-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NL0k9UY2K3GfUgJqMXRUkv3chrMEp3mmvc9YdduzENkU2TMGfCPsiF0siIWbBhzt VkN2EfTDkHIXovGCL4PFyg== 0000950131-01-001591.txt : 20020723 0000950131-01-001591.hdr.sgml : 20020723 20010323153100 ACCESSION NUMBER: 0000950131-01-001591 CONFORMED SUBMISSION TYPE: N-2/A PUBLIC DOCUMENT COUNT: 14 FILED AS OF DATE: 20010323 DATE AS OF CHANGE: 20010323 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NUVEEN CALIFORNIA DIVIDEND ADVANTAGE MUNICIPAL FUND 2 CENTRAL INDEX KEY: 0001127706 FILING VALUES: FORM TYPE: N-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-49242 FILM NUMBER: 01577631 BUSINESS ADDRESS: STREET 1: C/O JOHN NUVEEN & CO INC STREET 2: 333 W. WACKER DR. CITY: CHICAGO STATE: IL ZIP: 60606 MAIL ADDRESS: STREET 1: C/O JOHN NUVEEN & CO INC STREET 2: 333 W. WACKER DR. CITY: CHICAGO STATE: IL ZIP: 60606 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NUVEEN CALIFORNIA DIVIDEND ADVANTAGE MUNICIPAL FUND 2 CENTRAL INDEX KEY: 0001127706 FILING VALUES: FORM TYPE: N-2/A SEC ACT: 1940 Act SEC FILE NUMBER: 811-10197 FILM NUMBER: 01577632 BUSINESS ADDRESS: STREET 1: C/O JOHN NUVEEN & CO INC STREET 2: 333 W. WACKER DR. CITY: CHICAGO STATE: IL ZIP: 60606 MAIL ADDRESS: STREET 1: C/O JOHN NUVEEN & CO INC STREET 2: 333 W. WACKER DR. CITY: CHICAGO STATE: IL ZIP: 60606 N-2/A 1 0001.txt NUVEEN CA DIVIDEND ADVANTAGE MUNI FUND 2 As filed with the Securities and Exchange Commission on March 23, 2001 ================================================================================ 1933 Act File No. 333-49242 1940 Act File No. 811-10197 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form N-2 (Check appropriate box or boxes) [x] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X] Pre-Effective Amendment No. 3 [ ] Post-Effective Amendment No. __________ and [x] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X] Amendment No. 3 Nuveen California Dividend Advantage Municipal Fund 2 Exact Name of Registrant as Specified in Declaration of Trust 333 West Wacker Drive, Chicago, Illinois 60606 Address of Principal Executive Offices (Number, Street, City, State, Zip Code) (800) 257-8787 Registrant's Telephone Number, including Area Code Gifford R. Zimmerman Vice President and Secretary 333 West Wacker Drive Chicago, Illinois 60606 Name and Address (Number, Street, City, State, Zip Code) of Agent for Service Copies of Communications to: Stacy H. Winick Thomas S. Harman Cynthia G. Cobden Bell, Boyd & Lloyd LLC Morgan, Lewis & Bockius LLP Simpson Thacher & Bartlett 70 W. Madison St. 1800 M Street, N.W. 425 Lexington, Avenue Chicago, IL 60602 Washington, D.C. 20036 New York, NY 10017 Approximate Date of Proposed Public Offering: As soon as practicable after the effective date of this Registration Statement ____________________________ If any of the securities being registered on this form are offered on a delayed or continuous basis in reliance on Rule 415 under the Securities Act of 1933, other than securities offered in connection with a dividend reinvestment plan, check the following box. [_] It is proposed that this filing will become effective (check appropriate box) [X] when declared effective pursuant to section 8(c) ____________________________
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933 ===================================================================================================================== Proposed Maximum Title of Securities Amount Proposed Maximum Aggregate Offering Amount of Being Registered Being Registered Offering Price Per Unit Price(1) Registration Fee(2) - ------------------------------------------------------------------------------------------------------------------------ Common Shares, $.01 per value 16,666,667 Shares $15.00 $250,000,005 $62,500 ========================================================================================================================
(1) Estimated solely for the purpose of calculating the registration fee. (2) $11,250 of which previously has been paid. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such dates as the Commission, acting pursuant to said Section 8(a), may determine. ================================================================================ ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +The information in this prospectus is not complete and may be changed. We may + +not sell these securities until the registration statement filed with the + +Securities and Exchange Commission is effective. This prospectus is not an + +offer to sell these securities and it is not soliciting an offer to buy these + +securities in any state where the offer or sale is not permitted. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED MARCH 23, 2001 PROSPECTUS Shares Nuveen California Dividend Advantage [NUVEEN LOGO] Municipal Fund 2 Common Shares $15.00 per share ---------- Investment Objectives. The Fund is a newly-organized, non-diversified, closed-end, management investment company. The Fund's investment objectives are: . to provide current income exempt from regular federal and California income tax; and . to enhance portfolio value relative to the municipal bond market by investing in tax-exempt municipal bonds that the Fund's investment adviser believes are underrated or undervalued or that represent municipal market sectors that are undervalued. Portfolio Contents. Under normal market conditions, the Fund will invest its net assets in a portfolio of municipal bonds that are exempt from regular federal and California income taxes. Under normal market conditions, the Fund expects to be fully invested in such tax-exempt municipal bonds. Through March 31, 2002, the Fund may invest in municipal bonds that are exempt from regular federal income tax but not from California income tax, provided that no more than 10% of the Fund's investment income during that time may be derived from investments in those bonds. The Fund will invest at least 80% of its net assets in investment grade quality municipal bonds. The Fund may invest up to 20% of its net assets in municipal bonds that are rated Ba/BB or B or that are unrated but judged to be of comparable quality by the Fund's investment adviser. The Fund cannot assure you that it will achieve its investment objectives. No Prior History. Because the Fund is newly organized, its common shares have no history of public trading. Shares of closed-end investment companies frequently trade at a discount from their net asset value. This risk may be greater for investors expecting to sell their shares in a relatively short period after completion of the public offering. The common shares have been approved for listing on the American Stock Exchange, subject to notice of issuance. The trading or "ticker" symbol of the common shares is expected to be "NVX". ---------- Investing in common shares involves certain risks. See "Risks" beginning on page 17. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. ----------
Per Share Total --------- ------- Public Offering Price $15.00 $ Sales Load $ 0.675 $ Proceeds to the Fund $14.325 $
The underwriters expect to deliver the common shares to purchasers on or about , 2001. ---------- Salomon Smith Barney Nuveen Investments A.G. Edwards & Sons, Inc. Prudential Securities UBS Warburg LLC Crowell, Weedon & Co. First Union Securities, Inc. Wedbush Morgan Securities Sutro & Co. Incorporated , 2001 You should read the Prospectus, which contains important information about the Fund, before deciding whether to invest and retain it for future reference. A Statement of Additional Information, dated , 2001, containing additional information about the Fund, has been filed with the Securities and Exchange Commission and is incorporated by reference in its entirety into this Prospectus. You may request a free copy of the Statement of Additional Information, the table of contents of which is on page 35 of this Prospectus, by calling (800) 257-8787 or by writing to the Fund, or obtain a copy (and other information regarding the Fund) from the Securities and Exchange Commission web site (http://www.sec.gov). The Fund's common shares do not represent a deposit or obligation of, and are not guaranteed or endorsed by, any bank or other insured depository institution, and are not federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other government agency. The underwriters named in this Prospectus may purchase up to additional common shares from the Fund under certain circumstances. 2 You should rely only on the information contained or incorporated by reference in this Prospectus. The Fund has not authorized anyone to provide you with different information. The Fund is not making an offer of these securities in any state where the offer is not permitted. You should not assume that the information contained in this Prospectus is accurate as of any date other than the date on the front of this Prospectus. ------------ TABLE OF CONTENTS
Page ---- Prospectus Summary......................................................... 4 Summary of Fund Expenses................................................... 9 The Fund................................................................... 11 Use of Proceeds............................................................ 11 The Fund's Investments..................................................... 11 MuniPreferred Shares and Leverage.......................................... 14 Risks...................................................................... 17 How the Fund Manages Risk.................................................. 20 Management of the Fund..................................................... 22 Net Asset Value............................................................ 23 Distributions.............................................................. 23 Dividend Reinvestment Plan................................................. 24 Description of Shares...................................................... 25 Certain Provisions in the Declaration of Trust............................. 27 Repurchase of Fund Shares; Conversion to Open-End Fund..................... 28 Tax Matters................................................................ 29 Other Matters.............................................................. 31 Underwriting............................................................... 32 Custodian and Transfer Agent............................................... 34 Legal Opinions............................................................. 34 Table of Contents for the Statement of Additional Information.............. 35
------------ Until , 2001 (25 days after the date of this Prospectus), all dealers that buy, sell or trade the Common Shares, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. 3 PROSPECTUS SUMMARY This is only a summary. You should review the more detailed information contained in the Prospectus and in the Statement of Additional Information. The Fund............... Nuveen California Dividend Advantage Municipal Fund 2 (the "Fund") is a newly organized, non-diversified, closed-end management investment company. The Fund is designed to provide tax benefits to investors who are residents of California. See "The Fund." The Offering........... The Fund is offering common shares of beneficial interest at $15.00 per share through a group of underwriters (the "Underwriters") led by Salomon Smith Barney Inc., Nuveen Investments ("Nuveen"), A.G. Edwards & Sons, Inc., Prudential Securities Incorporated, UBS Warburg LLC, Crowell, Weedon & Co., First Union Securities, Inc., Sutro & Co. Incorporated and Wedbush Morgan Securities. The common shares of beneficial interest are called "Common Shares" in the rest of this Prospectus. You must purchase at least 100 Common Shares. The Fund has given the Underwriters an option to purchase up to additional Common Shares to cover orders in excess of Common Shares. See "Underwriting." Nuveen Investments has agreed to pay (i) all organizational expenses and (ii) offering costs (other than sales load) that exceed $0.03 per Common Share. Investment Objectives.. The Fund's investment objectives are to provide current income exempt from regular federal and California income tax and enhance portfolio value relative to the municipal bond market by investing in tax-exempt municipal bonds that the Fund's investment adviser believes are underrated or undervalued or that represent municipal market sectors that are undervalued. Under normal market conditions, the Fund will invest its net assets in a portfolio of municipal bonds that are exempt from regular federal and California income taxes. Under normal market conditions, the Fund expects to be fully invested in such tax-exempt municipal bonds. Through March 31, 2002, the Fund may invest in municipal bonds that are exempt from regular federal income tax but not from California income tax ("Out of State Bonds"), provided that no more than 10% of the Fund's investment income during that time may be derived from Out of State Bonds. The Fund will invest at least 80% of its net assets in municipal bonds that at the time of investment are investment grade quality. Investment grade quality bonds are bonds rated within the four highest grades (Baa or BBB or better by Moody's Investor Service, Inc. ("Moody's"), Standard & Poor's Corporation ("S&P") or Fitch IBCA, Inc. ("Fitch")), or bonds that are unrated but judged to be of comparable quality by the Fund's investment adviser. The Fund may invest up to 20% of its net assets in municipal bonds that, at the time of investment, are rated Ba/BB or B by Moody's, S&P or Fitch or that are unrated but judged to be 4 of comparable quality by the Fund's investment adviser. Bonds of below investment grade quality are regarded as having predominately speculative characteristics with respect to capacity to pay interest and repay principal, and are commonly referred to as junk bonds. The Fund cannot assure you that it will attain its investment objectives. See "The Fund's Investments." Special If the Fund invests in Out of State Bonds, a portion Considerations........ of your dividends will be subject to California income taxes. The Fund expects that a substantial portion of its investments will pay interest that is taxable under the federal alternative minimum tax. If you are, or as a result of investment in the Fund would become, subject to the federal alternative minimum tax, the Fund may not be a suitable investment for you. In addition, distributions of ordinary taxable income (including any net short-term capital gain) will be taxable to shareholders as ordinary income, and capital gain dividends will be subject to capital gains taxes. See "Tax Matters." Proposed Offering of MuniPreferred(R) Shares............... Subject to market conditions approximately one to three months after completion of this offering, the Fund intends to offer preferred shares of beneficial interest ("MuniPreferred Shares") representing approximately 35% of the Fund's capital after their issuance. The issuance of MuniPreferred Shares will leverage your investment in Common Shares. Leverage involves special risks. There is no assurance that the Fund will issue MuniPreferred Shares or that, if issued, the Fund's leveraging strategy will be successful. See "Risks--Leverage Risk." The money the Fund obtains by selling the MuniPreferred Shares will be invested in long-term municipal bonds, which generally will pay fixed rates of interest over the life of the bond. The MuniPreferred Shares will pay dividends based on shorter-term rates, which will be reset frequently. So long as the rate of return, net of applicable Fund expenses, on the long-term bonds purchased by the Fund exceeds MuniPreferred Share dividend rates as reset periodically, the investment of the proceeds of the MuniPreferred Shares will generate more income than will be needed to pay dividends on the MuniPreferred Shares. If so, the excess will be used to pay higher dividends to holders of Common Shares ("Common Shareholders"). However, the Fund cannot assure you that the issuance of MuniPreferred Shares will result in a higher yield on your Common Shares. Once MuniPreferred Shares are issued, the net asset value and market price of the Common Shares and the yield to Common Shareholders will be more volatile. See "MuniPreferred Shares and Leverage" and "Description of Shares--MuniPreferred Shares." Investment Adviser.... Nuveen Advisory Corp. ("Nuveen Advisory") will be the Fund's investment adviser. Nuveen Advisory will receive an annual fee, payable monthly, in a maximum amount equal to .65% of the Fund's average daily net assets (including assets attributable to any 5 MuniPreferred Shares that may be outstanding), with lower fee levels for assets that exceed $125 million. Nuveen Advisory has contractually agreed to reimburse the Fund for fees and expenses in the amount of .30% of average daily net assets of the Fund for the first five full years of the Fund's operations (through March 31, 2006), and for a declining amount for an additional five years (through March 31, 2011). Nuveen Advisory is a wholly owned subsidiary of Nuveen. See "Management of the Fund." Distributions......... Commencing with the Fund's first dividend, the Fund intends to make regular monthly cash distributions to you at a level rate based on the projected performance of the Fund. The Fund's ability to maintain a level dividend rate will depend on a number of factors, including dividends payable on the MuniPreferred Shares. As portfolio and market conditions change, the rate of dividends on the Common Shares and the Fund's dividend policy could change. Over time, the Fund will distribute all of its net investment income (after it pays accrued dividends on any outstanding MuniPreferred Shares). In addition, at least annually, the Fund intends to distribute net capital gain and taxable ordinary income, if any, to you so long as the net capital gain and taxable ordinary income are not necessary to pay accrued dividends on, or redeem or liquidate, any MuniPreferred Shares. Your initial distribution is expected to be declared approximately 45 days, and paid approximately 60 to 90 days, from the completion of this offering, depending on market conditions. You may elect to automatically reinvest some or all of your distributions in additional Common Shares under the Fund's Dividend Reinvestment Plan. See "Distributions" and "Dividend Reinvestment Plan." Listing............... The Common Shares have been approved for listing on the American Stock Exchange, subject to notice of issuance. See "Description of Shares--Common Shares." The trading or "ticker" symbol of the Common Shares is expected to be "NVX." Custodian............. The Chase Manhattan Bank will serve as custodian of the Fund's assets. See "Custodian and Transfer Agent." Market Price of Shares................ Shares of closed-end investment companies frequently trade at prices lower than net asset value. Shares of closed-end investment companies like the Fund that invest predominately in investment grade municipal bonds have during some periods traded at prices higher than net asset value and during other periods have traded at prices lower than net asset value. The Fund cannot assure you that Common Shares will trade at a price higher than net asset value in the future. Net asset value will be reduced immediately following the offering by the sales load and the amount of organization and offering expenses paid by the Fund. See "Use of Proceeds." In addition to net asset value, market price may be affected by such factors as dividend levels (which are in turn affected by expenses), call protection, dividend stability, portfolio credit quality and liquidity 6 and market supply and demand. See "MuniPreferred Shares and Leverage," "Risks," "Description of Shares," "Repurchase of Fund Shares; Conversion to Open-End Fund" and the Statement of Additional Information under "Repurchase of Fund Shares; Conversion to Open-End Fund." The Common Shares are designed primarily for long-term investors, and you should not view the Fund as a vehicle for trading purposes. Special Risk Considerations........ No Operating History. The Fund is a newly organized, non-diversified, closed-end management investment company with no history of operations. Interest Rate Risk. Generally, when market interest rates fall, bond prices rise, and vice versa. Interest rate risk is the risk that the municipal bonds in the Fund's portfolio will decline in value because of increases in market interest rates. The prices of longer-term bonds fluctuate more than prices of shorter-term bonds as interest rates change. Conversely, the values of lower-rated and comparable unrated debt securities are less likely than those of investment grade and comparable unrated debt securities to fluctuate inversely with changes in interest rates. Because the Fund will invest primarily in long-term bonds, the Common Share net asset value and market price per share will fluctuate more in response to changes in market interest rates than if the Fund invested primarily in shorter-term bonds. The Fund's use of leverage, as described below, will tend to increase Common Share interest rate risk. Credit Risk. Credit risk is the risk that one or more municipal bonds in the Fund's portfolio will decline in price, or fail to pay interest or principal when due, because the issuer of the bond experiences a decline in its financial status. The Fund may invest up to 20% (measured at the time of investment) of its net assets in municipal bonds that are rated Ba/BB or B or that are unrated but judged to be of comparable quality by Nuveen Advisory. The prices of these lower grade bonds are more sensitive to negative developments, such as a decline in the issuer's revenues or a general economic downturn, than are the prices of higher grade securities. Municipal bonds of below investment grade quality are predominately speculative with respect to the issuer's capacity to pay interest and repay principal when due, and therefore involve a greater risk of default. Concentration in California Issuers. The Fund's policy of investing primarily in municipal obligations of issuers located in California makes the Fund more susceptible to adverse economic, political or regulatory occurrences affecting such issuers. Leverage Risk. The use of leverage through the issuance of MuniPreferred Shares creates an opportunity for increased Common Share net income, but also creates special risks for Common Shareholders. There is no assurance that the Fund's leveraging strategy will be successful. It is anticipated that MuniPreferred 7 dividends will be based on shorter-term municipal bond rates of return (which would be redetermined periodically, pursuant to an auction process), and that the Fund will invest the proceeds of the MuniPreferred Shares offering in long-term, typically fixed rate, municipal bonds. So long as the Fund's municipal bond portfolio provides a higher rate of return (net of Fund expenses) than the MuniPreferred dividend rate, as reset periodically, the leverage will cause Common Shareholders to receive a higher current rate of return than if the Fund were not leveraged. If, however, long and/or short-term rates rise, the MuniPreferred dividend rate could exceed the rate of return on long-term bonds held by the Fund that were acquired during periods of generally lower interest rates, reducing return to Common Shareholders. Leverage creates two major types of risks for Common Shareholders: . the likelihood of greater volatility of net asset value and market price of Common Shares, because changes in the value of the Fund's bond portfolio (including bonds bought with the proceeds of the MuniPreferred Shares offering) are borne entirely by the Common Shareholders; and . the possibility either that Common Share income will fall if the MuniPreferred dividend rate rises, or that Common Share income will fluctuate because the MuniPreferred dividend rate varies. Municipal Bond Market Risk. The amount of public information available about the municipal bonds in the Fund's portfolio is generally less than that for corporate equities or bonds, and the investment performance of the Fund may therefore be more dependent on the analytical abilities of Nuveen Advisory than would be a stock fund or taxable bond fund. The secondary market for municipal bonds, particularly the below investment grade bonds in which the Fund may invest, also tends to be less well-developed or liquid than many other securities markets, which may adversely affect the Fund's ability to sell its bonds at attractive prices. Non-Diversification. Because the Fund is classified as "non-diversified" under the Investment Company Act of 1940, as amended (the "1940 Act"), it can invest a greater portion of its assets in obligations of a single issuer. As a result, the Fund will be more susceptible than a more widely diversified fund to any single corporate, economic, political or regulatory occurrence. See "The Fund's Investments." In addition, the Fund must satisfy certain asset diversification rules in order to qualify as a regulated investment company for federal income tax purposes. Anti-takeover Provisions. The Fund's Declaration of Trust (the "Declaration") includes provisions that could limit the ability of other entities or persons to acquire control of the Fund or convert the Fund to open-end status. The provisions of the Declaration described above could have the effect of depriving the Common Shareholders of opportunities to sell their Common Shares at a premium over the then current market price of the Common Shares. 8 SUMMARY OF FUND EXPENSES The following table assumes the issuance of MuniPreferred Shares in an amount equal to 35% of the Fund's capital (after their issuance), and shows Fund expenses both as a percentage of net assets attributable to Common Shares and as a percentage of total net assets. Shareholder Transaction Expenses Sales Load Paid by You (as a percentage of offering price)............................................... 4.50% Dividend Reinvestment Plan Fees....................... None(1)
Percentage of Net Assets Attributable to Common Shares(2) ------------------- Annual Expenses Management Fees......................................... 1.00% Other Expenses.......................................... .31% ---- Total Annual Expenses................................... 1.31% Fee and Expense Reimbursement (Years 1-5)............... (.46%)(3) ---- Total Net Annual Expenses (Years 1-5)................... .85%(3) ----
- -------- (1) You will be charged a $2.50 service charge and pay brokerage charges if you direct the Plan Agent to sell your Common Shares held in a dividend reinvestment account. (2) Stated as percentages of the Fund's total net assets, and again assuming the issuance of MuniPreferred Shares in an amount equal to 35% of the Fund's capital (after their issuance), the Fund's expenses would be estimated to be as follows:
Percentage of Total Net Assets ---------- Annual Expenses Management Fees................................................. .65% Other Expenses.................................................. .20% ---- Total Annual Expenses........................................... .85% Fees and Expense Reimbursement (Years 1-5)...................... (.30%)(3) ---- Total Net Annual Expenses (Years 1-5)........................... .55%(3) ----
(3) Nuveen Advisory has contractually agreed to reimburse the Fund for fees and expenses in the amount of .30% of average daily net assets for the first 5 full years of the Fund's operations, .25% of average daily net assets in year 6, .20% in year 7, .15% in year 8, .10% in year 9 and .05% in year 10. Without the reimbursement, "Total Net Annual Expenses" would be estimated to be 1.31% of average daily net assets attributable to Common Shares and .85% of average daily net assets. Nuveen has agreed to pay (i) all organizational expenses and (ii) offering costs (other than sales load) that exceed $0.03 per Common Share (.20% of offering price). The purpose of the table above is to help you understand all fees and expenses that you, as a Common Shareholder, would bear directly or indirectly. The expenses shown in the table are based on estimated amounts for the Fund's first year of operations and assume that the Fund issues approximately 6,000,000 Common Shares. See "Management of the Fund" and "Dividend Reinvestment Plan." 9 The following example illustrates the expenses (including the sales load of $45) that you would pay on a $1,000 investment in Common Shares, assuming (1) total net annual expenses of .85% of net assets attributable to Common Shares in years 1 through 5, increasing to 1.23% in year 10 and (2) a 5% annual return:(/1/)
1 Year 3 Years 5 Years 10 Years(/2/) ------ ------- ------- ------------- $53 $71 $90 $160
The example should not be considered a representation of future expenses. Actual expenses may be higher or lower. - -------- (1) The example assumes that the estimated Other Expenses set forth in the Annual Expenses table are accurate, that fees and expenses increase as described in note 2 below and that all dividends and distributions are reinvested at net asset value. Actual expenses may be greater or less than those assumed. Moreover, the Fund's actual rate of return may be greater or less than the hypothetical 5% return shown in the example. The expenses you would pay, based on the Fund's expenses stated as a percentage of the Fund's total net assets (assuming the issuance of MuniPreferred Shares in an amount equal to 35% of the Fund's capital after their issuance) and otherwise on the assumptions in the example would be: 1 year $50; 3 years $62; 5 years $74; and 10 years $121. (2) Assumes reimbursement of fees and expenses of .25% of average daily net assets in year 6, .20% in year 7, .15% in year 8, .10% in year 9 and .05% in year 10. Nuveen Advisory has not agreed to reimburse the Fund for any portion of its fees and expenses beyond March 31, 2011. See "Management of the Fund--Investment Management Agreement." 10 THE FUND The Fund is a recently organized, non-diversified, closed-end management investment company registered under the 1940 Act. The Fund was organized as a Massachusetts business trust on June 1, 1999, pursuant to a Declaration of Trust governed by the laws of the Commonwealth of Massachusetts. As a newly organized entity, the Fund has no operating history. The Fund's principal office is located at 333 West Wacker Drive, Chicago, Illinois 60606, and its telephone number is (800) 257-8787. The Fund is designed to provide tax benefits to investors who are residents of California. USE OF PROCEEDS The net proceeds of the offering of Common Shares will be approximately $ ($ if the Underwriters exercise the over-allotment option in full) after payment of the estimated organization and offering costs. Nuveen has agreed to pay (i) all organizational expenses and (ii) offering costs (other than sales load) that exceed $0.03 per Common Share. The Fund will invest the net proceeds of the offering in accordance with the Fund's investment objectives and policies as stated below. It is presently anticipated that the Fund will be able to invest substantially all of the net proceeds in municipal bonds that meet those investment objectives and policies within three months after the completion of the offering. Pending such investment, it is anticipated that the proceeds will be invested in short- term, tax-exempt securities. THE FUND'S INVESTMENTS Investment Objectives and Policies The Fund's investment objectives are: . to provide current income exempt from regular federal and California income tax; and . to enhance portfolio value relative to the municipal bond market by investing in tax-exempt municipal bonds that Nuveen Advisory believes are underrated or undervalued or that represent municipal market sectors that are undervalued. Underrated municipal bonds are those whose ratings do not, in Nuveen Advisory's opinion, reflect their true creditworthiness. Undervalued municipal bonds are bonds that, in Nuveen Advisory's opinion, are worth more than the value assigned to them in the marketplace. Nuveen Advisory may at times believe that bonds associated with a particular municipal market sector (for example, electric utilities), or issued by a particular municipal issuer, are undervalued. Nuveen Advisory may purchase such a bond for the Fund's portfolio because it represents a market sector or issuer that Nuveen Advisory considers undervalued, even if the value of the particular bond appears to be consistent with the value of similar bonds. Municipal bonds of particular types (e.g., hospital bonds, industrial revenue bonds or bonds issued by a particular municipal issuer) may be undervalued because there is a temporary excess of supply in that market sector, or because of a general decline in the market price of municipal bonds of the market sector for reasons that do not apply to the particular municipal bonds that are considered undervalued. The Fund's investment in underrated or undervalued municipal bonds will be based on Nuveen Advisory's belief that their yield is higher than that available on bonds bearing equivalent levels of interest rate risk, credit risk and other forms of risk, and that their prices will ultimately rise (relative to the market) to reflect their true value. The Fund attempts to increase its portfolio value relative to the municipal bond market by prudent selection of municipal bonds regardless of the direction the market may move. Any capital appreciation realized by the Fund will generally result in the distribution of taxable capital gains to Common Shareholders. 11 Under normal market conditions, the Fund will invest its net assets in a portfolio of municipal bonds that are exempt from regular federal and California income taxes. Under normal market conditions, the Fund expects to be fully invested (at least 95% of its assets) in such tax-exempt municipal bonds. After the completion of the offering through March 31, 2002, the Fund may invest in Out of State Bonds, provided that no more than 10% of the Fund's investment income during that time may be derived from Out of State Bonds. The Fund will purchase Out of State Bonds if other suitable investments are not available. Investment in Out of State Bonds would result in a portion of your dividends being subject to California income taxes. For more information, see the Statement of Additional Information. The Fund will invest at least 80% of its net assets in investment grade quality municipal bonds. Investment grade quality means that such bonds are rated, at the time of investment, within the four highest grades (Baa or BBB or better by Moody's, S&P or Fitch) or are unrated but judged to be of comparable quality by Nuveen Advisory. The Fund may invest up to 20% of its net assets in municipal bonds that are rated, at the time of investment, Ba/BB or B by Moody's, S&P or Fitch or that are unrated but judged to be of comparable quality by Nuveen Advisory. Bonds of below investment grade quality (Ba/BB or below) are commonly referred to as junk bonds. Bonds of below investment grade quality are regarded as having predominately speculative characteristics with respect to capacity to pay interest and repay principal. The foregoing credit quality policies apply only at the time a security is purchased, and the Fund is not required to dispose of a security in the event that a rating agency downgrades its assessment of the credit characteristics of a particular issue. In determining whether to retain or sell such a security, Nuveen Advisory may consider such factors as Nuveen Advisory's assessment of the credit quality of the issuer of such security, the price at which such security could be sold and the rating, if any, assigned to such security by other rating agencies. A general description of Moody's, S&P's and Fitch's ratings of municipal bonds is set forth in Appendix A to the Statement of Additional Information. See "--Municipal Bonds" below for a general description of the economic and credit characteristics of municipal issuers in California. The Fund may also invest in securities of other open- or closed-end investment companies that invest primarily in municipal bonds of the types in which the Fund may invest directly. See "-- Other Investment Companies" and "--Initial Portfolio Composition." The Fund may purchase municipal bonds that are additionally secured by insurance, bank credit agreements, or escrow accounts. The credit quality of companies which provide such credit enhancements will affect the value of those securities. Although the insurance feature reduces certain financial risks, the premiums for insurance and the higher market price paid for insured obligations may reduce the Fund's income. Insurance generally will be obtained from insurers with a claims-paying ability rated Aaa by Moody's or AAA by S&P or Fitch. The insurance feature does not guarantee the market value of the insured obligations or the net asset value of the Common Shares. Upon Nuveen Advisory's recommendation, during temporary defensive periods and in order to keep the Fund's cash fully invested, including the period during which the net proceeds of the offering are being invested, the Fund may invest up to 100% of its net assets in short-term investments including high quality, short-term securities that may be either tax-exempt or taxable. The Fund intends to invest in taxable short-term investments only in the event that suitable tax-exempt short-term investments are not available at reasonable prices and yields. Investment in taxable short-term investments would result in a portion of your dividends being subject to regular federal and California income taxes. For more information, see the Statement of Additional Information. The Fund cannot change its investment objectives without the approval of the holders of a "majority of the outstanding" Common Shares and MuniPreferred Shares voting together as a single 12 class, and of the holders of a "majority of the outstanding" MuniPreferred Shares voting as a separate class. A "majority of the outstanding" Common Shares means (i) 67% or more of the shares present at a meeting, if the holders of more than 50% of the shares are present or represented by proxy, or (ii) more than 50% of the shares, whichever is less. See "Description of Shares--MuniPreferred Shares--Voting Rights" and the Statement of Additional Information under "Description of Shares--MuniPreferred Shares--Voting Rights" for additional information with respect to the voting rights of holders of MuniPreferred Shares. If you are, or as a result of investment in the Fund would become, subject to the federal alternative minimum tax, the Fund may not be a suitable investment for you because the Fund expects that a substantial portion of its investments will pay interest that is taxable under the federal alternative minimum tax. Special rules apply to corporate holders. In addition, capital gain dividends will be subject to capital gains taxes. See "Tax Matters." Municipal Bonds Municipal bonds are either general obligation or revenue bonds and typically are issued to finance public projects (such as roads or public buildings), to pay general operating expenses, or to refinance outstanding debt. Municipal bonds may also be issued for private activities, such as housing, medical and educational facility construction, or for privately owned industrial development and pollution control projects. General obligation bonds are backed by the full faith and credit, or taxing authority, of the issuer and may be repaid from any revenue source; revenue bonds may be repaid only from the revenues of a specific facility or source. The Fund also may purchase municipal bonds that represent lease obligations. These carry special risks because the issuer of the bonds may not be obligated to appropriate money annually to make payments under the lease. In order to reduce this risk, the Fund will only purchase municipal bonds representing lease obligations where Nuveen Advisory believes the issuer has a strong incentive to continue making appropriations until maturity. The municipal bonds in which the Fund will invest are generally issued by the State of California, a city in California, or a political subdivision of such State or city, and pay interest that, in the opinion of bond counsel to the issuer (or on the basis of other authority believed by Nuveen Advisory to be reliable), is exempt from regular federal and California income taxes, although the interest may be subject to the federal alternative minimum tax. The Fund may invest in municipal bonds issued by United States territories (such as Puerto Rico or Guam) that are exempt from regular federal and California income taxes. Through March 31, 2002, the Fund also may invest in Out of State Bonds subject to the limitations described under "--Investment Objectives and Policies." The yields on municipal bonds depend on a variety of factors, including prevailing interest rates and the condition of the general money market and the municipal bond market, the size of a particular offering, the maturity of the obligation and the rating of the issue. The market value of municipal bonds will vary with changes in interest rate levels and as a result of changing evaluations of the ability of their issuers to meet interest and principal payments. The Fund will primarily invest in municipal bonds with long-term maturities in order to maintain a weighted average maturity of 15-30 years, but the weighted average maturity of obligations held by the Fund may be shortened, depending on market conditions. 13 When-Issued and Delayed Delivery Transactions The Fund may buy and sell municipal bonds on a when-issued or delayed delivery basis, making payment or taking delivery at a later date, normally within 15 to 45 days of the trade date. This type of transaction may involve an element of risk because no interest accrues on the bonds prior to settlement and, since bonds are subject to market fluctuations, the value of the bonds at time of delivery may be less (or more) than cost. A separate account of the Fund will be established with its custodian consisting of cash, cash equivalents, or liquid securities having a market value at all times at least equal to the amount of the commitment. Other Investment Companies The Fund may invest up to 10% of its net assets in securities of other open- or closed-end investment companies that invest primarily in municipal bonds of the types in which the Fund may invest directly. The Fund generally expects to invest in other investment companies either during periods when it has large amounts of uninvested cash, such as the period shortly after the Fund receives the proceeds of the offering of its Common Shares or MuniPreferred Shares, or during periods when there is a shortage of attractive, high-yielding municipal bonds available in the market. As a stockholder in an investment company, the Fund will bear its ratable share of that investment company's expenses, and would remain subject to payment of the Fund's advisory and administrative fees with respect to assets so invested. Common Shareholders would therefore be subject to duplicative expenses to the extent the Fund invests in other investment companies. Nuveen Advisory will take expenses into account when evaluating the investment merits of an investment in the investment company relative to available municipal bond investments. In addition, the securities of other investment companies may also be leveraged and will therefore be subject to the same leverage risks described herein. As described in the section entitled "Risks," the net asset value and market value of leveraged shares will be more volatile and the yield to shareholders will tend to fluctuate more than the yield generated by unleveraged shares. Initial Portfolio Composition If current market conditions persist, the Fund expects that approximately 95% of its initial portfolio will consist of investment grade quality municipal bonds, rated as such at the time of investment, meaning that such bonds are rated by national rating agencies within the four highest grades or are unrated but judged to be of comparable quality by Nuveen Advisory (approximately 50% in Aaa/AAA; 5% in Aa/AA; 25% in A and 15% in Baa/BBB). The Fund will generally select obligations which may not be redeemed at the option of the issuer for approximately seven to nine years from the date of purchase by the Fund. See the Statement of Additional Information under "Other Investment Policies and Techniques--Portfolio Trading and Turnover Rate." Subject to market availability, the Fund would likely seek to invest approximately 5% of its initial portfolio in municipal bonds that are, at the time of investment, either rated below investment grade or that are unrated but judged to be of comparable quality by Nuveen Advisory. See "--Investment Objectives and Policies." MUNIPREFERRED SHARES AND LEVERAGE Subject to market conditions, approximately one to three months after the completion of the offering of the Common Shares, the Fund intends to offer MuniPreferred Shares representing approximately 35% of the Fund's capital immediately after the issuance of the MuniPreferred Shares. 14 The MuniPreferred Shares have complete priority upon distribution of assets over the Common Shares. The issuance of MuniPreferred Shares will leverage the Common Shares. Leverage involves special risks. There is no assurance that the Fund's leveraging strategy will be successful. Although the timing and other terms of the offering of the MuniPreferred Shares will be determined by the Fund's Board of Trustees, the Fund expects to invest the proceeds of the MuniPreferred Shares offering in long-term municipal bonds. The MuniPreferred Shares will pay dividends based on shorter-term rates (which would be redetermined periodically by an auction process). So long as the Fund's portfolio is invested in securities that provide a higher rate of return than the dividend rate of the MuniPreferred Shares (after taking expenses into consideration), the leverage will cause you to receive a higher current rate of return than if the Fund were not leveraged. Changes in the value of the Fund's bond portfolio (including bonds bought with the proceeds of the MuniPreferred Shares offering) will be borne entirely by the Common Shareholders. If there is a net decrease (or increase) in the value of the Fund's investment portfolio, the leverage will decrease (or increase) the net asset value per Common Share to a greater extent than if the Fund were not leveraged. During periods in which the Fund is using leverage, the fees paid to Nuveen Advisory for advisory services will be higher than if the Fund did not use leverage because the fees paid will be calculated on the basis of the Fund's total net assets, including the proceeds from the issuance of MuniPreferred Shares. For tax purposes, the Fund is currently required to allocate net capital gain and other taxable income, if any, between the Common Shares and MuniPreferred Shares in proportion to total distributions paid to each class for the year in which the net capital gain or other taxable income is realized. If net capital gain or other taxable income is allocated to MuniPreferred Shares (instead of solely tax-exempt income), the Fund will likely have to pay higher total dividends to MuniPreferred Shareholders or make special payments to MuniPreferred Shareholders to compensate them for the increased tax liability. This would reduce the total amount of dividends paid to the Common Shareholders, but would increase the portion of the dividend that is tax-exempt. On an after-tax basis, Common Shareholders may still be better off than if they had been allocated all of the Fund's net capital gain or other taxable income (resulting in a higher amount of total dividends), but received a lower amount of tax-exempt income. If the increase in dividend payments or the special payments to MuniPreferred Shareholders are not entirely offset by a reduction in the tax liability of, and an increase in the tax-exempt dividends received by, the Common Shareholders, the advantage of the Fund's leveraged structure to Common Shareholders will be reduced. Under the 1940 Act, the Fund is not permitted to issue preferred shares unless immediately after such issuance the value of the Fund's total net assets is at least 200% of the liquidation value of the outstanding preferred shares (i.e., such liquidation value may not exceed 50% of the Fund's total net assets). In addition, the Fund is not permitted to declare any cash dividend or other distribution on its Common Shares unless, at the time of such declaration, the value of the Fund's total net assets is at least 200% of such liquidation value. If MuniPreferred Shares are issued, the Fund intends, to the extent possible, to purchase or redeem MuniPreferred Shares from time to time to the extent necessary in order to maintain coverage of any MuniPreferred Shares of at least 200%. If the Fund has MuniPreferred Shares outstanding, two of the Fund's trustees will be elected by the holders of MuniPreferred Shares, voting separately as a class. The remaining trustees of the Fund will be elected by holders of Common Shares and MuniPreferred Shares voting together as a single class. In the event the Fund failed to pay 15 dividends on MuniPreferred Shares for two years, MuniPreferred Shareholders would be entitled to elect a majority of the trustees of the Fund. The Fund may be subject to certain restrictions imposed by guidelines of one or more rating agencies which may issue ratings for MuniPreferred Shares issued by the Fund. These guidelines may impose asset coverage or portfolio composition requirements that are more stringent than those imposed on the Fund by the 1940 Act. It is not anticipated that these covenants or guidelines will impede Nuveen Advisory from managing the Fund's portfolio in accordance with the Fund's investment objectives and policies. The Fund may also borrow money for repurchase of its shares or as a temporary measure for extraordinary or emergency purposes, including the payment of dividends and the settlement of securities transactions which otherwise might require untimely dispositions of Fund securities. Assuming that the MuniPreferred Shares will represent approximately 35% of the Fund's capital and pay dividends at an annual average rate of 2.70%, the income generated by the Fund's portfolio (net of estimated expenses) must exceed 0.94% in order to cover such dividend payments and other expenses specifically related to the MuniPreferred Shares. Of course, these numbers are merely estimates, used for illustration. Actual MuniPreferred Share dividend rates will vary frequently and may be significantly higher or lower than the rate estimated above. The following table is furnished in response to requirements of the Securities and Exchange Commission. It is designed to illustrate the effect of leverage on Common Share total return, assuming investment portfolio total returns (comprised of income and changes in the value of bonds held in the Fund's portfolio) of -10%, -5%, 0%, 5% and 10%. These assumed investment portfolio returns are hypothetical figures and are not necessarily indicative of the investment portfolio returns expected to be experienced by the Fund. The table further reflects the issuance of MuniPreferred Shares representing 35% of the Fund's total capital, a 4.70% yield on the Fund's investment portfolio, net of expenses, and the Fund's currently projected annual MuniPreferred Share dividend rate of 2.70%. See "Risks" and "MuniPreferred Shares and Leverage." Assumed Portfolio Total Return............ (10.00)% (5.00)% 0.00% 5.00% 10.00% Common Share Total Return................. (16.84)% (9.15)% (1.45)% 6.24% 13.93%
