          DESCRIPTION OF COMMON SHARES

     In addition to the shares of MuniPreferred, the Declaration authorizes the
issuance of an unlimited number of Common Shares, par value $.01 per share. All
Common Shares have equal rights to the payment of dividends and the distribution
of assets upon liquidation. Common Shares are fully paid and, subject to matters
discussed in "Certain Provisions in the Declaration of Trust," non-assessable
when issued and have no preemptive, conversion rights or rights to cumulative
voting. So long as any shares of MuniPreferred are outstanding, the Fund is not
permitted to declare dividends on, make any distributions with respect to, or
purchase its Common Shares unless, at the time of such declaration, distribution
or purchase, as applicable (and after giving effect thereto), all accumulated
dividends on Preferred Shares have been paid.

                 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 of the obligations of the Fund. Thus, the
risk of a shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which the Fund would be unable to meet
its obligations. The Fund believes that the likelihood of such circumstances is
very remote.

     The Declaration includes provisions that could limit the ability of other
entities or persons to acquire control of the Fund or to convert the Fund to
open-end status. Specifically, the Declaration requires a vote by holders of at
least two-thirds of the Common Shares and MuniPreferred Shares, voting together
as a single class, except as described below, to authorize (1) a conversion of
the Fund from a closed-end to an open-end investment company, (2) a merger or
consolidation of the Fund, or a series or class of the Fund, with any
corporation, association, trust or other organization or a reorganization or
recapitalization of the Fund, or a series or class of the Fund, (3) a sale,
lease or transfer of all or substantially all of the Fund's assets (other than
in the regular course of the Fund's investment activities), (4) in certain
circumstances, a termination of Fund, or a series or class of the Fund, or (5)
removal of trustees, and then only for cause, unless, with respect to (1)
through (4), such transaction has already been authorized by the affirmative
vote of two-thirds of the total number of trustees fixed in accordance with the
Declaration or the By-laws, in which case the affirmative vote of the holders of
at least a majority of the Fund's Common Shares and MuniPreferred Shares
outstanding at the time, voting together as a single class, is required,
provided, however, that where only a particular class or series is affected (or,
in the case of removing a trustee, when the trustee has been elected by only one
class), only the required vote by the applicable class or series will be
required. None of the foregoing provisions may
                                       26
<PAGE>   29

be amended except by the vote of at least two-thirds of the Common Shares and
MuniPreferred Shares, voting together as a single class. In the case of the
conversion of the Fund to an open-end investment company, or in the case of any
of the foregoing transactions constituting a plan of reorganization which
adversely affects the holders of MuniPreferred Shares, the action in question
will also require the affirmative vote of the holders of at least two-thirds of
the Fund's MuniPreferred Shares outstanding at the time, voting as a separate
class, or, if such action has been authorized by the affirmative vote of
two-thirds of the total number of trustees fixed in accordance with the
Declaration or the By-laws, the affirmative vote of the holders of at least a
majority of the Fund's MuniPreferred Shares outstanding at the time, voting as a
separate class. The votes required to approve the conversion of the Fund from a
closed-end to an open-end investment company or to approve transactions
constituting a plan of reorganization which adversely affects the holders of
MuniPreferred Shares are higher than those required by the 1940 Act. The Board
of Trustees believes that the provisions of the Declaration relating to such
higher votes are in the best interest of the Fund and its shareholders. See the
Statement of Additional Information under "Certain Provisions in the Declaration
of Trust."

     Reference should be made to the Declaration on file with the Securities and
Exchange Commission for the full text of these provisions.

            REPURCHASE OF COMMON 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 conditions and other factors. Because shares of closed-end
investment companies may frequently trade at prices lower than net asset value,
the Fund's Board of Trustees has currently determined that, at least annually,
it will consider action that might be taken to reduce or eliminate any material
discount from net asset value in respect of Common Shares, which may include the
repurchase of such shares in the open market or in private transactions, the
making of a tender offer for such shares at net asset value, or the conversion
of the Fund to an open-end investment company. The Fund cannot assure you that
its Board of Trustees will decide to take any of these actions, or that share
repurchases or tender offers will actually reduce market discount.


     If the Fund converted to an open-end company, it would be required to
redeem all MuniPreferred shares then outstanding (requiring in turn that it
liquidate a portion of its investment portfolio), and the Fund's Common Shares
would no longer be listed on the New York Stock Exchange. In contrast to a
closed-end investment company, shareholders of an open-end investment company
may require the company to redeem their shares at any time (except in certain
circumstances as authorized by or under the 1940 Act) at their net asset value,
less any redemption charge that is in effect at the time of redemption. See the
Statement of Additional Information under "Certain Provisions in the Declaration
of Trust" for a discussion of the voting requirements applicable to the
conversion of the Fund to an open-end company.


     Before deciding whether to take any action if the Common Shares trade below
net asset value, the Board would consider all relevant factors, including the
extent and duration of the discount, the liquidity of the Fund's portfolio, the
impact of any action that might be taken on the Fund or its shareholders, and
market considerations. Based on these considerations, even if the Fund's shares
should trade at a discount, the Board of Trustees may determine that, in the
interest of the Fund and its shareholders, no action should be taken. See the
Statement of Additional Information under "Repurchase of Fund Shares; Conversion
to Open-End Fund" for a further discussion of possible action to reduce or
eliminate such discount to net asset value.

                                       27
<PAGE>   30

                                  TAX MATTERS

FEDERAL INCOME TAX MATTERS


     The Fund intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), and
intends to distribute substantially all of its net income and gains to its
shareholders. Therefore, it is not expected that the Fund will be subject to any
Federal income tax. Substantially all of the Fund's dividends to the Common
Shareholders and MuniPreferred shareholders will qualify as "exempt-interest
dividends." A shareholder treats an exempt-interest dividend as interest on
state and local bonds exempt from regular Federal income tax. Some or all of an
exempt-interest dividend, however, may be subject to Federal alternative minimum
tax imposed on the shareholder. Different Federal alternative tax rules apply to
individuals and to corporations. In addition to exempt-interest dividends, the
Fund also may distribute to its shareholders amounts that are treated as
long-term capital gain or ordinary income. The Fund will allocate distributions
to shareholders that are treated as tax-exempt interest and as long-term capital
gain and ordinary income, if any, proportionately among the Common Shares and
MuniPreferred shares. The Fund intends to notify MuniPreferred shareholders in
advance if it will allocate to them income that is not exempt from regular
Federal income tax. In certain circumstances the Fund will make payments to
MuniPreferred shareholders to offset the tax effects of the taxable
distribution. See "Description of MuniPreferred -- Dividends and Dividend
Periods -- Gross-Up Payments." The sale or other disposition of Common Shares or
shares of MuniPreferred of the Fund will normally result in capital gain or loss
to shareholders. Present law taxes both long-term and short-term capital gains
of corporations at the rates applicable to ordinary income. For non-corporate
taxpayers, under current law short-term capital gains and ordinary income will
be taxed at a maximum rate of 39.6% while long-term capital gains will generally
be taxed at a maximum rate of 20%. Because of certain limitations on itemized
deductions and the deduction for personal exemptions applicable to higher income
taxpayers, the effective rate of tax may be higher in certain circumstances.
Losses realized by a shareholder on the sale or exchange of shares of the Fund
held for six months or less are disallowed to the extent of any distribution of
exempt-interest dividends received with respect to such shares, and, if not
disallowed, such losses are treated as long-term capital losses to the extent of
any distribution of long-term capital gain received with respect to such shares.
A shareholder's holding period is suspended for any periods during which the
shareholder's risk of loss is diminished as a result of holding one or more
other positions in substantially similar or related property, or through certain
options or short sales. Any loss realized on a sale or exchange of shares of the
Fund will be disallowed to the extent those shares of the Fund are replaced by
other shares within a period of 61 days beginning 30 days before and ending 30
days after the date of disposition of the original shares. In that event, the
basis of the replacement shares of the Fund will be adjusted to reflect the
disallowed loss. The Statement of Additional Information contains a more
detailed summary of the Federal tax rules that apply to the Fund and its
shareholders. Legislative, judicial or administrative action may change the tax
rules that apply to the Fund or its shareholders and any such change may be
retroactive. You should consult with your tax adviser about Federal income tax
matters.


CALIFORNIA TAX MATTERS


     The Fund's regular monthly dividends will not be subject to California
personal income taxes to the extent they are paid out of income earned on
obligations that, when held by individuals, pay interest that is exempt from
taxation by California under California law (e.g., obligations of California and
its political subdivisions) or federal laws, 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 taxes. The Fund
expects to earn no or only a minimal amount of such non-exempt income. If you
are otherwise subject to California personal income tax, you will be subject to
such taxes to the extent the Fund distributes any taxable income or realized
capital gains, or if you sell or exchange MuniPreferred shares and realize a
capital gain on the transaction.


     Please refer to the Statement of Additional Information for more detailed
information. You are urged to consult your tax adviser.

                                       28
<PAGE>   31

   CUSTODIAN, TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REDEMPTION AGENT

     The custodian of the assets of the Fund is The Chase Manhattan Bank, 4 New
York Plaza, New York, NY 10004-2413. The Custodian performs custodial, fund
accounting and portfolio accounting services. The Fund's transfer, shareholder
services and dividend paying agent is Chase Global Funds Services Company, P.O.
Box 5186, Bowling Green Station, New York, NY 10275-0672 (regular mail) or 4 New
York Plaza, 6th Floor, New York, NY 10004 (for overnight courier). Bankers Trust
Company, 4 Albany Street, New York, New York 10006, a banking corporation
organized under the laws of New York, is the Auction Agent with respect to
shares of MuniPreferred and acts as transfer agent, registrar, dividend
disbursing agent, and redemption agent with respect to such shares.

                                  UNDERWRITING

     Subject to the terms and conditions of 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 MuniPreferred
shares set forth opposite the name of such underwriter.


<TABLE>
<CAPTION>
                                                           NUMBER OF SHARES
                                                          -------------------
                          NAME                            SERIES TH  SERIES F
                          ----                            ---------  --------
<S>                                                       <C>        <C>
Salomon Smith Barney Inc. ..............................
A.G. Edwards & Sons, Inc. ..............................
Deutsche Bank Securities Inc. ..........................
Goldman, Sachs & Co. ...................................
John Nuveen & Co. Incorporated..........................
PaineWebber Incorporated................................
Prudential Securities Incorporated......................
          Total.........................................
</TABLE>


     The underwriting agreement provides that the obligations of the
underwriters to purchase the shares included in this offering are subject to the
approval of certain legal matters by counsel and to certain other conditions.
The underwriters are obligated to purchase all the MuniPreferred shares if they
purchase any of the shares.


     The underwriters, for whom Salomon Smith Barney is acting as
representative, propose to offer some of the shares directly to the public at
the public offering price set forth on the cover page of this Prospectus and
some of the shares to certain dealers at the public offering price less a
concession not in excess of $     per share. The sales load the fund will pay of
$     per share is equal to      % of the initial offering price. The
underwriters may allow, and such dealers may reallow, a concession not in excess
of $     per share on sales to certain other dealers. After the initial public
offering, the underwriters may change the public offering price, and the
concession. Investors must pay for any MuniPreferred shares purchased in the
initial public offering on or before             , 1999.


     The Fund anticipates that the underwriters may from time to time act as
brokers or dealers in executing the Fund's portfolio transactions after they
have ceased to be underwriters. The underwriters are active underwriters of, and
dealers in, securities and act as market makes in a number of such securities,
and therefore can be expected to engage in portfolio transactions with the Fund,
John Nuveen & Co. Incorporated may engage in these transactions only in
compliance with the 1940 Act.

     The Fund anticipates that the underwriters or one of their respective
affiliates may, from time to time, act in auctions as Broker-Dealers as set
forth under "The Auction."

     John Nuveen & Co. Incorporated, one of the underwriters, is the parent
company of Nuveen Advisory.

     The Fund and Nuveen Advisory have agreed to indemnify the underwriters
against certain liabilities, including liabilities arising under the 1933 Act,
or to contribute payments to the underwriters may be required to make for any of
those liabilities.

                                       29
<PAGE>   32

                                 LEGAL OPINIONS

     Certain legal matters in connection with the shares of MuniPreferred
offered hereby will be passed upon for the Fund by Vedder, Price, Kaufman &
Kammholz, Chicago, Illinois, and for the Underwriters by Skadden, Arps, Slate,
Meagher & Flom LLP, Boston, Massachusetts. Vedder, Price, Kaufman & Kammholz
will rely as to certain matters of Massachusetts law on the opinion of Bingham
Dana, LLP, Boston, Massachusetts and as to certain matters of California law on
the opinion of Orrick, Herrington & Sutcliffe LLP, San Francisco, California.

                             AVAILABLE INFORMATION

     The Fund is subject to the informational requirements of the Securities
Exchange Act of 1934, the 1940 Act and are required to file reports, proxy
statements and other information with the SEC. These documents can be inspected
and copied for a fee at the SEC's public reference room, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the SEC's New York Regional Office, Seven World
Trade Center, New York, New York 10048 and Chicago Regional Office, Suite 1400,
Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois
60661-2511. Reports, proxy statements, and other information about the Funds can
be inspected at the offices of the New York Stock Exchange, 20 Broad Street, New
York, New York 10005.

     This Prospectus does not contain all of the information in the Fund's
registration statement, including amendments, exhibits, and schedules.
Statements in this Prospectus about the contents of any contract or other
document are not necessarily complete and in each instance reference is made to
the copy of the contract or other document filed as an exhibit to the
registration statement, each such statement being qualified in all respects by
this reference.

     Additional information about the Fund and MuniPreferred shares can be found
in the Fund's Registration Statement (including amendments, exhibits, and
schedules) on Form N-2 filed with the SEC. The SEC maintains a web site
(http://www.sec.gov) that contains each Fund's Registration Statement, other
documents incorporated by reference, and other information the Fund has filed
electronically with the Commission, including proxy statements and reports filed
under the Securities Exchange Act of 1934. Additional information may be found
on the Internet at http://www.nuveen.com.

               SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

     Certain statements in this Prospectus constitute forward-looking
statements, which involve known and unknown risks, uncertainties and other
factors that may cause the actual results, levels of activity, performance or
achievements of the Fund to be materially different from any future results,
levels of activity, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, those listed
under "Risk Factors" and elsewhere in this Prospectus. As a result of the
foregoing and other factors, no assurance can be given as to the future results,
levels of activity or achievements, and neither the Fund nor any other person
assumes responsibility for the accuracy and completeness of such statements.

                                       30
<PAGE>   33

         TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL INFORMATION

<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Investment Objective and Policies...........................   S-1
Investment Policies and Techniques..........................   S-3
Other Investment Policies and Techniques....................  S-16
Management of the Fund......................................  S-18
Portfolio Transactions......................................  S-22
Net Asset Value.............................................  S-23
Additional Information Concerning the Auctions for
  MuniPreferred.............................................  S-23
Certain Provisions in the Declaration of Trust..............  S-25
Repurchase of Common Shares; Conversion to Open-End Fund....  S-26
Tax Matters.................................................  S-27
Certain Owners of Record....................................  S-31
Experts.....................................................  S-32
Financial Statements........................................   F-1
Report of Independent Auditors..............................     1
Statement Establishing and Fixing the Rights and Preferences
  of Municipal Auction Rate Cumulative Preferred Shares.....   A-1
Ratings of Investments......................................   B-1
Hedging Strategies and Risks................................   C-1
</TABLE>

                                       31
<PAGE>   34

                                                                      APPENDIX A

                         TAXABLE EQUIVALENT YIELD TABLE

     The taxable equivalent yield is the current yield you would need to earn on
a taxable investment in order to equal a stated tax-free yield on a municipal
investment. To assist you to more easily compare municipal investments like the
Fund with taxable alternative investments, the table below presents the taxable
equivalent yields for a range of hypothetical tax-free yields and tax rates:

                     TAXABLE EQUIVALENT OF TAX-FREE YIELDS
                                 TAX FREE YIELD

<TABLE>
<CAPTION>
                   TAX RATE                      4.00%   4.50%   5.00%   5.50%   6.00%
                   --------                      -----   -----   -----   -----   -----
<S>                                              <C>     <C>     <C>     <C>     <C>
28.0%..........................................  5.56%   6.25%   6.94%   7.64%   8.33%
31.0%..........................................  5.80%   6.52%   7.25%   7.97%   8.70%
36.0%..........................................  6.25%   7.03%   7.81%   8.59%   9.38%
39.6%..........................................  6.62%   7.45%   8.28%   9.11%   9.93%
</TABLE>

                                   CALIFORNIA


<TABLE>
<CAPTION>
                                                          FEDERAL   STATE    COMBINED
 SINGLE RETURN                                              TAX      TAX       TAX
    BRACKET*              JOINT RETURN BRACKET*            RATE     RATE**    RATE**
 -------------    --------------------------------------  -------   ------   --------
<S>               <C>                                     <C>       <C>      <C>
$0-25,750         $0-43,050.............................  15.00%    6.00%     20.00%
25,751-62,450     43,051-104,050........................  28.00%    9.30%     34.50%
62,450-130,250    104,051-158,550.......................  31.00%    9.30%     37.50%
130,251-283,150   158,551-283,150.......................  36.00%    9.30%     42.00%
Over 283,151      Over 283,151..........................  39.60%    9.30%     45.00%
</TABLE>


- ------------
 * The federal tax brackets shown are for 1999.


** The State Tax Rates used to determine the rates shown in the State Tax Rate
   and Combined Tax Rate columns are those for 1998. The 1999 State Tax Rates
   will be adjusted to take into account changes in the California Consumer
   Price Index. These adjustments have not yet been released. Please note that
   the table does not reflect (i) any federal or state limitations on the
   amounts of allowable itemized deductions, phase-outs of personal or dependent
   exemption credits or other allowable credits, (ii) any local taxes imposed,
   or (iii) any taxes other than personal income taxes at 1999 rates and
   brackets. The table assumes that federal taxable income is equal to state
   income subject to tax, and in cases where more than one state rate falls
   within a federal bracket, the highest state rate corresponding to the highest
   income within that federal bracket is used. Persons whose taxable income is
   less than the maximum amount shown in the applicable line of the applicable
   Federal Bracket column may be taxable on incremental income at state and
   combined tax rates that are lower than the rates shown in the State Tax Rate
   and Combined Tax Rate column.


                                       A-1
<PAGE>   35

- ------------------------------------------------------
- ------------------------------------------------------

     NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE FUND OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION.

                          ---------------------------

                               TABLE OF CONTENTS


<TABLE>
<CAPTION>
                                       PAGE
                                       -----
<S>                                    <C>
Prospectus Summary...................      1
Financial Highlights.................      4
The Fund.............................      5
Use of Proceeds......................      5
Capitalization.......................      6
Portfolio Composition................      7
The Fund's Investments...............      8
Risk Factors.........................     12
Management of the Fund...............     15
Description of MuniPreferred.........     16
The Auction..........................     24
Description of Common Shares.........     27
Certain Provisions in the Declaration
  of Trust...........................     28
Repurchase of Common Shares;
  Conversion to Open-End Fund........     28
Tax Matters..........................     29
Custodian, Transfer Agent, Dividend
  Disbursing Agent and Redemption
  Agent..............................     30
Underwriting.........................     30
Legal Opinions.......................     31
Available Information................     31
Special Note Regarding Forward
  Looking Statements.................     32
Table of Contents for the Statement
  of Additional Information..........     33
</TABLE>


- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------


                                  $170,000,000


                                     NUVEEN
                              CALIFORNIA DIVIDEND
                              ADVANTAGE MUNICIPAL
                                      FUND

                               MUNICIPAL AUCTION
                                RATE CUMULATIVE
                                PREFERRED SHARES

                                MUNIPREFERRED(R)


                             3,400 SHARES SERIES TH


                             3,400 SHARES SERIES F

                                  ------------

                                   PROSPECTUS
                                  ------------

                              SALOMON SMITH BARNEY


                           A.G. EDWARDS & SONS, INC.


                                 BT ALEX. BROWN


                              GOLDMAN, SACHS & CO.


                         JOHN NUVEEN & CO. INCORPORATED


                            PAINEWEBBER INCORPORATED


                             PRUDENTIAL SECURITIES

                                           , 1999

- ------------------------------------------------------
- ------------------------------------------------------
<PAGE>   36
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
       PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION DATED JULY 6, 1999


                      NUVEEN CALIFORNIA DIVIDEND ADVANTAGE
                                 MUNICIPAL FUND

                       STATEMENT OF ADDITIONAL INFORMATION


         This Statement of Additional Information relating to this offering does
not constitute a prospectus, but should be read in conjunction with the
Prospectus relating thereto dated , 1999 (the "Prospectus"). This Statement of
Additional Information does not include all information that a prospective
investor should consider before purchasing shares of MuniPreferred in this
offering, and investors should obtain and read the Prospectus prior to
purchasing such shares. A copy of the Prospectus may be obtained without charge
by calling (800) 257-8787. Capitalized terms used but not defined in this
Statement of Additional Information have the meanings ascribed to them in the
Prospectus.


<TABLE>
<CAPTION>
                                                 TABLE OF CONTENTS
                                                                                                               PAGE
<S>                                                                                                           <C>
Investment Objective and Policies...............................................................................S-1
Investment Policies and Techniques..............................................................................S-3
Other Investment Policies and Techniques.......................................................................S-16
Management of the Fund.........................................................................................S-18
Portfolio Transactions.........................................................................................S-22
Net Asset Value................................................................................................S-23
Additional Information Concerning the Auctions for MuniPreferred...............................................S-23
Certain Provisions in the Declaration of Trust.................................................................S-25
Repurchase of Common Shares; Conversion to Open-End Fund.......................................................S-26
Tax Matters....................................................................................................S-27
Certain Owners of Record.......................................................................................S-31
Experts  ......................................................................................................S-32
Financial Statements............................................................................................F-1
Report of Independent Auditors....................................................................................1
Statement Establishing and Fixing the Rights and Preferences of Municipal Auction Rate
         Cumulative Preferred Shares............................................................................A-1
Ratings of Investments..........................................................................................B-1
Hedging Strategies and Risks....................................................................................C-1
</TABLE>














       THE DATE OF THIS STATEMENT OF ADDITIONAL INFORMATION IS    , 1999.


<PAGE>   37



                        INVESTMENT OBJECTIVE AND POLICIES

         The Fund's investment objective is to provide current income exempt
from regular Federal and California income tax and enhance portfolio value
relative to the municipal bond market by investing in tax-exempt municipal bonds
that Nuveen Advisory Corp. ("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. Municipal bonds may be underrated
because of the time that has elapsed since their rating was assigned or
reviewed, or because of positive factors that may not have been fully taken into
account by rating agencies, or for other similar reasons. Undervalued municipal
bonds are bonds that, in Nuveen Advisory's opinion, are worth more than the
value assigned to them in the marketplace. Nuveen Advisory may at times believe
that bonds associated with a particular municipal market sector (for example,
electric utilities), or issued by a particular municipal issuer, are
undervalued. Nuveen Advisory may purchase such a bond for 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 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 reflect their
true creditworthiness. The Fund attempts to increase its portfolio value
relative to the municipal bond market by prudent selection of municipal bonds,
regardless of which direction the market may move. Any capital appreciation
realized by the Fund will generally result in the distribution of taxable
capital gains to Common Shareholders and MuniPreferred shareholders. The Fund's
investment objectives are fundamental policies of the Fund.

         The Fund has not established any limit on the percentage of its
portfolio that may be invested in municipal bonds subject to the alternative
minimum tax provisions of Federal tax law, and the Fund expects that a
substantial portion of the income it produces will be includable in alternative
minimum taxable income. MuniPreferred shares therefore would not ordinarily be a
suitable investment for investors who are subject to the Federal alternative
minimum tax or who would become subject to such tax by purchasing MuniPreferred
shares. The suitability of an investment in MuniPreferred shares will depend
upon a comparison of the after-tax yield likely to be provided from the Fund
with that from comparable tax-exempt investments not subject to the alternative
minimum tax, and from comparable fully taxable investments, in light of each
such investor's tax position. Special considerations apply to corporate
investors. See "Tax Matters."

INVESTMENT RESTRICTIONS

         Except as described below, the Fund, as a fundamental policy, may not,
without the approval of the holders of a majority of the outstanding Common
Shares and 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:

               1.   Issue senior securities, as defined in the Investment
         Company Act of 1940, other than MuniPreferred shares, except to the
         extent permitted under the Investment Company Act of 1940 and except
         as otherwise described in the Prospectus;

               2.   Borrow money, except from banks for temporary or emergency
         purposes or for repurchase of its shares, and then only in an amount
         not exceeding one-third of the value of the Fund's total assets
         (including the amount borrowed) less the Fund's liabilities (other than
         borrowings);

               3.   Act as underwriter of another issuer's securities, except
         to the extent that the Fund may be deemed to be an underwriter within
         the meaning of the Securities Act of 1933 in connection with the
         purchase and sale of portfolio securities;



                                       S-1

<PAGE>   38
               4.   Invest more than 25% of its total assets in securities of
         issuers in any one industry; provided, however, that such limitation
         shall not apply to municipal bonds other than those municipal bonds
         backed only by the assets and revenues of non-governmental users;

               5.   Purchase or sell real estate, but this shall not prevent
         the Fund from investing in municipal bonds secured real estate or
         interests therein or foreclosing upon and selling such security;

               6.   Purchase or sell physical commodities unless acquired as a
         result of ownership of securities or other instruments (but this shall
         not prevent the Fund from purchasing or selling options, futures
         contracts, derivative instruments or from investing in securities or
         other instruments backed by physical commodities);

               7.   Make loans, other than by entering into repurchase
         agreements and through the purchase of municipal bonds or short-term
         investments in accordance with its investment objectives, policies and
         limitations;

               8.   Invest more than 5% of its total assets in securities of
         any one issuer, except that this limitation shall not apply to bonds
         issued by the United States Government, its agencies and
         instrumentalities or to the investment of 25% of its total assets.

         For purposes of the foregoing, "majority of the outstanding," when used
with respect to particular shares of the Fund, means (i) 67% of more of the
shares present at a meeting, if the holders of more than 50% of the shares are
present or represented by proxy, or (ii) more than 50% of the shares, whichever
is less.

         For the purpose of applying the limitation set forth in subparagraph
(8) above, an issuer shall be deemed the sole issuer of a security when its
assets and revenues are separate from other governmental entities and its
securities are backed only by its assets and revenues. Similarly, in the case of
a non-governmental issuer, such as an industrial corporation or a privately
owned or operated hospital, if the security is backed only by the assets and
revenues of the non-governmental issuer, then such non-governmental issuer would
be deemed to be the sole issuer. Where a security is also backed by the
enforceable obligation of a superior or unrelated governmental or other entity
(other than a bond insurer), it shall also be included in the computation of
securities owned that are issued by such governmental or other entity. Where a
security is guaranteed by a governmental entity or some other facility, such as
a bank guarantee or letter of credit, such a guarantee or letter of credit would
be considered a separate security and would be treated as an issue of such
government, other entity or bank. When a municipal bond is insured by bond
insurance, it shall not be considered a security that is issued or guaranteed by
the insurer; instead, the issuer of such municipal bond will be determined in
accordance with the principles set forth above. The foregoing restrictions do
not limit the percentage of the Fund's assets that may be invested in municipal
bonds insured by any given insurer.

         Under the Investment Company Act of 1940, the Fund may invest only up
to 10% of its total assets in the aggregate in shares of other investment
companies and only up to 5% of its total assets in any one investment company,
provided the investment does not represent more than 3% of the voting stock of
the acquired investment company at the time such shares are purchased. As a
shareholder in any 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. In addition, the
securities of other investment companies may also be leveraged and will
therefore be subject to the same leverage risks described herein.

         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.

                                      S-2


<PAGE>   39

               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 and companies for the purpose of
         exercising control.

               6.   Invest in inverse floating rate securities (which are
         securities that pay interest at rates that vary inversely with changes
         in prevailing short-term tax-exempt interest rates and which represent
         a leveraged investment in an underlying municipal bond).

         The restrictions and other limitations set forth above will apply only
at the time of purchase of securities and will not be considered violated unless
an excess or deficiency occurs or exists immediately after and as a result of an
acquisition of securities.


                       INVESTMENT POLICIES AND TECHNIQUES

         The following information supplements the discussion of the Fund's
investment objectives, policies, and techniques that are described in the
Prospectus.

INVESTMENT IN MUNICIPAL BONDS

PORTFOLIO INVESTMENTS

         The Fund will invest its net assets in a diversified portfolio of
municipal bonds that are exempt from regular Federal and California income tax.
Under normal market conditions, and except for the temporary investments
described below, the Fund expects to be fully invested (at least 95% of its
assets) in such tax-exempt municipal bonds. The Fund will invest at least 80% of
its net assets in investment grade quality municipal bonds rated as such at the
time of investment. Investment grade quality means that such bonds are rated
within the four highest grades (Baa or BBB or better) by Moody's, S&P or Fitch
or are unrated but judged to be of comparable quality by Nuveen Advisory. The
Fund may invest up to 20% of its net assets in municipal bonds that are, at the
time of investment, rated Ba/BB or B by Moody's, S&P or Fitch or that are
unrated but judged to be of comparable quality by Nuveen Advisory. Bonds of
below investment grade quality (Ba/BB or below) are commonly referred to as
"junk bonds." Issuers of bonds rated Ba/BB or B are regarded as having current
capacity to make principal and interest payments but are subject to business,
financial or economic conditions which could adversely affect such payment
capacity. The foregoing policies are fundamental policies of the Fund. Municipal
bonds rated Baa or BBB are considered "investment grade" securities; municipal
bonds rated Baa are considered medium grade obligations which lack outstanding
investment characteristics and have speculative characteristics, while municipal
bonds rated BBB are regarded as having adequate capacity to pay principal and
interest. Municipal bonds rated AAA in which the Fund may invest may have been
so rated on the basis of the existence of insurance guaranteeing the timely
payment, when due, of all principal and interest. Municipal bonds rated below
investment grade quality are obligations of issuers that are considered
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal according to the terms of the obligation and, therefore,
carry greater investment risk, including the possibility of issuer default and
bankruptcy and increased market price volatility. Municipal bonds rated below
investment grade tend to be less marketable than higher-quality bonds because
the market for them is less broad. The market for unrated municipal bonds is
even narrower. During periods of thin trading in these markets, the spread
between bid and asked prices is likely to increase significantly and the Fund
may have greater difficulty selling its portfolio securities. The Fund will be
more dependent on Nuveen Advisory's research and analysis when investing in
these securities.

                                      S-3

<PAGE>   40
         A general description of Moody's, S&P's and Fitch's ratings of
municipal bonds is set forth in Appendix B 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.

         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 may be shortened from time to time 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 cash on
hand fully invested, including the period during which the net proceeds of the
offering are being invested, the Fund may invest any percentage of its assets in
short-term investments including high quality, short-term securities which may
be either tax-exempt or taxable and securities of other open or closed-end
investment companies that invest primarily in municipal bonds of the type in
which the Fund may invest directly. The Fund intends to invest in taxable
short-term investments only in the event that suitable tax-exempt temporary
investments are not available at reasonable prices and yields. Tax-exempt
temporary investments include various obligations issued by state and local
governmental issuers, such as tax-exempt notes (bond anticipation notes, tax
anticipation notes and revenue anticipation notes or other such municipal bonds
maturing in three years or less from the date of issuance) and municipal
commercial paper. The Fund will invest only in taxable temporary investments
which are U.S. Government securities or securities rated within the highest
grade by Moody's, S&P or Fitch, and which mature within one year from the date
of purchase or carry a variable or floating rate of interest. See Appendix A for
a general description of Moody's, S&P's and Fitch's ratings of securities in
such categories. Taxable temporary investments of 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
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 reflect their true value.

         The Fund has not established any limit on the percentage of its
portfolio investments that may be invested in municipal bonds subject to the
Federal alternative minimum tax provisions of Federal tax law. The Fund expects
that a substantial portion of the current income it produces will be included in
alternative minimum taxable income. Special considerations apply to corporate
investors. See "Tax Matters."



                                       S-4

<PAGE>   41

         Also included within the general category of municipal bonds described
in the 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 provide difficult. In order to reduce this risk, the Fund will only
purchase Municipal Lease Obligations where Nuveen Advisory believes the issuer
has a strong incentive to continue making appropriations until maturity.

         During temporary defensive periods and in order to keep the Fund's cash
fully invested, including the period during which the net proceeds of the
offering are being invested, the Fund may invest up to 100% of its net assets in
short-term investments including high quality, short-term securities that may be
either tax-exempt or taxable. To the extent the Fund invests in taxable
short-term investments, the Fund will not at such times be in a position to
achieve that portion of its investment objective of seeking current income
exempt from regular Federal income tax. For further information, see "Short-Term
Investments" below.

         Obligations of issuers of municipal bonds are subject to the provisions
of bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors, such as the Bankruptcy Reform Act of 1978. In addition, the
obligations of such issuers may become subject to the laws enacted in the future
by Congress, state legislatures or referenda extending the time for payment of
principal or interest, or both, or imposing other constraints upon enforcement
of such obligations or upon municipalities to levy taxes. There is also the
possibility that, as a result of legislation or other conditions, the power or
ability of any issuer to pay, when due, the principal of and interest on its
municipal bonds may be materially affected.

         The Fund may also invest in securities of other open or closed-end
investment companies that invest primarily in municipal bonds of the type in
which the Fund may invest directly. The Fund will generally select obligations
which may not be redeemed at the option of the issuer for approximately seven to
nine years.

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 total 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,


                                       S-5

<PAGE>   42



         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 temporarily available cash. The Fund may enter into
         repurchase agreements only with respect to obligations of the U.S.
         government, its agencies or instrumentalities; certificates of deposit;
         or bankers' acceptances in which the Fund may invest. Repurchase
         agreements may be considered loans to the seller, collateralized by the
         underlying securities. The risk to the Fund is limited to the ability
         of the seller to pay the agreed-upon sum on the repurchase date; in the
         event of default, the repurchase agreement provides that the Fund is
         entitled to sell the underlying collateral. If the value of the
         collateral declines after the agreement is entered into, and if the
         seller defaults under a repurchase agreement when the value of the
         underlying collateral is less than the repurchase price, the Fund could
         incur a loss of both principal and interest. The investment adviser
         monitors the value of the collateral at the time the action is entered
         into and at all times during the term of the repurchase agreement. The
         investment adviser does so in an effort to determine that the value of
         the collateral always equals or exceeds the agreed-upon repurchase
         prices 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. The investment adviser will
         consider the financial condition of the corporation (e.g., earning
         power, cash flow, and other liquidity ratios) and will continuously
         monitor the corporation's ability to meet all of its financial
         obligations, because the Fund's liquidity might be impaired if the
         corporation were unable to pay principal and interest on demand.
         Investments in commercial paper will be limited to commercial paper
         rated in the highest categories by a major rating agency and which
         mature within one year of the date of purchase or carry a variable or
         floating rate of interest.

SHORT-TERM TAX-EXEMPT FIXED INCOME SECURITIES

         Short-term tax-exempt fixed-income securities are securities that are
exempt from regular Federal income tax and mature within three years or less
from the date of issuance. Short-term tax-exempt fixed income securities are
defined to include, without limitation, the following:

         Bond Anticipation Notes ("BANs") are usually general obligations of
state and local governmental issuers which are sold to obtain interim financing
for projects that will eventually be funded through the sale of long-term debt
obligations or bonds. The ability of an issuer to meet its obligations on its
BANs is primarily dependent on the issuer's access to the long-term municipal
bond market and the likelihood that the proceeds of such bond sales will be used
to pay the principal and interest on the BANs.

         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


                                       S-6

<PAGE>   43



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 as
those described above to commercial banks as evidence of borrowings. The
purposes for which the notes are issued are varied but they are frequently
issued to meet short-term working capital or capital-project needs. These notes
may have risks similar to the risks associated with TANs and RANs.

         Tax-Exempt Commercial Paper ("Municipal Paper") represents very
short-term unsecured, negotiable promissory notes, issued by states,
municipalities and their agencies. Payment of principal and interest on issues
of municipal paper may be made from various sources, to the extent the funds are
available therefrom. Maturities or municipal paper generally will be shorter
than the maturities of TANs, BANs or RANs. There is a limited secondary market
for issues of Municipal Paper.

         Certain municipal bonds may carry variable or floating rates of
interest whereby the rate of interest is not fixed but varies with changes in
specified market rates or indices, such as a bank prime rate or a tax-exempt
money market indexes.

         While the various types of notes described above as a group represent
the major portion of the tax-exempt note market, other types of notes are
available in the marketplace, and the Fund may invest in such other types of
notes to the extent permitted under its investment objectives, policies and
limitations. Such notes may be issued for different purposes and may be secured
differently from those mentioned above.

HEDGING STRATEGIES

         The Fund may periodically engage in hedging transactions. Hedging is a
term used for various methods of seeking to preserve portfolio capital value of
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 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 the 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 a necessary to
close a prior investment if, immediately after such investment, the sum of the
amount of its


                                       S-7

<PAGE>   44



premiums and deposits would exceed 5% of the Fund's net assets. The Fund will
invest in these instruments only in markets believed by Nuveen Advisory to be
active and sufficiently liquid. Successful implementation of most hedging
strategies would generate taxable income, and the Fund has no present intention
to use these strategies. For further information regarding these investment
strategies and risks presented thereby, see Appendix C to this Statement of
Additional Information.

FACTORS PERTAINING TO CALIFORNIA

         The following information provides only a brief summary of the complex
factors affecting the financial situation in California (the "State") and is
derived from sources that are generally available to investors and is believed
to be accurate. It is based in part on information obtained from various State
and local agencies in 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 local government
obligations in the event of default or financial difficulty.

GENERAL

         During the early 1990's, California experienced significant financial
difficulties, which reduced its credit standing, but the State's finances have
improved significantly since 1994, with ratings increases since 1996. The
ratings of certain related debt of other issuers for which California has an
outstanding lease purchase, guarantee or other contractual obligation (such as
for state-insured hospital bonds) are generally linked directly to California's
rating. Should the financial condition of California deteriorate again, its
credit ratings could be reduced, and the market value and marketability of all
outstanding notes and bonds issued by California, its public authorities or
local governments could be adversely affected.

ECONOMIC FACTORS

         California's economy is the largest among the 50 states and one of the
largest in the world. The State's population of almost 34 million represents
over 12% of the total United States population and grew by 26% in the 1980s,
more than double the national rate. Population growth slowed to less than 1%
annually in 1994 and 1995, but rose to 1.8% in 1996 and 1.6% in 1997. During the
early 1990s, net population growth in the State was due to births and foreign
immigration, but in recent years, immigration from the other states has
increased.

         Total personal income in the State, at an estimated $902 billion in
1998, accounts for almost 13% of all personal income in the nation. Total
employment is over 15 million, the majority of which is in the service, trade
and manufacturing sectors.

         From mid-1990 to late 1993, the State suffered a recession with the
worst economic, fiscal and budget conditions since the 1930s. Construction,
manufacturing (especially aerospace), and financial services, among others, were
all severely affected, particularly in Southern California. Employment levels
stabilized by late 1993 and pre-recession job levels were reached in 1996.
Unemployment, while remaining higher than the national average, has come down
from its 10% recession peak to under 6% in early 1999. Economic indicators show
a steady and strong recovery underway in California since the start of 1994
particularly in high technology manufacturing and services, including computer
software, electronic manufacturing and motion picture/television production, and
other services, entertainment and tourism, and both residential and commercial
construction. International economic problems starting in 1997 had some
moderating impact on California's economy, but negative impacts, such as a sharp
drop in exports to Asia which have hurt the manufacturing and agricultural
sectors, have apparently been offset by increased exports to Latin American and
other nations, and a greater strength in services, computer software and
construction. Current forecasts predict continued strong growth of the State's
economy in 1999, with a slowdown predicted in 2000 and beyond. Any delay or
reversal of the recovery may create new shortfalls in State revenues.



                                       S-8

<PAGE>   45


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 the rate of ad valorem property taxes on real property and generally
restricts the reassessment of property to 2% per year, except under new
construction or change of ownership (subject to a number of exemptions). Taxing
entities may, however, raise ad valorem taxes above the 1% limit to pay debt
service on voter-approved bonded indebtedness.

         Under Article XIIIA, the basic 1% ad valorem tax levy is applied
against the assessed value of property as of the owner's date of acquisition (or
as of March 1, 1975, if acquired earlier), subject to certain adjustments. This
system has resulted in widely varying amounts of tax on similarly situated
properties. Several lawsuits have been filed challenging the acquisition-based
assessment system of Proposition 13, but it was upheld by the U.S. Supreme Court
in 1992.

         Article XIIIA prohibits local governments from raising revenues through
ad valorem taxes above the 1% limit; it also requires voters of any governmental
unit to give two-thirds approval to levy any "special tax." Court decisions,
however, allowed a non-voter approved levy of "general taxes" which were not
dedicated to a specific use.

         LIMITATIONS ON OTHER TAXES, FEES AND CHARGES. On November 5, 1996, the
voters of the State approved Proposition 218, called the "Right to Vote on Taxes
Act." Proposition 218 added Articles XIIIC and XIIID to the State Constitution,
which contain a number of provisions affecting the ability of local agencies to
levy and collect both existing and future taxes, assessments, fees and charges.

         Article XIIIC requires that all new or increased local taxes be
submitted to the electorate before they become effective. Taxes for general
governmental purposes require a majority vote and taxes for specific purposes
require a two-thirds vote. Further, any general purpose tax which was imposed,
extended or increased without voter approval after December 31, 1994 must be
approved by a majority vote within two years.

         Article XIIID contains several new provisions making it generally more
difficult for local agencies to levy and maintain "assessments" for municipal
services and programs. Article XIIID also contains several new provisions
affecting "fees" and "charges," defined for purposes of Article XIIID to mean
"any levy other than 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, and others may be, reduced.