Common Share total return is composed of two elements--the Common Share dividends paid by the Fund (the amount of which is largely determined by the net investment income of the Fund after paying dividends on MuniPreferred Shares) and gains or losses on the value of the securities the Fund owns. As required by Securities and Exchange Commission rules, the table assumes that the Fund is more likely to suffer capital losses than to enjoy capital appreciation. For example, to assume a total return of 0%, the Fund must assume that the tax-exempt interest it receives on its municipal bond investments is entirely offset by losses in the value of those bonds. Unless and until MuniPreferred Shares are issued, the Common Shares will not be leveraged and this section will not apply. 16 RISKS The net asset value of the Common Shares will fluctuate with and be affected by, among other things, interest rate risk, credit risk, reinvestment risk and leverage risk, and an investment in Common Shares will be subject to market discount risk, inflation risk and municipal bond market risk, each of which is more fully described below. Newly Organized. The Fund is a newly organized, non-diversified, closed-end management investment company and has no operating history. Market Discount Risk. Shares of closed-end management investment companies frequently trade at a discount from their net asset value. Interest Rate Risk. Interest rate risk is the risk that bonds (and the Fund's net assets) will decline in value because of changes in interest rates. Generally, municipal bonds will decrease in value when interest rates rise and increase in value when interest rates decline. This means that the net asset value of the Common Shares will fluctuate with interest rate changes and the corresponding changes in the value of the Fund's municipal bond holdings. The value of the longer-term bonds in which the Fund generally invests fluctuates more in response to changes in interest rates than does the value of shorter- term bonds. Conversely, the values of lower-rated and comparable unrated debt securities are less likely than those of investment grade and comparable unrated debt securities to fluctuate inversely with changes in interest rates. Because the Fund will invest primarily in long-term bonds, the Common Share net asset value and market price per share will fluctuate more in response to changes in market interest rates than if the Fund invested primarily in shorter-term bonds. The Fund's use of leverage, as described below, will tend to increase Common Share interest rate risk. Credit Risk. Credit risk is the risk that an issuer of a municipal bond will become unable to meet its obligation to make interest and principal payments. In general, lower rated municipal bonds carry a greater degree of risk that the issuer will lose its ability to make interest and principal payments, which could have a negative impact on the Fund's net asset value or dividends. The Fund may invest up to 20% of its net assets in municipal bonds that are rated Ba/BB or B by Moody's, S&P or Fitch or that are unrated but judged to be of comparable quality by the Fund's investment adviser. Bonds rated Ba/BB or B are regarded as having predominately speculative characteristics with respect to capacity to pay interest and repay principal, and these bonds are commonly referred to as junk bonds. The prices of these lower grade bonds are more sensitive to negative developments, such as a decline in the issuer's revenues or a general economic downturn, than are the prices of higher grade securities. Concentration Risk. As described above, except to the extent the Fund invests in temporary investments, the Fund will invest substantially all of its net assets in California municipal bonds. The Fund is therefore susceptible to political, economic or regulatory factors affecting issuers of California municipal bonds. The information set forth below and in the Statement of Additional Information is derived from sources that are generally available to investors. The information is intended to give recent historical description and is not intended to indicate future or continuing trends in the financial or other positions of California. It should be noted that the creditworthiness of obligations issued by local California issuers may be unrelated to the creditworthiness of obligations issued by the State of California, and that there is no obligation on the part of the State to make payment on such local obligations in the event of default. California's economy is the largest among the 50 states and one of the largest in the world. The State has a diversified economy with major sectors in manufacturing, agriculture, services, tourism, 17 international trade and construction. The State has a population of over 34 million, which has been growing at a 1-2% annual rate for several decades. Gross domestic product of goods and services in the State exceeds $1 trillion. Personal income was estimated at over $991 billion in 1999. Total employment is over 15 million. Since 1994 the California economy has been growing strongly, outpacing the rest of the nation, with particular strength in high technology manufacturing, software, exports, services, entertainment and construction. Unemployment is at its lowest level in three decades. Economic growth remained very strong through 2000, but is projected to slow in 2001, in response to the national economic slowdown. California has experienced shortages of and increased prices for natural gas and electricity, which may also adversely impact the economy if they result in significant blackouts or other disruptions in power supplies. In response to the energy difficulties, which have severely weakened the financial condition of the three investor-owned utility companies serving most of the State, the State has entered the electricity market to purchase power on behalf of retail customers. Such purchases will be repaid from customer payments and long-term revenue bond debt. The State has received significant tax revenues in recent years, derived from the strong economy and stock market. General Fund revenues are estimated at $71.9 billion in fiscal year 1999-2000 and $77 billion in fiscal year 2000- 01. Revenue growth is expected to slow compared to the last two years, to about $79.4 billion in fiscal year 2001-02, in response to the decline in the stock markets and slower economic growth; State revenues could be adversely impacted even more if the economy is weaker than expected in 2001. A large part of the State's annual budget is mandated by constitutional guarantees (such as for education funding and debt service) and caseload requirements for health and welfare programs. State General Obligations bonds are, as of March 1, 2001, rated "Aa2" by Moody's, "AA" by S&P, and "AA" by Fitch although S&P placed the ratings on CreditWatch in January, 2001. Many local government agencies, particularly counties, continue to face budget constraints due to limited taxing powers and mandated expenditures for health, welfare and public safety, among other factors. The State and local governments are limited in their ability to levy and raise property taxes and other forms of taxes, fees or assessments, and in their ability to appropriate their tax revenues, by a series of constitutional amendments, enacted by voter initiative since 1978. Individual local governments may also have local initiatives which affect their fiscal flexibility. The foregoing information constitutes only a brief summary of some of the general factors which may impact certain issuers of municipal bonds and does not purport to be a complete or exhaustive description of all adverse conditions to which the issuers of municipal bonds held by the Fund are subject. Additionally, many factors including national economic, social and environmental policies and conditions, which are not within the control of the issuers of the municipal bonds, could affect or could have an adverse impact on the financial condition of the issuers. The Fund is unable to predict whether or to what extent such factors or other factors may affect the issuers of the municipal bonds, the market value or marketability of the municipal bonds or the ability of the respective issuers of the municipal bonds acquired by the Fund to pay interest on or principal of the municipal bonds. This information has not been independently verified. See the Statement of Additional Information for a further discussion of factors affecting municipal bonds in California. Municipal Bond Market Risk. Investing in the municipal bond market involves certain risks. The amount of public information available about the municipal bonds in the Fund's portfolio is generally less than that for corporate equities or bonds, and the investment performance of the Fund may 18 therefore be more dependent on the analytical abilities of Nuveen Advisory than would be a stock fund or taxable bond fund. The secondary market for municipal bonds, particularly the below investment grade bonds in which the Fund may invest, also tends to be less well-developed or liquid than many other securities markets, which may adversely affect the Fund's ability to sell its bonds at attractive prices. The ability of municipal issuers to make timely payments of interest and principal may be diminished during general economic downturns and as governmental cost burdens are reallocated among federal, state and local governments. In addition, laws enacted in the future by Congress or state legislatures or referenda could extend the time for payment of principal and/or interest, or impose other constraints on enforcement of such obligations, or on the ability of municipalities to levy taxes. Issuers of municipal securities might seek protection under the bankruptcy laws. In the event of bankruptcy of such an issuer, the Fund could experience delays in collecting principal and interest and the Fund may not, in all circumstances, be able to collect all principal and interest to which it is entitled. To enforce its rights in the event of a default in the payment of interest or repayment of principal, or both, the Fund may take possession of and manage the assets securing the issuer's obligations on such securities, which may increase the Fund's operating expenses. Any income derived from the Fund's ownership or operation of such assets may not be tax-exempt. Reinvestment Risk. Reinvestment risk is the risk that income from the Fund's bond portfolio will decline if and when the Fund invests the proceeds from matured, traded or called bonds at market interest rates that are below the portfolio's current earnings rate. A decline in income could affect the Common Shares' market price or their overall returns. Leverage Risk. Leverage risk is the risk associated with the issuance of the MuniPreferred Shares to leverage the Common Shares. There can be no assurance that the Fund's leveraging strategy will be successful. Once the MuniPreferred Shares are issued, the net asset value and market value of Common Shares will be more volatile, and the yield to Common Shareholders will tend to fluctuate with changes in the shorter-term dividend rates on the MuniPreferred Shares. Long-term municipal bond rates of return are typically, although not always, higher than shorter-term municipal bond rates of return. If the dividend rate on the MuniPreferred Shares approaches the net rate of return on the Fund's investment portfolio, the benefit of leverage to Common Shareholders would be reduced. If the dividend rate on the MuniPreferred Shares exceeds the net rate of return on the Fund's portfolio, the leverage will result in a lower rate of return to Common Shareholders than if the Fund were not leveraged. Because the long-term bonds included in the Fund's portfolio will typically pay fixed rates of interest while the dividend rate on the MuniPreferred Shares will be adjusted periodically, this could occur even when both long-term and short-term municipal rates rise. In addition, the Fund will pay (and Common Shareholders will bear) any costs and expenses relating to the issuance and ongoing maintenance of the MuniPreferred Shares. Accordingly, the Fund cannot assure you that the issuance of MuniPreferred Shares will result in a higher yield or return to Common Shareholders. Similarly, any decline in the net asset value of the Fund's investments will be borne entirely by Common Shareholders. Therefore, if the market value of the Fund's portfolio declines, the leverage will result in a greater decrease in net asset value to Common Shareholders than if the Fund were not leveraged. Such greater net asset value decrease will also tend to cause a greater decline in the market price for the Common Shares. The Fund might be in danger of failing to maintain the required 200% asset coverage or of losing its expected AAA/aaa ratings on the MuniPreferred Shares or, in an extreme case, the Fund's current investment income might not be sufficient to meet the dividend requirements 19 on the MuniPreferred Shares. In order to counteract such an event, the Fund might need to liquidate investments in order to fund a redemption of some or all of the MuniPreferred Shares. Liquidation at times of low municipal bond prices may result in capital loss and may reduce returns to Common Shareholders. While the Fund may from time to time consider reducing leverage in response to actual or anticipated changes in interest rates in an effort to mitigate the increased volatility of current income and net asset value associated with leverage, there can be no assurance that the Fund will actually reduce leverage in the future or that any reduction, if undertaken, will benefit the Common Shareholders. Changes in the future direction of interest rates are very difficult to predict accurately. If the Fund were to reduce leverage based on a prediction about future changes to interest rates, and that prediction turned out to be incorrect, the reduction in leverage would likely operate to reduce the income and/or total returns to Common Shareholders relative to the circumstance where the Fund had not reduced leverage. The Fund may decide that this risk outweighs the likelihood of achieving the desired reduction to volatility in income and share price if the prediction were to turn out to be correct, and determine not to reduce leverage as described above. The Fund may invest in the securities of other investment companies. Such securities may also be leveraged and will therefore be subject to the leverage risks described above. Such additional leverage may in certain market conditions serve to reduce the net asset value of the Fund's Common Shares and the returns to Common Shareholders. Inflation Risk. Inflation risk is the risk that the value of assets or income from investment will be worth less in the future as inflation decreases the value of money. As inflation increases, the real value of the Common Shares and distributions can decline. In addition, during any periods of rising inflation, MuniPreferred Share dividend rates would likely increase, which would tend to further reduce returns to Common Shareholders. Non-Diversification. Because the Fund is classified as "non-diversified" under the 1940 Act it can invest a greater portion of its assets in obligations of a single issuer. As a result, the Fund will be more susceptible than a more widely diversified fund to any single corporate, economic, political or regulatory occurrence. See "The Fund's Investments." In addition, the Fund must satisfy certain asset diversification rules in order to qualify as a regulated investment company for federal income tax purposes. HOW THE FUND MANAGES RISK Investment Limitations The Fund has adopted certain investment limitations designed to limit investment risk and maintain portfolio diversification. These limitations are fundamental and may not be changed without the approval of the holders of a majority of the outstanding Common Shares and, if issued, MuniPreferred Shares voting together as a single class, and the approval of the holders of a majority of the MuniPreferred Shares voting as a separate class. Among other restrictions, the Fund may not invest more than 25% of total Fund assets in securities of issuers in any one industry, except that this limitation does not apply to municipal bonds backed by the assets and revenues of governments or political subdivisions of governments. 20 The Fund may become subject to guidelines which are more limiting than the investment restriction set forth above in order to obtain and maintain ratings from Moody's or S&P on the MuniPreferred Shares that it intends to issue. The Fund does not anticipate that such guidelines would have a material adverse effect on the Fund's Common Shareholders or the Fund's ability to achieve its investment objectives. See "Investment Objectives" in the Statement of Additional Information for information about these guidelines and a complete list of the fundamental and non-fundamental investment policies of the Fund. Quality Investments The Fund will invest at least 80% of its net assets in bonds of investment grade quality at the time of investment. Investment grade quality means that such bonds are rated by national rating agencies within the four highest grades (Baa or BBB or better by Moody's, S&P or Fitch) or are unrated but judged to be of comparable quality by Nuveen Advisory. Limited Issuance of MuniPreferred Shares Under the 1940 Act, the Fund could issue MuniPreferred Shares having a total liquidation value (original purchase price of the shares being liquidated plus any accrued and unpaid dividends) of up to one-half of the value of the total net assets of the Fund. If the total liquidation value of the MuniPreferred Shares was ever more than one-half of the value of the Fund's total net assets, the Fund would not be able to declare dividends on the Common Shares until the liquidation value, as a percentage of the Fund's assets, was reduced. The Fund intends to issue MuniPreferred Shares representing about 35% of the Fund's total capital immediately after the time of issuance, if the Fund sells all the Common Shares discussed in this Prospectus. This higher than required margin of net asset value provides a cushion against later fluctuations in the value of the Fund's portfolio and will subject Common Shareholders to less income and net asset value volatility than if the Fund were more leveraged. The Fund intends to purchase or redeem MuniPreferred Shares, if necessary, to keep the liquidation value of the MuniPreferred Shares below one-half of the value of the Fund's total net assets. Management of Investment Portfolio and Capital Structure to Limit Leverage Risk The Fund may take certain actions if short-term interest rates increase or market conditions otherwise change (or the Fund anticipates such an increase or change) and the Fund's leverage begins (or is expected) to adversely affect Common Shareholders. In order to attempt to offset such a negative impact of leverage on Common Shareholders, the Fund may shorten the average maturity of its investment portfolio (by investing in short-term, high quality securities) or may extend the maturity of outstanding MuniPreferred Shares. The Fund may also attempt to reduce the leverage by redeeming or otherwise purchasing MuniPreferred Shares. As explained above under "Risks--Leverage Risk," the success of any such attempt to limit leverage risk depends on Nuveen Advisory's ability to accurately predict interest rate or other market changes. Because of the difficulty of making such predictions, the Fund may never attempt to manage its capital structure in the manner described above. If market conditions suggest that additional leverage would be beneficial, the Fund may sell previously unissued MuniPreferred Shares or MuniPreferred Shares that the Fund previously issued but later repurchased. Currently, the Fund may not invest in inverse floating rate securities, which are securities that pay interest at rates that vary inversely with changes in prevailing short-term tax-exempt interest rates and which represent a leveraged investment in an underlying municipal bond. This restriction is a non-fundamental policy of the Fund that may be changed by vote of the Fund's Board of Trustees. 21 Hedging Strategies The Fund may use various investment strategies designed to limit the risk of bond price fluctuations and to preserve capital. These hedging strategies include using financial futures contracts, options on financial futures or options based on either an index of long-term municipal securities or on taxable debt securities whose prices, in the opinion of Nuveen Advisory, correlate with the prices of the Fund's investments. Successful implementation of most hedging strategies would generate taxable income, and the Fund has no present intention to use these strategies. MANAGEMENT OF THE FUND Trustees and Officers The Board of Trustees is responsible for the management of the Fund, including supervision of the duties performed by Nuveen Advisory. There are seven trustees of the Fund, one of whom is an "interested person" (as defined in the 1940 Act) and six of whom are not "interested persons." The names and business addresses of the trustees and officers of the Fund and their principal occupations and other affiliations during the past five years are set forth under "Management of the Fund" in the Statement of Additional Information. Investment Adviser Nuveen Advisory, 333 West Wacker Drive, Chicago, Illinois 60606, serves as the investment adviser to the Fund. In this capacity, Nuveen Advisory is responsible for the selection and on-going monitoring of the municipal bonds in the Fund's investment portfolio, managing the Fund's business affairs and providing certain clerical, bookkeeping and administrative services. Nuveen Advisory serves as investment adviser to investment portfolios with more than $35 billion in assets under management. See the Statement of Additional Information under "Investment Adviser." Nuveen Advisory is responsible for execution of specific investment strategies and day-to-day investment operations. Nuveen Advisory manages the Fund using a team of analysts and portfolio managers that focus on a specific group of funds. William M. Fitzgerald is the portfolio manager of the Fund and will provide daily oversight for, and execution of, the Fund's investment activities. Mr. Fitzgerald has been a Managing Director of Nuveen Advisory since 2000. Prior to that time, he was a Vice President of Nuveen Advisory. Mr. Fitzgerald has been a portfolio manager for Nuveen Advisory since 1990, and currently manages investments for twelve Nuveen-sponsored investment companies. Nuveen Advisory is a wholly owned subsidiary of Nuveen, 333 West Wacker Drive, Chicago, Illinois 60606. Founded in 1898, Nuveen and its affiliates have over $61 billion of net assets under management or surveillance. Nuveen is a subsidiary of The John Nuveen Company which, in turn, is a majority-owned subsidiary of The St. Paul Companies, Inc., a publicly-traded company which is principally engaged in providing property-liability insurance through subsidiaries. Investment Management Agreement Pursuant to an investment management agreement between Nuveen Advisory and the Fund, the Fund has agreed to pay for the services and facilities provided by Nuveen Advisory an annual management fee, payable on a monthly basis, according to the following schedule:
Average Daily Net Assets(/1/) Management Fee ----------------------------- -------------- Up to $125 million......................................... .6500% $125 million to $250 million............................... .6375% $250 million to $500 million............................... .6250% $500 million to $1 billion................................. .6125% $1 billion to $2 billion................................... .6000% $2 billion and over........................................ .5750%
- -------- (1) Including net assets attributable to MuniPreferred Shares. 22 In addition to the fee of Nuveen Advisory, the Fund pays all other costs and expenses of its operations, including compensation of its trustees (other than those affiliated with Nuveen Advisory), custodian, transfer agency and dividend disbursing expenses, legal fees, expenses of independent auditors, expenses of repurchasing shares, expenses of issuing any MuniPreferred Share, expenses of preparing, printing and distributing shareholder reports, notices, proxy statements and reports to governmental agencies, and taxes, if any. For the first ten years of the Fund's operation, Nuveen Advisory has contractually agreed to reimburse the Fund for fees and expenses in the amounts, and for the time periods, set forth below:
Percentage Reimbursed (as a percentage Year Ending of average daily March 31 net assets)(/1/) ----------- ---------------- 2001(/2/)....... 0.30% 2002............ 0.30% 2003............ 0.30% 2004............ 0.30% 2005............ 0.30% 2006............ 0.30%
Percentage Reimbursed (as a percentage Year Ending of average daily March 31 net assets)(/1/) ----------- ---------------- 2007............ 0.25% 2008............ 0.20% 2009............ 0.15% 2010............ 0.10% 2011............ 0.05%
- -------- (1) Including net assets attributable to MuniPreferred Shares. (2) From the commencement of operations. Nuveen Advisory has not agreed to reimburse the Fund for any portion of its fees and expenses beyond March 31, 2011. NET ASSET VALUE The Fund's net asset value per share is determined as of the close of regular session trading (normally 4:00 p.m. eastern time) on each day the New York Stock Exchange is open for business. Net asset value is calculated by taking the fair value of the Fund's total assets, including interest or dividends accrued but not yet collected, less all liabilities, and dividing by the total number of shares outstanding. The result, rounded to the nearest cent, is the net asset value per share. In determining net asset value, expenses are accrued and applied daily and securities and other assets for which market quotations are available are valued at market value. The prices of municipal bonds are provided by a pricing service and based on the mean between the bid and asked price. When price quotes are not readily available (which is usually the case for municipal bonds), the pricing service establishes a fair market value based on prices of comparable municipal bonds. All valuations are subject to review by the Fund's Board of Trustees or its delegate, Nuveen Advisory. DISTRIBUTIONS Commencing with the first dividend, the Fund intends to make regular monthly cash distributions to Common Shareholders at a rate that reflects the past and projected performance of the Fund. Distributions can only be made from net investment income after paying any accrued dividends to MuniPreferred Shareholders. The Fund's ability to maintain a level dividend rate will depend on a number of factors, including dividends payable on the MuniPreferred Shares. The net income of the 23 Fund consists of all interest income accrued on portfolio assets less all expenses of the Fund. Expenses of the Fund are accrued each day. Over time, all the net investment income of the Fund will be distributed. At least annually, the Fund also intends to distribute net capital gain and ordinary taxable income, if any, after paying any accrued dividends or making any liquidation payments to MuniPreferred Shareholders. Initial distributions to Common Shareholders are expected to be declared approximately 45 days, and paid approximately 60 to 90 days, from the completion of this offering, depending on market conditions. Although it does not now intend to do so, the Board of Trustees may change the Fund's dividend policy and the amount or timing of the distributions, based on a number of factors, including the amount of the Fund's undistributed net investment income and historical and projected investment income and the amount of the expenses and dividend rates on the outstanding MuniPreferred Shares. To permit the Fund to maintain a more stable monthly distribution, the Fund will initially distribute less than the entire amount of net investment income earned in a particular period. The undistributed net investment income would be available to supplement future distributions. As a result, the distributions paid by the Fund for any particular monthly period may be more or less than the amount of net investment income actually earned by the Fund during the period. Undistributed net investment income will be added to the Fund's net asset value and, correspondingly, distributions from undistributed net investment income will be deducted from the Fund's net asset value. DIVIDEND REINVESTMENT PLAN You may elect to have all dividends, including any capital gain dividends, on your Common Shares automatically reinvested by The Chase Manhattan Bank, as agent for the Common Shareholders (the "Plan Agent"), in additional Common Shares under the Dividend Reinvestment Plan (the "Plan"). You may elect to participate in the Plan by completing the Dividend Reinvestment Plan Application Form. If you do not participate, you will receive all distributions in cash paid by check mailed directly to you by The Chase Manhattan Bank as dividend paying agent. If you decide to participate in the Plan, the number of Common Shares you will receive will be determined as follows: (1) If Common Shares are trading at or above net asset value at the time of valuation, the Fund will issue new shares at the then current market price; or (2) If Common Shares are trading below net asset value at the time of valuation, the Plan Agent will receive the dividend or distribution in cash and will purchase Common Shares in the open market, on the American Stock Exchange or elsewhere, for the participants' accounts. It is possible that the market price for the Common Shares may increase before the Plan Agent has completed its purchases. Therefore, the average purchase price per share paid by the Plan Agent may exceed the market price at the time of valuation, resulting in the purchase of fewer shares than if the dividend or distribution had been paid in Common Shares issued by the Fund. The Plan Agent will use all dividends and distributions received in cash to purchase Common Shares in the open market within 30 days of the dividend payment date. Interest will not be paid on any uninvested cash payments. You may withdraw from the Plan at any time by giving written notice to the Plan Agent. If you withdraw or the Plan is terminated, you will receive a certificate for each whole share in your account under the Plan and you will receive a cash payment for any fraction of a share in your account. If you wish, the Plan Agent will sell your shares and send you the proceeds, minus brokerage commissions and a $2.50 service fee. 24 The Plan Agent maintains all shareholders' accounts in the Plan and gives written confirmation of all transactions in the accounts, including information you may need for tax records. Common Shares in your account will be held by the Plan Agent in non-certificated form. Any proxy you receive will include all Common Shares you have received under the Plan. There is no brokerage charge for reinvestment of your dividends or distributions in Common Shares. However, all participants will pay a pro rata share of brokerage commissions incurred by the Plan Agent when it makes open market purchases. Automatically reinvesting dividends and distributions does not mean that you do not have to pay income taxes due upon receiving dividends and distributions. The Fund reserves the right to amend or terminate the Plan if in the judgment of the Board of Trustees the change is warranted. There is no direct service charge to participants in the Plan; however, the Fund reserves the right to amend the Plan to include a service charge payable by the participants. Additional information about the Plan may be obtained from The Chase Manhattan Bank, P.O. Box 660086, Dallas, Texas 75266-0086. DESCRIPTION OF SHARES Common Shares The Declaration authorizes the issuance of an unlimited number of Common Shares, par value $.01 per share. All Common Shares have equal rights to the payment of dividends and the distribution of assets upon liquidation. Common Shares will, when issued, be fully paid and, subject to matters discussed in "Certain Provisions in the Declaration of Trust," non-assessable, and will have no pre-emptive or conversion rights or rights to cumulative voting. Whenever MuniPreferred Shares are outstanding, Common Shareholders will not be entitled to receive any distributions from the Fund unless all accrued dividends on MuniPreferred Shares have been paid, and unless asset coverage (as defined in the 1940 Act) with respect to MuniPreferred Shares would be at least 200% after giving effect to the distributions. See "--MuniPreferred Shares" below. The Common Shares have been approved for listing on the American Stock Exchange, subject to notice of issuance. The Fund intends to hold annual meetings of shareholders so long as the Common Shares are listed on a national securities exchange and such meetings are required as a condition to such listing. The Fund's net asset value per share generally increases when interest rates decline, and decreases when interest rates rise, and these changes are likely to be greater because the Fund intends to have a leveraged capital structure. Net asset value will be reduced immediately following the offering by the amount of the sales load and organization and offering expenses paid by the Fund. Nuveen has agreed to pay (i) all organizational expenses and (ii) offering costs (other than sales load) that exceed $0.03 per Common Share. See "Use of Proceeds." Unlike open-end funds, closed-end funds like the Fund do not continuously offer shares and do not provide daily redemptions. Rather, if a shareholder determines to buy additional Common Shares or sell shares already held, the shareholder may conveniently do so by trading on the exchange through a broker or otherwise. Shares of closed-end investment companies may frequently trade on an exchange at prices lower than net asset value. Shares of closed-end investment companies like the Fund that 25 invest predominately in investment grade municipal bonds have during some periods traded at prices higher than net asset value and during other periods have traded at prices lower than net asset value. Because the market value of the Common Shares may be influenced by such factors as dividend levels (which are in turn affected by expenses), call protection, dividend stability, portfolio credit quality, net asset value, relative demand for and supply of such shares in the market, general market and economic conditions, and other factors beyond the control of the Fund, the Fund cannot assure you that Common Shares will trade at a price equal to or higher than net asset value in the future. The Common Shares are designed primarily for long-term investors, and investors in the Common Shares should not view the Fund as a vehicle for trading purposes. See "MuniPreferred Shares and Leverage" and the Statement of Additional Information under "Repurchase of Fund Shares; Conversion to Open- End Fund." MuniPreferred Shares The Declaration authorizes the issuance of an unlimited number of MuniPreferred Shares, par value $0.01 per share, in one or more classes or series, with rights as determined by the Board of Trustees, by action of the Board of Trustees without the approval of the Common Shareholders. The Fund's Board of Trustees has indicated its intention to authorize an offering of MuniPreferred Shares (representing approximately 35% of the Fund's capital immediately after the time the MuniPreferred Shares are issued) approximately one to three months after completion of the offering of Common Shares. Any such decision is subject to market conditions and to the Board's continuing belief that leveraging the Fund's capital structure through the issuance of MuniPreferred Shares is likely to achieve the benefits to the Common Shareholders described in this Prospectus. Although the terms of the MuniPreferred Shares will be determined by the Board of Trustees (subject to applicable law and the Fund's Declaration) if and when it authorizes a MuniPreferred Shares offering, the Board has determined that the MuniPreferred Shares, at least initially, would likely pay cumulative dividends at rates determined over relatively shorter-term periods (such as 7 days), by providing for the periodic redetermination of the dividend rate through an auction or remarketing procedure. The Board of Trustees has indicated that the preference on distribution, liquidation preference, voting rights and redemption provisions of the MuniPreferred Shares will likely be as stated below. Limited Issuance of MuniPreferred Shares. Under the 1940 Act, the Fund could issue MuniPreferred Shares with an aggregate liquidation value of up to one-half of the value of the Fund's total net assets, measured immediately after issuance of the MuniPreferred Shares. "Liquidation value" means the original purchase price of the shares being liquidated plus any accrued and unpaid dividends. In addition, the Fund is not permitted to declare any cash dividend or other distribution on its Common Shares unless the liquidation value of the MuniPreferred Shares is less than one-half of the value of the Fund's total net assets (determined after deducting the amount of such dividend or distribution) immediately after the distribution. If the Fund sells all the Common Shares and MuniPreferred Shares discussed in this Prospectus, the liquidation value of the MuniPreferred Shares is expected to be approximately 35% of the value of the Fund's total net assets. The Fund intends to purchase or redeem MuniPreferred Shares, if necessary, to keep that fraction below one-half. Distribution Preference. The MuniPreferred Shares have complete priority over the Common Shares as to distribution of assets. Liquidation Preference. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Fund, holders of MuniPreferred Shares will be entitled to receive a preferential liquidating distribution (expected to equal the original purchase price per share plus 26 accumulated and unpaid dividends thereon, whether or not earned or declared) before any distribution of assets is made to holders of Common Shares. Voting Rights. MuniPreferred Shares are required to be voting shares and to have equal voting rights with Common Shares. Except as otherwise indicated in this Prospectus or the Statement of Additional Information and except as otherwise required by applicable law, holders of MuniPreferred Shares will vote together with Common Shareholders as a single class. Holders of MuniPreferred Shares, voting as a separate class, will be entitled to elect two of the Fund's trustees. The remaining trustees will be elected by Common Shareholders and holders of MuniPreferred Shares, voting together as a single class. In the unlikely event that two full years of accrued dividends are unpaid on the MuniPreferred Shares, the holders of all outstanding MuniPreferred Shares, voting as a separate class, will be entitled to elect a majority of the Fund's trustees until all dividends in arrears have been paid or declared and set apart for payment. In order for the Fund to take certain actions or enter into certain transactions, a separate class vote of holders of MuniPreferred Shares will be required, in addition to the single class vote of the holders of MuniPreferred Shares and Common Shares. See the Statement of Additional Information under "Description of Shares-- MuniPreferred Shares--Voting Rights." Redemption, Purchase and Sale of MuniPreferred Shares. The terms of the MuniPreferred Shares may provide that they are redeemable at certain times, in whole or in part, at the original purchase price per share plus accumulated dividends. The terms may also state that the Fund may tender for or purchase MuniPreferred Shares and resell any shares so tendered. Any redemption or purchase of MuniPreferred Shares by the Fund will reduce the leverage applicable to Common Shares, while any resale of shares by the Fund will increase such leverage. See "MuniPreferred Shares and Leverage." The discussion above describes the Board of Trustees' present intention with respect to a possible offering of MuniPreferred Shares. If the Board of Trustees determines to authorize such an offering, the terms of the MuniPreferred Shares may be the same as, or different from, the terms described above, subject to applicable law and the Fund's Declaration. CERTAIN PROVISIONS IN THE DECLARATION OF TRUST Under Massachusetts law, shareholders could, under certain circumstances, be held personally liable for the obligations of the Fund. However, the Declaration contains an express disclaimer of shareholder liability for debts or obligations of the Fund and requires that notice of such limited liability be given in each agreement, obligation or instrument entered into or executed by the Fund or the trustees. The Declaration further provides for indemnification out of the assets and property of the Fund for all loss and expense of any shareholder held personally liable for the obligations of the Fund. Thus, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which the Fund would be unable to meet its obligations. The Fund believes that the likelihood of such circumstances is remote. The Declaration includes provisions that could limit the ability of other entities or persons to acquire control of the Fund or to convert the Fund to open-end status. Specifically, the Declaration requires a vote by holders of at least two-thirds of the Common Shares and MuniPreferred Shares, voting together as a single class, except as described below, to authorize (1) a conversion of the Fund from a closed-end to an open-end investment company, (2) a merger or consolidation of the Fund, or a 27 series or class of the Fund, with any corporation, association, trust or other organization or a reorganization or recapitalization of the Fund, or a series or class of the Fund, (3) a sale, lease or transfer of all or substantially all of the Fund's assets (other than in the regular course of the Fund's investment activities), (4) in certain circumstances, a termination of the Fund, or a series or class of the Fund, or (5) a removal of trustees by shareholders, and then only for cause, unless, with respect to (1) through (4), such transaction has already been authorized by the affirmative vote of two-thirds of the total number of trustees fixed in accordance with the Declaration or the By-laws, in which case the affirmative vote of the holders of at least a majority of the Fund's Common Shares and MuniPreferred Shares outstanding at the time, voting together as a single class, is required, provided, however, that where only a particular class or series is affected (or, in the case of removing a trustee, when the trustee has been elected by only one class), only the required vote by the applicable class or series will be required. Approval of shareholders is not required, however, for any transaction, whether deemed a merger, consolidation, reorganization or otherwise whereby the Fund issues Shares in connection with the acquisition of assets (including those subject to liabilities) from any other investment company or similar entity. None of the foregoing provisions may be amended except by the vote of at least two-thirds of the Common Shares and MuniPreferred Shares, voting together as a single class. In the case of the conversion of the Fund to an open-end investment company, or in the case of any of the foregoing transactions constituting a plan of reorganization which adversely affects the holders of MuniPreferred Shares, the action in question will also require the affirmative vote of the holders of at least two-thirds of the Fund's MuniPreferred Shares outstanding at the time, voting as a separate class, or, if such action has been authorized by the affirmative vote of two-thirds of the total number of trustees fixed in accordance with the Declaration or the By-laws, the affirmative vote of the holders of at least a majority of the Fund's MuniPreferred Shares outstanding at the time, voting as a separate class. The votes required to approve the conversion of the Fund from a closed-end to an open-end investment company or to approve transactions constituting a plan of reorganization which adversely affects the holders of MuniPreferred Shares are higher than those required by the 1940 Act. The Board of Trustees believes that the provisions of the Declaration relating to such higher votes are in the best interest of the Fund and its shareholders. See the Statement of Additional Information under "Certain Provisions in the Declaration of Trust." The provisions of the Declaration described above could have the effect of depriving the Common Shareholders of opportunities to sell their Common Shares at a premium over the then current market price of the Common Shares by discouraging a third party from seeking to obtain control of the Fund in a tender offer or similar transaction. The overall effect of these provisions is to render more difficult the accomplishment of a merger or the assumption of control by a third party. They provide, however, the advantage of potentially requiring persons seeking control of the Fund to negotiate with its management regarding the price to be paid and facilitating the continuity of the Fund's investment objectives and policies. The Board of Trustees of the Fund has considered the foregoing anti-takeover provisions and concluded that they are in the best interests of the Fund and its Common Shareholders. Reference should be made to the Declaration on file with the Securities and Exchange Commission for the full text of these provisions. REPURCHASE OF FUND SHARES; CONVERSION TO OPEN-END FUND The Fund is a closed-end investment company and as such its shareholders will not have the right to cause the Fund to redeem their shares. Instead, the Common Shares will trade in the open market at a price that will be a function of several factors, including dividend levels (which are in turn affected by expenses), net asset value, call protection, dividend stability, portfolio credit quality, relative demand 28 for and supply of such shares in the market, general market and economic conditions and other factors. Because shares of closed-end investment companies may frequently trade at prices lower than net asset value, the Fund's Board of Trustees has currently determined that, at least annually, it will consider action that might be taken to reduce or eliminate any material discount from net asset value in respect of Common Shares, which may include the repurchase of such shares in the open market or in private transactions, the making of a tender offer for such shares at net asset value, or the conversion of the Fund to an open-end investment company. The Fund cannot assure you that its Board of Trustees will decide to take any of these actions, or that share repurchases or tender offers will actually reduce market discount. If the Fund converted to an open-end investment company, it would be required to redeem all MuniPreferred Shares then outstanding (requiring in turn that it liquidate a portion of its investment portfolio), and the Common Shares would no longer be listed on the American Stock Exchange. In contrast to a closed-end investment company, shareholders of an open-end investment company may require the company to redeem their shares at any time (except in certain circumstances as authorized by or under the 1940 Act) at their net asset value, less any redemption charge that is in effect at the time of redemption. See the Statement of Additional Information under "Certain Provisions in the Declaration of Trust" for a discussion of the voting requirements applicable to the conversion of the Fund to an open-end investment company. Before deciding whether to take any action if the Common Shares trade below net asset value, the Board would consider all relevant factors, including the extent and duration of the discount, the liquidity of the Fund's portfolio, the impact of any action that might be taken on the Fund or its shareholders, and market considerations. Based on these considerations, even if the Fund's shares should trade at a discount, the Board of Trustees may determine that, in the interest of the Fund and its shareholders, no action should be taken. See the Statement of Additional Information under "Repurchase of Fund Shares; Conversion to Open-End Fund" for a further discussion of possible action to reduce or eliminate such discount to net asset value. TAX MATTERS Federal Income Tax Matters The discussion below and in the Statement of Additional Information provide general tax information related to an investment in the Common Shares. Because tax laws are complex and often change, you should consult your tax advisor about the tax consequences of an investment in the Fund. The Fund intends to qualify as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), and intends to distribute substantially all of its net income and gains to its shareholders. Therefore, it is not expected that the Fund will be subject to any federal income tax. The Fund primarily invests in municipal bonds from issuers located in California or in municipal bonds whose income is otherwise exempt from regular federal and California income taxes. Thus, substantially all of the Fund's dividends to you will qualify as "exempt-interest dividends." A shareholder treats an exempt-interest dividend as interest on state and local bonds exempt from regular federal income tax. Some or all of an exempt-interest dividend, however, may be subject to federal alternative minimum tax imposed on the shareholder. Different federal alternative tax rules apply to individuals and to corporations. Although the Fund does not seek to realize taxable income or capital gains, the Fund may realize and distribute taxable income or capital gains from time to time as a result of the Fund's normal investment activities. The Fund will distribute at least annually any ordinary taxable income or net 29 capital gain. Distributions of net short-term capital gain are taxable as ordinary income. Distributions of net capital gain (the excess of net long- term capital gain over net short-term capital loss) are taxable as long-term capital gains regardless of how long you have owned your investment. Taxable dividends do not qualify for a dividends received deduction if you are a corporate shareholder. The Fund will allocate distributions to shareholders that are treated as tax-exempt interest and as long-term capital gain and ordinary income, if any, proportionately among the Common Shares and MuniPreferred Shares. As long as the Fund qualifies as a regulated investment company, distributions paid by the Fund generally will not be eligible for the dividends received deduction allowed to corporations. Each year, you will receive a year-end statement that describes the tax status of dividends paid to you during the preceding year, including the source of investment income by state and the portion of income that is subject to the federal alternative minimum tax. You will receive this statement from the firm where you purchased your Common Shares if you hold your investment in street name; the Fund will send you this statement if you hold your shares in registered form. The tax status of your dividends is not affected by whether you reinvest your dividends or receive them in cash. In order to avoid corporate taxation of its earnings and to pay tax-free dividends, the Fund must meet certain I.R.S. requirements that govern the Fund's sources of income, diversification of assets and distribution of earnings to shareholders. The Fund intends to meet these requirements. If the Fund failed to do so, the Fund would be required to pay corporate taxes on its earnings and all your distributions would be taxable as ordinary income. In particular, in order for the Fund to pay exempt-interest dividends, at least 50% of the value of the Fund's total assets must consist of tax-exempt obligations. The Fund intends to meet this requirement. If the Fund failed to do so, it would not be able to pay exempt-interest dividends and your distributions attributable to interest received by the Fund from any source would be taxable as ordinary income. The Fund may be required to withhold 31% of certain of your dividends if you have not provided the Fund with your correct taxpayer identification number (normally your Social Security number) and certain certifications, or if you are otherwise subject to backup withholding. If you receive Social Security benefits, you should be aware that exempt-interest dividends are taken into account in calculating the amount of these benefits that may be subject to federal income tax. If you borrow money to buy Fund shares, you may not deduct the interest on that loan. Under I.R.S. rules, Fund shares may be treated as having been bought with borrowed money even if the purchase of the Fund shares cannot be traced directly to borrowed money. If you are subject to the federal alternative minimum tax, a portion of your regular monthly dividends may be taxable. California Tax Matters The Fund's regular monthly dividends will not be subject to California personal income taxes to the extent they are paid out of income earned on obligations that, when held by individuals, pay interest that is exempt from taxation by California under California law (e.g., obligations of California and its political subdivisions) or federal law, so long as at the close of each quarter of the Fund's taxable year 30 at least 50 percent of the value of the Fund's total assets consist of such obligations. The portion of the Fund's monthly dividends that is attributable to income other than as described in the preceding sentence will be subject to the California income tax. The Fund expects to earn no or only a minimal amount of such non-exempt income. You will be subject to California personal income taxes to the extent the Fund distributes any taxable income or realized capital gains, or if you sell or exchange Common Shares and realize a capital gain on the transaction. Please refer to the Statement of Additional Information for more detailed information. You are urged to consult your tax advisor. OTHER MATTERS A lawsuit brought in June 1996 (Green et al. v. Nuveen Advisory Corp., et al.) by certain individual common shareholders of six leveraged closed-end funds sponsored by Nuveen is currently pending in federal district court. The plaintiffs allege that the leveraged closed-end funds engaged in certain practices that violated various provisions of the 1940 Act and common law. The plaintiffs also alleged, among other things, breaches of fiduciary duty by the funds' directors and Nuveen Advisory and various misrepresentations and omissions in prospectuses and shareholder reports relating to the use of leverage through the issuance and periodic auctioning of preferred stock and the basis of the calculation and payment of management fees to Nuveen Advisory and Nuveen. Plaintiffs also filed a motion to certify defendant and plaintiff classes. The defendants are vigorously defending the case and filed motions to dismiss the entire lawsuit asserting that the claims are without merit and to oppose certification of any classes. By opinion dated March 30, 1999, the court granted most of the defendants' motion to dismiss and denied plaintiffs' motion to certify defendant and plaintiff classes. The court dismissed all claims against the funds, the funds' directors and Nuveen. The court dismissed these claims without prejudice (which means that the plaintiffs can re-file the claims if they can correct the defect that led to the claim being dismissed) on the ground that a claim should have been brought as derivative claims on behalf of the funds. The only remaining claim is brought under Section 36(b) of the 1940 Act against Nuveen Advisory, and relates solely to advisory fees Nuveen Advisory received from the six relevant funds. Discovery is underway on that single claim. While the Fund cannot assure you that the litigation will be decided in Nuveen Advisory's favor, Nuveen Advisory believes a decision, if any, against it would have no material adverse effect on the Fund, its Common Shares, or the ability of Nuveen Advisory to perform its duties under the investment management agreement. 31 UNDERWRITING Subject to the terms and conditions stated in the underwriting agreement dated the date hereof, each Underwriter named below has severally agreed to purchase, and the Fund has agreed to sell to such Underwriter, the number of Common Shares set forth opposite the name of such Underwriter.
Number Underwriters of Shares ------------ --------- Salomon Smith Barney Inc........................................ ------- Nuveen Investments.............................................. ------- A.G. Edwards & Sons, Inc. ...................................... ------- Prudential Securities Incorporated.............................. ------- UBS Warburg LLC................................................. ------- Crowell, Weedon & Co. .......................................... ------- First Union Securities, Inc. ................................... ------- Sutro & Co. Incorporated........................................ ------- Wedbush Morgan Securities....................................... ------- Total......................................................... =======
The underwriting agreement provides that the obligations of the several Underwriters to purchase the Common Shares included in this offering are subject to approval of certain legal matters by counsel and to certain other conditions. The Underwriters are obligated to purchase all the Common Shares (other than those covered by the over-allotment option described below) if they purchase any of the Common Shares. The representatives have advised the Fund that the Underwriters do not intend to confirm any sales to any accounts over which they exercise discretionary authority. The Underwriters, for whom Salomon Smith Barney Inc., Nuveen Investments, A.G. Edwards & Sons, Inc., Prudential Securities Incorporated, UBS Warburg LLC, Crowell, Weedon & Co., First Union Securities, Inc., Sutro & Co. Incorporated and Wedbush Morgan Securities are acting as representatives, propose to offer some of the Common Shares directly to the public at the public offering price set forth on the cover page of this Prospectus and some of the Common Shares to certain dealers at the public offering price less a concession not in excess of $0.45 per Common Share. The sales load the Fund will pay of $0.675 per share is equal to 4.5% of the initial offering price. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $0.10 per Common Share on sales to certain other dealers. If all of the Common Shares are not sold at the initial offering price, the representatives may change the public offering price and other selling terms. Investors must pay for any Common Shares purchased on or before , 2001. In connection with this offering, Nuveen may perform clearing services without charge for brokers and dealers for whom it regularly provides clearing services that are participating in the offering as members of the selling group. The Fund has granted to the Underwriters an option, exercisable for 45 days from the date of this Prospectus, to purchase up to additional Common Shares at the public offering price less the sales load. The Underwriters may exercise such option solely for the purpose of covering over- allotments, if any, in connection with this offering. To the extent such option is exercised, each Underwriter will be obligated, subject to certain conditions, to purchase a number of additional Common Shares approximately proportionate to such Underwriter's initial purchase commitment. 32 The Fund and Nuveen Advisory have agreed that, for a period of 180 days from the date of this Prospectus, they will not, without the prior written consent of Salomon Smith Barney Inc., on behalf of the Underwriters, dispose of or hedge any Common Shares or any securities convertible into or exchangeable for Common Shares. Salomon Smith Barney Inc. in its sole discretion may release any of the securities subject to these agreements at any time without notice. Prior to the offering, there has been no public market for the Common Shares. Consequently, the initial public offering price for the Common Shares was determined by negotiation among the Fund, Nuveen Advisory and the representatives. There can be no assurance, however, that the price at which the Common Shares will sell in the public market after this offering will not be lower than the price at which they are sold by the Underwriters or that an active trading market in the Common Shares will develop and continue after this offering. The Common Shares have been approved for listing on the American Stock Exchange, subject to official notice of issuance. The Fund and Nuveen Advisory have each agreed to indemnify the several Underwriters or contribute to losses arising out of certain liabilities, including liabilities under the Securities Act of 1933, as amended. Nuveen has agreed to pay (i) all organizational expenses and (ii) offering costs (other than sales load) that exceed $0.03 per share. In addition, the Fund has agreed to reimburse the Underwriters for certain expenses incurred by the Underwriters in the offering. In connection with the requirements for listing the Fund's Common Shares on the American Stock Exchange, the Underwriters have undertaken to sell lots of 100 or more Common Shares to a minimum of 400 beneficial owners in the United States. The minimum investment requirement is 100 Common Shares. Certain Underwriters may make a market in the Common Shares after trading in the Common Shares has commenced on the American Stock Exchange. No Underwriter is, however, obligated to conduct market-making activities and any such activities may be discontinued at any time without notice, at the sole discretion of the Underwriter. No assurance can be given as to the liquidity of, or the trading market for, the Common Shares as a result of any market- making activities undertaken by any Underwriter. This Prospectus is to be used by any Underwriter in connection with the offering and, during the period in which a prospectus must be delivered, with offers and sales of the Common Shares in market-making transactions in the over-the-counter market at negotiated prices related to prevailing market prices at the time of the sale. The Underwriters have advised the Fund that, pursuant to Regulation M under the Securities Exchange Act of 1934, as amended, certain persons participating in the offering may engage in transactions, including stabilizing bids, covering transactions or the imposition of penalty bids, which may have the effect of stabilizing or maintaining the market price of the Common Shares at a level above that which might otherwise prevail in the open market. A "stabilizing bid" is a bid for or the purchase of the Common Shares on behalf of an Underwriter for the purpose of fixing or maintaining the price of the Common Shares. A "covering transaction" is a bid for or purchase of the Common Shares on behalf of an Underwriter to reduce a short position incurred by the Underwriters in connection with the offering. A "penalty bid" is a contractual arrangement whereby if, during a specified period after the issuance of the Common Shares, the Underwriters purchase Common Shares 33 in the open market for the account of the underwriting syndicate and the Common Shares purchased can be traced to a particular Underwriter or member of the selling group, the underwriting syndicate may require the Underwriter or selling group member in question to purchase the Common Shares in question at the cost price to the syndicate or may recover from (or decline to pay to) the Underwriter or selling group member in question any or all compensation (including, with respect to a representative, the applicable syndicate management fee) applicable to the Common Shares in question. As a result, an Underwriter or selling group member and, in turn, brokers may lose the fees that they otherwise would have earned from a sale of the Common Shares if their customer resells the Common Shares while the penalty bid is in effect. The Underwriters are not required to engage in any of these activities, and any such activities, if commenced, may be discontinued at any time. The underwriting agreement provides that it may be terminated in the absolute discretion of the representatives without liability on the part of any Underwriter to the Fund or Nuveen Advisory if, prior to delivery of and payment for the Common Shares, (i) trading in the Common Shares or securities generally on the New York Stock Exchange, American Stock Exchange, Nasdaq National Market or the Nasdaq Stock Market shall have been suspended or materially limited, (ii) additional material governmental restrictions not in force on the date of the underwriting agreement have been imposed upon trading in securities generally or a general moratorium on commercial banking activities in New York shall have been declared by either federal or state authorities or (iii) any outbreak or material escalation of hostilities or other international or domestic calamity, crisis or change in political, financial or economic conditions, occurs, the effect of which is such as to make it, in the judgment of the representatives, impracticable or inadvisable to commence or continue the offering of the Common Shares at the offering price to the public set forth on the cover page of the Prospectus or to enforce contracts for the resale of the Common Shares by the Underwriters. The Fund anticipates that from time to time the representatives of the Underwriters and certain other Underwriters may act as brokers or dealers in connection with the execution of the Fund's portfolio transactions after they have ceased to be Underwriters and, subject to certain restrictions, may act as brokers while they are Underwriters. Prior to the public offering of Common Shares, Nuveen Advisory will purchase Common Shares from the Fund in an amount satisfying the net worth requirements of Section 14(a) of the 1940 Act. Nuveen, one of the representatives of the Underwriters, is the parent company of Nuveen Advisory. The principal business address of Salomon Smith Barney Inc. is 388 Greenwich Street, New York, New York 10013. CUSTODIAN AND TRANSFER AGENT The custodian of the assets of the Fund is The Chase Manhattan Bank, P.O. Box 660086, Dallas, Texas 75266-0086. The Custodian performs custodial, fund accounting and portfolio accounting services. The Fund's transfer, shareholder services and dividend paying agent is also The Chase Manhattan Bank. LEGAL OPINIONS Certain legal matters in connection with the Common Shares will be passed upon for the Fund by Bell, Boyd & Lloyd LLC, Chicago, Illinois, and for the Underwriters by Simpson Thacher & Bartlett, New York, New York. Bell, Boyd & Lloyd LLC and Simpson Thacher & Bartlett may rely as to certain matters of Massachusetts law on the opinion of Bingham Dana LLP, Boston, Massachusetts. 34 TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL INFORMATION
Page ---- Use of Proceeds...................................................... 3 Investment Objectives ............................................... 5 Investment Policies and Techniques................................... 10 Other Investment Policies and Techniques............................. 18 Management of the Fund............................................... 21 Investment Adviser................................................... 27 Portfolio Transactions............................................... 28 Distributions........................................................ 29 Description of Shares................................................ 30 Certain Provisions in the Declaration of Trust....................... 33 Repurchase of Fund Shares; Conversion to Open-End Fund............... 34 Tax Matters.......................................................... 37 Performance Related and Comparative Information...................... 40 Experts.............................................................. 41 Custodian............................................................ 41 Additional Information............................................... 41 Report of Independent Auditors....................................... 43 Financial Statements................................................. 44 Appendices Appendix A--Ratings of Investments................................. A-1 Appendix B--Taxable Equivalent Yield Tables........................ B-1 Appendix C--Hedging Strategies and Risks........................... C-1 Appendix D--Factors Pertaining to California....................... D-1 Appendix E--Performance Related and Comparative Information........ E-1
35 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Shares Nuveen California Dividend Advantage Municipal Fund 2 Common Shares -------- PROSPECTUS , 2001 -------- Salomon Smith Barney Nuveen Investments A.G. Edwards & Sons, Inc. Prudential Securities UBS Warburg LLC Crowell, Weedon & Co. First Union Securities, Inc. Sutro & Co. Incorporated Wedbush Morgan Securities - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- The information in this Statement of Additional Information is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This Statement of Additional Information is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION--DATED March 23, 2001 Nuveen California Dividend Advantage Municipal Fund 2 STATEMENT OF ADDITIONAL INFORMATION Nuveen California Dividend Advantage Municipal Fund 2 (the "Fund" or the "California Fund") is a newly organized, non-diversified closed-end management investment company. This Statement of Additional Information relating to common shares of the Fund ("Common Shares") does not constitute a prospectus, but should be read in conjunction with the Fund's Prospectus relating thereto dated ________ __, 2001 (the "Prospectus"). This Statement of Additional Information does not include all information that a prospective investor should consider before purchasing Common Shares, and investors should obtain and read the Fund's Prospectus prior to purchasing such shares. A copy of the Fund's Prospectus may be obtained without charge by calling (800) 257-8787. You may also obtain a copy of the Fund's Prospectus on the Securities and Exchange Commission's web site (http://www.sec.gov). Capitalized terms used but not defined in this Statement of Additional Information have the meanings ascribed to them in the Prospectus. 1 TABLE OF CONTENTS
Page -------- Use of Proceeds 3 Investment Objectives 5 Investment Policies and Techniques 10 Other Investment Policies and Techniques 18 Management of the Fund 21 Investment Adviser 27 Portfolio Transactions 28 Distributions 29 Description of Shares 30 Certain Provisions in the Declaration of Trust 33 Repurchase of Fund Shares; Conversion to Open-End Fund 34 Tax Matters 37 Performance Related and Comparative Information 40 Experts 41 Custodian 41 Additional Information 41 Report of Independent Auditors 43 Financial Statements 44 Ratings of Investments (Appendix A) A-1 Taxable Equivalent Yield Tables (Appendix B) B-1 Hedging Strategies and Risks (Appendix C) C-1 Factors Pertaining to California (Appendix D) D-1 Performance Related and Comparative Information (Appendix E) E-1
This Statement of Additional Information is dated ________ __, 2001 2 USE OF PROCEEDS The net proceeds of the offering of Common Shares of the Fund will be approximately: $ ($ if the Underwriters exercise the over- allotment option in full) after payment of organization and offering costs. 3 For the Fund, Nuveen Advisory has agreed to pay (i) all organizational expenses and (ii) offering costs (other than sales load) that exceed $0.03 per Common Share. Pending investment in municipal bonds that meet the Fund's investment objectives and policies, the net proceeds of the offering will be invested in high quality, short-term tax-exempt money market securities or in high quality municipal bonds with relatively low volatility (such as pre-refunded and intermediate-term bonds), to the extent such securities are available. If necessary to invest fully the net proceeds of the offering immediately, the Fund may also purchase, as temporary investments, short-term taxable investments of the type described under "Investment Policies and Techniques--Investment in Municipal Bonds--Portfolio Investments," the income on which is subject to regular federal income tax and securities of other open or closed-end investment companies that invest primarily in municipal bonds of the type in which the Fund may invest directly. 4 INVESTMENT OBJECTIVES The Fund's investment objective is to provide current income exempt from regular federal and California income tax, and to enhance portfolio value relative to the municipal bond market by investing in tax-exempt municipal bonds that the Fund's investment adviser believes are underrated or undervalued or that represent municipal market sectors that are undervalued. 5 The Fund's investment in underrated or undervalued municipal bonds will be based on Nuveen Advisory's belief that their yield is higher than that available on bonds bearing equivalent levels of interest rate risk, credit risk and other forms of risk, and that their prices will ultimately rise (relative to the market) to reflect their true value. The Fund attempts to increase its portfolio value relative to the municipal bond market by prudent selection of municipal bonds regardless of the direction the market may move. Any capital appreciation realized by the Fund will 6 generally result in the distribution of taxable capital gains to holders of Common Shares. The Fund's investment objectives are fundamental policies of the Fund. The Fund has not established any limit on the percentage of its portfolio that may be invested in municipal bonds subject to the alternative minimum tax provisions of federal tax law, and the Fund expects that a substantial portion of the income it produces will be includable in alternative minimum taxable income. Common Shares therefore would not ordinarily be a suitable investment for investors who are subject to the federal alternative minimum tax or who would become subject to such tax by purchasing Common Shares. The suitability of an investment in Common Shares will depend upon a comparison of the after-tax yield likely to be provided from the Fund with that from comparable tax-exempt investments not subject to the alternative minimum tax, and from comparable fully taxable investments, in light of each such investor's tax position. Special considerations apply to corporate investors. See "Tax Matters." Investment Restrictions Except as described below, the Fund, as a fundamental policy, may not, without the approval of the holders of a majority of the outstanding Common Shares and, if issued, MuniPreferred Shares (as hereinafter defined) voting together as a single class, and of the holders of a majority of the outstanding MuniPreferred Shares voting as a separate class: (1) Issue senior securities, as defined in the Investment Company Act of 1940, other than MuniPreferred Shares, except to the extent permitted under the Investment Company Act of 1940 and except as otherwise described in the Prospectus; (2) Borrow money, except from banks for temporary or emergency purposes or for repurchase of its shares, and then only in an amount not exceeding one-third of the value of the Fund's total assets (including the amount borrowed) less the Fund's liabilities (other than borrowings); (3) Act as underwriter of another issuer's securities, except to the extent that the Fund may be deemed to be an underwriter within the meaning of the Securities Act of 1933 in connection with the purchase and sale of portfolio securities; (4) Invest more than 25% of its total assets in securities of issuers in any one industry; provided, however, that such limitation shall not apply to municipal bonds other than those municipal bonds backed only by the assets and revenues of non-governmental users; 7 (5) Purchase or sell real estate, but this shall not prevent the Fund from investing in municipal bonds secured by real estate or interests therein or foreclosing upon and selling such security; (6) Purchase or sell physical commodities unless acquired as a result of ownership of securities or other instruments (but this shall not prevent the Fund from purchasing or selling options, futures contracts, derivative instruments or from investing in securities or other instruments backed by physical commodities); (7) Make loans, other than by entering into repurchase agreements and through the purchase of municipal bonds or short-term investments in accordance with its investment objectives, policies and limitations; (8) Purchase any securities (other than obligations issued or guaranteed by the United States Government or by its agencies or instrumentalities), if as a result more than 5% of the Fund's total assets would then be invested in securities of a single issuer or if as a result the Fund would hold more than 10% of the outstanding voting securities of any single issuer; provided that, with respect to 50% of the Fund's assets, the Fund may invest up to 25% of its assets in the securities of any one issuer. For purposes of the foregoing and "Description of Shares--MuniPreferred Shares--Voting Rights" below, "majority of the outstanding," when used with respect to particular shares of the Fund, means (i) 67% or more of the shares present at a meeting, if the holders of more than 50% of the shares are present or represented by proxy, or (ii) more than 50% of the shares, whichever is less. For the purpose of applying the limitation set forth in subparagraph (8) above, an issuer shall be deemed the sole issuer of a security when its assets and revenues are separate from other governmental entities and its securities are backed only by its assets and revenues. Similarly, in the case of a non- governmental issuer, such as an industrial corporation or a privately owned or operated hospital, if the security is backed only by the assets and revenues of the non-governmental issuer, then such non-governmental issuer would be deemed to be the sole issuer. Where a security is also backed by the enforceable obligation of a superior or unrelated governmental or other entity (other than a bond insurer), it shall also be included in the computation of securities owned that are issued by such governmental or other entity. Where a security is guaranteed by a governmental entity or some other facility, such as a bank guarantee or letter of credit, such a guarantee or letter of credit would be considered a separate security and would be treated as an issue of such government, other entity or bank. When a municipal bond is insured by bond insurance, it shall not be considered a security that is issued or guaranteed by the insurer; instead, the issuer of such municipal bond will be determined in accordance with the principles set forth above. The foregoing restrictions do not limit the percentage of the Fund's assets that may be invested in municipal bonds insured by any given insurer. Under the Investment Company Act of 1940, the Fund may invest only up to 10% of its total assets in the aggregate in shares of other investment companies and only up to 5% of its total assets in any one investment company, provided the investment does not represent more than 3% of the voting stock of the acquired investment company at the time such shares are purchased. As a stockholder in any investment company, the Fund will bear its ratable share of 8 that investment company's expenses, and would remain subject to payment of the Fund's management, advisory and administrative fees with respect to assets so invested. Holders of Common Shares would therefore be subject to duplicative expenses to the extent the Fund invests in other investment companies. In addition, the securities of other investment companies may also be leveraged and will therefore be subject to the same leverage risks described herein. As described in the Prospectus in the section entitled "Risks", the net asset value and market value of leveraged shares will be more volatile and the yield to shareholders will tend to fluctuate more than the yield generated by unleveraged shares. In addition to the foregoing fundamental investment policies, the Fund is also subject to the following non-fundamental restrictions and policies, which may be changed by the Board of Trustees. The Fund may not: (1) Sell securities short, unless the Fund owns or has the right to obtain securities equivalent in kind and amount to the securities sold at no added cost, and provided that transactions in options, futures contracts, options on futures contracts, or other derivative instruments are not deemed to constitute selling securities short. (2) Purchase securities of open-end or closed-end investment companies except in compliance with the Investment Company Act of 1940 or any exemptive relief obtained thereunder. (3) Enter into futures contracts or related options or forward contracts, if more than 30% of the Fund's net assets would be represented by futures contracts or more than 5% of the Fund's net assets would be committed to initial margin deposits and premiums on futures contracts and related options. (4) Purchase securities when borrowings exceed 5% of its total assets if and so long as MuniPreferred Shares are outstanding. (5) Purchase securities of companies for the purpose of exercising control. (6) Invest in inverse floating rate securities (which are securities that pay interest at rates that vary inversely with changes in prevailing short-term tax-exempt interest rates and which represent a leveraged investment in an underlying municipal bond). The restrictions and other limitations set forth above will apply only at the time of purchase of securities and will not be considered violated unless an excess or deficiency occurs or exists immediately after and as a result of an acquisition of securities. The Fund intends to apply for ratings for its preferred shares (called "MuniPreferred Shares" herein) from Moody's and/or S&P. In order to obtain and maintain the required ratings, the Fund may be required to comply with investment quality, diversification and other guidelines established by Moody's or S&P. Such guidelines will likely be more restrictive than the restrictions set forth above. The Fund does not anticipate that such guidelines would have a material 9 adverse effect on its Common Shareholders or its ability to achieve its investment objectives. The Fund presently anticipates that any MuniPreferred Shares that it intends to issue would be initially given the highest ratings by Moody's ("Aaa") or by S&P ("AAA"), but no assurance can be given that such ratings will be obtained. No minimum rating is required for the issuance of MuniPreferred Shares by the Fund. Moody's and S&P receive fees in connection with their ratings issuances. INVESTMENT POLICIES AND TECHNIQUES The following information supplements the discussion of the Fund's investment objectives, policies, and techniques that are described in the Fund's Prospectus. Investment in Municipal Bonds Portfolio Investments The California Fund will invest its net assets in a portfolio of municipal bonds that are exempt from regular federal and California income tax. Under normal market conditions, and except for the temporary investments described below, the Fund expects to be fully invested (at least 95% of its assets) in such tax-exempt municipal bonds described above. Through March 31, 2002, the Fund may invest in municipal bonds that are exempt from regular federal income tax but not from the Fund's particular state income tax ("Out of State Bonds"), provided that no more than 10% of the Fund's investment income during that time may be derived from Out of State Bonds. The Fund will invest at least 80% of its net assets in municipal bonds that at the time of investment are investment grade quality. Investment 10 grade quality bonds are bonds rated within the four highest grades (Baa or BBB or better by Moody's, S&P or Fitch) or bonds that are unrated but judged to be of comparable quality by Nuveen Advisory. The Fund may invest up to 20% of its net assets in municipal bonds that, at the time of investment, are rated Ba/BB or B by Moody's, S&P or Fitch or unrated but judged to be of comparable quality by Nuveen Advisory. Bonds of below investment grade quality (Ba/BB or below) are commonly referred to as junk bonds. Issuers of bonds rated Ba/BB or B are regarded as having current capacity to make principal and interest payments but are subject to business, financial or economic conditions which could adversely affect such payment capacity. Municipal bonds rated Baa or BBB are considered "investment grade" securities; municipal bonds rated Baa are considered medium grade obligations which lack outstanding investment characteristics and have speculative characteristics, while municipal bonds rated BBB are regarded as having adequate capacity to pay principal and interest. Municipal bonds rated AAA in which the Fund may invest may have been so rated on the basis of the existence of insurance guaranteeing the timely payment, when due, of all principal and interest. Municipal bonds rated below investment grade quality are obligations of issuers that are considered predominately speculative with respect to the issuer's capacity to pay interest and repay principal according to the terms of the obligation and, therefore, carry greater investment risk, including the possibility of issuer default and bankruptcy and increased market price volatility. Municipal bonds rated below investment grade tend to be less marketable than higher-quality bonds because the market for them is less broad. The market for unrated municipal bonds is even narrower. During periods of thin trading in these markets, the spread between bid and asked prices is likely to increase significantly and the Fund may have greater difficulty selling its portfolio securities. The Fund will be more dependent on Nuveen Advisory's research and analysis when investing in these securities. A general description of Moody's, S&P's and Fitch's ratings of municipal bonds is set forth in Appendix A hereto. The ratings of Moody's, S&P and Fitch represent their opinions as to the quality of the municipal bonds they rate. It should be emphasized, however, that ratings are general and are not absolute standards of quality. Consequently, municipal bonds with the same maturity, coupon and rating may have different yields while obligations of the same maturity and coupon with different ratings may have the same yield. 11 The Fund will primarily invest in municipal bonds with long-term maturities in order to maintain a weighted average maturity of 15-30 years, but the average weighted maturity of obligations held by the Fund may be shortened, depending on market conditions. As a result, the Fund's portfolio at any given time may include both long-term and intermediate-term municipal bonds. Moreover, during temporary defensive periods (e.g., times when, in Nuveen Advisory's opinion, temporary imbalances of supply and demand or other temporary dislocations in the tax-exempt bond market adversely affect the price at which long-term or intermediate-term municipal bonds are available), and in order to keep the Fund's cash fully invested, including the period during which the net proceeds of the offering are being invested, the Fund may invest any percentage of its net assets in short-term investments including high quality, short-term securities that may be either tax-exempt or taxable and up to 10% of its net assets in securities of other open or closed-end investment companies that invest primarily in municipal bonds of the type in which the Fund may invest directly. The Fund intends to invest in taxable short-term investments only in the event that suitable tax-exempt short-term investments are not available at reasonable prices and yields. Tax-exempt short-term investments include various obligations issued by state and local governmental issuers, such as tax-exempt notes (bond anticipation notes, tax anticipation notes and revenue anticipation notes or other such municipal bonds maturing in three years or less from the date of issuance) and municipal commercial paper. The Fund will invest only in taxable short-term investments which are U.S. Government securities or securities rated within the highest grade by Moody's, S&P or Fitch, and which mature within one year from the date of purchase or carry a variable or floating rate of interest. See Appendix A for a general description of Moody's, S&P's and Fitch's ratings of securities in such categories. Taxable short-term investments of the Fund may include certificates of deposit issued by U.S. banks with assets of at least $1 billion, or commercial paper or corporate notes, bonds or debentures with a remaining maturity of one year or less, or repurchase agreements. See "Other Investment Policies and Techniques--Repurchase Agreements." To the extent the Fund invests 12 in taxable investments, the Fund will not at such times be in a position to achieve its investment objective of tax-exempt income. The foregoing policies as to ratings of portfolio investments will apply only at the time of the purchase of a security, and the Fund will not be required to dispose of securities in the event Moody's, S&P or Fitch downgrades its assessment of the credit characteristics of a particular issuer. Nuveen Advisory seeks to enhance portfolio value relative to the municipal bond market by investing in tax-exempt municipal bonds that it believes are underrated or undervalued or that represent municipal market sectors that are undervalued. Underrated municipal bonds are those whose ratings do not, in Nuveen Advisory's opinion, reflect their true creditworthiness. Undervalued municipal bonds are bonds that, in Nuveen Advisory's opinion, are worth more than the value assigned to them in the marketplace. Nuveen Advisory may at times believe that bonds associated with a particular municipal market sector (for example, electric utilities), or issued by a particular municipal issuer, are undervalued. Nuveen Advisory may purchase such a bond for the Fund's portfolio because it represents a market sector or issuer that Nuveen Advisory considers undervalued, even if the value of the particular bond is consistent with the value of similar bonds. Municipal bonds of particular types or purposes (e.g., hospital bonds, industrial revenue bonds or bonds issued by a particular municipal issuer) may be undervalued because there is a temporary excess of supply in that market sector, or because of a general decline in the market price of municipal bonds of the market sector for reasons that do not apply to the particular municipal bonds that are considered undervalued. The Fund's investment in underrated or undervalued municipal bonds will be based on Nuveen Advisory's belief that their yield is higher than that available on bonds bearing equivalent levels of interest rate risk, credit risk and other forms of risk, and that their prices will ultimately rise (relative to the market) to reflect their true value. The Fund has not established any limit on the percentage of its portfolio investments that may be invested in municipal bonds subject to the federal alternative minimum tax provisions of federal tax law, and the Fund expects that a substantial portion of the current income it produces will be includable in alternative minimum taxable income. Special considerations apply to corporate investors. See "Tax Matters." Also included within the general category of municipal bonds described in the Fund's Prospectus are participations in lease obligations or installment purchase contract obligations (hereinafter collectively called "Municipal Lease Obligations") of municipal authorities or entities. Although a Municipal Lease Obligation does not constitute a general obligation of the municipality for which the municipality's taxing power is pledged, a Municipal Lease Obligation is ordinarily backed by the municipality's covenant to budget for, appropriate and make the payments due under the Municipal Lease Obligation. However, certain Municipal Lease Obligations contain "non-appropriation" clauses which provide that the municipality has no obligation to make lease or installment purchase payments in future years unless money is appropriated for such purpose on a yearly basis. In the case of a "non-appropriation" lease, the Fund's ability to recover under the lease in the event of non-appropriation or default will be limited solely to the repossession of the leased property, without recourse to the general credit of the lessee, and disposition or releasing of the property might prove difficult. In order to reduce this risk, the Fund will only 13 purchase Municipal Lease Obligations where Nuveen Advisory believes the issuer has a strong incentive to continue making appropriations until maturity. Upon Nuveen Advisory's recommendation, during temporary defensive periods and in order to keep the Fund's cash fully invested, including the period during which the net proceeds of the offering are being invested, the Fund may invest up to 100% of its net assets in short-term investments including high quality, short-term securities that may be either tax-exempt or taxable. To the extent the Fund invests in taxable short-term investments, the Fund will not at such times be in a position to achieve that portion of its investment objective of seeking current income exempt from regular federal income tax. For further information, see, "Short-Term Investments" below. Obligations of issuers of municipal bonds are subject to the provisions of bankruptcy, insolvency and other laws affecting the rights and remedies of creditors, such as the Bankruptcy Reform Act of 1978. In addition, the obligations of such issuers may become subject to the laws enacted in the future by Congress, state legislatures or referenda extending the time for payment of principal or interest, or both, or imposing other constraints upon enforcement of such obligations or upon municipalities to levy taxes. There is also the possibility that, as a result of legislation or other conditions, the power or ability of any issuer to pay, when due, the principal of and interest on its municipal bonds may be materially affected. The Fund also may invest up to 10% of its net assets in securities of other open or closed-end investment companies that invest primarily in municipal bonds of the type in which the Fund may invest directly. The Fund will generally select obligations which may not be redeemed at the option of the issuer for approximately seven to nine years. 14 Short-Term Investments Short-Term Taxable Fixed Income Securities For temporary defensive purposes or to keep cash on hand fully invested, the Fund may invest up to 100% of its net assets in cash equivalents and short- term taxable fixed-income securities, although the Fund intends to invest in taxable short-term investments only in the event that suitable tax-exempt short- term investments are not available at reasonable prices and yields. Short-term taxable fixed income investments are defined to include, without limitation, the following: (1) U.S. government securities, including bills, notes and bonds differing as to maturity and rates of interest that are either issued or guaranteed by the U.S. Treasury or by U.S. government agencies or instrumentalities. U.S. government agency securities include securities issued by (a) the Federal Housing Administration, Farmers Home Administration, Export-Import Bank of the United States, Small Business Administration, and the Government National Mortgage Association, whose securities are supported by the full faith and credit of the United States; (b) the Federal Home Loan Banks, Federal Intermediate Credit Banks, and the Tennessee Valley Authority, whose securities are supported by the right of the agency to borrow from the U.S. Treasury; (c) the Federal National Mortgage Association, whose securities are supported by the discretionary authority of the U.S. government to purchase certain obligations of the agency or instrumentality; and (d) the Student Loan Marketing Association, whose securities are supported only by its credit. While the U.S. government provides financial support to such U.S. government-sponsored agencies or instrumentalities, no assurance can be given that it always will do so since it is not so obligated by law. The U.S. government, its agencies, and instrumentalities do not guarantee the market value of their securities. Consequently, the value of such securities may fluctuate. (2) Certificates of Deposit issued against funds deposited in a bank or a savings and loan association. Such certificates are for a definite period of time, earn a specified rate of return, and are normally negotiable. The issuer of a certificate of deposit agrees to pay the amount deposited plus interest to the bearer of the certificate on the date specified thereon. Under current FDIC regulations, the maximum insurance payable as to any one certificate of deposit is $100,000; therefore, certificates of deposit purchased by the Fund may not be fully insured. (3) Repurchase agreements, which involve purchases of debt securities. At the time the Fund purchases securities pursuant to a repurchase agreement, it simultaneously agrees to resell and redeliver such securities to the seller, who also simultaneously agrees to buy back the securities at a fixed price and time. This assures a predetermined yield for the Fund during its holding period, since the resale price is always greater than the purchase price and reflects an agreed-upon market rate. Such actions afford an opportunity for the Fund to invest 15 temporarily available cash. The Fund may enter into repurchase agreements only with respect to obligations of the U.S. government, its agencies or instrumentalities; certificates of deposit; or bankers' acceptances in which the Fund may invest. Repurchase agreements may be considered loans to the seller, collateralized by the underlying securities. The risk to the Fund is limited to the ability of the seller to pay the agreed-upon sum on the repurchase date; in the event of default, the repurchase agreement provides that the Fund is entitled to sell the underlying collateral. If the value of the collateral declines after the agreement is entered into, and if the seller defaults under a repurchase agreement when the value of the underlying collateral is less than the repurchase price, the Fund could incur a loss of both principal and interest. The investment adviser monitors the value of the collateral at the time the action is entered into and at all times during the term of the repurchase agreement. The investment adviser does so in an effort to determine that the value of the collateral always equals or exceeds the agreed-upon repurchase price to be paid to the Fund. If the seller were to be subject to a federal bankruptcy proceeding, the ability of the Fund to liquidate the collateral could be delayed or impaired because of certain provisions of the bankruptcy laws. (4) Commercial paper, which consists of short-term unsecured promissory notes, including variable rate master demand notes issued by corporations to finance their current operations. Master demand notes are direct lending arrangements between the Fund and a corporation. There is no secondary market for such notes. However, they are redeemable by the Fund at any time. Nuveen Advisory will consider the financial condition of the corporation (e.g., earning power, cash flow, and other liquidity ratios) and will continuously monitor the corporation's ability to meet all of its financial obligations, because the Fund's liquidity might be impaired if the corporation were unable to pay principal and interest on demand. Investments in commercial paper will be limited to commercial paper rated in the highest categories by a major rating agency and which mature within one year of the date of purchase or carry a variable or floating rate of interest. Short-Term Tax-Exempt Fixed Income Securities Short-term tax-exempt fixed-income securities are securities that are exempt from regular federal income tax and mature within three years or less from the date of issuance. Short-term tax-exempt fixed income securities are defined to include, without limitation, the following: Bond Anticipation Notes ("BANs") are usually general obligations of state and local governmental issuers which are sold to obtain interim financing for projects that will eventually be funded through the sale of long-term debt obligations or bonds. The ability of an issuer to meet its obligations on its BANs is primarily dependent on the issuer's access to the long-term municipal bond market and the likelihood that the proceeds of such bond sales will be used to pay the principal and interest on the BANs. 16 Tax Anticipation Notes ("TANs") are issued by state and local governments to finance the current operations of such governments. Repayment is generally to be derived from specific future tax revenues. TANs are usually general obligations of the issuer. A weakness in an issuer's capacity to raise taxes due to, among other things, a decline in its tax base or a rise in delinquencies, could adversely affect the issuer's ability to meet its obligations on outstanding TANs. Revenue Anticipation Notes ("RANs") are issued by governments or governmental bodies with the expectation that future revenues from a designated source will be used to repay the notes. In general, they also constitute general obligations of the issuer. A decline in the receipt of projected revenues, such as anticipated revenues from another level of government, could adversely affect an issuer's ability to meet its obligations on outstanding RANs. In addition, the possibility that the revenues would, when received, be used to meet other obligations could affect the ability of the issuer to pay the principal and interest on RANs. Construction Loan Notes are issued to provide construction financing for specific projects. Frequently, these notes are redeemed with funds obtained from the Federal Housing Administration. Bank Notes are notes issued by local government bodies and agencies, such as those described above to commercial banks as evidence of borrowings. The purposes for which the notes are issued are varied but they are frequently issued to meet short-term working capital or capital-project needs. These notes may have risks similar to the risks associated with TANs and RANs. Tax-Exempt Commercial Paper ("Municipal Paper") represents very short-term unsecured, negotiable promissory notes issued by states, municipalities and their agencies. Payment of principal and interest on issues of municipal paper may be made from various sources, to the extent the funds are available therefrom. Maturities or municipal paper generally will be shorter than the maturities of TANs, BANs or RANs. There is a limited secondary market for issues of Municipal Paper. Certain municipal bonds may carry variable or floating rates of interest whereby the rate of interest is not fixed but varies with changes in specified market rates or indices, such as a bank prime rate or a tax-exempt money market index. While the various types of notes described above as a group represent the major portion of the tax-exempt note market, other types of notes are available in the marketplace and the Fund may invest in such other types of notes to the extent permitted under its investment objectives, policies and limitations. Such notes may be issued for different purposes and may be secured differently from those mentioned above. Hedging Strategies The Fund may periodically engage in hedging transactions. Hedging is a term used for various methods of seeking to preserve portfolio capital value by offsetting price changes in one investment through making another investment whose price should tend to move in the opposite direction. It may be desirable and possible in various market environments to partially hedge the portfolio against fluctuations in market value due to interest rate fluctuations by investment in 17 financial futures and index futures as well as related put and call options on such instruments. Both parties entering into an index or financial futures contract are required to post an initial deposit of 1% to 5% of the total contract price. Typically, option holders enter into offsetting closing transactions to enable settlement in cash rather than take delivery of the position in the future of the underlying security. The Fund will only sell covered futures contracts, which means that the Fund segregates assets equal to the amount of the obligations. These transactions present certain risks. In particular, the imperfect correlation between price movements in the futures contract and price movements in the securities being hedged creates the possibility that losses on the hedge by a Fund may be greater than gains in the value of the securities in the Fund's portfolio. In addition, futures and options markets may not be liquid in all circumstances. As a result, in volatile markets, the Fund may not be able to close out the transaction without incurring losses substantially greater than the initial deposit. Finally, the potential deposit requirements in futures contracts create an ongoing greater potential financial risk than do options transactions, where the exposure is limited to the cost of the initial premium. Losses due to hedging transactions will reduce yield. Net gains, if any, from hedging and other portfolio transactions will be distributed as taxable distributions to shareholders. The Fund will not make any investment (whether an initial premium or deposit or a subsequent deposit) other than as necessary to close a prior investment if, immediately after such investment, the sum of the amount of its premiums and deposits would exceed 5% of the Fund's net assets. The Fund will invest in these instruments only in markets believed by Nuveen Advisory to be active and sufficiently liquid. Successful implementation of most hedging strategies would generate taxable income, and the Fund has no present intention to use these strategies. For further information regarding these investment strategies and risks presented thereby, see Appendix C to this Statement of Additional Information. Factors Pertaining to California Factors pertaining to California are set forth in Appendix D. OTHER INVESTMENT POLICIES AND TECHNIQUES Illiquid Securities The Fund may invest in illiquid securities (i.e., securities that are not readily marketable), including, but not limited to, restricted securities (securities the disposition of which is restricted under the federal securities laws), securities that may only be resold pursuant to Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"); and repurchase agreements with maturities in excess of seven days. 18 Restricted securities may be sold only in privately negotiated transactions or in a public offering with respect to which a registration statement is in effect under the Securities Act. Where registration is required, the Fund may be obligated to pay all or part of the registration expenses and a considerable period may elapse between the time of the decision to sell and the time the Fund may be permitted to sell a security under an effective registration statement. If, during such a period, adverse market conditions were to develop, the Fund might obtain a less favorable price than that which prevailed when it decided to sell. Illiquid securities will be priced at a fair value as determined in good faith by the Board of Trustees or its delegate. Portfolio Trading and Turnover Rate Portfolio trading may be undertaken to accomplish the investment objectives of the Fund in relation to actual and anticipated movements in interest rates. In addition, a security may be sold and another of comparable quality purchased at approximately the same time to take advantage of what Nuveen Advisory believes to be a temporary price disparity between the two securities. Temporary price disparities between two comparable securities may result from supply and demand imbalances where, for example, a temporary oversupply of certain bonds may cause a temporarily low price for such bonds, as compared with other bonds of like quality and characteristics. The Fund may also engage to a limited extent in short-term trading consistent with its investment objectives. Securities may be sold in anticipation of a market decline (a rise in interest rates) or purchased in anticipation of a market rise (a decline in interest rates) and later sold, but the Fund will not engage in trading solely to recognize a gain. Subject to the foregoing, the Fund will attempt to achieve its investment objectives by prudent selection of municipal bonds with a view to holding them for investment. While there can be no assurance thereof, the Fund anticipates that its annual portfolio turnover rate will generally not exceed 100%. However, the rate of turnover will not be a limiting factor when the Fund deems it desirable to sell or purchase securities. Therefore, depending upon market conditions, the annual portfolio turnover rate of the Fund may exceed 100% in particular years. Other Investment Companies The Fund may invest in securities of other open or closed-end investment companies that invest primarily in municipal bonds of the types in which the Fund may invest directly. The Fund generally expects to invest in other investment companies either during periods when it has large amounts of uninvested cash, such as the period shortly after the Fund receives the proceeds of the offering of its Common Shares or MuniPreferred Shares, or during periods when there is a shortage of attractive, high-yielding municipal bonds available in the market. As a stockholder in an investment company, the Fund will bear its ratable share of that investment company's expenses and would remain subject to payment of the Fund's management, advisory and administrative fees with respect to assets so invested. Common Shareholders would therefore be subject to duplicative expenses to the extent the Fund invests in other investment companies. Nuveen Advisory will take expenses into account when evaluating the investment merits of an investment in the investment company relative to available municipal bond investments. In addition, the securities of other investment companies may also be leveraged and will therefore be subject to the same leverage risks described herein. As described in the Fund's Prospectus in the section entitled "Risks," the net asset value and market value of leveraged shares will be more 19 volatile and the yield to shareholders will tend to fluctuate more than the yield generated by unleveraged shares. When-Issued and Delayed Delivery Transactions The Fund may buy and sell municipal bonds on a when-issued or delayed delivery basis, making payment or taking delivery at a later date, normally within 15-45 days of the trade date. On such transactions the payment obligation and the interest rate are fixed at the time the buyer enters into the commitment. Beginning on the date the Fund enters into a commitment to purchase securities on a when-issued or delayed delivery basis, the Fund is required under rules of the Securities and Exchange Commission to maintain in a separate account liquid assets, consisting of cash, cash equivalents or liquid securities having a market value at all times of at least equal to the amount of the commitment. Income generated by any such assets which provide taxable income for federal income tax purposes is includable in the taxable income of the Fund. The Fund may enter into contracts to purchase municipal bonds on a forward basis (i.e., where settlement will occur more than 60 days from the date of the transaction) only to the extent that the Fund specifically collateralizes such obligations with a security that is expected to be called or mature within sixty days before or after the settlement date of the forward transaction. The commitment to purchase securities on a when-issued, delayed delivery or forward basis may involve an element of risk because no interest accrues on the bonds prior to settlement and at the time of delivery the market value may be less than cost. Repurchase Agreements As temporary investments, the Fund may invest in repurchase agreements. A repurchase agreement is a contractual agreement whereby the seller of securities (U.S. Government securities or municipal bonds) agrees to repurchase the same security at a specified price on a future date agreed upon by the parties. The agreed-upon repurchase price determines the yield during the Fund's holding period. Repurchase agreements are considered to be loans collateralized by the underlying security that is the subject of the repurchase contract. Income generated from transactions in repurchase agreements will be taxable. See "Tax Matters" for information relating to the allocation of taxable income between Common Shares and MuniPreferred Shares, if any. The Fund will only enter into repurchase agreements with registered securities dealers or domestic banks that, in the opinion of Nuveen Advisory, present minimal credit risk. The risk to the Fund is limited to the ability of the issuer to pay the agreed-upon repurchase price on the delivery date; however, although the value of the underlying collateral at the time the transaction is entered into always equals or exceeds the agreed-upon repurchase price, if the value of the collateral declines there is a risk of loss of both principal and interest. In the event of default, the collateral may be sold but the Fund might incur a loss if the value of the collateral declines, and might incur disposition costs or experience delays in connection with liquidating the collateral. In addition, if bankruptcy proceedings are commenced with respect to the seller of the security, realization upon the collateral by the Fund may be delayed or limited. Nuveen Advisory will monitor the value of the collateral at the time the transaction is entered into and at all times subsequent during the term of the repurchase agreement in an effort to determine that such value always equals or exceeds the agreed-upon repurchase price. In the event the value of the collateral declines below the repurchase price, Nuveen Advisory will 20 demand additional collateral from the issuer to increase the value of the collateral to at least that of the repurchase price, including interest. Zero Coupon Bonds The Fund may invest in zero coupon bonds. A zero coupon bond is a bond that does not pay interest for its entire life. The market prices of zero coupon bonds are affected to a greater extent by changes in prevailing levels of interest rates and thereby tend to be more volatile in price than securities that pay interest periodically. In addition, because the Fund accrues income with respect to these securities prior to the receipt of such interest, it may have to dispose of portfolio securities under disadvantageous circumstances in order to obtain cash needed to pay income dividends in amounts necessary to avoid unfavorable tax consequences. MANAGEMENT OF THE FUND Trustees and Officers The management of the Fund, including general supervision of the duties performed for the Fund under the Management Agreement, is the responsibility of the Board of Trustees of the Fund. The number of trustees of the Fund is currently set at seven, one of whom is an "interested" person (as the term "interested" persons is defined in the Investment Company Act of 1940) and six of whom are not "interested" persons. None of the trustees who are not "interested" persons of the Fund has ever been a director or employee of, or consultant to, Nuveen or its affiliates. The names and business addresses of the trustees and officers of the Fund and their principal occupations and other affiliations during the past five years are set forth below, with those trustees who are "interested" persons of the Fund indicated by an asterisk.
Name and Address Birthdate Positions and Principal Occupations During ---------------- --------- ------------- ---------------------------- Offices with the Past Five Years ---------------- --------------- Fund ---- Timothy R. Schwertfeger* 3/28/49 Chairman of the Chairman and Director (since July 1996) of The John Nuveen Company, 333 West Wacker Drive Board, President Nuveen Investments, Nuveen Advisory Corp. and Nuveen Institutional Chicago, IL 60606 and Trustee Advisory Corp.; prior thereto, Executive Vice President and Director of The John Nuveen Company and Nuveen Investments; Director (since 1992) and Chairman (since 1996) of Nuveen Advisory Corp. and Nuveen Institutional Advisory Corp.; Chairman and Director (since January 1997) of Nuveen Asset Management, Inc.; Director (since 1996) of Institutional Capital Corporation; Chairman and Director of
21
Name and Address Birthdate Positions and Principal Occupations During ---------------- --------- ------------- ---------------------------- Offices with the Past Five Years ---------------- --------------- Fund ---- Rittenhouse Financial Services Inc. (since 1999); Chief Executive Officer (since September 1999) of Nuveen Senior Loan Asset Management Inc. Robert P. Bremner 8/22/40 Trustee Private Investor and Management Consultant. 3725 Huntington Street, N.W. Washington, D.C. 20015 Lawrence H. Brown 7/29/34 Trustee Retired (August 1989) as Senior Vice President of The Northern Trust 201 Michigan Avenue Company Highwood, IL 60040 Anne E. Impellizzeri 1/26/33 Trustee Executive Director (since 1998) of Manitoga (Center for Russel 3 West 29th Street Wright's Design with Nature), formerly President and Chief Executive New York, NY 10001 Officer of Blanton-Peale Institutes of Religion and Health (since December 1990); prior thereto, Vice President, Metropolitan Life Insurance Co. Peter R. Sawers 4/3/33 Trustee Adjunct Professor of Business and Economics, University of Dubuque, 22 The Landmark Iowa; formerly (1991-2000) Adjunct Professor, Lake Forest Graduate Northfield, IL 60093 School of Management, Lake Forest, Illinois; prior thereto, Executive Director, Towers Perrin Australia; Chartered Financial Analyst; Certified Management Consultant. William J. Schneider 9/24/44 Trustee Senior Partner and Chief Operating Officer, Miller-Valentine Partners, 4000 Miller-Valentine Ct. Vice President, Miller-Valentine Group, a development and contract P. O. Box 744 company; Member Community Advisory Board, National City Bank, Dayton, Dayton, OH 45401 Ohio; Business Advisory Council, Cleveland Federal Reserve Bank. Judith M. Stockdale 12/29/47 Trustee Executive Director, Gaylord and Dorothy Donnelley Foundation (since 35 E. Wacker Drive 1994); prior thereto, Executive Director, Great Lakes Protection Fund Suite 2600 (from 1990 to 1994). Chicago, IL 60601 Alan G. Berkshire 12/28/60 Vice President and Senior Vice President and General Counsel (since September 1997) and 333 W. Wacker Drive Assistant Secretary Secretary (since May 1998) of The Chicago, IL 60606
22
Name and Address Birthdate Positions and Principal Occupations During ---------------- --------- ------------- ---------------------------- Offices with the Past Five Years ---------------- --------------- Fund ---- John Nuveen Company, Nuveen Investments, Nuveen Advisory Corp. and Nuveen Institutional Advisory Corp., Senior Vice President and Secretary (since September 1999) of Nuveen Senior Loan Management Inc.; prior thereto, Partner in the law firm of Kirkland & Ellis. Peter H. D'Arrigo 11/28/67 Vice President and Vice President of Nuveen Investments 333 W. Wacker Drive Treasurer (since January 1999), prior thereto, Chicago, IL 60606 Assistant Vice President (from January 1997); formerly, Associate of Nuveen Investments; Vice President and Treasurer (since September 1999) of Nuveen Senior Loan Asset Management Inc.; Chartered Financial Analyst. Michael S. Davern 6/26/57 Vice President Vice President of Nuveen Advisory 333 W. Wacker Drive Corp. (Since January 1997); prior Chicago, IL 60606 thereto, Vice President and Portfolio Manager of Flagship Financial. Lorna C. Ferguson 10/24/45 Vice President Vice President of Nuveen Investments; 333 W. Wacker Drive Vice President (since January 1998) of Chicago, IL 60606 Nuveen Advisory Corp. and Nuveen Institutional Advisory Corp. William M. Fitzgerald 3/2/64 Vice President Vice President of Nuveen Advisory 333 W. Wacker Drive Corp. (since December 1995); Chicago, IL 60606 Assistant Vice President of Nuveen Advisory Corp. (from September 1992 to December 1995), prior thereto, Assistant Portfolio Manager of Nuveen Advisory Corp.; Chartered Financial Analyst. Stephen D. Foy 5/31/54 Vice President and Vice President of Nuveen Investments 333 W. Wacker Drive Controller and (since May 1998) The John Nuveen Chicago, IL 60606 Company, Vice President (since September 1999) of Nuveen Senior Loan Management Inc.; Certified Public Accountant. J. Thomas Futrell 7/5/55 Vice President Vice President of Nuveen Advisory 333 W. Wacker Drive Corp.; Chartered Financial Analyst.
23
Name and Address Birthdate Positions and Principal Occupations During ---------------- --------- ------------- ---------------------------- Offices with the Past Five Years ---------------- --------------- Fund ---- Chicago, IL 60606 Richard A. Huber 3/26/63 Vice President Vice President of Nuveen Institutional 333 W. Wacker Drive Advisory Corp. (since March 1998) and Chicago, IL 60606 Nuveen Advisory Corp. (since January 1997); prior thereto, Vice President and Portfolio Manager of Flagship Financial, Inc. Steven J. Krupa 8/21/57 Vice President Vice President of Nuveen Advisory 333 W. Wacker Drive Corp. Chicago, IL 60606 David J. Lamb 3/22/63 Vice President Vice President (since March 2000) of Nuveen Investments, previously Assistant Vice President (since January 1999), prior thereto, Associate of Nuveen Investments; Certified Public Accountant Larry W. Martin 7/27/51 Vice President and Vice President, Assistant Secretary 333 W. Wacker Drive Assistant Secretary and Assistant General Counsel of Chicago, IL 60606 Nuveen Investments; Vice President and Assistant Secretary of Nuveen Advisory Corp. and Nuveen Institutional Advisory Corp.; Assistant Secretary of the John Nuveen Company and (since January 1997) Nuveen Asset Management, Inc.; Vice President and Assistant Secretary (since September 1999) of Nuveen Senior Loan Asset Management Inc. Edward F. Neild, IV 7/7/65 Vice President Vice President (since September 1996), 333 W. Wacker Drive previously Assistant Vice President Chicago, IL 60606 (since December 1993) of Nuveen Advisory Corp., Portfolio Manager prior thereto; Vice President (since September 1996), previously Assistant Vice President (since May 1995) of Nuveen Institutional Advisory Corp., Portfolio Manager prior thereto; Chartered Financial Analyst. Stephen S. Peterson 9/20/57 Vice President Vice President (since September 1997), 333 W. Wacker Drive previously Assistant Vice President Chicago, IL 60606 (since September 1996), Portfolio Manager, prior thereto,
24
Name and Address Birthdate Positions and Principal Occupations During ---------------- --------- ------------- ---------------------------- Offices with the Past Five Years ---------------- --------------- Fund ---- of Nuveen Advisory Corp.; Chartered Financial Analyst. Thomas C. Spalding, Jr. 7/31/51 Vice President Vice President of Nuveen Advisory 333 W. Wacker Drive Corp. and Nuveen Institutional Chicago, IL 60606 Advisory Corp.; Chartered Financial Analyst. Gifford R. Zimmerman 9/9/56 Vice President and Vice President, Assistant Secretary 333 W. Wacker Drive Secretary and Associate General Counsel, formerly Chicago, IL 60606 Assistant General Counsel, of Nuveen Investments; Vice President and Assistant Secretary of Nuveen Advisory Corp. and Nuveen Institutional Advisory Corp.; Vice President and Assistant Secretary of The John Nuveen Company (since May 1994); Vice President and Assistant Secretary (since September 1999) of Nuveen Senior Loan Asset Management Inc.; Chartered Financial Analyst.