                                       S-9

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         APPROPRIATIONS LIMITS. The State and its local governments are subject
to an annual "appropriations limit" imposed by Article XIIIB of the California
Constitution, enacted by the voters in 1979 and significantly amended by
Propositions 98 and 111 in 1988 and 1990, respectively. Article XIIIB prohibits
the State or any covered local government from spending "appropriations subject
to limitation" in excess of the appropriations limit imposed. "Appropriations
subject to limitation" are authorizations to spend "proceeds of taxes," which
consist of tax revenues and certain other funds, including proceeds from
regulatory licenses, user charges or other fees, to the extent that such
proceeds exceed the cost of providing the product or service, but "proceeds of
taxes" exclude most State subventions to local governments. No limit is imposed
on appropriations of funds which are not "proceeds of taxes," such as reasonable
user charges or fees, and certain other non-tax funds, including bond proceeds.

         Among the expenditures not included in the Article XIIIB appropriations
limit are (1) the debt service cost of bonds issued or authorized prior to
January 1, 1979, or subsequently authorized by the voters, (2) appropriations
arising from certain emergencies declared by the Governor, (3) appropriations
for certain capital outlay projects, (4) appropriations by the State of
post-1989 increases in gasoline taxes and vehicle weight fees, and (5)
appropriations made in certain cases 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
since 1990 because of the recession, few governments are currently operating
near their spending limits, but this condition may change over time. Local
governments may by voter approval exceed their spending limits for up to four
years. During fiscal year 1986-87, State receipts from proceeds of taxes
exceeded its appropriations limit by $1.1 billion, which was returned to
taxpayers. Since that year, appropriations subject to limitation have been under
the State limit. State appropriations were $6.8 billion under the limit for
fiscal year 1998-99.

         Because of the complex nature of Articles XIIIA, XIIIB, XIIIC and XIIID
of the California Constitution, the ambiguities and possible inconsistencies in
their terms, and the impossibility of predicting future appropriations or
changes in population and cost of living, and the probability of continuing
legal challenges, it is not currently possible to determine fully the impact of
these Articles on California municipal obligations or on the ability of the
State or local governments to pay debt service on such California municipal
obligations. It is not possible, at the present time, to predict the outcome of
any pending litigation with respect to the ultimate scope, impact or
constitutionality of these Articles or the impact of any such determinations
upon State agencies or local governments, or upon their ability to pay debt
service on their obligations. Further initiatives or legislative changes in laws
or the California Constitution may also affect the ability of the State or local
issuers to repay their obligations.

OBLIGATIONS OF THE STATE OF CALIFORNIA

         Under the California Constitution, debt service on outstanding general
obligation bonds is the second charge to the General Fund after support of the
public school system and public institutions of higher education. As of May 1,
1999, the State had outstanding approximately $19.7 billion of long-term general
obligation bonds, plus $246 million of general obligation commercial paper which
will be refunded by long-term bonds in the future, and $6.6 billion of
lease-purchase debt supported by the State General Fund. The State also had
about $15.3 billion of authorized and unissued long-term general obligation
bonds and lease-purchase debt. In FY 1997-98, debt service on general obligation
bonds and lease purchase debt was approximately 4.4% of General Fund revenues.

RECENT FINANCIAL RESULTS

         The principal sources of General Fund revenues in 1997-1998 were the
California personal income tax (51% of total revenues), the sales tax (32%),
bank and corporation taxes (11%), and the gross premium tax on insurance (2%).
The State maintains a Special Fund for Economic Uncertainties (the "SFEU"),
derived from General Fund revenues, as a reserve to meet cash needs of the
General Fund, but which is required to be replenished as soon as sufficient


                                      S-10

<PAGE>   47



revenues are available. Year-end balances in the SFEU are included for financial
reporting purposes in the General Fund balance. Because of the recession and an
accumulated budget deficit, no reserve was budgeted in the SFEU from 1992-93 to
1995-96.

         GENERAL. Throughout the 1980s, State spending increased rapidly as the
State population and economy also grew rapidly, including increased spending for
many assistance programs to local governments, which were constrained by
Proposition 13 and other laws. The largest State program is assistance to local
public school districts. In 1988, an initiative (Proposition 98) was enacted
which (subject to suspension by a two-thirds vote of the Legislature and the
Governor) guarantees local school districts and community college districts a
minimum share of State General Fund revenues (currently about 35%).

         RECENT BUDGETS. As a result of the severe economic recession from
1990-94 and other factors, the State experienced substantial revenue shortfalls,
and greater than anticipated social service costs, in the early 1990s. The State
accumulated and sustained a budget deficit in the budget reserve, the SFEU,
approaching $2.8 billion at its peak at June 30, 1993. The Legislature and
Governor agreed on a number of different steps to respond to the adverse
financial conditions and produce Budget Acts in the years 1991-92 to 1994-95
(although not all of these actions were taken in each year):

         -     significant cuts in health and welfare program expenditures;

         -     transfers of program responsibilities and some funding sources
               from the State to local governments, coupled with some reduction
               in mandates on local government;

         -     transfer of about $3.6 billion in annual local property tax
               revenues from cities, counties, redevelopment agencies and some
               other districts to local school districts, thereby reducing State
               fund for schools;

         -     reduction in growth of support for higher education programs,
               coupled with increases in student fees;

         -     revenue increases (particularly in the 1992-93 Fiscal Year
               budget), most of which were for a short duration;

         -     increase reliance on aid from the federal government to offset
               the costs of incarcerating, educating and providing health and
               welfare services to undocumented aliens (although these efforts
               have produced much less federal aid than the State Administration
               had requested); and

         -     various one-time adjustments and accounting changes (some of
               which have been challenged in court and reversed).

         A consequence of the accumulated budget deficits in the early 1990s,
together with other factors such as disbursement of funds to local school
districts "borrowed" from future fiscal years and hence not shown in the annual
budget, was to significantly reduce the State's cash resources available to pay
its ongoing obligations. The State's cash condition became so serious that from
late spring 1992 until 1995, the State had to rely on issuance of short-term
notes which matured in a subsequent fiscal year to finance its ongoing deficit,
and pay current obligations. For a two-month period in the summer of 1992,
pending adoption of the annual Budget Act, the State was forced to issue
registered warrants (IOUs) to some of its suppliers, employees and other
creditors. The last of these deficit notes was repaid in April, 1996.

         The State's financial condition improved markedly during the 1995-1996,
1996-97 and 1997-98 fiscal years, with a combination of better than expected
revenues, slowdown in growth of social welfare programs, and continued spending
restraint based on the actions taken in earlier years. The State's cash position
also improved, and no external deficit borrowing has occurred over the end of
these three fiscal years.

         The economy grew strongly during these fiscal years, and 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 and $2.1 billion in 1997-98) than were
initially planned when the budgets were enacted. These additional funds were
largely directed to school spending as


                                      S-11

<PAGE>   48



mandated by Proposition 98, and to make up shortfalls from reduced federal
health and welfare aid in 1995-96 and 1996-97. The accumulated budget deficit
from the recession years was finally eliminated. The Department of Finance
estimates that the State's budget reserve (the SFEU) totaled about $400 million
as of June 30, 1997 and $1.8 billion at June 30, 1998.

         FY 1997-98 BUDGET. In May 1997, the California Supreme Court ruled that
the State had acted illegally in 1993 and 1994 by using a deferral of payments
to the Public Employees Retirement Fund to help balance earlier budgets. In
response to this court decision, the Governor ordered an immediate repayment to
the Retirement Fund of about $1.235 billion, which was made in late July, 1997,
and substantially "used up" the then-expected additional General Fund revenues
for the fiscal year. The 1997-98 Budget Act provided another year of rapidly
increasing funding for K-14 public education. Support for higher education units
in the State also increased by about 6 percent. Because of the pension payment,
most other State programs were funded at levels consistent with prior years, and
several initiatives had to be dropped. The final results for FY 1997-98 showed
General Fund revenues and transfers of $54.7 billion and expenditures of $53.3
billion.

         Part of the 1997-98 Budget Act was completion of the State welfare
reform legislation to implement the new federal law passed in 1996. The new
State program, called "CalWORKs," became effective January 1, 1998, and
emphasizes programs to bring aid recipients into the workforce. As required by
federal law, new time limits are placed on receipt of welfare aid.

         FY 1998-99 BUDGET. The FY 1998-99 Budget Act was signed on August 21,
1998. After giving effect to line-item vetoes made by the Governor, the Budget
plan resulted in spending of about $57.3 billion for the General Fund and $14.7
billion for Special Funds. The Budget Act assumed General Fund revenues and
transfers in FY 1998-99 of $57.0 billion. After enactment of the Budget Act, the
Legislature passed a number of additional fiscal bills, which resulted in a net
increase of expenditures of about $250 million, but the Administration also
raised its estimate of revenues from the 1997-98 fiscal year. In total, the
Administration projected in September, 1998 that the balance in the SFEU at June
30, 1999 would be about $1.2 billion.

         As has been the case in the last several years, spending on K-12
education increased significantly, by a total of $2.2 billion, with projected
per-pupil spending of $5,695, more than one-third higher than the per-pupil
spending during the last recession year of 1993-94.

         Funding to support higher education was also increased significantly
(15% for the University of California and 14% for the California State
University system). The Budget included some increases in health and welfare
programs, including the first increase in the monthly welfare grant since levels
were cut during the recession.

         One of the most important elements of the 1998-99 Budget Act was
agreement on substantial tax cuts. The largest of these is a phased-in cut in
the Vehicle License Fee (an annual tax on the value of cars registered in the
State, the "VLF"). Starting in 1999, the VLF is reduced by 25%. Under current
law, VLF funds are automatically transferred to cities and counties, so the new
legislation provides for the General Fund to make up the reductions. If State
General Fund revenues continue to grow above certain targeted levels in future
years, the cut could reach as much as 67.5% by the year 2003. The initial 25%
VLF cut will be offset by about $500 million in General Fund money in FY
1998-99, and $1 billion for future years. Other tax cuts in FY 1998-99 include
an increase in the dependent credit exemption for personal income tax filers,
restoration of a renter's tax credit for taxpayers, and a variety of business
tax relief measures. The total cost of these tax cuts is estimated at $1.4
billion for FY 1998-99.

         The Administration released new projections for the balance of FY
1998-99 on May 14, 1999 as part of the May Revision of the Governor's Proposed
Budget for 1999-2000 (the "May Revision"). The May Revision revealed that the
State's economy was much stronger in late 1998 and into 1999 than the
Administration had thought when it made its first FY 1999-2000 Budget Proposal
in January 1999. As a result, the May Revision updates 1998-99 General Fund
revenues to be $57.9 billion, almost $1 billion above the original FY 1998-99
estimates, and over $1.6 billion above the Administration's January estimate.
Most of the increase is from personal income taxes, reflecting stronger wage
employment than previously estimated, and extraordinary growth in capital gain
realizations resulting from the stock market's rise. The May Revision projects
the SFEU will have a balance of almost $1.9 billion at June 30, 1999.



                                      S-12

<PAGE>   49



         Although, as noted, the Administration projects a budget reserve in the
SFEU of about $1.9 billion on June 30, 1999, the General Fund balance on that
date also reflects $1.0 billion of "loans" which the General Fund made to local
schools in the recession years, representing cash outlays above the mandatory
minimum funding level. Settlement of litigation over these transactions in July
1996 calls for repayment of these loans over the period ending in 2001-02, about
equally split between outlays from the General Fund and from schools'
entitlements. The 1998-99 Budget Act contained a $300 million appropriation from
the General Fund toward this settlement.


         FY 1999-2000 Budget. The newly elected Governor, Gray Davis, released
his proposed FY 1999-00 Budget in January 1999. It projected somewhat lower
General Fund revenues than in earlier projections, due to slower economic growth
which was expected in late 1998, but totaling an estimated $60.3 billion. The
May Revision has sharply increased the revenue estimates, by over $2.7 billion,
to a total of almost $63.0 billion, which would represent a 9% increase above FY
1998-99. Again, the greatest increase is expected in personal income taxes
(about 10% year-over-year increase), with more moderate increases in sales taxes
(6%) and corporate taxes (3%).

         The 1999-00 Budget Act was signed on June 29, 1999, after the Governor
used his line-item veto power to reduce expenditures by about $581 million. The
final spending plan called for about $63.7 billion of General Fund expenditures,
$16.1 billion of Special Fund expenditures, and $1.5 billion in bond funded
expenditures. The Governor's final budget actions left the SFEU with an
estimated balance of $881 million at June 30, 2000, but the Governor also
reduced spending to set aside $300 million for future appropriation for either
employee pay raises or potential litigation costs. If not fully used, these
"set-aside" funds would increase the SFEU year-end balance.

         The final Budget Act generally provided increased funding for a wide
range of programs. Education spending under Proposition 98 received the largest
increase (over $2.3 billion above 1998-99), with other significant increases for
higher education, health and welfare, natural resources and capital outlay. The
budget provides several hundred million dollars in direct new aid to cities and
counties. A proposal is being drafted to place a constitutional amendment on the
ballot in 2000 to provide more extensive, permanent fiscal relief for local
government.

         The final spending plan includes several targeted tax cuts for
businesses, totaling under $150 million in annual cost. The plan also includes a
one-time, one-year additional cut of 10% in the Vehicle License Fee for calendar
year 2000. This cut will cost the General Fund about $500 million in each of
1999-00 and 2000-01 to make up lost funds for local governments. Under the 1998
law, the VLF cut to 35% would become permanent in the year 2001 if General Fund
revenues reach a certain specified level in 2000-01.




         Although the State's strong economy is producing record revenues to the
State government, the State's budget continues to be under stress from mandated
spending on education, a rising prison population, and social needs of a growing
population with many immigrants. These factors which limit State spending growth
also put pressure on local governments. There can be no assurances that, if
economic conditions weaken, or other factors intercede, the State will not
experience budget gaps in the future.

BOND RATING

         The ratings on California's long-term general obligation bonds were
reduced in the early 1990s from "AAA" levels which had existed prior to the
recession. After 1996, the three major rating agencies raised their ratings for
California's general obligation bonds, which as of May 1999 were assigned
ratings of "A+" from Standard & Poor's, "Aa3" from Moody's and "AA-" from Fitch.

         There can be no assurance that such ratings will be maintained in the
future. It should be noted that the creditworthiness of obligations issued by
local California issuers may be unrelated to creditworthiness of obligations
issued by the State of California, and that there is no obligation on the part
of the State to make payment on such local obligations in the event of default.

LEGAL PROCEEDINGS

         The State is involved in certain legal proceedings (described in the
State's recent financial statements) that, if decided against the State, may
require the State to make significant future expenditures or may substantially
impair revenues. Trial courts have recently entered tentative decisions or
injunctions which would overturn several parts of the State's recent budget
compromises. The matters covered by these lawsuits include reductions in welfare
payments and the use of certain cigarette tax funds for health costs. All of
these cases are subject to further proceedings and appeals, and if California
eventually loses, the final remedies may not have to be implemented in one year.


                                      S-13


<PAGE>   50
YEAR 2000 PREPARATIONS

         The State and local governments, along with all other public and
private institutions in the nation, face a major challenge to ensure that their
computer systems, including microchips embedded into existing machinery, will
not fail prior to or at the January 1, 2000 date which may not be recognized
properly by software utilizing only to digits to identify a year. The new State
Administration has placed a very high priority on "Year 2000" remediation and
contingency planning. The State has a Department of Information Technology
("DOIT") which coordinates activities, provides technical assistance to State
agencies and local governments, and reports on the status of remediation efforts
by over 100 State departments and agencies.

         DOIT has reported that, as of early 1999, 372 of 564 "mission critical"
systems in State government had been remediated (although final testing was
still going on in some cases). Of the balance, 54 were being retired and 138
were in process. DOIT does not report on all State agencies. In addition to
hardware and software changes, agencies are preparing business contingency plans
in case of computer problems at 1/1/2000, and are actively coordinating with
outside agencies, vendors, contractors and others with whom computer data is
shared. The State Treasurer and State Controller, responsible for State fiscal
controls and debt service payments, have reported they were fully remediated by
December 31, 1998 and are spending the 1999 year in testing and confirmation of
their systems.

         The State has expended and plans to spend many hundreds of millions of
dollars on Year 2000 projects of all sorts, and has set aside several tens of
millions of dollars in contingency funds to support late-coming needs. There is
no survey of local government costs, or the overall status of their activities.
It is likely that larger government agencies are better prepared at this time
than smaller ones. Both the State and local governments are preparing emergency
plans for Year 2000 computer difficulties similar to their normal planning for
natural emergencies, such as floods or earthquakes.

OBLIGATIONS OF OTHER ISSUERS

         OTHER ISSUERS OF CALIFORNIA MUNICIPAL OBLIGATIONS. There are a number
of State agencies, instrumentalities and political subdivisions of the State
that issue municipal obligations, some of which may be conduit revenue
obligations payable from payments from private borrowers. These entities are
subject to various economic risks and uncertainties, and the credit quality of
the securities issued by them may vary considerably from the credit quality of
obligations backed by the full faith and credit of the State.

         STATE ASSISTANCE. Property tax revenues received by local governments
declined more than 50% following passage of Proposition 13. Subsequently, the
California Legislature enacted measures to provide for the redistribution of the
State's General Fund surplus to local agencies, the reallocation of certain
State revenues to local agencies and the assumption of certain governmental
functions by the State to assist municipal issuers to raise revenues. Total
local assistance from the State's General Fund was budgeted at approximately 75%
of General Fund expenditures in recent years, including the effect of
implementing reductions in certain aid programs. To reduce State General Fund
support for school districts, the 1992-93 and 1993-94 Budget Acts caused local
governments to transfer $3.9 billion of property tax revenues to school
districts, representing loss of the post-Proposition 13 "bailout" aid. Local
governments have in return received greater revenues and greater flexibility to
operate health and welfare programs. However, except for agreement in 1997 on a
new program for the State to substantially take over funding for local trial
courts (savings cities and counties some $400 million annually), there has been
no large-scale reversal of the property tax shift to help local government.

         To the extent the State should be constrained by its Article XIIIB
appropriations limit, or its obligation to conform to Proposition 98, or other
fiscal considerations, the absolute level, or the rate of growth, of State
assistance to local governments may continue to be reduced. Any such reductions
in State aid could compound the serious fiscal constraints already experienced
by many local governments, particularly counties. Los Angeles County, the
largest in the State, was forced to make significant cuts in services and
personnel, particularly in the health care system, in order to balance its
budget in FY 1995-96 and FY 1996-97. 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.


                                      S-14

<PAGE>   51



         Counties and cities may face further budgetary pressures as a result of
changes in welfare and public assistance programs, which were enacted in August
1997 in order to comply with the federal welfare reform law. Generally, counties
play a large role in the new system, and are given substantial flexibility to
develop and administer programs to bring aid recipients into the workforce.
Counties are also given financial incentives if either at the county or
statewide level, the "Welfare-to-Work" programs exceed minimum targets; counties
are also subject to financial penalties for failure to meet such targets.
Counties remain responsible to provide "general assistance" for able-bodied
indigents who are ineligible for other welfare programs. The long-term financial
impact of the new CalWORKs system on local governments is still unknown.

         ASSESSMENT BONDS. California Municipal Obligations which are assessment
bonds may be adversely affected by a general decline in real estate values or a
slowdown in real estate sales activity. In many cases, such bonds are secured by
land which is undeveloped at the time of issuance but anticipated to be
developed within a few years after issuance. In the event of such reduction or
slowdown, such development may not occur or may be delayed, thereby increasing
the risk of a default on the bonds. Because the special assessments or taxes
securing these bonds are not the personal liability of the owners of the
property assessed, the lien on the property is the only security for the bonds.
Moreover, in most cases the issuer of these bonds is not required to make
payments on the bonds in the event of delinquency in the payment of assessments
or taxes, except from amounts, if any, in a reserve fund established for the
bonds.

         CALIFORNIA LONG TERM LEASE OBLIGATIONS. Based on a series of court
decisions, certain long-term lease obligations, though typically payable from
the general fund of the State or a municipality, are not considered
"indebtedness" requiring voter approval. Such leases, however, are subject to
"abatement" in the event the facility being leased is unavailable for beneficial
use and occupancy by the municipality during the term of the lease. Abatement is
not a default, and there may be no remedies available to the holders of the
certificates evidencing the lease obligation in the event abatement occurs. The
most common cases of abatement are failure to complete construction of the
facility before the end of the period during which lease payments have been
capitalized and uninsured casualty losses to the facility (e.g., due to
earthquake). In the event abatement occurs with respect to a lease obligation,
lease payments may be interrupted (if all available insurance 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


                                      S-15

<PAGE>   52



or which either would further limit or, alternatively, would increase the
abilities of state and local governments to impose new taxes or increase
existing taxes. It is not possible, at present, to predict the extent to which
any such legislation will be enacted. Nor is it possible, at present, to
determine the impact of any such legislation on California Municipal Obligations
in which the Fund may invest, future allocations of state revenues to local
governments or the abilities of state or local governments to pay the interest
on, or repay the principal of, such California Municipal Obligations.

         Substantially all of California is within an active geologic region
subject to major seismic activity. Northern California in 1989 and Southern
California in 1994 experienced major earthquakes causing billions of dollars in
damages. The federal government provided more than $13 billion in aid for both
earthquakes, and neither event is expected to have any long-term negative
economic impact. Any California Municipal Obligation in the Fund could be
affected by an interruption of revenues because of damaged facilities, or,
consequently, income tax deductions for casualty losses or property tax
assessment reductions. Compensatory financial assistance could be constrained by
the inability of (i) an issuer to have obtained earthquake insurance coverage
rates; (ii) an insurer to perform on its contracts of insurance in the event of
widespread losses; or (iii) the federal or State government to appropriate
sufficient funds within their respective budget limitations.

                    OTHER INVESTMENT POLICIES AND TECHNIQUES

ILLIQUID SECURITIES

         The Fund may invest in illiquid securities (i.e., securities that are
not readily marketable), including, but not limited to, restricted securities
(securities the disposition of which is restricted under the Federal securities
laws), securities that may only be resold pursuant to Rule 144A under the
Securities Act of 1933, as amended (the "Securities Act"); and repurchase
agreements with maturities in excess of seven days.

         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.



                                      S-16

<PAGE>   53
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 shareholder 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.

WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS

         The Fund may buy and sell municipal bonds on a when-issued or delayed
delivery basis, making payment or taking delivery at a later date, normally
within 15-45 days of the trade date. On such transactions the payment obligation
and the interest rate are fixed at the time the buyer enters into the
commitment. Beginning on the date the Fund enters into a commitment to purchase
securities on a when-issued or delayed delivery basis, the Fund is required
under rules of the Securities and Exchange Commission to maintain in a separate
account liquid assets, consisting of cash, cash equivalents or liquid securities
having a market value at all times of at least equal to the amount of the
commitment. Income generated by any such assets which provide taxable income for
Federal income tax purposes is includable in the taxable income of the Fund and
will be distributed as taxable distributions to shareholders. The Fund may enter
into contracts to purchase municipal bonds on a forward basis (i.e., where
settlement will occur more than 60 days from the date of the transaction) only
to the extent that the Fund specifically collateralizes such obligations with a
security that is expected to be called or mature within sixty days before or
after the settlement date of the forward transaction. The commitment to purchase
securities on a when-issued, delayed delivery or forward basis may involve an
element of risk because no interest accrues on the bonds prior to settlement and
at the time of delivery the market value may be less than cost.

REPURCHASE AGREEMENTS

         As temporary investments, the Fund may invest in repurchase agreements.
A repurchase agreement is a contractual agreement whereby the seller of
securities (U.S. Government securities or municipal bonds) agrees to repurchase
the same security at a specified price on a future date agreed upon by the
parties. The agreed-upon repurchase price determines the yield during the Fund's
holding period. Repurchase agreements are considered to be loans collateralized
by the underlying security that is the subject of the repurchase contract.
Income generated from transactions in repurchase agreements will be taxable. See
"Tax Matters" for information relating to the allocation of taxable income
between Common Shares and MuniPreferred Shares, if any. The Fund will only enter
into repurchase agreements with registered securities dealers or domestic banks
that, in the opinion of Nuveen Advisory, present minimal credit risk. The risk
to the Fund is limited to the ability of the issuer to pay the agreed-upon
repurchase price on the delivery dates; 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 equal or exceeds the
agreed-upon repurchase price. In the event the value of the collateral declines
below the repurchase price, Nuveen Advisory will demand additional collateral
from the issuer to increase the value of the collateral to at least that of the
repurchase price, including interest.



                                      S-17

<PAGE>   54



ZERO COUPON BONDS

         The Fund may invest in zero coupon bonds. A zero coupon bond is a bond
that does not pay interest for its entire life. The market prices of zero coupon
bonds are affected to a greater extent by changes in prevailing levels of
interest rates and thereby tend to be more volatile in price than securities
that pay interest periodically. In addition, because the Fund accrues income
with respect to these securities prior to the receipt of such interest, it may
have to dispose of portfolio securities under disadvantageous circumstances in
order to obtain cash needed to pay income dividends in amounts necessary to
avoid unfavorable tax consequences.


                             MANAGEMENT OF THE FUND

TRUSTEES AND OFFICERS

         The management of the Fund, including general supervision of the duties
performed for the Fund under the Management Agreement, is the responsibility of
Board of Trustees. The number of trustees of the Fund is currently set at seven,
one of whom is an "interested person" (as the term "interested persons" is
defined in the Investment Company Act of 1940) and six of whom are not
"interested persons." The names and business addresses of the trustees and
officers of the Fund and their principal occupations and other affiliations
during the past five years are set forth below, with those trustees who are
"interested persons" of the Fund indicated by an asterisk.


<TABLE>
<CAPTION>
                                    POSITIONS AND OFFICES
NAME, AGE AND ADDRESS                     WITH FUND               PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
- ---------------------               ---------------------         --------------------------------------------
<S>                                 <C>                           <C>
Timothy R. Schwertfeger*, 50        Chairman and Trustee          Chairman since July 1, 1996 of The John Nuveen
   333 West Wacker Drive                                          Company, John Nuveen & Co. Incorporated,
   Chicago, IL  60606                                             Nuveen Advisory Corp. and Nuveen Institutional
                                                                  Advisory Corp.; prior thereto, Executive Vice
                                                                  President and Director of The John Nuveen
                                                                  Company, John Nuveen & Co. Incorporated,
                                                                  Nuveen Advisory Corp. and Nuveen Institutional
                                                                  Advisory Corp.; Chairman and Director (since
                                                                  January 1997) of Nuveen Asset Management, Inc.;
                                                                  Director (since 1996) of Institutional Capital
                                                                  Corporation.

Robert P. Bremner, 58               Trustee                       Private Investor and Management Consultant.
   3725 Huntington Street, N.W.
   Washington, D.C. 20015

Lawrence H. Brown, 64               Trustee                       Retired (August 1989) as Senior Vice President of
   201 Michigan Avenue                                            The Northern Trust Company
   Highwood, IL  60040

Anne E. Impellizzeri, 66            Trustee                       Executive Director of Manitoga (Center for Russel
   5 Peter Cooper Road                                            Wright's Design with Nature); formerly President
   New York, NY 10010                                             and Chief Executive Officer of Blanton-Peale
                                                                  Institute.

Peter R. Sawers, 66                 Trustee                       Adjunct Professor of Business and Economics,
   22 The Landmark                                                University of Dubuque, Iowa; Adjunct Professor,
   Northfield, IL 60093                                           Lake Forest Graduate School of Management, Lake
                                                                  Forest, Illinois; Chartered Financial Analyst;
                                                                  Certified Management Consultant.
</TABLE>


                                      S-18

<PAGE>   55


<TABLE>
<CAPTION>
                                    POSITIONS AND OFFICES
NAME, AGE AND ADDRESS                     WITH FUND               PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
- ---------------------               ---------------------         --------------------------------------------
<S>                                 <C>                           <C>
William J. Schneider, 54            Trustee                       Senior Partner, Miller-Valentine Partners, Vice
   4000 Miller-Valentine Court                                    President, Miller-Valentine Group.
   P.O. Box 744
   Dayton, OH  45401

Judith M. Stockdale, 51             Trustee                       Executive Director, Gaylord and Dorothy
   35 East Wacker Drive                                           Donnelley Foundation (since 1994); prior thereto,
   Suite 2600                                                     Executive Director, Great Lakes Protection Fund
                                                                  Chicago, IL 60601 (from 1990 to 1994).

Alan G. Berkshire, 38               Vice President and            Vice President and General Counsel (since
   333 West Wacker Drive            Assistant Secretary           September 1997) and Secretary (since May 1998)
   Chicago, IL 60606                                              of The John Nuveen Company, John Nuveen & Co.
                                                                  Incorporated, Nuveen Advisory Corp. and Nuveen
                                                                  Institutional Advisory Corp., prior thereto, Partner
                                                                  in the law firm of Kirkland & Ellis.

Peter H. D'Arrigo, 31               Vice President and            Vice President of John Nuveen & Co. Incorporated
   333 West Wacker Drive            Treasurer                     (January 1999), prior thereto, Assistant Vice
   Chicago, IL  60606                                             President (January 1997); formerly, Associate of
                                                                  John Nuveen & Co. Incorporated; Chartered
                                                                  Financial Analyst.

Michael S. Davern, 41               Vice President                Vice President of Nuveen Advisory Corp. (since
   333 West Wacker Drive                                          January 1997); prior thereto, Vice President and
   Chicago, IL  60606                                             Portfolio Manager of Flagship Financial.

Lorna C. Ferguson, 53               Vice President                Vice President of John Nuveen & Co.
   333 West Wacker Drive                                          Incorporated; Vice President (since January 1998)
   Chicago, IL  60606                                             of Nuveen Advisory Corp. and Nuveen
                                                                  Institutional Advisory Corp.

William M. Fitzgerald, 35           Vice President                Vice President of Nuveen Advisory Corp. (since
   333 West Wacker Drive                                          December 1995); Assistant Vice President of
   Chicago, IL  60606                                             Nuveen Advisory Corp. (from September 1992 to
                                                                  December 1995), prior thereto, Assistant
                                                                  Portfolio Manager of Nuveen Advisory Corp.;
                                                                  Chartered Financial Analyst.

Stephen D. Foy, 44                  Vice President and            Vice President of John Nuveen & Co.
   333 West Wacker Drive            Controller                    Incorporated; Certified Public Accountant.
   Chicago, IL  60606

J. Thomas Futrell, 43               Vice President                Vice President of Nuveen Advisory Corp.;
   333 West Wacker Drive                                          Chartered Financial Analyst.
   Chicago, IL  60606

Richard A. Hubert, 36               Vice President                Vice President of Nuveen Institutional Advisory
   333 West Wacker Drive                                          Corp. (since March 1998) and Nuveen Advisory
   Chicago, IL  60606                                             Corp. (since January 1997); prior thereto, Vice
                                                                  President and Portfolio Manager of Flagship
                                                                  Financial.
</TABLE>


                                      S-19

<PAGE>   56




<TABLE>
<CAPTION>
                                    POSITIONS AND OFFICES
NAME, AGE AND ADDRESS                     WITH FUND               PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
- ---------------------               ---------------------         --------------------------------------------
<S>                                 <C>                           <C>
Steven J. Krupa, 41                 Vice President                Vice President of Nuveen Advisory Corp.
   333 West Wacker Drive
   Chicago, IL  60606

Larry W. Martin, 47                 Vice President and            Vice President, Assistant Secretary and Assistant
   333 West Wacker Drive            Assistant Secretary           General Counsel of John Nuveen & Co.
   Chicago, IL  60606                                             Incorporated; Vice President and Assistant
                                                                  Secretary of Nuveen Advisory Corp. and Nuveen
                                                                  Institutional Advisory Corp.; Vice President and
                                                                  Assistant Secretary (since January 1997) of Nuveen
                                                                  Asset Management, Inc.; Assistant Secretary of
                                                                  The John Nuveen Company.

Edward F. Neild, IV, 33             Vice President                Vice President (since September 1996); previously
   333 West Wacker Drive                                          Assistant Vice President (since December 1993) of
   Chicago, IL  60606                                             Nuveen Advisory  Corp., Portfolio Manager prior
                                                                  thereto; Vice President (since September 1996),
                                                                  previously Assistant Vice President (since May
                                                                  1995), of Nuveen Institutional Advisory Corp.,
                                                                  Portfolio Manager prior thereto; Chartered
                                                                  Financial Analyst.

Stephen S. Peterson, 41            Vice President                 Vice President (since September 1997), previously
   333 West Wacker Drive                                          Assistant Vice President (since September 1996) of
   Chicago, IL 60606                                              Nuveen Advisory Corp., Portfolio Manager prior thereto;
                                                                  Chartered Financial Analyst.

Stuart W. Rogers, 42               Vice President                 Vice President of John Nuveen & Co. Incorporated.
   333 West Wacker Drive
   Chicago, IL 60606

Thomas C. Spalding, Jr., 47        Vice President                 Vice President of Nuveen Advisory Corp. and
   333 West Wacker Drive                                          Nuveen Institutional Advisory Corp.; Chartered
   Chicago, IL 60606                                              Financial Analyst.

William S. Swanson, 33             Vice President                 Vice President of John Nuveen & Co. Incorporated
   333 West Wacker Drive                                          (since October 1997), prior thereto, Assistant Vice
   Chicago, IL 60606                                              President (since September 1996); formerly, Associate
                                                                  of John Nuveen & Co. Incorporated); Chartered
                                                                  Financial Analyst.

Gifford R. Zimmerman, 42           Vice President and             Vice President, Assistant Secretary and Associate
   333 West Wacker Drive           Secretary                      General Counsel of John Nuveen & Co. Incorporated;
   Chicago, IL 60606                                              Vice President and Assistant Secretary of Nuveen
                                                                  Advisory Corp., Vice President and Assistant Secretary
                                                                  of Nuveen Institutional Advisory Corp.; Assistant
                                                                  Secretary, The John Nuveen Company (since May
                                                                  1994); Chartered Financial Analyst.
</TABLE>


         Peter R. Sawers and Timothy R. Schwertfeger serve as members of the
Executive Committee of the Board of Trustees. 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.


                                      S-20

<PAGE>   57



         Mr. Schwertfeger is also a director or trustee, as the case may be, of
100 Nuveen open-end and closed-end funds advised by Nuveen Advisory and Nuveen
Institutional Advisory Corp.

         The other trustees of the Fund are directors or trustees, as the case
may be, of 36 open-end funds and 53 Nuveen closed-end funds advised by Nuveen
Advisory.


         At the next annual meeting, 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.


         The following table sets forth compensation to be paid by the Fund
projected through the end of the Fund's first full fiscal year. The Fund has no
retirement or pension plans. The officers and trustees affiliated with Nuveen
serve without any compensation from the Fund.

<TABLE>
<CAPTION>
                              ESTIMATED AGGREGATE           ESTIMATED TOTAL COMPENSATION
    NAME OF TRUSTEE         COMPENSATION FROM FUND*         FROM FUND AND FUND COMPLEX**
    ---------------         -----------------------         ----------------------------
<S>                         <C>                             <C>
Robert P. Bremner                      $132                       $68,000(1)
Lawrence H. Brown                      $143                       $74,000
Anne E. Impellizzeri                   $132                       $68,000(2)
Peter R. Sawers                        $132                       $68,000(2)
William J. Schneider                   $132                       $68,000(2)
Judith M. Stockdale                    $132                       $68,000(3)
</TABLE>

- ------------------

*    Based on the estimated compensation to be earned by the independent
     trustees for the period from inception to the fiscal year ending 10/31/99
     for services to the trust.

**   Based on the estimated compensation paid to the trustees for the one year
     period ending 12/31/99 for services to the open-end and closed-end funds
     advised by Nuveen Advisory.

(1) Includes $7,871 in estimated deferred compensation.
(2) Includes $52,470 in estimated deferred compensation.
(3) Includes $13,118 in estimated deferred compensation.

         The Fund has no employees. Its officers are compensated by Nuveen
Advisory or Nuveen.

INVESTMENT ADVISER

         Nuveen Advisory acts as investment adviser to the Fund, with
responsibility for the overall management of the Fund. Its address is 333 West
Wacker Drive, Chicago, Illinois 60606. Nuveen Advisory is also responsible for
managing the Fund's business affairs and providing day-to-day administrative
services to the Fund. For additional information regarding the management
services performed by Nuveen Advisory, see "Management of the Fund" in the
Prospectus.

         Nuveen Advisory is a wholly-owned subsidiary of Nuveen, which is also a
co-managing underwriter of the Fund's shares. Nuveen is sponsor of the Nuveen
Defined Portfolios, registered unit investment trusts, is the principal
underwriter for the Nuveen Mutual Funds, and has served as co-managing
underwriter for the shares of the Nuveen Exchange-Traded Funds. Over 1,300,000
individuals have invested to date in Nuveen's funds and trusts. Founded in 1898,
Nuveen brings over a century of expertise to the municipal bond market.
According to data from Strategic Insight, Nuveen is the leading sponsor of
exchange-traded municipal bond funds as measured by number of funds (57) and
fund assets under management ($26 billion). Overall, Nuveen and its affiliates
manage more than $55 billion in assets in a variety of products. Nuveen is a
subsidiary of The John Nuveen Company which, in turn, is approximately 78% owned
by The St. Paul Companies, Inc. ("St. Paul"). St. Paul is a publicly-traded
company located in St. Paul Minnesota, and is principally engaged in providing
property-liability insurance through subsidiaries.



                                      S-21

<PAGE>   58


         Pursuant to an investment management agreement between Nuveen Advisory
and the Fund, the Fund has agreed to pay for the services and facilities
provided by Nuveen Advisory an annual management fee, payable on a monthly
basis, according to the following schedule:


<TABLE>
<CAPTION>
   AVERAGE DAILY NET ASSET VALUE            MANAGEMENT FEE
   -----------------------------            --------------
<S>                                         <C>
For the first $125 million........              .6500%
For the next $125 million.........              .6375%
For the next $250 million.........              .6250%
For the next $500 million.........              .6125%
For the next $1 billion...........              .6000%
For assets over $2 billion........              .5750%
</TABLE>


         All fees and expenses are accrued daily and deducted before payment of
dividends to investors. The investment management agreement has been approved by
a majority of the disinterested trustees of the Fund and the sole shareholder of
the Fund.

         For the first ten years of the Fund's operation, Nuveen Advisory has
agreed to reduce the Fund's operating expenses by waiving the percentage of its
management fee set forth below:


<TABLE>
<CAPTION>
                   PERCENTAGE                           PERCENTAGE
                   REIMBURSED                           REIMBURSED
                (as a percentage                     (as a percentage
  YEAR ENDING   of average daily       YEAR ENDING   of average daily
    JULY 31       net assets)            JULY 31        net assets)
  ----------       ----------          ----------       ----------
<S>                <C>                 <C>              <C>
      1999            .30%                 2005             .25%
      2000            .30%                 2006             .20%
      2001            .30%                 2007             .15%
      2002            .30%                 2008             .10%
      2003            .30%                 2009             .05%
      2004            .30%
</TABLE>

- ------------------

*   From the commencement of operations.

         Reducing Fund expenses in this manner will tend to increase the amount
of income available for the Common Shareholders. Nuveen Advisory has not agreed
to reimburse the Fund for any portion of its fees and expenses beyond July 31,
2009.


                             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 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. Purchase from underwriters will
include a commission or concession paid by the issuer to the underwriter, and
purchases from dealers will include the spread between the bid and asked price.
It is the policy of Nuveen Advisory to seek the best execution under the
circumstances of each trade. Nuveen Advisory evaluates price as the primary
consideration, with the financial condition, reputation and responsiveness of
the dealer considered secondary in determining best execution. Given the best
execution obtainable, it will be Nuveen Advisory's practice to select dealers
which, in addition, furnish research information (primarily credit analysis 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


                                      S-22

<PAGE>   59



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, and
policies and practices of Nuveen Advisory in this regard must be consistent with
the foregoing and will, at all times, be subject to review by the Board of
Trustees of the Fund.

         Nuveen Advisory may manage other investment accounts and investment
companies for other clients which have investment objectives similar to those of
the Fund. Subject to applicable laws and regulations, Nuveen Advisory seeks to
allocate portfolio transactions equitably whenever concurrent decisions are made
to purchase or sell securities by the Fund and another advisory account. In
making such allocations the main factors to be considered will be the respective
investment objectives, the relative size of portfolio holdings of the same or
comparable securities, the availability of cash for investment and the size of
investment commitments generally held. While this procedure could have a
detrimental effect on the price or amount of the securities available to the
Fund from time to time, it is the opinion of the Board of Trustees that the
benefits available from Nuveen Advisory's organization will outweigh any
disadvantage that may arise from exposure to simultaneous transactions.

         Under the 1940 Act, the Fund may not purchase portfolio securities from
any underwriting syndicate of which Nuveen is a member except under certain
limited conditions set forth in Rule 10f-3. The rule sets forth requirements
relating to, among other things, the terms of an issue of municipal bonds
purchased by the Fund, the amount of municipal bonds which may be purchased in
any one issue and the assets of the Fund that may be invested in a particular
issue. In addition, purchases of securities made pursuant to the terms of the
Rule must be approved at least quarterly by the Board of Trustees, including a
majority of the members thereof who are not interested persons of the Fund.


                                 NET ASSET VALUE

         The Fund's net asset value per share is determined as of the close of
trading (normally 4:00 p.m. eastern time) on each day the New York Stock
Exchange is open for business. Net asset value is calculated by taking the fair
value of the Fund's total assets, including interest or dividends accrued but
not yet collected, less all liabilities, and dividing by the total number of
shares outstanding. The result, rounded to the nearest cent, is the net asset
value per share.

         In determining net asset value, expenses are accrued and applied daily
and securities and other assets for which market quotations are available are
valued at market value. The prices of municipal bonds are provided by a pricing
service and based on the mean between the bid and asked price. When price quotes
are not readily available (which is usually the case for municipal bonds), the
pricing service establishes a fair market value based on prices of comparable
municipal bonds. All valuations are subject to review by the Fund's Board of
Trustees or its delegate, Nuveen Advisory.


                       ADDITIONAL INFORMATION CONCERNING
                         THE AUCTIONS FOR MUNIPREFERRED

GENERAL

         AUCTION AGENCY AGREEMENT. The Fund has entered into an Auction Agency
Agreement (the "Auction Agency Agreement") with the Auction Agent (currently,
Bankers Trust Company) which provides, among other things, that the Auction
Agent will follow the Auction Procedures for purposes of determining the
Applicable Rate for shares of each series of MuniPreferred so long as the
Applicable Rate for shares of such series is to be based on the results of an
Auction.

         BROKER-DEALER AGREEMENTS. Each Auction requires the participation of
one or more Broker-Dealers. The Auction Agent has entered into agreements
(collectively, the "Broker-Dealer Agreements") with several Broker-Dealers
selected by the Fund, which provide for the participation of those
Broker-Dealers in Auctions for shares of MuniPreferred. See "Broker-Dealers"
below.



                                      S-23

<PAGE>   60



         SECURITIES DEPOSITORY. The Depository Trust Company ("DTC") will act as
the Securities Depository for the Agent Members with respect to shares of each
series of MuniPreferred. One certificate for all of the shares of each series of
MuniPreferred will be registered in the name of Cede, as nominee of the
Securities Depository. Such certificate will bear a legend to the effect that
such certificate is issued subject to the provisions restricting transfers of
shares of MuniPreferred contained in the Statement. The Fund will also issue
stop-transfer instructions to the transfer agent for shares of each series of
MuniPreferred. Prior to the commencement of the right of holders of preferred
shares to elect a majority of the Fund's trustees, as described under
"Description of MuniPreferred -- Voting Rights" in the Prospectus, Cede will be
the holder of record of all shares of each series of MuniPreferred and owners of
such shares will not be entitled to receive certificates representing their
ownership interest in such shares.

         DTC, a New York-chartered limited purpose trust company, performs
services for its participants (including the Agent Members), some of whom
(and/or their representatives) own DTC. DTC maintains lists of its participants
and will maintain the positions (ownership interests) held by each such
participant (the "Agent Member") in shares of MuniPreferred, whether for its own
account or as a nominee for another person.

CONCERNING THE AUCTION AGENT

         The Auction Agent is acting as agent for the Fund in connection with
Auctions. In the absence of bad faith or negligence on its part, the Auction
Agent will not be liable for any action taken, suffered, or omitted or for any
error of judgment made by it in the performance of its duties under the Auction
Agency Agreement and will not be liable any error of judgment made in good faith
unless the Auction Agent will have been negligent in ascertaining the pertinent
facts.

         The Auction Agent may rely upon, as evidence of the identities of the
Existing Holders of shares of MuniPreferred, the Auction Agent's registry of
Existing Holders, the results of Auctions and notices from any Broker-Dealer (or
other Person, if permitted by the Fund) with respect to transfers described
under "The Auction -- Secondary Market Trading and Transfer of MuniPreferred" in
the Prospectus and notices from the Fund. The Auction Agent is not required to
accept any such notice for an Auction unless it is received by the Auction Agent
by 3:00 p.m., New York City time, on the Business Day preceding such Auction.

         The Auction Agent may terminate the Auction Agency Agreement upon
notice to the Fund on a date no earlier than 45 days after such notice. If the
Auction Agent should resign, the Fund will use its best efforts to enter into an
agreement with a successor Auction Agent containing substantially the same terms
and conditions as the Auction Agency Agreement. The Fund may remove the Auction
Agent provided that prior to such removal the Fund shall have entered into such
an agreement with a successor Auction Agent.

BROKER-DEALERS

         The Auction Agent after each Auction for shares of MuniPreferred will
pay to each Broker-Dealer, from funds provided by the Fund, a service charge at
the annual rate of 1/4 of 1% in the case of any Auction immediately preceding a
Rate Period of less than one year, or a percentage agreed to by the Fund and the
Broker-Dealers in the case of any Auction immediately preceding a Rate Period of
one year or longer, of the purchase price of shares of MuniPreferred placed by
such Broker-Dealer at such Auction. For the purposes of the preceding sentence,
shares of MuniPreferred will be placed by a Broker-Dealer if such shares were
(a) the subject of Hold Orders deemed to have been submitted to the Auction
Agent by the Broker-Dealer and were acquired by such Broker-Dealer for its own
account or were acquired by such Broker-Dealer for its customers who are
Beneficial Owners or (b) the subject of an Order submitted by such Broker-Dealer
that is (i) a Submitted Bid of an Existing Holder that resulted in such Existing
Holder continuing to hold such shares as a result of the Auction or (ii) a
Submitted Bid of a Potential Holder that resulted in such Potential Holder
purchasing such shares as a result of the Auction or (iii) a valid Hold Order.

         The Fund may request the Auction Agent to terminate one or more
Broker-Dealer Agreements at any time, provided that at least one Broker-Dealer
Agreement is in effect after such termination.

         The Broker-Dealer Agreement provides that a Broker-Dealer (other than
an affiliate of the Fund) may submit Orders in Auctions for its own account,
unless the Fund notifies all Broker-Dealers that they may no longer do so, in


                                      S-24

<PAGE>   61



which case Broker-Dealers may continue to submit Hold Orders and Sell Orders for
their own accounts. Any Broker-Dealer that is an affiliate of the Fund may
submit Orders in Auctions, but only if such Orders are not for its own account.
If a Broker-Dealer submits an Order for its own account in any Auction, it might
have an advantage over other Bidders because it would have knowledge of all
Orders submitted by it in that Auction; such Broker-Dealer, however, would not
have knowledge of Orders submitted by other Broker-Dealers in that Auction.


                 CERTAIN PROVISIONS IN THE DECLARATION OF TRUST

         Under the Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Fund.
However, the Declaration contains an express disclaimer of shareholder liability
for debts or obligations of the Fund and requires that notice of such limited
liability be given in each agreement, obligation or instrument entered into or
executed by the Fund or the trustees. The Declaration further provides for
indemnification out of the assets and property of the Fund for all loss and
expense of any shareholder held personally liable for the obligations of the
Fund. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which the Fund would be
unable to meet its obligations. The Fund believes that the likelihood of such
circumstances is very remote.

         The Declaration includes provisions that could limit the ability of
other entities or persons to acquire control of the Fund. Specifically, the
Declaration requires a vote by holders of at least two-thirds of the Common
Shares and MuniPreferred Shares, voting together as a single class, except as
described below, to authorize (1) a conversion of the Fund from a closed-end to
an open-end investment company, (2) a merger or consolidation of the Fund, or a
series or class of the Fund, with any corporation, association, trust or other
organization or a reorganization or recapitalization of the Fund, or a series or
class of the Fund, (3) a sale, lease or transfer of all or substantially all of
the Fund's assets (other than in the regular course of the Fund's investment
activities), (4) in certain circumstances, a termination of the Fund, or a
series or class of the Fund or (5) removal of trustees, and then only for cause,
unless, with respect to (1) through (4), such transaction has already been
authorized by the affirmative vote of two-thirds of the total number of trustees
fixed in accordance with the Declaration or the By-laws, in which case the
affirmative vote of the holders of at least a majority of the Fund's Common
Shares and MuniPreferred Shares outstanding at the time, voting together as a
single class, is required, provided, however, that where only a particular class
or series is affected (or, in the case of removing a trustee, when the trustee
has been elected by only one class), only the required vote by the applicable
class or series will be required. None of the foregoing provisions may be
amended except by the vote of at least two-thirds of the Common Shares and
MuniPreferred Shares, voting together as a single class. In the case of the
conversion of the Fund to an open-end investment company, or in the case of any
of the foregoing transactions constituting a plan of reorganization which
adversely affects the holders of MuniPreferred Shares, the action in question
will also require the affirmative vote of the holders of at least two-thirds of
the Fund's MuniPreferred Shares outstanding at the time, voting as a separate
class, or, if such action has been authorized by the affirmative vote of
two-thirds of the total number of trustees fixed in accordance with the
Declaration or the By-laws, the affirmative vote of the holders of at least a
majority of the Fund's MuniPreferred Shares outstanding at the time, voting as a
separate class. The votes required to approve the conversion of the Fund from a
closed-end to an open-end company or to approve transactions constituting a plan
of reorganization which investment 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.

         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.



                                      S-25
<PAGE>   62



            REPURCHASE OF COMMON 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 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 the 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 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 New York Stock Exchange, or (b) impair the Fund's status as a
regulated investment company under 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 New York
Stock Exchange, (c) declaration of a banking moratorium by Federal or state
authorities or any suspension of payment by United States 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 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 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


                                      S-26

<PAGE>   63



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 New
York Stock Exchange. 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 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 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.

         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.


                                   TAX MATTERS

FEDERAL INCOME TAX MATTERS

         The following is based upon the advice of Vedder, Price, Kaufman &
Kammholz, counsel to the Fund.


         The Fund intends to qualify under Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code"), as a regulated investment company and to
satisfy conditions which enable dividends on Common Shares or shares of
MuniPreferred which are attributable to interest on Municipal Obligations to be
exempt from Federal income tax in the hands of owners of such stock, subject to
the possible application of the alternative minimum tax.


         To qualify under Subchapter M for tax treatment as a regulated
investment company, the Fund must, among other things: (a) distribute to its
shareholders at least 90% of the sum of (i) its investment company taxable
income (as that term is defined in the Code determined without regard to the
deduction for dividends paid) and (ii) its net tax-exempt income and (b)
diversify its holdings so that, at the end of each fiscal quarter of the Fund
(i) at least 50% of the market value of the Fund's assets is represented by
cash, cash items, U.S. government securities and securities of other regulated
investment companies, and other securities, with these other securities limited,
with respect to any one issuer, to an amount not greater in value than 5% of the
Fund's total assets, and to not more than 10% of the outstanding voting
securities of such issue, and (ii) not more than 25% of the market value of the
Fund's assets is invested in the securities of any one issuer (other than U.S.
government securities or securities of other regulated investment companies). In
meeting these requirements of Subchapter M of the Code, the Fund may be
restricted in the utilization of certain of the investment techniques described
under "Investment Objective and Policies" above. 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 Federal corporate income tax upon its
taxable income for that year, and distributions to its


                                      S-27

<PAGE>   64



shareholders would be taxable to such holders as ordinary income to the extent
of the earnings and profits of the Fund. A regulated investment company that
fails to distribute, by the close of each calendar year, an amount equal to the
sum of 98% of its ordinary taxable income for such year and 98% of its capital
gain net income for the one year period ending October 31 in such year, plus any
shortfalls from the prior year's required distribution, is liable for a 4%
excise tax on the portion of the undistributed amount of such income that is
less than the required amount for such distributions. To avoid the imposition of
this excise tax, the Fund generally makes the required distributions of its
ordinary taxable income, if any, and its capital gain net income, to the extent
possible, by the close of each calendar year.


         The Fund intends to qualify to pay "exempt-interest" dividends on its
Common Shares and shares of MuniPreferred as defined under the Code. Under the
Code, at the close of each quarter of its taxable year, if at least 50% of the
value of its total assets consists of municipal bonds, the Fund will be
qualified to pay exempt-interest dividends to its shareholders. Exempt-interest
dividends are dividends or any part thereof (other than a capital gain dividend)
paid by the Fund which are attributable to interest on municipal bonds and are
so designated by the Fund. Exempt-interest dividends will be exempt from Federal
income tax, subject to the possible application of the Federal alternative
minimum tax. Insurance proceeds received by the Fund under any insurance
policies in respect of scheduled interest payments on defaulted municipal bonds,
as described herein, will generally be excludable from Federal gross income
under Section 103(a) of the Code. In the case of non-appropriation by a
political subdivision, however, there can be no assurance that payments made by
the issuer representing interest on such "non-appropriation" municipal lease
obligations will be excludable from gross income for Federal income tax
purposes. See "Investment Policies and Techniques" above. Gains of the Fund that
are attributable to market discount on certain Municipal Obligations acquired
after April 30, 1993 are treated as ordinary income. Distributions to
shareholders by the Fund of net income received, if any, from taxable temporary
investments and net short-term capital gains, if any, realized by the Fund will
be taxable to its shareholders as ordinary income. Distributions by the Fund of
net capital gains (i.e., the excess of net long-term capital gain over net
short-term capital loss), if any, are taxable as long-term capital gain,
regardless of the length of time the shareholder has owned Common Shares or
shares of MuniPreferred of the Fund. The amount of taxable income allocable to
the Fund's shares of MuniPreferred will depend upon the amount of such income
realized by the Fund, but is not generally expected to be significant. Except
for dividends paid on shares of MuniPreferred which include an allocable portion
of any net capital gains or other taxable income, the Fund anticipates that all
other dividends paid on shares of its MuniPreferred will constitute
exempt-interest dividends for Federal income tax purposes. Distributions, if
any, in excess of the Fund's earnings and profits will first reduce its adjusted
tax basis of a shareholder's shares and, after that basis has been reduced to
zero will constitute capital gain to the shareholder (assuming the shares are
held as a capital asset). As long as the Fund qualifies as a regulated
investment company under the Code, no part of its distributions to shareholders
will qualify for the dividends-received deduction for corporations.



         The Internal Revenue Service (the "IRS") requires that a regulated
investment company that has two or more classes of shares must designate to each
such class proportionate amounts of each type of its income for each tax year
based upon the percentage of total dividends distributed to each class for such
year. The Fund intends each year to allocate, to the fullest extent practicable,
net tax-exempt interest, net capital gains and other taxable income, if any,
between its Common Shares and shares of MuniPreferred in proportion to the total
dividends paid to each class with respect to such year. To the extent permitted
under applicable law, the Fund reserves the right to make special allocations of
income within a class, consistent with the objectives of the Fund. The Fund
will, in the case of a Minimum Rate Period or a Special Rate Period of 28 Rate
Period Days, and may, in the case of any other Special Rate Period, notify the
Auction Agent of the amount of any net capital gains or other income taxable for
Federal income tax purposes to be included in any dividend on shares of its
MuniPreferred prior to the Auction establishing the Applicable Rate for such
dividend. If, (a) in the case of any Minimum Rate Period or any Special Rate
Period of 28 Rate Period Days or fewer, the Fund allocates any net capital gains
or other income taxable for Federal income tax purposes to a dividend paid on
shares of MuniPreferred without having given advance notice thereof to the
Auction Agent as required by the Statement solely by reason of the fact that
such allocation is made retroactively as a result of the redemption of all or a
portion of the outstanding shares of its MuniPreferred or the liquidation of the
Fund or (b) in the case of any Special Rate Period of more than 28 Rate Period
Days, the Fund allocates any net capital gains or other taxable income for
Federal income tax purposes to shares of its MuniPreferred without having given
advance notice thereof as described above, the Fund will make certain payments
to owners of shares of its MuniPreferred to which such allocation was made to
offset the Federal income tax effect thereof as described under "Description of
MuniPreferred -- Dividends and Dividend Periods -- Gross-up Payments" in the
Prospectus.



         In order for any distributions to owners of the Fund's shares of
MuniPreferred to be eligible to be treated as exempt-interest dividends, such
shares of MuniPreferred must be treated as stock for Federal income tax
purposes.




                                      S-28

<PAGE>   65




         If at any time when the Fund's shares of MuniPreferred are outstanding
the Fund fails to meet the MuniPreferred Basic Maintenance Amount or the 1940
Act MuniPreferred Asset Coverage, the Fund will be required to suspend
distributions to holders of its Common Shares until such maintenance amount or
asset coverage, as the case may be, is restored. See "Description of
MuniPreferred -- Dividends and Dividend Periods -- Restrictions on Dividends and
Other Distributions" in the Prospectus. This may prevent the Fund from
distributing at least 90% of its investment company taxable income and net
tax-exempt income, and may therefore jeopardize the Fund's qualification for
taxation as a regulated investment company or cause the Fund to incur a tax
liability or a non-deductible 4% excise tax on the undistributed taxable income
(including gain), or both. Upon failure to meet the MuniPreferred Basic
Maintenance Amount or the 1940 Act MuniPreferred Asset Coverage, the Fund will
be required to redeem its shares of MuniPreferred in order to maintain or
restore such maintenance amount or asset coverage and avoid the adverse
consequences to the Fund and its shareholders of failing to qualify as a
regulated investment company. There can be no assurance, however, that any such
redemption would achieve such objectives.

         The Code provides that interest on indebtedness incurred or continued
to purchase or carry the Fund's shares to which exempt-interest dividends are
allocated is not deductible. Under rules used by the IRS for determining when
borrowed funds are considered used for the purpose of purchasing or carrying
particular assets, the purchase or ownership of shares may be considered to have
been made with borrowed funds even though such funds are not directly used for
the purchase or ownership of such shares.


         The interest on private activity bonds in most instances is not
Federally tax-exempt to a person who is a "substantial user" of a facility
financed by such bonds or a "related person" of such "substantial user." As a
result, the Fund may not be an appropriate investment for shareholders who are
considered either a "substantial user" or a "related person" within the meaning
of the Code. In general, a "substantial user" of a facility includes a
"non-exempt person who regularly uses a part of such facility in his trade or
business." "Related persons" are in general defined to include persons among
whom there exists a relationship, either by family or business, which would
result in a disallowance of losses in transactions among them under various
provisions of the Code (or if they are members of the same controlled group of
corporations under the Code), including a partnership and each of its partners
(and certain members of their families), an S corporation and each of its
shareholders (and certain members of their families) and various combinations of
these and other relationships. The foregoing is not a complete description of
all of the provisions of the Code covering the definitions of "substantial user"
and "related person."


         The Fund may, at its option, redeem shares of its MuniPreferred in
whole or in part, and is required to redeem shares of its MuniPreferred to the
extent required to maintain the MuniPreferred Basic Maintenance Amount and the
1940 Act MuniPreferred Asset Coverage. Gain or loss, if any, resulting from a
redemption of the shares of MuniPreferred will be taxed as gain or loss from the
sale or exchange of the shares of MuniPreferred under Section 302 of the Code
rather than as a dividend, but only if the redemption distribution (a) is deemed
not to be essentially equivalent to a dividend, (b) is in complete redemption of
an owner's interest in the Fund, (c) is substantially disproportionate with
respect to the owner, or (d) with respect to non-corporate owners, is in partial
liquidation of the Fund. For purposes of (a), (b) and (c) above, an owner's
common shares ownership of the Fund will be taken into account.

         Nonresident alien individuals and certain foreign corporations and
other entities ("foreign investors") generally are subject to U.S. withholding
tax at the rate of 30% (or possibly a lower rate provided by an applicable tax
treaty) on distributions of taxable net investment income and net short-term
capital gains. To the extent received by foreign


                                      S-29

<PAGE>   66




investors, exempt-interest dividends, distributions of net long-term capital
gains and gain from the sale or other disposition of the shares of
MuniPreferred generally are exempt from U.S. taxation. Different tax
consequences may result if the owner is engaged in a trade or business in the
United States or, in the case of an individual, is present in the United States
for more than 182 days during a taxable year.


         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 of the year declared.


         Certain of the Fund's investment practices are subject to special
provisions of the Code that, among other things, may defer the use of certain
deductions or losses of the Fund and affect the holding period of securities
held by the Fund and the character of the gains or losses realized by the Fund.
These provisions may also require the Fund to recognize income or gain without
receiving cash with which to make distributions in the amounts necessary to
satisfy the requirements for maintaining regulated investment company status
and for avoiding income and excise taxes. The Fund will monitor its
transactions and may make certain tax elections in order to mitigate the effect
of these rules and prevent disqualification of the Fund as a regulated
investment company.



         The sale or other disposition of Common Shares or shares of
MuniPreferred of the Fund will normally result in capital gain or loss to
shareholders. 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, under current law short-term capital gains and ordinary
income will be taxed at a maximum rate of 39.6% while long-term capital gains
generally will be taxed at a maximum rate of 20%. However, because of the
limitations on itemized deductions and the deduction for personal exemptions
applicable to higher income taxpayers, the effective rate of tax may be higher
in certain circumstances. Losses realized by a shareholder on the sale or
exchange of shares of the Fund held for six months or less are disallowed to the
extent of any distribution of exempt-interest dividends received with respect to
such shares, and, if not disallowed, such losses are treated as long-term
capital losses to the extent of any distribution of long-term capital gain
received with respect to such shares. A shareholder's holding period is
suspended for any periods during which the shareholder's risk of loss is
diminished as a result of holding one or more other positions in substantially
similar or related property, or through certain options or short sales. Any
loss realized on a sale or exchange of shares of the Fund will be disallowed to
the extent those shares of the Fund are replaced by other shares within a
period of 61 days beginning 30 days before and ending 30 days after the date of
disposition of the original shares. In that event, the basis of the
replacement shares of the Fund will be adjusted to reflect the disallowed loss.



         Federal tax law imposes an alternative minimum tax with respect to both
corporations and individuals. Interest on certain Municipal Obligations, such as
bonds issued to make loans for housing purposes or to private entities (but not
to certain tax-exempt organizations such as universities and non-profit
hospitals) is included as an item of tax preference in determining the amount of
a taxpayer's alternative minimum taxable income. To the extent that the Fund
receives income from Municipal Obligations subject to the Federal alternative
minimum tax, a portion of the dividends paid by it, although otherwise exempt
from Federal income tax, will be taxable to its shareholders to the extent that
their tax liability is determined under the alternative minimum tax. The Fund
will annually supply a report indicating the percentage of the Fund's income
attributable to Municipal Obligations subject to the Federal alternative minimum
tax. In addition, for certain corporations, alternative minimum taxable income
is increased by 75% of the difference between an alternative measure of income
("adjusted current earnings") and the amount otherwise determined to be the
alternative minimum taxable income. Interest on all Municipal Obligations, and
therefore all distributions by the Fund that would otherwise be tax-exempt, is
included in calculating a corporation's adjusted current earnings. Certain small
corporations are not subject to the alternative minimum tax.


         Tax-exempt income, including exempt-interest dividends paid by the
Fund, is taken into account in calculating the amount of social security and
railroad retirement benefits that may be subject to Federal income tax.

         The Fund is required in certain circumstances to withhold 31% of
taxable dividends and certain other payments paid to non-corporate holders of
the Fund's shares who do not furnish to the Fund their correct taxpayer
identification number (in the case of individuals, their social security number)
and certain certifications, or who are otherwise subject to backup withholding.

         The Code provides that every shareholder required to file a tax return
must include for information purposes on such return the amount of tax-exempt
interest received during the taxable year, including any exempt-interest
dividends received from the Fund.


                                      S-30
<PAGE>   67




         The value of Common Shares acquired pursuant to the Fund's Dividend
Reinvestment Plan will generally be excluded from gross income to the extent
that the cash amount reinvested would be excluded from gross income.



         The foregoing is a general summary of the provisions of the Code and
regulations thereunder presently in effect as they directly govern the taxation
of the Fund and its shareholders. These provisions are subject to change by
legislative or administrative action, and any such change may be retroactive.
Moreover, the foregoing does not address many of the factors that may be
determinative of whether an investor will be liable for the alternative minimum
tax. Shareholders are advised to consult their own tax advisers for more
detailed information concerning the Federal income tax consequences of
purchasing, holding, and disposing of Fund shares.


STATE TAX MATTERS


         The following is a general 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 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, and that it will distribute all
interest and dividends it receives to the shareholders.

         The Fund will be subject to the California corporate franchise and
corporation income tax only if it has a sufficient nexus with California. If it
is subject to the California franchise or corporation income tax, the Fund does
not expect to pay a material amount of such tax.

         If at the close of each quarter of the Fund's taxable year at least 50%
of the value of its total assets consists of obligations that, when held by
individuals, pay interest that is exempt from tax under California 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
subject to the California personal income tax.

         All distributions of the Fund to corporate shareholders, regardless of
source, will be subject to the California corporate [franchise] tax.

         Gain on the sale, exchange, or other disposition of the MuniPreferred
shares will be subject to the California personal income and corporate franchise
tax.

         MuniPreferred may be subject to the California estate tax if held by a
California decedent at the time of death.

         Shareholders are advised to consult with their own tax advisers for
more detailed information concerning California tax matters.


                            CERTAIN OWNERS OF RECORD

         As of _________, __, 1998, no person is known to the Fund to own of
record or beneficially five percent or more of the outstanding Common Shares or
MuniPreferred.




                                      S-31

<PAGE>   68



                                     EXPERTS


         The Statement of Net Assets of the Fund as of May 21, 1999 appearing in
this Statement of Additional Information has been audited by Ernst & Young LLP,
Sears Tower, 233 South Wacker Drive, Chicago, Illinois 60606, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
is included in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing. Ernst & Young audits and reports on the
Fund's annual financial statements, reviews certain regulatory reports and the
Fund's Federal income tax returns, and performs other professional accounting,
auditing, tax and advisory services when engaged to do so by the Fund.




                                      S-32

<PAGE>   69

                         REPORT OF INDEPENDENT AUDITORS


The Board of Trustees and Shareholder
Nuveen California Dividend Advantage Municipal Fund

We have audited the accompanying statement of net assets of the Fund as of
May 21, 1999. This statement is the responsibility of the Fund's management.
Our responsibility is to express an opinion on this statement of net assets
based on our audit.

We conducted our audit in accordance with generally accepted accounting
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement of net assets is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statement of net assets. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall statement of
net assets presentation. We believe that our audit provides a reasonable basis
for our opinion.

In our opinion, the statement of net assets referred to above presents fairly,
in all material respects, the financial position of the Fund at May 21, 1999,
in conformity with generally accepted accounting principles.


                                             ERNST & YOUNG LLP


Chicago, Illinois
May 21, 1999



<PAGE>   70
               NUVEEN CALIFORNIA DIVIDED ADVANTAGE MUNICIPAL FUND


                            STATEMENT OF NET ASSETS
                                  May 21, 1999

<TABLE>
<S>                                                                           <C>
ASSETS
  Cash......................................................................  $100,021
                                                                              --------

NET ASSETS..................................................................  $100,021
                                                                              ========

NET ASSETS REPRESENTS:
    Cumulative preferred shares, $.01 par value; unlimited number
      of share authorized, no shares outstanding............................  $     --
    Common Shares, $.01 par value; unlimited number of shares
      authorized, shares outstanding........................................        70
    Paid-in surplus.........................................................    99,951
                                                                              --------
                                                                              $100,021
                                                                              ========
Net asset value per Common Share outstanding ($100,021 divided by
  6,982.238 Common Shares outstanding)......................................  $ 14.325
                                                                              ========
</TABLE>




- -----------
NOTES--
     The Fund was organized as a Massachusetts business trust on December 1,
1998, and has been inactive since that date except for matters relating to its
organization and registration as a closed-end, diversified management
investment company under the Investment Company Act of 1940, as amended, and
the Securities Act of 1933, as amended, and the sale of 6,982.238 Common Shares
to Nuveen Advisory Corp. (the Adviser), the Fund's investment adviser. All
organization costs (approximately $10,000) and offering costs, limited to $0.02
per Common Share, incurred by the Fund in connection with the initial seeding
will be absorbed by Nuveen. All other offering costs relating to the Fund's
offering of Common Shares, limited to $0.02 per Common Share, will be reflected
as a reduction of net assets at the time of the public offering of Common
Shares. All offering costs (other than sales load) that exceed $0.02 per Common
Share will be absorbed by Nuveen.

The Fund is authorized by its Declaration of Trust to issue an unlimited number
of preferred shares having a par value of $.01 per share in one or more classes
or series, with dividend, liquidation preference and other rights as determined
by the Fund's Board of Trustees, by action of the Board of Trustees without the
approval of the Common Shareholders.

The Fund's financial statements are prepared in accordance with generally
accepted accounting principles which require the use of management estimates.
Actual results may differ from those estimates.

<PAGE>   71


STATEMENT OF NET ASSETS(UNAUDITED)
June 28, 1999





<TABLE>
<S>                                                                 <C>
ASSETS                                                              $ 319,588,585
Investments in municipal securities, at market value
Temporary investments in short-term municipal securities,
  at amortized cost, which approximates market value                   13,500,000
Cash                                                                   35,278,346
Interest receivable                                                     4,457,285
Other assets                                                              155,297
                                                                    -------------

  Total assets                                                        372,979,513
                                                                    -------------



LIABILITIES                                                            55,059,718
Payable for investments purchased
Accrued expenses:
  Management fees                                                           6,878
  Other                                                                   466,280
                                                                    -------------

  Total liabilities                                                    55,532,876
                                                                    -------------

Net assets                                                          $ 317,446,637
                                                                    =============

Shares outstanding                                                     22,556,982
                                                                    =============

Net asset value per share outstanding (net assets
  divided by shares outstanding)                                    $       14.07
                                                                    =============
</TABLE>


<PAGE>   72





STATEMENT OF OPERATIONS (UNAUDITED)
For the Period May 26, 1999 (commencement of operations) through June 28, 1999



<TABLE>
<S>                                                                    <C>
INVESTMENT INCOME                                                      $    1,041,519
                                                                       --------------
EXPENSES
Management fees                                                               174,580
Shareholder's servicing agent fees and expenses                                 1,451
Custodian's fees and expenses                                                   4,151
Trustee's fees and expenses                                                       211
Professional fees                                                               1,706
Shareholders' reports - printing and mailing expenses                           5,613
Stock exchange listing fees                                                     2,127
Investor relations expense                                                      1,753
Other expenses                                                                    519
                                                                       --------------
Total expenses before expense reimbursement                                   192,111
  Expense reimbursement                                                       (81,826)
                                                                       --------------
Net expenses                                                                  110,285
                                                                       --------------

Net investment income                                                         931,234
                                                                       --------------

REALIZED AND UNREALIZED GAIN (LOSS) FROM INVESTMENTS
Net realized gain (loss) from investment transactions                             -
Net change in unrealized appreciation or depreciation of investment        (6,162,368)
                                                                       --------------
Net gain (loss) from investments                                           (6,162,368)
                                                                       --------------
Net increase (decrease) in net assets from operations                  $   (5,231,134)
                                                                       ==============
</TABLE>

<PAGE>   73
STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED)
For the Period May 26, 1999 (commencement of operations) through June 28, 1999


<TABLE>
<S>                                                            <C>
OPERATIONS
Net investment income                                          $     931,234
Net realized gain (loss) from investment transactions                     --
Net change in unrealized appreciation or depreciation
  of investments                                                  (6,162,368)
                                                               -------------

Net increase (decrease) in net assets from operations             (5,231,134)
                                                               -------------

CAPITAL SHARE TRANSACTIONS
Net proceeds from sale of Common shares                          322,577,750
                                                               -------------

Net increase in net assets                                       317,346,616
Net assets at beginning of period                                    100,021
                                                               -------------

Net assets at end of period                                    $ 317,446,637
                                                               =============

Balance of undistributed net investment income at
  end of period                                                $     931,234
                                                               =============
</TABLE>

<PAGE>   74
              PORTFOLIO OF INVESTMENTS (Unaudited)

              NUVEEN CALIFORNIA DIVIDEND ADVANTAGE MUNICIPAL FUND (NAC)


              June 28, 1999


<TABLE>
<CAPTION>

      PRINCIPAL                                                                          OPTIONAL CALL                  MARKET
       AMOUNT     DESCRIPTION                                                             PROVISIONS* RATINGS**          VALUE

<S>                                                                                      <C>           <C>             <C>
                  HEALTH CARE - 2.6%
      $ 8,400,000 CALIFORNIA HEALTH, KAISER PERMANENTE, SERIES 98B,                      10/10 at 100       A         $  8,213,940
                  5.250%, 10/01/14 (Optional put 10/01/08)


                  HOUSING/MULTIFAMILY - 17.9%


        7,700,000 CALIFORNIA STATEWIDE COMMUNITIES DEVELOPMENT AUTHORITY,                 7/09 at 102     N/R            7,700,000
                  MULTIFAMILY HOUSING, EL SERENO CITY LIGHTS, 6.650%,
                  7/01/39 (Alternative Minimum Tax)



       10,000,000 CALIFORNIA STATEWIDE COMMUNITIES DEVELOPMENT AUTHORITY,                No Opt. Call    BBB+           10,000,000
                  MULTIFAMILY HOUSING, ARCHSTONE/LECLUB, SERIES 99G, 5.300%,
                  6/01/29 (DD) (Mandatory put 6/01/08)


       15,000,000 CALIFORNIA STATEWIDE COMMUNITIES DEVELOPMENT AUTHORITY,                 7/08 at 101     BBB           14,506,350
                  IRVINE APARTMENTS, SERIES 98A2, 4.900%, 5/15/25 (Mandatory
                  put 5/15/08)


        4,810,000 CALIFORNIA STATEWIDE COMMUNITIES DEVELOPMENT AUTHORITY,                 7/09 at 102     N/R            4,764,065
                  MULTIFAMILY HOUSING, CHERRY HILL VILLAGE, SERIES 99,
                  6.500%, 7/01/34


        5,000,000 CONTRA COSTA COUNTY, MULTIFAMILY HOUSING, DELTA VIEW,                   6/09 at 102     N/R            4,954,550
                  SERIES 99C, 6.750%, 12/01/30 (Alternative Minimum Tax)


       15,000,000 SAN BERNARDINO COUNTY HOUSING, REDLANDS APARTMENTS,                    No Opt. Call      A3           14,965,050
                  MULTIFAMILY HOUSING, 5.200%, 12/01/28 (Mandatory put
                  6/15/09)



                  HOUSING/SINGLE FAMILY - 3.5%


       11,500,000 CALIFORNIA HOUSING FINANCE AGENCY, HOME MORTGAGE,                   2/09 at 101 1/2     AAA           10,993,425
                  SERIES 98E2, 5.250%, 2/01/33 (Alternative Minimum Tax)



                  LONG-TERM CARE - 2.5%
</TABLE>


<PAGE>   75


<TABLE>
<S>                                                                                      <C>           <C>           <C>
     $  8,000,000 RIVERSIDE COUNTY PUBLIC FINANCING AUTHORITY,  AIR                       5/09 at 101    BBB-         $  7,932,080
                  FORCE VILLAGE WEST,  5.800%, 5/15/29 (DD)

                  TAX OBLIGATION/GENERAL - 4.4%


       15,000,000 CALIFORNIA STATE GENERAL OBLIGATION,  5.000%, 8/01/29                   8/09 at 101     AAA           14,037,750


                  TAX OBLIGATION/LIMITED - 25.9%


       15,250,000 LOS ANGELES COUNTY PUBLIC WORKS, REGIONAL PARK/OPEN                    10/07 at 101      AA           14,493,905
                  SPACE  DISTRICT, SERIES 97A, 5.000%, 10/01/19



       14,160,000 OAKLAND - STATE  BUILDING AUTHORITY, STATE LEASE,                       4/08 at 101     AAA           13,342,543
                  SERIES 98A, ELIHU M. HARRIS STATE OFFICE  BUILDING,
                  5.000%, 4/01/23



       13,290,000 JURUPA COMMUNITY SERVICE DISTRICT, SPECIAL TAX,                         9/08 at 102     AAA           11,914,219
                  4.750%, 9/01/24 (Optional put 9/01/10)


        5,500,000 LOS ANGELES COUNTY CERTIFICATES OF PARTICIPATION,                       9/08 at 101     AAA            4,947,085
                  DISNEY PROJECT  REFUNDING,  4.750%, 3/01/23


       33,000,000 LOS ANGELES COUNTY METROPOLITAN TRANSPORATION AUTHORITY,
                  PROPOSITION C SALES TAX, SERIES 98A,  5.000%, 7/01/23                   7/08 at 101     AAA           31,087,650



        6,880,000 LOS ANGELES COUNTY METROPOLITAN TRANSPORATION AUTHORITY,                7/09 at 101     AAA            6,486,670
                  PROPOSITION A SALES TAX, SERIES 99C,  5.000%, 7/01/21


                  TRANSPORTATION - 8.0%


       15,000,000 ALAMEDA CORRIDOR TRANSPORTATION, SENIOR LIEN, 5.000%,                  10/09 at 101     AAA           14,035,200
                  10/01/29


       11,995,000 SAN FRANCISCO INTERNATIONAL AIRPORT, SERIES 2ND-23B,                    5/09 at 101     AAA           11,372,220
                  5.125%, 5/01/30


                  U.S. GUARANTEED - 1.7%


        5,000,000 SAN FRANCISCO PUBLIC UTILITIES COMMISSION, WATER                       11/01 at 102     Aaa            5,378,700
                  REVENUE, SERIES 91A, 6.500%, 11/01/17 (Pre-refunded
                  to 11/01/01)

</TABLE>



<PAGE>   76


<TABLE>
<S>                                                                                   <C>             <C>            <C>
                  UTILITIES - 18.5%


     $ 10,000,000 NORTHERN CALIFORNIA POWER AGENCY, HYDROELECTRIC PROJECT 1,              7/08 at 101     AAA         $  9,368,500
                  SERIES 98A,  5.000%, 7/01/28


       26,500,000 NORTHERN CALIFORNIA POWER AGENCY, HYDROELECTRIC PROJECT 1,              7/08 at 101     AAA           25,353,610
                  SERIES 98A, DEBT RESTRUCTURING PROGRAM,  5.200%, 7/01/32


       10,500,000 PUERTO RICO ELECTRIC POWER AUTHORITY, SERIES 98DD, 5.000%,          7/08 at 101 1/2    BBB+            9,721,740
                  7/01/28


       15,000,000 SACRAMENTO MUNICIPAL ELECTRIC REVENUE, SERIES 99M REFUNDING,            7/04 at 101       A           14,261,550
                  5.250%, 7/01/28 (DD)


                  WATER AND SEWER - 15.7%


       12,000,000 CARMICHAEL WATER DISTRICT, CERTICATES OF PARTICIPATION,                 9/09 at 102     AAA           11,407,680
                  5.125%, 9/01/29


        4,985,000 EAST BAY MUNICIPAL WASTEWATER SYSTEM, SUBORDINATE LIEN,                 6/08 at 101     AAA            4,436,650
                  4.750%, 6/01/28


        5,000,000 EAST BAY MUNICIPAL WASTEWATER SYSTEM, SUBORDINATE LIEN,                 6/08 at 101     AAA            4,409,950
                  4.750%, 6/01/34


        7,000,000 LOS ANGELES WASTEWATER SYSTEM,  REVENUE BONDS, 1998                     6/08 at 101     AAA            6,558,230
                  SERIES A,  5.000%, 6/01/28


        9,000,000 METROPOLITAN WATER DISTRICT, SOUTHERN CALIFORNIA                        1/08 at 101      AA            8,305,920
                  WATERWORKS REVENUE BONDS,  5.000%, 7/01/37


       15,640,000 SAN DIEGO PUBLIC FINANCING AUTHORITY,  SEWER REVENUE,                   5/09 at 101     AAA           14,639,353
                  SERIES 99A,  5.000%, 5/15/29

- -----------------------------------------------------------------------------------------------------------------------------------
     $336,110,000 Total Investments - (cost $325,750,953) - 100.7%                                                     319,588,585
- -----------------------------------------------------------------------------------------------------------------------------------
- -------------------
                  Short-Term Investments - 4.2%


     $ 3,500,000  CALIFORNIA STATEWIDE COMMUNITIES DEVELOPMENT AUTHORITY,                                A-1+            3,500,000
                  S CERTIFICATES OF PARTICIPATION, ST. JOSEPH  HEALTH
                  SYSTEM OBLIGATED GROUP, VARIABLE RATE DEMAND BONDS,
                  4.250%, 7/01/24+



      10,000,000  VISTA CALIFORNIA TAX-FREE MONEY MARKET FUND                                                           10,000,000

- -----------------------------------------------------------------------------------------------------------------------------------
     $13,500,000   Total Short-Term Investments - (cost $13,500,000) - 4.2%                                             13,500,000
- -----------------------------------------------------------------------------------------------------------------------------------
- -------------------
</TABLE>



<PAGE>   77


<TABLE>
<S>                                                                                                                    <C>
                  Other Assets Less Liabilities - (4.9%)                                                              (15,641,948)
- ---------------------------------------------------------------------------------------------------------------------------------

                  Net Assets - 100%                                                                                  $317,446,637
=================================================================================================================================
</TABLE>




*    Optional Call Provisions: Dates (month and year) and prices of the earliest
     optional call or redemption. There may be other call provisions at varying
     prices at later dates.

**   Ratings: Using the higher of Standard & Poor's or Moody's rating.

N/R  Investment is not rated.

(DD) Security purchased on a delayed delivery basis (note 1).

+    Security has a maturity of more than one year, but has variable rate and
     demand features which qualify it as a short-term security. The rate
     disclosed is that currently in effect. This rate changes periodically based
     on market conditions or a specified market index.

     See accompanying notes to financial statements.