Peter R. Sawers and Timothy R. Schwertfeger serve as members of the Executive Committee of the Board of Trustees of the Fund. The Executive Committee, which meets between regular meetings of the Board of Trustees, is authorized to exercise all of the powers of the Board of Trustees. The trustees of the Fund are also directors or trustees, as the case may be, of 35 Nuveen open-end funds and 59 Nuveen closed-end funds advised by Nuveen Advisory Corp. Mr. Schwertfeger is a director or trustee, as the case may be, of 13 Nuveen open-end and closed-end funds advised by Nuveen Institutional Advisory Corp. and two funds advised by Nuveen Senior Loan Asset Management Inc. None of the independent trustees has ever been a director, officer, or employee of, or a consultant to, Nuveen Advisory, Nuveen or their affiliates. 25 The Common Shareholders of the Fund will elect trustees at the next annual meeting of Common Shareholders, unless any MuniPreferred Shares are outstanding at that time, in which event holders of MuniPreferred Shares, voting as a separate class, will elect two trustees and the remaining trustees shall be elected by Common Shareholders and holders of MuniPreferred Shares, voting together as a single class. Holders of MuniPreferred Shares will be entitled to elect a majority of the Fund's trustees under certain circumstances. See "Description of Shares - MuniPreferred Shares - Voting Rights." The following table sets forth estimated compensation to be paid by the Fund projected during the Fund's first full fiscal year after commencement of operation. The Fund does not have a retirement or pension plan. The officers and trustees affiliated with Nuveen serve without any compensation from the Fund.
Amount of Total Total Compensation Compensation that California from Fund and Has Been Name of Trustee Fund* Fund Complex** Deferred --------------------- -------------------- -------------------- ------------------ - ---------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------- Robert P. Bremner $120 $71,000 $ 8,368 - ---------------------------------------------------------------------------------------------- Lawrence H. Brown $126 $75,250 $ 0 - ---------------------------------------------------------------------------------------------- Anne E. Impellizzeri $120 $71,000 $55,784 - ---------------------------------------------------------------------------------------------- Peter R. Sawers $120 $71,000 $55,784 - ---------------------------------------------------------------------------------------------- William J. Schneider $120 $69,000 $54,216 - ---------------------------------------------------------------------------------------------- Judith M. Stockdale $120 $71,000 $13,946 - ----------------------------------------------------------------------------------------------
26 - -------------------- * Based on the estimated compensation to be earned by the independent trustees for the period from inception through the end of the Fund's first full fiscal year for services to the Fund. **Based on the estimated compensation paid to the trustees for the one year period ending 12/31/00 for services to the open-end and closed-end funds advised by Nuveen Advisory. The Fund has no employees. Its officers are compensated by Nuveen Advisory or Nuveen. INVESTMENT ADVISER Nuveen Advisory acts as investment adviser to the Fund, with responsibility for the overall management of the Fund. Its address is 333 West Wacker Drive, Chicago, Illinois 60606. Nuveen Advisory is also responsible for managing the Fund's business affairs and providing day-to-day administrative services to the Fund. For additional information regarding the management services performed by Nuveen Advisory, see "Management of the Fund" in the Fund's Prospectus. Nuveen Advisory is a wholly owned subsidiary of Nuveen, which is also a co- managing underwriter of the Fund's shares. Nuveen is sponsor of the Nuveen Defined Portfolios, registered unit investment trusts, is the principal underwriter for the Nuveen Mutual Funds, and has served as co-managing underwriter for the shares of the Nuveen Exchange-Traded Funds. Over 1,300,000 individuals have invested to date in Nuveen's funds and trusts. Founded in 1898, Nuveen brings over a century of expertise to the municipal bond market. According to data from Strategic Insight, Nuveen is the leading sponsor of exchange-traded municipal bond funds as measured by number of funds (59) and fund assets under management ($28 billion). Overall, Nuveen and its affiliates have over $62 billion in assets under management or surveillance. Nuveen is a subsidiary of The John Nuveen Company which, in turn, is approximately 77% owned by The St. Paul Companies, Inc. ("St. Paul"). St. Paul is a publicly-traded company 27 located in St. Paul, Minnesota, and is principally engaged in providing property-liability insurance through subsidiaries. Pursuant to an investment management agreement between Nuveen Advisory and the Fund, the Fund has agreed to pay for the services and facilities provided by Nuveen Advisory an annual management fee, payable on a monthly basis, according to the following schedule:
Average Daily Net Assets(1) Management Fee - ----------------------------- ------------------ Up to $125 million .6500% $125 million to $250 million .6375% $250 million to $500 million .6250% $500 million to $1 billion .6125% $1 billion to $2 billion .6000% $2 billion and over .5750%
(1) Including net assets attributable to MuniPreferred Shares. All fees and expenses are accrued daily and deducted before payment of dividends to investors. The investment management agreement has been approved by a majority of the disinterested trustees of the Fund and the sole shareholder of the Fund. For the first ten years of the Fund's operation, Nuveen Advisory has contractually agreed to reimburse the Fund for fees and expenses in the amounts, and for the time periods, set forth below:
Percentage Percentage Reimbursed Reimbursed Year Ending (as a percentage of Year Ending (as a percentage of March 31, daily net assets)(1) March 31, daily net assets)(1) ------------- ------------------- ------------- ------------------- 2001(2) .30% 2007 .25% 2002 .30% 2008 .20% 2003 .30% 2009 .15% 2004 .30% 2010 .10% 2005 .30% 2011 .05% 2006 .30%
- ----------------------- (1) Including net assets attributable to MuniPreferred Shares. (2) From the commencement of operations. Reducing Fund expenses in this manner will tend to increase the amount of income available for the Common Shareholders. Nuveen Advisory has not agreed to reimburse the Fund for any portion of its fees and expenses beyond March 31, 2011. The Fund, Nuveen Advisory, Nuveen, Salomon Smith Barney Inc. and other related entities have adopted codes of ethics which essentially prohibit certain of their personnel, including the Nuveen fund portfolio manager, from engaging in personal investments which compete or interfere with, or attempt to take advantage of a client's, including the Fund's, anticipated or actual portfolio transactions, and are designed to assure that the interests of clients, including Fund shareholders, are placed before the interests of personnel in connection with personal investment transactions. Text-only versions of the codes of ethics can be viewed online or downloaded from the EDGAR Database on the SEC's internet web site at www.sec.gov. You may also review and copy those documents by visiting the SEC's Public Reference Room in Washington, DC. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 202-942-8090. In addition, copies of the codes of ethics may be obtained, after mailing the appropriate duplicating fee, by writing to the SEC's Public Reference Section, 450 5th Street, N.W., Washington, DC 20549-0102 or by e-mail request at publicinfo@sec.gov. PORTFOLIO TRANSACTIONS Nuveen Advisory is responsible for decisions to buy and sell securities for the Fund and for the placement of the Fund's securities business, the negotiation of the prices to be paid for principal trades and the allocation of its transactions among various dealer firms. Portfolio securities will normally be purchased directly from an underwriter or in the over-the-counter market from the principal dealers in such securities, unless it appears that a better price or 28 execution may be obtained through other means. Portfolio securities will not be purchased from Nuveen or its affiliates except in compliance with the 1940 Act. The Fund expects that substantially all portfolio transactions will be effected on a principal (as opposed to an agency) basis and, accordingly, does not expect to pay any brokerage commissions. Purchases from underwriters will include a commission or concession paid by the issuer to the underwriter, and purchases from dealers will include the spread between the bid and asked price. On occasion, the Fund may clear portfolio transactions through Nuveen. It is the policy of Nuveen Advisory to seek the best execution under the circumstances of each trade. Nuveen Advisory evaluates price as the primary consideration, with the financial condition, reputation and responsiveness of the dealer considered secondary in determining best execution. Given the best execution obtainable, it will be Nuveen Advisory's practice to select dealers which, in addition, furnish research information (primarily credit analyses of issuers and general economic reports) and statistical and other services to Nuveen Advisory. It is not possible to place a dollar value on information and statistical and other services received from dealers. Since it is only supplementary to Nuveen Advisory's own research efforts, the receipt of research information is not expected to reduce significantly Nuveen Advisory's expenses. While Nuveen Advisory will be primarily responsible for the placement of the business of the Fund, the policies and practices of Nuveen Advisory in this regard must be consistent with the foregoing and will, at all times, be subject to review by the Board of Trustees of the Fund. Nuveen Advisory may manage other investment accounts and investment companies for other clients which have investment objectives similar to those of the Fund. Subject to applicable laws and regulations, Nuveen Advisory seeks to allocate portfolio transactions equitably whenever concurrent decisions are made to purchase or sell securities by the Fund and another advisory account. In making such allocations the main factors to be considered will be the respective investment objectives, the relative size of portfolio holdings of the same or comparable securities, the availability of cash for investment and the size of investment commitments generally held. While this procedure could have a detrimental effect on the price or amount of the securities available to the Fund from time to time, it is the opinion of the Board of Trustees that the benefits available from Nuveen Advisory's organization will outweigh any disadvantage that may arise from exposure to simultaneous transactions. Under the 1940 Act, the Fund may not purchase portfolio securities from any underwriting syndicate of which Nuveen is a member except under certain limited conditions set forth in Rule 10f-3. The rule sets forth requirements relating to, among other things, the terms of an issue of municipal bonds purchased by the Fund, the amount of municipal bonds which may be purchased in any one issue and the assets of the Fund that may be invested in a particular issue. In addition, purchases of securities made pursuant to the terms of the Rule must be approved at least quarterly by the Board of Trustees of the Fund, including a majority of the members thereof who are not interested persons of the Fund. DISTRIBUTIONS As described in the Fund's Prospectus, initial distributions to Common Shareholders are expected to be declared approximately 45 days, and paid approximately 60 to 90 days, from the completion of the offering of the Common Shares, depending on market conditions. To permit the Fund to maintain a 29 more stable monthly distribution, the Fund will initially (prior to its first distribution), and may from time to time thereafter, distribute less than the entire amount of net investment income earned in a particular period. Such undistributed net investment income would be available to supplement future distributions, including distributions which might otherwise have been reduced by a decrease in the Fund's monthly net income due to fluctuations in investment income or expenses, or due to an increase in the dividend rate on the Fund's outstanding MuniPreferred Shares. As a result, the distributions paid by the Fund for any particular period may be more or less than the amount of net investment income actually earned by the Fund during such period. Undistributed net investment income will be added to the Fund's net asset value and, correspondingly, distributions from undistributed net investment income will be deducted from the Fund's net asset value. For tax purposes, the Fund is currently required to allocate net capital gain and other taxable income, if any, between Common Shares and MuniPreferred Shares in proportion to total distributions paid to each class for the year in which such net capital gain or other taxable income is realized. For information relating to the impact of the issuance of MuniPreferred Shares on the distributions made by a Fund to Common Shareholders, see the Fund's Prospectus under "MuniPreferred Shares and Leverage." While any MuniPreferred Shares are outstanding, the Fund may not declare any cash dividend or other distribution on its Common Shares unless at the time of such declaration (1) all accumulated dividends on the MuniPreferred Shares have been paid and (2) the net asset value of the Fund's portfolio (determined after deducting the amount of such dividend or other distribution) is at least 200% of the liquidation value of any outstanding MuniPreferred Shares. This latter limitation on the Fund's ability to make distributions on its Common Shares could under certain circumstances impair the ability of the Fund to maintain its qualification for taxation as a regulated investment company. See "Tax Matters." DESCRIPTION OF SHARES Common Shares The Fund's Declaration of Trust (the "Declaration") authorizes the issuance of an unlimited number of Common Shares, par value $.01 per share. All Common Shares of the Fund have equal rights as to the payment of dividends and the distribution of assets upon liquidation of the Fund. Common Shares will, when issued, be fully paid and, subject to matters discussed in "Certain Provisions in the Declaration of Trust," non-assessable, and will have no pre-emptive or conversion rights or rights to cumulative voting. At any time when the Fund's MuniPreferred Shares are outstanding, Common Shareholders will not be entitled to receive any distributions from the Fund unless all accrued dividends on MuniPreferred Shares have been paid, and unless asset coverage (as defined in the 1940 Act) with respect to MuniPreferred Shares would be at least 200% after giving effect to such distributions. See "MuniPreferred Shares" below. The Common Shares have been approved for listing on the American Stock Exchange, subject to notice of issuance. The Fund intends to hold annual meetings of shareholders so long as the Common Shares are listed on a national securities exchange and such meetings are required as a condition to such listing. 30 Shares of closed-end investment companies may frequently trade at prices lower than net asset value. Shares of closed-end investment companies like the Fund that invest predominately in investment grade municipal bonds have during some periods traded at prices higher than net asset value and during other periods have traded at prices lower than net asset value. There can be no assurance that Common Shares or shares of other municipal funds will trade at a price higher than net asset value in the future. Net asset value will be reduced immediately following the offering after payment of the sales load and organization and offering expenses. Net asset value generally increases when interest rates decline, and decreases when interest rates rise, and these changes are likely to be greater in the case of a fund having a leveraged capital structure. Whether investors will realize gains or losses upon the sale of Common Shares will not depend upon a Fund's net asset value but will depend entirely upon whether the market price of the Common Shares at the time of sale is above or below the original purchase price for the shares. Since the market price of the Fund's Common Shares will be determined by factors beyond the control of the Fund, the Fund cannot predict whether the Common Shares will trade at, below, or above net asset value or at, below or above the initial public offering price. Accordingly, the Common Shares are designed primarily for long-term investors, and investors in the Common Shares should not view the Fund as a vehicle for trading purposes. See "Repurchase of Fund Shares; Conversion to Open-End Fund" and the Fund's Prospectus under "MuniPreferred Shares and Leverage" and "The Fund's Investments--Municipal Bonds." MuniPreferred Shares The Declaration authorizes the issuance of an unlimited number of MuniPreferred Shares, par value $.01 per share, in one or more classes or series, with rights as determined by the Board of Trustees of the Fund, by action of the Board of Trustees without the approval of the Common Shareholders. The Fund's Board of Trustees has indicated its intention to authorize an offering of MuniPreferred Shares (representing approximately 35% of the Fund's capital immediately after the time the MuniPreferred Shares are issued) within approximately one to three months after completion of the offering of Common Shares, subject to market conditions and to the Board's continuing belief that leveraging the Fund's capital structure through the issuance of MuniPreferred Shares is likely to achieve the benefits to the Common Shareholders described in this Statement of Additional Information. Although the terms of the MuniPreferred Shares, including their dividend rate, voting rights, liquidation preference and redemption provisions, will be determined by the Board of Trustees (subject to applicable law and the Fund's Declaration) if and when it authorizes a MuniPreferred Shares offering, the Board has stated that the initial series of MuniPreferred Shares would likely pay cumulative dividends at relatively shorter-term periods (such as 7 days); by providing for the periodic redetermination of the dividend rate through an auction or remarketing procedure. The Board of Trustees of the Fund has indicated that the liquidation preference, preference on distribution, voting rights and redemption provisions of the MuniPreferred Shares will likely be as stated below. Limited Issuance of MuniPreferred Shares. Under the 1940 Act, the Fund could issue MuniPreferred Shares with an aggregate liquidation value of up to one-half of the value of the Fund's total net assets, measured immediately after issuance of the MuniPreferred Shares. "Liquidation value" means the original purchase price of the shares being liquidated plus any accrued and unpaid dividends. In addition, the Fund is not permitted to declare any cash dividend or other distribution on its Common Shares unless the liquidation value of the MuniPreferred shares is less than one-half of the value of the Fund's total net assets (determined after deducting the amount of such dividend or distribution) immediately after the distribution. If the Fund sells all the Common Shares and MuniPreferred Shares discussed in this Prospectus, the liquidation value of the MuniPreferred Shares is expected to be approximately 35% of the value of the Fund's total net assets. The Fund intends to purchase or redeem MuniPreferred Shares, if necessary, to keep that fraction below one-half. Distribution Preference. The MuniPreferred Shares have complete priority over the Common Shares as to distribution of assets. 31 Liquidation Preference. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Fund, holders of MuniPreferred Shares will be entitled to receive a preferential liquidating distribution (expected to equal the original purchase price per share plus accumulated and unpaid dividends thereon, whether or not earned or declared) before any distribution of assets is made to holders of Common Shares. After payment of the full amount of the liquidating distribution to which they are entitled, holders of MuniPreferred Shares will not be entitled to any further participation in any distribution of assets by the Fund. A consolidation or merger of the Fund with or into any Massachusetts business trust or corporation or a sale of all or substantially all of the assets of the Fund shall not be deemed to be a liquidation, dissolution or winding up of the Fund. Voting Rights. In connection with any issuance of MuniPreferred Shares, the Fund must comply with Section 18(i) of the 1940 Act which requires, among other things, that MuniPreferred Shares be voting shares and have equal voting rights with Common Shares. Except as otherwise indicated in this Statement of Additional Information and except as otherwise required by applicable law, holders of MuniPreferred Shares will vote together with Common Shareholders as a single class. In connection with the election of the Fund's trustees, holders of MuniPreferred Shares, voting as a separate class, will be entitled to elect two of the Fund's trustees, and the remaining trustees shall be elected by Common Shareholders and holders of MuniPreferred Shares, voting together as a single class. In addition, if at any time dividends on the Fund's outstanding MuniPreferred Shares shall be unpaid in an amount equal to two full years' dividends thereon, the holders of all outstanding MuniPreferred Shares, voting as a separate class, will be entitled to elect a majority of the Fund's trustees until all dividends in arrears have been paid or declared and set apart for payment. The affirmative vote of the holders of a majority of the Fund's outstanding MuniPreferred Shares of any class or series, as the case may be, voting as a separate class, will be required to, among other things (1) take certain actions which would affect the preferences, rights, or powers of such class or series or (2) authorize or issue any class or series ranking prior to the MuniPreferred Shares. Except as may otherwise be required by law, (1) the affirmative vote of the holders of at least two-thirds of the Fund's MuniPreferred Shares outstanding at the time, voting as a separate class, will be required to approve any conversion of the Fund from a closed-end to an open-end investment company and (2) the affirmative vote of the holders of at least two-thirds of the outstanding MuniPreferred Shares, voting as a separate class, shall be required to approve any plan of reorganization (as such term is used in the 1940 Act) adversely affecting such shares, provided however, that such separate class vote shall be a majority vote if the action in question has previously been approved, adopted or authorized by the affirmative vote of two-thirds of the total number of Trustees fixed in accordance with the Declaration or the By-laws. The affirmative vote of the holders of a majority of the outstanding MuniPreferred Shares, voting as a separate class, shall be required to approve any action not described in the preceding sentence requiring a vote of security holders under Section 13(a) of the 1940 Act including, among other things, changes in a Fund's investment objectives or changes in the investment restrictions described as fundamental policies under "Investment Objectives and Policies--Investment Restrictions." The class or series vote of holders of MuniPreferred Shares described 32 above shall in each case be in addition to any separate vote of the requisite percentage of Common Shares and MuniPreferred Shares necessary to authorize the action in question. The foregoing voting provisions will not apply with respect to the Fund's MuniPreferred Shares if, at or prior to the time when a vote is required, such shares shall have been (1) redeemed or (2) called for redemption and sufficient funds shall have been deposited in trust to effect such redemption. Redemption, Purchase and Sale of MuniPreferred Shares by the Fund. The terms of the MuniPreferred Shares may provide that they are redeemable at certain times, in whole or in part, at the original purchase price per share plus accumulated dividends, that the Fund may tender for or purchase MuniPreferred Shares and that the Fund may subsequently resell any shares so tendered for or purchased. Any redemption or purchase of MuniPreferred Shares by the Fund will reduce the leverage applicable to Common Shares, while any resale of shares by the Fund will increase such leverage. The discussion above describes the Fund's Board of Trustees' present intention with respect to a possible offering of MuniPreferred Shares. If the Board of Trustees determines to authorize such an offering, the terms of the MuniPreferred Shares may be the same as, or different from, the terms described above, subject to applicable law and the Fund's Declaration. CERTAIN PROVISIONS IN THE DECLARATION OF TRUST Under Massachusetts law, shareholders could, under certain circumstances, be held personally liable for the obligations of the Fund. However, the Declaration contains an express disclaimer of shareholder liability for debts or obligations of the Fund and requires that notice of such limited liability be given in each agreement, obligation or instrument entered into or executed by the Fund or the trustees. The Declaration further provides for indemnification out of the assets and property of the Fund for all loss and expense of any shareholder held personally liable for the obligations of the Fund. Thus, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which the Fund would be unable to meet its obligations. The Fund believes that the likelihood of such circumstances is very remote. The Declaration includes provisions that could limit the ability of other entities or persons to acquire control of the Fund. Specifically, the Declaration requires a vote by holders of at least two-thirds of the Common Shares and MuniPreferred Shares, voting together as a single class, except as described below, to authorize (1) a conversion of the Fund from a closed-end to an open-end investment company, (2) a merger or consolidation of the Fund, or a series or class of the Fund, with any corporation, association, trust or other organization or a reorganization or recapitalization of the Fund, or a series or class of the Fund, (3) a sale, lease or transfer of all or substantially all of the Fund's assets (other than in the regular course of the Fund's investment activities), (4) in certain circumstances, a termination of the Fund, or a series or class of the Fund or (5) removal of trustees, and then only for cause, unless, with respect to (1) through (4), such transaction has already been authorized by the affirmative vote of two-thirds of the total number of trustees fixed in accordance with the Declaration or the By-laws, in which case the affirmative vote of the holders of at least a majority of the Fund's Common Shares and MuniPreferred Shares 33 outstanding at the time, voting together as a single class, is required, provided, however, that where only a particular class or series is affected (or, in the case of removing a trustee, when the trustee has been elected by only one class), only the required vote by the applicable class or series will be required. Approval of shareholders is not required, however, for any transaction, whether deemed a merger, consolidation, reorganization or otherwise whereby the Fund issues shares in connection with the acquisition of assets (including those subject to liabilities) from any other investment company or similar entity. None of the foregoing provisions may be amended except by the vote of at least two-thirds of the Common Shares and MuniPreferred Shares, voting together as a single class. In the case of the conversion of the Fund to an open-end investment company, or in the case of any of the foregoing transactions constituting a plan of reorganization which adversely affects the holders of MuniPreferred Shares, the action in question will also require the affirmative vote of the holders of at least two-thirds of the Fund's MuniPreferred Shares outstanding at the time, voting as a separate class, or, if such action has been authorized by the affirmative vote of two-thirds of the total number of trustees fixed in accordance with the Declaration or the By- laws, the affirmative vote of the holders of at least a majority of the Fund's MuniPreferred Shares outstanding at the time, voting as a separate class. The votes required to approve the conversion of the Fund from a closed-end to an open-end investment company or to approve transactions constituting a plan of reorganization which adversely affects the holders of MuniPreferred Shares are higher than those required by the 1940 Act. The Board of Trustees believes that the provisions of the Declaration relating to such higher votes are in the best interest of the Fund and its shareholders. The provisions of the Declaration described above could have the effect of depriving the Common Shareholders of opportunities to sell their Common Shares at a premium over market value by discouraging a third party from seeking to obtain control of the Fund in a tender offer or similar transaction. The overall effect of these provisions is to render more difficult the accomplishment of a merger or the assumption of control by a third party. They provide, however, the advantage of potentially requiring persons seeking control of a Fund to negotiate with its management regarding the price to be paid and facilitating the continuity of the Fund's investment objectives and policies. The Board of Trustees of the Fund has considered the foregoing anti-takeover provisions and concluded that they are in the best interests of the Fund and its Common Shareholders. Reference should be made to the Declaration on file with the Securities and Exchange Commission for the full text of these provisions. The Declaration provides that the obligations of the Fund are not binding upon the trustees of the Fund individually, but only upon the assets and property of the Fund, and that the trustees shall not be liable for errors of judgment or mistakes of fact or law. Nothing in the Declaration, however, protects a trustee against any liability to which he would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office. REPURCHASE OF FUND SHARES; CONVERSION TO OPEN-END FUND The Fund is a closed-end investment company and as such its shareholders will not have the right to cause the Fund to redeem their shares. Instead, the Fund's Common Shares will trade in the open market at a price that will be a function of several factors, including dividend levels (which are in turn affected by expenses), net asset value, call protection, price, dividend stability, relative demand for and supply of such shares in the market, general market and economic 34 conditions and other factors. Because shares of a closed-end investment company may frequently trade at prices lower than net asset value, the Fund's Board of Trustees has currently determined that, at least annually, it will consider action that might be taken to reduce or eliminate any material discount from net asset value in respect of Common Shares, which may include the repurchase of such shares in the open market or in private transactions, the making of a tender offer for such shares at net asset value, or the conversion of the Fund to an open-end investment company. There can be no assurance, however, that the Board of Trustees will decide to take any of these actions, or that share repurchases or tender offers, if undertaken, will reduce market discount. Notwithstanding the foregoing, at any time when the Fund's MuniPreferred Shares are outstanding, the Fund may not purchase, redeem or otherwise acquire any of its Common Shares unless (1) all accrued MuniPreferred Shares dividends have been paid and (2) at the time of such purchase, redemption or acquisition, the net asset value of the Fund's portfolio (determined after deducting the acquisition price of the Common Shares) is at least 200% of the liquidation value of the outstanding MuniPreferred Shares (expected to equal the original purchase price per share plus any accrued and unpaid dividends thereon). The staff of the Securities and Exchange Commission currently requires that any tender offer made by a closed-end investment company for its shares must be at a price equal to the net asset value of such shares on the close of business on the last day of the tender offer. Any service fees incurred in connection with any tender offer made by the Fund will be borne by the Fund and will not reduce the stated consideration to be paid to tendering shareholders. Subject to its investment limitations, the Fund may borrow to finance the repurchase of shares or to make a tender offer. Interest on any borrowings to finance share repurchase transactions or the accumulation of cash by the Fund in anticipation of share repurchases or tenders will reduce the Fund's net income. Any share repurchase, tender offer or borrowing that might be approved by the Board of Trustees would have to comply with the Securities Exchange Act of 1934, as amended, and the 1940 Act and the rules and regulations thereunder. Although the decision to take action in response to a discount from net asset value will be made by the Board of the Fund at the time it considers such issue, it is the Board's present policy, which may be changed by the Board, not to authorize repurchases of Common Shares or a tender offer for such shares if (1) such transactions, if consummated, would (a) result in the delisting of the Common Shares from the American Stock Exchange, or (b) impair the Fund's status as a regulated investment company under the Internal Revenue Code of 1986, as amended (the "Code") (which would make the Fund a taxable entity, causing the Fund's income to be taxed at the corporate level in addition to the taxation of shareholders who receive dividends from the Fund) or as a registered closed-end investment company under the 1940 Act; (2) the Fund would not be able to liquidate portfolio securities in an orderly manner and consistent with the Fund's investment objectives and policies in order to repurchase shares; or (3) there is, in the Board's judgment, any (a) material legal action or proceeding instituted or threatened challenging such transactions or otherwise materially adversely affecting the Fund, (b) general suspension of or limitation on prices for trading securities on the American Stock Exchange, (c) declaration of a banking moratorium by Federal or state authorities or any suspension of payment by United States or state banks in which the Fund invests, (d) material limitation affecting the Fund or the issuers of its portfolio securities by Federal or state authorities on the extension of credit by lending institutions or on the exchange of 35 foreign currency, (e) commencement of war, armed hostilities or other international or national calamity directly or indirectly involving the United States, or (f) other event or condition which would have a material adverse effect (including any adverse tax effect) on the Fund or its shareholders if shares were repurchased. The Board of Trustees of the Fund may in the future modify these conditions in light of experience. Conversion to an open-end company would require the approval of the holders of at least two-thirds of the Fund's Common Shares and MuniPreferred Shares outstanding at the time, voting together as a single class, and of the holders of at least two-thirds of the Fund's MuniPreferred Shares outstanding at the time, voting as a separate class, provided however, that such separate class vote shall be a majority vote if the action in question has previously been approved, adopted or authorized by the affirmative vote of two-thirds of the total number of trustees fixed in accordance with the Declaration or By-laws. See the Prospectus under "Certain Provisions in the Declaration of Trust" for a discussion of voting requirements applicable to conversion of the Fund to an open-end company. If the Fund converted to an open-end company, it would be required to redeem all MuniPreferred Shares then outstanding, and the Fund's Common Shares would no longer be listed on the American Stock Exchange. Shareholders of an open-end investment company may require the company to redeem their shares on any business day (except in certain circumstances as authorized by or under the 1940 Act) at their net asset value, less such redemption charge, if any, as might be in effect at the time of redemption. In order to avoid maintaining large cash positions or liquidating favorable investments to meet redemptions, open-end companies typically engage in a continuous offering of their shares. Open-end companies are thus subject to periodic asset in-flows and out-flows that can complicate portfolio management. The Board of Trustees of the Fund may at any time propose conversion of the Fund to an open-end company depending upon their judgment as to the advisability of such action in light of circumstances then prevailing. The repurchase by the Fund of its shares at prices below net asset value will result in an increase in the net asset value of those shares that remain outstanding. However, there can be no assurance that share repurchases or tenders at or below net asset value will result in the Fund's shares trading at a price equal to their net asset value. Nevertheless, the fact that the Fund's shares may be the subject of repurchase or tender offers at net asset value from time to time, or that the Fund may be converted to an open-end company, may reduce any spread between market price and net asset value that might otherwise exist. In addition, a purchase by the Fund of its Common Shares will decrease the Fund's total assets which would likely have the effect of increasing the Fund's expense ratio. Any purchase by the Fund of its Common Shares at a time when MuniPreferred Shares are outstanding will increase the leverage applicable to the outstanding Common Shares then remaining. See the Fund's Prospectus under "Risks--Concentration Risk" and "Risks--Leverage Risk." Before deciding whether to take any action if the Fund's Common Shares trade below net asset value, the Board of the Fund would consider all relevant factors, including the extent and duration of the discount, the liquidity of the Fund's portfolio, the impact of any action that might be taken on the Fund or its shareholders and market considerations. Based on these considerations, even if the Fund's shares should trade at a discount, the Board of Trustees may determine that, in the interest of the Fund and its shareholders, no action should be taken. 36 TAX MATTERS Federal Income Tax Matters The following discussion of federal income tax matters is based upon the advice of Bell, Boyd & Lloyd LLC, special counsel to the Fund. The Fund intends to qualify under Subchapter M of the Code, for tax treatment as a regulated investment company and to satisfy certain conditions which will enable interest from municipal obligations, which is exempt from regular federal income taxes in the hands of the Fund, to qualify as "exempt- interest dividends" when distributed to the Fund's shareholders. In order to qualify for tax treatment as a regulated investment company, the Fund must satisfy certain requirements relating to the source of its income, diversification of its assets, and distributions of its income to shareholders. First, the Fund must derive at least 90% of its annual gross income (including tax-exempt interest) from dividends, interest, payments with respect to securities loans, gains from the sale or other disposition of stock or securities or foreign currencies, or other income (including but not limited to gains from options, futures and forward contracts) derived with respect to its business of investing in such stock, securities or currencies (the "90% gross income test"). Second, the Fund must diversify its holdings so that, at the close of each quarter of its taxable year, (i) at least 50% of the value of its total assets is comprised of cash, cash items, United States Government securities, securities of other regulated investment companies and other securities limited in respect of any one issuer to an amount not greater in value than 5% of the value of the Fund's total assets and to not more than 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the value of its total assets is invested in the securities of any one issuer (other than United States Government securities and securities of other regulated investment companies) or two or more issuers controlled by the Fund and engaged in the same, similar or related trades or businesses. As a regulated investment company, the Fund will not be subject to federal income tax in any taxable year with respect to "net investment income" (i.e., its "investment company taxable income," as that term is defined in the Code, determined without reference to the deduction for dividends paid) and "net capital gain" (i.e., the excess of the Fund's net long-term capital gain over its net short-term capital loss), provided that it distributes at least 90% of the sum of (i) its investment company taxable income (which includes dividends, taxable interest, taxable original issue discount and market discount income, income from securities lending, net short-term capital gain in excess of net long-term capital loss, and any other taxable income other than net capital gain and is reduced by deductible expenses) and (ii) its net tax-exempt interest (the excess of its gross tax-exempt interest income over certain disallowed deductions). The Fund may retain for investment its net capital gain. However, if the Fund retains any net capital gain or any investment company taxable income, it will be subject to tax at regular corporate rates on the amount retained. If the Fund retains any net capital gain, it may designate the retained amount as undistributed capital gains in a notice to its shareholders who, if subject to federal income tax on long-term capital gains, (i) will be required to include in income for federal income tax purposes, as long-term capital gain, their share of such undistributed amount, and (ii) will be entitled to credit their proportionate shares of the tax paid by the Fund on such undistributed amount against their federal income tax liabilities, if any, and to claim refunds to the extent the credit exceeds such liabilities. For federal income tax purposes, the tax basis of shares owned by a shareholder of the Fund will be increased by an amount equal under current law to the difference between the amount of undistributed capital gains included in the shareholder's gross income and the tax deemed paid by the shareholder under clause (ii) of the preceding sentence. The 37 Fund intends to distribute at least annually to its shareholders all or substantially all of its net tax-exempt interest and any investment company taxable income and net capital gain. Treasury regulations permit a regulated investment company, in determining its investment company taxable income and net capital gain, to elect (unless it has made a taxable year election for excise tax purposes as discussed below) to treat all or part of any net capital loss, any net long-term capital loss or any net foreign currency loss incurred after October 31 as if it had been incurred in the succeeding year. The Fund intends to qualify to pay "exempt-interest dividends" by satisfying the requirement that at the close of each quarter of the Fund's taxable year at least 50% of the value of its total assets consist of tax-exempt municipal obligations. Distributions from the Fund will constitute exempt- interest dividends to the extent of its tax-exempt interest income (net of expenses and amortized bond premium). Exempt-interest dividends distributed to Common Shareholders are excluded from gross income for federal income tax purposes, although they are required to be reported on the Common Shareholders' federal income tax returns. Gain from the sale or redemption of Common Shares, however, will be taxable to the Common Shareholders as capital gain (provided such Common Shares were held as capital assets) even though the increase in value of such Common Shares is attributable to tax-exempt interest income. In addition, gain realized by the Fund from the disposition of a tax-exempt municipal obligation that was purchased at a price less than the principal amount of the bond will be taxable to the Fund's shareholders as ordinary income to the extent of accrued market discount. Under the Code, interest on indebtedness incurred or continued to purchase or carry Common Shares, which interest is deemed to relate to exempt-interest dividends, will not be deductible by Common Shareholders for federal income tax purposes. Moreover, while exempt-interest dividends are excluded from gross income for federal income tax purposes, they may be subject to alternative minimum tax ("AMT") and may have other collateral tax consequences. Taxpayers that may be subject to the AMT should consult their advisers before investing in Common Shares. Distributions by the Fund of net interest received from certain taxable temporary investments (such as certificates of deposit, commercial paper and obligations of the U.S. Government, its agencies and instrumentalities) and net short-term capital gain realized by the Fund, if any, will be taxable to Common Shareholders as ordinary income whether received in cash or additional shares. Any net long-term capital gain realized by the Fund and distributed to Common Shareholders in cash or additional shares will be taxable to Common Shareholders as long-term capital gain regardless of the length of time investors have owned shares of the Fund. Distributions by the Fund to Common Shareholders that do not constitute ordinary income dividends or capital gain dividends will be treated as a return of capital to the extent of (and in reduction of) the Common Shareholder's tax basis in his or her shares. Any excess will be treated as gain from the sale of his or her shares, as discussed below. The Internal Revenue Service's position in a published revenue ruling indicates that the Fund is required to designate distributions paid with respect to its Common Shares and its MuniPreferred Shares as consisting of a portion of each type of income distributed by the Fund. The portion of each type of income deemed received by the holders of each class of shares will be equal to the portion of total Fund distributions received by such class. Thus, the Fund will designate dividends paid as exempt-interest dividends in a manner that allocates such dividends between the holders of the Common Shares and the holders of MuniPreferred Shares, in proportion to the total dividends paid to each such class during or with respect to the taxable year, or otherwise as required by applicable law. Capital gain dividends and ordinary income dividends will similarly be allocated between the two classes. If the Fund engages in hedging transactions involving financial futures and options, these transactions will be subject to special tax rules, the effect of which may be to accelerate income to the Fund, defer the Fund's losses, cause adjustments in the holding periods of the Fund's securities, convert long-term capital gains into short-term capital gains and convert short-term capital losses into long-term capital losses. These rules could therefore affect the amount, timing and character of distributions to Common Shareholders. Prior to purchasing shares in the Fund, an investor should carefully consider the impact of dividends or distributions which are expected to be or have been declared, but not paid. Any dividend or distribution declared shortly after a purchase of such shares prior to the record date will have the effect of reducing the per share net asset value by the per share amount of the dividend or distribution. Although dividends generally will be treated as distributed when paid, dividends declared in October, November or December, payable to shareholders of record on a specified date in one of those months and paid during the following January, will be treated as having been distributed by the Fund (and received by the shareholders) on December 31. The redemption or exchange of Common Shares normally will result in capital gain or loss to the Common Shareholders who hold their Common Shares as capital assets. However, any loss on the sale or exchange of a Common Share that has been held for six months or less will be disallowed to the extent of any distribution of exempt-interest dividends received with respect to such Common Share. Generally, a Common Shareholder's gain or loss will be long-term gain or loss if the shares have been held for more than one year. If a shareholder sells or otherwise disposes of Common Shares before holding them for more than six months, however, any loss on the sale or other disposition of such Common Shares shall be treated as a long-term capital loss to the extent of any capital gain dividends received by the Common Shareholder (or credited to the Common Shareholder as an undistributed capital gain) with respect to such Common Shares. Present law taxes both long- and short-term capital gains of corporations at the rates applicable to ordinary income. For non-corporate taxpayers, however, net capital gain (i.e., the excess of net long-term capital gain over net short-term capital loss) with respect to securities will be taxed at a maximum rate of 20%, while short-term capital gain and other ordinary income will be taxed at a maximum 38 rate of 39.6%. The maximum long-term capital gain rate will decrease from 20% to 18% for capital assets that have been held for more than five years and whose holding periods begin after December 31, 2000. Because of the limitations on itemized deductions and the deduction for personal exemptions applicable to higher income taxpayers, the effective tax rate may be higher in certain circumstances. All or a portion of a sales charge paid in purchasing Common Shares cannot be taken into account for purposes of determining gain or loss on the redemption or exchange of such shares within 90 days after their purchase to the extent shares of the Fund or another fund are subsequently acquired without payment of a sales charge pursuant to a reinvestment right. Any disregarded portion of such charge will result in an increase in the Common Shareholder's tax basis in the shares subsequently acquired. In addition, no loss will be allowed on the redemption or exchange of Common Shares if the Common Shareholder purchases other shares of the Fund (whether through reinvestment of distributions or otherwise) or the Common Shareholder acquires or enters into a contract or option to acquire securities that are substantially identical to shares of the Fund within a period of 61 days beginning 30 days before and ending 30 days after such redemption or exchange. If disallowed, the loss will be reflected in an adjustment to the basis of the shares acquired. In order to avoid a 4% federal excise tax, the Fund must distribute or be deemed to have distributed by December 31 of each calendar year at least 98% of its taxable ordinary income for such year, at least 98% of its capital gain net income (the excess of its realized capital gains over its realized capital losses, generally computed on the basis of the one-year period ending on October 31 of such year) and 100% of any taxable ordinary income and any excess of realized capital gains over realized capital losses for the prior year that was not distributed during such year and on which the Fund paid no federal income tax. For purposes of the excise tax, a regulated investment company may reduce its capital gain net income (but not below its net capital gain) by the amount of any net ordinary loss for the calendar year. The Fund intends to make timely distributions in compliance with these requirements and consequently it is anticipated that it generally will not be required to pay the excise tax. If in any year the Fund should fail to qualify under Subchapter M for tax treatment as a regulated investment company, the Fund would incur a regular corporate federal income tax upon its income for that year, and distributions to its Common Shareholders would be taxable to Common Shareholders as ordinary dividend income for federal income tax purposes to the extent of the Fund's earnings and profits. The Fund is required in certain circumstances to withhold 31% of taxable dividends and certain other payments paid to non-corporate holders of shares who have not furnished to the Fund their correct taxpayer identification numbers (in the case of individuals, their Social Security number) and certain certifications, or who are otherwise subject to backup withholding. Backup withholding is not an additional tax and any amounts withheld may be credited against the shareholder's federal income tax liability. The foregoing is a general and abbreviated summary of the provisions of the Code and Treasury Regulations presently in effect as they directly govern the taxation of the Fund and its Common Shareholders. For complete provisions, reference should be made to the pertinent Code sections and Treasury Regulations. The Code and Treasury Regulations are subject to change by legislative or administrative action, and any such change may be retroactive with respect to Fund transactions. Common Shareholders are advised to consult their own tax 39 advisors for more detailed information concerning the federal taxation of the Fund and the income tax consequences to its Common Shareholders. State Tax Matters Tax matters pertaining to California are set forth in Appendix D. PERFORMANCE RELATED AND COMPARATIVE INFORMATION The Fund may be a suitable investment for a shareholder who is thinking of adding bond investments to his portfolio to balance the appreciated stocks that the shareholder is holding. California municipal bonds can provide double tax- free income (exempt from both regular federal and state income taxes) for residents of California. Because the Fund expects that a substantial portion of its investments will pay interest that is taxable under the federal alternative minimum tax, the Fund may not be a suitable investment for shareholders that are subject to the federal alternative minimum tax. The Fund may quote certain performance-related information and may compare certain aspects of its portfolio and structure to other substantially similar closed-end funds as categorized by Lipper, Inc. ("Lipper"), Morningstar Inc. or other independent services. Comparison of the Fund to an alternative investment should be made with consideration of differences in features and expected performance. The Fund may obtain data from sources or reporting services, such as Bloomberg Financial ("Bloomberg") and Lipper, that the Fund believes to be generally accurate. Past performance is not indicative of future results. At the time Common Shareholders sell their shares, they may be worth more or less than their original investment. See Appendix E for additional performance related and comparative information. 40 EXPERTS The Statement of Net Assets of the Fund as of March 5, 2001, appearing in this Statement of Additional Information has been audited by Ernst & Young LLP, 233 South Wacker Drive, Chicago, Illinois 60606, independent auditors, as set forth in their report thereon appearing elsewhere herein, and is included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. Ernst & Young LLP provides accounting and auditing services to the Fund. CUSTODIAN The custodian of the assets of the Fund is The Chase Manhattan Bank, P.O. Box 660086, Dallas, Texas 75266-0086. The custodian performs custodial, fund accounting and portfolio accounting services. ADDITIONAL INFORMATION A Registration Statement on Form N-2, including amendments thereto, relating to the shares of the Fund offered hereby, has been filed by the Fund with the Securities and Exchange Commission (the "Commission"), Washington, D.C. The Fund's Prospectus and this Statement of Additional Information do not contain all of the information set forth in the Registration Statement, including any exhibits and schedules thereto. For further information with respect to the Fund and the shares offered hereby, reference is made to the Fund's Registration Statement. Statements contained in the Fund's Prospectus and this Statement of Additional Information as to the contents of any contract or other document referred to are not 41 necessarily complete and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. Copies of the Registration Statement may be inspected without charge at the Commission's principal office in Washington, D.C., and copies of all or any part thereof may be obtained from the Commission upon the payment of certain fees prescribed by the Commission. 42 REPORT OF INDEPENDENT AUDITORS The Board of Trustees and Shareholder Nuveen California Dividend Advantage Municipal Fund 2 We have audited the statement of net assets as of March 5, 2001 and the related statement of operations for the period from June 1, 1999 (date of organization) through March 5, 2001 for the Nuveen California Dividend Advantage Municipal Fund 2 (the "Fund"). These financial statements are the responsibility of the Fund's management. Our responsibility is to express an opinion on these statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above presents fairly, in all material respects, the financial position of the Fund at March 5, 2001, and operating results for the period from June 1, 1999 (date of organization) through March 5, 2001, in conformity with accounting principles generally accepted in the United States. ERNST & YOUNG LLP Chicago, Illinois March 6, 2001 43 NUVEEN CALIFORNIA DIVIDEND ADVANTAGE MUNICIPAL FUND 2 FINANCIAL STATEMENTS Nuveen California Dividend Advantage Municipal Fund 2 Statement of Net Assets March 5, 2001 Assets: Cash................................................................. $100,275 Offering costs....................................................... 115,700 Receivable from adviser.............................................. 15,000 -------- Total assets...................................................... 230,975 -------- Liabilities: Accrued expenses..................................................... 115,700 Payable for organization costs....................................... 15,000 -------- Total liabilities................................................. 130,700 -------- Net assets............................................................... $100,275 ======== Net asset value per Common Share outstanding ($100,275 divided by 7,000 Common Shares outstanding).................................. $ 14.325 ======== Net Assets Represent: Cumulative Preferred Shares, $25,000 liquidation value; unlimited number of shares authorized, no shares outstanding................ $ - Common Shares, $.01 par value; unlimited number of shares authorized, 7,000 shares outstanding.............................. 70 Paid-in surplus...................................................... 100,205 -------- $100,275 ========