<PAGE>   78
                                                                      APPENDIX A






               NUVEEN CALIFORNIA DIVIDEND ADVANTAGE MUNICIPAL FUND

                  STATEMENT ESTABLISHING AND FIXING THE RIGHTS
                               AND PREFERENCES OF
                             MUNICIPAL AUCTION RATE
                  CUMULATIVE PREFERRED SHARES ("MUNIPREFERRED")


                                       A-1

<PAGE>   79




               NUVEEN CALIFORNIA DIVIDEND ADVANTAGE MUNICIPAL FUND

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                               PAGE
                                                                                                               ----
<S>                                                                                                            <C>
DEFINITIONS.....................................................................................................A-7
         "AA" Composite Commercial Paper Rate...................................................................A-7
         Accountant's Confirmation..............................................................................A-7
         Affiliate..............................................................................................A-8
         Agent Member...........................................................................................A-8
         Anticipation Notes.....................................................................................A-8
         Applicable Rate........................................................................................A-8
         Auction................................................................................................A-8
         Auction Agency Agreement...............................................................................A-8
         Auction Agent..........................................................................................A-8
         Auction Date...........................................................................................A-8
         Auction Procedures.....................................................................................A-8
         Available MuniPreferred................................................................................A-8
         Benchmark Rate.........................................................................................A-8
         Beneficial Owner.......................................................................................A-8
         "Bid" and "Bids".......................................................................................A-8
         "Bidder" and "Bidders".................................................................................A-8
         Board of Trustees......................................................................................A-8
         Broker-Dealer..........................................................................................A-8
         Broker-Dealer Agreement................................................................................A-9
         Business Day...........................................................................................A-9
         Code...................................................................................................A-9
         Commercial Paper Dealers...............................................................................A-9
         Common Shares..........................................................................................A-9
         Cure Date..............................................................................................A-9
         Date of Original Issue.................................................................................A-9
         Declaration............................................................................................A-9
         Deposit Securities.....................................................................................A-9
         Discounted Value.......................................................................................A-9
         [Reserved].............................................................................................A-9
         [Reserved].............................................................................................A-9
         Dividend Payment Date..................................................................................A-9
         Dividend Period........................................................................................A-9
         Existing Holder........................................................................................A-9
         Failure to Deposit....................................................................................A-10
         Federal Tax Rate Increase.............................................................................A-10
         Fund..................................................................................................A-10
         Gross-up Payment......................................................................................A-10
         Holder................................................................................................A-10
         "Hold Order" and "Hold Orders"........................................................................A-10
         Independent Accountant................................................................................A-10
         Initial Rate Period...................................................................................A-10
         Interest Equivalent...................................................................................A-10
         Issue Type Category...................................................................................A-10
         Kenny Index...........................................................................................A-10
         Late Charge...........................................................................................A-10
         Liquidation Preference................................................................................A-10
         Market Value..........................................................................................A-10
</TABLE>


                                      A-2

<PAGE>   80


<TABLE>
<S>                                                                                                            <C>
         Maximum Potential Gross-up Payment Liability..........................................................A-11
         Maximum Rate..........................................................................................A-11
         [Reserved]............................................................................................A-11
         Minimum Rate Period...................................................................................A-11
         Moody's...............................................................................................A-11
         Moody's Discount Factor...............................................................................A-11
         Moody's Eligible Asset................................................................................A-11
         Moody's Exposure Period...............................................................................A-11
         Moody's Volatility Factor.............................................................................A-12
         MuniPreferred.........................................................................................A-12
         MuniPreferred Basic Maintenance Amount................................................................A-12
         MuniPreferred Basic Maintenance Cure Date.............................................................A-13
         MuniPreferred Basic Maintenance Report................................................................A-13
         Municipal Obligations.................................................................................A-13
         1940 Act..............................................................................................A-13
         1940 Act Cure Date....................................................................................A-13
         1940 Act MuniPreferred Asset Coverage.................................................................A-13
         Notice of Redemption..................................................................................A-13
         Notice of Special Rate Period.........................................................................A-13
         "Order" and "Orders"..................................................................................A-13
         Original Issue Insurance..............................................................................A-13
         Other Issues..........................................................................................A-13
         Outstanding...........................................................................................A-14
         Permanent Insurance...................................................................................A-14
         Person................................................................................................A-14
         Portfolio Insurance...................................................................................A-14
         Potential Beneficial Owner............................................................................A-14
         Potential Holder......................................................................................A-14
         Preferred Shares......................................................................................A-14
         Quarterly Valuation Date..............................................................................A-14
         Rate Multiple.........................................................................................A-14
         Rate Period...........................................................................................A-14
         Rate Period Days......................................................................................A-14
         Receivables for Municipal Obligations Sold............................................................A-14
         Redemption Price......................................................................................A-14
         Reference Rate........................................................................................A-15
         Registration Statement................................................................................A-15
         S&P...................................................................................................A-15
         S&P Discount Factor...................................................................................A-15
         S&P Eligible Asset....................................................................................A-15
         S&P Exposure Period...................................................................................A-15
         S&P Volatility Factor.................................................................................A-15
         Secondary Market Insurance............................................................................A-15
         Securities Depository.................................................................................A-15
         "Sell Order" and "Sell Orders"........................................................................A-15
         Special Rate Period...................................................................................A-15
         Special Redemption Provisions.........................................................................A-15
         Submission Deadline...................................................................................A-15
         "Submitted Bid" and "Submitted Bids"..................................................................A-15
         "Submitted Hold Order" and "Submitted Hold Orders"....................................................A-15
         "Submitted Order" and "Submitted Orders"..............................................................A-15
         "Submitted Sell Order" and "Submitted Sell Orders"....................................................A-15
         Subsequent Rate Period................................................................................A-16
         Substitute Commercial Paper Dealer....................................................................A-16
         Substitute U.S. Government Securities Dealer..........................................................A-16
         Sufficient Clearing Bids..............................................................................A-16
</TABLE>


                                      A-3

<PAGE>   81



<TABLE>
<S>                                                                                                              <C>
         Taxable Allocation....................................................................................A-16
         Taxable Income........................................................................................A-16
         Taxable Equivalent of the Short-Term Municipal Bond Rate..............................................A-16
         Treasury Bill.........................................................................................A-16
         Treasury Bill Rate....................................................................................A-16
         Treasury Note.........................................................................................A-17
         Treasury Note Rate....................................................................................A-17
         U.S. Government Securities Dealer.....................................................................A-17
         Valuation Date........................................................................................A-17
         Volatility Factor.....................................................................................A-17
         Voting Period.........................................................................................A-17
         Winning Bid Rate......................................................................................A-17

PART I   ......................................................................................................A-18
         1.       Number of Authorized Shares..................................................................A-18
         2.       Dividends....................................................................................A-18
                  (a)    Ranking...............................................................................A-18
                  (b)    Cumulative Cash Dividends.............................................................A-18
                  (c)    Dividends Cumulative From Date of Original Issue......................................A-18
                  (d)    Dividend Payment Dates and Adjustment Thereof.........................................A-18
                  (e)    Dividend Rates and Calculation of Dividends...........................................A-18
                         (i)   Dividend Rates..................................................................A-18
                         (ii)  Calculation of Dividends........................................................A-20
                  (f)    Curing a Failure to Deposit...........................................................A-20
                  (g)    Dividend Payments by Fund to Auction Agent............................................A-20
                  (h)    Auction Agent as Trustee of Dividend Payments by Fund.................................A-20
                  (i)    Dividends Paid to Holders.............................................................A-21
                  (j)    Dividends Credited Against Earliest Accumulated But Unpaid Dividends..................A-21
                  (k)    Dividends Designated as Exempt-Interest Dividends.....................................A-21
         3.       Gross-up Payments............................................................................A-21
                  (a)    Minimum Rate Periods and Special Rate Periods of 28 Rate Period
                         Days or Fewer.........................................................................A-21
                  (b)    Special Rate Periods of More Than 28 Rate Period Days.................................A-21
                  (c)    No Gross-up Payments In the Event of a Reallocation...................................A-21
         4.       Designation of Special Rate Periods..........................................................A-21
                  (a)    Length of and Preconditions for Special Rate Period...................................A-21
                  (b)    Adjustment of Length of Special Rate Period...........................................A-22
                  (c)    Notice of Proposed Special Rate Period................................................A-22
                  (d)    Notice of Special Rate Period.........................................................A-22
                  (e)    Failure to Deliver Notice of Special Rate Period......................................A-23
         5.       Voting Rights................................................................................A-23
                  (a)    One Vote Per Share of MuniPreferred...................................................A-23
                  (b)    Voting For Additional Trustees........................................................A-23
                         (i)   Voting Period...................................................................A-23
                         (ii)  Notice of Special Meeting.......................................................A-24
                         (iii) Terms of Office of Existing Trustees............................................A-24
                         (iv)  Terms of Office of Certain Trustees to Terminate Upon
                               Termination of Voting Period....................................................A-24
                  (c)    Holders of MuniPreferred To Vote On Certain Other Matters.............................A-24
                         (i)   Increases in Capitalization.....................................................A-24
                         (ii)  1940 Act Matters................................................................A-25
                  (d)    Board May Take Certain Actions Without Shareholder Approval...........................A-25
                  (e)    Voting Rights Set Forth Herein Are Sole Voting Rights.................................A-26
                  (f)    No Preemptive Rights or Cumulative Voting.............................................A-26
                  (g)    Voting for Trustees Sole Remedy for Fund's Failure to Pay Dividends...................A-26
                  (h)    Holders Entitled to Vote..............................................................A-26
</TABLE>


                                      A-4

<PAGE>   82


<TABLE>
<S>               <C>                                                                                          <C>
         6.       1940 Act MuniPreferred Asset Coverage........................................................A-26
         7.       MuniPreferred Basic Maintenance Amount.......................................................A-26
         8.       [Reserved]...................................................................................A-28
         9.       Restrictions on Dividends and Other Distributions............................................A-28
                  (a)    Dividends on Preferred Shares Other Than MuniPreferred................................A-28
                  (b)    Dividends and Other Distributions With Respect to Common Shares
                         Under the 1940 Act....................................................................A-28
                  (c)    Other Restrictions On Dividends and Other Distributions...............................A-28
         10.      Rating Agency Restrictions...................................................................A-29
         11.      Redemption...................................................................................A-29
                  (a)    Optional Redemption...................................................................A-29
                  (b)    Mandatory Redemption..................................................................A-30
                  (c)    Notice of Redemption..................................................................A-31
                  (d)    No Redemption Under Certain Circumstances.............................................A-31
                  (e)    Absence of Funds Available for Redemption.............................................A-31
                  (f)    Auction Agent as Trustee of Redemption Payments by Fund...............................A-31
                  (g)    Shares for Which Notice of Redemption Has Been Given Are
                         No Longer Outstanding.................................................................A-31
                  (h)    Compliance With Applicable Law........................................................A-32
                  (i)    Only Whole Shares of MuniPreferred May Be Redeemed....................................A-32
         12.      Liquidation Rights...........................................................................A-32
                  (a)    Ranking...............................................................................A-32
                  (b)    Distributions Upon Liquidation........................................................A-32
                  (c)    Pro Rata Distributions................................................................A-32
                  (d)    Rights of Junior Shares...............................................................A-32
                  (e)    Certain Events Not Constituting Liquidation...........................................A-33
         13.      Miscellaneous................................................................................A-33
                  (a)    Amendment of Appendix A to Add Additional Series......................................A-33
                  (b)    Appendix A Incorporated By Reference..................................................A-33
                  (c)    No Fractional Shares..................................................................A-33
                  (d)    Status of Shares of MuniPreferred Redeemed, Exchanged or Otherwise
                         Acquired by the Fund..................................................................A-33
                  (e)    Board May Resolve Ambiguities.........................................................A-33
                  (f)    Headings Not Determinative............................................................A-33
                  (g)    Notices...............................................................................A-33

PART II  ......................................................................................................A-34
         1.       Orders.......................................................................................A-34
         2.       Submission of Orders by Broker-Dealers to Auction Agent......................................A-35
         3.       Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable Rate..............A-37
         4.       Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and
                  Allocation of Shares.........................................................................A-38
         5.       Notification of Allocations..................................................................A-40
         6.       Auction Agent................................................................................A-40
         7.       Transfer of Shares of MuniPreferred..........................................................A-40
         8.       Global Certificate...........................................................................A-41

Appendix A.....................................................................................................A-42
         Section 1.      Designation As To Series..............................................................A-42
         Section 2.      Number of Authorized Shares Per Series................................................A-42
         Section 3.      Exceptions to Certain Definitions.....................................................A-42
         Section 4.      Certain Definitions...................................................................A-42
         Section 5.      Initial Rate Periods..................................................................A-47
         Section 6.      Date for Purposes of Paragraph (yyy) Contained Under the Heading "Definitions" in
                         this Statement........................................................................A-47
         Section 7.      Party Named for Purposes of the Definition of "Rate Multiple" in this Statement.......A-47
</TABLE>


                                      A-5

<PAGE>   83

<TABLE>
<S>                      <C>                                                                                   <C>
         Section 8.      Additional Definitions................................................................A-47
         Section 9.      Dividend Payment Dates................................................................A-48
         Section 10.     Amount for Purposes of Subparagraph (c)(i) of Section 5 of Part I of
                         this Statement........................................................................A-48
         Section 11.     Redemption Provisions Applicable to Initial Rate Periods..............................A-48
         Section 12.     Applicable Rate for Purposes of Subparagraph (b)(iii) of Section 3 of
                         Part II of this Statement.............................................................A-48
</TABLE>



                                      A-6

<PAGE>   84



         NUVEEN CALIFORNIA DIVIDEND ADVANTAGE MUNICIPAL FUND, a Massachusetts
business trust (the "Fund"), certifies that:

         First: Pursuant to authority expressly vested in the Board of Trustees
of the Fund by Article [IV] of the Fund's Declaration of Trust (which, as
hereafter restated or amended from time to time is, together with this
Statement, herein called the "Declaration"), the Board of Trustees has, by
resolution, authorized the issuance of shares of the Fund's authorized Preferred
Shares liquidation preference $25,000 per share, having such designation or
designations as to series as is set forth in Section 1 of Appendix A hereto and
such number of shares per such series as is set forth in Section 2 of Appendix A
hereto.

         Second: The preferences, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions of redemption, of the shares
of each series of MuniPreferred described in Section 1 of Appendix A hereto are
as follows (each such series being referred to herein as a series of
MuniPreferred, and shares of all such series being referred to herein
individually as a share of MuniPreferred and collectively as shares of
MuniPreferred):


                                   DEFINITIONS

         Except as otherwise specifically provided in Section 3 of Appendix A
hereto, as used in Parts I and II of this Statement, the following terms shall
have the following meanings (with terms defined in the singular having
comparable meanings when used in the plural and vice versa), unless the context
otherwise requires:

         (a) "AA" COMPOSITE COMMERCIAL PAPER RATE," on any date for any Rate
Period of shares of a series of MuniPreferred, shall mean (i) (A) in the case of
any Minimum Rate Period or any Special Rate Period of fewer than 49 Rate Period
Days, the interest equivalent of the 30-day rate; provided, however, that if
such Rate Period is a Minimum Rate Period and the "AA" Composite Commercial
Paper Rate is being used to determine the Applicable Rate for shares of such
series when all of the Outstanding shares of such series are subject to
Submitted Hold Orders, then the interest equivalent of the seven-day rate, and
(B) in the case of any Special Rate Period of (1) 49 or more but fewer than 70
Rate Period Days, the interest equivalent of the 60-day rate; (2) 70 or more but
fewer than 85 Rate Period Days, the arithmetic average of the interest
equivalent of the 60-day and 90-day rates; (3) 85 or more but fewer than 99 Rate
Period Days, the interest equivalent of the 90-day rate; (4) 99 or more but
fewer than 120 Rate Period Days, the arithmetic average of the interest
equivalent of the 90-day and 120-day rates; (5) 120 or more but fewer than 141
Rate Period Days, the interest equivalent of the 120-day rate; (6) 141 or more
but fewer than 162 Rate Period Days, the arithmetic average of the 120-day and
180-day rates; and (7) 162 or more but fewer than 183 Rate Period Days, the
interest equivalent of the 180-day rate, in each case on commercial paper placed
on behalf of issuers whose corporate bonds are rated "AA" by S&P or the
equivalent of such rating by S&P or another rating agency, as made available on
a discount basis or otherwise by the Federal Reserve Bank of New York for the
Business Day next preceding such date; or (ii) in the event that the Federal
Reserve Bank of New York does not make available any such rate, then the
arithmetic average of such rates, as quoted on a discount basis or otherwise, by
the Commercial Paper Dealers to the Auction Agent for the close of business on
the Business Day next preceding such date. If any Commercial Paper Dealer does
not quote a rate required to determine the "AA" Composite Commercial Paper Rate,
the "AA" Composite Commercial Paper Rate shall be determined on the basis of the
quotation or quotations furnished by the remaining Commercial Paper Dealer or
Commercial Paper Dealers and any Substitute Commercial Paper Dealer or
Substitute Commercial Paper Dealers selected by the Fund to provide such rate or
rates not being supplied by any Commercial Paper Dealer or Commercial Paper
Dealers, as the case may be, or, if the Fund does not select any such Substitute
Commercial Paper Dealer or Substitute Commercial Paper Dealers, by the remaining
Commercial Paper Dealer or Commercial Paper Dealers. For purposes of this
definition, the "interest equivalent" of a rate stated on a discount basis (a
"discount rate") for commercial paper of a given days' maturity shall be equal
to the quotient (rounded upwards to the next higher one-thousandth (.001) of 1%)
of (A) the discount rate divided by (B) the difference between (x) 1.00 and (y)
a fraction, the numerator of which shall be the product of the discount rate
times the number of days in which such commercial paper matures and the
denominator of which shall be 360.

         (b) "ACCOUNTANT'S CONFIRMATION" shall have the meaning specified in
paragraph (c) of Section 7 of Part I of this Statement.



                                       A-7

<PAGE>   85



         (c) "AFFILIATE" shall mean, for purposes of the definition of
"Outstanding," any Person known to the Auction Agent to be controlled by, in
control of or under common control with the Fund; provided, however, that no
Broker-Dealer controlled by, in control of or under common control with the Fund
shall be deemed to be an Affiliate nor shall any corporation or any Person
controlled by, in control of or under common control with such corporation one
of the trustees, directors, or executive officers of which is a trustee of the
Fund be deemed to be an Affiliate solely because such trustee, director, or
executive officer is also a trustee of the Fund.

         (d) "AGENT MEMBER" shall mean a member of or participant in the
Securities Depository that will act on behalf of a Bidder.

         (e) "ANTICIPATION NOTES" shall mean Tax Anticipation Notes (TANs),
Revenue Anticipation Notes (RAN's), Tax and Revenue Anticipation Notes (TRANs),
Grant Anticipation Notes (GANs) that are rated by S&P and Bond Anticipation
Notes (BANs) that are rated by S&P.

         (f) "APPLICABLE RATE" shall have the meaning specified in subparagraph
(e)(i) of Section 2 of Part I of this Statement.

         (g) "AUCTION" shall mean each periodic implementation of the Auction
Procedures.

         (h) "AUCTION AGENCY AGREEMENT" shall mean the agreement between the
Fund and the Auction Agent which provides, among other things, that the Auction
Agent will follow the Auction Procedures for purposes of determining the
Applicable Rate for shares of a series of MuniPreferred so long as the
Applicable Rate for shares of such series is to be based on the results of an
Auction.

         (i) "AUCTION AGENT" shall mean the entity appointed as such by a
resolution of the Board of Trustees in accordance with Section 6 of Part II of
this Statement.

         (j) "AUCTION DATE," with respect to any Rate Period, shall mean the
Business Day next preceding the first day of such Rate Period.

         (k) "AUCTION PROCEDURES" shall mean the procedures for conducting
Auctions set forth in Part II of this Statement.

         (l) "AVAILABLE MUNIPREFERRED" shall have the meaning specified in
paragraph (a) of Section 3 of Part II of this Statement.

         (m) "BENCHMARK RATE" shall have the meaning specified in Section 12 of
Appendix A hereto.

         (n) "BENEFICIAL OWNER," with respect to shares of a series of
MuniPreferred, means a customer of a Broker-Dealer who is listed on the records
of that Broker-Dealer (or, if applicable, the Auction Agent) as a holder of
shares of such series.

         (o) "BID" and "BIDS" shall have the respective meanings specified in
paragraph (a) of Section 1 of Part II of this Statement.

         (p) "BIDDER" and "BIDDERS" shall have the respective meanings specified
in paragraph (a) of Section 1 of Part II of this Statement; provided, however,
that neither the Fund nor any affiliate thereof shall be permitted to be a
Bidder in an Auction, except that any Broker-Dealer that is an affiliate of the
Fund may be a Bidder in an Auction, but only if the Orders placed by such
Broker-Dealer are not for its own account.

         (q) "BOARD OF TRUSTEES" shall mean the Board of Trustees of the Fund or
any duly authorized committee thereof.

         (r) "BROKER-DEALER" shall mean any broker-dealer, commercial bank or
other entity permitted by law to perform the functions required of a
Broker-Dealer in Part II of this Statement, that is a member of, or a
participant


                                       A-8

<PAGE>   86



in, the Securities Depository or is an affiliate of such member or participant,
has been selected by the Fund and has entered into a Broker-Dealer Agreement
that remains effective.

         (s) "BROKER-DEALER AGREEMENT" shall mean an agreement among the Fund,
the Auction Agent and a Broker-Dealer pursuant to which such Broker-Dealer
agrees to follow the procedures specified in Part II of this Statement.

         (t) "BUSINESS DAY" shall mean a day on which the New York Stock
Exchange is open for trading and which is neither a Saturday, Sunday nor any
other day on which banks in The City of New York, New York, are authorized by
law to close.

         (u) "CODE" means the Internal Revenue Code of 1986, as amended.

         (v) "COMMERCIAL PAPER DEALERS" shall mean Lehman Commercial Paper
Incorporated, Goldman, Sachs & Co. and Merrill Lynch, Pierce, Fenner & Smith
Incorporated or, in lieu of any thereof, their respective affiliates or
successors, if such entity is a commercial paper dealer.

         (w) "COMMON SHARES" shall mean the common shares of beneficial
interest, par value $.01 per share, of the Fund.

         (x) "CURE DATE" shall mean the MuniPreferred Basic Maintenance Cure
Date or the 1940 Act Cure Date, as the case may be.

         (y) "DATE OF ORIGINAL ISSUE," with respect to shares of a series of
MuniPreferred, shall mean the date on which the Fund initially issued such
shares.

         (z) "DECLARATION" shall have the meaning specified on the first page of
this Statement.

         (aa) "DEPOSIT SECURITIES" shall mean cash and Municipal Obligations
rated at least A-l+ or SP-l+ by S&P, except that, for purposes of subparagraph
(a) (v) of Section 11 of Part I of this Statement, such Municipal Obligations
shall be considered "Deposit Securities" only if they are also rated P-1, MIG-1
or VMIG-1 by Moody's.

         (bb) "DISCOUNTED VALUE," as of any Valuation Date, shall mean, (i) with
respect to an S&P Eligible Asset, the quotient of the Market Value thereof
divided by the applicable S&P Discount Factor and (ii)(a) with respect to a
Moody's Eligible Asset that is not currently callable as of such Valuation Date
at the option of the issuer thereof, the quotient of the Market Value thereof
divided by the applicable Moody's Discount Factor, or (b) with respect to a
Moody's Eligible Asset that is currently callable as of such Valuation Date at
the option of the issuer thereof, the quotient of (1) the lesser of the Market
Value or call price thereof, including any call premium, divided by (2) the
applicable Moody's Discount Factor.

         (cc)     [RESERVED]

         (dd)     [RESERVED]

         (ee) "DIVIDEND PAYMENT DATE," with respect to shares of a series of
MuniPreferred, shall mean any date on which dividends are payable on shares of
such series pursuant to the provisions of paragraph (d) of Section 2 of Part I
of this Statement.

         (ff) "DIVIDEND PERIOD," with respect to shares of a series of
MuniPreferred, shall mean the period from and including the Date of Original
Issue of shares of such series to but excluding the initial Dividend Payment
Date for shares of such series and any period thereafter from and including one
Dividend Payment Date for shares of such series to but excluding the next
succeeding Dividend Payment Date for shares of such series.

         (gg) "EXISTING HOLDER," with respect to shares of a series of
MuniPreferred, shall mean a Broker-Dealer (or any such other Person as may be
permitted by the Fund) that is listed on the records of the Auction Agent as a
holder of shares of such series.


                                       A-9

<PAGE>   87




         (hh) "FAILURE TO DEPOSIT," with respect to shares of a series of
MuniPreferred, shall mean a failure by the Fund to pay to the Auction Agent, not
later than 12:00 noon, New York City time, (A) on the Business Day next
preceding any Dividend Payment Date for shares of such series, in funds
available on such Dividend Payment Date in The City of New York, New York, the
full amount of any dividend (whether or not earned or declared) to be paid on
such Dividend Payment Date on any share of such series or (B) on the Business
Day next preceding any redemption date in funds available on such redemption
date for shares of such series in The City of New York, New York, the Redemption
Price to be paid on such redemption date for any share of such series after
notice of redemption is mailed pursuant to paragraph (c) of Section 11 of Part I
of this Statement; provided, however, that the foregoing clause (B) shall not
apply to the Fund's failure to pay the Redemption Price in respect of shares of
MuniPreferred when the related Notice of Redemption provides that redemption of
such shares is subject to one or more conditions precedent and any such
condition precedent shall not have been satisfied at the time or times and in
the manner specified in such Notice of Redemption.

         (ii) "FEDERAL TAX RATE INCREASE" shall have the meaning specified in
the definition of "Moody's Volatility Factor."

         (jj) "FUND" shall mean the entity named on the first page of this
Statement, which is the issuer of the shares of MuniPreferred.

         (kk) "GROSS-UP PAYMENT" shall have the meaning specified in Section 4
of Appendix A hereto.

         (ll) "HOLDER," with respect to shares of a series of MuniPreferred,
shall mean the registered holder of such shares as the same appears on the
record books of the Fund.

         (mm) "HOLD ORDER" and "HOLD ORDERS" shall have the respective meanings
specified in paragraph (a) of Section 1 of Part II of this Statement.

         (nn) "INDEPENDENT ACCOUNTANT" shall mean a nationally recognized
accountant, or firm of accountants, that is with respect to the Fund an
independent public accountant or firm of independent public accountants under
the Securities Act of 1933, as amended from time to time.

         (oo) "INITIAL RATE PERIOD," with respect to shares of a series of
MuniPreferred, shall have the meaning specified with respect to shares of such
series in Section 5 of Appendix A hereto.

         (pp) "INTEREST EQUIVALENT" means a yield on a 360-day basis of a
discount basis security which is equal to the yield on an equivalent
interest-bearing security.

         (qq) "ISSUE TYPE CATEGORY," if defined in Section 4 of Appendix A
hereto, shall have the meaning specified in that section.

         (rr) "KENNY INDEX" shall have the meaning specified in the definition
of "Taxable Equivalent of the Short-Term Municipal Bond Rate."

         (ss) "LATE CHARGE" shall have the meaning specified in subparagraph (e)
(1) (B) of Section 2 of Part I of this Statement.

         (tt) "LIQUIDATION PREFERENCE," with respect to a given number of shares
of MuniPreferred, means $25,000 times that number.

         (uu) "MARKET VALUE" of any asset of the Fund shall mean the market
value thereof determined by the pricing service designated from time to time by
the Board of Trustees. Market Value of any asset shall include any interest
accrued thereon. The pricing service values portfolio securities at the mean
between the quoted bid and asked price or the yield equivalent when quotations
are readily available. Securities for which quotations are not readily available
are valued at fair value as determined by the pricing service using methods
which include consideration of: yields or prices of municipal bonds of
comparable quality, type of issue, coupon, maturity and rating; indications as
to


                                      A-10

<PAGE>   88



value from dealers; and general market conditions. The pricing service may
employ electronic data processing techniques or a matrix system, or both, to
determine valuations.

         (vv) "MAXIMUM POTENTIAL GROSS-UP PAYMENT LIABILITY," as of any
Valuation Date, shall mean the aggregate amount of Gross-up Payments that would
be due if the Fund were to make Taxable Allocations, with respect to any taxable
year, estimated based upon dividends paid and the amount of undistributed
realized net capital gains and other taxable income earned by the Fund, as of
the end of the calendar month immediately preceding such Valuation Date, and
assuming such Gross-up Payments are fully taxable.

         (ww) "MAXIMUM RATE," for shares of a series of MuniPreferred on any
Auction Date for shares of such series, shall mean:

                  (i) in the case of any Auction Date which is not the Auction
         Date immediately prior to the first day of any proposed Special Rate
         Period designated by the Fund pursuant to Section 4 of Part I of this
         Statement, the product of (A) the Reference Rate on such Auction Date
         for the next Rate Period of shares of such series and (B) the Rate
         Multiple on such Auction Date, unless shares of such series have or had
         a Special Rate Period (other than a Special Rate Period of 28 Rate
         Period Days or fewer) and an Auction at which Sufficient Clearing Bids
         existed has not yet occurred for a Minimum Rate Period of shares of
         such series after such Special Rate Period, in which case the higher
         of:

                           (A) the dividend rate on shares of such series for
                  the then-ending Rate Period; and

                           (B) the product of (1) the higher of (x) the
                  Reference Rate on such Auction Date for a Rate Period equal in
                  length to the then-ending Rate Period of shares of such
                  series, if such then-ending Rate Period was 364 Rate Period
                  Days or fewer, or the Treasury Note Rate on such Auction Date
                  for a Rate Period equal in length to the then-ending Rate
                  Period of shares of such series, if such then-ending Rate
                  Period was more than 364 Rate Period Days, and (y) the
                  Reference Rate on such Auction Date for a Rate Period equal in
                  length to such Special Rate Period of shares of such series,
                  if such Special Rate Period was 364 Rate Period Days or fewer,
                  or the Treasury Note Rate on such Auction Date for a Rate
                  Period equal in length to such Special Rate Period, if such
                  Special Rate Period was more than 364 Rate Period Days and (2)
                  the Rate Multiple on such Auction Date; or

                  (ii) in the case of any Auction Date which is the Auction Date
         immediately prior to the first day of any proposed Special Rate Period
         designated by the Fund pursuant to Section 4 of Part I of this
         Statement, the product of (A) the highest of (1) the Reference Rate on
         such Auction Date for a Rate Period equal in length to the then-ending
         Rate Period of shares of such series, if such then-ending Rate Period
         was 364 Rate Period Days or fewer, or the Treasury Note Rate on such
         Auction Date for a Rate Period equal in length to the then-ending Rate
         Period of shares of such series, if such then-ending Rate Period was
         more than 364 Rate Period Days, (2) the Reference Rate on such Auction
         Date for the Special Rate Period for which the Auction is being held if
         such Special Rate Period is 364 Rate Period Days or fewer or the
         Treasury Note Rate on such Auction Date for the Special Rate Period for
         which the Auction is being held if such Special Rate Period is more
         than 364 Rate Period Days, and (3) the Reference Rate on such Auction
         Date for Minimum Rate Periods and (B) the Rate Multiple on such Auction
         Date.

         (xx) [RESERVED]

         (yy) "MINIMUM RATE PERIOD" shall mean any Rate Period consisting of 7
Rate Period Days.

         (zz) "MOODY'S" shall mean Moody's Investors Service, Inc., a Delaware
corporation, and its successors.

         (aaa) "MOODY'S DISCOUNT FACTOR" shall have the meaning specified in
Section 4 of Appendix A hereto.

         (bbb) "MOODY'S ELIGIBLE ASSET" shall have the meaning specified in
Section 4 of Appendix A hereto.

         (ccc) "MOODY'S EXPOSURE PERIOD" shall mean the period commencing on a
given Valuation Date and ending 56 days thereafter.


                                      A-11

<PAGE>   89



         (ddd) "MOODY'S VOLATILITY FACTOR" shall mean, as of any Valuation Date,
(i) in the case of any Minimum Rate Period, any Special Rate Period of 28 Rate
Period Days or fewer, or any Special Rate Period of 57 Rate Period Days or more,
a multiplicative factor equal to 275%, except as otherwise provided in the last
sentence of this definition; (ii) in the case of any Special Rate Period of more
than 28 but fewer than 36 Rate Period Days, a multiplicative factor equal to
203%; (iii) in the case of any Special Rate Period of more than 35 but fewer
than 43 Rate Period Days, a multiplicative factor equal to 217%; (iv) in the
case of any Special Rate Period of more than 42 but fewer than 50 Rate Period
Days, a multiplicative factor equal to 226%; and (v) in the case of any Special
Rate Period of more than 49 but fewer than 57 Rate Period Days, a multiplicative
factor equal to 235%. If, as a result of the enactment of changes to the Code,
the greater of the maximum marginal Federal individual income tax rate
applicable to ordinary income and the maximum marginal Federal corporate income
tax rate applicable to ordinary income will increase, such increase being
rounded up to the next five percentage points (the "Federal Tax Rate Increase"),
until the effective date of such increase, the Moody's Volatility Factor in the
case of any Rate Period described in (i) above in this definition instead shall
be determined by reference to the following table:


<TABLE>
<CAPTION>
  FEDERAL TAX RATE INCREASE              VOLATILITY FACTOR
  -------------------------              -----------------
<S>                                      <C>
               5%                                295%
              10%                                317%
              15%                                341%
              20%                                369%
              25%                                400%
              30%                                436%
              35%                                477%
              40%                                525%
</TABLE>

         (eee) "MUNIPREFERRED" shall have the meaning set forth on the first
page of this Statement.

         (fff) "MUNIPREFERRED BASIC MAINTENANCE AMOUNT," as of any Valuation
Date, shall mean the dollar amount equal to the sum of (i)(A) the product of the
number of shares of MuniPreferred outstanding on such date multiplied by $25,000
(plus the product of the number of shares of any other series of Preferred
Shares outstanding on such date multiplied by the liquidation preference of such
shares), plus any redemption premium applicable to shares of MuniPreferred (or
other Preferred Shares) then subject to redemption; (B) the aggregate amount of
dividends that will have accumulated at the respective Applicable Rates (whether
or not earned or declared) to (but not including) the first respective Dividend
Payment Dates for shares of MuniPreferred outstanding that follow such Valuation
Date (plus the aggregate amount of dividends, whether or not earned or declared,
that will have accumulated in respect of other outstanding Preferred Shares to,
but not including, the first respective dividend payment dates for such other
shares that follow such Valuation Date); (C) the aggregate amount of dividends
that would accumulate on shares of each series of MuniPreferred outstanding from
such first respective Dividend Payment Date therefor through the 56th day after
such Valuation Date, at the Maximum Rate (calculated as if such Valuation Date
were the Auction Date for the Rate Period commencing on such Dividend Payment
Date) for a Minimum Rate Period of shares of such series to commence on such
Dividend Payment Date, assuming, solely for purposes of the foregoing, that if
on such Valuation Date the Fund shall have delivered a Notice of Special Rate
Period to the Auction Agent pursuant to Section 4(d)(i) of this Part I with
respect to shares of such series, such Maximum Rate shall be the higher of (a)
the Maximum Rate for the Special Rate Period of shares of such series to
commence on such Dividend Payment Date and (b) the Maximum Rate for a Minimum
Rate Period of shares of such series to commence on such Dividend Payment Date,
multiplied by the Volatility Factor applicable to a Minimum Rate Period, or, in
the event the Fund shall have delivered a Notice of Special Rate Period to the
Auction Agent pursuant to Section 4(d)(i) of this Part I with respect to shares
of such series designating a Special Rate Period consisting of 56 Rate Period
Days or more, the Volatility Factor applicable to a Special Rate Period of that
length (plus the aggregate amount of dividends that would accumulate at the
maximum dividend rate or rates on any other Preferred Shares outstanding from
such respective dividend payment dates through the 56th day after such Valuation
Date, as established by or pursuant to the respective statements establishing
and fixing the rights and preferences of such other Preferred Shares) (except
that (1) if such Valuation Date occurs at a time when a Failure to Deposit (or,
in the case of Preferred Shares other than MuniPreferred, a failure similar to a
Failure to Deposit) has occurred that has not been cured, the dividend for
purposes of calculation would accumulate at the current dividend rate then
applicable to the shares in respect of which such failure has occurred and (2)
for those days during the period


                                      A-12

<PAGE>   90

described in this subparagraph (C) in respect of which the Applicable Rate in
effect immediately prior to such Dividend Payment Date will remain in effect
(or, in the case of Preferred Shares other than MuniPreferred, in respect of
which the dividend rate or rates in effect immediately prior to such respective
dividend payment dates will remain in effect), the dividend for purposes of
calculation would accumulate at such Applicable Rate (or other rate or rates, as
the case may be) in respect of those days); (D) the amount of anticipated
expenses of the Fund for the 90 days subsequent to such Valuation Date; (E) the
amount of the Fund's Maximum Potential Gross-up Payment Liability in respect of
shares of MuniPreferred (and similar amounts payable in respect of other
Preferred Shares pursuant to provisions similar to those contained in Section 3
of Part I of this Statement) as of such Valuation Date; and (F) any current
liabilities as of such Valuation Date to the extent not reflected in any of
(i)(A) through (i)(E) (including, without limitation, any payables for Municipal
Obligations purchased as of such Valuation Date and any liabilities incurred for
the purpose of clearing securities transactions) less (ii) the value (i.e., for
purposes of current Moody's guidelines, the face value of cash, short-term
Municipal Obligations rated MIG-1, VMIG-1 or P-1, and short-term securities that
are the direct obligation of the U.S. government, provided in each case that
such securities mature on or prior to the date upon which any of (i)(A) through
(i)(F) become payable, otherwise the Moody's Discounted Value) of any of the
Fund's assets irrevocably deposited by the Fund for the payment of any of (i)(A)
through (i)(F).

         (ggg) "MUNIPREFERRED BASIC MAINTENANCE CURE DATE," with respect to the
failure by the Fund to satisfy the MuniPreferred Basic Maintenance Amount (as
required by paragraph (a) of Section 7 of Part I of this Statement) as of a
given Valuation Date, shall mean the seventh Business Day following such
Valuation Date.

         (hhh) "MUNIPREFERRED BASIC MAINTENANCE REPORT" shall mean a report
signed by the President, Treasurer or any Senior Vice President or Vice
President of the Fund which sets forth, as of the related Valuation Date, the
assets of the Fund, the Market Value and the Discounted Value thereof (seriatim
and in aggregate), and the MuniPreferred Basic Maintenance Amount.

         (iii) "MUNICIPAL OBLIGATIONS" shall mean "Municipal Obligations" as
defined in the Fund's registration statement on Form N-2 on file with the
Securities and Exchange Commission, as such registration statement may be
amended from time to time (the "Registration Statement").

         (jjj) "1940 ACT" shall mean the Investment Company Act of 1940, as
amended from time to time.

         (kkk) "1940 ACT CURE DATE," with respect to the failure by the Fund to
maintain the 1940 Act MuniPreferred Asset Coverage (as required by Section 6 of
Part I of this Statement) as of the last Business Day of each month, shall mean
the last Business Day of the following month.

         (lll) "1940 ACT MUNIPREFERRED ASSET COVERAGE" shall mean asset
coverage, as defined in Section 18(h) of the 1940 Act, of at least 200% with
respect to all outstanding senior securities of the Fund which are shares of
beneficial interest, including all outstanding shares of MuniPreferred (or such
other asset coverage as may in the future be specified in or under the 1940 Act
as the minimum asset coverage for senior securities which are shares or stock of
a closed-end investment company as a condition of declaring dividends on its
common shares or stock).

         (mmm) "NOTICE OF REDEMPTION" shall mean any notice with respect to the
redemption of shares of MuniPreferred pursuant to paragraph (c) of Section 11 of
Part I of this Statement.

         (nnn) "NOTICE OF SPECIAL RATE PERIOD" shall mean any notice with
respect to a Special Rate Period of shares of MuniPreferred pursuant to
subparagraph (d)(i) of Section 4 of Part I of this Statement.

         (ooo) "ORDER" and "ORDERS" shall have the respective meanings specified
in paragraph (a) of Section 1 of Part II of this Statement.

         (ppp) "ORIGINAL ISSUE INSURANCE," if defined in Section 4 of Appendix A
hereto, shall have the meaning specified in that section.

         (qqq) "OTHER ISSUES," if defined in Section 4 of Appendix A hereto,
shall have the meaning specified in that section.


                                      A-13

<PAGE>   91




         (rrr) "OUTSTANDING" shall mean, as of any Auction Date with respect to
shares of a series of MuniPreferred, the number of shares of such series
theretofore issued by the Fund except, without duplication, (i) any shares of
such series theretofore cancelled or delivered to the Auction Agent for
cancellation or redeemed by the Fund, (ii) any shares of such series as to which
the Fund or any Affiliate thereof shall be an Existing Holder and (iii) any
shares of such series represented by any certificate in lieu of which a new
certificate has been executed and delivered by the Fund.

         (sss) "PERMANENT INSURANCE," if defined in Section 4 of Appendix A
hereto, shall have the meaning specified in that section.

         (ttt) "PERSON" shall mean and include an individual, a partnership, a
corporation, a trust, an unincorporated association, a joint venture or other
entity or a government or any agency or political subdivision thereof.

         (uuu) "PORTFOLIO INSURANCE," if defined in Section 4 of Appendix A
hereto, shall have the meaning specified in that section.

         (vvv) "POTENTIAL BENEFICIAL OWNER," with respect to shares of a series
of MuniPreferred, shall mean a customer of a Broker-Dealer that is not a
Beneficial Owner of shares of such series but that wishes to purchase shares of
such series, or that is a Beneficial Owner of shares of such series that wishes
to purchase additional shares of such series.

         (www) "POTENTIAL HOLDER," with respect to shares of a series of
MuniPreferred, shall mean a Broker-Dealer (or any such other person as may be
permitted by the Fund) that is not an Existing Holder of shares of such series
or that is an Existing Holder of shares of such series that wishes to become the
Existing Holder of additional shares of such series.

         (xxx) "PREFERRED SHARES" shall mean the preferred shares of the Fund,
and includes the shares of MuniPreferred.

         (yyy) "QUARTERLY VALUATION DATE" shall mean the last Business Day of
each February, May, August and November of each year, commencing on the date set
forth in Section 6 of Appendix A hereto.

         (zzz) "RATE MULTIPLE" shall have the meaning specified in Section 4 of
Appendix A hereto.

         (aaaa) "RATE PERIOD," with respect to shares of a series of
MuniPreferred, shall mean the Initial Rate Period, and any Transitional Rate
Period, of shares of such series and any Subsequent Rate Period, including any
Special Rate Period, of shares of such series.

         (bbbb) "RATE PERIOD DAYS," for any Rate Period or Dividend Period,
means the number of days that would constitute such Rate Period or Dividend
Period but for the application of paragraph (d) of Section 2 of Part I of this
Statement or paragraph (b) of Section 4 of Part I of this Statement.

         (cccc) "RECEIVABLES FOR MUNICIPAL OBLIGATIONS SOLD" shall mean (A) for
purposes of calculation of Moody's Eligible Assets as of any Valuation Date, no
more than the aggregate of the following: (i) the book value of receivables for
Municipal Obligations sold as of or prior to such Valuation Date if such
receivables are due within five business days of such Valuation Date, and if the
trades which generated such receivables are (x) settled through clearing house
firms with respect to which the Fund has received prior written authorization
from Moody's or (y) with counterparties having a Moody's long-term debt rating
of at least Baa3; and (ii) the Moody's Discounted Value of Municipal Obligations
sold as of or prior to such Valuation Date which generated receivables, if such
receivables are due within five business days of such Valuation Date but do not
comply with either of the conditions specified in (i) above, and (B) for
purposes of calculation of S&P Eligible Assets as of any Valuation Date, the
book value of receivables for Municipal Obligations sold as of or prior to such
Valuation Date if such receivables are due within five business days of such
Valuation Date.

         (dddd) "REDEMPTION PRICE" shall mean the applicable redemption price
specified in paragraph (a) or (b) of Section 11 of Part I of this Statement.


                                      A-14

<PAGE>   92



         (eeee) "REFERENCE RATE" shall mean (i) the higher of the Taxable
Equivalent of the Short-Term Municipal Bond Rate and the "AA" Composite
Commercial Paper Rate in the case of Minimum Rate Periods and Special Rate
Periods of 28 Rate Period Days or fewer, (ii) the "AA" Composite Commercial
Paper Rate in the case of Special Rate Periods of more than 28 Rate Period Days
but fewer than 183 Rate Period Days; and (iii) the Treasury Bill Rate in the
case of Special Rate Periods of more than 182 Rate Period Days but fewer than
365 Rate Period Days.

         (ffff) "REGISTRATION STATEMENT" has the meaning specified in the
definition of "Municipal Obligations."

         (gggg) "S&P" shall mean Standard & Poor's Corporation, a New York
corporation, and its successors.

         (hhhh) "S&P DISCOUNT FACTOR" shall have the meaning specified in
Section 4 of Appendix A hereto.

         (iiii) "S&P ELIGIBLE ASSET" shall have the meaning specified in Section
4 of Appendix A hereto.

         (jjjj) "S&P EXPOSURE PERIOD" shall mean the maximum period of time
following a Valuation Date that the Fund has under this Statement to cure any
failure to maintain, as of such Valuation Date, the Discounted Value for its
portfolio at least equal to the MuniPreferred Basic Maintenance Amount (as
described in paragraph (a) of Section 7 of Part I of this Statement).

         (kkkk) "S&P VOLATILITY FACTOR" shall mean, as of any Valuation Date, a
multiplicative factor equal to (i) 305% in the case of any Minimum Rate Period
or any Special Rate Period of 28 Rate Period Days or fewer, (ii) 268% in the
case of any Special Rate Period of more than 28 Rate Period Days but fewer than
183 Rate Period Days; and (iii) 204% in the case of any Special Rate Period of
more than 182 Rate Period Days.

         (llll) "SECONDARY MARKET INSURANCE," if defined in Section 4 of
Appendix A hereto, shall have the meaning specified in that section.

         (mmmm) "SECURITIES DEPOSITORY" shall mean The Depository Trust Company
and its successors and assigns or any other securities depository selected by
the Fund which agrees to follow the procedures required to be followed by such
securities depository in connection with shares of MuniPreferred.

         (nnnn) "SELL ORDER" and "SELL ORDERS" shall have the respective
meanings specified in paragraph (a) of Section 1 of Part II of this Statement.

         (oooo) "SPECIAL RATE PERIOD," with respect to shares of a series of
MuniPreferred, shall have the meaning specified in paragraph (a) of Section 4 of
Part I of this Statement.

         (pppp) "SPECIAL REDEMPTION PROVISIONS" shall have the meaning specified
in subparagraph (a)(i) of Section 11 of Part I of this Statement.

         (qqqq) "SUBMISSION DEADLINE" shall mean 1:30 P.M., New York City time,
on any Auction Date or such other time on any Auction Date by which
Broker-Dealers are required to submit Orders to the Auction Agent as specified
by the Auction Agent from time to time.

         (rrrr) "SUBMITTED BID" and "SUBMITTED BIDS" shall have the respective
meanings specified in paragraph (a) of Section 3 of Part II of this Statement.

         (ssss) "SUBMITTED HOLD ORDER" and "SUBMITTED HOLD ORDERS" shall have
the respective meanings specified in paragraph (a) of Section 3 of Part II of
this Statement.

         (tttt) "SUBMITTED ORDER" and "SUBMITTED ORDERS" shall have the
respective meanings specified in paragraph (a) of Section 3 of Part II of this
Statement.

         (uuuu) "SUBMITTED SELL ORDER" and "SUBMITTED SELL ORDERS" shall have
the respective meanings specified in paragraph (a) of Section 3 of Part II of
this Statement.


                                      A-15

<PAGE>   93




         (vvvv) "SUBSEQUENT RATE PERIOD," with respect to shares of a series of
MuniPreferred, shall mean the period from and including the first day following
the Initial Rate Period of shares of such series to but excluding the next
Dividend Payment Date for shares of such series and any period thereafter from
and including one Dividend Payment Date for shares of such series to but
excluding the next succeeding Dividend Payment Date for shares of such series;
provided, however, that if any Subsequent Rate Period is also a Special Rate
Period, such term shall mean the period commencing on the first day of such
Special Rate Period and ending on the last day of the last Dividend Period
thereof.

         (wwww) "SUBSTITUTE COMMERCIAL PAPER DEALER" shall mean The First Boston
Company or Morgan Stanley & Co. Incorporated or their respective affiliates or
successors, if such entity is a commercial paper dealer; provided, however, that
none of such entities shall be a Commercial Paper Dealer.

         (xxxx) "SUBSTITUTE U.S. GOVERNMENT SECURITIES DEALER" shall mean The
First Boston Company and Merrill Lynch, Pierce, Fenner & Smith Incorporated or
their respective affiliates or successors, if such entity is a U.S. Government
securities dealer; provided, however, that none of such entities shall be a U.S.
Government Securities Dealer.

         (yyyy) "SUFFICIENT CLEARING BIDS" shall have the meaning specified in
paragraph (a) of Section 3 of Part II of this Statement.

         (zzzz) "TAXABLE ALLOCATION" shall have the meaning specified in Section
3 of Part I of this Statement.

         (aaaaa) "TAXABLE INCOME" shall have the meaning specified in Section 12
of Appendix A hereto.

         (bbbbb) "TAXABLE EQUIVALENT OF THE SHORT-TERM MUNICIPAL BOND RATE," on
any date for any Minimum Rate Period or Special Rate Period of 28 Rate Period
Days or fewer, shall mean 90% of the quotient of (A) the per annum rate
expressed on an interest equivalent basis equal to the Kenny S&P 30 day High
Grade Index or any successor index (the "Kenny Index") (provided, however, that
any such successor index must be approved by Moody's (if Moody's is then rating
the shares of MuniPreferred) and S&P (if S&P is then rating the shares of
MuniPreferred)), made available for the Business Day immediately preceding such
date but in any event not later than 8:30 A.M., New York City time, on such date
by Kenny S&P Evaluation Services or any successor thereto, based upon 30-day
yield evaluations at par of short-term bonds the interest on which is excludable
for regular Federal income tax purposes under the Code of "high grade" component
issuers selected by Kenny S&P Evaluation Services or any such successor from
time to time in its discretion, which component issuers shall include, without
limitation, issuers of general obligation bonds, but shall exclude any bonds the
interest on which constitutes an item of tax preference under Section 57 (a)(5)
of the Code, or successor provisions, for purposes of the "alternative minimum
tax," divided by (B) 1.00 minus the maximum marginal regular Federal individual
income tax rate applicable to ordinary income or the maximum marginal regular
Federal corporate income tax rate applicable to ordinary income (in each case
expressed as a decimal), whichever is greater; provided, however, that if the
Kenny Index is not made so available by 8:30 A.M., New York City time, on such
date by Kenny S&P Evaluation Services or any successor, the Taxable Equivalent
of the Short-Term Municipal Bond Rate shall mean the quotient of (A) the per
annum rate expressed on an interest equivalent basis equal to the most recent
Kenny Index so made available for any preceding Business Day, divided by (B)
1.00 minus the maximum marginal regular Federal individual income tax rate
applicable to ordinary income or the maximum marginal regular Federal corporate
income tax rate applicable to ordinary income (in each case expressed as a
decimal), whichever is greater.

         (ccccc) "TREASURY BILL" shall mean a direct obligation of the U.S.
Government having a maturity at the time of issuance of 364 days or less.

         (ddddd) "TREASURY BILL RATE," on any date for any Rate Period, shall
mean (i) the bond equivalent yield, calculated in accordance with prevailing
industry convention, of the rate on the most recently auctioned Treasury Bill
with a remaining maturity closest to the length of such Rate Period, as quoted
in The Wall Street Journal on such date for the Business Day next preceding such
date; or (ii) in the event that any such rate is not published in The Wall
Street Journal, then the bond equivalent yield, calculated in accordance with
prevailing industry convention, as calculated by reference to the arithmetic
average of the bid price quotations of the most recently auctioned Treasury Bill
with a remaining maturity closest to the length of such Rate Period, as
determined by bid price quotations as of the close of


                                      A-16

<PAGE>   94



business on the Business Day immediately preceding such date obtained from the
U.S. Government Securities Dealers to the Auction Agent.

         (eeeee) "TREASURY NOTE" shall mean a direct obligation of the U.S.
Government having a maturity at the time of issuance of five years or less but
more than 364 days.

         (fffff) "TREASURY NOTE RATE," on any date for any Rate Period, shall
mean (i) the yield on the most recently auctioned Treasury Note with a remaining
maturity closest to the length of such Rate Period, as quoted in The Wall Street
Journal on such date for the Business Day next preceding such date; or (ii) in
the event that any such rate is not published in The Wall Street Journal, then
the yield as calculated by reference to the arithmetic average of the bid price
quotations of the most recently auctioned Treasury Note with a remaining
maturity closest to the length of such Rate Period, as determined by bid price
quotations as of the close of business on the Business Day immediately preceding
such date obtained from the U.S. Government Securities Dealers to the Auction
Agent. If any U.S. Government Securities Dealer does not quote a rate required
to determine the Treasury Bill Rate or the Treasury Note Rate, the Treasury Bill
Rate or the Treasury Note Rate shall be determined on the basis of the quotation
or quotations furnished by the remaining U.S. Government Securities Dealer or
U.S. Government Securities Dealers and any Substitute U.S. Government Securities
Dealers selected by the Fund to provide such rate or rates not being supplied by
any U.S. Government Securities Dealer or U.S. Government Securities Dealers, as
the case may be, or, if the Fund does not select any such Substitute U.S.
Government Securities Dealer or Substitute U.S. Government Securities Dealers,
by the remaining U.S. Government Securities Dealer or U.S. Government Securities
Dealers.

         (ggggg) "U.S. GOVERNMENT SECURITIES DEALER" shall mean Lehman
Government Securities Incorporated, Goldman, Sachs & Co., Salomon Brothers Inc
and Morgan Guaranty Trust Company of New York or their respective affiliates or
successors, if such entity is a U.S. Government securities dealer.

         (hhhhh) "VALUATION DATE" shall mean, for purposes of determining
whether the Fund is maintaining the MuniPreferred Basic Maintenance Amount, each
Business Day.

         (iiiii) "VOLATILITY FACTOR" shall mean, as of any Valuation Date, the
greater of the Moody's Volatility Factor and the S&P Volatility Factor.

         (jjjjj) "VOTING PERIOD" shall have the meaning specified in paragraph
(b) of Section 5 of Part I of this Statement.

         (kkkkk) "WINNING BID RATE" shall have the meaning specified in
paragraph (a) of Section 3 of Part II of this Statement.

         Any additional definitions specifically set forth in Section 8 of
Appendix A hereto shall be incorporated herein and made part hereof by reference
thereto.



                                      A-17
<PAGE>   95
                                     PART I

1.       NUMBER OF AUTHORIZED SHARES.

         The number of authorized shares constituting a series of MuniPreferred
shall be as set forth with respect to such series in Section 2 of Appendix A
hereto.

2.       DIVIDENDS.

         (a) RANKING. The shares of a series of MuniPreferred shall rank on a
parity with each other, with shares of any other series of MuniPreferred and
with shares of any other series of Preferred Shares as to the payment of
dividends by the Fund.

         (b) CUMULATIVE CASH DIVIDENDS. The Holders of shares of MuniPreferred
of any series shall be entitled to receive, when, as and if declared by the
Board of Trustees, out of funds legally available therefor in accordance with
the Declaration and applicable law, cumulative cash dividends at the Applicable
Rate for shares of such series, determined as set forth in paragraph (e) of this
Section 2, and no more (except to the extent set forth in Section 3 of this Part
I), payable on the Dividend Payment Dates with respect to shares of such series
determined pursuant to paragraph (d) of this Section 2. Holders of shares of
MuniPreferred shall not be entitled to any dividend, whether payable in cash,
property or shares, in excess of full cumulative dividends, as herein provided,
on shares of MuniPreferred. No interest, or sum of money in lieu of interest,
shall be payable in respect of any dividend payment or payments on shares of
MuniPreferred which may be in arrears, and, except to the extent set forth in
subparagraph (e)(i) of this Section 2, no additional sum of money shall be
payable in respect of any such arrearage.

         (c) DIVIDENDS CUMULATIVE FROM DATE OF ORIGINAL ISSUE. Dividends on
shares of MuniPreferred of any series shall accumulate at the Applicable Rate
for shares of such series from the Date of Original Issue thereof.

         (d) DIVIDEND PAYMENT DATES AND ADJUSTMENT THEREOF. The Dividend Payment
Dates with respect to shares of a series of MuniPreferred shall be as set forth
with respect to shares of such series in Section 9 of Appendix A hereto;
provided, however, that:

                  (i) (A) in the case of a series of MuniPreferred designated as
         "Series F MuniPreferred" or "Series M MuniPreferred" in Section 1 of
         Appendix A hereto, if the Monday or Tuesday, as the case may be, on
         which dividends would otherwise be payable on shares of such series is
         not a Business Day, then such dividends shall be payable on such shares
         on the first Business Day that falls after such Monday or Tuesday, as
         the case may be, and (B) in the case of a series of MuniPreferred
         designated as "Series T MuniPreferred," "Series W MuniPreferred" or
         "Series TH MuniPreferred" in Section 1 of Appendix A hereto, if the
         Wednesday, Thursday or Friday, as the case may be, on which dividends
         would otherwise be payable on shares of such series is not a Business
         Day, then such dividends shall be payable on such shares on the first
         Business Day that falls prior to such Wednesday, Thursday or Friday, as
         the case may be; and

                  (ii) notwithstanding Section 9 of Appendix A hereto, the Fund
         in its discretion may establish the Dividend Payment Dates in respect
         of any Special Rate Period of shares of a series of MuniPreferred
         consisting of more than 28 Rate Period Days; provided, however, that
         such dates shall be set forth in the Notice of Special Rate Period
         relating to such Special Rate Period, as delivered to the Auction
         Agent, which Notice of Special Rate Period shall be filed with the
         Secretary of the Fund; and further provided that (1) any such Dividend
         Payment Date shall be a Business Day and (2) the last Dividend Payment
         Date in respect of such Special Rate Period shall be the Business Day
         immediately following the last day thereof, as such last day is
         determined in accordance with paragraph (b) of Section 4 of this Part
         I.

         (e) DIVIDEND RATES AND CALCULATION OF DIVIDENDS.

                  (i) DIVIDEND RATES. The dividend rate on shares of
         MuniPreferred of any series during the period from and after the Date
         of Original Issue of shares of such series to and including the last
         day of the Initial Rate Period of shares of such series shall be equal
         to the rate per annum set forth with respect to shares of such series
         under "Designation" in Section 1 of Appendix A hereto. For each
         Subsequent Rate Period of


                                      A-18

<PAGE>   96



         shares of such series thereafter, the dividend rate on shares of such
         series shall be equal to the rate per annum that results from an
         Auction for shares of such series on the Auction Date next preceding
         such Subsequent Rate Period; provided, however, that if:

                           (A) an Auction for any such Subsequent Rate Period is
                  not held for any reason other than as described below, the
                  dividend rate on shares of such series for such Subsequent
                  Rate Period will be the Maximum Rate for shares of such series
                  on the Auction Date therefor;

                           (B) any Failure to Deposit shall have occurred with
                  respect to shares of such series during any Rate Period
                  thereof (other than any Special Rate Period consisting of more
                  than 364 Rate Period Days or any Rate Period succeeding any
                  Special Rate Period consisting of more than 364 Rate Period
                  Days during which a Failure to Deposit occurred that has not
                  been cured), but, prior to 12:00 Noon, New York City time, on
                  the third Business Day next succeeding the date on which such
                  Failure to Deposit occurred, such Failure to Deposit shall
                  have been cured in accordance with paragraph (f) of this
                  Section 2 and the Fund shall have paid to the Auction Agent a
                  late charge ("Late Charge") equal to the sum of (1) if such
                  Failure to Deposit consisted of the failure timely to pay to
                  the Auction Agent the full amount of dividends with respect to
                  any Dividend Period of the shares of such series, an amount
                  computed by multiplying (x) 200% of the Reference Rate for the
                  Rate Period during which such Failure to Deposit occurs on the
                  Dividend Payment Date for such Dividend Period by (y) a
                  fraction, the numerator of which shall be the number of days
                  for which such Failure to Deposit has not been cured in
                  accordance with paragraph (f) of this Section 2 (including the
                  day such Failure to Deposit occurs and excluding the day such
                  Failure to Deposit is cured) and the denominator of which
                  shall be 360, and applying the rate obtained against the
                  aggregate Liquidation Preference of the outstanding shares of
                  such series and (2) if such Failure to Deposit consisted of
                  the failure timely to pay to the Auction Agent the Redemption
                  Price of the shares, if any, of such series for which Notice
                  of Redemption has been mailed by the Fund pursuant to
                  paragraph (c) of Section 11 of this Part I, an amount computed
                  by multiplying (x) 200% of the Reference Rate for the Rate
                  Period during which such Failure to Deposit occurs on the
                  redemption date by (y) a fraction, the numerator of which
                  shall be the number of days for which such Failure to Deposit
                  is not cured in accordance with paragraph (f) of this Section
                  2 (including the day such Failure to Deposit occurs and
                  excluding the day such Failure to Deposit is cured) and the
                  denominator of which shall be 360, and applying the rate
                  obtained against the aggregate Liquidation Preference of the
                  outstanding shares of such series to be redeemed, no Auction
                  will be held in respect of shares of such series for the
                  Subsequent Rate Period thereof and the dividend rate for
                  shares of such series for such Subsequent Rate Period will be
                  the Maximum Rate for shares of such series on the Auction Date
                  for such Subsequent Rate Period;

                           (C) any Failure to Deposit shall have occurred with
                  respect to shares of such series during any Rate Period
                  thereof (other than any Special Rate Period consisting of more
                  than 364 Rate Period Days or any Rate Period succeeding any
                  Special Rate Period consisting of more than 364 Rate Period
                  Days during which a Failure to Deposit occurred that has not
                  been cured), and, prior to 12:00 Noon, New York City time, on
                  the third Business Day next succeeding the date on which such
                  Failure to Deposit occurred, such Failure to Deposit shall not
                  have been cured in accordance with paragraph (f) of this
                  Section 2 or the Fund shall not have paid the applicable Late
                  Charge to the Auction Agent, no Auction will be held in
                  respect of shares of such series for the first Subsequent Rate
                  Period thereof thereafter (or for any Rate Period thereof
                  thereafter to and including the Rate Period during which (1)
                  such Failure to Deposit is cured in accordance with paragraph
                  (f) of this Section 2 and (2) the Fund pays the applicable
                  Late Charge to the Auction Agent (the condition set forth in
                  this clause (2) to apply only in the event Moody's is rating
                  such shares at the time the Fund cures such Failure to
                  Deposit), in each case no later than 12:00 Noon, New York City
                  time, on the fourth Business Day prior to the end of such Rate
                  Period), and the dividend rate for shares of such series for
                  each Subsequent Rate Period shall be a rate per annum equal to
                  the Maximum Rate for shares of such series on the Auction Date
                  for such Subsequent Rate Period (but with the prevailing
                  rating for shares of such series, for purposes of determining
                  such Maximum Rate, being deemed to be "Below "ba3"/BB2"); or



                                      A-19

<PAGE>   97



                           (D) any Failure to Deposit shall have occurred with
                  respect to shares of such series during a Special Rate Period
                  thereof consisting of more than 364 Rate Period Days, or
                  during any Rate Period thereof succeeding any Special Rate
                  Period consisting of more than 364 Rate Period Days during
                  which a Failure to Deposit occurred that has not been cured,
                  and, prior to 12:00 Noon, New York City time, on the fourth
                  Business Day preceding the Auction Date for the Rate Period
                  subsequent to such Rate Period, such Failure to Deposit shall
                  not have been cured in accordance with paragraph (f) of this
                  Section 2 or, in the event Moody's is then rating such shares,
                  the Fund shall not have paid the applicable Late Charge to the
                  Auction Agent (such Late Charge, for purposes of this
                  subparagraph (D), to be calculated by using, as the Reference
                  Rate, the Reference Rate applicable to a Rate Period (x)
                  consisting of more than 182 Rate Period Days but fewer than
                  365 Rate Period Days and (y) commencing on the date on which
                  the Rate Period during which Failure to Deposit occurs
                  commenced), no Auction will be held in respect of shares of
                  such series for such Subsequent Rate Period (or for any Rate
                  Period thereof thereafter to and including the Rate Period
                  during which (1) such Failure to Deposit is cured in
                  accordance with paragraph (f) of this Section 2 and (2) the
                  Fund pays the applicable Late Charge to the Auction Agent (the
                  condition set forth in this clause (2) to apply only in the
                  event Moody's is rating such shares at the time the Fund cures
                  such Failure to Deposit), in each case no later than 12:00
                  Noon, New York City time, on the fourth Business Day prior to
                  the end of such Rate Period), and the dividend rate for shares
                  of such series for each such Subsequent Rate Period shall be a
                  rate per annum equal to the Maximum Rate for shares of such
                  series on the Auction Date for such Subsequent Rate Period
                  (but with the prevailing rating for shares of such series, for
                  purposes of determining such Maximum Rate, being deemed to be
                  "Below "ba3"/BB2") (the rate per annum at which dividends are
                  payable on shares of a series of MuniPreferred for any Rate
                  Period thereof being herein referred to as the "Applicable
                  Rate" for shares of such series).

                  (ii) CALCULATION OF DIVIDENDS. The amount of dividends per
         share payable on shares of a series of MuniPreferred on any date on
         which dividends shall be payable on shares of such series shall be
         computed by multiplying the Applicable Rate for shares of such series
         in effect for such Dividend Period or Dividend Periods or part thereof
         for which dividends have not been paid by a fraction, the numerator of
         which shall be the number of days in such Dividend Period or Dividend
         Periods or part thereof and the denominator of which shall be 365 if
         such Dividend Period consists of 7 Rate Period Days and 360 for all
         other Dividend Periods, and applying the rate obtained against $25,000.

         (f) CURING A FAILURE TO DEPOSIT. A Failure to Deposit with respect to
shares of a series of MuniPreferred shall have been cured (if such Failure to
Deposit is not solely due to the willful failure of the Fund to make the
required payment to the Auction Agent) with respect to any Rate Period of shares
of such series if, within the respective time periods described in subparagraph
(e)(i) of this Section 2, the Fund shall have paid to the Auction Agent (A) all
accumulated and unpaid dividends on shares of such series and (B) without
duplication, the Redemption Price for shares, if any, of such series for which
Notice of Redemption has been mailed by the Fund pursuant to paragraph (c) of
Section 11 of Part I of this Statement; provided, however, that the foregoing
clause (B) shall not apply to the Fund's failure to pay the Redemption Price in
respect of shares of MuniPreferred when the related Redemption Notice provides
that redemption of such shares is subject to one or more conditions precedent
and any such condition precedent shall not have been satisfied at the time or
times and in the manner specified in such Notice of Redemption.

         (g) DIVIDEND PAYMENTS BY FUND TO AUCTION AGENT. The Fund shall pay to
the Auction Agent, not later than 12:00 Noon, New York City time, on the
Business Day next preceding each Dividend Payment Date for shares of a series of
MuniPreferred, an aggregate amount of funds available on the next Business Day
in The City of New York, New York, equal to the dividends to be paid to all
Holders of shares of such series on such Dividend Payment Date.

         (h) AUCTION AGENT AS TRUSTEE OF DIVIDEND PAYMENTS BY FUND. All moneys
paid to the Auction Agent for the payment of dividends (or for the payment of
any Late Charge) shall be held in trust for the payment of such dividends (and
any such Late Charge) by the Auction Agent for the benefit of the Holders
specified in paragraph (i) of this Section 2. Any moneys paid to the Auction
Agent in accordance with the foregoing but not applied by the Auction Agent to
the payment of dividends (and any such Late Charge) will, to the extent
permitted by law, be repaid to the Fund at the end of 90 days from the date on
which such moneys were so to have been applied.



                                      A-20

<PAGE>   98



         (i) DIVIDENDS PAID TO HOLDERS. Each dividend on shares of MuniPreferred
shall be paid on the Dividend Payment Date therefor to the Holders thereof as
their names appear on the record books of the Fund on the Business Day next
preceding such Dividend Payment Date.

         (j) DIVIDENDS CREDITED AGAINST EARLIEST ACCUMULATED BUT UNPAID
DIVIDENDS. Any dividend payment made on shares of MuniPreferred shall first be
credited against the earliest accumulated but unpaid dividends due with respect
to such shares. Dividends in arrears for any past Dividend Period may be
declared and paid at any time, without reference to any regular Dividend Payment
Date, to the Holders as their names appear on the record books of the Fund on
such date, not exceeding 15 days preceding the payment date thereof, as may be
fixed by the Board of Trustees.

         (k) DIVIDENDS DESIGNATED AS EXEMPT-INTEREST DIVIDENDS. Dividends on
shares of MuniPreferred shall be designated as exempt-interest dividends up to
the amount of tax-exempt income of the Fund, to the extent permitted by, and for
purposes of, Section 852 of the Code.

3.       GROSS-UP PAYMENTS.

         Holders of shares of MuniPreferred shall be entitled to receive, when,
as and if declared by the Board of Trustees, out of funds legally available
therefor, dividends in an amount equal to the aggregate Gross-up Payments as
follows:

         (a) MINIMUM RATE PERIODS AND SPECIAL RATE PERIODS OF 28 RATE PERIOD
DAYS OR FEWER. If, in the case of any Minimum Rate Period or any Special Rate
Period of 28 Rate Period Days or fewer, the Fund allocates any net capital gains
or other income taxable for Federal income tax purposes to a dividend paid on
shares of MuniPreferred without having given advance notice thereof to the
Auction Agent as provided in Section 5 of Part II of this Statement (such
allocation being referred to herein as a "Taxable Allocation") solely by reason
of the fact that such allocation is made retroactively as a result of the
redemption of all or a portion of the outstanding shares of MuniPreferred or the
liquidation of the Fund, the Fund shall, prior to the end of the calendar year
in which such dividend was paid, provide notice thereof to the Auction Agent and
direct the Fund's dividend disbursing agent to send such notice with a Gross-up
Payment to each Holder of such shares that was entitled to such dividend payment
during such calendar year at such Holder's address as the same appears or last
appeared on the record books of the Fund.

         (b) SPECIAL RATE PERIODS OF MORE THAN 28 RATE PERIOD DAYS. If, in the
case of any Special Rate Period of more than 28 Rate Period Days, the Fund makes
a Taxable Allocation to a dividend paid on shares of MuniPreferred, the Fund
shall, prior to the end of the calendar year in which such dividend was paid,
provide notice thereof to the Auction Agent and direct the Fund's dividend
disbursing agent to send such notice with a Gross-up Payment to each Holder of
shares that was entitled to such dividend payment during such calendar year at
such Holder's address as the same appears or last appeared on the record books
of the Fund.

         (c) NO GROSS-UP PAYMENTS IN THE EVENT OF A REALLOCATION. The Fund shall
not be required to make Gross-up Payments with respect to any net capital gains
or other taxable income determined by the Internal Revenue Service to be
allocable in a manner different from that allocated by the Fund.

4.       DESIGNATION OF SPECIAL RATE PERIODS.

         (a) LENGTH OF AND PRECONDITIONS FOR SPECIAL RATE PERIOD. The Fund, at
its option, may designate any succeeding Subsequent Rate Period of shares of a
series of MuniPreferred as a Special Rate Period consisting of a specified
number of Rate Period Days evenly divisible by seven and not more than 1,820,
subject to adjustment as provided in paragraph (b) of this Section 4. A
designation of a Special Rate Period shall be effective only if (A) notice
thereof shall have been given in accordance with paragraph (c) and subparagraph
(d)(i) of this Section 4, (B) an Auction for shares of such series shall have
been held on the Auction Date immediately preceding the first day of such
proposed Special Rate Period and Sufficient Clearing Bids for shares of such
series shall have existed in such Auction, and (C) if any Notice of Redemption
shall have been mailed by the Fund pursuant to paragraph (c) of Section 11 of
this Part I with respect to any shares of such series, the Redemption Price with
respect to such shares shall have been deposited with the Auction Agent. In the
event the Fund wishes to designate any succeeding Subsequent Rate Period for
shares of a series of MuniPreferred as a Special Rate Period consisting of more
than 28 Rate Period Days, the Fund shall notify S&P (if S&P is then rating such
series) and Moody's (if Moody's is then rating such series) in advance of the
commencement


                                      A-21

<PAGE>   99



of such Subsequent Rate Period that the Fund wishes to designate such Subsequent
Rate Period as a Special Rate Period and shall provide S&P (if S&P is then
rating such series) and Moody's (if Moody's is then rating such series) with
such documents as either may request.

         (b) ADJUSTMENT OF LENGTH OF SPECIAL RATE PERIOD. In the event the Fund
wishes to designate a Subsequent Rate Period as a Special Rate Period, but the
day following what would otherwise be the last day of such Special Rate Period
is not (a) a Tuesday that is a Business Day in the case of a series of
MuniPreferred designated as "Series M MuniPreferred" in Section 1 of Appendix A
hereto, (b) a Wednesday that is a Business Day in the case of a series of
MuniPreferred designated as "Series T MuniPreferred" in Section 1 of Appendix A
hereto, (c) a Thursday that is a Business Day in the case of a series of
MuniPreferred designated as "Series W MuniPreferred" in Section 1 of Appendix A
hereto, (d) a Friday that is a Business Day in the case of a series of
MuniPreferred designated as "Series TH MuniPreferred" in Section 1 of Appendix A
hereto, or (e) a Monday that is a Business Day in the case of a series of
MuniPreferred designated as "Series F MuniPreferred" in Section 1 of Appendix A
hereto, then the Fund shall designate such Subsequent Rate Period as a Special
Rate Period consisting of the period commencing on the first day following the
end of the immediately preceding Rate Period and ending (a) on the first Monday
that is followed by a Tuesday that is a Business Day preceding what would
otherwise be such last day, in the case of Series M MuniPreferred, (b) on the
first Tuesday that is followed by a Wednesday that is a Business Day preceding
what would otherwise be such last day, in the case of Series T MuniPreferred,
(c) on the first Wednesday that is followed by a Thursday that is a Business Day
preceding what would otherwise be such last day, in the case of Series W
MuniPreferred, (d) on the first Thursday that is followed by a Friday that is a
Business Day preceding what would otherwise be such last day, in the case of
Series TH MuniPreferred, and (e) on the first Sunday that is followed by a
Monday that is a Business Day preceding what would otherwise be such last day,
in the case of Series F MuniPreferred.

         (c) NOTICE OF PROPOSED SPECIAL RATE PERIOD. If the Fund proposes to
designate any succeeding Subsequent Rate Period of shares of a series of
MuniPreferred as a Special Rate Period pursuant to paragraph (a) of this Section
4, not less than 20 (or such lesser number of days as may be agreed to from time
to time by the Auction Agent) nor more than 30 days prior to the date the Fund
proposes to designate as the first day of such Special Rate Period (which shall
be such day that would otherwise be the first day of a Minimum Rate Period),
notice shall be (i) published or caused to be published by the Fund in a
newspaper of general circulation to the financial community in The City of New
York, New York, which carries financial news, and (ii) mailed by the Fund by
first-class mail, postage prepaid, to the Holders of shares of such series. Each
such notice shall state (A) that the Fund may exercise its option to designate a
succeeding Subsequent Rate Period of shares of such series as a Special Rate
Period, specifying the first day thereof and (B) that the Fund will, by 11:00
A.M., New York City time, on the second Business Day next preceding such date
(or by such later time or date, or both, as may be agreed to by the Auction
Agent) notify the Auction Agent of either (x) its determination, subject to
certain conditions, to exercise such option, in which case the Fund shall
specify the Special Rate Period designated, or (y) its determination not to
exercise such option.

         (d) NOTICE OF SPECIAL RATE PERIOD. No later than 11:00 A.M., New York
City time, on the second Business Day next preceding the first day of any
proposed Special Rate Period of shares of a series of MuniPreferred as to which
notice has been given as set forth in paragraph (c) of this Section 4 (or such
later time or date, or both, as may be agreed to by the Auction Agent), the Fund
shall deliver to the Auction Agent either:

                  (i) a notice ("Notice of Special Rate Period") stating (A)
         that the Fund has determined to designate the next succeeding Rate
         Period of shares of such series as a Special Rate Period, specifying
         the same and the first day thereof, (B) the Auction Date immediately
         prior to the first day of such Special Rate Period, (C) that such
         Special Rate Period shall not commence if (1) an Auction for shares of
         such series shall not be held on such Auction Date for any reason or
         (2) an Auction for shares of such series shall be held on such Auction
         Date but Sufficient Clearing Bids for shares of such series shall not
         exist in such Auction, (D) the scheduled Dividend Payment Dates for
         shares of such series during such Special Rate Period and (E) the
         Special Redemption Provisions, if any, applicable to shares of such
         series in respect of such Special Rate Period, such notice to be
         accompanied by a MuniPreferred Basic Maintenance Report showing that,
         as of the third Business Day next preceding such proposed Special Rate
         Period, Moody's Eligible Assets (if Moody's is then rating such series)
         and S&P Eligible Assets (if S&P is then rating such series) each have
         an aggregate Discounted Value at least equal to the MuniPreferred Basic
         Maintenance Amount as of such Business Day (assuming for purposes of
         the foregoing calculation that (a) the Maximum Rate is the Maximum Rate
         on such Business Day as if such Business Day were the Auction Date for
         the proposed Special Rate Period, and (b) the


                                      A-22

<PAGE>   100



         Moody's Discount Factors applicable to Moody's Eligible Assets are
         determined by reference to the first Exposure Period longer than the
         Exposure Period then applicable to the Fund, as described in the
         definition of Moody's Discount Factor herein); or

                  (ii) a notice stating that the Fund has determined not to
         exercise its option to designate a Special Rate Period of shares of
         such series and that the next succeeding Rate Period of shares of such
         series shall be a Minimum Rate Period.

         (e) FAILURE TO DELIVER NOTICE OF SPECIAL RATE PERIOD. If the Fund fails
to deliver either of the notices described in subparagraphs (d)(i) or (d)(ii) of
this Section 4 (and, in the case of the notice described in subparagraph (d)(i)
of this Section 4, a MuniPreferred Basic Maintenance Report to the effect set
forth in such subparagraph (if either Moody's or S&P is then rating the series
in question)) with respect to any designation of any proposed Special Rate
Period to the Auction Agent by 11:00 A.M., New York City time, on the second
Business Day next preceding the first day of such proposed Special Rate Period
(or by such later time or date, or both, as may be agreed to by the Auction
Agent), the Fund shall be deemed to have delivered a notice to the Auction Agent
with respect to such Special Rate Period to the effect set forth in subparagraph
(d)(ii) of this Section 4. In the event the Fund delivers to the Auction Agent a
notice described in subparagraph (d)(i) of this Section 4, it shall file a copy
of such notice with the Secretary of the Fund, and the contents of such notice
shall be binding on the Fund. In the event the Fund delivers to the Auction
Agent a notice described in subparagraph (d)(ii) of this Section 4, the Fund
will provide Moody's (if Moody's is then rating the series in question) and S&P
(if S&P is then rating the series in question) a copy of such notice.

5.       VOTING RIGHTS.

         (a) ONE VOTE PER SHARE OF MUNIPREFERRED. Except as otherwise provided
in the Declaration or as otherwise required by law, (i) each Holder of shares of
MuniPreferred shall be entitled to one vote for each share of MuniPreferred held
by such Holder on each matter submitted to a vote of shareholders of the Fund,
and (ii) the holders of outstanding Preferred Shares, including each share of
MuniPreferred, and of Common Shares shall vote together as a single class;
provided, however, that, at any meeting of the shareholders of the Fund held for
the election of trustees, the holders of outstanding Preferred Shares, including
MuniPreferred, represented in person or by proxy at said meeting, shall be
entitled, as a class, to the exclusion of the holders of all other securities
and classes of shares of beneficial interest of the Fund, to elect two trustees
of the Fund, each Preferred Share, including each share of MuniPreferred,
entitling the holder thereof to one vote. Subject to paragraph (b) of this
Section 5, the holders of outstanding Common Shares and Preferred Shares,
including MuniPreferred, voting together as a single class, shall elect the
balance of the trustees.

         (b) VOTING FOR ADDITIONAL TRUSTEES.

                  (i) VOTING PERIOD. During any period in which any one or more
         of the conditions described in subparagraphs (A) or (B) of this
         subparagraph (b)(i) shall exist (such period being referred to herein
         as a "Voting Period"), the number of trustees constituting the Board of
         Trustees shall be automatically increased by the smallest number that,
         when added to the two trustees elected exclusively by the holders of
         Preferred Shares, including shares of MuniPreferred, would constitute a
         majority of the Board of Trustees as so increased by such smallest
         number; and the holders of Preferred Shares, including MuniPreferred,
         shall be entitled, voting as a class on a one-vote-per-share basis (to
         the exclusion of the holders of all other securities and classes of
         shares of beneficial interest of the Fund), to elect such smallest
         number of additional trustees, together with the two trustees that such
         holders are in any event entitled to elect. A Voting Period shall
         commence:

                           (A) if at the close of business on any dividend
                  payment date accumulated dividends (whether or not earned or
                  declared) on any outstanding Preferred Share, including
                  MuniPreferred, equal to at least two full years' dividends
                  shall be due and unpaid and sufficient cash or specified
                  securities shall not have been deposited with the Auction
                  Agent for the payment of such accumulated dividends; or

                           (B) if at any time holders of Preferred Shares are
                  entitled under the 1940 Act to elect a majority of the
                  trustees of the Fund.



                                      A-23

<PAGE>   101



                  Upon the termination of a Voting Period, the voting rights
         described in this subparagraph (b)(i) shall cease, subject always,
         however, to the revesting of such voting rights in the Holders upon the
         further occurrence of any of the events described in this subparagraph
         (b)(i).

                  (ii) NOTICE OF SPECIAL MEETING. As soon as practicable after
         the accrual of any right of the holders of Preferred Shares to elect
         additional trustees as described in subparagraph (b)(i) of this Section
         5, the Fund shall notify the Auction Agent and the Auction Agent shall
         call a special meeting of such holders, by mailing a notice of such
         special meeting to such holders, such meeting to be held not less than
         10 nor more than 20 days after the date of mailing of such notice. If
         the Fund fails to send such notice to the Auction Agent or if the
         Auction Agent does not call such a special meeting, it may be called by
         any such holder on like notice. The record date for determining the
         holders entitled to notice of and to vote at such special meeting shall
         be the close of business on the fifth Business Day preceding the day on
         which such notice is mailed. At any such special meeting and at each
         meeting of holders of Preferred Shares held during a Voting Period at
         which trustees are to be elected, such holders, voting together as a
         class (to the exclusion of the holders of all other securities and
         classes of shares of beneficial interest of the Fund), shall be
         entitled to elect the number of trustees prescribed in subparagraph
         (b)(i) of this Section 5 on a one-vote-per-share basis.

                  (iii) TERMS OF OFFICE OF EXISTING TRUSTEES. The terms of
         office of all persons who are trustees of the Fund at the time of a
         special meeting of Holders and holders of other Preferred Shares to
         elect trustees shall continue, notwithstanding the election at such
         meeting by the Holders and such other holders of the number of trustees
         that they are entitled to elect, and the persons so elected by the
         Holders and such other holders, together with the two incumbent
         trustees elected by the Holders and such other holders of Preferred
         Shares and the remaining incumbent trustees elected by the holders of
         the Common Shares and Preferred Shares, shall constitute the duly
         elected trustees of the Fund.

                  (iv) TERMS OF OFFICE OF CERTAIN TRUSTEES TO TERMINATE UPON
         TERMINATION OF VOTING PERIOD. Simultaneously with the termination of a
         Voting Period, the terms of office of the additional trustees elected
         by the Holders and holders of other Preferred Shares pursuant to
         subparagraph (b)(i) of this Section 5 shall terminate, the remaining
         trustees shall constitute the trustees of the Fund and the voting
         rights of the Holders and such other holders to elect additional
         trustees pursuant to subparagraph (b)(i) of this Section 5 shall cease,
         subject to the provisions of the last sentence of subparagraph (b)(i)
         of this Section 5.

         (c) HOLDERS OF MUNIPREFERRED TO VOTE ON CERTAIN OTHER MATTERS.