44 Nuveen California Dividend Advantage Municipal Fund 2 Statement of Operations Period from June 1, 1999 (date of organization) through March 5, 2001 Investment income.................................................... $ - -------- Expenses: Organization costs................................................ $ 15,000 Expense reimbursement............................................. (15,000) -------- Total expenses................................................. - -------- Net investment income................................................ $ - ========
Note 1: Organization The Fund was organized as a Massachusetts business trust on June 1, 1999, and has been inactive since that date except for matters relating to its organization and registration as a closed-end management investment company under the Investment Company Act of 1940, as amended, and the Securities Act of 1933, as amended, and the sale of 7,000 Common Shares to Nuveen Advisory Corp., the Fund's investment adviser (the "Adviser"), a wholly owned subsidiary of The John Nuveen Company. Nuveen Investments, also a wholly owned subsidiary of The John Nuveen Company, has agreed to reimburse all organization expenses (approximately $15,000) and pay all offering costs (other than the sales load) that exceed $.03 per Common Share. The Fund is authorized by its Declaration of Trust to issue Preferred Shares having a liquidation value of $25,000 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 without approval of the Common Shareholders. Note 2: Accounting Policies The Fund's financial statements are prepared in accordance with accounting principles generally accepted in the United States which require the use of management estimates. Actual results may differ from those estimates. Note 3: Investment Management Agreement Pursuant to an investment management agreement between the Adviser and the Fund, the Fund has agreed to pay a management fee, payable on a monthly basis, at an annual rate ranging from 0.6500% of the first $125 million of the average daily net assets (including net assets attributable to MuniPreferred Shares) to 0.5750% of the average daily net assets (including net assets attributable to MuniPreferred Shares) in excess of $2 billion. 45 In addition to the reimbursement and waiver of organization and offering costs discussed in Note 1, the Adviser has contractually agreed to reimburse the Fund for fees and expenses during the first 10 years of operations. These reductions range from 0.3000% of the average daily net assets (including net assets attributable to MuniPreferred Shares) during the first year of operations, declining to 0.0500% of the average daily net assets (including net assets attributable to MuniPreferred Shares) during the tenth year. The Adviser has not agreed to reimburse the Fund for any portion of its fees and expenses beyond March 31, 2011. Note 4: Income Taxes The Fund intends to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute all of its tax- exempt net investment income, in addition to any significant amounts of net realized capital gains and/or market discount realized from investment transactions. 46 APPENDIX A Ratings of Investments Standard & Poor's Corporation--A brief description of the applicable Standard & Poor's Corporation ("Standard & Poor's" or "S&P") rating symbols and their meanings (as published by S&P) follows: A Standard & Poor's issue credit rating is a current opinion of the creditworthiness of an obligor with respect to a specific financial obligation, a specific class of financial obligations, or a specific financial program. It takes into consideration the creditworthiness of guarantors, insurers, or other forms of credit enhancement on the obligation. The issue credit rating is not a recommendation to purchase, sell, or hold a financial obligation, inasmuch as it does not comment as to market price or suitability for a particular investor. Issue credit ratings are based on current information furnished by the obligors or obtained by Standard & Poor's from other sources it considers reliable. Standard & Poor's does not perform an audit in connection with any credit rating and may, on occasion, rely on unaudited financial information. Credit ratings may be changed, suspended, or withdrawn as a result of changes in, or unavailability of, such information, or based on other circumstances. Issue credit ratings can be either long term or short term. Short-term ratings are generally assigned to those obligations considered short term in the relevant market. In the U.S., for example, that means obligations with an original maturity of no more than 365 days - including commercial paper. Short-term ratings are also used to indicate the creditworthiness of an obligor with respect to put features on long-term obligations. The result is a dual rating, in which the short-term ratings address the put feature, in addition to the usual long-term rating. Medium-term notes are assigned long-term ratings. Long-term Issue Credit Ratings Issue credit ratings are based in varying degrees, on the following considerations: 1. Likelihood of payment - capacity and willingness of the obligor to meet its financial commitment on an obligation in accordance with the terms of the obligation; 2. Nature of and provisions of the obligation; and 3. Protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors' rights. The issue ratings definitions are expressed in terms of default risk. As such, they pertain to senior obligations of an entity. Junior obligations are typically rated lower than senior obligations, to reflect the lower priority in bankruptcy, as noted above. AAA An obligation rated 'AAA' has the highest rating assigned by Standard & Poor's. The obligor's capacity to meet its financial A-1 commitment on the obligation is extremely strong. AA An obligation rated `AA' differs from the highest-rated obligations only in small degree. The obligor's capacity to meet its financial commitment on the obligation is very strong. A An obligation rated `A' is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated categories. However, the obligor's capacity to meet it financial commitment on the obligation is still strong. BBB An obligation rated `BBB' exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation. BB, B, CCC, CC, And C Obligations rated `BB', `B', `CCC', `CC', and `C' are regarded as having significant speculative characteristics. `BB' indicates the least degree of speculation and `C' the highest. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions. BB An obligation rated `BB' is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions, which could lead to the obligor's inadequate capacity to meet its financial commitment on the obligation. B An obligation rated `B' is more vulnerable to nonpayment than obligations rated `BB', but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment on the obligation. CCC An obligation rated `CCC' is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation. CC An obligation rated `CC' is currently highly vulnerable to nonpayment. A-2 C The `C' rating may be used to cover a situation where a bankruptcy petition has been filed or similar action has been taken, but payments on this obligation are being continued. D An obligation rated `D' is in payment default. The `D' rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor's believes that such payments will be made during such grace period. The `D' rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized. Plus (+) or minus (-) The ratings from `AA' to `CCC' may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories. c The `c' subscript is used to provide additional information to investors that the bank may terminate its obligation to purchase tendered bonds if the long-term credit rating of the issuer is below an investment-grade level and/or the issuer's bonds are deemed taxable. p The letter `p' indicates that the rating is provisional. A provisional rating assumes the successful completion of the project financed by the debt being rated and indicates that payment of debt service requirements is largely or entirely dependent upon the successful, timely completion of the project. This rating, however, while addressing credit quality subsequent to completion of the project, makes no comment on the likelihood of or the risk of default upon failure of such completion. The investor should exercise his own judgment with respect to such likelihood and risk. * Continuance of the ratings is contingent upon Standard & Poor's receipt of an executed copy of the escrow agreement or closing documentation confirming investments and cash flows. r The `r' highlights derivative, hybrid, and certain other obligations that Standard & Poor's believes may experience high volatility or high variability in expected returns as a result of noncredit risks. Examples of such obligations are securities with principal or interest return indexed to equities, commodities, or currencies; certain swaps and options; and interest-only and principal-only mortgage securities. The absence of an `r' symbol should not be taken as an indication that an obligation will exhibit no volatility or variability in total return. N.R. Not rated. Debt obligations of issuers outside the United States and its territories are rated on the same basis as domestic corporate and municipal issues. The ratings measure the creditworthiness of the obligor but do not take into account currency exchange and related uncertainties. Bond Investment Quality Standards Under present commercial bank regulations issued by the Comptroller of the Currency, bonds rated in the top four categories (`AAA', `AA', `BBB', commonly known as investment-grade ratings) generally are regarded as eligible for bank investment. Also, the laws of various states governing legal investments impose certain rating or other standards for obligations eligible for investment by savings banks, trust companies, insurance companies, and fiduciaries in general. Short-Term Issue Credit Ratings Notes A Standard & Poor's note ratings reflects the liquidity factors and market access risks unique to notes. Notes due in three years or less will likely receive a note rating. Notes maturing beyond three years will most likely receive a long-term debt rating. The following criteria will be used in making that assessment: . Amortization schedule -- the larger the final maturity relative to other maturities, the more likely it will be treated as a note; and . Source of payment -- the more dependent the issue is on the market for its refinancing, the more likely it will be treated as a note. Note rating symbols are as follows: SP-1 Strong capacity to pay principal and interest. An issue determined to possess a very strong capacity to pay debt service is given a plus (+) designation. SP-2 Satisfactory capacity to pay principal and interest, with some vulnerability to adverse financial and economic changes over the term of the notes. SP-3 Speculative capacity to pay principal and interest. A-3 A note rating is not a recommendation to purchase, sell, or hold a security inasmuch as it does not comment as to market price or suitability for a particular investor. The ratings are based on current information furnished to S&P by the issuer or obtained by S&P from other sources it considers reliable. S&P does not perform an audit in connection with any rating and may, on occasion, rely on unaudited financial information. The ratings may be changed, suspended, or withdrawn as a result of changes in or unavailability of such information or based on other circumstances. Commercial Paper An S&P commercial paper rating is a current assessment of the likelihood of timely payment of debt having an original maturity of no more than 365 days. Ratings are graded into several categories, ranging from `A-1' for the highest quality obligations to `D' for the lowest. These categories are as follows: A-1 A short-term obligation rated `A-1' is rated in the highest category by Standard & Poor's. The obligor's capacity to meet its financial commitment on the obligation is strong. Within this category, certain obligations are designated with a plus sign (+). This indicates that the obligor's capacity to meet its financial commitment on these obligations is extremely strong. A-2 A short-term obligation rated `A-2' is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rating categories. However, the obligor's capacity to meet its financial commitment on the obligation is satisfactory. A-3 A short-term obligation rated `A-3' exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation. B A short-term obligation rated `B' is regarded as having significant speculative characteristics. The obligor currently has the capacity to meet its financial commitment on the obligation; however, it faces major ongoing uncertainties which could lead to the obligor's inadequate capacity to meet its financial commitment on the obligation. C A short-term obligation rated `C' is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. D A short-term obligation rated `D' is in payment default. The `D' rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor's believes that such payments will be made during such grace period. The `D' rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized. A commercial rating is not a recommendation to purchase, sell, or hold a security inasmuch as it does not comment as to market price or suitability for a particular investor. The ratings are based on current information furnished to S&P by the issuer or obtained by S&P from other sources it considers reliable. S&P does not perform an audit in connection with any rating and may, on occasion, rely on unaudited financial information. The ratings may be changed, suspended, or withdrawn as a result of changes in or unavailability of such information or based on other circumstances. A-4 Moody's Investors Service, Inc.--A brief description of the applicable Moody's Investors Service, Inc. ("Moody's") rating symbols and their meanings (as published by Moody's) follows: Municipal Bonds Aaa Bonds which are rated `Aaa' are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edged." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Aa Bonds which are rated `Aa' are judged to be of high quality by all standards. Together with the `Aaa' group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in `Aaa' securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risks appear somewhat larger than in `Aaa' securities. A Bonds which are rated `A' possess many favorable investment attributes and are to be considered as upper medium grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future. Baa Bonds which are rated `Baa' are considered as medium grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Ba Bonds which are rated `Ba' are judged to have speculative elements; their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B Bonds which are rated `B' generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. Caa Bonds which are rated `Caa' are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. Ca Bonds which are rated `Ca' represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. C Bonds which are rated `C' are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. A-5 Issues that are secured by escrowed funds held in trust, reinvested in direct, non-callable U.S. government obligations or non-callable obligations unconditionally guaranteed by the U.S. Government or Resolution Funding Corporation are identified with a # (hatchmark) symbol, e.g., #Aaa. Con. (...): Bonds for which the security depends upon the completion of some act or the fulfillment of some condition are rated conditionally. These are bonds secured by (a) earnings of projects under construction, (b) earnings of projects unseasoned in operation experience, (c) rentals which begin when facilities are completed, or (d) payments to which some other limiting condition attaches. The parenthetical rating denotes probable credit stature upon completion of construction or elimination of the basis of the condition. Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category. Short-Term Loans MIG 1/VMIG 1 This designation denotes superior credit quality. Excellent protection is afforded by established cash flows, highly reliable liquidity support, or demonstrated broad-based access to the market for refinancing. MIG 2/VMIG 2 This designation denotes strong credit quality. Margins of protection are ample, although not as large as in the preceding group. MIG 3/VMIG 3 This designation denotes acceptable credit quality. Liquidity and cash-flow protection may be narrow, and market access for refinancing is likely to be less well-established. SG This designation denotes speculative-grade credit quality. Debt instruments in this category may lack sufficient margins of protection. Commercial Paper Issuers rated Prime-1 (or related supporting institutions) have a superior ability for repayment of senior short-term debt obligations. Prime-1 repayment ability will normally be evidenced by the following characteristics: -- Leading market positions in well-established industries. -- High rates of return on funds employed. -- Conservative capitalization structures with moderate reliance on debt and ample asset protection. -- Broad margins in earnings coverage of fixed financial charges and high internal cash generation. A-6 -- Well-established access to a range of financial markets and assured sources of alternate liquidity. Issuers rated Prime-2 (or related supporting institutions) have a strong ability for repayment of senior short-term debt obligations. This will normally be evidenced by many of the characteristics cited above but to a lesser degree. Earnings trends and coverage ratios, while sound, will be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained. Issuers rated Prime-3 (or related supporting institutions) have an acceptable ability for repayment of senior short-term debt obligations. The effect of industry characteristics and market composition may be more pronounced. Variability in earnings and profitability may result in changes in the level of debt protection measurements and the requirement for relatively high financial leverage. Adequate alternate liquidity is maintained. Issuers rated Not Prime do not fall within any of the Prime rating categories. Fitch IBCA, Inc.--A brief description of the applicable Fitch IBCA, Inc. ("Fitch") ratings symbols and meanings (as published by Fitch) follows: Long-Term Credit Ratings Investment Grade AAA Highest credit quality. `AAA' ratings denote the lowest expectation of credit risk. They are assigned only in case of exceptionally strong capacity for timely payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events. AA Very high credit quality. `AA' ratings denote a very low expectation of credit risk. They indicate very strong capacity for timely payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events. A High credit quality. `A' ratings denote a low expectation of credit risk. The capacity for timely payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to changes in circumstances or in economic conditions than is the case for higher ratings. BBB Good credit quality. `BBB' ratings indicate that there is currently a low expectation of credit risk. The capacity for timely payment of financial commitments is considered adequate, but adverse changes in circumstances and in economic conditions are more likely to impair this capacity. This is the lowest investment-grade category. Speculative Grade BB Speculative. `BB' ratings indicate that there is a possibility of credit risk developing, particularly as the result of adverse economic change over time; however, business or A-7 financial alternatives may be available to allow financial commitments to be met. Securities rated in this category are not investment grade. B Highly speculative. `B' ratings indicate that significant credit risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity for continued payment is contingent upon a sustained, favorable business and economic environment. CCC, CC, C High default risk. Default is a real possibility. Capacity for meeting financial commitments is solely reliant upon sustained, favorable business or economic developments. A `CC' rating indicates that default of some kind appears probable. `C' ratings signal imminent default. DDD, DD, and D Default. The ratings of obligations in this category are based on their prospects for achieving partial or full recovery in a reorganization or liquidation of the obligor. While expected recovery values are highly speculative and cannot be estimated with any precision, the following serve as general guidelines. `DDD' obligations have the highest potential for recovery, around 90%-100% of outstanding amounts and accrued interest. `DD' indicates potential recoveries in the range of 50%-90%, and `D' the lowest recovery potential, i.e., below 50%. Entities rated in this category have defaulted on some or all of their obligations. Entities rated `DDD' have the highest prospect for resumption of performance or continued operation with or without a formal reorganization process. Entities rated `DD' and `D' are generally undergoing a formal reorganization or liquidation process; those rated `DD' are likely to satisfy a higher portion of their outstanding obligations, while entities rated `D' have a poor prospect for repaying all obligations. Short-Term Credit Ratings A short-term rating has a time horizon of less than 12 months for most obligations, or up to three years for U.S. public finance securities, and thus places greater emphasis on the liquidity necessary to meet financial commitments in a timely manner. F1 Highest credit quality. Indicates the strongest capacity for timely payment of financial commitments; may have an added "+" to denote any exceptionally strong credit feature. F2 Good credit quality. A satisfactory capacity for timely payment of financial commitments, but the margin of safety is not as great as in the case of the higher ratings. F3 Fair credit quality. The capacity for timely payment of financial commitments is adequate; however, near-term adverse changes could result in a reduction to non-investment grade. B Speculative. Minimal capacity for timely payment of financial commitments, plus vulnerability to near-term adverse changes in financial and economic conditions. A-8 C High default risk. Default is a real possibility. Capacity for meeting financial commitments is solely reliant upon a sustained, favorable business and economic environment. D Default. Denotes actual or imminent payment default. Notes: "+" or "-" may be appended to a rating to denote relative status within major rating categories. Such suffixes are not added to the `AAA' long-term rating category, to categories below `CCC', or to short-term ratings other than `F1'. `NR' indicates that Fitch does not rate the issuer or issue in question. `Withdrawn': A rating is withdrawn when Fitch deems the amount of information available to be inadequate for rating purposes, or when an obligation matures, is called, or refinanced. Rating Watch: Ratings are placed on RatingWatch to notify investors that there is a reasonable probability of a rating change and the likely direction of such change. These are designated as "Positive", indicating a potential upgrade, "Negative", for a potential downgrade, or "Evolving", if ratings may be raised, lowered or maintained. Rating Watch is typically resolved over a relatively short period. A Rating Outlook indicates the direction a rating is likely to move over a one to two year period. Outlooks may be positive, stable, or negative. A positive or negative Rating Outlook does not imply a rating change is inevitable. Similarly, companies whose outlooks are `stable' could be downgraded before an outlook moves to positive or negative if circumstances warrant such an action. Occasionally, Fitch may be unable to identify the fundamental trend. In these cases, the Rating Outlook may be described as evolving. A-9 APPENDIX B TAXABLE EQUIVALENT YIELD TABLES The taxable equivalent yield is the current yield you would need to earn on a taxable investment in order to equal a stated tax-free yield on a municipal investment. To assist you to more easily compare municipal investments like the Fund with taxable alternative investments, the table below presents the taxable equivalent yields for a range of hypothetical tax-free yields assuming the stated marginal Federal tax rates for 2001 listed below: Taxable Equivalent of Tax-Free Yields Tax Free Yields Tax Rate 4.00% 4.50% 5.00% 5.50% 6.00% 6.50% - ------------------------------------------------------------------------------- 15.0% 4.71% 5.29% 5.88% 6.47% 7.06% 7.65% 28.0% 5.56% 6.25% 6.94% 7.64% 8.33% 9.03% 31.0% 5.80% 6.52% 7.25% 7.97% 8.70% 9.42% 36.0% 6.25% 7.03% 7.81% 8.59% 9.38% 10.16% 39.6% 6.62% 7.45% 8.28% 9.11% 9.93% 10.76%
B-1 CALIFORNIA The following tables show the approximate taxable yields for individuals that are equivalent to tax-free yields under combined Federal and California state taxes, using published 2001 marginal Federal tax rates and marginal California tax rates currently available and scheduled to be in effect.
Single Return Joint Return Federal Tax State Tax Combined Tax Bracket Bracket Rate Rate* Rate* - --------------- --------------- ----------- --------- ------------ $0-27,050 $0-45,200 15.00% 6.00% 20.10% 27,050-65,550 45,200-109,250 28.00% 9.30% 34.70% 65,550-136,750 109,250-166,500 31.00% 9.30% 37.40% 136,750-297,350 166,500-297,350 36.00% 9.30% 42.00% Over 297,350 Over 297,350 39.60% 9.30% 45.20%
4.00% 4.50% 5.00% 5.50% 6.00% 6.50% ----- ----- ----- ----- ----- ----- 5.01% 5.63% 6.26% 6.88% 7.51% 8.14% 6.13% 6.89% 7.66% 8.42% 9.19% 9.95% 6.39% 7.19% 7.99% 8.79% 9.58% 10.38% 6.90% 7.76% 8.62% 9.48% 10.34% 11.21% 7.30% 8.21% 9.12% 10.04% 10.95% 11.86%
- ---------------- * The combined state and Federal tax rates shown reflect the fact that state tax payments are currently deductible for Federal tax purposes. The State tax brackets used are those for 2000. The 2001 brackets will be adjusted to take into account changes in the California Consumer Price Index. These adjustments have not yet been released. Please note that the table does not reflect (i) any federal or state limitations on the amounts of allowable itemized deductions, phase-outs of personal or dependent exemption credits or other allowable credits, (ii) any local taxes imposed, or (iii) any taxes other than personal income taxes. The table assumes that federal taxable income is equal to state income subject to tax, and in cases where more than one state rate falls within a federal bracket, the highest state rate corresponding to the highest income within that federal bracket is used. The numbers in the Combined Tax Rate column are rounded to the nearest one-tenth of one percent. B-2 APPENDIX C HEDGING STRATEGIES AND RISKS Set forth below is additional information regarding the various defensive hedging techniques. Futures and Index Transactions Financial Futures A financial future is an agreement between two parties to buy and sell a security for a set price on a future date. They have been designed by boards of trade which have been designated "contracts markets" by the Commodity Futures Trading Commission ("CFTC"). The purchase of financial futures is for the purpose of hedging the Fund's existing or anticipated holdings of long-term debt securities. When the Fund purchases a financial future, it deposits in cash or securities an "initial margin" of between 1% and 5% of the contract amount. Thereafter, the Fund's account is either credited or debited on a daily basis in correlation with the fluctuation in price of the underlying future or other requirements imposed by the exchange in order to maintain an orderly market. The Fund must make additional payments to cover debits to its account and has the right to withdraw credits in excess of the liquidity, the Fund may close out its position at any time prior to expiration of the financial future by taking an opposite position. At closing a final determination of debits and credits is made, additional cash is paid by or to the Fund to settle the final determination and the Fund realizes a loss or gain depending on whether on a net basis it made or received such payments. The sale of financial futures is for the purpose of hedging the Fund's existing or anticipated holdings of long-term debt securities. For example, if the Fund owns long-term bonds and interest rates were expected to increase, it might sell financial futures. If interest rates did increase, the value of long-term bonds in the Fund's portfolio would decline, but the value of the Fund's financial futures would be expected to increase at approximately the same rate thereby keeping the net asset value of the Fund from declining as much as it otherwise would have. Among the risks associated with the use of financial futures by the Fund as a hedging device, perhaps the most significant is the imperfect correlation between movements in the price of the financial futures and movements in the price of the debt securities which are the subject of the hedge. Thus, if the price of the financial future moves less or more than the price of the securities which are the subject of the hedge, the hedge will not be fully effective. To compensate for this imperfect correlation, the Fund may enter into financial futures in a greater dollar amount than the dollar amount of the securities being hedged if the historical volatility of the prices of such securities has been greater than the historical volatility of the financial futures. Conversely, the Fund may enter into fewer financial futures if the historical volatility of the price of the securities being hedged is less than the historical volatility of the financial futures. C-1 The market prices of financial futures may also be affected by factors other than interest rates. One of these factors is the possibility that rapid changes in the volume of closing transactions, whether due to volatile markets or movements by speculators, would temporarily distort the normal relationship between the markets in the financial future and the chosen debt securities. In these circumstances as well as in periods of rapid and large price movements. The Fund might find it difficult or impossible to close out a particular transaction. Options on Financial Futures The Fund may also purchase put or call options on financial futures which are traded on a U.S. Exchange or board of trade and enter into closing transactions with respect to such options to terminate an existing position. Currently, options can be purchased with respect to financial futures on U.S. Treasury Bonds on The Chicago Board of Trade. The purchase of put options on financial futures is analogous to the purchase of put options by the Fund on its portfolio securities to hedge against the risk of rising interest rates. As with options on debt securities, the holder of an option may terminate his position by selling an option of the Fund. There is no guarantee that such closing transactions can be effected. Index Contracts Index Futures A tax-exempt bond index which assigns relative values to the tax-exempt bonds included in the index is traded on the Chicago Board of Trade. The index fluctuates with changes in the market values of all tax-exempt bonds included rather than a single bond. An index future is a bilateral agreement pursuant to which two parties agree to take or make delivery of an amount of cash-rather than any security-equal to specified dollar amount times the difference between the index value at the close of the last trading day of the contract and the price at which the index future was originally written. Thus, an index future is similar to traditional financial futures except that settlement is made in cash. Index Options The Fund may also purchase put or call options on U.S. Government or tax- exempt bond index futures and enter into closing transactions with respect to such options to terminate an existing position. Options on index futures are similar to options on debt instruments except that an option on an index future gives the purchaser the right, in return for the premium paid, to assume a position in an index contract rather than an underlying security at a specified exercise price at any time during the period of the option. Upon exercise of the option, the delivery of the futures position by the writer of the option to the holder of the option will be accompanied by delivery of the accumulated balance of the writer's futures margin account which represents the amount by which the market price of the index futures contract, at exercise, is less than the exercise price of the option on the index future. Bond index futures and options transactions would be subject to risks similar to transactions in financial futures and options thereon as described above. No series will enter into transactions in index or financial futures or related options unless and until, in the Adviser's opinion, the market for such instruments has developed sufficiently. C-2 APPENDIX D Factors Pertaining to California The information set forth below is derived from sources that are generally available to investors. The information is intended to give recent historical description and is not intended to indicate future or continuing trends in the financial or other positions of California. It should be noted that the creditworthiness of obligations issued by local California issuers may be unrelated to the creditworthiness of obligations issued by the State of California, and there is no obligation on the part of the State to make payment on such local obligations in the event of default. General During the early 1990's, California experienced significant financial difficulties, which reduced its credit standing, but the State's finances have improved significantly starting in 1995, with ratings increases since 1996. The ratings of certain related debt of other issuers for which California has an outstanding lease purchase, guarantee or other contractual obligation (such as for state-insured hospital bonds) are generally linked directly to California's rating. Should the financial condition of California deteriorate again, its credit ratings could be reduced, and the market value and marketability of all outstanding notes and bonds issued by California, its public authorities or local governments could be adversely affected. Economic Factors California's economy is the largest among the 50 states and one of the largest in the world. The State's population of over 34 million represents about 12-1/2% of the total United States population and grew by 26% in the 1980s, more than double the national rate. Population growth slowed to less than 1% annually in 1994 and 1995, but rose to almost 2% in the final years of the 1990's. The bulk of population growth in the State is due to births and foreign immigration. Total personal income in the State, at an estimated $991 billion in 1999, accounts for almost 13% of all personal income in the nation. Total employment is over 15 million, the majority of which is in the service, trade and manufacturing sectors. From mid-1990 to late 1993, the State suffered a recession with the worst economic, fiscal and budget conditions since the 1930s. Construction, manufacturing (especially aerospace), and financial services, among others, were all severely affected, particularly in Southern California. Recovery did not begin in California until 1994, later than the rest of the nation, but since that time California's economy has outpaced the national average. By mid-2000, unemployment in the State was under 5%, its lowest level in three decades. Economic indicators show a steady and strong recovery underway in California since the start of 1994 particularly in high technology manufacturing and services, including computer software and other services, entertainment, tourism, and nonresidential construction. Residential construction has increased since the lows of the early 1990's but is lower than during the previous expansion in the 1980's. Exports have been very strong, especially to Asia, Latin America and Canada. Following the strongest growth in a decade in 1999 and 2000, the State's economy is projected to grow more slowly in 2001. The nationwide economic slowdown was not felt strongly in California (which had 90% of new job growth in the nation in the fourth quarter of 2000) through the end of the year, but may affect the economy in 2001. The high technology sector appears to be entering a cyclical downturn. Widely publicized difficulties in California's energy supplies pose some risks to the economy, especially if there are prolonged blackouts or shortages of natural gas, but these factors, and the impact of rising energy prices, are mitigated by the fact that California's economy is very energy-efficient. U.S. Department of Energy statistics for 1997 revealed that California ranked 49th of the 50 states in energy expenditures as a D-1 percentage of state domestic product. Nevertheless, slower than expected economic growth, or significant interruptions in energy supplies, could adversely affect the State's revenues. Recent Development Regarding Energy California has experienced difficulties with the supply and price of electricity and natural gas in much of the State since mid-2000, which are likely to continue for several years. Energy usage in the State has been rising sharply with the strong economy, but no new power generating plants have been built since the 1980's. The three major investor-owned utilities in the State ("IOUs") have been purchasing electricity to meet their needs above their own generating capacity and contracted supplies at fluctuating short-term and spot market rates, while the retail prices they can charge their residential and small business customers have been capped at specified levels. Starting in mid- 2000, power purchase costs exceeded retail charges, and the IOUs incurred substantial losses and accumulated large debts to continue to purchase power for their customers. As a result, the credit ratings of the IOUs have deteriorated, making it difficult to continue to purchase power. The two largest IOUs have reported they are in default in paying certain of their obligations, and may be forced into bankruptcy. In mid-January 2001, there were rolling electricity blackouts in northern California affecting millions of customers. The Governor declared a state of emergency under State law on January 17, 2001, and ordered the State's Department of Water Resources ("DWR") to begin purchasing electricity for resale to retail end use customers, to fill the gap in supplies resulting from the inability of the IOUs to continue to purchase power. DWR also started to enter into long-term power supply contracts to reduce reliance on short-term and spot markets. DWR's purchases are initially being funded by advances from the State's General Fund; about $1.8 billion was expended in the first six weeks. DWR is entitled to repayment from a portion of retail end use customer's payments, remitted through the IOUs, but these amounts will not equal the power purchase costs. The balance is intended to be funded from the issuance of up to $10 billion of revenue bonds, expected to be issued by mid-2001. Pending implementation of these repayment mechanisms, the State has sufficient cash reserves and available internal borrowings to fund DWR power purchases for many months. The revenue bonds will be repaid from a dedicated revenue stream derived from customer payments. DWR has the legal power to set retail rates at a sufficient level to recover all its costs. These bonds will not be backed in any way by the faith and credit or taxing power of the State. The State is intensifying programs for energy conservation, load management and improved energy efficiency in government, businesses and homes. Approval for construction of new power generating facilities, especially smaller and "peaking" power facilities, has been accelerated. A number of new larger power plants are under construction and in permitting phase, and will come on line in 2001-2003. As noted, the State is seeking longer term power supply contracts at lower costs. The combination of these elements is expected to lower wholesale electricity costs in the future and promote the financial recovery of the IOUs. Natural gas prices in California have been increasing significantly as a result of limited pipeline capacity into the State, and nationwide price increases. The prices nationally may remain high for some time until additional supplies are produced, as natural gas prices are not regulated. One of the State's IOUs also supplies natural gas, and its credit difficulties have impaired its ability D-2 to obtain supplies. Significant interruption in natural gas supplies could adversely affect the economy, including generation of electricity, much of which is fueled by natural gas. A number of additional plans are under consideration by the State Legislature, including the authorization of State agencies to own, build or purchase power generation or transmission facilities and assist energy conservation efforts. Plans are also being considered to assist the IOUs repay their debts incurred in purchasing power; these may include a State purchase of their transmission facilities, funded also with revenue bonds. A number of lawsuits are pending dealing with many aspects of the energy situation in California, including disputes over the rates which the California Public Utilities Commission may charge retail customers, financial responsibility for purchases of power by the IOUs, and various antitrust and fraud claims against energy suppliers. Constitutional Limitations on Taxes, Other Charges and Appropriations Limitation on Property Taxes. Certain California Municipal Obligations may be obligations of issuers which rely in whole or in part, directly or indirectly, on ad valorem property taxes as a source of revenue. The taxing powers of California local governments and districts are limited by Article XIIIA of the California Constitution, enacted by the voters in 1978 and commonly known as "Proposition 13." Briefly, Article XIIIA limits to 1% of full cash value of the rate of ad valorem property taxes on real property and generally restricts the reassessment of property to 2% per year, except under new construction or change of ownership (subject to a number of exemptions). Taxing entities may, however, raise ad valorem taxes above the 1% limit to pay debt service on voter-approved bonded indebtedness. Under Article XIIIA, the basic 1% ad valorem tax levy is applied against the assessed value of property as of the owner's date of acquisition (or as of March 1, 1975, if acquired earlier), subject to certain adjustments. This system has resulted in widely varying amounts of tax on similarly situated properties. Several lawsuits were filed challenging the acquisition-based assessment system of Proposition 13, but it was upheld by the U.S. Supreme Court in 1992. Article XIIIA prohibits local governments from raising revenues through ad valorem taxes above the 1% limit; it also requires voters of any governmental unit to give two-thirds approval to levy any "special tax." Limitations on Other Taxes, Fees and Charges. On November 5, 1996, the voters of the State approved Proposition 218, called the "Right to Vote on Taxes Act." Proposition 218 added Articles XIIIC and XIIID to the State Constitution, which contain a number of provisions affecting the ability of local agencies to levy and collect both existing and future taxes, assessments, fees and charges. Article XIIIC requires that all new or increased local taxes be submitted to the electorate before they become effective. Taxes for general governmental purposes require a majority vote and taxes for specific purposes require a two-thirds vote. D-3 Article XIIID contains several new provisions making it generally more difficult for local agencies to levy and maintain "assessments" for municipal services and programs. Article XIIID also contains several new provisions affecting "fees" and "charges", defined for purposes of Article XIIID to mean "any levy other than an ad valorem tax, a special tax, or an assessment, imposed by a [local government] upon a parcel or upon a person as an incident of property ownership, including a user fee or charge for a property related service." All new and existing property related fees and charges must conform to requirements prohibiting, among other things, fees and charges which generate revenues exceeding the funds required to provide the property related service or are used for unrelated purposes. There are new notice, hearing and protest procedures for levying or increasing property related fees and charges, and, except for fees or charges for sewer, water and refuse collection services (or fees for electrical and gas service, which are not treated as "property related" for purposes of Article XIIID), no property related fee or charge may be imposed or increased without majority approval by the property owners subject to the fee or charge or, at the option of the local agency, two-thirds voter approval by the electorate residing in the affected area. In addition to the provisions described above, Article XIIIC removes limitations on the initiative power in matters of local taxes, assessments, fees and charges. Consequently, local voters could, by future initiative, repeal, reduce or prohibit the future imposition or increase of any local tax, assessment, fee or charge. It is unclear how this right of local initiative may be used in cases where taxes or charges have been or will be specifically pledged to secure debt issues. The interpretation and application of Proposition 218 will ultimately be determined by the courts with respect to a number of matters, and it is not possible at this time to predict with certainty the outcome of such determinations. Proposition 218 is generally viewed as restricting the fiscal flexibility of local governments, and for this reason, some ratings of California cities and counties have been affected. Appropriations Limits. The State and its local governments are subject to an annual "appropriations limit" imposed by Article XIIIB of the California Constitution, enacted by the voters in 1979 and significantly amended by Propositions 98 and 111 in 1988 and 1990, respectively. Article XIIIB prohibits the State or any covered local government from spending "appropriations subject to limitation" in excess of the appropriations limit imposed. "Appropriations subject to limitation" are authorizations to spend "proceeds of taxes," which consist of tax revenues and certain other funds, including proceeds from regulatory licenses, user charges or other fees, to the extent that such proceeds exceed the cost of providing the product or service, but "proceeds of taxes" exclude most State subventions to local governments. No limit is imposed on appropriations of funds which are not "proceeds of taxes," such as reasonable user charges or fees, and certain other non-tax funds, including bond proceeds. Among the expenditures not included in the Article XIIIB appropriations limit are (1) the debt service cost of bonds issued or authorized prior to January 1, 1979, or subsequently authorized by the voters, (2) appropriations to comply with mandates of courts or the federal government, (3) appropriations for certain capital outlay projects, (4) appropriations by the State of post-1989 increases in gasoline taxes and vehicle weight fees, and (5) appropriations made in certain cases of emergency. D-4 The appropriations limit for each year is adjusted annually to reflect changes in cost of living and population, and any transfers of service responsibilities between government units. The definitions for such adjustments were liberalized in 1990 to follow more closely growth in the State's economy. "Excess" revenues are measured over a two year cycle. Local governments must return any excess to taxpayers by rate reductions. The State must refund 50% of any excess, with the other 50% paid to schools and community colleges. With more liberal annual adjustment factors since 1988, and depressed revenues in the early 1990's because of the recession, few governments have been operating near their spending limits, but this condition may change over time. Local governments may by voter approval exceed their spending limits for up to four years. For the last ten years, appropriations subject to limitation have been under the State's limit. However, because of extraordinary revenue receipts in fiscal year 1999-2000, State appropriations were estimated to be about $700 million above the limit. No refund will occur unless the State also exceeds its limit in fiscal year 2000-01; the State Department of Finance estimates the State will be about $3.6 billion below its appropriation limit in fiscal year 2000-01. Because of the complex nature of Articles XIIIA, XIIIB, XIIIC and XIIID of the California Constitution, the ambiguities and possible inconsistencies in their terms, and the impossibility of predicting future appropriations or changes in population and cost of living, and the probability of continuing legal challenges, it is not currently possible to determine fully the impact of these Articles on California municipal obligations or on the ability of the State or local governments to pay debt service on such California municipal obligations. It is not possible, at the present time, to predict the outcome of any pending litigation with respect to the ultimate scope, impact or constitutionality of these Articles or the impact of any such determinations upon State agencies or local governments, or upon their ability to pay debt service on their obligations. Further initiatives or legislative changes in laws or the California Constitution may also affect the ability of the State or local issuers to repay their obligations. Obligations of the State of California Under the California Constitution, debt service on outstanding general obligation bonds is the second charge to the General Fund after support of the public school system and public institutions of higher education. As of February 1, 2001, the State had outstanding approximately $22.6 billion of long-term general obligation bonds, plus $800 million of general obligation commercial paper which will be refunded by long-term bonds in the future, and $6.7 billion of lease-purchase debt supported by the State General Fund. The State also had about $14.9 billion of authorized and unissued long-term general obligation bonds and lease-purchase debt. In FY 1999-2000, debt service on general obligation bonds and lease purchase debt was approximately 3.7% of General Fund revenues. Recent Financial Results The principal sources of General Fund revenues in 1999-2000 were the California personal income tax (55 percent of total revenues), the sales tax (29 percent), bank and corporation taxes (9 percent), and the gross premium tax on insurance (2 percent). An estimated 20% of personal income tax receipts (10% of total General Fund) is derived from capital gains realizations D-5 and stock option income. While these sources have been extraordinarily strong in the past few years, they are particularly volatile. The State has taken account of the recent drop in stock market levels and reduced its estimated receipts from these revenues in the future. The State maintains a Special Fund for Economic Uncertainties (the "SFEU"), derived from General Fund revenues, as a reserve to meet cash needs of the General Fund, but which is required to be replenished as soon as sufficient revenues are available. Year-end balances in the SFEU are included for financial reporting purposes in the General Fund balance. Throughout the 1980's, State spending increased rapidly as the State population and economy also grew rapidly, including increased spending for many assistance programs to local governments, which were constrained by Proposition 13 and other laws. The largest State program is assistance to local public school districts. In 1988, an initiative (Proposition 98) was enacted which (subject to suspension by a two-thirds vote of the Legislature and the Governor) guarantees local school districts and community college districts a minimum share of State General Fund revenues (currently about 35 percent). Recent Budgets. The State suffered a severe economic recession from 1990-94 during which the State experienced substantial revenue shortfalls and accumulated a budget deficit of about $2.8 billion. With the economic recovery which began in 1994, the State's financial condition improved markedly in the years from fiscal year 1995-96 onward, with a combination of better than expected revenues, slowdown in growth of social welfare programs, and continued spending restraint based on the actions taken in earlier years. The economy grew strongly during the second half of the 1990's, and as a result, the General Fund took in substantially greater tax revenues (around $2.2 billion in 1995-96, $1.6 billion in 1996-97, $2.4 billion in 1997-98, $1.7 billion in 1998-99 and $8.2 billion in 1999-2000) than were initially planned when the budgets were enacted. These additional funds were largely directed to school spending as mandated by Proposition 98, and to make up shortfalls from reduced federal health and welfare aid in 1995-96 and 1996-97. In 1998-99 and 1999-2000, significant new spending programs were also enacted, particularly for education. The accumulated budget deficit from the recession years was finally eliminated. The Department of Finance estimates that the State's budget reserve (the SFEU) totaled $8.7 billion at June 30, 2000. The growth in General Fund revenues since the end of the recession resulted in significant increases in State funding for local school districts under Proposition 98. From the recession level of about $4,200 per pupil, annual State funding has increased to over $6,700 per pupil in FY 2000-01. A significant amount of the new moneys have been directed to specific educational reforms, including reduction of class sizes in many grade levels. The improved budget condition also allowed annual increases in support for higher education in the State, permitting increased enrollment and reduction of student fees. Part of the 1997-98 Budget Act was completion of State welfare reform legislation to implement the new federal law passed in 1996. The new State program, called "CalWORKs," became effective January 1, 1998, and emphasizes programs to bring aid recipients into the workforce. As required by federal law, new time limits are placed on receipt of welfare aid. Generally, health and welfare costs have been contained even during the recent period of economic D-6 recovery, with the first real increases (after inflation) in welfare support levels occurring in 1999-2000 and additional increases in 2000-01. One of the most important elements of recent Budget Acts was agreement on substantial tax cuts. The largest of these was a phased-in cut in the Vehicle License Fee (an annual tax on the value of cars registered in the State, the "VLF"). Starting on January 1, 1999, the VLF was reduced by 25 percent, which was increased to a 35% reduction effective January 1, 2000 and a 67.5% reduction effective January 1, 2001. Under pre-existing law, VLF funds are automatically transferred to cities and counties, so the new legislation provided for the General Fund to make up the reductions. The full 67.5% percent VLF cut will be offset by about $2.6 billion in General Fund money in FY 2000-01, and $3.6 billion for fiscal year 2001-02. Other tax cuts included an increase in the dependent credit exemption for personal income tax filers, restoration of a renter's tax credit for taxpayers, and a variety of business tax relief measures. Fiscal Year 2000-01 Budget. By the spring of 2000, as the fiscal year 2000-01 budget was being enacted, the Administration released updated revenue and expenditure projections for 1999-2000 and 2000-01. These reports showed that the State's very strong economy together with the strong stock market, resulted in extraordinary growth in revenues, particular personal income taxes. The Administration revised its revenue estimates for 1999-2000 upward to $71.2 billion, an increase of $8.2 billion above the original Budget Act estimate. Expenditures were projected to increase to about $67.2 billion. The Administration's projected balance in the SFEU at June 30, 2000 increased from about $880 million at the time of the original Budget Act to over $8.7 billion. As noted above under "Constitutional Limitations on Taxes, Other Charges and Appropriations," the extraordinary and rapid growth of State revenues placed the State $700 million over its Constitutional appropriations limit in fiscal year 1999-2000. The Administration estimated over $12 billion additional revenue for fiscal years 1999-2000 and 2000-01, compared to initial estimates made in January 2000. The 2000-01 Budget Act (the "2000 Budget Act") was signed on June 30, 2000. The spending plan assumed General Fund revenues and transfers of $73.9 billion, and appropriated $78.8 billion (the difference coming from the SFEU surplus generated in fiscal year 1999-2000). To avoid pressures on future budgets, the Administration devoted about $7.0 billion of the new spending on one-time expenditures and investments. The Administration estimated that the SFEU would have a balance of $1.781 billion at June 30, 2001. The Governor also held back $500 million as a set-aside for litigation costs, which have been spent. Because of the State's strong cash position, the Administration announced the State would not undertake any revenue anticipation note borrowing in 2000-01. The largest program in the 2000 Budget Act is aid to K-12 school districts, which increased by $3.0 billion above 1999-2000 levels. There was also a large increase in funding for the public higher education systems, and for health and welfare programs. New investments were made for capital outlay, including $2.0 billion General Fund support for transportation projects, to supplement gasoline taxes normally used for those purposes, part of a six-year $6.9 billion transportation package. A total of about $1.5 billion was devoted to tax relief, including the additional VLF reduction described above under "Recent Budgets." The Legislature also enacted a one-time tax relief package for senior citizen homeowners and renters valued at about $150 D-7 million, a personal income tax credit for credentialed teachers ($218 million) and a refundable tax credit for child care expenses ($195 million). The 2000 Budget Act included a $200 million unrestricted grant to cities and counties, as well as about $200 million in funding to support various local law enforcement programs. Although, as noted, the Administration projected a budget reserve in the SFEU of about $1.78 billion on June 30, 2001, the General Fund fund balance on that date also reflects $350 million of "loans" which the General Fund made to local schools in the recession years, representing cash outlays above the mandatory minimum funding level. Settlement of litigation over these transactions in July 1996 calls for repayment of these loans over the period ending in 2001-02, about equally split between outlays from the General Fund and from schools' entitlements. The 2000-01 Budget Act contained a $350 million appropriation from the General Fund toward this settlement. Reports since the FY 2000-01 Budget Act was enacted showed that revenues were significantly higher than projected through the first half of the fiscal year. As a result, the State will reduce its sales tax by 0.25% for at least one year, starting January 1, 2001. This will result in about $1.15 billion in lower revenues during calendar year 2001. On January 10, 2001, the Governor released his proposed Budget for fiscal year 2001-02 (the "Governor's Budget"). The Governor's Budget estimated that General Fund revenues in fiscal year 2000-01 would be about $76.9 billion, $3.0 billion above the estimates when the 2000-01 Budget Act was signed. Expenditures for 2000-01 were estimated to be about $79.7 billion, $0.9 billion above the original spending plan. The Governor's Budget revised the estimate for the SFEU, the budget reserve, at June 30, 2001 from $1.78 billion to $5.85 billion. As noted above, however, the State is currently expending some of these funds for energy purchases, although the advances are expected to be repaid. The Governor's Budget projects General Fund revenues in fiscal year 2001-02 of $79.4 billion, a 3.3 percent increase over the current year. This estimate assumes slower economic growth in 2001-02 than in the previous year, and assumes lower stock option income and the effect of the lower sales tax. A more current estimate of fiscal year 2001-02 revenues will be made in May 2001 before the final budget is adopted. Estimates may be reduced if economic activity is more strongly affected by the energy situation or the national economic slowdown. The Governor's Budget proposes $82.9 billion in expenditures, a 3.9 percent increase over the prior year, utilizing a portion of the expected surplus. The Governor's Budget proposes to fund reserves of $2.4 billion, of which $500 million will be a set-aside for unplanned litigation costs. The final 2001-02 budget is expected to be adopted by July 1, 2001 after further deliberation by the Legislature and the Governor. Although the State's strong economy is producing record revenues to the State government, the State's budget continues to be marked by mandated spending on education, a large prison population, and social needs of a growing population with many immigrants. These factors which limit State spending growth also put pressure on local governments. There can be no assurances that, if economic conditions weaken, or other factors intercede, the State will not experience budget gaps in the future. D-8 Bond Rating The ratings on California's long-term general obligation bonds were reduced in the early 1990's from "AAA" levels which had existed prior to the recession. After 1996, the three major rating agencies raised their ratings of California's general obligation bonds, which as of March 1, 2001 were assigned ratings of "AA" from Standard & Poor's, "Aa2" from Moody's and "AA" from Fitch. In January 2001, Standard & Poor's placed California's senior ratings on Credit Watch with negative implications as a result of the energy situation. There can be no assurance that such ratings will be maintained in the future. It should be noted that the creditworthiness of obligations issued by local California issuers may be unrelated to creditworthiness of obligations issued by the State of California, and that there is no obligation on the part of the State to make payment on such local obligations in the event of default. Legal Proceedings The State is involved in certain legal proceedings (described in the State's recent financial statements) that, if decided against the State, may require the State to make significant future expenditures or may substantially impair revenues. If the State eventually loses any of these cases, the final remedies may not have to be implemented in one year. Obligations of Other Issuers Other Issuers of California Municipal Obligations. There are a number of State agencies, instrumentalities and political subdivisions of the State that issue Municipal Obligations, some of which may be conduit revenue obligations payable from payments from private borrowers. These entities are subject to various economic risks and uncertainties, and the credit quality of the securities issued by them may vary considerably from the credit quality of obligations backed by the full faith and credit of the State. State Assistance. Property tax revenues received by local governments declined more than 50% following passage of Proposition 13. Subsequently, the California Legislature enacted measures to provide for the redistribution of the State's General Fund surplus to local agencies, the reallocation of certain State revenues to local agencies and the assumption of certain governmental functions by the State to assist municipal issuers to raise revenues. Total local assistance from the State's General Fund was budgeted at approximately 75% of General Fund expenditures in recent years, including the effect of implementing reductions in certain aid programs. To reduce State General Fund support for school districts, the 1992-93 and 1993-94 Budget Acts caused local governments to transfer $3.9 billion of property tax revenues to school districts, representing loss of the post-Proposition 13 "bailout" aid. Local governments have in return received greater revenues and greater flexibility to operate health and welfare programs. D-9 In 1997, a new program provided for the State to substantially take over funding for local trial courts (saving cities and counties some $400 million annually). For the last several years, the State has also provided $100 million annually to support local law enforcement costs. In 2000-01, the State provided $200 million in unrestricted grants to cities and counties. To the extent the State should be constrained by its Article XIIIB appropriations limit, or its obligation to conform to Proposition 98, or other fiscal considerations, the absolute level, or the rate of growth, of State assistance to local governments may continue to be reduced. Any such reductions in State aid could compound the serious fiscal constraints already experienced by many local governments, particularly counties. Los Angeles County, the largest in the State, was forced to make significant cuts in services and personnel, particularly in the health care system, in order to balance its budget in FY1995-96 and FY1996-97. Orange County, which emerged from Federal Bankruptcy Court protection in June 1996, has significantly reduced county services and personnel, and faces strict financial conditions following large investment fund losses in 1994 which resulted in bankruptcy. Counties and cities may face further budgetary pressures as a result of changes in welfare and public assistance programs, which were enacted in August, 1997 in order to comply with the federal welfare reform law. Generally, counties play a large role in the new system, and are given substantial flexibility to develop and administer programs to bring aid recipients into the workforce. Counties are also given financial incentives if either at the county or statewide level, the "Welfare-to-Work" programs exceed minimum targets; counties are also subject to financial penalties for failure to meet such targets. Counties remain responsible to provide "general assistance" for able- bodied indigents who are ineligible for other welfare programs. The long-term financial impact of the new CalWORKs system on local governments is still unknown. Assessment Bonds. California Municipal Obligations which are assessment bonds may be adversely affected by a general decline in real estate values or a slowdown in real estate sales activity. In many cases, such bonds are secured by land which is undeveloped at the time of issuance but anticipated to be developed within a few years after issuance. In the event of such reduction or slowdown, such development may not occur or may be delayed, thereby increasing the risk of a default on the bonds. Because the special assessments or taxes securing these bonds are not the personal liability of the owners of the property assessed, the lien on the property is the only security for the bonds. Moreover, in most cases the issuer of these bonds is not required to make payments on the bonds in the event of delinquency in the payment of assessments or taxes, except from amounts, if any, in a reserve fund established for the bonds. California Long Term Lease Obligations. Based on a series of court decisions, certain long-term lease obligations, though typically payable from the general fund of the State or a municipality, are not considered "indebtedness" requiring voter approval. Such leases, however, are subject to "abatement" in the event the facility being leased is unavailable for beneficial use and occupancy by the municipality during the term of the lease. Abatement is not a default, and there may be no remedies available to the holders of the certificates evidencing the lease obligation in the event abatement occurs. The most common cases of abatement are failure to complete construction of the facility before the end of the period during which lease payments have been capitalized and uninsured casualty losses to the facility (e.g., due to earthquake). In the event abatement occurs with respect to a lease obligation, lease payments may be interrupted (if all available insurance D-10 proceeds and reserves are exhausted) and the certificates may not be paid when due. Although litigation is brought from time to time which challenges the constitutionality of such lease arrangements, the California Supreme Court issued a ruling in August, 1998 which reconfirmed the legality of these financing methods. Other Considerations The repayment of industrial development securities secured by real property may be affected by California laws limiting foreclosure rights of creditors. Securities backed by health care and hospital revenues may be affected by changes in State regulations governing cost reimbursements to health care providers under Medi-Cal (the State's Medicaid program), including risks related to the policy of awarding exclusive contracts to certain hospitals. Limitations on ad valorem property taxes may particularly affect "tax allocation" bonds issued by California redevelopment agencies. Such bonds are secured solely by the increase in assessed valuation of a redevelopment project area after the start of redevelopment activity. In the event that assessed values in the redevelopment project decline (e.g., because of a major natural disaster such as an earthquake), the tax increment revenue may be insufficient to make principal and interest payments on these bonds. Both Moody's and S&P suspended ratings on California tax allocation bonds after the enactment of Articles XIIIA and XIIIB, and only resumed such ratings on a selective basis. Proposition 87, approved by California voters in 1988, requires that all revenues produced by a tax rate increase go directly to the taxing entity which increased such tax rate to repay that entity's general obligation indebtedness. As a result, redevelopment agencies (which, typically, are the issuers of tax allocation securities) no longer receive an increase in tax increment when taxes on property in the project area are increased to repay voter-approved bonded indebtedness. The effect of these various constitutional and statutory changes upon the ability of California municipal securities issuers to pay interest and principal on their obligations remains unclear. Furthermore, other measures affecting the taxing or spending authority of California or its political subdivisions may be approved or enacted in the future. Legislation has been or may be introduced which would modify existing taxes or other revenue-raising measures or which either would further limit or, alternatively, would increase the abilities of state and local governments to impose new taxes or increase existing taxes. It is not possible, at present, to predict the extent to which any such legislation will be enacted. Nor is it possible, at present, to determine the impact of any such legislation on California Municipal Obligations in which the Fund may invest, future allocations of state revenues to local governments or the abilities of state or local governments to pay the interest on, or repay the principal of, such California Municipal Obligations. Substantially all of California is within an active geologic region subject to major seismic activity. Northern California in 1989 and Southern California in 1994 experienced major earthquakes causing billions of dollars in damages. The federal government provided more than $13 billion in aid for both earthquakes, and neither event has had any long-term negative economic impact. Any California Municipal Obligation in the Fund could be affected by an interruption of revenues because of damaged facilities, or, consequently, income tax deductions for casualty losses D-11 or property tax assessment reductions. Compensatory financial assistance could be constrained by the inability of (i) an issuer to have obtained earthquake insurance coverage rates; (ii) an insurer to perform on its contracts of insurance in the event of widespread losses; or (iii) the federal or State government to appropriate sufficient funds within their respective budget limitations. D-12 California Tax Matters The following is based upon the advice of Orrick, Herrington & Sutcliffe LLP, special California counsel to the Fund. The following is a general, abbreviated summary of certain provisions of the applicable California tax law as presently in effect as it directly governs the taxation of resident individual and corporate Common Shareholders of the Fund. This summary does not address the taxation of other shareholders nor does it discuss any local taxes that may be applicable. These provisions are subject to change by legislative or administrative action, and any such change may be retroactive with respect to transactions of the Fund. The following is based on the assumptions that the Fund will qualify under Subchapter M of the Code as a regulated investment company, that it will satisfy the conditions which will cause distributions of the Fund to qualify as exempt- interest dividends to shareholders for federal and California purposes, and that it will distribute all interest and dividends it receives to the shareholders. The Fund will be subject to the California corporate franchise and corporation income tax only if it has a sufficient nexus with California. If it is subject to the California franchise or corporation income tax, the Fund does not expect to pay a material amount of such tax. If at the close of each quarter of the Fund's taxable year at least 50% of the value of its total assets consists of obligations that, when held by individuals, pay interest that is exempt from tax by California under California or federal law, then distributions by the Fund that are attributable to interest on any such obligation will not be subject to the California personal income tax. All other distributions, including distributions attributable to capital gains, will be includable in gross income for purposes of the California personal income tax. Interest on indebtedness incurred or continued for the purpose of acquiring or maintaining an investment in the Common Shares will not be deductible for purposes of the California personal income tax. All distributions of the Fund, regardless of source, to corporate Common Shareholders that are subject to the California corporate franchise tax will be included in gross income for purposes of such tax. Gain on the sale, exchange, or other disposition of Common Shares will be subject to the California personal income and corporate franchise tax. In addition, any loss realized by a holder of Common Shares upon the sale of shares held for six months or less may be disallowed to the extent of any exempt interest dividends received with respect to such shares. Moreover, any loss realized upon the sale of Common Shares within thirty days before or after the acquisition of other Common Shares may be disallowed under the "wash sale" rules. Common Shares may be subject to the California estate tax if held by a California decedent at the time of death. Common Shareholders are advised to consult with their own tax advisers for more detailed information concerning California tax matters. D-13 APPENDIX E PERFORMANCE RELATED AND COMPARATIVE INFORMATION The Fund may be a suitable investment for a shareholder that is thinking of adding bond investments to his portfolio to balance the appreciated stocks that the shareholder is holding. Municipal bonds can provide double, tax-free income (exempt from both regular federal and state income taxes) for residents of that state. Because the Fund expects that a substantial portion of its investments will pay interest that is taxable under the federal alternative minimum tax, the Fund may not be a suitable investment for shareholders that are subject to the federal alternative minimum tax. The Fund may quote certain performance-related information and may compare certain aspects of its portfolio and structure to other substantially similar closed-end funds as categorized by Lipper, Inc. ("Lipper"), Morningstar or other independent services. Comparison of the Fund to an alternative investment should be made with consideration of differences in features and expected performance. The Fund may obtain data from sources or reporting services, such as Bloomberg Financial ("Bloomberg") and Lipper, that the Fund believes to be generally accurate. E-1 Past performance is not indicative of future results. At the time Common Shareholders sell their shares, they may be worth more or less than their original investment. Higher Dividends Often Correlate with Higher Share Prices Scatter chart appears here (share prices of all state closed-end municipal bond funds):
Annualized Share Price Dividend (Adjusted to $15 IPO) ---------- --------------------- 0.78756 15.12 0.738 13.32 0.68496 12.62 0.75 15.4125 0.69 13.42 0.7908 14.16 0.804 14.73 0.918 16.06 0.906 16.75 0.774 14.655 0.894 15.76 0.768 14 0.942 16.48 0.912 16.32 0.87 15.56 0.639 13.41 0.882 15.71 0.84 15.2 0.918 16.99 0.87 13.09 0.792 13.8 0.78 13.59 0.8628 14.94 0.705 12.25 0.792 13.5 0.8406 13.725 0.9 14.085 0.75 14.08 0.74496 13.05 0.9 15.14 0.9 14.1875 0.675 11.6375 1.0875 18.1375 1.30618 20.89888 1.125 20.415 1.08 19.08 1.1016 19.185 0.75 12.87 0.7488 12.88 0.7584 12.72 0.7992 13.485 0.78 13.17 0.8568 14.11 0.8136 13.86 0.798 12.82 0.846 14.76 0.834 14.36 0.84 14.35 0.864 14.5 0.804 14 0.774 13.65 0.876 14.85 0.798 13.72 0.918 15.15 0.912 14.81 0.864 14.44 0.768 12.58 0.738 11.8 0.8925 14.375 0.906 13.53 0.708 12.37 0.774 14.2 0.66 11.125 0.792 13.575 0.78 13.31 0.9 15.37 0.822 14.21 0.72 12.04 0.858 12.68 0.876 14.99 0.738 13.37 0.7308 14.19 0.66 12.05 0.6792 12.95 0.67476 13.56 0.7884 14.45 0.8052 15.02 0.918 15.55 0.81 15.32 0.768 14.5 0.852 15.78 0.81756 14 0.72 13.125 0.675 12.25 0.69 13.27 0.78 14.83 0.765 14.04 0.87 15.25 0.714 13.45 0.792 14.69 0.84 14.61 0.96 16.34 0.675 12.44 0.67308 12.32 0.7644 13.7 0.684 12.95 0.816 15.74 0.816 15.95 0.768 15.18 0.816 15.2 0.78 15.19 0.738 14.44 0.75 14.81 0.9 16.95 0.858 14.57 0.804 15.91 0.828 14.92 0.816 15.85 0.696 13.6 0.76164 15.13 0.735 14.55 0.8172 13.99 0.663 12.29 0.792 13.42 0.912 15.14 0.78 13.63 0.9 15.76 0.882 15.5 0.71976 13.36 0.9 15.61 0.8184 14.3
Municipal Bond/Equity Portfolios Can Provide Portfolio Benefits
Standard Deviation Average Annual Bond Portion (Risk) After-tax Return - ------------ ------------------ ---------------- 0% 14.91% 12.16% 5% 14.39% 12.06% 10% 13.88% 11.95% 15% 13.37% 11.85% 20% 12.88% 11.74% 25% 12.40% 11.63% 30% 11.94% 11.52% 35% 11.48% 11.40% 40% 11.05% 11.29% 45% 10.64% 11.15% 50% 10.25% 11.04% 55% 9.88% 10.92% 60% 9.55% 10.79% 65% 9.25% 10.66% 70% 8.99% 10.53% 75% 8.78% 10.39% 80% 8.62% 10.25% 85% 8.53% 10.11% 90% 8.50% 9.96% 95% 8.55% 9.81% 100% 8.68% 9.65%
Market price is affected by many factors, including market interest rates, income tax rates, the common shares' net asset value and dividend stability, the portfolio's duration, call protection and credit quality, analyst recommendations, and other market factors. Any of these factors individually or collectively may, at any given time, be as or more important to market price than annualized dividend rates. A positive correlation does not necessarily mean that higher dividends cause or result in higher market prices, and you should not assume that any particular level of dividends will result in any particular market price. In addition, the positive correlation between dividends and market price of this group of funds does not necessarily mean that every fund in the group exhibits a positive correlation between dividend and market price, and it is possible that the Fund may not exhibit such a correlation. There can be no assurance that the correlation suggested by the above data will continue in the future. E-2 Nuveen California Dividend Advantage Municipal Fund 2 _________ Common Shares ------------------------------------------ STATEMENT OF ADDITIONAL INFORMATION ------------------------------------------ ________________, 2001 PART C - OTHER INFORMATION Item 24: Financial Statements and Exhibits 1. Financial Statements: Registrant has not conducted any business as of the date of this filing, other than in connection with its organization. Financial Statements indicating that the Registrant has met the net worth requirements of Section 14(a) of the 1940 Act are filed with this Pre-effective Amendment to the registration statement. 2. Exhibits: a. Declaration of Trust dated June 1, 1999. Filed on November 3, 2000 as Exhibit a to Registrant's Registration Statement on Form N-2 (File No. 333-49242) and incorporated herein by reference.* b. By-Laws of Registrant. Filed on November 3, 2000 as Exhibit b to Registrant's Registration Statement on Form N-2 (File No. 333-49242) and incorporated herein by reference.* c. None. d. Form of Share Certificate. Filed on February 22, 2001 as Exhibit d to Pre- effective Amendment No. 2 to Registrant's Registration Statement on Form N- 2 (File No. 333-49242) and incorporated herein by reference.* e. Terms and Conditions of the Dividend Reinvestment Plan. Filed on February 22, 2001 as Exhibit e to Pre-effective Amendment No. 2 to Registrant's Registration Statement on Form N-2 (File No. 333-49242) and incorporated herein by reference.* f. None. g. Investment Management Agreement between Registrant and Nuveen Advisory Corp. dated February 20, 2001. h.1 Form of Underwriting Agreement. h.2 Form of Master Selected Dealer Agreement. h.3 Form of Master Agreement among Underwriters. h.4 Form of Salomon Smith Barney Inc. Letter Agreement. i. Nuveen Open-End and Closed-End Funds Deferred Compensation Plan for Independent Directors and Trustees. Filed on February 22, 2001 as Exhibit i to Pre-effective Amendment No. 2 to Registrant's Registration Statement on Form N-2 (File No. 333-49242) and incorporated herein by reference.* j. Form of Exchange Traded Fund Custody Agreement between Registrant and The Chase Manhattan Bank dated March __, 2001. k.1 Form of Shareholder Transfer Agency Agreement between Registrant and The Chase Manhattan Bank dated March __, 2001. k.2 Expense Reimbursement Agreement between Registrant and Nuveen Advisory Corp. dated February 20, 2001. C-1 l.1 Opinion and consent of Bell, Boyd & Lloyd LLC. Filed on February 22, 2001 as Exhibit 1.1 to Pre-effective Amendment No. 2 to Registrant's Registration Statement on Form N-2 (File No. 333-49242) and incorporated herein by reference.* l.2 Opinion and consent of Bingham Dana LLP. Filed on February 22, 2001 as Exhibit 1.2 to Pre-effective Amendment No. 2 to Registrant's Registration Statement on Form N-2 (File No. 333-49242) and incorporated herein by reference.* 1.3 Consent of Bell, Boyd & Lloyd LLC. 1.4 Consent of Bingham Dana LLP. m. None. n. Consent of Ernst & Young LLP. o. None. p. Subscription Agreement of Nuveen Advisory Corp. dated March 5, 2001. q. None. r.1 Code of Ethics of Nuveen Advisory Corp. Filed on January 5, 2001 as Exhibit r to Pre-effective Amendment no. 1 to Registrant's Registration Statement on Form N-2 (333-49242) and incorporated herein by reference.* r.2 Code of Ethics of Salomon Smith Barney Inc. Filed on February 22, 2001 as Exhibit r.2 to Pre-effective Amendment No. 2 to Registrant's Registration Statement on Form N-2 (File No. 333-49242) and incorporated herein by reference.* s. Powers of Attorney. ___________________ * Previously filed. Item 25: Marketing Arrangements See Sections 2, 3 and 5(n) of the Underwriting Agreement filed as Exhibit h.1 to this Registration Statement. See the Introductory Paragraph of the Form of Master Selected Dealer Agreement filed as Exhibit h.2 to this Registration Statement. See Introductory Paragraphs and Sections 1, 3, 5, 6 and 7 of the Form of Master Agreement Among Underwriters filed as Exhibit h.3 to this Registration Statement. See Paragraph e of the Form of Salomon Smith Barney Inc. Letter Agreement filed as Exhibit h.4 to this Registration Statement. Item 26: Other Expenses of Issuance and Distribution Securities and Exchange Commission fees $ 62,500 National Association of Securities Dealers, Inc. fees 25,500 Printing and engraving expenses 187,000 Legal Fees 50,000 American Stock Exchange listing fees 5,000 Accounting expenses 8,500 Blue Sky filing fees and expenses 0 Transfer agent fees 0 Miscellaneous expenses 11,500 -------- Total $350,000* ========
C-2 - ------------ *Expenses may be reduced pursuant to the contractual agreement of Nuveen Investments to pay (i) all of Registrant's organizational expenses and (ii) offering costs (other than the sales load) that exceed $0.03 per Common Share. Item 27: Persons Controlled by or under Common Control with Registrant Not applicable. Item 28: Number of Holders of Securities At March 22, 2001
Number of Title of Class Record Holders -------------- -------------- Common Shares, $.01 par value 1
Item 29: Indemnification Section 4 of Article XII of the Registrant's Declaration of Trust provides as follows: Subject to the exceptions and limitations contained in this Section 4, every person who is, or has been, a Trustee, officer, employee or agent of the Trust, including persons who serve at the request of the Trust as directors, trustees, officers, employees or agents of another organization in which the Trust has an interest as a shareholder, creditor or otherwise (hereinafter referred to as a "Covered Person"), shall be indemnified by the Trust to the fullest extent permitted by law against liability and against all expenses reasonably incurred or paid by him in connection with any claim, action, suit or proceeding in which he becomes involved as a party or otherwise by virtue of his being or having been such a Trustee, director, officer, employee or agent and against amounts paid or incurred by him in settlement thereof. No indemnification shall be provided hereunder to a Covered Person: (a) against any liability to the Trust or its Shareholders by reason of a final adjudication by the court or other body before which the proceeding was brought that he engaged in willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office; (b) with respect to any matter as to which he shall have been finally adjudicated not to have acted in good faith in the reasonable belief that his action was in the best interests of the Trust; or C-3 (c) in the event of a settlement or other disposition not involving a final adjudication (as provided in paragraph (a) or (b)) and resulting in a payment by a Covered Person, unless there has been either a determination that such Covered Person did not engage in willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office by the court or other body approving the settlement or other disposition or a reasonable determination, based on a review of readily available facts (as opposed to a full trial-type inquiry), that he did not engage in such conduct: (i) by a vote of a majority of the Disinterested Trustees acting on the matter (provided that a majority of the Disinterested Trustees then in office act on the matter); or (ii) by written opinion of independent legal counsel. The rights of indemnification herein provided may be insured against by policies maintained by the Trust, shall be severable, shall not affect any other rights to which any Covered Person may now or hereafter be entitled, shall continue as to a person who has ceased to be such a Covered Person and shall inure to the benefit of the heirs, executors and administrators of such a person. Nothing contained herein shall affect any rights to indemnification to which Trust personnel other than Covered Persons may be entitled by contract or otherwise under law. Expenses of preparation and presentation of a defense to any claim, action, suit or proceeding subject to a claim for indemnification under this Section 4 shall be advanced by the Trust prior to final disposition thereof upon receipt of an undertaking by or on behalf of the recipient to repay such amount if it is ultimately determined that he is not entitled to indemnification under this Section 4, provided that either: (a) such undertaking is secured by a surety bond or some other appropriate security or the Trust shall be insured against losses arising out of any such advances; or (b) a majority of the Disinterested Trustees acting on the matter (provided that a majority of the Disinterested Trustees then in office act on the matter) or independent legal counsel in a written opinion shall determine, based upon a review of the readily available facts (as opposed to a full trial-type inquiry), that there is reason to believe that the recipient ultimately will be found entitled to indemnification. As used in this Section 4, a "Disinterested Trustee" is one (x) who is not an Interested Person of the Trust (including anyone, as such Disinterested Trustee, who has been exempted from being an Interested Person by any rule, regulation or order of the Commission), and (y) against whom none of such actions, suits or other proceedings or another action, suit or other proceeding on the same or similar grounds is then or has been pending. C-4 As used in this Section 4, the words "claim," "action," "suit" or "proceeding" shall apply to all claims, actions, suits, proceedings (civil, criminal, administrative or other, including appeals), actual or threatened; and the words "liability" and "expenses" shall include without limitation, attorneys' fees, costs, judgments, amounts paid in settlement, fines, penalties and other liabilities. The trustees and officers of the Registrant are covered by Investment Trust Errors and Omission policies in the aggregate amount of $20,000,000 (with a maximum deductible of $500,000) against liability and expenses of claims of wrongful acts arising out of their position with the Registrant, except for matters which involve willful acts, bad faith, gross negligence and willful disregard of duty (i.e., where the insured did not act in good faith for a purpose he or she reasonably believed to be in the best interest of Registrant or where he or she had reasonable cause to believe this conduct was unlawful). Section 8 of the Underwriting Agreement filed as Exhibit h.1, to this Registration Statement provides for each of the parties thereto, including the Registrant and the Underwriters, to indemnify the others, their trustees, directors, certain of their officers, trustees, directors and persons who control them against certain liabilities in connection with the offering described herein, including liabilities under the federal securities laws. Insofar as Indemnification for liability arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue. Item 30: Business and Other Connections of Investment Adviser Nuveen Advisory Corp. serves as investment adviser to the following open- end management type investment companies: Nuveen Multistate Trust I, Nuveen Multistate Trust II, Nuveen Multistate Trust III, Nuveen Multistate Trust IV, Nuveen Municipal Trust, Nuveen Money Market Trust, Nuveen Municipal Money Market Fund, Inc. and Nuveen Taxable Funds Inc. Nuveen Advisory Corp. also serves as investment adviser to the following closed-end management type investment companies other than the Registrant: Nuveen Municipal Value Fund, Inc., Nuveen California Municipal Value Fund, Inc., Nuveen New York Municipal Value Fund, Inc., Nuveen Municipal Income Fund, Inc., Nuveen Premium Income Municipal Fund, Inc., Nuveen Performance Plus Municipal Fund, Inc., Nuveen California Performance Plus Municipal Fund, Inc., Nuveen New York Performance Plus Municipal Fund, Inc., Nuveen Municipal Advantage Fund, Inc., Nuveen Municipal Market Opportunity Fund, Inc., Nuveen California Municipal Market Opportunity Fund, Inc., Nuveen New York Municipal Market Opportunity Fund, Inc., Nuveen Investment Quality Municipal Fund, Inc., Nuveen California Investment Quality Municipal Fund, Inc., Nuveen New York Investment Quality Municipal Fund, Inc., Nuveen Insured Quality Municipal Fund, Inc., Nuveen Florida Investment Quality Municipal Fund, Nuveen New Jersey Investment Quality Municipal Fund, Inc., Nuveen Pennsylvania Investment Quality Municipal Fund, Nuveen Select Quality Municipal Fund, Inc., Nuveen California Select Quality Municipal Fund, Inc., Nuveen New York Select Quality Municipal Fund, Inc., Nuveen Quality Income Municipal Fund, Inc., Nuveen Insured Municipal Opportunity Fund, Inc., Nuveen Florida Quality Income Municipal Fund, Nuveen Michigan Quality Income Municipal Fund, Inc., Nuveen Ohio Quality Income Municipal Fund, Inc., Nuveen Texas Quality Income Municipal Fund, C-5 Nuveen California Quality Income Municipal Fund, Inc., Nuveen New York Quality Income Municipal Fund, Inc., Nuveen Premier Municipal Income Fund, Inc., Nuveen Premier Insured Municipal Income Fund, Inc., Nuveen Insured California Premium Income Municipal Fund, Inc., Nuveen Insured New York Premium Income Municipal Fund, Inc., Nuveen Premium Income Municipal Fund 2, Inc., Nuveen Select Maturities Municipal Fund, Nuveen Arizona Premium Income Municipal Fund, Inc., Nuveen Insured Florida Premium Income Municipal Fund, Nuveen Michigan Premium Income Municipal Fund, Inc., Nuveen New Jersey Premium Income Municipal Fund, Inc., Nuveen Premium Income Municipal Fund 4, Inc., Nuveen Insured California Premium Income Municipal Fund 2, Inc., Nuveen Insured New York Premium Income Municipal Fund 2, Nuveen New Jersey Premium Income Municipal Fund 2, Nuveen Pennsylvania Premium Income Municipal Fund 2, Nuveen Maryland Premium Income Municipal Fund, Nuveen Massachusetts Premium Income Municipal Fund, Nuveen Virginia Premium Income Municipal Fund, Nuveen Connecticut Premium Income Municipal Fund, Nuveen Georgia Premium Income Municipal Fund, Nuveen Missouri Premium Income Municipal Fund, Nuveen North Carolina Premium Income Municipal Fund, Nuveen California Premium Income Municipal Fund, Nuveen Insured Premium Income Municipal Fund 2, Nuveen New York Dividend Advantage Municipal Fund, Nuveen California Dividend Advantage Municipal Fund, Nuveen Dividend Advantage Municipal Fund, Nuveen Arizona Dividend Advantage Municipal Fund, Nuveen Connecticut Dividend Advantage Municipal Fund, Nuveen North Carolina Dividend Advantage Municipal Fund, Nuveen Virginia Dividend Advantage Municipal Fund, Nuveen Massachusetts Dividend Advantage Municipal Fund and Nuveen Maryland Dividend Advantage Municipal Fund. Nuveen Advisory Corp. has no other clients or business at the present time. For a description of other business, profession, vocation or employment of a substantial nature in which any director or officer of the investment adviser has engaged during the last two years for his account or in the capacity of director, officer, employee, partner or trustee, see the descriptions under "Management of the Fund" in Part A of this Registration Statement. Item 31: Location of Accounts and Records Nuveen Advisory Corp., 333 West Wacker Drive, Chicago, Illinois 60606, maintains the Declaration of Trust, By-Laws, minutes of trustees and shareholders meetings and contracts of the Registrant and all advisory material of the investment adviser. The Chase Manhattan Bank, P.O. Box 660086, Dallas, Texas 75266-0086, all general and subsidiary ledgers, journals, trial balances, records of all portfolio purchases and sales, and all other required records not maintained by Nuveen Advisory Corp. Item 32: Management Services Not applicable. C-6 Item 33: Undertakings 1. Registrant undertakes to suspend the offering of its shares until it amends its prospectus if (1) subsequent to the effective date of its Registration Statement, the net asset value declines more than 10 percent from its net asset value as of the effective date of the Registration Statement, or (2) the net asset value increases to an amount greater than its net proceeds as stated in the prospectus. 2. Not applicable. 3. Not applicable. 4. Not applicable. 5. The Registrant undertakes that: a. For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of a registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant under Rule 497(h) under the Securities Act of 1933 shall be deemed to be part of the Registration Statement as of the time it was declared effective. b. For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of the securities at that time shall be deemed to be the initial bona fide offering thereof. 6. The Registrant undertakes to send by first class mail or other means designed to ensure equally prompt delivery, within two business days of receipt of a written or oral request, any Statement of Additional Information. C-7 SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in this City of Chicago, and State of Illinois, on the 23rd day of March, 2001. NUVEEN CALIFORNIA DIVIDEND ADVANTAGE MUNICIPAL FUND 2 /s/ Gifford R. Zimmerman ________________________________________ Gifford R. Zimmerman, Vice President and Secretary Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the date indicated.
Signature Title Date --------- ----- ---- /s/ Stephen D. Foy Vice President and Controller March 23, 2001 - -------------------- (Principal Financial and Stephen D. Foy Accounting Officer) Chairman of the Board and Timothy R. Schwertfeger* Trustee (Principal Executive Officer) Robert P. Bremner* Trustee Lawrence H. Brown* Trustee Anne E. Impellizzeri* Trustee Peter R. Sawers* Trustee William J. Schneider* Trustee Judith M. Stockdale* Trustee By: /s/ Gifford R. Zimmerman -------------------------- Gifford R. Zimmerman Attorney-In-Fact March 23, 2001
*Original powers of attorney authorizing Alan G. Berkshire and Gifford R. Zimmerman, among others, to execute this Registration Statement, and Amendments thereto, for each of the trustees of Registrant on whose behalf this Registration Statement is filed, have been executed and filed as an exhibit. INDEX TO EXHIBITS a. Declaration of Trust dated June 1, 1999.* b. By-Laws of Registrant.* c. None. d. Form of Share Certificate.* e. Terms and Conditions of the Dividend Reinvestment Plan.* f. None. g. Investment Management Agreement between Registrant and Nuveen Advisory Corp. dated February 20, 2001. h.1 Form of Underwriting Agreement. h.2 Form of Master Selected Dealer Agreement. h.3 Form of Master Agreement among Underwriters. h.4 Form of Salomon Smith Barney Inc. Letter Agreement. i. Nuveen Open-End and Closed-End Funds Deferred Compensation Plan for Independent Directors and Trustees.* j. Form of Exchange Traded Fund Custody Agreement between Registrant and The Chase Manhattan Bank dated March __, 2001. k.1 Form of Shareholder Transfer Agency Agreement between Registrant and The Chase Manhattan Bank dated March __, 2001. k.2 Expense Reimbursement Agreement between Registrant and Nuveen Advisory Corp. dated February 20, 2001. l.1 Opinion and consent of Bell, Boyd & Lloyd LLC.* l.2 Opinion and consent of Bingham Dana LLP.* 1.3 Consent of Bell, Boyd & Lloyd LLC. 1.4 Consent of Bingham Dana LLP. m. None. n. Consent of Ernst & Young LLP. o. None. p. Subscription Agreement of Nuveen Advisory Corp. dated March 5, 2001. q. None. r.1 Code of Ethics of Nuveen Advisory Corp.* r.2 Code of Ethics of Salomon Smith Barney Inc.* s. Powers of Attorney.