                  (i) INCREASES IN CAPITALIZATION. So long as any shares of
         MuniPreferred are outstanding, the Fund shall not, without the
         affirmative vote or consent of the Holders of at least a majority of
         the shares of MuniPreferred outstanding at the time, in person or by
         proxy, either in writing or at a meeting, voting as a separate class:
         (a) authorize, create or issue any class or series of shares ranking
         prior to or on a parity with shares of MuniPreferred with respect to
         the payment of dividends or the distribution of assets upon
         dissolution, liquidation or winding up of the affairs of the Fund, or
         authorize, create or issue additional shares of any series of
         MuniPreferred (except that, notwithstanding the foregoing, but subject
         to the provisions of paragraph (c) of Section 10 of this Part I, the
         Board of Trustees, without the vote or consent of the Holders of
         MuniPreferred, may from time to time authorize and create, and the Fund
         may from time to time issue, additional shares of any series of
         MuniPreferred or classes or series of Preferred Shares ranking on a
         parity with shares of MuniPreferred with respect to the payment of
         dividends and the distribution of assets upon dissolution, liquidation
         or winding up of the affairs of the Fund; provided, however, that if
         Moody's or S&P is not then rating the shares of MuniPreferred, the
         aggregate liquidation preference of all Preferred Shares of the Fund
         outstanding after any such issuance, exclusive of accumulated and
         unpaid dividends, may not exceed the amount set forth in Section 10 of
         Appendix A hereto) or (b) amend, alter or repeal the provisions of the
         Declaration, or this Statement, whether by merger, consolidation or
         otherwise, so as to affect any preference, right or power of such
         shares of MuniPreferred or the Holders thereof; provided, however, that
         (i) none of the actions permitted by the exception to (a) above will be
         deemed to affect such preferences, rights or powers, (ii) a division of
         a share of MuniPreferred will be deemed to affect such preferences,
         rights or powers only if the terms of such division adversely affect
         the Holders of shares of MuniPreferred and (iii) the authorization,
         creation and issuance of classes or series of shares ranking junior to
         shares of MuniPreferred with respect to the payment of dividends and
         the distribution of assets upon dissolution, liquidation or winding up
         of the


                                      A-24

<PAGE>   102



         affairs of the Fund, will be deemed to affect such preferences, rights
         or powers only if Moody's or S&P is then rating shares of MuniPreferred
         and such issuance would, at the time thereof, cause the Fund not to
         satisfy the 1940 Act MuniPreferred Asset Coverage or the MuniPreferred
         Basic Maintenance Amount. So long as any shares of MuniPreferred are
         outstanding, the Fund shall not, without the affirmative vote or
         consent of the Holders of at least 66 2/3% of the shares of
         MuniPreferred outstanding at the time, in person or by proxy, either in
         writing or at a meeting, voting as a separate class, file a voluntary
         application for relief under Federal bankruptcy law or any similar
         application under state law for so long as the Fund is solvent and does
         not foresee becoming insolvent. If any action set forth above would
         adversely affect the rights of one or more series (the "Affected
         Series") of MuniPreferred in a manner different from any other series
         of MuniPreferred, the Fund will not approve any such action without the
         affirmative vote or consent of the Holders of at least a majority of
         the shares of each such Affected Series outstanding at the time, in
         person or by proxy, either in writing or at a meeting (each such
         Affected Series voting as a separate class).

                  (ii) 1940 ACT MATTERS. Unless a higher percentage is provided
         for in the Declaration, (A) the affirmative vote of the Holders of at
         least a majority of the Preferred Shares, including MuniPreferred,
         outstanding at the time, voting as a separate class, shall be required
         to approve any conversion of the Fund from a closed-end to an open-end
         investment company and (B) the affirmative vote of the Holders of a
         "majority of the outstanding Preferred Shares," including
         MuniPreferred, 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. The affirmative vote of the Holders of
         a "majority of the outstanding Preferred Shares," including
         MuniPreferred, voting as a separate class, shall be required to approve
         any action not described in the first sentence of this Section 5(c)(ii)
         requiring a vote of security holders of the Fund under Section 13(a) of
         the 1940 Act. For purposes of the foregoing, "majority of the
         outstanding Preferred Shares" means (i) 67% or more of such shares
         present at a meeting, if the Holders of more than 50% of such shares
         are present or represented by proxy, or (ii) more than 50% of such
         shares, whichever is less. In the event a vote of Holders of
         MuniPreferred is required pursuant to the provisions of Section 13(a)
         of the 1940 Act, the Fund shall, not later than ten Business Days prior
         to the date on which such vote is to be taken, notify Moody's (if
         Moody's is then rating the shares of MuniPreferred) and S&P (if S&P is
         then rating the shares of MuniPreferred) that such vote is to be taken
         and the nature of the action with respect to which such vote is to be
         taken. The Fund shall, not later than ten Business Days after the date
         on which such vote is taken, notify Moody's (if Moody's is then rating
         the shares of MuniPreferred) of the results of such vote.

         (d) BOARD MAY TAKE CERTAIN ACTIONS WITHOUT SHAREHOLDER APPROVAL. The
Board of Trustees, without the vote or consent of the shareholders of the Fund,
may from time to time amend, alter or repeal any or all of the definitions of
the terms listed below, or any provision of this Statement viewed by Moody's or
S&P as a predicate for any such definition, and any such amendment, alteration
or repeal will not be deemed to affect the preferences, rights or powers of
shares of MuniPreferred or the Holders thereof; provided, however, that the
Board of Trustees receives written confirmation from Moody's (such confirmation
being required to be obtained only in the event Moody's is rating the shares of
MuniPreferred and in no event being required to be obtained in the case of the
definitions of (x) Deposit Securities, Discounted Value, Receivables for
Municipal Obligations Sold, Issue Type Category and Other Issues as such terms
apply to S&P Eligible Assets and (y) S&P Discount Factor, S&P Eligible Asset,
S&P Exposure Period and S&P Volatility Factor) and S&P (such confirmation being
required to be obtained only in the event S&P is rating the shares of
MuniPreferred and in no event being required to be obtained in the case of the
definitions of (x) Discounted Value, Receivables for Municipal Obligations Sold,
Issue Type Category and Other Issues as such terms apply to Moody's Eligible
Assets, and (y) Moody's Discount Factor, Moody's Eligible Asset, Moody's
Exposure Period and Moody's Volatility Factor) that any such amendment,
alteration or repeal would not impair the ratings then assigned by Moody's or
S&P, as the case may be, to shares of MuniPreferred:


<TABLE>
<S>                                                   <C>
Deposit Securities                                    Moody's Volatility Factor
Discounted Value                                      1940 Act Cure Date
Escrowed Bonds                                        1940 Act MuniPreferred Asset Coverage
Issue Type Category                                   Other Issues
Market Value                                          Quarterly Valuation Date
Maximum Potential Gross-up Payment Liability          Receivables for Municipal Obligations Sold
MuniPreferred Basic Maintenance Amount                S&P Discount Factor
MuniPreferred Basic Maintenance Cure Date             S&P Eligible Asset
</TABLE>



                                      A-25

<PAGE>   103




<TABLE>
<S>                                                   <C>
MuniPreferred Basic Maintenance Report                S&P Exposure Period
Moody's Discount Factor                               S&P Volatility Factor
Moody's Eligible Asset                                Valuation Date
Moody's Exposure Period                               Volatility Factor
</TABLE>

         (e) VOTING RIGHTS SET FORTH HEREIN ARE SOLE VOTING RIGHTS. Unless
otherwise required by law, the Holders of shares of MuniPreferred shall not have
any relative rights or preferences or other special rights other than those
specifically set forth herein.

         (f) NO PREEMPTIVE RIGHTS OR CUMULATIVE VOTING. The Holders of shares of
MuniPreferred shall have no preemptive rights or rights to cumulative voting.

         (g) VOTING FOR TRUSTEES SOLE REMEDY FOR FUND'S FAILURE TO PAY
DIVIDENDS. In the event that the Fund fails to pay any dividends on the shares
of MuniPreferred, the exclusive remedy of the Holders shall be the right to vote
for trustees pursuant to the provisions of this Section 5.

         (h) HOLDERS ENTITLED TO VOTE. For purposes of determining any rights of
the Holders to vote on any matter, whether such right is created by this
Statement, by the other provisions of the Declaration, by statute or otherwise,
no Holder shall be entitled to vote any share of MuniPreferred and no share of
MuniPreferred shall be deemed to be "outstanding" for the purpose of voting or
determining the number of shares required to constitute a quorum if, prior to or
concurrently with the time of determination of shares entitled to vote or shares
deemed outstanding for quorum purposes, as the case may be, the requisite Notice
of Redemption with respect to such shares shall have been mailed as provided in
paragraph (c) of Section 11 of this Part I and the Redemption Price for the
redemption of such shares shall have been deposited in trust with the Auction
Agent for that purpose. No share of MuniPreferred held by the Fund or any
affiliate of the Fund (except for shares held by a Broker-Dealer that is an
affiliate of the Fund for the account of its customers) shall have any voting
rights or be deemed to be outstanding for voting or other purposes.

6.       1940 ACT MUNIPREFERRED ASSET COVERAGE.

         The Fund shall maintain, as of the last Business Day of each month in
which any share of MuniPreferred is outstanding, the 1940 Act MuniPreferred
Asset Coverage.

7.       MUNIPREFERRED BASIC MAINTENANCE AMOUNT.

         (a) So long as shares of MuniPreferred are outstanding, the Fund shall
maintain, on each Valuation Date, and shall verify to its satisfaction that it
is maintaining on such Valuation Date, (i) S&P Eligible Assets having an
aggregate Discounted Value equal to or greater than the MuniPreferred Basic
Maintenance Amount (if S&P is then rating the shares of MuniPreferred) and (ii)
Moody's Eligible Assets having an aggregate Discounted Value equal to or greater
than the MuniPreferred Basic Maintenance Amount (if Moody's is then rating the
shares of MuniPreferred).

         (b) On or before 5:00 P.M., New York City time, on the third Business
Day after a Valuation Date on which the Fund fails to satisfy the MuniPreferred
Basic Maintenance Amount, and on the third Business Day after the MuniPreferred
Basic Maintenance Cure Date with respect to such Valuation Date, the Fund shall
complete and deliver to S&P (if S&P is then rating the shares of MuniPreferred),
Moody's (if Moody's is then rating the shares of MuniPreferred) and the Auction
Agent (if either S&P or Moody's is then rating the shares of MuniPreferred) a
MuniPreferred Basic Maintenance Report as of the date of such failure or such
MuniPreferred Basic Maintenance Cure Date, as the case may be, which will be
deemed to have been delivered to the Auction Agent if the Auction Agent receives
a copy or telecopy, telex or other electronic transcription thereof and on the
same day the Fund mails to the Auction Agent for delivery on the next Business
Day the full MuniPreferred Basic Maintenance Report. The Fund shall also deliver
a MuniPreferred Basic Maintenance Report to (i) the Auction Agent (if either
Moody's or S&P is then rating the shares of MuniPreferred) as of (A) the
fifteenth day of each month (or, if such day is not a Business Day, the next
succeeding Business Day) and (B) the last Business Day of each month, (ii)
Moody's (if Moody's is then rating the shares of MuniPreferred) and S&P (if S&P
is then rating the shares of MuniPreferred) as of any Quarterly Valuation Date,
in each case on or before the third Business Day after such day, and (iii) S&P,
if and when requested for any Valuation Date, on or before the third Business
Day after such request. A failure by the Fund to deliver a MuniPreferred Basic
Maintenance Report pursuant to the preceding sentence shall be deemed to be
delivery of a MuniPreferred Basic


                                      A-26

<PAGE>   104



Maintenance Report indicating the Discounted Value for all assets of the Fund is
less than the MuniPreferred Basic Maintenance Amount, as of the relevant
Valuation Date.

         (c) Within ten Business Days after the date of delivery of a
MuniPreferred Basic Maintenance Report in accordance with paragraph (b) of this
Section 7 relating to a Quarterly Valuation Date, the Fund shall cause the
Independent Accountant to confirm in writing to S&P (if S&P is then rating the
shares of MuniPreferred), Moody's (if Moody's is then rating the shares of
MuniPreferred) and the Auction Agent (if either S&P or Moody's is then rating
the shares of MuniPreferred) (i) the mathematical accuracy of the calculations
reflected in such Report (and in any other MuniPreferred Basic Maintenance
Report, randomly selected by the Independent Accountant, that was delivered by
the Fund during the quarter ending on such Quarterly Valuation Date) and (ii)
that, in such Report (and in such randomly selected Report), the Fund determined
in accordance with this Statement whether the Fund had, at such Quarterly
Valuation Date (and at the Valuation Date addressed in such randomly-selected
Report), S&P Eligible Assets (if S&P is then rating the shares of MuniPreferred)
of an aggregate Discounted Value at least equal to the MuniPreferred Basic
Maintenance Amount and Moody's Eligible Assets (if Moody's is then rating the
shares of MuniPreferred) of an aggregate Discounted Value at least equal to the
MuniPreferred Basic Maintenance Amount (such confirmation being herein called
the "Accountant's Confirmation").

         (d) Within ten Business Days after the date of delivery of a
MuniPreferred Basic Maintenance Report in accordance with paragraph (b) of this
Section 7 relating to any Valuation Date on which the Fund failed to satisfy the
MuniPreferred Basic Maintenance Amount, and relating to the MuniPreferred Basic
Maintenance Cure Date with respect to such failure to satisfy the MuniPreferred
Basic Maintenance Amount, the Fund shall cause the Independent Accountant to
provide to S&P (if S&P is then rating the shares of MuniPreferred), Moody's (if
Moody's is then rating the shares of MuniPreferred) and the Auction Agent (if
either S&P or Moody's is then rating the shares of MuniPreferred) an
Accountant's Confirmation as to such MuniPreferred Basic Maintenance Report.

         (e) If any Accountant's Confirmation delivered pursuant to paragraph
(c) or (d) of this Section 7 shows that an error was made in the MuniPreferred
Basic Maintenance Report for a particular Valuation Date for which such
Accountant's Confirmation was required to be delivered, or shows that a lower
aggregate Discounted Value for the aggregate of all S&P Eligible Assets (if S&P
is then rating the shares of MuniPreferred) or Moody's Eligible Assets (if
Moody's is then rating the shares of MuniPreferred), as the case may be, of the
Fund was determined by the Independent Accountant, the calculation or
determination made by such Independent Accountant shall be final and conclusive
and shall be binding on the Fund, and the Fund shall accordingly amend and
deliver the MuniPreferred Basic Maintenance Report to S&P (if S&P is then rating
the shares of MuniPreferred), Moody's (if Moody's is then rating the shares of
MuniPreferred) and the Auction Agent (if either S&P or Moody's is then rating
the shares of MuniPreferred) promptly following receipt by the Fund of such
Accountant's Confirmation.

         (f) On or before 5:00 p.m., New York City time, on the first Business
Day after the Date of Original Issue of any shares of MuniPreferred, the Fund
shall complete and deliver to S&P (if S&P is then rating the shares of
MuniPreferred) and Moody's (if Moody's is then rating the shares of
MuniPreferred) a MuniPreferred Basic Maintenance Report as of the close of
business on such Date of Original Issue. Within five Business Days of such Date
of Original Issue, the Fund shall cause the Independent Accountant to confirm in
writing to S&P (if S&P is then rating the shares of MuniPreferred) (i) the
mathematical accuracy of the calculations reflected in such Report and (ii) that
the Discounted Value of S&P Eligible Assets reflected thereon equals or exceeds
the MuniPreferred Basic Maintenance Amount reflected thereon.

         (g) On or before 5:00 p.m., New York City time, on the third Business
Day after either (i) the Fund shall have redeemed Common Shares or (ii) the
ratio of the Discounted Value of S&P Eligible Assets or the Discounted Value of
Moody's Eligible Assets to the MuniPreferred Basic Maintenance Amount is less
than or equal to 105%, the Fund shall complete and deliver to S&P (if S&P is
then rating the shares of MuniPreferred) or Moody's (if Moody's is then rating
the shares of MuniPreferred), as the case may be, a MuniPreferred Basic
Maintenance Report as of the date of either such event.



                                      A-27

<PAGE>   105



8.       [RESERVED]

9.       RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS.

         (a) DIVIDENDS ON PREFERRED SHARES OTHER THAN MUNIPREFERRED. Except as
set forth in the next sentence, no dividends shall be declared or paid or set
apart for payment on the shares of any class or series of shares of beneficial
interest of the Fund ranking, as to the payment of dividends, on a parity with
shares of MuniPreferred for any period unless full cumulative dividends have
been or contemporaneously are declared and paid on the shares of each series of
MuniPreferred through its most recent Dividend Payment Date. When dividends are
not paid in full upon the shares of each series of MuniPreferred through its
most recent Dividend Payment Date or upon the shares of any other class or
series of shares of beneficial interest of the Fund ranking on a parity as to
the payment of dividends with shares of MuniPreferred through their most recent
respective dividend payment dates, all dividends declared upon shares of
MuniPreferred and any other such class or series of shares of beneficial
interest ranking on a parity as to the payment of dividends with shares of
MuniPreferred shall be declared pro rata so that the amount of dividends
declared per share on shares of MuniPreferred and such other class or series of
shares of beneficial interest shall in all cases bear to each other the same
ratio that accumulated dividends per share on the shares of MuniPreferred and
such other class or series of shares of beneficial interest bear to each other
(for purposes of this sentence, the amount of dividends declared per share of
MuniPreferred shall be based on the Applicable Rate for such share for the
Dividend Periods during which dividends were not paid in full).

         (b) DIVIDENDS AND OTHER DISTRIBUTIONS WITH RESPECT TO COMMON SHARES
UNDER THE 1940 ACT. The Board of Trustees shall not declare any dividend (except
a dividend payable in Common Shares), or declare any other distribution, upon
the Common Shares, or purchase Common Shares, unless in every such case the
Preferred Shares have, at the time of any such declaration or purchase, an asset
coverage (as defined in and determined pursuant to the 1940 Act) of at least
200% (or such other asset coverage as may in the future be specified in or under
the 1940 Act as the minimum asset coverage for senior securities which are
shares or stock of a closed-end investment company as a condition of declaring
dividends on its common shares or stock) after deducting the amount of such
dividend, distribution or purchase price, as the case may be.

         (c) OTHER RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS. For so
long as any share of MuniPreferred is outstanding, and except as set forth in
paragraph (a) of this Section 9 and paragraph (c) of Section 12 of this Part I,
(A) the Fund shall not declare, pay or set apart for payment any dividend or
other distribution (other than a dividend or distribution paid in shares of, or
in options, warrants or rights to subscribe for or purchase, Common Shares or
other shares, if any, ranking junior to the shares of MuniPreferred as to the
payment of dividends and the distribution of assets upon dissolution,
liquidation or winding up) in respect of the Common Shares or any other shares
of the Fund ranking junior to or on a parity with the shares of MuniPreferred as
to the payment of dividends or the distribution of assets upon dissolution,
liquidation or winding up, or call for redemption, redeem, purchase or otherwise
acquire for consideration any Common Shares or any other such junior shares
(except by conversion into or exchange for shares of the Fund ranking junior to
the shares of MuniPreferred as to the payment of dividends and the distribution
of assets upon dissolution, liquidation or winding up), or any such parity
shares (except by conversion into or exchange for shares of the Fund ranking
junior to or on a parity with MuniPreferred as to the payment of dividends and
the distribution of assets upon dissolution, liquidation or winding up), unless
(i) full cumulative dividends on shares of each series of MuniPreferred through
its most recently ended Dividend Period shall have been paid or shall have been
declared and sufficient funds for the payment thereof deposited with the Auction
Agent and (ii) the Fund has redeemed the full number of shares of MuniPreferred
required to be redeemed by any provision for mandatory redemption pertaining
thereto, and (B) the Fund shall not declare, pay or set apart for payment any
dividend or other distribution (other than a dividend or distribution paid in
shares of, or in options, warrants or rights to subscribe for or purchase,
Common Shares or other shares, if any, ranking junior to shares of MuniPreferred
as to the payment of dividends and the distribution of assets upon dissolution,
liquidation or winding up) in respect of Common Shares or any other shares of
the Fund ranking junior to shares of MuniPreferred as to the payment of
dividends or the distribution of assets upon dissolution, liquidation or winding
up, or call for redemption, redeem, purchase or otherwise acquire for
consideration any Common Shares or any other such junior shares (except by
conversion into or exchange for shares of the Fund ranking junior to shares of
MuniPreferred as to the payment of dividends and the distribution of assets upon
dissolution, liquidation or winding up), unless immediately after such
transaction the Discounted Value of Moody's Eligible Assets (if Moody's is then
rating the shares of MuniPreferred) and S&P Eligible Assets (if S&P is then
rating the shares of MuniPreferred) would each at least equal the MuniPreferred
Basic Maintenance Amount.


                                      A-28

<PAGE>   106




10.      RATING AGENCY RESTRICTIONS.

         For so long as any shares of MuniPreferred are outstanding and Moody's
or S&P, or both, are rating such shares, the Fund will not, unless it has
received written confirmation from Moody's or S&P, or both, as appropriate, that
any such action would not impair the ratings then assigned by such rating agency
to such shares, engage in any one or more of the following transactions:

         (a) buy or sell futures or write put or call options;

         (b) borrow money, except that the Fund may, without obtaining the
written confirmation described above, borrow money for the purpose of clearing
securities transactions if (i) the MuniPreferred Basic Maintenance Amount would
continue to be satisfied after giving effect to such borrowing and (ii) such
borrowing (A) is privately arranged with a bank or other person and is evidenced
by a promissory note or other evidence of indebtedness that is not intended to
be publicly distributed or (B) is for "temporary purposes," is evidenced by a
promissory note or other evidence of indebtedness and is in an amount not
exceeding 5 per centum of the value of the total assets of the Fund at the time
of the borrowing; for purposes of the foregoing, "temporary purpose" means that
the borrowing is to be repaid within sixty days and is not to be extended or
renewed;

         (c) issue additional shares of any series of MuniPreferred or any class
or series of shares ranking prior to or on a parity with shares of MuniPreferred
with respect to the payment of dividends or the distribution of assets upon
dissolution, liquidation or winding up of the Fund, or reissue any shares of
MuniPreferred previously purchased or redeemed by the Fund;

         (d) engage in any short sales of securities;

         (e) lend securities;

         (f) merge or consolidate into or with any other corporation;

         (g) change the pricing service (currently J.J. Kenny) referred to in
the definition of Market Value; or

         (h) enter into reverse repurchase agreements.

11.      REDEMPTION.

         (a) OPTIONAL REDEMPTION.

                  (i) Subject to the provisions of subparagraph (v) of this
         paragraph (a), shares of MuniPreferred of any series may be redeemed,
         at the option of the Fund, as a whole or from time to time in part, on
         the second Business Day preceding any Dividend Payment Date for shares
         of such series, out of funds legally available therefor, at a
         redemption price per share equal to the sum of $25,000 plus an amount
         equal to accumulated but unpaid dividends thereon (whether or not
         earned or declared) to (but not including) the date fixed for
         redemption; provided, however, that (1) shares of a series of
         MuniPreferred may not be redeemed in part if after such partial
         redemption fewer than 500 shares of such series remain outstanding; (2)
         unless otherwise provided in Section 11 of Appendix A hereto, shares of
         a series of MuniPreferred are redeemable by the Fund during the Initial
         Rate Period thereof only on the second Business Day next preceding the
         last Dividend Payment Date for such Initial Rate Period; and (3)
         subject to subparagraph (ii) of this paragraph (a), the Notice of
         Special Rate Period relating to a Special Rate Period of shares of a
         series of MuniPreferred, as delivered to the Auction Agent and filed
         with the Secretary of the Fund, may provide that shares of such series
         shall not be redeemable during the whole or any part of such Special
         Rate Period (except as provided in subparagraph (iv) of this paragraph
         (a)) or shall be redeemable during the whole or any part of such
         Special Rate Period only upon payment of such redemption premium or
         premiums as shall be specified therein ("Special Redemption
         Provisions").



                                      A-29

<PAGE>   107



                  (ii) A Notice of Special Rate Period relating to shares of a
         series of MuniPreferred for a Special Rate Period thereof may contain
         Special Redemption Provisions only if the Fund's Board of Trustees,
         after consultation with the Broker-Dealer or Broker-Dealers for such
         Special Rate Period of shares of such series, determines that such
         Special Redemption Provisions are in the best interest of the Fund.

                  (iii) If fewer than all of the outstanding shares of a series
         of MuniPreferred are to be redeemed pursuant to subparagraph (i) of
         this paragraph (a), the number of shares of such series to be redeemed
         shall be determined by the Board of Trustees, and such shares shall be
         redeemed pro rata from the Holders of shares of such series in
         proportion to the number of shares of such series held by such Holders.

                  (iv) Subject to the provisions of subparagraph (v) of this
         paragraph (a), shares of any series of MuniPreferred may be redeemed,
         at the option of the Fund, as a whole but not in part, out of funds
         legally available therefor, on the first day following any Dividend
         Period thereof included in a Rate Period consisting of more than 364
         Rate Period Days if, on the date of determination of the Applicable
         Rate for shares of such series for such Rate Period, such Applicable
         Rate equalled or exceeded on such date of determination the Treasury
         Note Rate for such Rate Period, at a redemption price per share equal
         to the sum of $25,000 plus an amount equal to accumulated but unpaid
         dividends thereon (whether or not earned or declared) to (but not
         including) the date fixed for redemption.

                  (v) The Fund may not on any date mail a Notice of Redemption
         pursuant to paragraph (c) of this Section 11 in respect of a redemption
         contemplated to be effected pursuant to this paragraph (a) unless on
         such date (a) the Fund has available Deposit Securities with maturity
         or tender dates not later than the day preceding the applicable
         redemption date and having a value not less than the amount (including
         any applicable premium) due to Holders of shares of MuniPreferred by
         reason of the redemption of such shares on such redemption date and (b)
         the Discounted Value of Moody's Eligible Assets (if Moody's is then
         rating the shares of MuniPreferred) and the Discounted Value of S&P
         Eligible Assets (if S&P is then rating the shares of MuniPreferred)
         each at least equal the MuniPreferred Basic Maintenance Amount, and
         would at least equal the MuniPreferred Basic Maintenance Amount
         immediately subsequent to such redemption if such redemption were to
         occur on such date. For purposes of determining in clause (b) of the
         preceding sentence whether the Discounted Value of Moody's Eligible
         Assets at least equals the MuniPreferred Basic Maintenance Amount, the
         Moody's Discount Factors applicable to Moody's Eligible Assets shall be
         determined by reference to the first Exposure Period longer than the
         Exposure Period then applicable to the Fund, as described in the
         definition of Moody's Discount Factor herein.

         (b) MANDATORY REDEMPTION. The Fund shall redeem, at a redemption price
equal to $25,000 per share plus accumulated but unpaid dividends thereon
(whether or not earned or declared) to (but not including) the date fixed by the
Board of Trustees for redemption, certain of the shares of MuniPreferred, if the
Fund fails to have either Moody's Eligible Assets with a Discounted Value or S&P
Eligible Assets with a Discounted Value greater than or equal to the
MuniPreferred Basic Maintenance Amount or fails to maintain the 1940 Act
MuniPreferred Asset Coverage, in accordance with the requirements of the rating
agency or agencies then rating the shares of MuniPreferred, and such failure is
not cured on or before the MuniPreferred Basic Maintenance Cure Date or the 1940
Act Cure Date, as the case may be. The number of shares of MuniPreferred to be
redeemed shall be equal to the lesser of (i) the minimum number of shares of
MuniPreferred, together with all other Preferred Shares subject to redemption or
retirement, the redemption of which, if deemed to have occurred immediately
prior to the opening of business on the Cure Date, would have resulted in the
Fund's having both Moody's Eligible Assets with a Discounted Value and S&P
Eligible Assets with a Discounted Value greater than or equal to the
MuniPreferred Basic Maintenance Amount or maintaining the 1940 Act MuniPreferred
Asset Coverage, as the case may be, on such Cure Date (provided, however, that
if there is no such minimum number of shares of MuniPreferred and other
Preferred Shares the redemption or retirement of which would have had such
result, all shares of MuniPreferred and Preferred Shares then outstanding shall
be redeemed), and (ii) the maximum number of shares of MuniPreferred, together
with all other Preferred Shares subject to redemption or retirement, that can be
redeemed out of funds expected to be legally available therefor in accordance
with the Declaration and applicable law. In determining the shares of
MuniPreferred required to be redeemed in accordance with the foregoing, the Fund
shall allocate the number required to be redeemed to satisfy the MuniPreferred
Basic Maintenance Amount or the 1940 Act MuniPreferred Asset Coverage, as the
case may be, pro rata among shares of MuniPreferred and other Preferred Shares
(and, then, pro rata among each series of MuniPreferred) subject to redemption
or retirement. The Fund shall effect such redemption on the date fixed by the
Fund therefor, which date


                                      A-30

<PAGE>   108



shall not be earlier than 20 days nor later than 40 days after such Cure Date,
except that if the Fund does not have funds legally available for the redemption
of all of the required number of shares of MuniPreferred and other Preferred
Shares which are subject to redemption or retirement or the Fund otherwise is
unable to effect such redemption on or prior to 40 days after such Cure Date,
the Fund shall redeem those shares of MuniPreferred and other Preferred Shares
which it was unable to redeem on the earliest practicable date on which it is
able to effect such redemption. If fewer than all of the outstanding shares of a
series of MuniPreferred are to be redeemed pursuant to this paragraph (b), the
number of shares of such series to be redeemed shall be redeemed pro rata from
the Holders of shares of such series in proportion to the number of shares of
such series held by such Holders.

         (c) NOTICE OF REDEMPTION. If the Fund shall determine or be required to
redeem shares of a series of MuniPreferred pursuant to paragraph (a) or (b) of
this Section 11, it shall mail a Notice of Redemption with respect to such
redemption by first class mail, postage prepaid, to each Holder of the shares of
such series to be redeemed, at such Holder's address as the same appears on the
record books of the Fund on the record date established by the Board of
Trustees. Such Notice of Redemption shall be so mailed not less than 20 nor more
than 45 days prior to the date fixed for redemption. Each such Notice of
Redemption shall state: (i) the redemption date; (ii) the number of shares of
MuniPreferred to be redeemed and the series thereof; (iii) the CUSIP number for
shares of such series; (iv) the Redemption Price; (v) the place or places where
the certificate(s) for such shares (properly endorsed or assigned for transfer,
if the Board of Trustees shall so require and the Notice of Redemption shall so
state) are to be surrendered for payment of the Redemption Price; (vi) that
dividends on the shares to be redeemed will cease to accumulate on such
redemption date; and (vii) the provisions of this Section 11 under which such
redemption is made. If fewer than all shares of a series of MuniPreferred held
by any Holder are to be redeemed, the Notice of Redemption mailed to such Holder
shall also specify the number of shares of such series to be redeemed from such
Holder. The Fund may provide in any Notice of Redemption relating to a
redemption contemplated to be effected pursuant to paragraph (a) of this Section
11 that such redemption is subject to one or more conditions precedent and that
the Fund shall not be required to effect such redemption unless each such
condition shall have been satisfied at the time or times and in the manner
specified in such Notice of Redemption.

         (d) NO REDEMPTION UNDER CERTAIN CIRCUMSTANCES. Notwithstanding the
provisions of paragraphs (a) or (b) of this Section 11, if any dividends on
shares of a series of MuniPreferred (whether or not earned or declared) are in
arrears, no shares of such series shall be redeemed unless all outstanding
shares of such series are simultaneously redeemed, and the Fund shall not
purchase or otherwise acquire any shares of such series; provided, however, that
the foregoing shall not prevent the purchase or acquisition of all outstanding
shares of such series pursuant to the successful completion of an otherwise
lawful purchase or exchange offer made on the same terms to, and accepted by,
Holders of all outstanding shares of such series.

         (e) ABSENCE OF FUNDS AVAILABLE FOR REDEMPTION. To the extent that any
redemption for which Notice of Redemption has been mailed is not made by reason
of the absence of legally available funds therefor in accordance with the
Declaration and applicable law, such redemption shall be made as soon as
practicable to the extent such funds become available. Failure to redeem shares
of MuniPreferred shall be deemed to exist at any time after the date specified
for redemption in a Notice of Redemption when the Fund shall have failed, for
any reason whatsoever, to deposit in trust with the Auction Agent the Redemption
Price with respect to any shares for which such Notice of Redemption has been
mailed; provided, however, that the foregoing shall not apply in the case of the
Fund's failure to deposit in trust with the Auction Agent the Redemption Price
with respect to any shares where (1) the Notice of Redemption relating to such
redemption provided that such redemption was subject to one or more conditions
precedent and (2) any such condition precedent shall not have been satisfied at
the time or times and in the manner specified in such Notice of Redemption.
Notwithstanding the fact that the Fund may not have redeemed shares of
MuniPreferred for which a Notice of Redemption has been mailed, dividends may be
declared and paid on shares of MuniPreferred and shall include those shares of
MuniPreferred for which a Notice of Redemption has been mailed.

         (f) AUCTION AGENT AS TRUSTEE OF REDEMPTION PAYMENTS BY FUND. All moneys
paid to the Auction Agent for payment of the Redemption Price of shares of
MuniPreferred called for redemption shall be held in trust by the Auction Agent
for the benefit of Holders of shares so to be redeemed.

         (g) SHARES FOR WHICH NOTICE OF REDEMPTION HAS BEEN GIVEN ARE NO LONGER
OUTSTANDING. Provided a Notice of Redemption has been mailed pursuant to
paragraph (c) of this Section 11, upon the deposit with the Auction Agent (on
the Business Day next preceding the date fixed for redemption thereby, in funds
available on the next


                                      A-31

<PAGE>   109



Business Day in The City of New York, New York) of funds sufficient to redeem
the shares of MuniPreferred that are the subject of such notice, dividends on
such shares shall cease to accumulate and such shares shall no longer be deemed
to be outstanding for any purpose, and all rights of the Holders of the shares
so called for redemption shall cease and terminate, except the right of such
Holders to receive the Redemption Price, but without any interest or other
additional amount, except as provided in subparagraph (e)(i) of Section 2 of
this Part I and in Section 3 of this Part I. Upon surrender in accordance with
the Notice of Redemption of the certificates for any shares so redeemed
(properly endorsed or assigned for transfer, if the Board of Trustees shall so
require and the Notice of Redemption shall so state), the Redemption Price shall
be paid by the Auction Agent to the Holders of shares of MuniPreferred subject
to redemption. In the case that fewer than all of the shares represented by any
such certificate are redeemed, a new certificate shall be issued, representing
the unredeemed shares, without cost to the Holder thereof. The Fund shall be
entitled to receive from the Auction Agent, promptly after the date fixed for
redemption, any cash deposited with the Auction Agent in excess of (i) the
aggregate Redemption Price of the shares of MuniPreferred called for redemption
on such date and (ii) all other amounts to which Holders of shares of
MuniPreferred called for redemption may be entitled. Any funds so deposited that
are unclaimed at the end of 90 days from such redemption date shall, to the
extent permitted by law, be repaid to the Fund, after which time the Holders of
shares of MuniPreferred so called for redemption may look only to the Fund for
payment of the Redemption Price and all other amounts to which they may be
entitled. The Fund shall be entitled to receive, from time to time after the
date fixed for redemption, any interest on the funds so deposited.

         (h) COMPLIANCE WITH APPLICABLE LAW. In effecting any redemption
pursuant to this Section 11, the Fund shall use its best efforts to comply with
all applicable conditions precedent to effecting such redemption under the 1940
Act and any applicable Massachusetts law, but shall effect no redemption except
in accordance with the 1940 Act and any applicable Massachusetts law.

         (i) ONLY WHOLE SHARES OF MUNIPREFERRED MAY BE REDEEMED. In the case of
any redemption pursuant to this Section 11, only whole shares of MuniPreferred
shall be redeemed, and in the event that any provision of the Declaration would
require redemption of a fractional share, the Auction Agent shall be authorized
to round up so that only whole shares are redeemed.

12.      LIQUIDATION RIGHTS.

         (a) RANKING. The shares of a series of MuniPreferred shall rank on a
parity with each other, with shares of any other series of MuniPreferred and
with shares of any other series of Preferred Shares as to the distribution of
assets upon dissolution, liquidation or winding up of the affairs of the Fund.

         (b) DISTRIBUTIONS UPON LIQUIDATION. Upon the dissolution, liquidation
or winding up of the affairs of the Fund, whether voluntary or involuntary, the
Holders of shares of MuniPreferred then outstanding shall be entitled to receive
and to be paid out of the assets of the Fund available for distribution to its
shareholders, before any payment or distribution shall be made on the Common
Shares or on any other class of shares of the Fund ranking junior to the
MuniPreferred upon dissolution, liquidation or winding up, an amount equal to
the Liquidation Preference with respect to such shares plus an amount equal to
all dividends thereon (whether or not earned or declared) accumulated but unpaid
to (but not including) the date of final distribution in same day funds,
together with any payments required to be made pursuant to Section 3 of this
Part I in connection with the liquidation of the Fund. After the payment to the
Holders of the shares of MuniPreferred of the full preferential amounts provided
for in this paragraph (b), the Holders of MuniPreferred as such shall have no
right or claim to any of the remaining assets of the Fund.

         (c) PRO RATA DISTRIBUTIONS. In the event the assets of the Fund
available for distribution to the Holders of shares of MuniPreferred upon any
dissolution, liquidation, or winding up of the affairs of the Fund, whether
voluntary or involuntary, shall be insufficient to pay in full all amounts to
which such Holders are entitled pursuant to paragraph (b) of this Section 12, no
such distribution shall be made on account of any shares of any other class or
series of Preferred Shares ranking on a parity with the shares of MuniPreferred
with respect to the distribution of assets upon such dissolution, liquidation or
winding up unless proportionate distributive amounts shall be paid on account of
the shares of MuniPreferred, ratably, in proportion to the full distributable
amounts for which holders of all such parity shares are respectively entitled
upon such dissolution, liquidation or winding up.

         (d) RIGHTS OF JUNIOR SHARES. Subject to the rights of the holders of
shares of any series or class or classes of shares ranking on a parity with the
shares of MuniPreferred with respect to the distribution of assets upon
dissolution,


                                      A-32

<PAGE>   110



liquidation or winding up of the affairs of the Fund, after payment shall have
been made in full to the Holders of the shares of MuniPreferred as provided in
paragraph (b) of this Section 12, but not prior thereto, any other series or
class or classes of shares ranking junior to the shares of MuniPreferred with
respect to the distribution of assets upon dissolution, liquidation or winding
up of the affairs of the Fund shall, subject to the respective terms and
provisions (if any) applying thereto, be entitled to receive any and all assets
remaining to be paid or distributed, and the Holders of the shares of
MuniPreferred shall not be entitled to share therein.

         (e) CERTAIN EVENTS NOT CONSTITUTING LIQUIDATION. Neither the sale of
all or substantially all the property or business of the Fund, nor the merger or
consolidation of the Fund into or with any Massachusetts business trust or
corporation nor the merger or consolidation of any Massachusetts business trust
or corporation into or with the Fund shall be a dissolution, liquidation or
winding up, whether voluntary or involuntary, for the purposes of this Section
12.

13.      MISCELLANEOUS.

         (a) AMENDMENT OF APPENDIX A TO ADD ADDITIONAL SERIES. Subject to the
provisions of paragraph (c) of Section 10 of this Part I, the Board of Trustees
may, by resolution duly adopted, without shareholder approval (except as
otherwise provided by this Statement or required by applicable law), amend
Appendix A hereto to (1) reflect any amendments hereto which the Board of
Trustees is entitled to adopt pursuant to the terms of this Statement without
shareholder approval or (2) add additional series of MuniPreferred or additional
shares of a series of MuniPreferred (and terms relating thereto) to the series
and shares of MuniPreferred theretofore described thereon. Each such additional
series and all such additional shares shall be governed by the terms of this
Statement.

         (b) APPENDIX A INCORPORATED BY REFERENCE. Appendix A hereto is
incorporated in and made a part of this Statement by reference thereto.

         (c) NO FRACTIONAL SHARES. No fractional shares of MuniPreferred shall
be issued.

         (d) STATUS OF SHARES OF MUNIPREFERRED REDEEMED, EXCHANGED OR OTHERWISE
ACQUIRED BY THE FUND. Shares of MuniPreferred which are redeemed, exchanged or
otherwise acquired by the Fund shall return to the status of authorized and
unissued Preferred Shares without designation as to series.

         (e) BOARD MAY RESOLVE AMBIGUITIES. To the extent permitted by
applicable law, the Board of Trustees may interpret or adjust the provisions of
this Statement to resolve any inconsistency or ambiguity or to remedy any formal
defect, and may amend this Statement with respect to any series of MuniPreferred
prior to the issuance of shares of such series.

         (f) HEADINGS NOT DETERMINATIVE. The headings contained in this
Statement are for convenience of reference only and shall not affect the meaning
or interpretation of this Statement.

         (g) NOTICES. All notices or communications, unless otherwise specified
in the By-Laws of the Fund or this Statement, shall be sufficiently given if in
writing and delivered in person or mailed by first-class mail, postage prepaid.


                                      A-33

<PAGE>   111
                                     PART II

1.       ORDERS.

         (a) Prior to the Submission Deadline on each Auction Date for shares of
a series of MuniPreferred:

                  (i) each Beneficial Owner of shares of such series may submit
         to its Broker-Dealer by telephone or otherwise information as to:

                           (A) the number of Outstanding shares, if any, of such
                  series held by such Beneficial Owner which such Beneficial
                  Owner desires to continue to hold without regard to the
                  Applicable Rate for shares of such series for the next
                  succeeding Rate Period of such shares;

                           (B) the number of Outstanding shares, if any, of such
                  series held by such Beneficial Owner which such Beneficial
                  Owner offers to sell if the Applicable Rate for shares of such
                  series for the next succeeding Rate Period of shares of such
                  series shall be less than the rate per annum specified by such
                  Beneficial Owner; and/or

                           (C) the number of Outstanding shares, if any, of such
                  series held by such Beneficial Owner which such Beneficial
                  Owner offers to sell without regard to the Applicable Rate for
                  shares of such series for the next succeeding Rate Period of
                  shares of such series;

         and

                  (ii) one or more Broker-Dealers, using lists of Potential
         Beneficial Owners, shall in good faith for the purpose of conducting a
         competitive Auction in a commercially reasonable manner, contact
         Potential Beneficial Owners (by telephone or otherwise), including
         Persons that are not Beneficial Owners, on such lists to determine the
         number of shares, if any, of such series which each such Potential
         Beneficial Owner offers to purchase if the Applicable Rate for shares
         of such series for the next succeeding Rate Period of shares of such
         series shall not be less than the rate per annum specified by such
         Potential Beneficial Owner.

         For the purposes hereof, the communication by a Beneficial Owner or
Potential Beneficial Owner to a Broker-Dealer, or by a Broker-Dealer to the
Auction Agent, of information referred to in clause (i) (A), (i), (B), (i), (C)
or (ii) of this paragraph (a) is hereinafter referred to as an "Order" and
collectively as "Orders" and each Beneficial Owner and each Potential Beneficial
Owner placing an Order with a Broker-Dealer, and such Broker-Dealer placing an
Order with the Auction Agent, is hereinafter referred to as a "Bidder" and
collectively as "Bidders"; an Order containing the information referred to in
clause (i)(A) of this paragraph (a) is hereinafter referred to as a "Hold Order"
and collectively as "Hold Orders"; an Order containing the information referred
to in clause (i)(B) or (ii) of this paragraph (a) is hereinafter referred to as
a "Bid" and collectively as "Bids"; and an Order containing the information
referred to in clause (i)(C) of this paragraph (a) is hereinafter referred to as
a "Sell Order" and collectively as "Sell Orders."

         (b) (i) A Bid by a Beneficial Owner or an Existing Holder of shares of
         a series of MuniPreferred subject to an Auction on any Auction Date
         shall constitute an irrevocable offer to sell:

                           (A) the number of Outstanding shares of such series
                  specified in such Bid if the Applicable Rate for shares of
                  such series determined on such Auction Date shall be less than
                  the rate specified therein;

                           (B) such number or a lesser number of Outstanding
                  shares of such series to be determined as set forth in clause
                  (iv) of paragraph (a) of Section 4 of this Part II if the
                  Applicable Rate for shares of such series determined on such
                  Auction Date shall be equal to the rate specified therein; or

                                      A-34

<PAGE>   112


                           (C) the number of Outstanding shares of such series
                  specified in such Bid if the rate specified therein shall be
                  higher than the Maximum Rate for shares of such series, or
                  such number or a lesser number of Outstanding shares of such
                  series to be determined as set forth in clause (iii) of
                  paragraph (b) of Section 4 of this Part II if the rate
                  specified therein shall be higher than the Maximum Rate for
                  shares of such series and Sufficient Clearing Bids for shares
                  of such series do not exist.

                  (ii) A Sell Order by a Beneficial Owner or an Existing Holder
         of shares of a series of MuniPreferred subject to an Auction on any
         Auction Date shall constitute an irrevocable offer to sell:

                           (A) the number of Outstanding shares of such series
                  specified in such Sell Order; or

                           (B) such number or a lesser number of Outstanding
                  shares of such series as set forth in clause (iii) of
                  paragraph (b) of Section 4 of this Part II if Sufficient
                  Clearing Bids for shares of such series do not exist;

provided, however, that a Broker-Dealer that is an Existing Holder with respect
to shares of a series of MuniPreferred shall not be liable to any Person for
failing to sell such shares pursuant to a Sell Order described in the proviso to
paragraph (c) of Section 2 of this Part II if (1) such shares were transferred
by the Beneficial Owner thereof without compliance by such Beneficial Owner or
its transferee Broker-Dealer (or other transferee person, if permitted by the
Fund) with the provisions of Section 7 of this Part II or (2) such Broker-Dealer
has informed the Auction Agent pursuant to the terms of its Broker-Dealer
Agreement that, according to such Broker-Dealer's records, such Broker-Dealer
believes it is not the Existing Holder of such shares.

                  (iii) A Bid by a Potential Beneficial Holder or a Potential
         Holder of shares of a series of MuniPreferred subject to an Auction on
         any Auction Date shall constitute an irrevocable offer to purchase:

                           (A) the number of Outstanding shares of such series
                  specified in such Bid if the Applicable Rate for shares of
                  such series determined on such Auction Date shall be higher
                  than the rate specified therein; or

                           (B) such number or a lesser number of Outstanding
                  shares of such series as set forth in clause (v) of paragraph
                  (a) of Section 4 of this Part II if the Applicable Rate for
                  shares of such series determined on such Auction Date shall be
                  equal to the rate specified therein.

         (c) No Order for any number of shares of MuniPreferred other than whole
shares shall be valid.

2.       SUBMISSION OF ORDERS BY BROKER-DEALERS TO AUCTION AGENT.

         (a) Each Broker-Dealer shall submit in writing to the Auction Agent
prior to the Submission Deadline on each Auction Date all Orders for shares of
MuniPreferred of a series subject to an Auction on such Auction Date obtained by
such Broker-Dealer, designating itself (unless otherwise permitted by the Fund)
as an Existing Holder in respect of shares subject to Orders submitted or deemed
submitted to it by Beneficial Owners and as a Potential Holder in respect of
shares subject to Orders submitted to it by Potential Beneficial Owners, and
shall specify with respect to each Order for such shares:

                  (i) the name of the Bidder placing such Order (which shall be
         the Broker-Dealer unless otherwise permitted by the Fund);

                  (ii) the aggregate number of shares of such series that are
         the subject of such Order;

                  (iii) to the extent that such Bidder is an Existing Holder of
         shares of such series:

                           (A) the number of shares, if any, of such series
                  subject to any Hold Order of such Existing Holder;

                           (B) the number of shares, if any, of such series
                  subject to any Bid of such Existing Holder and the rate
                  specified in such Bid; and


                                      A-35

<PAGE>   113



                           (C) the number of shares, if any, of such series
                  subject to any Sell Order of such Existing Holder; and

                  (iv) to the extent such Bidder is a Potential Holder of shares
         of such series, the rate and number of shares of such series specified
         in such Potential Holder's Bid.

         (b) If any rate specified in any Bid contains more than three figures
to the right of the decimal point, the Auction Agent shall round such rate up to
the next highest one thousandth (.001) of 1%.

         (c) If an Order or Orders covering all of the Outstanding shares of
MuniPreferred of a series held by any Existing Holder is not submitted to the
Auction Agent prior to the Submission Deadline, the Auction Agent shall deem a
Hold Order to have been submitted by or on behalf of such Existing Holder
covering the number of Outstanding shares of such series held by such Existing
Holder and not subject to Orders submitted to the Auction Agent; provided,
however, that if an Order or Orders covering all of the Outstanding shares of
such series held by any Existing Holder is not submitted to the Auction Agent
prior to the Submission Deadline for an Auction relating to a Special Rate
Period consisting of more than 28 Rate Period Days, the Auction Agent shall deem
a Sell Order to have been submitted by or on behalf of such Existing Holder
covering the number of outstanding shares of such series held by such Existing
Holder and not subject to Orders submitted to the Auction Agent.

         (d) If one or more Orders of an Existing Holder is submitted to the
Auction Agent covering in the aggregate more than the number of Outstanding
shares of MuniPreferred of a series subject to an Auction held by such Existing
Holder, such Orders shall be considered valid in the following order of
priority:

                  (i) all Hold Orders for shares of such series shall be
         considered valid, but only up to and including in the aggregate the
         number of Outstanding shares of such series held by such Existing
         Holder, and if the number of shares of such series subject to such Hold
         Orders exceeds the number of Outstanding shares of such series held by
         such Existing Holder, the number of shares subject to each such Hold
         Order shall be reduced pro rata to cover the number of Outstanding
         shares of such series held by such Existing Holder;

                  (ii) (A) any Bid for shares of such series shall be considered
                  valid up to and including the excess of the number of
                  Outstanding shares of such series held by such Existing Holder
                  over the number of shares of such series subject to any Hold
                  Orders referred to in clause (i) above;

                       (B) subject to subclause (A), if more than one Bid of an
                  Existing Holder for shares of such series is submitted to the
                  Auction Agent with the same rate and the number of Outstanding
                  shares of such series subject to such Bids is greater than
                  such excess, such Bids shall be considered valid up to and
                  including the amount of such excess, and the number of shares
                  of such series subject to each Bid with the same rate shall be
                  reduced pro rata to cover the number of shares of such series
                  equal to such excess;

                       (C) subject to subclauses (A) and (B), if more than one
                  Bid of an Existing Holder for shares of such series is
                  submitted to the Auction Agent with different rates, such Bids
                  shall be considered valid in the ascending order of their
                  respective rates up to and including the amount of such
                  excess; and

                       (D) in any such event, the number, if any, of such
                  Outstanding shares of such series subject to any portion of
                  Bids considered not valid in whole or in part under this
                  clause (ii) shall be treated as the subject of a Bid for
                  shares of such series by or on behalf of a Potential Holder at
                  the rate therein specified; and

                  (iii) all Sell Orders for shares of such series shall be
         considered valid up to and including the excess of the number of
         Outstanding shares of such series held by such Existing Holder over the
         sum of shares of such series subject to valid Hold Orders referred to
         in clause (i) above and valid Bids referred to in clause (ii) above.



                                      A-36

<PAGE>   114



         (e) If more than one Bid for one or more shares of a series of
MuniPreferred is submitted to the Auction Agent by or on behalf of any Potential
Holder, each such Bid submitted shall be a separate Bid with the rate and number
of shares therein specified.

         (f) Any Order submitted by a Beneficial Owner or a Potential Beneficial
Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction Agent, prior to
the Submission Deadline on any Auction Date, shall be irrevocable.

3.       DETERMINATION OF SUFFICIENT CLEARING BIDS, WINNING BID RATE AND
         APPLICABLE RATE.

         (a) Not earlier than the Submission Deadline on each Auction Date for
shares of a series of MuniPreferred, the Auction Agent shall assemble all valid
Orders submitted or deemed submitted to it by the Broker- Dealers in respect of
shares of such series (each such Order as submitted or deemed submitted by a
Broker-Dealer being hereinafter referred to individually as a "Submitted Hold
Order," a "Submitted Bid" or a "Submitted Sell Order," as the case may be, or as
a "Submitted Order" and collectively as "Submitted Hold Orders," "Submitted
Bids" or "Submitted Sell Orders," as the case may be, or as "Submitted Orders")
and shall determine for such series:

                  (i) the excess of the number of Outstanding shares of such
         series over the number of Outstanding shares of such series subject to
         Submitted Hold Orders (such excess being hereinafter referred to as the
         "Available MuniPreferred" of such series);

                  (ii)from the Submitted Orders for shares of such series
         whether:

                           (A) the number of Outstanding shares of such series
                  subject to Submitted Bids of Potential Holders specifying one
                  or more rates equal to or lower than the Maximum Rate for
                  shares of such series;

         exceeds or is equal to the sum of:

                           (B) the number of Outstanding shares of such series
                 subject to Submitted Bids of Existing Holders specifying one or
                 more rates higher than the Maximum Rate for shares of such
                 series; and

                           (C) the number of Outstanding shares of such series
                 subject to Submitted Sell Orders

         (in the event such excess or such equality exists (other than because
         the number of shares of such series in subclauses (B) and (C) above is
         zero because all of the Outstanding shares of such series are subject
         to Submitted Hold Orders), such Submitted Bids in subclause (A) above
         being hereinafter referred to collectively as "Sufficient Clearing
         Bids" for shares of such series); and

                  (iii) if Sufficient Clearing Bids for shares of such series
         exist, the lowest rate specified in such Submitted Bids (the "Winning
         Bid Rate" for shares of such series) which if:

                           (A) (I) each such Submitted Bid of Existing Holders
                  specifying such lowest rate and (II) all other such Submitted
                  Bids of Existing Holders specifying lower rates were rejected,
                  thus entitling such Existing Holders to continue to hold the
                  shares of such series that are subject to such Submitted Bids;
                  and

                           (B) (I) each such Submitted Bid of Potential Holders
                  specifying such lowest rate and (II) all other such Submitted
                  Bids of Potential Holders specifying lower rates were
                  accepted;

         would result in such Existing Holders described in subclause (A) above
         continuing to hold an aggregate number of Outstanding shares of such
         series which, when added to the number of Outstanding shares of such
         series to be purchased by such Potential Holders described in subclause
         (B) above, would equal not less than the Available MuniPreferred of
         such series.


                                      A-37

<PAGE>   115



         (b) Promptly after the Auction Agent has made the determinations
pursuant to paragraph (a) of this Section 3, the Auction Agent shall advise the
Fund of the Maximum Rate for shares of the series of MuniPreferred for which an
Auction is being held on the Auction Date and, based on such determination, the
Applicable Rate for shares of such series for the next succeeding Rate Period
thereof as follows:

                  (i) if Sufficient Clearing Bids for shares of such series
         exist, that the Applicable Rate for all shares of such series for the
         next succeeding Rate Period thereof shall be equal to the Winning Bid
         Rate for shares of such series so determined;

                  (ii) if Sufficient Clearing Bids for shares of such series do
         not exist (other than because all of the Outstanding shares of such
         series are subject to Submitted Hold Orders), that the Applicable Rate
         for all shares of such series for the next succeeding Rate Period
         thereof shall be equal to the Maximum Rate for shares of such series;
         or

                  (iii) if all of the Outstanding shares of such series are
         subject to Submitted Hold Orders, that the Applicable Rate for all
         shares of such series for the next succeeding Rate Period thereof shall
         be as set forth in Section 12 of Appendix A hereto.

4.       ACCEPTANCE AND REJECTION OF SUBMITTED BIDS AND SUBMITTED SELL ORDERS
         AND ALLOCATION OF SHARES.

         Existing Holders shall continue to hold the shares of MuniPreferred
that are subject to Submitted Hold Orders, and, based on the determinations made
pursuant to paragraph (a) of Section 3 of this Part II, the Submitted Bids and
Submitted Sell Orders shall be accepted or rejected by the Auction Agent and the
Auction Agent shall take such other action as set forth below:

         (a) If Sufficient Clearing Bids for shares of a series of MuniPreferred
have been made, all Submitted Sell Orders with respect to shares of such series
shall be accepted and, subject to the provisions of paragraphs (d) and (e) of
this Section 4, Submitted Bids with respect to shares of such series shall be
accepted or rejected as follows in the following order of priority and all other
Submitted Bids with respect to shares of such series shall be rejected:

                  (i) Existing Holders' Submitted Bids for shares of such series
         specifying any rate that is higher than the Winning Bid Rate for shares
         of such series shall be accepted, thus requiring each such Existing
         Holder to sell the shares of MuniPreferred subject to such Submitted
         Bids;

                  (ii) Existing Holders' Submitted Bids for shares of such
         series specifying any rate that is lower than the Winning Bid Rate for
         shares of such series shall be rejected, thus entitling each such
         Existing Holder to continue to hold the shares of MuniPreferred subject
         to such Submitted Bids;

                  (iii) Potential Holders' Submitted Bids for shares of such
         series specifying any rate that is lower than the Winning Bid Rate for
         shares of such series shall be accepted;

                  (iv) each Existing Holder's Submitted Bid for shares of such
         series specifying a rate that is equal to the Winning Bid Rate for
         shares of such series shall be rejected, thus entitling such Existing
         Holder to continue to hold the shares of MuniPreferred subject to such
         Submitted Bid, unless the number of Outstanding shares of MuniPreferred
         subject to all such Submitted Bids shall be greater than the number of
         shares of MuniPreferred ("remaining shares") in the excess of the
         Available MuniPreferred of such series over the number of shares of
         MuniPreferred subject to Submitted Bids described in clauses (ii) and
         (iii) of this paragraph (a), in which event such Submitted Bid of such
         Existing Holder shall be rejected in part, and such Existing Holder
         shall be entitled to continue to hold shares of MuniPreferred subject
         to such Submitted Bid, but only in an amount equal to the number of
         shares of MuniPreferred of such series obtained by multiplying the
         number of remaining shares by a fraction, the numerator of which shall
         be the number of Outstanding shares of MuniPreferred held by such
         Existing Holder subject to such Submitted Bid and the denominator of
         which shall be the aggregate number of Outstanding shares of
         MuniPreferred subject to such Submitted Bids made by all such Existing
         Holders that specified a rate equal to the Winning Bid Rate for shares
         of such series; and



                                      A-38

<PAGE>   116



                  (v) each Potential Holder's Submitted Bid for shares of such
         series specifying a rate that is equal to the Winning Bid Rate for
         shares of such series shall be accepted but only in an amount equal to
         the number of shares of such series obtained by multiplying the number
         of shares in the excess of the Available MuniPreferred of such series
         over the number of shares of MuniPreferred subject to Submitted Bids
         described in clauses (ii) through (iv) of this paragraph (a) by a
         fraction, the numerator of which shall be the number of Outstanding
         shares of MuniPreferred subject to such Submitted Bid and the
         denominator of which shall be the aggregate number of Outstanding
         shares of MuniPreferred subject to such Submitted Bids made by all such
         Potential Holders that specified a rate equal to the Winning Bid Rate
         for shares of such series.

         (b) If Sufficient Clearing Bids for shares of a series of MuniPreferred
have not been made (other than because all of the Outstanding shares of such
series are subject to Submitted Hold Orders), subject to the provisions of
paragraph (d) of this Section 4, Submitted Orders for shares of such series
shall be accepted or rejected as follows in the following order of priority and
all other Submitted Bids for shares of such series shall be rejected:

                  (i) Existing Holders' Submitted Bids for shares of such series
         specifying any rate that is equal to or lower than the Maximum Rate for
         shares of such series shall be rejected, thus entitling such Existing
         Holders to continue to hold the shares of MuniPreferred subject to such
         Submitted Bids;

                  (ii) Potential Holders' Submitted Bids for shares of such
         series specifying any rate that is equal to or lower than the Maximum
         Rate for shares of such series shall be accepted; and

                  (iii) Each Existing Holder's Submitted Bid for shares of such
         series specifying any rate that is higher than the Maximum Rate for
         shares of such series and the Submitted Sell Orders for shares of such
         series of each Existing Holder shall be accepted, thus entitling each
         Existing Holder that submitted or on whose behalf was submitted any
         such Submitted Bid or Submitted Sell Order to sell the shares of such
         series subject to such Submitted Bid or Submitted Sell Order, but in
         both cases only in an amount equal to the number of shares of such
         series obtained by multiplying the number of shares of such series
         subject to Submitted Bids described in clause (ii) of this paragraph
         (b) by a fraction, the numerator of which shall be the number of
         Outstanding shares of such series held by such Existing Holder subject
         to such Submitted Bid or Submitted Sell Order and the denominator of
         which shall be the aggregate number of Outstanding shares of such
         series subject to all such Submitted Bids and Submitted Sell Orders.

         (c) If all of the Outstanding shares of a series of MuniPreferred are
subject to Submitted Hold Orders, all Submitted Bids for shares of such series
shall be rejected.

         (d) If, as a result of the procedures described in clause (iv) or (v)
of paragraph (a) or clause (iii) of paragraph (b) of this Section 4, any
Existing Holder would be entitled or required to sell, or any Potential Holder
would be entitled or required to purchase, a fraction of a share of a series of
MuniPreferred on any Auction Date, the Auction Agent shall, in such manner as it
shall determine in its sole discretion, round up or down the number of shares of
MuniPreferred of such series to be purchased or sold by any Existing Holder or
Potential Holder on such Auction Date as a result of such procedures so that the
number of shares so purchased or sold by each Existing Holder or Potential
Holder on such Auction Date shall be whole shares of MuniPreferred.

         (e) If, as a result of the procedures described in clause (v) of
paragraph (a) of this Section 4, any Potential Holder would be entitled or
required to purchase less than a whole share of a series of MuniPreferred on any
Auction Date, the Auction Agent shall, in such manner as it shall determine in
its sole discretion, allocate shares of MuniPreferred of such series for
purchase among Potential Holders so that only whole shares of MuniPreferred of
such series are purchased on such Auction Date as a result of such procedures by
any Potential Holder, even if such allocation results in one or more Potential
Holders not purchasing shares of MuniPreferred of such series on such Auction
Date.

         (f) Based on the results of each Auction for shares of a series of
MuniPreferred, the Auction Agent shall determine the aggregate number of shares
of such series to be purchased and the aggregate number of shares of such series
to be sold by Potential Holders and Existing Holders and, with respect to each
Potential Holder and Existing Holder, to the extent that such aggregate number
of shares to be purchased and such aggregate number of shares to be sold differ,
determine to which other Potential Holder(s) or Existing Holder(s) they shall
deliver, or from which other Potential Holder(s) or Existing Holder(s) they
shall receive, as the case may be, shares of MuniPreferred of such series.


                                      A-39

<PAGE>   117



Notwithstanding any provision of the Auction Procedures or the Settlement
Procedures to the contrary, in the event an Existing Holder or Beneficial Owner
of shares of a series of MuniPreferred with respect to whom a Broker-Dealer
submitted a Bid to the Auction Agent for such shares that was accepted in whole
or in part, or submitted or is deemed to have submitted a Sell Order for such
shares that was accepted in whole or in part, fails to instruct its Agent Member
to deliver such shares against payment therefor, partial deliveries of shares of
MuniPreferred that have been made in respect of Potential Holders' or Potential
Beneficial Owners' Submitted Bids for shares of such series that have been
accepted in whole or in part shall constitute good delivery to such Potential
Holders and Potential Beneficial Owners.

         (g) Neither the Fund nor the Auction Agent nor any affiliate of either
shall have any responsibility or liability with respect to the failure of an
Existing Holder, a Potential Holder, a Beneficial Owner, a Potential Beneficial
Owner or its respective Agent Member to deliver shares of MuniPreferred of any
series or to pay for shares of MuniPreferred of any series sold or purchased
pursuant to the Auction Procedures or otherwise.

5.       NOTIFICATION OF ALLOCATIONS.

         Whenever the Fund intends to include any net capital gains or other
income taxable for Federal income tax purposes in any dividend on shares of
MuniPreferred, the Fund shall, in the case of a Minimum Rate Period or a Special
Rate Period of 28 Rate Period Days or fewer, and may, in the case of any other
Special Rate Period, notify the Auction Agent of the amount to be so included
not later than the Dividend Payment Date next preceding the Auction Date on
which the Applicable Rate for such dividend is to be established. Whenever the
Auction Agent receives such notice from the Fund, it will be required in turn to
notify each Broker-Dealer, who, on or prior to such Auction Date, in accordance
with its Broker-Dealer Agreement, will be required to notify its Beneficial
Owners and Potential Beneficial Owners of shares of MuniPreferred believed by it
to be interested in submitting an Order in the Auction to be held on such
Auction Date.

6.       AUCTION AGENT.

         For so long as any shares of MuniPreferred are outstanding, the Auction
Agent, duly appointed by the Fund to so act, shall be in each case a commercial
bank, trust company or other financial institution independent of the Fund and
its affiliates (which however, may engage or have engaged in business
transactions with the Fund or its affiliates) and at no time shall the Fund or
any of its affiliates act as the Auction Agent in connection with the Auction
Procedures. If the Auction Agent resigns or for any reason its appointment is
terminated during any period that any shares of MuniPreferred are outstanding,
the Board of Trustees shall use its best efforts promptly thereafter to appoint
another qualified commercial bank, trust company or financial institution to act
as the Auction Agent. The Auction Agent's registry of Existing Holders of shares
of a series of MuniPreferred shall be conclusive and binding on the Broker-
Dealers. A Broker-Dealer may inquire of the Auction Agent between 3:00 p.m. on
the Business Day preceding an Auction for shares of a series of MuniPreferred
and 9:30 a.m. on the Auction Date for such Auction to ascertain the number of
shares of such series in respect of which the Auction Agent has determined such
Broker-Dealer to be an Existing Holder. If such Broker-Dealer believes it is the
Existing Holder of fewer shares of such series than specified by the Auction
Agent in response to such Broker-Dealer's inquiry, such Broker-Dealer may so
inform the Auction Agent of that belief. Such Broker-Dealer shall not, in its
capacity as Existing Holder of shares of such series, submit Orders in such
Auction in respect of shares of such series covering in the aggregate more than
the number of shares of such series specified by the Auction Agent in response
to such Broker-Dealer's inquiry.

7.       TRANSFER OF SHARES OF MUNIPREFERRED.

         Unless otherwise permitted by the Fund, a Beneficial Owner or an
Existing Holder may sell, transfer or otherwise dispose of shares of
MuniPreferred only in whole shares and only pursuant to a Bid or Sell Order
placed with the Auction Agent in accordance with the procedures described in
this Part II or to a Broker-Dealer, provided, however, that (a) a sale, transfer
or other disposition of shares of MuniPreferred from a customer of a
Broker-Dealer who is listed on the records of that Broker-Dealer as the holder
of such shares to that Broker-Dealer or another customer of that Broker-Dealer
shall not be deemed to be a sale, transfer or other disposition for purposes of
this Section 7 if such Broker-Dealer remains the Existing Holder of the shares
so sold, transferred or disposed of immediately after such sale, transfer or
disposition and (b) in the case of a transfers other than pursuant to Auctions,
the Broker-Dealer (or other Person, if permitted by the Fund) to whom such
transfer is made shall advise the Auction Agent of such transfer.



                                      A-40

<PAGE>   118



8.       GLOBAL CERTIFICATE.

         Prior to the commencement of a Voting Period, (i) all of the shares of
a series of MuniPreferred outstanding from time to time shall be represented by
one global certificate registered in the name of the Securities Depository or
its nominee and (ii) no registration of transfer of shares of a series of
MuniPreferred shall be made on the books of the Fund to any Person other than
the Securities Depository or its nominee.

         IN WITNESS WHEREOF, NUVEEN CALIFORNIA DIVIDEND ADVANTAGE MUNICIPAL
FUND, has caused these presents to be signed on _______________, 1999 in its
name and on its behalf by its Vice President and attested by its Assistant
Secretary. The Fund's Declaration of Trust is on file with the Secretary of
State of the Commonwealth of Massachusetts, and the said officers of the Fund
have executed this Statement as officers and not individually, and the
obligations and rights set forth in this Statement are not binding upon any such
officers, or the trustees or shareholders of the Fund, individually, but are
binding only upon the assets and property of the Fund.


                                                    NUVEEN CALIFORNIA DIVIDEND
                                                    ADVANTAGE MUNICIPAL FUND


                                                    By:
                                                       -------------------------
                                                       Gifford R. Zimmerman
                                                       Vice President


ATTEST:
       ----------------------------------
       Larry W. Martin
       Assistant Secretary



                                      A-41

<PAGE>   119



               NUVEEN CALIFORNIA DIVIDEND ADVANTAGE MUNICIPAL FUND

APPENDIX A

SECTION 1.  DESIGNATION AS TO SERIES.

         SERIES TH: A series of 10,000 Preferred Shares, par value $.01 per
share, liquidation preference $25,000 per share, is hereby designated "Municipal
Auction Rate Cumulative Preferred Shares, Series TH." Each share of Series TH
MuniPreferred shall, for purposes hereof, be deemed to have a Date of Original
Issue of ______ __, 1999; have an Applicable Rate for its Initial Rate Period
equal to ____% per annum; have an initial Dividend Payment Date of ______ __,
1999; and have such other preferences, limitations and relative voting rights,
in addition to those required by applicable law or set forth in the Declaration
of Trust applicable to Preferred Shares of the Fund, as set forth in Part I and
Part II of this Statement. Any shares of Series TH MuniPreferred issued after
the effective date of this Statement shall be issued on the first day of a Rate
Period of the then outstanding shares of Series TH MuniPreferred, shall have,
for such Rate Period, an Applicable Rate equal to the Applicable Rate for shares
of such series established in the first Auction for shares of such series
preceding the date of such issuance; and shall have such other preferences,
limitations and relative voting rights, in addition to those required by
applicable law or set forth in the Declaration of Trust applicable to Preferred
Shares of the Fund, as set forth in Part I and Part II of this Statement. The
Series TH MuniPreferred shall constitute a separate series of Preferred Shares
of the Fund, and each share of Series TH MuniPreferred shall be identical except
as provided in Section 11 of Part I of this Statement.

         SERIES F: A series of 10,000 Preferred Shares, par value $.01 per
share, liquidation preference $25,000 per share, is hereby designated "Municipal
Auction Rate Cumulative Preferred Shares, Series F." Each share of Series F
MuniPreferred shall, for purposes hereof, be deemed to have a Date of Original
Issue of ______ __, 1999; have an Applicable Rate for its Initial Rate Period
equal to ____% per annum; have an initial Dividend Payment Date of ______ __,
1999; and have such other preferences, limitations and relative voting rights,
in addition to those required by applicable law or set forth in the Declaration
of Trust applicable to Preferred Shares of the Fund, as set forth in Part I and
Part II of this Statement. Any shares of Series F MuniPreferred issued after the
effective date of this Statement shall be issued on the first day of a Rate
Period of the then outstanding shares of Series F MuniPreferred; shall have, for
such Rate Period, an Applicable Rate equal to the Applicable Rate for shares of
such series established in the first Auction for shares of such series preceding
the date of such issuance; and shall have such other preferences, limitations
and relative voting rights, in addition to those required by applicable law or
set forth in the Declaration of Trust applicable to Preferred Shares of the
Fund, as set forth in Part I and Part II of this Statement. The Series F
MuniPreferred shall constitute a separate series of Preferred Shares of the
Fund, and each share of Series F MuniPreferred shall be identical except as
provided in Section 11 of Part I of this Statement.

SECTION 2.  NUMBER OF AUTHORIZED SHARES PER SERIES.

         The number of authorized shares constituting Series TH MuniPreferred is
10,000 and Series F MuniPreferred is 10,000.

SECTION 3.  EXCEPTIONS TO CERTAIN DEFINITIONS.

         Notwithstanding the definitions contained under the heading
"Definitions" in this Statement, the following terms shall have the following
meanings for purposes of this Statement:

         Not applicable.

SECTION 4.  CERTAIN DEFINITIONS.

         For purposes of this Statement, the following terms shall have the
following meanings (with terms defined in the singular having comparable
meanings when used in the plural and vice versa), unless the context otherwise
requires:

                  "ESCROWED BONDS" shall mean Municipal Obligations that (i)
         have been determined to be legally defeased in accordance with S&P's
         legal defeasance criteria, (ii) have been determined to be economically
         defeased in accordance with S&P's economic defeasance criteria and
         assigned a rating of AAA by S&P,


                                      A-42

<PAGE>   120



         (iii) are not rated by S&P but have been determined to be legally
         defeased by Moody's or (iv) have been determined to be economically
         defeased by Moody's and assigned a rating no lower than the rating that
         is Moody's equivalent of S&P's AAA rating. In the event that a defeased
         obligation which is an S&P Eligible Asset does not meet the criteria of
         an Escrowed Bond, such Municipal Obligation will be deemed to remain in
         the Issue Type Category into which it fell prior to such defeasance.


                  "GROSS-UP PAYMENT" means payment to a Holder of shares of
         MuniPreferred of an amount which, when taken together with the
         aggregate amount of Taxable Allocations made to such Holder to which
         such Gross-up Payment relates, would cause such Holder's dividends in
         dollars (after Federal and California income tax consequences) from the
         aggregate of such Taxable Allocations and the related Gross-up Payment
         to be equal to the dollar amount of the dividends which would have been
         received by such Holder if the amount of such aggregate Taxable
         Allocations would have been excludable from the gross income of such
         Holder. Such Gross-up Payment shall be calculated (i) without
         consideration being given to the time value of money; (ii) assuming
         that no Holder of shares of MuniPreferred is subject to the Federal
         alternative minimum tax with respect to dividends received from the
         Fund; and (iii) assuming that each Taxable Allocation and each Gross-
         up Payment (except to the extent such Gross-up Payment is designated as
         an exempt-interest dividend under Section 852(b)(5) of the Code or
         successor provisions) would be taxable in the hands of each Holder of
         shares of MuniPreferred at the maximum marginal combined regular
         Federal and California personal income tax rate applicable to ordinary
         income (taking into account the Federal tax deductibility of state
         taxes paid or incurred) or net capital gains, as applicable, or the
         maximum marginal regular Federal corporate income tax rate applicable
         to ordinary income or net capital gains, as applicable, whichever is
         greater, in effect at the time such Gross-up Payment is made.


                  "ISSUE TYPE CATEGORY" shall mean, with respect to a Municipal
         Obligation acquired by the Fund, (A) for purposes of calculating
         Moody's Eligible Assets as of any Valuation Date, one of the following
         categories into which such Municipal Obligation falls based upon a good
         faith determination by the Fund: health care issues (including issues
         related to teaching and non-teaching hospitals, public or private);
         housing issues (including issues related to single- and multi-family
         housing projects); educational facilities issues (including issues
         related to public and private schools); student loan issues; resource
         recovery issues; transportation issues (including issues related to
         mass transit, airports and highways); industrial development bond
         issues (including issues related to pollution control facilities);
         utility issues (including issues related to the provision of gas,
         water, sewers and electricity); general obligation issues; lease
         obligations (including certificates of participation); escrowed bonds;
         and other issues ("Other Issues") not falling within one of the
         aforementioned categories; and (B) for purposes of calculating S&P
         Eligible Assets as of any Valuation Date, one of the following
         categories into which such Municipal Obligation falls based upon a good
         faith determination by the Fund: health care issues (including issues
         related to teaching and non-teaching hospitals, public or private);
         housing issues (including issues related to single- and multi-family
         housing projects); educational facilities issues (including issues
         related to public and private schools); student loan issues;
         transportation issues (including issues related to mass transit,
         airports and highways); industrial development bond issues (including
         issues related to pollution control facilities); public power utilities
         issues (including issues related to the provision of electricity,
         either singly or in combination with the provision of other utilities,
         and issues related only to the provision of gas); water and sewer
         utilities issues (including issues related to the provision of water
         and sewers as well as combination utilities not falling within the
         public power utilities category); special utilities issues (including
         issues related to resource recovery, solid waste and irrigation as well
         as other utility issues not falling within the public power and water
         and sewer utilities categories); general obligation issues; lease
         obligations (including certificates of participation); Escrowed Bonds;
         and other issues ("Other Issues") not falling within one of the
         aforementioned categories.

                  "MOODY'S DISCOUNT FACTOR" shall mean, for purposes of
         determining the Discounted Value of any Moody's Eligible Asset, the
         percentage determined by reference to the rating on such asset and the
         shortest Exposure Period set forth opposite such rating that is the
         same length as or is longer than the Moody's Exposure Period, in
         accordance with the table set forth below:



                                      A-43

<PAGE>   121



<TABLE>
<CAPTION>
                                                                  RATING CATEGORY
                                      -----------------------------------------------------------------------
                                                                          BELOW BAA
                                                                        OR UNRATED BY
                                                                         MOODY'S/S&P
EXPOSURE PERIOD                         AAA*     AA*     A*      BAA*       **(V)       MIG-1***     SP-1+***
- ---------------                       --------   ----- ------- -------- ------------- ------------- ----------
<S>                                   <C>        <C>   <C>     <C>      <C>            <C>          <C>
7 weeks..............................   151%      159%    168%    202%      225%         136%          148%
8 weeks or less but greater than
 seven weeks.........................   154       164     173     205       231          137           149
9 weeks or less but greater than
 eight weeks.........................   158       169     179     209       240          138           150
</TABLE>


- ------------------

   *  Moody's rating.

  **  Municipal Obligations not rated by Moody's but rated BBB or BBB+ by S&P.


 ***  Municipal Obligations rated MIG-1 or VMIG-1 or, if not rated by Moody's,
      rated SP-1+ by S&P, which do not mature or have a demand feature at par
      exercisable in 30 days and which do not have a long-term rating.

         Notwithstanding the foregoing, (i) the Moody's Discount Factor for
short-term Municipal Obligations will be 115%, so long as such Municipal
Obligations are rated at least MIG-1, VMIG-l or P-1 by Moody's and mature or
have a demand feature at par exercisable in 30 days or less or 125% as long as
such Municipal Obligations are rated at least A-1+/AA or SP-1+/AA by S&P and
mature or have a demand feature at par exercisable in 30 days or less and (ii)
no Moody's Discount Factor will be applied to cash or to Receivables for
Municipal Obligations Sold.

                  "MOODY'S ELIGIBLE ASSET" shall mean cash, Receivables for
         Municipal Obligations Sold or a Municipal Obligation that (i) pays
         interest in cash, (ii) is publicly rated Baa or higher by Moody's or,
         if not rated by Moody's but rated by S&P, is rated at least BBB by S&P
         (provided, however, that for purposes of determining the Moody's
         Discount Factor applicable to any such S&P-rated Municipal Obligation,
         such Municipal Obligation (excluding any short-term Municipal
         Obligation) shall be deemed to have a Moody's rating which is one full
         rating category lower than its S&P rating), (iii) does not have its
         Moody's rating suspended by Moody's, and (iv) is part of an issue of
         Municipal Obligations of at least $10,000,000. Except for general
         obligation bonds, Municipal Obligations issued by any one issuer and
         rated BBB by S&P may comprise no more than 4% of total Moody's Eligible
         Assets; such BBB-rated Municipal Obligations, if any, together with any
         Municipal Obligations issued by the same issuer and rated Baa by
         Moody's or A by S&P, may comprise no more than 6% of total Moody's
         Eligible Assets; such BBB, Baa and A-rated Municipal Obligations, if
         any, together with any Municipal Obligations issued by the same issuer
         and rated A by Moody's or AA by S&P, may comprise no more than 10% of
         total Moody's Eligible Assets; and such BBB, Baa, A and AA-rated
         Municipal Obligations, if any, together with any Municipal Obligations
         issued by the same issuer and rated Aa by Moody's or AAA by S&P, may
         comprise no more than 20% of total Moody's Eligible Assets. For
         purposes of the foregoing sentence, any Municipal Obligation backed by
         the guaranty, letter of credit or insurance issued by a third party
         shall be deemed to be issued by such third party if the issuance of
         such third party credit is the sole determinant of the rating on such
         Municipal Obligation. Municipal Obligations falling within a particular
         Issue Type Category and rated BBB by S&P may comprise no more than 12%
         of total Moody's Eligible Assets; such BBB-rated Municipal Obligations,
         if any, together with any Municipal Obligations falling within a
         particular Issue Type Category and rated Baa by Moody's or A by S&P,
         may comprise no more than 20% of total Moody's Eligible Assets; such
         BBB, Baa and A-rated Municipal Obligations, if any, together with any
         Municipal Obligations falling within a particular Issue Type Category
         and rated A by Moody's or AA by S&P, may comprise no more than 40% of
         total Moody's Eligible Assets; and such BBB, Baa, A and AA-rated
         Municipal Obligations, if any, together with any Municipal Obligations
         falling within a particular Issue Type Category and rated Aa by Moody's
         or AAA by S&P, may comprise no more than 60% of total Moody's Eligible
         Assets. For purposes of this definition, a Municipal Obligation shall
         be deemed to be rated BBB by S&P if rated BBB or BBB+ by S&P.
         Notwithstanding any other provision of this definition, (A) in the case
         of general obligation Municipal Obligations only, Municipal Obligations
         issued by issuers located within any one county and rated BBB by S&P
         may comprise no more than 4% of Moody's Eligible Assets; such BBB-rated
         Municipal Obligations, if any, together with any Municipal Obligations
         issued by issuers located within the same county and rated Baa by
         Moody's or A by S&P, may comprise no more than 6% of Moody's Eligible
         Assets; such BBB, Baa and A-rated Municipal Obligations, if any,
         together with any Municipal Obligations issued by issuers located
         within the same county and rated A by Moody's or AA by S&P, may
         comprise no more than 10% of Moody's Eligible Assets; and such BBB,
         Baa, A and AA-rated


                                      A-44

<PAGE>   122



         Municipal Obligations, if any, together with any Municipal Obligations
         issued by issuers located within the same county and rated Aa by
         Moody's or AAA by S&P, may comprise no more than 20% of Moody's
         Eligible Assets; and (B) in no event may (i) student loan Municipal
         Obligations comprise more than 10% of Moody's Eligible Assets; (ii)
         resource recovery Municipal Obligations comprise more than 10% of
         Moody's Eligible Assets; and (iii) Other Issues comprise more than 10%
         of Moody's Eligible Assets. For purposes of applying the foregoing
         requirements, a Municipal Obligation rated BBB- by S&P shall not be
         considered to be rated BBB by S&P, Moody's Eligible Assets shall be
         calculated without including cash, and Municipal Obligations rated
         MIG-1, VMIG-1 or P-1 or, if not rated by Moody's, rated A-1+/AA or
         SP-1+/AA by S&P, shall be considered to have a long-term rating of A.
         When the Fund sells a Municipal Obligation and agrees to repurchase
         such Municipal Obligation at a future date, such Municipal Obligation
         shall be valued at its Discounted Value for purposes of determining
         Moody's Eligible Assets, and the amount of the repurchase price of such
         Municipal Obligation shall be included as a liability for purposes of
         calculating the MuniPreferred Basic Maintenance Amount. When the Fund
         purchases a Moody's Eligible Asset and agrees to sell it at a future
         date, such Eligible Asset shall be valued at the amount of cash to be
         received by the Fund upon such future date, provided that the
         counterparty to the transaction has a long-term debt rating of at least
         A2 from Moody's and the transaction has a term of no more than 30 days,
         otherwise such Eligible Asset shall be valued at the Discounted Value
         of such Eligible Asset.


         Notwithstanding the foregoing, an asset will not be considered a
Moody's Eligible Asset to the extent it is (i) subject to any material lien,
mortgage, pledge, security interest or security agreement of any kind
(collectively, "Liens"), except for (a) Liens which are being contested in good
faith by appropriate proceedings and which Moody's has indicated to the Fund
will not affect the status of such asset as a Moody's Eligible Asset, (b) Liens
for taxes that are not then due and payable or that can be paid thereafter
without penalty, (c) Liens to secure payment for services rendered or cash
advanced to the Fund by Nuveen Advisory Corp., Chase Manhattan Bank or the
Auction Agent and (d) Liens by virtue of any repurchase agreement; or (iii)
deposited irrevocably for the payment of any liabilities for purposes of
determining the MuniPreferred Basic Maintenance Amount.


                  "OTHER ISSUES" shall have the respective meanings specified in
         the definition of "Issue Type Category."

                  "RATE MULTIPLE," for shares of a series of MuniPreferred on
         any Auction Date for shares of such series, shall mean the percentage,
         determined as set forth below, based on the prevailing rating of shares
         of such series in effect at the close of business on the Business Day
         next preceding such Auction Date:


<TABLE>
<CAPTION>
     PREVAILING RATING             PERCENTAGE
     -----------------             ----------
<S>                                <C>
"aa3"/AA--or higher........            110%
"a3"/A--....................           125%
"baa3"/BBB--................           150%
"ba3"/BB--..................           200%
 Below "ba3"/BB--...........           250%
</TABLE>



provided, however, that in the event the Fund has notified the Auction Agent of
its intent to allocate income taxable for Federal income tax purposes to shares
of such series prior to the Auction establishing the Applicable Rate for shares
of such series, the applicable percentage in the foregoing table shall be
divided by the quantity 1 minus the maximum marginal combined regular Federal
and California personal income tax rate applicable to ordinary income
(taking into account the Federal income tax deductibility of state taxes paid or
incurred) or the maximum marginal regular Federal corporate income tax rate
applicable to ordinary income, whichever is greater.