___________________ * Previously filed. EX-99.G 2 0002.txt FORM OF INVESTMENT MANAGEMENT AGREEMENT INVESTMENT MANAGEMENT AGREEMENT ------------------------------- AGREEMENT made this 20/th/ day of February, 2001, by and between NUVEEN CALIFORNIA DIVIDEND ADVANTAGE MUNICIPAL FUND 2, a Massachusetts business trust (the "Fund"), and NUVEEN ADVISORY CORP., a Delaware corporation (the "Adviser"). W I T N E S S E T H - - - - - - - - - - In consideration of the mutual covenants hereinafter contained, it is hereby agreed by and between the parties hereto as follows: 1. The Fund hereby employs the Adviser to act as the investment adviser for, and to manage the investment and reinvestment of the assets of the Fund in accordance with the Fund's investment objective and policies and limitations, and to administer the Fund's affairs to the extent requested by and subject to the supervision of the Board of Trustees of the Fund for the period and upon the terms herein set forth. The investment of the Fund's assets shall be subject to the Fund's policies, restrictions and limitations with respect to securities investments as set forth in the Fund's then current registration statement under the Investment Company Act of l940, and all applicable laws and the regulations of the Securities and Exchange Commission relating to the management of registered closed-end, non-diversified management investment companies. The Adviser accepts such employment and agrees during such period to render such services, to furnish office facilities and equipment and clerical, bookkeeping and administrative services 2 (other than such services, if any, provided by the Fund's transfer agent) for the Fund, to permit any of its officers or employees to serve without compensation as trustees or officers of the Fund if elected to such positions, and to assume the obligations herein set forth for the compensation herein provided. The Adviser shall, for all purposes herein provided, be deemed to be an independent contractor and, unless otherwise expressly provided or authorized, shall have no authority to act for nor represent the Fund in any way, nor otherwise be deemed an agent of the Fund. 2. For the services and facilities described in Section l, the Fund will pay to the Adviser, at the end of each calendar month, an investment management fee computed by applying the following annual rate to the average daily net assets of the Fund: Rate Net Assets ---- ---------- .6500% Up to $125 million .6375% $125 to $250 million .6250% $250 to $500 million .6125% $500 million to $1 billion .6000% $1 billion to $2 billion .5750% $2 billion and over For the month and year in which this Agreement becomes effective, or terminates, there shall be an appropriate proration on the basis of the number of days that the Agreement shall have been in effect during the month and year, respectively. The services of the Adviser to the Fund under this Agreement are not to be deemed exclusive, and the Adviser shall be free to render similar services or other services to others so long as its services hereunder are not impaired thereby. 3. The Adviser shall arrange for officers or employees of the Adviser to serve, without compensation from the Fund, as trustees, officers or agents of the Fund, if duly elected or 3 appointed to such positions, and subject to their individual consent and to any limitations imposed by law. 4. Subject to applicable statutes and regulations, it is understood that officers, trustees, or agents of the Fund are, or may be, interested in the Adviser as officers, directors, agents, shareholders or otherwise, and that the officers, directors, shareholders and agents of the Adviser may be interested in the Fund otherwise than as trustees, officers or agents. 5. The Adviser shall not be liable for any loss sustained by reason of the purchase, sale or retention of any security, whether or not such purchase, sale or retention shall have been based upon the investigation and research made by any other individual, firm or corporation, if such recommendation shall have been selected with due care and in good faith, except loss resulting from willful misfeasance, bad faith, or gross negligence on the part of the Adviser in the performance of its obligations and duties, or by reason of its reckless disregard of its obligations and duties under this Agreement. 6. The Adviser currently manages other investment accounts and funds, including those with investment objectives similar to the Fund, and reserves the right to manage other such accounts and funds in the future. Securities considered as investments for the Fund may also be appropriate for other investment accounts and funds that may be managed by the Adviser. Subject to applicable laws and regulations, the Adviser will attempt to allocate equitably portfolio transactions among the portfolios of its other investment accounts and funds purchasing securities whenever decisions are made to purchase or sell securities by the Fund and one or more of such 4 other accounts or funds simultaneously. In making such allocations, the main factors to be considered by the Adviser will be the respective investment objectives of the Fund and such other accounts and funds, the relative size of portfolio holdings of the same or comparable securities, the availability of cash for investment by the Fund and such other accounts and funds, the size of investment commitments generally held by the Fund and such accounts and funds, and the opinions of the persons responsible for recommending investments to the Fund and such other accounts and funds. 7. This Agreement shall continue in effect until August 1, 2002 unless and until terminated by either party as hereinafter provided, and shall continue in force from year to year thereafter, but only as long as such continuance is specifically approved, at least annually, in the manner required by the Investment Company Act of l940. This Agreement shall automatically terminate in the event of its assignment, and may be terminated at any time without the payment of any penalty by the Fund or by the Adviser upon sixty (60) days' written notice to the other party. The Fund may effect termination by action of the Board of Trustees or by vote of a majority of the outstanding voting securities of the Fund, accompanied by appropriate notice. This Agreement may be terminated, at any time, without the payment of any penalty, by the Board of Trustees of the Fund, or by vote of a majority of the outstanding voting securities of the Fund, in the event that it shall have been established by a court of competent jurisdiction that the Adviser, or any officer or director of the Adviser, has taken any action which results in a 5 breach of the covenants of the Adviser set forth herein. Termination of this Agreement shall not affect the right of the Adviser to receive payments on any unpaid balance of the compensation, described in Section 2, earned prior to such termination. 8. If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule, or otherwise, the remainder shall not be thereby affected. 9. Any notice under this Agreement shall be in writing, addressed and delivered or mailed, postage prepaid, to the other party at such address as such other party may designate for receipt of such notice. 6 10. The Fund's Declaration of Trust is on file with the Secretary of the Commonwealth of Massachusetts. This Agreement is executed on behalf of the Fund by the Fund's officers as officers and not individually and the obligations imposed upon the Fund by this Agreement are not binding upon any of the Fund's Trustees, officers or shareholders individually but are binding only upon the assets and property of the Fund. IN WITNESS WHEREOF, the Fund and the Adviser have caused this Agreement to be executed on the day and year above written. NUVEEN CALIFORNIA DIVIDEND ADVANTAGE MUNICIPAL FUND 2 by: /s/ Gifford R. Zimmerman ------------------------------------- Vice President Attest: /s/ Virginia L. O'Neal --------------------------- Assistant Secretary NUVEEN ADVISORY CORP. by: /s/ William M. Fitzgerald ------------------------------------- Vice President Attest: /s/ Nicholas Dalmaso --------------------------- Assistant Secretary EX-99.H.1 3 0003.txt FORM OF UNDERWRITING AGREEMENT ______________ Shares NUVEEN CALIFORNIA DIVIDEND ADVANTAGE MUNICIPAL FUND 2 Common Stock UNDERWRITING AGREEMENT ---------------------- March [27], 2001 Salomon Smith Barney Inc. Nuveen Investments A.G. Edwards & Sons, Inc. Prudential Securities Incorporated UBS Warburg LLC Crowell, Weedon & Co. First Union Securities, Inc. Sutro & Co. Incorporated Wedbush Morgan Securities As Representatives of the Several Underwriters c/o Salomon Smith Barney Inc. 388 Greenwich Street New York, New York 10013 Dear Sirs: The undersigned, Nuveen California Dividend Advantage Municipal Fund 2, a Massachusetts business trust (the "Fund") and Nuveen Advisory Corp., a Delaware corporation (the "Manager"), address you as Underwriters and as the representatives (the "Representatives") of each of the other persons, firms and corporations, if any, listed in Schedule I hereto (herein collectively called "Underwriters"). The Fund proposes to issue and sell an aggregate of ________ shares (the "Firm Shares") of its common shares of beneficial interest, $.01 par value per share (the "Common Shares"), to the several Underwriters. The Fund also proposes to sell to the Underwriters, upon the terms and conditions set forth in Section 2 hereof, up to an additional _______ Common Shares (the "Additional Shares"). The Firm Shares and Additional Shares are hereinafter collectively referred to as the "Shares". The Fund and the Manager wish to confirm as follows their agreements with you and the other several Underwriters on whose behalf you are acting in connection with the several purchases of the Shares by the Underwriters. The Fund is entering into an investment management agreement with the Manager dated February 20, 2001, an exchange traded fund custody agreement with The Chase Manhattan Bank dated March __, 2001 and a shareholder transfer agency agreement with The Chase Manhattan Bank dated March __, 2001 and such agreements are herein referred to as the "Management Agreement", the "Custodian Agreement" and the "Transfer Agency Agreement", respectively. Collectively, the Management Agreement, the Custodian Agreement and the Transfer Agency Agreement are herein referred to as the "Fund Agreements". This Underwriting Agreement is herein referred to as the "Agreement". 1. Registration Statement and Prospectus. The Fund has prepared and filed ---------------------------------------- with the Securities and Exchange Commission (the "Commission") in accordance with the provisions of the Securities Act of 1933, as amended (the "1933 Act"), the Investment Company Act of 1940, as amended (the "1940 Act") and the rules and regulations of the Commission under the 1933 Act (the "1933 Act Rules and Regulations") and the 1940 Act (the "1940 Act Rules and Regulations" and together with the 1933 Act Rules and Regulations, the "Rules and Regulations") a registration statement on Form N-2 (File No. 333-49242) under the 1933 Act and the 1940 Act and may pursuant to the Rules and Regulations prepare and file an additional registration statement relating to a portion of the Shares pursuant to Rule 462(b) of the 1933 Act Rules and Regulations (collectively, the "registration statement"), including a prospectus (including any statement of additional information) relating to the Shares and a notification of registration of the Fund as an investment company under the 1940 Act on Form N-8A (the "1940 Act Notification"). The term "Registration Statement" as used in this Agreement means the registration statement (including all financial schedules and exhibits), as amended at the time it becomes effective under the 1933 Act or, if the registration statement became effective under the 1933 Act prior to the execution of this Agreement, as amended or supplemented thereto, prior to the execution of this Agreement and includes any information deemed to be included by Rule 430A under the 1933 Act Rules and Regulations. If it is contemplated, at the time this Agreement is executed, that a post-effective amendment to the registration statement will be filed under the 1933 Act and must be declared effective before the offering of the Shares may commence, the term "Registration Statement" as used in this Agreement means the registration statement as amended by said post-effective amendment. The term "Prospectus" as used in this Agreement means the prospectus (including the statement of additional information) in the form included in the Registration Statement or, if the prospectus (including the statement of additional information) included in the Registration Statement omits information in reliance on Rule 430A and such information is included in a prospectus (including the statement of additional information) filed with the Commission pursuant to Rule 497(h) under the 1933 Act Rules and Regulations, the term "Prospectus" as used in this Agreement means the prospectus (including the statement of additional information) in the form included in the Registration Statement as supplemented by the addition of the information contained in the prospectus (including the statement of additional information) filed with the Commission pursuant to Rule 497(h). The term "Prepricing Prospectus" as used in this Agreement means the prospectus (including the statement of additional information) subject to completion in the form included in the registration statement at the time of the initial filing of the registration statement with the Commission and as such prospectus (including the statement of additional information) shall have been amended 2 from time to time prior to the date of the Prospectus, together with any other prospectus (including any other statement of additional information) relating to the Fund other than the Prospectus. The Fund has furnished the Representatives with copies of such registration statement, each amendment to such registration statement filed with the Commission and each Prepricing Prospectus. 2. Agreements to Sell, Purchase and Compensate. The Fund hereby agrees, ---------------------------------------------- subject to all the terms and conditions set forth herein, to issue and to sell to each Underwriter and, upon the basis of the representations, warranties and agreements of the Fund and the Manager herein contained and subject to all of the other terms and conditions set forth herein, each Underwriter agrees, severally and not jointly, to purchase from the Fund at a purchase price per share of $14.325 per Share (the "purchase price per share"), the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I hereto (or such number of Firm Shares increased as set forth in Section 10 hereof). The Fund also agrees, subject to all the terms and conditions set forth herein, to issue and to sell to the Underwriters and, upon the basis of the representations, warranties and agreements of the Fund and the Manager herein contained and subject to all the terms and conditions set forth herein, the Underwriters shall have the right to purchase from the Fund, at the purchase price per share, pursuant to an option (the "over-allotment option") which may be exercised at any time and from time to time prior to 9:00 P.M., New York City time, on the 45th day after the date of the Prospectus (or if such 45th day shall be a Saturday or a Sunday or a holiday, on the next business day thereafter when the New York Stock Exchange (the "NYSE") is open for trading) up to an aggregate of ________ Additional Shares. Additional Shares may be purchased solely for the purpose of covering over-allotments made in connection with the offering of the Firm Shares. Upon any exercise of the over-allotment option, upon the basis of the representations, warranties and agreements of the Fund and the Manager herein contained and subject to all of the other terms and conditions set forth herein, each Underwriter agrees, severally and not jointly, to purchase from the Fund the number of Additional Shares (subject to such adjustments as you may determine to avoid fractional shares) which bears the same proportion to the number of Additional Shares to be purchased by the Underwriters as the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I (or such number of Firm Shares increased as set forth in Section 10 hereof) bears to the aggregate number of Firm Shares. 3. Terms of Public Offering. The Fund and the Manager have been advised by --------------------------- you that the Underwriters propose to make a public offering of their respective portions of the Firm Shares as soon after the Registration Statement and this Agreement have become effective as in your judgment is advisable and initially to offer the Firm Shares upon the terms set forth in the Prospectus. 4. Delivery of Shares and Payments Therefor. ------------------------------------------- 3 (a) Delivery to the Underwriters of and payment to the Fund for the Firm Shares and compensation of the Underwriters with respect thereto shall be made at the office of Salomon Smith Barney Inc., 388 Greenwich Street, New York, New York 10013 or through the facilities of the Depository Trust Company or another mutually agreeable facility, at 9:00 A.M., New York City time, on March [30], 2001 (the "Closing Date"). The place of closing for the Firm Shares and the Closing Date may be varied by agreement between you and the Fund. (b) Delivery to the Underwriters of and payment to the Fund for any Additional Shares to be purchased by the Underwriters and compensation of the Underwriters with respect thereto shall be made at the aforementioned office of Salomon Smith Barney Inc. at such time on such date (an "Option Closing Date"), which may be the same as the Closing Date, but shall in no event be earlier than the Closing Date nor earlier than two nor later than three business days after the giving of the notice hereinafter referred to, as shall be specified in a written notice from you on behalf of the Underwriters to the Fund of the Underwriters' determination to purchase a number, specified in said notice, of Additional Shares. The place of closing for any Additional Shares and the Option Closing Date for such Additional Shares may be varied by agreement between you and the Fund. (c) Certificates for the Firm Shares and for any Additional Shares shall be registered in such names and in such denominations as you shall request prior to 1:00 P.M., New York City time, (i) in respect of the Firm Shares, on the second business day preceding the Closing Date and (ii) in respect of Additional Shares, on the day of the giving of the written notice in respect of such Additional Shares. Such certificates will be made available to you in New York City for inspection and packaging not later than 9:00 A.M., New York City time, on the business day next preceding the Closing Date or any Option Closing Date, as the case may be. The certificates evidencing the Firm Shares and any Additional Shares to be purchased hereunder shall be delivered to you on the Closing Date or the Option Closing Date, as the case may be, against payment of the purchase price therefor in same-day funds to the order of the Fund. 5. Agreements of the Fund and the Manager. The Fund and the Manager, ----------------------------------------- jointly and severally, agree with the several Underwriters as follows: (a) If, at the time this Agreement is executed and delivered, it is necessary for the Registration Statement or a post-effective amendment thereto to be declared effective under the 1933 Act before the offering of the Firm Shares may commence, the Fund will use its reasonable best efforts to cause the Registration Statement or such post-effective amendment to become effective under the 1933 Act as soon as possible. If the Registration Statement has become effective and the Prospectus contained therein omits certain information at the time of effectiveness pursuant to Rule 430A of the 1933 Act Rules and Regulations, the Fund will file a prospectus including such information pursuant to Rule 497(h) of the 1933 Act Rules and Regulations, as promptly as practicable, but no later than the second business day following the earlier of the date of 4 the determination of the offering price of the Shares or the date the Prospectus is first used after the effective date of the Registration Statement. If the Registration Statement has become effective and the Prospectus contained therein does not so omit such information, the Fund will file a Prospectus pursuant to Rule 497 (c) or (j) of the 1933 Act Rules and Regulations as promptly as practicable, but no later than the fifth business day following the date of the later of the effective date of the Registration Statement or the commencement of the public offering of the Shares after the effective date of the Registration Statement. The Fund will advise you promptly and, if requested by you, will confirm such advice in writing (i) when the Registration Statement or such post-effective amendment has become effective, (ii) when the Prospectus has been timely filed pursuant to Rule 497(c) or Rule 497(h) of the 1933 Act Rules and Regulations or the certification permitted pursuant to Rule 497(j) of the 1933 Act Rules and Regulations has been timely filed, whichever is applicable. (b) The Fund will advise you promptly and, if requested by you, will confirm such advice in writing: (i) of any request made by the Commission for amendment of or a supplement to the Registration Statement, the Prospectus or any Prepricing Prospectus or the Prospectus (or any amendment or supplement to any of the foregoing) or for additional information, (ii) of the issuance by the Commission, the National Association of Securities Dealers, Inc. (the "NASD"), any state securities commission, any national securities exchange, any arbitrator, any court or any other governmental, regulatory, self-regulatory or administrative agency or any official suspending the effectiveness of the Registration Statement, prohibiting or suspending the use of the Prospectus, any Prepricing Prospectus or any sales material (as hereinafter defined), of any notice pursuant to Section 8(e) of the 1940 Act, of the suspension of qualification of the Shares for offering or sale in any jurisdiction, or the initiation or contemplated initiation of any proceeding for any such purposes, (iii) of receipt by the Fund, the Manager, any affiliate of the Fund or the Manager or any representative or attorney of the Fund or the Manager of any other material communication from the Commission, the NASD, any state securities commission, any national securities exchange, any arbitrator, any court or any other governmental, regulatory, self-regulatory or administrative agency or any official relating to the Fund (if such communication relating to the Fund is received by such person within three years after the date of this Agreement), the Registration Statement, the 1940 Act Notification, the Prospectus, any Prepricing Prospectus, any sales material (as hereinafter defined) (or any amendment or supplement to any of the foregoing), this Agreement or any of the Fund Agreements and (iv) within the period of time referred to in paragraph (f) below, of any material, adverse change in the condition (financial or other), business, prospects, properties, net assets or results of operations of the Fund or the Manager or of the happening of any event which makes any statement of a material fact made in the Registration Statement, the Prospectus, any Prepricing Prospectus or any sales material (as herein defined) (or any amendment or supplement to any of the foregoing) untrue or which requires the making of any additions to or changes in the Registration Statement, the Prospectus, any Prepricing Prospectus or any sales materials (as herein defined) (or any amendment or supplement to any of the foregoing) in order to 5 state a material fact required by the 1933 Act, the 1940 Act or the Rules and Regulations to be stated therein or necessary in order to make the statements therein (in the case of a prospectus, in light of the circumstances under which they were made) not misleading or of the necessity to amend or supplement the Registration Statement, the Prospectus, any Prepricing Prospectus or any sales material (as herein defined) (or any amendment or supplement to any of the foregoing) to comply with the 1933 Act, the 1940 Act, the Rules and Regulations or any other law or order of any court or regulatory body. If at any time the Commission, the NASD, any state securities commission, any national securities exchange, any arbitrator, any court or any other governmental, regulatory, self-regulatory or administrative agency or any official shall issue any order suspending the effectiveness of the Registration Statement, prohibiting or suspending the use of the Prospectus, any Prepricing Prospectus or any sales material (as hereinafter defined) (or any amendment or supplement to any of the foregoing) or suspending the qualification of the Shares for offering or sale in any jurisdiction, the Fund will use its reasonable best efforts to obtain the withdrawal of such order at the earliest possible time. (c) The Fund will furnish to you, without charge, three signed copies of the registration statement and the 1940 Act Notification as originally filed with the Commission and of each amendment thereto, including financial statements and all exhibits thereto (except any post-effective amendment required by Rule 8b-16 of the 1940 Act Rules and Regulations which is filed with the Commission after the later of (x) one year from the date of this Agreement and (y) the date on which the distribution of the Shares is completed) and will also furnish to you, without charge, such number of conformed copies of the registration statement as originally filed and of each amendment thereto (except any post-effective amendment required by Rule 8b-16 of the 1940 Act Rules and Regulations which is filed with the Commission after the later of (x) one year from the date of this Agreement and (y) the date on which the distribution of the Shares is completed), with or without exhibits, as you may reasonably request. (d) The Fund will not (i) file any amendment to the registration statement or make any amendment or supplement to the Prospectus, any Prepricing Prospectus or any sales material (as hereinafter defined) (or any amendment or supplement to any of the foregoing) of which you shall not previously have been advised or to which you shall reasonably object within a reasonable time after being so advised or (ii) so long as, in the opinion of counsel for the Underwriters, a Prospectus is required to be delivered in connection with sales by any Underwriter or dealer, file any information, documents or reports pursuant to the Securities Exchange Act of 1934, as amended (the "1934 Act"), without delivering a copy of such information, documents or reports to you, as Representatives of the Underwriters, prior to or concurrently with such filing. (e) Prior to the execution and delivery of this Agreement, the Fund has delivered to you, without charge, in such quantities as you have reasonably requested, copies of each form of any Prepricing Prospectus. The Fund consents to the use, in accordance with the provisions of the 1933 Act and with the securities or Blue Sky laws of the 6 jurisdictions in which the Shares are offered by the several Underwriters and by dealers, prior to the date of the Prospectus, of each Prepricing Prospectus so furnished by the Fund. (f) As soon after the execution and delivery of this Agreement as possible and thereafter from time to time, for such period as in the opinion of counsel for the Underwriters a prospectus is required by the 1933 Act to be delivered in connection with sales of Shares by any Underwriter or dealer, the Fund will expeditiously deliver to each Underwriter and each dealer, without charge, as many copies of the Prospectus (and of any amendment or supplement thereto) as you may reasonably request. The Fund consents to the use of the Prospectus (and of any amendments or supplements thereto) in accordance with the provisions of the 1933 Act and with the securities or Blue Sky laws of the jurisdictions in which the Shares are offered by the several Underwriters and by all dealers to whom Shares may be sold, both in connection with the offering or sale of the Shares and for such period of time thereafter as the Prospectus is required by law to be delivered in connection with sales of Shares by any Underwriter or dealer. If during such period of time any event shall occur that in the judgment of the Fund or in the opinion of counsel for the Underwriters is required to be set forth in the Prospectus (as then amended or supplemented) or should be set forth therein in order to make the statements therein, in light of the circumstances under which they were made, not misleading or if it is necessary to supplement or amend the Prospectus to comply with the 1933 Act, the 1940 Act, the Rules and Regulations or any other law, rule or regulation, the Fund will forthwith prepare and, subject to the provisions of paragraph (d) above, file with the Commission an appropriate amendment or supplement thereto and will expeditiously furnish to the Underwriters and dealers, without charge, such number of copies thereof as they shall reasonably request. In the event that the Prospectus is to be amended or supplemented, the Fund, if requested by you, will promptly issue a press release announcing or disclosing the matters to be covered by the proposed amendment or supplement. (g) The Fund will cooperate with you and with counsel for the Underwriters in connection with the registration or qualification of the Shares for offering and sale by the several Underwriters and by dealers under the securities or Blue Sky laws of such jurisdictions as you may designate and will file such consents to service of process or other documents necessary or appropriate in order to effect such registration or qualification; provided that in no event shall the Fund be obligated to qualify to do business in any jurisdiction where it is not now so qualified or to take any action which would subject it to service of process in suits, other than those arising out of the offering or sale of the Shares, in any jurisdiction where it is not now so subject. (h) The Fund will make generally available to its security holders an earnings statement, which need not be audited, covering a twelve-month period commencing after the effective date of the Registration Statement and ending not later than 15 months thereafter, as soon as practicable after the end of such period, which earnings statement 7 shall satisfy the provisions of Section 11(a) of the 1933 Act and Rule 158 of the 1933 Act Rules and Regulations. (i) The Fund will comply with the undertaking set forth in paragraph 6 of Item 33 of Part C of the Registration Statement. (j) During the period of five years hereafter, the Fund will furnish to you (i) as soon as available, a copy of each report of the Fund mailed to shareholders or filed with the Commission and (ii) from time to time such other information concerning the Fund as you may reasonably request. (k) If this Agreement shall terminate or shall be terminated after execution pursuant to any provisions hereof (otherwise than pursuant to the second paragraph of Section 10 hereof or by notice given by you terminating this Agreement pursuant to Section 10 or Section 11 hereof) or if this Agreement shall be terminated by the Underwriters because of any failure or refusal on the part of the Fund or the Manager to comply with the terms or fulfill any of the conditions of this Agreement, the Fund and the Manager, jointly and severally, agree to reimburse the Representatives for all out-of-pocket expenses (including fees and expenses of counsel for the Underwriters) incurred by you in connection herewith, but the Fund and the Manager shall in no event be liable for any internal cost of the Underwriters or any loss of anticipated profits or speculative, consequential or similar damages for such termination. (l) The Fund will direct the investment of the net proceeds of the offering of the Shares in such a manner as to comply with the investment objectives, policies and restrictions of the Fund as described in the Prospectus. (m) The Fund will file the requisite copies of the Prospectus with the Commission in a timely fashion pursuant to Rule 497(c) or Rule 497(h) of the 1933 Act Rules and Regulations, whichever is applicable or, if applicable, will file in a timely fashion the certification permitted by Rule 497(j) of the 1933 Act Rules and Regulations and will advise you of the time and manner of such filing. (n) Except as provided in this Agreement or pursuant to any dividend reinvestment plan of the Fund in effect on the date hereof, the Fund will not sell, contract to sell or otherwise dispose of, any Common Shares or any securities convertible into or exercisable or exchangeable for Common Shares or grant any options or warrants to purchase Common Shares, for a period of 180 days after the date of the Prospectus, without the prior written consent of Salomon Smith Barney Inc. (o) Except as stated in this Agreement and in the Prospectus, neither the Fund nor the Manager has taken, nor will it take, directly or indirectly, any action designed to or that might reasonably be expected to cause or result in stabilization or manipulation of the price of the Common Shares. 8 (p) The Fund will use its reasonable best efforts to have the Common Shares listed, subject to notice of issuance, on the American Stock Exchange (the "AMEX") concurrently with the effectiveness of the registration statement and to comply with the rules and regulations of such exchange. 6. Representations and Warranties of the Fund and the Manager. The Fund --------------------------------------------------------------- and the Manager, jointly and severally, represent and warrant to each Underwriter that: (a) Each Prepricing Prospectus included as part of the registration statement as originally filed or as part of any amendment or supplement thereto or filed pursuant to Rule 497 of the 1933 Act Rules and Regulations, complied when so filed in all material respects with the provisions of the 1933 Act, the 1940 Act and the Rules and Regulations. (b) The Registration Statement, in the form in which it became or becomes effective and also in such form as it may be when any post-effective amendment thereto shall become effective and the Prospectus and any amendment or supplement thereto when filed with the Commission under Rule 497 of the 1933 Act Rules and Regulations and the 1940 Act Notification when originally filed with the Commission and any amendment or supplement thereto when filed with the Commission complied or will comply in all material respects with the provisions of the 1933 Act, the 1940 Act and the Rules and Regulations and did not or will not at any such times contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein (in the case of a prospectus, in light of the circumstances under which they were made) not misleading; except that this representation and warranty does not apply to statements in or omissions from the Registration Statement or the Prospectus (or any amendment or supplement thereto) made in reliance upon and in conformity with information relating to any Underwriter furnished to the Fund in writing by or on behalf of any Underwriter through you expressly for use therein. (c) All the outstanding Common Shares of the Fund have been duly authorized and validly issued, are fully paid and, except as described in the Registration Statement, nonassessable and are free of any preemptive or similar rights; the Shares have been duly authorized and, when issued and delivered to the Underwriters against payment therefor in accordance with the terms hereof, will be validly issued, fully paid and, except as described in the Registration Statement, nonassessable and free of any preemptive or similar rights and the capital stock of the Fund conforms to the description thereof in the Registration Statement and the Prospectus (and any amendment or supplement to either of them). (d) The Fund has been duly formed and is validly existing in good standing as a business trust under the laws of The Commonwealth of Massachusetts, with full power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement and the Prospectus (and any amendment or supplement to either of them) and is duly registered and qualified to conduct business and 9 is in good standing in each jurisdiction or place where the nature of its properties or the conduct of its business requires such registration or qualification, except where the failure so to register or to qualify does not have a material, adverse effect on the condition (financial or other), business, properties, net assets or results of operations of the Fund. The Fund has no subsidiaries. (e) There are no legal or governmental proceedings pending or, to the knowledge of the Fund, threatened, against the Fund or to which the Fund or any of its properties is subject, that are required to be described in the Registration Statement or the Prospectus (or any amendment or supplement to either of them) but are not described as required and there are no agreements, contracts, indentures, leases or other instruments that are required to be described in the Registration Statement or the Prospectus (or any amendment or supplement to either of them) or to be filed as an exhibit to the Registration Statement that are not described or filed as required by the 1933 Act, the 1940 Act or the Rules and Regulations. (f) The Fund is not in violation of its Declaration of Trust or By- Laws or in material violation of any material law, ordinance, administrative or governmental rule or regulation applicable to the Fund or of any material decree of the Commission, the NASD, any state securities commission, any national securities exchange, any arbitrator, any court or any other governmental, regulatory, self-regulatory or administrative agency or any official having jurisdiction over the Fund or in breach or default in any material respect in the performance of any obligation, agreement or condition contained in any material bond, debenture, note or any other evidence of indebtedness or in any agreement, indenture, lease or other instrument to which the Fund is a party or by which it or any of its properties may be bound. (g) Neither the issuance and sale of the Shares, the execution, delivery or performance of this Agreement nor any of the Fund Agreements by the Fund, nor the consummation by the Fund of the transactions contemplated hereby or thereby (A) requires any consent, approval, authorization or other order of or registration or filing with the Commission, the NASD, any national securities exchange, any arbitrator, any court or any other governmental, regulatory, self-regulatory or administrative agency or any official (except compliance with the securities or Blue Sky laws of various jurisdictions which have been or will be effected in accordance with this Agreement and except for compliance with the filing requirements of the NASD Division of Corporate Finance) or conflicts or will conflict with or constitutes or will constitute a breach of the Declaration of Trust or By- Laws of the Fund or (B) conflicts or will conflict with or constitutes or will constitute a breach of or a default under, any material agreement, indenture, lease or other instrument to which the Fund is a party or by which it or any of its properties may be bound or materially violates or will materially violate any material statute, law, regulation or filing or judgment, injunction, order or decree applicable to the Fund or any of its properties or will result in the creation or imposition of any material lien, charge or encumbrance upon any property or assets of the Fund pursuant to the 10 terms of any agreement or instrument to which it is a party or by which it may be bound or to which any of the property or assets of the Fund is subject. (h) Since the date as of which information is given in the Registration Statement and the Prospectus (and any amendment or supplement to either of them), except as otherwise stated therein, (A) there has been no material, adverse change in the condition (financial or other), business, properties, net assets or results of operations of the Fund or business prospects (other than as a result of a change in the financial markets generally) of the Fund, whether or not arising in the ordinary course of business, (B) there have been no transactions entered into by the Fund which are material to the Fund other than those in the ordinary course of its business as described in the Prospectus (and any amendment or supplement thereto) and (C) there has been no dividend or distribution of any kind declared, paid or made by the Fund on any class of its common stock. (i) The accountants, Ernst & Young LLP, who have audited or shall audit the Statement of Assets and Liabilities included in the Registration Statement and the Prospectus (and any amendment or supplement to either of them), are an independent public accounting firm as required by the 1933 Act, the 1940 Act and the Rules and Regulations. (j) The financial statements, together with related schedules and notes, included in the Registration Statement or the Prospectus (or any amendment or supplement to either of them) present fairly the financial position of the Fund on the basis stated in the Registration Statement at the respective dates or for the respective periods to which they apply; such statements and related schedules and notes have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved except as disclosed therein; and the other financial and statistical information and data included in the Registration Statement or the Prospectus (or any amendment or supplement thereto) are accurately derived from such financial statements and the books and records of the Fund. (k) The Fund, subject to the Registration Statement having been declared effective and the filing of the Prospectus under Rule 497 under the Rules and Regulations, has taken all required action under the 1933 Act, the 1940 Act and the Rules and Regulations to make the public offering and consummate the sale of the Shares as contemplated by this Agreement. (l) The execution and delivery of and the performance by the Fund of its obligations under this Agreement and the Fund Agreements have been duly and validly authorized by the Fund and this Agreement and the Fund Agreements have been duly executed and delivered by the Fund and constitute the valid and legally binding agreements of the Fund, enforceable against the Fund in accordance with their terms, except as rights to indemnity and contribution hereunder may be limited by federal or state securities laws and subject to the qualification that the enforceability of the Fund's obligations hereunder and thereunder may be limited by bankruptcy, insolvency, 11 reorganization, moratorium and other laws relating to or affecting creditors' rights generally and by general equitable principles. (m) Except as disclosed in the Registration Statement and the Prospectus (or and any amendment or supplement to either of them), subsequent to the respective dates as of which such information is given in the Registration Statement and the Prospectus (and any amendment or supplement to either of them), the Fund has not incurred any liability or obligation, direct or contingent or entered into any transaction, not in the ordinary course of business, that is material to the Fund and there has not been any change in the capital stock or material increase in the short-term debt or long-term debt of the Fund or any material, adverse change or any development involving or which should reasonably be expected to involve a prospective material, adverse change in the condition (financial or other), business, properties, net assets or results of operations of the Fund. (n) The Fund has not distributed and, prior to the later to occur of (i) the Closing Date and (ii) completion of the distribution of the Shares, will not distribute to the public any offering material in connection with the offering and sale of the Shares other than the Registration Statement, the Prepricing Prospectus included in Pre-Effective Amendment No. 3 to the Registration Statement, the Prospectus and the advertisements/sales literature filed by Nuveen Investments with the NASD on February 26, 2001. (o) The Fund has such licenses, permits, and authorizations of governmental or regulatory authorities ("permits") as are necessary to own its property and to conduct its business in the manner described in the Prospectus (and any amendment or supplement thereto); the Fund has fulfilled and performed all its material obligations with respect to such permits and no event has occurred which allows or, after notice or lapse of time, would allow, revocation or termination thereof or results in any other material impairment of the rights of the Fund under any such permit, subject in each case to such qualification as may be set forth in the Prospectus (and any amendment or supplement thereto); and, except as described in the Prospectus (and any amendment or supplement thereto), none of such permits contains any restriction that is materially burdensome to the Fund. (p) The Fund maintains and will maintain a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization and with the investment policies and restrictions of the Fund and the applicable requirements of the 1940 Act, the 1940 Act Rules and Regulations and the Internal Revenue Code of 1986, as amended; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles, to calculate net asset value, to maintain accountability for assets and to maintain material compliance with the books and records requirements under the 1940 Act and the 1940 Act Rules and Regulations; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded account for assets is compared with existing 12 assets at reasonable intervals and appropriate action is taken with respect to any differences. (q) The conduct by the Fund of its business (as described in the Prospectus) does not require it to be the owner, possessor or licensee of any patents, patent licenses, trademarks, service marks or trade names which it does not own, possess or license. (r) Except as stated in this Agreement and in the Prospectus (and any amendment or supplement thereto), the Fund has not taken and will not take, directly or indirectly, any action designed to or which should reasonably be expected to cause or result in or which will constitute stabilization or manipulation of the price of the Common Shares in violation of federal securities laws and the Fund is not aware of any such action taken or to be taken by any affiliates of the Fund. (s) The Fund is duly registered under the 1940 Act as a closed-end, non-diversified management investment company and the 1940 Act Notification has been duly filed with the Commission and, at the time of filing thereof and at the time of filing any amendment or supplement thereto, conformed in all material respects with all applicable provisions of the 1940 Act and the Rules and Regulations. The Fund has not received any notice from the Commission pursuant to Section 8(e) of the 1940 Act with respect to the 1940 Act Notification or the Registration Statement (or any amendment or supplement to either of them). (t) All advertising, sales literature or other promotional material (including "prospectus wrappers", "broker kits", "road show slides" and "road show scripts"), whether in printed or electronic form, authorized in writing by or prepared by the Fund or the Manager for use in connection with the offering and sale of the Shares (collectively, "sales material") complied and comply in all material respects with the applicable requirements of the 1933 Act, the 1933 Act Rules and Regulations and the rules and interpretations of the NASD and if required to be filed with the NASD under the NASD's conduct rules were so filed. No sales material contained or contains an untrue statement of a material fact or omitted or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (u) This Agreement and each of the Fund Agreements complies in all material respects with all applicable provisions of the 1940 Act, the 1940 Act Rules and Regulations, the Investment Advisers Act of 1940, as amended (the "Advisers Act") and the rules and regulations adopted by the Commission under the Advisers Act (the "Advisers Act Rules and Regulations"). (v) No holder of any security of the Fund has any right to require registration of Common Shares or any other security of the Fund because of the filing of the registration statement or consummation of the transactions contemplated by this Agreement. 13 (w) The Shares have been duly approved for listing upon notice of issuance on the AMEX and the Fund's registration statement on Form 8-A, under the 1934 Act, has become effective. (x) The Fund intends to direct the investment of the proceeds of the offering of the Shares in such a manner as to comply with the requirements of Subchapter M of the Internal Revenue Code of 1986, as amended. 7. Representations and Warranties of the Manager. The Manager -------------------------------------------------- represents and warrants to each Underwriter as follows: (a) The Manager is a corporation duly organized and validly existing in good standing under the laws of the State of Delaware, with full corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement and the Prospectus (and any amendment or supplement to either of them) and is duly registered and qualified to conduct business and is in good standing in each jurisdiction or place where the nature of its properties or conduct of its business requires such registration or qualification, except where the failure so to register or to qualify would not have a material, adverse effect on the condition (financial or other), business, properties, net assets or results of operations of the Manager. (b) The Manager is duly registered as an investment adviser under the Advisers Act and is not prohibited by the Advisers Act, the 1940 Act, the Advisers Act Rules and Regulations or the 1940 Act Rules and Regulations from acting under the Management Agreement for the Fund as contemplated by the Registration Statement and the Prospectus (or any amendment or supplement thereto). (c) The Manager has full power and authority to enter into this Agreement and the Management Agreement, the execution and delivery of, and the performance by the Manager of its obligations under, this Agreement and the Management Agreement have been duly and validly authorized by the Manager and this Agreement and the Management Agreement have been duly executed and delivered by the Manager and constitute the valid and legally binding agreements of the Manager, enforceable against the Manager in accordance with their terms, except as rights to indemnity and contribution hereunder may be limited by federal or state securities laws and subject to the qualification that the enforceability of the Manager's obligations hereunder and thereunder may be limited by bankruptcy, insolvency, reorganization, moratorium and other laws relating to or affecting creditors' rights generally and by general equitable principles. (d) The Manager has the financial resources available to it necessary for the performance of its services and obligations as contemplated in the Registration Statement, the Prospectus (or any amendment or supplement thereto) and under this Agreement and the Management Agreement. 14 (e) The description of the Manager and its business, and the statements attributable to the Manager, in the Registration Statement and the Prospectus (and any amendment or supplement thereto) complied and comply in all material respects with the provisions of the 1933 Act, the 1940 Act, the Advisers Act, the Rules and Regulations and the Advisers Act Rules and Regulations and did not and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein (in the case of a prospectus, in light of the circumstances under which they were made) not misleading. (f) There are no legal or governmental proceedings pending or, to the knowledge of the Manager, threatened against the Manager or to which any of its properties is subject, that are required to be described in the Registration Statement or the Prospectus (or any amendment or supplement to either of them) but are not described as required or that reasonably should result in any material, adverse change in the condition (financial or other), business, properties, net assets or results of operations of the Manager or that reasonably should have a material, adverse effect on the ability of the Manager to fulfill its obligations hereunder or under the Management Agreement. (g) Since the date as of which information is given in the Registration Statement and the Prospectus (and any amendment or supplement to either of them), except as otherwise stated therein, (A) there has been no material, adverse change in the condition (financial or other), business, properties, net assets or results of operations or business prospects of the Manager, whether or not arising from the ordinary course of business and (B) there have been no transactions entered into by the Manager which are material to the Manager other than those in the ordinary course of its business as described in the Prospectus. (h) The Manager has such licenses, permits and authorizations of governmental or regulatory authorities ("permits") as are necessary to own its property and to conduct its business in the manner described in the Prospectus; the Manager has fulfilled and performed all its material obligations with respect to such permits and no event has occurred which allows, or after notice or lapse of time would allow, revocation or termination thereof or results in any other material impairment of the rights of the Manager under any such permit. (i) This Agreement and the Management Agreement comply in all material respects with all applicable provisions of the 1940 Act, the 1940 Act Rules and Regulations, the Advisers Act and the Advisers Act Rules and Regulations. (j) Neither the execution, delivery or performance of this Agreement or the Management Agreement by the Manager, nor the consummation by the Manager of the transactions contemplated hereby or thereby (A) requires any consent, approval, authorization or other order of or registration or filing with the Commission, the NASD, any state securities commission, any national securities exchange, any arbitrator, any court or any other governmental, regulatory, self-regulatory or administrative agency or 15 any official (except compliance with the securities or Blue Sky laws of various jurisdictions which have been or will be effected in accordance with this Agreement and except for compliance with the filing requirements of the NASD Division of Corporate Finance) or conflicts or will conflict with or constitutes or will constitute a breach of or a default under, the Certificate of Incorporation or By-Laws of the Manager or (B) conflicts or will conflict with or constitutes or will constitute a breach of or a default under, any material agreement, indenture, lease or other instrument to which the Manager is a party or by which it or any of its properties may be bound or materially violates or will materially violate any material statute, law, regulation or filing or judgment, injunction, order or decree applicable to the Manager or any of its properties or will result in the creation or imposition of any material lien, charge or encumbrance upon any property or assets of the Manager pursuant to the terms of any agreement or instrument to which it is a party or by which it may be bound or to which any of the property or assets of the Manager is subject. (k) Except as stated in this Agreement and in the Prospectus (and in any amendment or supplement thereto), the Manager has not taken and will not take, directly or indirectly, any action designed to or which should reasonably be expected to cause or result in or which will constitute, stabilization or manipulation of the price of the Common Shares in violation of federal securities laws and the Manager is not aware of any such action taken or to be taken by any affiliates of the Manager. (l) In the event that the Fund or the Manager makes available any promotional materials intended for use only by qualified broker-dealers and registered representatives thereof by means of an Internet web site or similar electronic means, the Manager will install and maintain pre-qualification and password-protection or similar procedures which are reasonably designed to effectively prohibit access to such promotional materials by persons other than qualified broker-dealers and registered representatives thereof. 8. Indemnification and Contribution. ------------------------------------ (a) The Fund and the Manager, jointly and severally, agree to indemnify and hold harmless each of you and each other Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act, from and against any and all losses, claims, damages, liabilities and expenses, joint or several (including reasonable costs of investigation) arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, the Prospectus, any Prepricing Prospectus, any sales material (or any amendment or supplement to any of the foregoing) or arising out of or based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein (in the case of a prospectus, in light of the circumstances under which they were made) not misleading, except insofar as such losses, claims, damages, liabilities or expenses arise out of or are based upon any 16 untrue statement or omission or alleged untrue statement or omission which has been made therein or omitted therefrom in reliance upon and in conformity with the information relating to such Underwriters furnished in writing to the Fund by or on behalf of any Underwriter through you expressly for use in connection therewith; provided, however, that the foregoing indemnity with respect to the Registration Statement, the Prospectus or any Prepricing Prospectuses (or any amendment or supplement to any of the foregoing) shall not inure to the benefit of any Underwriter from whom the person asserting any loss, claim, damage, liability or expense purchased Shares, if it is shown that a copy of the Prospectus, as then amended or supplemented, which would have cured any defect giving rise to such loss, claim, damage, liability or expense was not sent or delivered to such person by or on behalf of such Underwriter, if required by law to be so delivered, at or prior to the confirmation of the sale of such Shares to such person and such Prospectus, amendments and supplements had been provided by the Fund to the Underwriters in the requisite quantity and on a timely basis to permit proper delivery. The foregoing indemnity agreement shall be in addition to any liability which the Fund or the Manager may otherwise have. (b) If any action, suit or proceeding shall be brought against any Underwriter or any person controlling any Underwriter in respect of which indemnity may be sought against the Fund or the Manager, such Underwriter or such controlling person shall promptly notify the Fund or the Manager and the Fund or the Manager shall assume the defense thereof, including the employment of counsel and the payment of all fees and expenses. Such Underwriter or any such controlling person shall have the right to employ separate counsel in any such action, suit or proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Underwriter or controlling person unless (i) the Fund or the Manager have agreed in writing to pay such fees and expenses, (ii) the Fund and the Manager have failed within a reasonable time to assume the defense and employ counsel or (iii) the named parties to any such action, suit or proceeding (including any impleaded parties) include both such Underwriter or such controlling person and the Fund or the Manager and such Underwriter or such controlling person shall have been advised by its counsel that representation of such indemnified party and the Fund or the Manager by the same counsel would be inappropriate under applicable standards of professional conduct (whether or not such representation by the same counsel has been proposed) due to actual or potential differing interests between them (in which case the Fund and the Manager shall not have the right to assume the defense of such action, suit or proceeding on behalf of such Underwriter or such controlling person). It is understood, however, that the Fund and the Manager shall, in connection with any one such action, suit or proceeding or separate but substantially similar or related actions, suits or proceedings in the same jurisdiction arising out of the same general allegations or circumstances be liable for the reasonable fees and expenses of only one separate firm of attorneys (in addition to any local counsel if there is any action, suit or proceeding in more than one jurisdiction) at any time for all such Underwriters and controlling persons not having actual or potential differing interests with you or among themselves, which firm shall be designated in 17 writing by Salomon Smith Barney Inc. and that, subject to the requirements of 1940 Act Release No. 11330, all such fees and expenses shall be reimbursed promptly as they are incurred. The Fund and the Manager shall not be liable for any settlement of any such action, suit or proceeding effected without the written consent of the Fund or the Manager, but if settled with such written consent or if there be a final judgment for the plaintiff in any such action, suit or proceeding, the Fund and the Manager agree to indemnify and hold harmless any Underwriter, to the extent provided in the preceding paragraph, and any such controlling person from and against any loss, liability, damage or expense by reason by such settlement or judgment. (c) Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Fund and the Manager, their trustees, directors, any officers of the Fund who sign the Registration Statement and any person who controls the Fund or the Manager within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act, to the same extent as the foregoing indemnity from the Fund and the Manager to each Underwriter, but only with respect to information relating to such Underwriter furnished in writing by or on behalf of such Underwriter through you expressly for use in the Registration Statement or the Prospectus (or any amendment or supplement or to either of them). If any action, suit or proceeding shall be brought against the Fund or the Manager, any of their trustees, directors, any such officer or any such controlling person, based on the Registration Statement or the Prospectus (or any amendment or supplement to either of them) and in respect of which indemnity may be sought against any Underwriter pursuant to this paragraph (c), such Underwriter shall have the rights and duties given to the Fund by paragraph (b) above (except that if the Fund or the Manager shall have assumed the defense thereof such Underwriter shall not be required to do so, but may employ separate counsel therein and participate in the defense thereof, but the fees and expenses of such counsel shall be at such Underwriter's expense) and the Fund and the Manager, their trustees, directors, any such officer and any such controlling person shall have the rights and duties given to the Underwriters by paragraph (b) above. The foregoing indemnity agreement shall be in addition to any liability which the Underwriters may otherwise have. (d) If the indemnification provided for in this section 8 is unavailable to an indemnified party under paragraphs (a) or (c) hereof in respect of any losses, claims, damages, liabilities or expenses referred to therein, then an indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or expenses (i) in such proportion as is appropriate to reflect the relative benefits received by the Fund and the Manager on the one hand (treated jointly for this purpose as one person) and the Underwriters on the other hand from the offering of the Shares or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Fund and the Manager on the one hand (treated jointly for this purpose as one person) and of the Underwriters on the other hand in connection with the 18 statements or omissions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Fund and the Manager on the one hand (treated jointly for this purpose as one person) and the Underwriters on the other hand shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Fund as set forth in the table on the cover page of the Prospectus bear to the total payments received by the Underwriters with respect to the Firm Shares as set forth in the table on the cover page of the Prospectus. The relative fault of the Fund and the Manager on the one hand (treated jointly for this purpose as one person) and of the Underwriters on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Fund and the Manager on the one hand (treated jointly for this purpose as one person) or by the Underwriters on the other hand and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. (e) The Fund, the Manager and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 8 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in paragraph (d) above. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities and expenses referred to in paragraph (d) above shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with defending any such action, suit or proceeding. Notwithstanding the provisions of this Section 8, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price of the Shares underwritten by it and distributed to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute pursuant to this Section 8 are several in proportion to the respective number of Firm Shares set forth opposite their names in Schedule I (or such numbers of Firm Shares increased as set forth in Section 10 hereof) and not joint. (f) No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened action, suit or proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability from claimants on claims that are the subject matter of such action, suit or proceeding. 19 (g) Any losses, claims, damages, liabilities or expenses for which an indemnified party is entitled to indemnification or contribution under this Section 8 shall be paid by the indemnifying party to the indemnified party as such losses, claims, damages, liabilities or expenses are incurred. The indemnity and contribution agreements contained in this Section 8 and the representations and warranties of the Fund and the Manager set forth in this Agreement shall remain operative and in full force and effect, regardless of (i) any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter, the Fund, the Manager or their trustees, directors or officers or any person controlling the Fund or the Manager, (ii) acceptance of any Shares and payment therefor hereunder and (iii) any termination of this Agreement. A successor to any Underwriter or to the Fund, the Manager or their trustees, directors or officers or any person controlling any Underwriter, the Fund or the Manager shall be entitled to the benefits of the indemnity, contribution and reimbursement agreements contained in this Section 8. 