         For purposes of this definition, the "prevailing rating" of shares of a
series of MuniPreferred shall be (i) "aa3"/AA-- or higher if such shares have a
rating of "aa3" or better by Moody's and AA-- or better by S&P or the equivalent
of such ratings by such agencies or a substitute rating agency or substitute
rating agencies selected as provided below, (ii) if not "aa3"/AA-- or higher,
then "a3"/A-- if such shares have a rating of "a3" or better by Moody's and A--
or better by S&P or the equivalent of such ratings by such agencies or a
substitute rating agency or substitute rating agencies selected as provided
below, (iii) if not "aa3"/AA-- or higher or "a3"/A--, then "baa3"/BBB-- if such
shares have a rating of "baa3" or better by Moody's and BBB-- or better by S&P
or the equivalent of such


                                      A-45

<PAGE>   123



ratings by such agencies or a substitute rating agency or substitute rating
agencies selected as provided below, (iv) if not "aa3"/AA-- or higher, "a3"/A--
or "baa3"/BBB--, then "ba3"/BB-- if such shares have a rating of "ba3" or better
by Moody's and BB-- or better by S&P or the equivalent of such ratings by such
agencies or a substitute rating agency or substitute rating agencies selected as
provided below, and (v) if not "aa3"/AA-- or higher, "a3"/A--, "baa3"/BBB--, or
"ba3"/BB--, then Below "ba3"/BB--; provided, however, that if such shares are
rated by only one rating agency, the prevailing rating will be determined
without reference to the rating of any other rating agency. The Fund shall take
all reasonable action necessary to enable either S&P or Moody's to provide a
rating for shares of MuniPreferred. If neither S&P nor Moody's shall make such a
rating available, the party set forth in Section 7 of Appendix A or its
successor shall select at least one nationally recognized statistical rating
organization (as that term is used in the rules and regulations of the
Securities and Exchange Commission under the Securities Exchange Act of 1934, as
amended from time to time) to act as a substitute rating agency in respect of
shares of the series of MuniPreferred set forth opposite such party's name in
Section 7 of Appendix A and the Fund shall take all reasonable action to enable
such rating agency to provide a rating for such shares.

                  "S&P DISCOUNT FACTOR" shall mean, for purposes of determining
         the Discounted Value of any S&P Eligible Asset, the percentage
         determined by reference to the rating on such asset and the shortest
         Exposure Period set forth opposite such rating that is the same length
         as or is longer than the S&P Exposure Period, in accordance with the
         table set forth below:



<TABLE>
<CAPTION>
                                       RATING CATEGORY
                              --------------------------------
EXPOSURE PERIOD               AAA*      AA*       A*      BBB*
- ---------------               ----      ---      ---      ----
<S>                           <C>       <C>      <C>      <C>
45 Business Days...........    200%     205%     220%      260%
25 Business Days...........    180      185      200       240
10 Business Days...........    165      170      185       225
7 Business Days............    160      165      180       220
3 Business Days............    140      145      160       200
</TABLE>


- ------------------

* S&P rating.

         Notwithstanding the foregoing, (i) the S&P Discount Factor for
short-term Municipal Obligations will be 115%, so long as such Municipal
Obligations are rated A-1+ or SP-1+ by S&P and mature or have a demand feature
exercisable within 30 days or less, or 125% if such Municipal Obligations are
not rated by S&P but are rated equivalent to A-1+ or SP-1+ by another nationally
recognized rating agency, on a case by case basis; provided, however, that any
such non-S&P rated short-term Municipal Obligations which have demand features
exercisable within 30 days or less must be backed by a letter of credit,
liquidity facility or guarantee from a bank or other financial institution with
a short-term rating of at least A-1+ from S&P; and further provided that such
non-S&P rated short-term Municipal Obligations may comprise no more than 50% of
short-term Municipal Obligations that qualify as S&P Eligible Assets; (ii) no
S&P Discount Factor will be applied to cash or to Receivables for Municipal
Obligations Sold; and (iii) except as set forth in clause (i) above, in the case
of any Municipal Obligation that is not rated by S&P but qualifies as an S&P
Eligible Asset pursuant to clause (iii) of that definition, such Municipal
Obligation will be deemed to have an S&P rating one full rating category lower
than the S&P rating category that is the equivalent of the rating category in
which such Municipal Obligation is placed by Moody's. For purposes of the
foregoing, Anticipation Notes rated SP- 1+ or, if not rated by S&P, rated
equivalent to A-1+ or SP-1+ by another nationally recognized rating agency, on a
case by case basis, which do not mature or have a demand feature at par
exercisable in 30 days and which do not have a long-term rating, shall be
considered to be short-term Municipal Obligations.

                  "S&P ELIGIBLE ASSET" shall mean cash (excluding any cash
         irrevocably deposited by the Fund for the payment of any liabilities
         within the meaning of MuniPreferred Basic Maintenance Amount),
         Receivables for Municipal Obligations Sold or a Municipal Obligation
         owned by the Fund that (i) is interest bearing and pays interest at
         least semi-annually; (ii) is payable with respect to principal and
         interest in U.S. Dollars; (iii) is publicly rated BBB or higher by S&P
         or, if not rated by S&P but rated equivalent or higher to an A by
         another nationally recognized credit rating agency, on a case by case
         basis; (iv) is not part of a private placement of Municipal
         Obligations; and (v) of an issue of Municipal Obligations with an
         original issue size of at least $20 million or, if of an issue with an
         original issue size below $20 million (but in no event below $10
         million), is


                                      A-46

<PAGE>   124




         issued by an issuer with a total of at least $50 million of securities
         outstanding. Special utilities issues that are not rated by S&P shall
         not comprise S&P Eligible Assets. Solely for purposes of this
         definition, the term "Municipal Obligation" means any obligation the
         interest on which is exempt from regular Federal income taxation and
         which is issued by any of the fifty United States, the District of
         Columbia or any of the territories of the United States, their
         subdivisions, counties, cities, towns, villages, school districts and
         agencies (including authorities and special districts created by the
         states), and federally sponsored agencies such as local housing
         authorities. Notwithstanding the foregoing limitations:


                  (1) Municipal Obligations (excluding Escrowed Bonds) of any
         one issuer or guarantor (excluding bond insurers) shall be considered
         S&P Eligible Assets only to the extent the Market Value of such
         Municipal Obligations does not exceed 10% of the aggregate Market Value
         of S&P Eligible Assets, provided that 2% is added to the applicable S&P
         Discount Factor for every 1% by which the Market Value of such
         Municipal Obligations exceeds 5% of the aggregate Market Value of S&P
         Eligible Assets;


                  (2) Municipal Obligations (excluding Escrowed Bonds) of any
         one Issue Type Category shall be considered S&P Eligible Assets only to
         the extent the Market Value of such Municipal Obligations does not
         exceed 20% of the aggregate Market Value of S&P Eligible Assets;
         PROVIDED, HOWEVER, that general obligation issues will be considered
         S&P Eligible Assets only to the extent the Market Value of such general
         obligation issues does not exceed 30% of the aggregate Market Value of
         S&P Eligible Assets;



                  (3) Municipal Obligations not rated by S&P shall be considered
         S&P Eligible Assets only to the extent the Market Value of such
         Municipal Obligations does not exceed 50% of the aggregate Market Value
         of S&P Eligible Assets; and



                  (4) Non-California long-term Municipal Obligations shall be
         considered S&P Eligible Assets only to the extent the Market Value of
         such Municipal Obligations does not exceed 20% of the aggregate Market
         Value of S&P Eligible Assets.


SECTION 5.  INITIAL RATE PERIODS.

         The Initial Rate Period for shares of Series TH MuniPreferred shall be
the period from and including the Date of Original Issue thereof to but
excluding ______ __, 1999.

         The Initial Rate Period for shares of Series F MuniPreferred shall be
the period from and including the Date of Original Issue thereof to but
excluding ______ __, 1999.

SECTION 6. DATE FOR PURPOSES OF PARAGRAPH (yyy) CONTAINED UNDER THE HEADING
"DEFINITIONS" IN THIS STATEMENT.

         ______ __, 1999.

SECTION 7. PARTY NAMED FOR PURPOSES OF THE DEFINITION OF "RATE MULTIPLE" IN THIS
STATEMENT.

<TABLE>
<CAPTION>
PARTY:                                              SERIES OF MUNIPREFERRED
- ------                                              -----------------------
<S>                                                 <C>
                                                           Series TH
                                                            Series F
</TABLE>


SECTION 8.  ADDITIONAL DEFINITIONS.

         "CALIFORNIA MUNICIPAL OBLIGATION" shall mean "California Municipal
Obligation" as defined in the Fund's Registration Statement.



                                      A-47

<PAGE>   125



SECTION 9.  DIVIDEND PAYMENT DATES.

         Except as otherwise provided in paragraph (d) of Section 2 of Part I of
this Statement, dividends shall be payable on shares of:

                  Series TH MuniPreferred, for the Initial Rate Period on
         _________, ______ __, 1999, and on each _________ thereafter; and

                  Series F MuniPreferred, for the Initial Rate Period on
         _________, ______ __, 1999, and on each _________ thereafter.

SECTION 10. AMOUNT FOR PURPOSES OF SUBPARAGRAPH (c)(i) OF SECTION 5 OF PART I OF
THIS STATEMENT.

         $__________.

SECTION 11.  REDEMPTION PROVISIONS APPLICABLE TO INITIAL RATE PERIODS.

         Not applicable.

SECTION 12. APPLICABLE RATE FOR PURPOSES OF SUBPARAGRAPH (b)(iii) OF SECTION 3
OF PART II OF THIS STATEMENT.


         For purposes of subparagraph (b)(iii) of Section 3 of Part II of this
Statement, the Applicable Rate for shares of such series for the next succeeding
Rate Period of shares of such series shall be equal to the lesser of the Kenny
Index (if such Rate Period consists of fewer than 183 Rate Period Days) or the
product of (A) (I) the "AA" Composite Commercial Paper Rate on such Auction Date
for such Rate Period, if such Rate Period consists of fewer than 183 Rate Period
Days; (II) the Treasury Bill Rate on such Auction Date for such Rate Period, if
such Rate Period consists of more than 182 but fewer than 365 Rate Period Days;
or (III) the Treasury Note Rate on such Auction Date for such Rate Period, if
such Rate Period is more than 364 Rate Period Days (the rate described in the
foregoing clause (A)(I), (II) or (III), as applicable, being referred to herein
as the "Benchmark Rate") and (B) 1 minus the maximum marginal combined regular
Federal and California personal income tax rate applicable to ordinary income
(taking into account the Federal income tax deductibility of state taxes paid or
incurred) or the maximum marginal regular Federal corporate income tax rate
applicable to ordinary income, whichever is greater; provided, however, that if
the Fund has notified the Auction Agent of its intent to allocate to shares of
such series in such Rate Period any net capital gains or other income taxable
for Federal income tax purposes ("Taxable Income"), the Applicable Rate for
shares of such series for such Rate Period will be (i) if the Taxable Yield Rate
(as defined below) is greater than the Benchmark Rate, then the Benchmark Rate,
or (ii) if the Taxable Yield Rate is less than or equal to the Benchmark Rate,
then the rate equal to the sum of (x) the lesser of the Kenny Index (if such
Rate Period consists of fewer than 183 Rate Period Days) or the product of the
Benchmark Rate multiplied by the factor set forth in the preceding clause (B)
and (y) the product of the maximum marginal combined regular Federal and
California personal tax rate applicable to ordinary income (taking into account
the Federal income tax deductibility of state taxes paid or incurred) or the
maximum marginal regular Federal corporate income tax applicable to ordinary
income, whichever is greater, multiplied by the Taxable Yield Rate. For purposes
of the foregoing, Taxable Yield Rate means the rate determined by (a) dividing
the amount of Taxable Income available for distribution per such share of
MuniPreferred by the number of days in the Dividend Period in respect of which
such Taxable Income is contemplated to be distributed, (b) multiplying the
amount determined in (a) above by 365 (in the case of a Dividend Period of 7
Rate Period Days) or 360 (in the case of any other Dividend Period), and (c)
dividing the amount determined in (b) above by $25,000.




                                      A-48

<PAGE>   126
                                                                      APPENDIX B


RATINGS OF INVESTMENTS

         Standard & Poor's Corporation--A brief description of the applicable
Standard & Poor's Corporation ("S&P") rating symbols and their meanings (as
published by S&P) follows:

LONG TERM DEBT

         An S&P corporate or municipal debt rating is a current assessment of
the creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers, or
lessees.

         The debt rating is not a recommendation to purchase, sell, or hold a
         security, inasmuch as it does not comment as to market price or
         suitability for a particular investor.

         The ratings are based on current information furnished by the issuer or
         obtained by S&P from other sources it considers reliable. S&P does not
         perform an audit in connection with any rating and may, on occasion,
         rely on unaudited financial information. The ratings may be changed,
         suspended, or withdrawn as a result of changes in, or unavailability
         of, such information, or based on other circumstances.

         The ratings are based, in varying degrees, on the following
considerations:

         1.       Likelihood of default--capacity and willingness of the obligor
                  as to the timely payment of interest and repayment of
                  principal in accordance with the terms of the obligation;

         2.       Nature of and provisions of the obligation;

         3.       Protection afforded by, and relative position of, the
                  obligation in the event of bankruptcy, reorganization, or
                  other arrangement under the laws of bankruptcy and other laws
                  affecting creditors' rights.

INVESTMENT GRADE

         AAA      Debt rated "AAA" has the highest rating assigned by S&P.
                  Capacity to pay interest and repay principal is extremely
                  strong.

         AA       Debt rated "AA" has a very strong capacity to pay interest and
                  repay principal and differs from the highest rated issues only
                  in small degree.

         A        Debt rated "A" has a strong capacity to pay interest and repay
                  principal although it is somewhat more susceptible to the
                  adverse effects of changes in circumstances and economic
                  conditions than debt in higher rated categories.

         BBB      Debt rated "BBB" is regarded as having an adequate capacity to
                  pay interest and repay principal. Whereas it normally exhibits
                  adequate protection parameters, adverse economic conditions or
                  changing circumstances are more likely to lead to a weakened
                  capacity to pay interest and repay principal for debt in this
                  category than in higher rated categories.

SPECULATIVE GRADE RATING

         Debt rated "BB", "B", "CCC", "CC" and "C" is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. "BB" indicates the least degree of speculation and
"C" the highest. While such debt will likely have some quality and protective
characteristics these are outweighed by major uncertainties or major exposures
to adverse conditions.


                                       B-1

<PAGE>   127



         BB       Debt rated "BB" has less near-term vulnerability to default
                  than other speculative issues. However, it faces major ongoing
                  uncertainties or exposure to adverse business, financial, or
                  economic conditions which could lead to inadequate capacity to
                  meet timely interest and principal payments. The "BB" rating
                  category is also used for debt subordinated to senior debt
                  that is assigned an actual or implied "BBB--" rating.

         B        Debt rated "B" has a greater vulnerability to default but
                  currently has the capacity to meet interest payments and
                  principal repayments. Adverse business, financial, or economic
                  conditions will likely impair capacity or willingness to pay
                  interest and repay principal.

         The "B" rating category is also used for debt subordinated to senior
         debt that is assigned an actual or implied "BB" or "BB--" rating.

         CCC      Debt rated "CCC" has a currently identifiable vulnerability to
                  default, and is dependent upon favorable business, financial,
                  and economic conditions to meet timely payment of interest and
                  repayment of principal. In the event of adverse business,
                  financial, or economic conditions, it is not likely to have
                  the capacity to pay interest and repay principal.

         The "CCC" rating category is also used for debt subordinated to senior
         debt that is assigned an actual or implied "B" or "B--" rating.

         CC       The rating "CC" typically is applied to debt subordinated to
                  senior debt that is assigned an actual or implied "CCC" debt
                  rating.

         C        The rating "C" typically is applied to debt subordinated to
                  senior debt which is assigned an actual or implied "CCC--"
                  debt rating. The "C" rating may be used to cover a situation
                  where a bankruptcy petition has been filed, but debt service
                  payments are continued.

         CI       The rating "CI" is reserved for income bonds on which no
                  interest is being paid.

         D        Debt rated "D" is in payment default. The "D" rating category
                  is used when interest payments or principal payments are not
                  made on the date due even if the applicable grace period has
                  not expired, unless S&P believes that such payments will be
                  made during such grace period. The "D" rating also will be
                  used upon the filing of a bankruptcy petition if debt service
                  payments are jeopardized.

         Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified
by the addition of a plus or minus sign to show relative standing within the
major rating categories.

         Provisional Ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project financed by the debt being rated and indicates that payment of debt
service requirements is largely or entirely dependent upon the successful and
timely completion of the project. This rating, however, while addressing credit
quality subsequent to completion of the project, makes no comment on the
likelihood of, or the risk of default upon failure of, such completion. The
investor should exercise judgment with respect to such likelihood and risk.

         L        The letter "L" indicates that the rating pertains to the
                  principal amount of those bonds to the extent that the
                  underlying deposit collateral is federally insured by the
                  Federal Savings & Loan Insurance Corp. or the Federal Deposit
                  insurance Corp.* and interest is adequately collateralized. In
                  the case of certificates of deposit the letter "L" indicates
                  that the deposit, combined with other deposits being held in
                  the same right and capacity will be honored for principal and
                  accrued pre-default interest up to the federal insurance
                  limits within 30 days after closing of the insured institution
                  or, in the event that the deposit is assumed by a successor
                  insured institution, upon maturity.

         *   Continuance of the rating is contingent upon S&P's receipt of an
             executed copy of the escrow agreement or closing documentation
             confirming investments and cash flow.



                                       B-2

<PAGE>   128



         NR       Indicates no rating has been requested, that there is
                  insufficient information on which to base a rating, or that
                  S&P does not rate a particular type of obligation as a matter
                  of policy.

MUNICIPAL NOTES

         An S&P note rating reflects the liquidity concerns and market access
risks unique to notes. Notes due in 3 years or less will likely receive a note
rating. Notes maturing beyond 3 years will most likely receive a long-term debt
rating. The following criteria will be used in making that assessment:

                  --  Amortization schedule (the larger the final maturity
                      relative to other maturities, the more likely it will be
                      treated as a note).

                  --  Source of payment (the more dependent the issue is on the
                      market for its refinancing, the more likely it will be
                      treated as a note).

Note rating symbols are as follows:

         SP-1     Very strong or strong capacity to pay principal and interest.
                  Those issues determined to possess overwhelming safety
                  characteristics will be given a plus (+) designation.

         SP-2     Satisfactory capacity to pay principal and interest.

         SP-3     Speculative capacity to pay principal and interest.

         A note rating is not a recommendation to purchase, sell, or hold a
security inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in or unavailability of such
information or based on other circumstances.

COMMERCIAL PAPER

         An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days.

         Ratings are graded into several categories, ranging from "A-1" for the
highest quality obligations to "D" for the lowest. These categories are as
follows:

         A-1      This highest category indicates that the degree of safety
                  regarding timely payment is strong. Those issues determined to
                  possess extremely strong safety characteristics are denoted
                  with a plus sign (+) designation.

         A-2      Capacity for timely payment on issues with this designation is
                  satisfactory. However, the relative degree of safety is not as
                  high as for issues designated "A-1."

         A-3      Issues carrying this designation have adequate capacity for
                  timely payment. They are, however, somewhat more vulnerable to
                  the adverse effects of changes in circumstances than
                  obligations carrying the higher designations.

         B        Issues rated "B" are regarded as having only speculative
                  capacity for timely payment.

         C        This rating is assigned to short-term debt obligations with a
                  doubtful capacity for payment.

         D        Debt rated "D" is in payment default. The "D" rating category
                  is used when interest payments or principal payments are not
                  made on the date due, even if the applicable grace period has
                  not expired, unless S&P believes that such payments will be
                  made during such grace period.


                                       B-3

<PAGE>   129



         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.

         Moody's Investors Service Inc.--A brief description of the applicable
Moody's Investors Service, Inc. ("Moody's") rating symbols and their meanings
(as published by Moody's) follows:

MUNICIPAL BONDS

         AAA      Bonds which are rated Aaa are judged to be of the best
                  quality. They carry the smallest degree of investment risk and
                  are generally referred to as "gilt edge." Interest payments
                  are protected by a large or by an exceptionally stable margin
                  and principal is secure. While the various protective elements
                  are likely to change, such changes as can be visualized are
                  most unlikely to impair the fundamentally strong position of
                  such issues.

         Aa       Bonds which are rated Aa are judged to be of high quality by
                  all standards. Together with the Aaa group they comprise what
                  are generally known as high grade bonds. They are rated lower
                  than the best bonds because margins of protection may not be
                  as large as in Aaa securities or fluctuation of protective
                  elements may be of greater amplitude or there may be other
                  elements present which make the long term risks appear
                  somewhat larger than in Aaa securities.

         A        Bonds which are rated A possess many favorable investment
                  attributes and are to be considered as upper medium grade
                  obligations. Factors giving security to principal and interest
                  are considered adequate, but elements may be present which
                  suggest a susceptibility to impairment sometime in the future.

         Baa      Bonds which are rated Baa are considered as medium grade
                  obligations, i.e., they are neither highly protected nor
                  poorly secured. Interest payments and principal security
                  appear adequate for the present but certain protective
                  elements may be lacking or may be characteristically
                  unreliable over any great length of time. Such bonds lack
                  outstanding investment characteristics and in fact have
                  speculative characteristics as well.

         Ba       Bonds which are rated Ba are judged to have speculative
                  elements; their future cannot be considered as well assured.
                  Often the protection of interest and principal payments may be
                  very moderate and thereby not well safeguarded during both
                  good and bad times over the future. Uncertainty of position
                  characterizes bonds in this class.

         B        Bonds which are rated B generally lack characteristics of the
                  desirable investment. Assurance of interest and principal
                  payments or of maintenance of other terms of the contract over
                  any long period of time may be small.

         Caa      Bonds which are rated Caa are of poor standing. Such issues
                  may be in default or there may be present elements of danger
                  with respect to principal or interest.

         Ca       Bonds which are rated Ca represent obligations which are
                  speculative in a high degree. Such issues are often in default
                  or have other marked shortcomings.

         C        Bonds which are rated C are the lowest rated class of bonds,
                  and issues so rated can be regarded as having extremely poor
                  prospects of ever attaining any real investment standing.

         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


                                       B-4

<PAGE>   130



                  when facilities are completed, or (d) payments to which some
                  other limiting condition attaches. Parenthetical rating
                  denotes probable credit stature upon completion of
                  construction or elimination of basis of condition.

         Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic
         rating category from Aa to B in the public finance sectors. The
         modifier 1 indicates that the issuer is in the higher end of its letter
         rating category; the modifier 2 indicates a mid-range ranking; the
         modifier 3 indicates that the issuer is in the lower end of the letter
         ranking category.

SHORT-TERM LOANS

         MIG 1/VMIG 1      This designation denotes best quality. There is
                           present strong protection by established cash flows,
                           superior liquidity support or demonstrated broadbased
                           access to the market for refinancing.

         MIG 2/VMIG 2      This designation denotes high quality. Margins of
                           protection are ample although not so large as in the
                           preceding group.

         MIG 3/VMIG 3      This designation denotes favorable quality. All
                           security elements are accounted for but there is
                           lacking the undeniable strength of the preceding
                           grades. Liquidity and cash flow protection may be
                           narrow and market access for refinancing is likely to
                           be less well-established.

         MIG 4/VMIG 4      This designation denotes adequate quality. Protection
                           commonly regarded as required of an investment
                           security is present and although not distinctly or
                           predominantly speculative, there is specific risk.

         S.G.              This designation denotes speculative quality. Debt
                           instruments in this category lack margins of
                           protection.

COMMERCIAL PAPER

         Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following characteristics:

                  -- Leading market posit-ions 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.

                  -- Well-established access to a range of financial markets and
                     assured sources of alternate liquidity.

         Issuers rated Prime-2 (or related supporting institutions) have a
         strong capacity for repayment of short-term promissory obligations.
         This will normally be evidenced by many of the characteristics cited
         above but to a lesser degree. Earnings trends and coverage ratios,
         while sound, will be more subject to variation. Capitalization
         characteristics, while still appropriate, may be more affected by
         external conditions. Ample alternate liquidity is maintained.

         Issuers rated Prime-3 (or related supporting institutions) have an
         acceptable capacity for repayment of short-term promissory obligations.
         The effect of industry characteristics and market composition may be
         more pronounced. Variability in earnings and profitability may result
         in changes in the level of debt protection measurements and the
         requirement for relatively high financial leverage. Adequate alternate
         liquidity is maintained.


                                       B-5

<PAGE>   131



         Issuers rated Not Prime do not fall within any of the Prime rating
categories.

         Fitch IBCA, Inc.--A brief description of the applicable Fitch IBCA,
Inc. ("Fitch") ratings symbols and meanings (as published by Fitch) follows:

LONG-TERM CREDIT RATINGS

Investment Grade

         AAA      Highest credit quality. 'AAA' ratings denote the lowest
                  expectation of credit risk. They are assigned only in case of
                  exceptionally strong capacity for timely payment of financial
                  commitments. This capacity is highly unlikely to be adversely
                  affected by foreseeable events.

         AA       Very high credit quality. 'AA' ratings denote a very low
                  expectation of credit risk. They indicate very strong capacity
                  for timely payment of financial commitments. This capacity is
                  not significantly vulnerable to foreseeable events.

         A        High credit quality. 'A' ratings denote a low expectation of
                  credit risk. The capacity for timely payment of financial
                  commitments is considered strong. This capacity may,
                  nevertheless, be more vulnerable to changes in circumstances
                  or in economic conditions than is the case for higher ratings.

         BBB      Good credit quality. 'BBB' ratings indicate that there is
                  currently a low expectation of credit risk. The capacity for
                  timely payment of financial commitments is considered
                  adequate, but adverse changes in circumstances and in economic
                  conditions are more likely to impair this capacity. This is
                  the lowest investment-grade category.

Speculative Grade

         BB                    Speculative. 'BB' ratings indicate that there is
                               a possibility of credit risk developing,
                               particularly as the result of adverse economic
                               change over time; however, business or 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 or
                               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.


                                       B-6

<PAGE>   132



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.

         Fl       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. 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'.

         'NRI' indicates that Fitch IBCA does not rate the issuer or issue in
question.

         'Withdrawn': A rating is withdrawn when Fitch IBCA deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.

         Rating Alert: Ratings are placed on RatingAlert to notify investors
that there is a reasonable probability of a rating change and the likely
direction of such change. These are designated as "Positive", indicating a
potential upgrade, "Negative", for a potential downgrade, or "Evolving", if
ratings may be raised, lowered or maintained. RatingAlert is typically resolved
over a relatively short period.



                                       B-7

<PAGE>   133



                                                                      APPENDIX C

                          HEDGING STRATEGIES AND RISKS

         Set forth below is additional information regarding the various
defensive hedging techniques.

FUTURES AND INDEX TRANSACTIONS

         Financial Futures

         A financial future is an agreement between two parties to buy and sell
a security for a set price on a future date. They have been designed by boards
of trade which have been designated "contracts markets" by the Commodity Futures
Trading Commission (" CFTC").

         The purchase of financial futures is for the purpose of hedging a
Fund's existing or anticipated holdings of long-term debt securities. When a
Fund purchases a financial future, it deposits in cash or securities an "initial
margin" of between 1% and 5% of the contract amount. Thereafter, the Fund's
account is either credited or debited on a daily basis in correlation with the
fluctuation in price of the underlying future or other requirements imposed by
the exchange in order to maintain an orderly market. 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 a Fund's
existing or anticipated holdings of long-term debt securities. For example, if a
Fund owns long-term bonds and interest rates were expected to increase, it might
sell financial futures. If interest rates did increase, the value of long-term
bonds in the Fund's portfolio would decline, but the value of the Fund's
financial futures would be expected to increase at approximately the same mate
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
Funds as a hedging device, perhaps the most significant is the imperfect
correlation between movements in the price of the financial futures and
movements in the price of the debt securities which are the subject of the
hedge.

         Thus, if the price of the financial future moves less or more than the
price of the securities which are the subject of the hedge, the hedge will not
be fully effective. To compensate for this imperfect correlation, 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.

         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 a Fund on its
portfolio securities to hedge against the risk of rising interest rates. As with
options on debt securities, the holder of an option may terminate his position
by selling an option of the same Fund. There is no guarantee that such closing
transactions can be effected.


                                       C-1

<PAGE>   134



INDEX CONTRACTS

         INDEX FUTURES

         A tax-exempt bond index which assigns relative values to the tax-exempt
bonds included in the index is traded on the Chicago Board of Trade. The index
fluctuates with changes in the market values of all tax-exempt bonds included
rather than a single bond. An index future is a bilateral agreement pursuant to
which two parties agree to take or make delivery of an amount of cash-rather
than any security-equal to specified dollar amount times the difference between
the index value at the close of the last trading day of the contract and the
price at which the index future was originally written. Thus, an index future is
similar to traditional financial futures except that settlement is made in cash.

         INDEX OPTIONS

         The Fund may also purchase put or call options on U.S. Government or
tax-exempt bond index futures and enter into closing transactions with respect
to Such options to terminate an existing position. Options on index futures are
similar to options on debt instruments except that an option on an index future
gives the purchaser the right, in return for the premium paid, to assume a
position in an index contract rather than an underlying security at a specified
exercise price at any time during the period of the option. Upon exercise of the
option, the delivery of the futures position by the writer of the option to the
holder of the option will be accompanied by delivery of the accumulated balance
of the writer's futures margin account which represents the amount by which the
market price of the index futures contract, at exercise, is less than the
exercise price of the option on the index future.

         Bond index futures and options transactions would be subject to risks
similar to transactions in financial futures and options thereon as described
above. No series will enter into transactions in index or financial futures or
related options unless and until, in the Adviser's opinion, the market for such
instruments has developed sufficiently.


                                       C-2

<PAGE>   135



                           PART C - OTHER INFORMATION


Item 24:          Financial Statements and Exhibits

1.      Financial Statements:

        Statement of Net Assets,            , 1999 (audited)
        Statement of Net Assets,            , 1999 (unaudited)
        Statement of Operations from              , 1999 (commencement of
             operations) to             , 1999 (unaudited)
        Statement of Changes in Net Assets from               , 1999
            (commencement of operations) to                  ,
            1999(unaudited)
        Portfolio of Investments,               , 1999 (unaudited)

2.      Exhibits:


a.1     Agreement and Declaration of Trust dated December 1, 1998.(1)
a.2     Certificate of Amendment to Declaration of Trust dated April 9, 1999.(2)
b.      By-laws of Registrant.(1)
c.      None.
d.      None.
e.      Dividend Investment Plan.(3)
f.      None.
g.      Form of Investment Management Agreement between Registrant and Nuveen
        Advisory Corp.(2)
h.      Form of Underwriting Agreement.*
i.      Deferred Compensation Plan for Non-Employee Trustees.(2)
j.      Form of Exchange Traded Fund Custody Agreement between Registrant and
        The Chase Manhattan Bank.(2)
k.1     Form of Shareholder Transfer Agency Agreement between Registrant and
        Chase Global Funds Services Company.(2)
k.2     Form of Expense Reimbursement Agreement between Registrant and Nuveen
        Advisory Corp.(2)
k.3     Form of Auction Agency Agreement between the Registrant and Bankers
        Trust Company as to the Registrant's MuniPreferred Shares. *
k.4     Form of Broker-Dealer Agreement as to the Registrant's MuniPreferred
        Shares.*
k.5     DTC Representations Letter as to the Registrant's MuniPreferred Shares.*
l.1     Opinion and consent of Vedder, Price, Kaufman & Kammholz.*
l.2     Opinion and consent of Bingham Dana LLP.*
m.      None.
n.      Consent of Ernst & Young LLP.*
o.      None.
p.      Subscription Agreement of Nuveen Advisory Corp. dated April 12, 1999.(4)
q.      None.
r.      None.
s.      Powers of Attorney.(2)
- ------------------
*To be filed by amendment.


(1)     Incorporated herein by reference to the initial Registrant's
        Registration Statement on Form N-2, File No. 333-69035, filed on
        December 16, 1998.

(2)     Incorporated herein by reference to Pre-Effective Amendment No.1 to
        Registrant's Registration Statement on Form N-2, File No. 333-69035,
        filed on April 16, 1999.

(3)     Incorporated herein by reference to Pre-Effective Amendment No. 3 to
        Registrant's Registration Statement on Form N-2, File No. 333-69035,
        filed on May 25, 1999.

(4)     Incorporated hereby by reference to Post-Effective Amendment No. 1 to
        Registrant's Registration Statement filed on Form N-2, File No.
        333-69035, filed on May 26, 1999.



                                    Part C-1


<PAGE>   136



Item 25:          Marketing Arrangements


         See Section __ of the Underwriting Agreement filed as Exhibit h to this
Registration Statement.


Item 26:          Other Expenses of Issuance and Distribution

         Securities and Exchange Commission fees
         Printing and engraving expenses                               $
         Legal fees
         Accounting expenses
         Blue Sky filing fees and expenses
         Miscellaneous expenses
         Total



Item 27:          Persons Controlled by or under Common Control with Registrant

         Not applicable.

Item 28:          Number of Holders of Securities

         At _________, 1999


         Title of Class                    Number of Record Holders
         Common Shares, $.01 par value

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) 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.



                                    Part C-2


<PAGE>   137




         The rights of indemnification herein provided may be insured against by
policies maintained by the Trust, shall be severable, shall not affect any other
rights to which any Covered Person may now or hereafter be entitled, shall
continue as to a person who has ceased to be such a Covered Person and shall
inure to the benefit of the heirs, executors and administrators of such a
person. Nothing contained herein shall affect any rights to indemnification to
which Trust personnel other than Covered Persons may be entitled by contract or
otherwise under law.

         Expenses of preparation and presentation of a defense to any claim,
action, suit or proceeding subject to a claim for indemnification under this
Section 4 shall be advanced by the Trust prior to final disposition thereof upon
receipt of an undertaking by or on behalf of the recipient to repay such amount
if it is ultimately determined that he is not entitled to indemnification under
this Section 4, provided that either:

                  (a) such undertaking is secured by a surety bond or some other
                  appropriate security or the Trust shall be insured against
                  losses arising out of any such advances; or

                  (b) a majority of the Disinterested Trustees acting on the
                  matter (provided that a majority of the Disinterested Trustees
                  then in office act on the matter) or independent legal counsel
                  in a written opinion shall determine, based upon a review of
                  the readily available facts (as opposed to a full trial- type
                  inquiry), that there is reason to believe that the recipient
                  ultimately will be found entitled to indemnification.

         As used in this Section 4, a "Disinterested Trustee" is one (x) who is
not an Interested Person of the Trust (including, as such Disinterested Trustee,
anyone who has been exempted from being an Interested Person by any rule,
regulation or order of the Commission), and (y) against whom none of such
actions, suits or other proceedings or another action, suit or other proceeding
on the same or similar grounds is then or has been pending.

         As used in this Section 4, the words "claim," "action," "suit" or
"proceeding" shall apply to all claims, actions, suits, proceedings (civil,
criminal, administrative or other, including appeals), actual or threatened; and
the words "liability" and "expenses" shall include without limitation,
attorneys' fees, costs, judgments, amounts paid in settlement, fines, penalties
and other liabilities.

         The trustees and officers of the Registrant are covered by Investment
Trust Errors and Omission policies in the aggregate amount of $20,000,000 (with
a maximum deductible of $500,000) against liability and expenses of claims of
wrongful acts arising out of their position with the Registrant, except for
matters which involve willful acts, bad faith, gross negligence and willful
disregard of duty (i.e., where the insured did not act in good faith for a
purpose he or she reasonably believed to be in the best interest of Registrant
or where he or she had reasonable cause to believe this conduct was unlawful).

         Section 8 of the Underwriting Agreement filed as Exhibit h to this
Registration Statement provides for each of the parties thereto, including the
Registrant and the Underwriters, to indemnify the others, their trustees,
directors, certain of their officers, trustees, directors and persons who
control them against certain liabilities in connection with the offering
described herein, including liabilities under the federal securities laws.

Item 30:          Business and Other Connections of Investment Adviser

         Nuveen Advisory Corp. serves as investment adviser to the following
open-end management type investment companies: Nuveen Flagship Multistate Trust
I, Nuveen Flagship Multistate II, Nuveen Flagship Multistate Trust III, Nuveen
Flagship Multistate Trust IV, Nuveen Flagship Municipal Trust, Nuveen California
Tax Free Fund, Inc., Nuveen Tax-Free Money Market Fund, Inc., Nuveen Tax-Exempt
Money Market Fund, Inc., Nuveen Tax-Free Reserves, Inc. and Nuveen Taxable Funds
Inc., Nuveen Advisory Corp. also serves as investment adviser to the following
closed-end management type investment companies other than the Registrant:
Nuveen Municipal Value Fund, Inc., Nuveen California Municipal Value Fund, Inc.,
Nuveen New York Municipal Value Fund, Inc., Nuveen Municipal Income Fund, Inc.,
Nuveen Premium Income Municipal Fund, Inc., Nuveen Performance Plus Municipal
Fund, Inc., Nuveen



                                    Part C-3


<PAGE>   138



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, Nuveen California Quality Income Municipal Fund,
Inc., Nuveen New York Quality Income Municipal Fund, Inc., Nuveen Premier
Municipal Income Fund, Inc., Nuveen Premier Insured Municipal Income Fund, Inc.,
Nuveen Insured California Premium Income Municipal Fund, Inc., Nuveen Insured
New York Premium Income Municipal Fund, Inc., Nuveen Premium Income Municipal
Fund 2, Inc., Nuveen Select Maturities Municipal Fund, Nuveen Arizona Premium
Income Municipal Fund, Inc., Nuveen Insured Florida Premium Income Municipal
Fund, Nuveen Michigan Premium Income Municipal Fund, Inc., Nuveen New Jersey
Premium Income Municipal Fund, Inc., Nuveen Premium Income Municipal Fund 4,
Inc., Nuveen Insured California Premium Income Municipal Fund 2, Inc., Nuveen
Insured New York Premium Income Municipal Fund 2, Nuveen New Jersey Premium
Income Municipal Fund 2, Nuveen Pennsylvania Premium Income Municipal Fund 2,
Nuveen Maryland Premium Income Municipal Fund, Nuveen Massachusetts Premium
Income Municipal Fund, Nuveen Virginia Premium Income Municipal Fund, Nuveen
Washington Premium Income Municipal Fund, Nuveen Connecticut Premium Income
Municipal Fund, Nuveen Georgia Premium Income Municipal Fund, Nuveen Missouri
Premium Income Municipal Fund, Nuveen North Carolina Premium Income Municipal
Fund, Nuveen California Premium Income Municipal Fund, Nuveen Insured Premium
Income Municipal Fund 2, Nuveen New York Municipal Advantage Fund and Nuveen
California Municipal Advantage Fund. Nuveen Advisory Corp. has no other clients
or business at the present time. For a description of other business,
profession, vocation or employment of a substantial nature in which any director
or officer of the investment adviser has engaged during the last two years for
his account or in the capacity of director, officer, employee, partner or
trustee, see the descriptions under "Management of the Fund" in Part A of this
Registration Statement.

Item 31:          Location of Accounts and Records

         Nuveen Advisory Corp., 333 West Wacker Drive, Chicago, Illinois 60606,
maintains the Declaration of Trust, By-Laws, minutes of trustees and
shareholders meetings and contracts of the Registrant and all Advisory material
of the investment adviser.

         The Chase Manhattan Bank, 4 New York Plaza, New York, New York
10004-2413 maintains all general and subsidiary ledgers, journals, trial
balances, records of all portfolio purchases and sales, and all other required
records not maintained by Nuveen Advisory Corp. or Chase Global Funds Services
Company.

         Chase Global Funds Services Company, P.O. Box 5186, Bowling Green
Station, New York, NY 10275-0672 (regular mail) or 4 New York Plaza, 6th Floor,
New York, NY 10004, maintains all the required records in its capacity as
transfer and dividend paying agent for the Registrant.

Item 32:          Management Services

         Not applicable.

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.



                                    Part C-4


<PAGE>   139



         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.



                                    Part C-5


<PAGE>   140
                                   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 6th day of
July, 1999.



                                            NUVEEN CALIFORNIA DIVIDEND ADVANTAGE
                                              MUNICIPAL FUND


                                        /s/ Gifford R. Zimmerman
                                        ----------------------------------------
                                        Gifford R. Zimmerman
                                        Vice President and Secretary


         Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.





<TABLE>
<CAPTION>
Signature                               Title                                          Date
- ---------                               -----                                          ----
<S>                                     <C>                                            <C>
/s/ Stephen D. Foy                      Vice President and Controller (Principal       June 6, 1999
- -----------------------------           Financial and Accounting Officer)
Stephen D. Foy


- -----------------------------           Chairman of the Board and Trustee              July 6, 1999
Timothy R. Schwertfeger                 (Principal Executive Officer)


- -----------------------------           Trustee                                        July 6, 1999
Robert P. Bremner


- -----------------------------           Trustee                                        July 6, 1999
Lawrence H. Brown


- -----------------------------           Trustee                                        July 6, 1999
Anne E. Impellizzeri


- -----------------------------           Trustee                                        July 6, 1999
Peter R. Sawers


- -----------------------------           Trustee                                        July 6, 1999
William J. Schneider


- -----------------------------           Trustee                                        July 6, 1999
Judith M. Stockdale
</TABLE>


                                            By:  /s/ Gifford R. Zimmerman
                                               ---------------------------------
                                                 Gifford R. Zimmerman
                                                 Attorney-in Fact

          Original powers of attorney authorizing Alan G. Berkshire and Gifford
R. Zimmerman, among others, to execute this Registration Statement, and
Amendments thereto, for each of the trustees of Registrant on whose behalf this
Registration Statement is filed, have been executed and previously filed as an
exhibit.




                                    Part C-6


<PAGE>   141



                                INDEX TO EXHIBITS










                                    Part C-7



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