9. Conditions of Underwriters' Obligations. The several obligations of -------------------------------------------- the Underwriters to purchase any Shares hereunder are subject to, in the good faith judgment of the Underwriters, the accuracy of and compliance with the representations, warranties and agreements of and by the Fund and the Manager contained herein on and as of the date hereof, the date on which the Registration Statement becomes or became effective, the date of the Prospectus (and of any amendment or supplement thereto), the Closing Date and, with respect to any Additional Shares, any Option Closing Date; to the accuracy and completeness of all statements made by the Fund, the Manager or any of their officers in any certificate delivered to the Representatives or their counsel pursuant to this Agreement and to the following conditions: (a) If, at the time this Agreement is executed and delivered, it is necessary for the Registration Statement or a post-effective amendment thereto to be declared effective before the offering of the Shares may commence, the Registration Statement or such post-effective amendment shall have become effective not later than 5:30 p.m., New York City time, on the date hereof or at such later date and time as shall be consented to in writing by you and all filings, if any, required by Rules 497 and 430A under the 1933 Act Rules and Regulations shall have been timely made; no order suspending the effectiveness of the Registration Statement shall have been issued and no proceeding for that purpose shall have been instituted or, to the knowledge of the Fund, the Manager or any Underwriter, threatened by the Commission and any request of the Commission for additional information (to be included in the Registration Statement or the Prospectus or otherwise) shall have been complied with to your satisfaction. (b) You shall have received on the Closing Date an opinion of Bell, Boyd & Lloyd, special counsel for the Fund and Manager, dated the Closing Date and addressed to you, as Representatives of the several Underwriters, to the effect that: (i) The Fund is a business trust duly organized, validly existing and in good standing under the laws of The Commonwealth of Massachusetts with full 20 power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement and the Prospectus (and any amendment or supplement thereto through the date of the opinion) and is duly registered and qualified to conduct its business and is in good standing in each jurisdiction where the nature of its properties or the conduct of its business requires such registration or qualification, except where the failure so to register or to qualify does not have a material, adverse effect on the condition (financial or other), business, properties, net assets or results of operations of the Fund; (ii) The authorized and outstanding capital stock of the Fund is as set forth in the Registration Statement and Prospectus (or any amendment or supplement thereto through the date of the opinion); and the description of the authorized capital stock of the Fund contained in the Prospectus (or any amendment or supplement thereto through the date of the opinion) under the caption "Description of Shares" conforms in all material respects as to legal matters to the terms thereof contained in the Fund's Declaration of Trust; (iii) All the shares of capital stock of the Fund outstanding prior to the issuance of the Shares have been duly authorized and validly issued and are fully paid and nonassessable, except that, as described in the Prospectus under the heading, "Certain Provisions in the Declaration of Trust," shareholders of the Fund may under certain circumstances be held personally liable for its obligations; (iv) The Shares have been duly authorized and, when issued and delivered to the Underwriters against payment therefor in accordance with the terms hereof, will be validly issued, fully paid and nonassessable not subject to any preemptive rights that entitle or will entitle any person to acquire any Shares upon the issuance thereof by the Fund, except that, as described in the Prospectus under the heading, "Certain Provisions in the Declaration of Trust," shareholders of the Fund may under certain circumstances be held personally liable for its obligations; (v) The form of certificates for the Shares is in due and proper form and complies with the requirements of all applicable laws and the AMEX; (vi) The Fund has the power and authority to enter into this Agreement and the Fund Agreements and to issue, sell and deliver the Shares to the Underwriters as provided herein and this Agreement and each of the Fund Agreements have been duly authorized, executed and delivered by the Fund and assuming due authorization, execution and delivery by the other parties thereto, constitute the valid, legal and binding agreements of the Fund, enforceable against the Fund in accordance with their terms, except as enforcement of rights to indemnity hereunder may be limited by Federal or state securities laws or principles of public policy and subject to the qualification that the enforceability 21 of the Fund's obligations hereunder and thereunder may be limited by bankruptcy, insolvency, reorganization, moratorium and other laws relating to or affecting creditors' rights generally and by general equitable principles, whether enforcement is considered in a proceeding in equity or at law; (vii) This Agreement constitutes a valid, legal and binding agreement of the Manager, enforceable against the Manager in accordance with its terms, except as enforcement of rights to indemnity hereunder may be limited by Federal or state securities laws or principles of public policy and subject to the qualification that the enforceability of the Manager's obligations hereunder and thereunder may be limited by bankruptcy, insolvency, reorganization, moratorium and other laws relating to or affecting creditors' rights generally and by general equitable principles, whether enforcement is considered in a proceeding in equity or at law; (viii) The Fund Agreements comply in all material respects with all applicable provisions of the 1933 Act, the 1940 Act, the Advisers Act, the Rules and Regulations and the Advisers Act Rules and Regulations; (ix) The Fund is not in violation of its Declaration of Trust or By-Laws or to the best knowledge of such counsel after reasonable inquiry, is not in material default in the performance of any material obligation, agreement or condition contained in any bond, debenture, note or other evidence of indebtedness, except as may be disclosed in the Prospectus (and any amendment or supplement thereto); (x) No consent, approval, authorization or order of or registration or filing with the Commission, the NASD, any state securities commission, any national securities exchange, any arbitrator, any court or any other governmental body, agency or regulatory, self-regulatory or administrative agency or any official is required on the part of the Fund (except as have been obtained under the 1933 Act and the 1934 Act or such as may be required under state securities or Blue Sky laws governing the purchase and distribution of the Shares) for the valid issuance and sale of the Shares to the Underwriters as contemplated by this Agreement, performance of the Fund Agreements or this Agreement by the Fund, the consummation by the Fund of the transactions contemplated thereby or hereby or the adoption of the Fund's Dividend Reinvestment Plan; (xi) Neither the offer, sale or delivery of the Shares, the execution, delivery or performance of this Agreement or the Fund Agreements, compliance by the Fund with the provisions hereof or thereof, consummation by the Fund of the transactions contemplated hereby or thereby nor the adoption of the Fund's Dividend Reinvestment Plan violates the Declaration of Trust or By-Laws of the Fund or any material agreement, indenture, lease or other instrument to which the Fund is a party or by which it or any of its properties is bound that is an exhibit to 22 the Registration Statement or that is known to such counsel after reasonable inquiry or, to the best of such counsel's knowledge after reasonable inquiry, will result in the creation or imposition of any material lien, charge or encumbrance upon any property or assets of the Fund, nor, to the best of such counsel's knowledge after reasonable inquiry, will any such action result in any violation of any existing material law, regulation, ruling (assuming compliance with all applicable state securities and Blue Sky laws), judgment, injunction, order or decree known to such counsel after reasonable inquiry, applicable to the Fund or any of its properties, except that, in the published opinion of the Commission, the indemnification provisions in this Agreement and the Fund Agreements, insofar as they relate to indemnification for liabilities arising under the 1933 Act, are against public policy as expressed in the 1933 Act and therefore unenforceable; (xii) The Registration Statement and all post-effective amendments, if any, have become effective under the 1933 Act and, to the best knowledge of such counsel after reasonable inquiry, no order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose are pending before or contemplated by the Commission; and any filing of the Prospectus and any amendments or supplements thereto required pursuant to Rule 497 of the 1933 Act Rules and Regulations prior to the date of such opinion have been made in accordance with Rule 497; (xiii) The Fund is duly registered with the Commission under the 1940 Act as a closed-end, non-diversified management investment company and all action has been taken by the Fund as required by the 1933 Act and the 1940 Act and the Rules and Regulations in connection with the issuance and sale of the Shares to make the public offering and consummate the sale of the Shares as contemplated by this Agreement; (xiv) The statements made in the Registration Statement and the Prospectus (and any amendment or supplement to either of them through the date of the opinion) under the caption "Tax Matters" have been reviewed by such counsel and to the extent they describe or summarize tax laws, doctrines or practices of the United States, present a fair and accurate description or summary thereof as of the date of the opinion; (xv) The statements in the Registration Statement and Prospectus (and any amendment or supplement to either of them through the date of the opinion), insofar as they are descriptions of contracts, agreements or other legal documents or refer to statements of law or legal conclusions, are accurate and present fairly the information required to be shown; (xvi) The Registration Statement and the Prospectus (and any amendment or supplement to either of them through the date of the opinion) comply as to form in all material respects with the requirements of the 1933 Act, 23 the 1940 Act and the Rules and Regulations (except that no opinion need be expressed as to the financial statements and the notes thereto and the schedules and other financial and statistical data included therein as to which such counsel need not express any opinion); (xvii) To the best knowledge of such counsel after reasonable inquiry, (A) other than as described or contemplated in the Prospectus (or any amendment or supplement thereto through the date of the opinion), there are no actions, suits or other legal or governmental proceedings pending or expressly threatened against the Fund and (B) there are no material agreements, contracts, indentures, leases or other instruments that are required to be described in the Registration Statement or the Prospectus (or any amendment or supplement to either of them through the date of the opinion) or to be filed as an exhibit to the Registration Statement that are not described or filed as required, as the case may be; (xviii) To the best knowledge of such counsel after reasonable inquiry, the Fund is not in violation of any law, ordinance, administrative or governmental rule or regulation applicable to the Fund or of any decree of the Commission, the NASD, any state securities commission, any national securities exchange, any arbitrator, any court or any other governmental, regulatory, self-regulatory or administrative agency or any official having jurisdiction over the Fund; and (xix) The Shares are duly authorized for listing, subject to official notice of issuance, on the American Stock Exchange and the Fund's registration statement on Form 8-A under the 1934 Act is effective. Such counsel shall also state that although counsel has not undertaken, except as otherwise indicated in their opinion, to determine independently and does not assume any responsibility for, the accuracy or completeness of the statements in the Registration Statement, such counsel has participated in the preparation of the Registration Statement and the Prospectus, including review and discussion of the contents thereof, and nothing has come to the attention of such counsel that has caused it to believe that the Registration Statement, at the time the Registration Statement became effective or the Prospectus, as of its date and as of the Closing Date, as the case may be, or the Option Closing Date, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein (in the case of a prospectus, in light of the circumstances under which they were made) not misleading or that any amendment or supplement to the Prospectus, as of the Closing Date or the Option Closing Date, contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading (it being understood that such counsel need express no view with respect to the financial statements and the notes thereto and the schedules and other financial and statistical data included in the Registration Statement or the Prospectus). 24 In rendering such opinion, such counsel may limit such opinion to matters involving the application of the laws of the State of California, The Commonwealth of Massachusetts and the United States and may rely, as to matters involving the application of laws of The Commonwealth of Massachusetts, to the extent they deem proper and specified in such opinion, upon the opinion of Bingham Dana LLP or other counsel of good standing whom they believe to be reliable and who are satisfactory to the Representatives; provided that (X) such reliance is expressly authorized by the opinion so relied upon and a copy of each such opinion is delivered to the Representatives and is, in form and substance, satisfactory to them and their counsel and (Y) Bell, Boyd & Lloyd states in their opinion that they believe that they and the Underwriters are justified in relying thereon. (c) You shall have received on the Closing Date an opinion of Gifford R. Zimmerman, Vice President, Assistant Secretary and General Counsel for the Manager, dated the Closing Date and addressed to you, as Representatives of the several Underwriters, to the effect that: (i) The Manager is a corporation duly incorporated and validly existing in good standing under the laws of the State of Delaware with full corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement and the Prospectus (and any amendment or supplement to either of them) and is duly registered and qualified to conduct its business and is in good standing in each jurisdiction or place where the nature of its properties or the conduct of its business requires such registration or qualification, except where the failure so to register or to qualify does not have a material, adverse effect on the condition (financial or other), business, properties, net assets or results of operations of the Manager; (ii) The Manager is duly registered with the Commission under the Advisers Act as an investment adviser and is not prohibited by the Advisers Act, the 1940 Act or the Rules and Regulations under such acts from acting for the Fund under the Management Agreement as contemplated by the Prospectus (and any amendment or supplement thereto); (iii) The Manager has corporate power and authority to enter into this Agreement and the Management Agreement and this Agreement and the Management Agreement have been duly authorized, executed and delivered by the Manager and the Management Agreement is a valid, legal and binding agreement of the Manager, enforceable against the Manager in accordance with its terms, except as enforcement of rights to indemnity and contribution hereunder may be limited by Federal or state securities laws or principles of public policy and subject to the qualification that the enforceability of the Manager's obligations hereunder and thereunder may be limited by bankruptcy, insolvency, reorganization, moratorium and other laws relating to or affecting creditors' rights generally and by general equitable principles; 25 (iv) The Management Agreement complies in all material respects with all applicable provisions of the Advisers Act, the 1940 Act and the Advisers Act Rules and Regulations and the 1940 Act Rules and Regulations; (v) Neither the execution and delivery by the Manager of this Agreement or the Management Agreement nor the consummation by the Manager of the transactions contemplated hereunder or thereunder constitutes or will constitute a breach of or a default under the Certificate of Incorporation or By-Laws of the Manager or any material agreement, indenture, lease or other instrument to which the Manager is a party or by which it or any of its properties is bound that is known to such counsel after reasonable inquiry, or will result in the creation or imposition of any material lien, charge or encumbrance upon any property or assets of the Manager, nor will any such action result in any violation of any existing material law, regulation, ruling (assuming compliance with all applicable state securities and Blue Sky laws), judgment, injunction, order or decree known to such counsel after reasonable inquiry, applicable to the Fund or any of its properties; (vi) The description of the Manager and its business in the Prospectus (and any amendment or supplement thereto) complies in all material respects with all requirements of the 1933 Act, the 1940 Act and the Rules and Regulations; (vii) To the best knowledge of such counsel after reasonable inquiry, other than as described or contemplated in the Prospectus (and any amendment or supplement thereto), there are no actions, suits or other legal or governmental proceedings pending or threatened against the Manager or to which the Manager or any of its property is subject which are required to be described in the Registration Statement or Prospectus (or any amendment or supplement to either of them); (viii) The Manager owns, possesses or has obtained and currently maintains all governmental licenses, permits, consents, orders, approvals and other authorizations as are necessary for the Manager to carry on its business as contemplated in the Prospectus (and any amendment or supplement thereto); and (ix) No material consent, approval, authorization or order of or registration or filing with any court, regulatory body, administrative or other governmental body, agency or official is required on the part of the Manager for the performance of this Agreement or the Management Agreement by the Manager or for the consummation by the Manager of the transactions contemplated hereby or thereby. Such counsel shall also state that although counsel has not undertaken, except as otherwise indicated in its opinion, to determine independently and does not assume any responsibility for, the accuracy or completeness of the statements 26 in the Registration Statement, such counsel has participated in the preparation of the Registration Statement and the Prospectus, including review and discussion of the contents thereof and nothing has come to its attention that has caused it to believe that the Registration Statement at the time it became effective or the Prospectus, as of its date and as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein (in the case of a prospectus, in light of the circumstances under which they were made) not misleading or that any amendment or supplement to the Prospectus, as of the Closing Date or the Option Closing Date, contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading (it being understood that such counsel need express no opinion with respect to the financial statements and the notes thereto and the schedules and other financial and statistical data included in the Registration Statement or the Prospectus). In rendering such opinion, counsel may limit such opinion to matters involving the application of the laws of the State of Illinois, the Delaware General Corporation Law statute and the laws of the United States and may rely upon an opinion or opinions, each dated the Closing Date, of other counsel retained by the Manager as to laws of any jurisdiction other than the United States, the State of Illinois and the Delaware General Corporation Law statute, provided that (X) each such local counsel is acceptable to the Representatives, (Y) such reliance is expressly authorized by each opinion so relied upon and a copy of each such opinion is delivered to the Representatives and is, in form and substance satisfactory to them and their counsel and (Z) counsel shall state in their view that they believe that they and the Underwriters are justified in relying thereon. (d) (i) You shall have received on the Closing Date an opinion of Orrick, Herrington & Sutcliffe LLP, special California counsel to the Fund, dated the Closing Date and addressed to you, as Representatives of the several Underwriters' to the effect that: The statements contained in the Prospectus under the headings "Risks - Concentration Risk" and "Tax Matters - California Tax Matters", in Appendix D to the statement of additional information under the headings "Factors Pertaining to California" and "California Tax Matters", to the extent that such statements constitute matters of law or legal conclusions, provide a fair and accurate summary of such law or conclusions. Such statements are based on current law and special counsel's understanding of the Fund's proposed operations, as disclosed in the Prospectus. 27 Such counsel shall also state that although special counsel does not pass upon or assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectus (other than to the extent set forth above), and has not made any independent check or verification thereof, no facts have come to the attention of such special counsel which would lead it to believe that the material contained in the Prospectus under the headings "Risks - Concentration Risk" and "Tax Matters - California Tax Matters", in Appendix D to the statement of additional information under the headings "Factors Pertaining to California" and "California Tax Matters", as of their respective dates or the Closing Date or the Option Closing Date, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading or that any statement contained in any amendment or supplement to the Prospectus or statement of additional information under such headings, as of its respective date, and as of the Closing Date or the Option Closing Date, contained any untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. In rendering such opinion, such special counsel may rely as to matters of fact, to the extent such special counsel deems proper, on certificates of responsible officers of the Fund and of the Manager, and of public officials. (ii) You shall have received on the Closing Date a comfort letter, substantially in the forms heretofore approved by you, from Chapman and Cutler, special counsel to the Fund, dated the Closing Date and addressed to you, as Representatives of the several Underwriters, with respect to the taxable equivalent yield tables in Appendix B to the statement of additional information under the heading "California". (e) That you shall have received on the Closing Date, an opinion, dated the Closing Date, of Simpson Thacher & Bartlett, counsel for the Underwriters, dated the Closing Date and addressed to you, as Representatives of the several Underwriters, with respect to such matters as the Underwriters may require and the Fund, the Manager and their respective counsels shall have furnished to such counsel such documents as they may request for the purpose of enabling them to pass upon such matters. (f) That you shall have received letters addressed to you, as Representatives of the several Underwriters, and dated the date hereof and the Closing Date from Ernst & Young LLP, independent certified public accountants, substantially in the forms heretofore approved by you. (g) (i) No order suspending the effectiveness of the registration statement or the Registration Statement or prohibiting or suspending the use of the Prospectus (or any amendment or supplement thereto) or any Prepricing Prospectus or any sales material shall have been issued and no proceedings for such purpose or for the purpose of commencing an enforcement action against the Fund, the Manager or, with respect to the transactions contemplated by the Prospectus (or any amendment or supplement thereto) and this Agreement, any Underwriter, may be pending before or, to the knowledge of the Fund, the Manager or any Underwriter or in the reasonable view of counsel to the Underwriters, shall be threatened or contemplated by the Commission at or prior to the 28 Closing Date and that any request for additional information on the part of the Commission (to be included in the Registration Statement, the Prospectus or otherwise) be complied with to the satisfaction of the Representatives, (ii) there shall not have been any change in the capital stock of the Fund nor any material increase in debt of the Fund from that set forth in the Prospectus (and any amendment or supplement thereto) and the Fund shall not have sustained any material liabilities or obligations, direct or contingent, other than those reflected in the Prospectus (and any amendment or supplement thereto); (iii) since the date of the Prospectus there shall not have been any material, adverse change in the condition (financial or other), business, prospects, properties, net assets or results of operations of the Fund or the Manager; (iv) the Fund and the Manager must not have sustained any material loss or interference with its business from any court or from legislative or other governmental action, order or decree or from any other occurrence not described in the Registration Statement and the Prospectus (and any amendment or supplement to either of them); and (v) all of the representations and warranties of the Fund and the Manager contained in this Agreement shall be true and correct on and as of the date hereof and as of the Closing Date as if made on and as of the Closing Date. (h) Subsequent to the effective date of this Agreement, there shall not have occurred (i) any change or any development involving a prospective change in or affecting the condition (financial or other), business, prospects, properties, net assets or results of operations of the Fund or the Manager not contemplated by the Prospectus (and any amendment or supplement thereto), which in your opinion, as Representatives of the several Underwriters, would materially, adversely affect the market for the Shares or (ii)any event or development relating to or involving the Fund, the Manager or any officer or trustee or director of the Fund or the Manager which makes any statement of a material fact made in the Prospectus (or any amendment or supplement thereto) untrue or which, in the opinion of the Fund and its counsel or the Underwriters and their counsel, requires the making of any addition to or change in the Prospectus (or any amendment or supplement thereto) in order to state a material fact required by the 1933 Act, the 1940 Act, the Rules and Regulations or any other law to be stated therein or necessary in order to make the statements therein (in the case of a prospectus, in light of the circumstances under which they were made) not misleading, if amending or supplementing the Prospectus (or any amendment or supplement thereto) to reflect such event or development would, in your opinion, as Representatives of the several Underwriters, materially, adversely affect the market for the Shares. (i) That neither the Fund nor the Manager shall have failed at or prior to the Closing Date to have performed or complied with any of the agreements herein contained and required to be performed or complied with by them at or prior to the Closing Date. (j) That you shall have received on the Closing Date a certificate, dated such date, of the president or any vice president and of the controller or treasurer of each of the Fund and the Manager certifying that (i) the signers have carefully examined the Registration Statement, the Prospectus (and any amendments or supplements to either of 29 them) and this Agreement, (ii) the representations and warranties of the Fund (with respect to the certificates from such Fund officers) and the representations of the Manager (with respect to the certificates from such officers of the Manager) in this Agreement are true and correct on and as of the date of the certificate as if made on such date, (iii) since the date of the Prospectus (and any amendment or supplement thereto) there has not been any material, adverse change in the condition (financial or other), business, prospects (other than as a result of a change in the financial markets generally), properties, net assets or results of operations of the Fund (with respect to the certificates from such Fund officers) or the Manager (with respect to the certificates from such officers of the Manager), (iv) to the knowledge of such officers after reasonable investigation, no order suspending the effectiveness of the Registration Statement or prohibiting the sale of any of the Shares or having a material, adverse effect on the Fund (with respect to the certificates from such Fund officers) or the Manager (with respect to the certificates from such officers of the Manager) has been issued and no proceedings for any such purpose are pending before or threatened by the Commission or any court or other regulatory body, the NASD, any state securities commission, any national securities exchange, any arbitrator, any court or any other governmental, regulatory, self-regulatory or administrative agency or any official, (v) each of the Fund (with respect to certificates from such Fund officers) and the Manager (with respect to certificates from such officers of the Manager) has performed and complied with all agreements that this Agreement require it to perform by such Closing Date, (vi) neither the Fund (with respect to the certificate from such officers of the Fund) nor the Manager (with respect to the certificate from such officers of the Manager) has sustained any material loss or interference with its business from any court or from legislative or other governmental action, order or decree or from any other occurrence not described in the Registration Statement and the Prospectus and any amendment or supplement to either of them and (vii) with respect to the certificate from such officers of the Fund, there has not been any change in the capital stock of the Fund nor any material increase in the debt of the Fund from that set forth in the Prospectus (and any amendment or supplement thereto) and the Fund has not sustained any material liabilities or obligations, direct or contingent, other than those reflected in the Prospectus (and any amendment or supplement thereto). (k) That the Fund and the Manager shall have furnished to you such further certificates, documents and opinions of counsel as you shall reasonably request (including certificates of officers of the Fund and the Manager). All such opinions, certificates, letters and other documents will be in compliance with the provisions hereof only if they are satisfactory in form and substance to you and your counsel acting in good faith. Any certificate or document signed by any officer of the Fund or the Manager and delivered to you, as Representatives of the Underwriters or to Underwriters' counsel, shall be deemed a representation and warranty by the Fund or the Manager to each Underwriter as to the statements made therein. 30 The several obligations of the Underwriters to purchase Additional Shares hereunder are subject to (i) the accuracy of and compliance with the representations and warranties of the Fund and the Manager contained herein on and as of the Option Closing Date as though made on any Option Closing Date, (ii) satisfaction on and as of any Option Closing Date of the conditions set forth in this Section 9 except that, if any Option Closing Date is other than the Closing Date, the certificates, opinions and letters referred to in paragraphs (b), (c), (d), (e), (f), (j), (k) and this paragraph shall be dated the Option Closing Date in question and the opinions and letters called for by paragraphs (b), (c), (d) and (e) shall be revised to reflect the sale of Additional Shares and (iii) the absence of circumstances on or prior to the Option Closing Date which would permit termination of this Agreement pursuant to Section 11 hereof if they existed on or prior to the Closing Date. 10. Effective Date of Agreement. This Agreement shall become effective: -------------------------------- (i) upon the execution and delivery hereof by the parties hereto; or (ii) if, at the time this Agreement is executed and delivered, it is necessary for the Registration Statement or a post-effective amendment thereto to be declared effective before the offering of the Shares may commence, when notification of the effectiveness of the Registration Statement or such post-effective amendment has been released by the Commission. Until such time as this Agreement shall have become effective, it may be terminated by the Fund by notifying you or by you, as Representatives of the several Underwriters, by notifying the Fund. If any one or more of the Underwriters shall fail or refuse to purchase Firm Shares which it or they have agreed to purchase hereunder and the aggregate number of Firm Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase is not more than one-tenth of the aggregate number of the Firm Shares, each non-defaulting Underwriter shall be obligated, severally, in the proportion which the aggregate number of Firm Shares set forth opposite its name in Schedule I hereto bears to the aggregate number of Firm Shares set forth opposite the names of all non-defaulting Underwriters or in such other proportion as you may specify in accordance with Section 20 of the Salomon Smith Barney Master Agreement Among Underwriters, to purchase Firm Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase. If any Underwriter or Underwriters shall fail or refuse to purchase Firm Shares and the aggregate number of Firm Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Firm Shares and arrangements satisfactory to you and the Fund for the purchase of such Firm Shares by one or more non-defaulting Underwriters or other party or parties approved by you and the Fund are not made within 36 hours after such default, this Agreement will terminate without liability on the part of any non-defaulting Underwriter or the Fund. In any such case which does not result in termination of this Agreement, either you or the Fund shall have the right to postpone the Closing Date, but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement and the Prospectus or any other documents or arrangements may be effected. Any action taken under this paragraph shall not relieve any defaulting Underwriter from liability in respect to any such default of any such Underwriter under this Agreement. The term "Underwriter" as used in this Agreement includes, for all 31 purposes of this Agreement, any party not listed in Schedule I hereto who, with your approval and the approval of the Fund, purchases Firm Shares which a defaulting Underwriter agreed, but failed or refused, to purchase. Any notice under this Section 10 may be made by telegram, telecopy or telephone but shall be subsequently confirmed by letter. 11. Termination of Agreement. This Agreement shall be subject to ----------------------------- termination in your absolute discretion, without liability on the part of any Underwriter to the Fund or the Manager by notice to the Fund or the Manager if prior to the Closing Date or any Option Closing Date (if different from the Closing Date and then only as to the Additional Shares), as the case may be, (i) trading in the Shares or securities generally on the NYSE, AMEX, Nasdaq National Market or the Nasdaq Stock Market shall have been suspended or materially limited, (ii) additional material governmental restrictions not in force on the date of this Agreement have been imposed upon trading in securities generally or a general moratorium on commercial banking activities in New York shall have been declared by either Federal or state authorities or (iii) any outbreak or material escalation of hostilities or other international or domestic calamity, crisis or change in political, financial or economic conditions, occurs, the effect of which is such as to make it, in your judgment, impracticable or inadvisable to commence or continue the offering of the Shares at the offering price to the public set forth on the cover page of the Prospectus or to enforce contracts for the resale of the Shares by the Underwriters. Notice of such termination may be given to the Fund or the Manager by telegram, telecopy or telephone but shall be subsequently confirmed by letter. 12. Expenses. The Fund agrees to pay the following costs and expenses and ------------- all other costs and expenses incident to the performance by the Fund of its obligations hereunder: (a) the preparation, printing or reproduction, filing (including, without limitation, the filing fees prescribed by the 1933 Act, the 1940 Act and the Rules and Regulations) and distribution of the Registration Statement (including exhibits thereto), the Prospectus, each Prepricing Prospectus and the 1940 Act Notification and all amendments or supplements to any of them, (b) the printing (or reproduction) and delivery (including postage, air freight charges and charges for counting and packaging) of such copies of the Registration Statement, the Prospectus, each Prepricing Prospectus, any sales material and all amendments or supplements to any of them as may be reasonably requested for use in connection with the offering and sale of the Shares, (c) the preparation, printing, authentication, issuance and delivery of certificates for the Shares, including any stamp taxes and transfer agent and registrar fees payable in connection with the original issuance and sale of such Shares, (d) the registrations or qualifications of the Shares for offer and sale under the securities or Blue Sky laws of the several states as provided in Section 5(g) hereof (including the reasonable fees, expenses and disbursements of counsel for the Underwriters relating to the preparation, printing or reproduction and delivery of the preliminary and supplemental Blue Sky Memoranda and such registration and qualification), (e) the fees and expenses of the Fund's independent accountants, counsel for the Fund and of the transfer agent, (f) the expenses of delivery to the Underwriters and dealers (including postage, air freight and the cost of counting and packaging) of copies of the Prospectus, the Prepricing Prospectus, any sales 32 material and all amendments or supplements to the Prospectus as may be requested for use in connection with the offering and sale of the Shares, (g) the printing (or reproduction) and delivery of this Agreement, any dealer agreements, the preliminary and supplemental Blue Sky Memoranda and all other company-authorized agreements or other documents printed (or reproduced) and delivered in connection with the offering of the Shares, (h) the filing fees and the fees and expenses of counsel for the Underwriters in connection with any filings required to be made with the NASD and incurred with respect to the review of the offering of the Shares by the NASD, (i) the registration of the Shares under the 1934 Act and the listing of the Shares on the AMEX, and (j) an amount equal to (A) $20,000 plus (B) $.0025 per Share for each Share in excess of 2,000,000 sold pursuant to this Agreement, payable no later than 45 days from the date of this Agreement to the Underwriters in partial reimbursement of their expenses (but not including reimbursement for the cost of one tombstone advertisement in a newspaper that is one-quarter of a newspaper page or less in size) in connection with the offering. Notwithstanding the foregoing, in the event that the sale of the Firm Shares is not consummated pursuant to Section 2 hereof, the Manager will pay the costs and expenses of the Fund set forth above in this Section 12 (a) through (i), and reimbursements of Underwriter expenses in connection with the offering shall be made in accordance with Section 5(k) hereof. 13. Information Furnished by the Underwriters. The statements set forth ----------------------------------------------- in the last sentence of the last paragraph of the front cover page in the Prospectus, as well as, under the caption "Underwriting" in the Prospectus, the names of the underwriters and numbers of Shares listed opposite such names in the first paragraph, the last sentence of the second paragraph, the first sentence of the tenth paragraph, the first sentence of the twelfth paragraph and the sixteenth paragraph constitute the only information relating to any Underwriter furnished to the Fund in writing by or on behalf of the Underwriters through you as such information is referred to herein, expressly for use in the Prospectus. 14. Miscellaneous. Except as otherwise provided in Sections 5, 10 and 11 ------------------- hereof, notice given pursuant to any provision of this Agreement shall be in writing and shall be delivered (a) if to the Fund or the Manager, c/o Nuveen Investments at 333 West Wacker Drive, Chicago, Illinois 60606, Attention: Alan G. Berkshire or (b) if to you, as Representatives of the Underwriters, at the office of Salomon Smith Barney Inc. at 388 Greenwich Street, New York, New York 10013, Attention: Manager, Investment Banking Division. This Agreement has been and is made solely for the benefit of the several Underwriters, the Fund, the Manager, their trustees, directors and officers and the other controlling persons referred to in Section 8 hereof and their respective successors and assigns to the extent provided herein and no other person shall acquire or have any right under or by virtue of this Agreement. Neither the term "successor" or the term "successors and assigns" as used in this Agreement shall include a purchaser from any Underwriter of any of the Shares in his status as such purchaser. A copy of the Declaration of Trust of the Fund is on file with the Secretary of State of The Commonwealth of Massachusetts. This Agreement has been executed on behalf of the Fund 33 by the vice-president of the Fund in such capacity and not individually and the obligations of this Agreement are not binding upon such officer, any of the trustees or the shareholders individually but are binding only upon the assets and property of the Fund. 15. Applicable Law; Counterparts. This Agreement shall be governed by and --------------------------------- construed in accordance with the laws of the State of New York. This Agreement may be signed in various counterparts which together constitute one and the same instrument. If signed in counterparts, this Agreement shall not become effective unless at least one counterpart hereof shall have been executed and delivered on behalf of each party hereto. 34 Please confirm that the foregoing correctly sets forth the agreement among the Fund and the Manager and the several Underwriters. Very truly yours, NUVEEN CALIFORNIA DIVIDEND ADVANTAGE MUNICIPAL FUND 2 By: _____________________________ Title: Vice President NUVEEN ADVISORY CORP. By: _____________________________ Title: Vice President 35 Confirmed as of the date first above written on behalf of themselves and the other several Underwriters named in Schedule I hereto. By: SALOMON SMITH BARNEY INC. NUVEEN INVESTMENTS A.G. EDWARDS & SONS, INC. PRUDENTIAL SECURITIES INCORPORATED UBS WARBURG LLC CROWELL, WEEDON & CO. FIRST UNION SECURITIES, INC. SUTRO & CO. INCORPORATED WEDBUSH MORGAN SECURITIES AS REPRESENTATIVES OF THE SEVERAL UNDERWRITERS By: SALOMON SMITH BARNEY INC. By: ___________________________________ Title: Director 36 SCHEDULE I Name of Underwriters Number of Common Shares - -------------------- ----------------------- Salomon Smith Barney Inc............................................ Nuveen Investments.................................................. A.G. Edwards & Sons, Inc............................................ Prudential Securities Incorporated.................................. UBS Warburg LLC..................................................... Crowell, Weedon & Co................................................ First Union Securities, Inc......................................... Sutro & Co. Incorporated............................................ Wedbush Morgan Securities........................................... EX-99.H.2 4 0004.txt FORM OF MASTER SELECTED DEALER AGREEMENT NUVEEN EXCHANGE-TRADED FUNDS -------- MASTER SELECTED DEALER AGREEMENT -------------------------------- ________, 2001 Dear Ladies and Gentlemen: In connection with public offerings of securities ("Securities") of registered investment companies sponsored by Nuveen Investments ("Nuveen") which are underwritten by a group of underwriters ("Underwriters") which are represented by Nuveen alone or in conjunction with other firms (the "Representatives"), you (a "Dealer") may be offered from time to time the opportunity to purchase a portion of such securities, as a principal, at a discount from the public offering price representing a selling concession or reallowance granted as consideration for services rendered in the distribution of such securities, subject to the terms and conditions of this Agreement. 1. GENERAL. (a) This Agreement sets forth the general terms, conditions and representations applicable to any such purchase. These general terms, conditions and representations may be modified, amended or supplemented in connection with an offering of Securities by telegram, telex, facsimile transmission or other written form (electronic or otherwise) of communication of Nuveen or other Representative of the Underwriters of such offering (any communication in any such form being herein referred to as a "written communication") to you in connection with such offering. This Agreement shall become effective with respect to your participation in an offering of Securities upon your acceptance of any reservation of any such Securities, as a Dealer. Such acceptance shall constitute your acceptance of this Agreement as modified, amended or supplemented by any such written communication. (b) As used herein, the term "Agreement" shall mean this Agreement and, after receipt by you of written notice thereof, any amendment or supplement hereto, plus any additional or supplementary terms, conditions and representations contained in the prospectus relating to the offering of Securities or any other written communication to you from Nuveen or any other Representative of the Underwriters of any offering of securities. This Agreement shall 1 constitute a binding agreement between you and Nuveen, individually, and, in respect of a public offering of Securities, Nuveen and the other Representatives of the Underwriters of such offering on whose behalf Nuveen is acting. (c) This Agreement supersedes any prior understanding you have with Nuveen with respect to the subject matter hereof. 2. SALES TO SELECTED DEALERS. For any specific offering, we will advise you by telegram of the method and terms of offering, the time of the release of the Securities for sale to the public, the initial offering price, the selling concession, the portion of the selling concession allowable to certain dealers (the "reallowance"), the time at which subscription books will be opened, the amount, if any, of Securities reserved for purchase by Dealers and the period of reservation. Subscription books may be closed by us at any time in our discretion without notice, and the right is reserved to reject any subscription in whole or in part. Notification of allotments against the rejections of subscriptions will be made as promptly as practicable. In purchasing Securities, you must rely only on the prospectus, and on no other statements whatsoever, written or oral. 3. OFFERING PROVISIONS. Upon receipt of the telegram or letter referred to in Section 2 hereof, promptly on the date set forth in such telegram for release of the Securities for sale to the public, you will reoffer the Securities purchased by you hereunder, subject to receipt and acceptance of the Securities by the Underwriters, and upon the other terms, conditions and representations set forth herein and in the prospectus relating to such Securities. Securities purchased hereunder are to be offered to the public at the initial public offering price set forth in the prospectus, except that if a reallowance is in effect, a reallowance from the public offering price not in excess of such reallowance may be allowed by you but only to dealers who are actually engaged in the investment banking or securities business, who execute the written agreement prescribed by Rule 2740(c) of the Rules of Conduct of the National Association of Securities Dealers, Inc. ("NASD") and who are members in good standing of the NASD or are foreign dealers, not eligible for membership in the NASD, who, in each case, represent to you that they will promptly reoffer such Securities to the public at the initial public offering price set forth in the prospectus and will abide by the conditions with respect to foreign brokers and dealers set forth in the first paragraph of Section 6 hereof. If prior to the completion of a distribution of the Securities in an offering, directly or indirectly in connection with their activities under this agreement, Nuveen or an Underwriter of the offering purchases on the open market any Securities purchased by you under this Agreement as part of the offering, you agree to pay Nuveen or the lead Representative of the Underwriters of the offering on demand an amount equal to the concession with respect to the Securities, plus, as applicable, transfer taxes, broker's commission, or dealer's markups, if any, paid in connection with such transactions. Alternatively, Nuveen or the Representatives of the Underwriters of the offering may withhold payment for a period of time of, or determine not to pay, all or any part of 2 the concession with respect to the Securities so received. You will advise Nuveen or any other Representative from time to time at our request, of the number of Securities purchased by you hereunder remaining unsold and you agree to sell to us, at our request, for the account of one or more of the Underwriters, such number of such unsold Securities as we may designate, at the initial offering price less an amount to be determined by us, not in excess of the full concession. 4. DELIVERY AND PAYMENT. Payment for and delivery of Securities purchased by you hereunder will be made through the facilities of the Depository Trust Company, if you are a member, or, if you are not a member, settlement may be made through a correspondent who is a member pursuant to instructions which you will send to us prior to such specified date. At the discretion of Nuveen or a Representative of the Underwriters of the offering, we may require you to pay the full public offering price for any offering of Securities. If you are called upon to pay the full public offering price for the Securities purchased by you the concession will be paid to you, less any amounts charged to your account pursuant to Section 3 above, after termination of this Agreement. 5. TERMINATION. This Agreement shall continue in full force and effect until terminated by either party by five days' written notice to the other; provided, that if this Agreement has become effective with respect to any offering of Securities, this Agreement may not be terminated by you with respect to such offering. It shall remain in full force and effect as to such offering. Notwithstanding any distribution and settlement of accounts, you shall be liable for the proper proportion of any transfer tax or other liability which may be asserted against the Representatives or any of the Underwriters or Dealers based upon the claim that the Dealers, or any of them, constitute a partnership, an association, an unincorporated business or other separate entity. 6. POSITION OF SELECTED DEALERS AND UNDERWRITERS. You represent that you are actually engaged in the investment banking or securities business and are a member in good standing of the NASD or that you are a foreign dealer, not eligible for membership in the NASD, which agrees not to offer or sell any Securities in, or to persons who are nationals or residents of, the United States of America. In making sales of Securities, if you are such a member, you agree to comply with all applicable rules of the NASD, including, without limitation, IM 2110-1 (the NASD's Interpretation with Respect to Free-Riding and Withholding) and Rules 2740 and 2750 of the NASD's Rules of Conduct, or, if you are a foreign dealer, you agree to comply with such Interpretation and Rules 2730, 2740 and 2750 of such Rules of Conduct as though you were such a member, and with Rule 2420 as that Rule applies to a non-member broker or dealer in a foreign country. You also confirm that you have complied and will comply with the prospectus delivery requirements of Rule 15c2-8 under the Securities Exchange Act of 1934, as amended including Rule 15c2-8(b) which requires all participating dealers to distribute a copy of the preliminary prospectus relating to the offering of Securities to each person to whom they expect to confirm a sale of the Securities not less than 48 hours prior to the time they expect to mail such confirmation. You are not authorized to give any information or make any representations with 3 respect to an offering of Securities other than those contained in the prospectus for the offering, or to act as agent for the issuer, any Underwriter, Representative or Nuveen. Neither Nuveen, individually or as Representative of the Underwriters, nor any of the Representatives or Underwriters shall be under any liability to you, except for obligations expressly assumed in this Agreement and any liabilities under the Securities Act of 1933, as amended. No obligations on the part of Nuveen will be implied or inferred herefrom. All communications to Nuveen relating to the subject matter of this Agreement should be addressed to John Nuveen & Co. Incorporated, 333 W. Wacker Drive, Chicago, Illinois 60606 (Attention: Tom Muntz), and any notices to you shall be deemed to have been duly given if mailed or telegraphed to you at such address as you shall indicate on the last page of this Agreement. 7. BLUE SKY MATTERS. Neither Nuveen, individually or as a Representative of the Underwriters, nor any of the Representatives or Underwriters will have any responsibility with respect to the right of any Dealer to sell Securities in any jurisdiction, notwithstanding any information we may furnish in that connection. 8. INDEMNIFICATION. You agree to indemnify and hold harmless Nuveen and each Representative and Underwriter of an offering of Securities and each person, if any, who controls Nuveen or any such Representative or Underwriter within the meaning of Section 15 of the Securities Act of 1933, as amended or Section 20 of the Securities Exchange Act of 1934, as amended, from and against any and all losses, claims, damages, liabilities and expenses, joint or several (including reasonable costs of investigation) (any of the foregoing being hereinafter referred to individually as a "Loss" and collectively, as "Losses") suffered or incurred by any such indemnified person arising out of or in connection with such offering for or on account of or arising from or in connection with (i) any violation of any law, rule or regulation (including any rule of any self-regulatory organization) or (ii) any breach of any representation, warranty, covenant or agreement contained in this Agreement. The foregoing indemnity agreement shall be in addition to any liability which you may otherwise have. 9. PROCEDURES RELATING TO INDEMNIFICATION. (a) An indemnified person under Section 8 of this Agreement (the "Indemnified Party") shall give written notice to you of any Loss in respect of which you have a duty to indemnify such Indemnified Party under Section 8 of this Agreement (a "Claim"), specifying in reasonable detail the nature of the Loss for which indemnification is sought, except that any delay or failure so to notify you shall only relieve you of your obligations hereunder to the extent, if at all, that you are actually prejudiced by reason of such delay or failure. (b) If a Claim results from any action, suit or proceeding brought or asserted against an Indemnified Party, you shall assume the defense thereof, including the employment of 4 counsel reasonably satisfactory to the Indemnified Party and the payment of all fees and expenses. The Indemnified Party shall have the right to employ separate counsel in such action, suit or proceeding and participate in such defense thereof, but the fees and expenses of such counsel shall be at the expense of the Indemnified Party unless (i) you have agreed in writing to pay such fees and expenses, (ii) you have failed within a reasonable time to assume the defense and employ counsel or (iii) the named parties to any such action, suit or proceeding (including any impleaded parties) include both such Indemnified Party and you and such Indemnified Party shall have been advised by its counsel that representation of such Indemnified Party and you by the same counsel would be inappropriate under applicable standards of professional conduct (whether or not such representation by the same counsel has been proposed) due to actual or potential differing interests between you and the Indemnified Party (in which case you shall not have the right to assume the defense of such action, suit or proceeding on behalf of such Indemnified Party). It is understood, however, that you shall, in connection with any one action, suit or proceeding or separate but substantially similar or related actions, suits or proceedings in the same jurisdiction arising out of the same general allegations or circumstances be liable for the reasonable fees and expenses of only one separate firm of attorneys (in addition to any local counsel) at any time for all such Indemnified Parties not having actual or potential differing interests with you or among themselves, which firm shall be designated in writing by the Representatives of the offering and that all such fees and expenses shall be reimbursed promptly as they are incurred. You shall not be liable for any settlement of any such action, suit or proceeding effected without your written consent, but if settled with such written consent or if there be a final judgment for the plaintiff in any such action, suit or proceeding, you agree to indemnify and hold harmless any Indemnified Party from and against any loss, liability, damage or expense by reason by such settlement or judgment. (c) With respect to any Claim not within Paragraph (b) of Section 9 hereof, you shall have 20 days from receipt of notice from the Indemnified Party of such Claim within which to respond thereto. If you do not respond within such twenty-day period, you shall be deemed to have accepted responsibility to make payment and shall have no further right to contest the validity of such Claim. If you notify the Indemnified Party within such twenty-day period that you reject such Claim in whole or in part, the Indemnified Party shall be free to pursue such remedies as may be available to the Indemnified Party under applicable law. 10. SURVIVAL. The representations, warranties, covenants and agreements of the undersigned contained in this Agreement, including, without limitation, the indemnity agreements contained in Sections 8 and 9 hereof, shall remain operative and in full force and effect, regardless of (i) any investigation made by or on behalf of any Representative or Underwriter or any person controlling any Representative or Underwriter, or their directors or officers, (ii) acceptance of any Shares and payment therefor and (iii) any termination of this Agreement. 5 11. This Agreement shall be governed by the laws of the State of New York or the laws of such other state as indicated in a written communication to you by Nuveen with respect to any particular securities offering. Please confirm your agreement to the foregoing by signing in the space provided below and returning to us the enclosed counterpart of this Agreement. NUVEEN INVESTMENTS By: ------------------------------ Managing Director Confirmed as of -------------. [Date] - ----------------------------- By: -------------------------- Title: ---------------------- Address: - ----------------------------- - ----------------------------- - ----------------------------- 6 EX-99.H.3 5 0005.txt FORM OF MASTER AGREEMENT AMONG UNDERWRITERS MASTER AGREEMENT AMONG UNDERWRITERS ----------------------------------- ______, 2001 Smith Barney, Harris Upham & Co. Incorporated 1345 Avenue of the Americas New York, N.Y. 10105 Dear Sirs: We understand that from time to time you may act as Representative or as one of the Representatives of the several underwriters of offerings of securities of various issuers. This Agreement shall apply to any offering of securities handled by your Corporate Syndicate Department in which we elect to act as an underwriter after receipt of an invitation from your Corporate Syndicate Department which shall identify the issuer, contain information regarding certain terms of the securities to be offered and specify the amount of our proposed participation and the names of the other Representatives, if any, and that our participation as an underwriter in the offering shall be subject to the provisions of this Agreement. Your invitation will include instructions for our acceptance of such invitation. At or prior to the time of an offering, you will advise us, to the extent applicable, as to the expected offering date, the expected closing date, the initial public offering price, the interest or dividend rate (or the method by which such rate is to be determined), the conversion price, the underwriting discount, the management fee, the selling concession and the reallowance, except that if the public offering price of the securities is to be determined by a formula based upon the market price of certain securities (such procedure being hereinafter referred to as "Formula Pricing"), you shall so advise us and shall specify the maximum underwriting discount, management fee and selling concession. Such information may be conveyed by you in one or more communications (such communications received by us with respect to the offering are hereinafter collectively referred to as the "Invitation"). If the Underwriting Agreement (as hereinafter defined) provides for the granting of an option to purchase additional securities to cover over-allotments, you will notify us, in the Invitation, of such option. This Agreement, as amended or supplemented by the Invitation, shall become effective with respect to our participation in an offering of securities if your Corporate Syndicate Department receives our oral or written acceptance and does not subsequently receive a written communication revoking our acceptance prior to the time and date specified in the Invitation (our unrevoked acceptance after expiration of such time and date being hereinafter referred to as our "Acceptance"). Our Acceptance will constitute our confirmation that, except as otherwise stated in such Acceptance, each statement included in the Master Underwriters' Questionnaire set forth as Exhibit A 2 hereto (or otherwise furnished to us) is correct. The issuer of the securities in any offering of securities made pursuant to this Agreement is hereinafter referred to as the "Issuer". If the Underwriting Agreement does not provide for an over-allotment option, the securities to be purchased are hereinafter referred to as the "Securities"; if the Underwriting Agreement provides for an over-allotment option, the securities the Underwriters (as hereinafter defined) are initially obligated to purchase pursuant to the Underwriting Agreement are hereinafter called the "Firm Securities" and any additional securities which may be purchased upon exercise of the over-allotment option are hereinafter called the "Additional Securities", with the Firm Securities and all or any part of the Additional Securities being hereinafter collectively referred to as the "Securities". Any underwriters of Securities under this Agreement, including the Representatives (as hereinafter defined), are hereinafter collectively referred to as the "Underwriters". All references herein to "you" or to the "Representatives" shall mean Smith Barney, Harris Upham & Co. Incorporated and the other firms, if any, which are named as Representatives in the Invitation. The Securities to be offered may, but need not, be registered for a delayed or continuous offering pursuant to Rule 415 under the Securities Act of 1933 (the "1933 Act"). The following provisions of this Agreement shall apply separately to each individual offering of Securities. This Agreement may be supplemented or amended by you by written notice to us and, except for supplements or amendments set forth in an Invitation relating to a particular offering of Securities, any such supplement or amendment to this Agreement shall be effective with respect to any offering of Securities to which this Agreement applies after this Agreement is so amended or supplemented. 1. UNDERWRITING AGREEMENT; AUTHORITY OF REPRESENTATIVES. We ---------------------------------------------------- authorize you to execute and deliver an underwriting or purchase agreement and any amendment or supplement thereto and any associated Terms Agreement or other similar agreement (collectively, the "Underwriting Agreement") on our behalf with the Issuer and/or any selling securityholder with respect to the Securities in such form as you determine. We will be bound by all terms of the Underwriting Agreement as executed. We understand that changes may be made in those who are to be Underwriters and in the amount of Securities to be purchased by them, but the amount of Securities to be purchased by us in accordance with the terms of this Agreement and the Underwriting Agreement, including the amount of Additional Securities, if any, which we may become obligated to purchase by reason of the exercise of any over-allotment option provided in the Underwriting Agreement, shall not be changed without our consent. As Representatives of the Underwriters, you are authorized to take such action as you deem necessary or advisable to carry out this Agreement, the Underwriting Agreement, and the 3 purchase, sale and distribution of the Securities, and to agree to any waiver or modification of any provision of the Underwriting Agreement. To the extent applicable, you are also authorized to determine (i) the amount of Additional Securities, if any, to be purchased by the Underwriters pursuant to any over- allotment option and (ii) with respect to offerings using Formula Pricing, the initial public offering price and the price at which the Securities are to be purchased in accordance with the Underwriting Agreement. It is understood and agreed that Smith Barney, Harris Upham & Co. Incorporated may act on behalf of all Representatives. It is understood that, if so specified in the Invitation, arrangements may be made for the sale of Securities by the Issuer pursuant to delayed delivery contracts (hereinafter referred to as "Delayed Delivery Contracts"). References herein to delayed delivery and Delayed Delivery Contracts apply only to offerings to which delayed delivery is applicable. The term "underwriting obligation", as used in this Agreement with respect to any Underwriter, shall refer to the amount of Securities, including any Additional Securities (plus such additional Securities as may be required by the Underwriting Agreement in the event of a default by one or more of the Underwriters) which such Underwriter is obligated to purchase pursuant to the provisions of the Underwriting Agreement, without regard to any reduction in such obligation as a result of Delayed Delivery Contracts which may be entered into by the Issuer. If the Securities consist in whole or in part of debt obligations maturing serially, the serial Securities being purchased by each Underwriter pursuant to the Underwriting Agreement will consist, subject to adjustment as provided in the Underwriting Agreement, of serial Securities of each maturity in a principal amount which bears the same proportion to the aggregate principal amount of the serial Securities of such maturity to be purchased by all the Underwriters as the principal amount of serial Securities set forth opposite such Underwriter's name in the Underwriting Agreement bears to the aggregate principal amount of the serial Securities to be purchased by all the Underwriters. 2. REGISTRATION STATEMENT PROSPECTUS; OFFERING CIRCULAR. In the case ---------------------------------------------------- of an Invitation regarding an offer of Securities registered under the 1933 Act (a "Registered Offering"), you will furnish to us, to the extent made available to you by the Issuer, copies of any registration statement or registration statements relating to the Securities which may be filed with the Securities and Exchange Commission (the "Commission") pursuant to the 1933 Act and of each amendment thereto (excluding exhibits but including any documents incorporated by reference therein). Such registration statement(s) as amended, and the prospectus(es) relating to the sale of Securities by the Issuer constituting a part thereof, including all documents incorporated therein by reference, as 4 from time to time amended or supplemented by the filing of documents pursuant to the Securities Exchange Act of 1934 (the "1934 Act"), the 1933 Act or otherwise, are referred to herein as the "Registration Statement" and "Prospectus", respectively; provided, however, that a supplement to the Prospectus filed with the Commission pursuant to Rule 424 under the 1933 Act with respect to an offering of Securities (a "Prospectus Supplement") shall be deemed to have supplemented the Prospectus only with respect to the offering of Securities to which it relates. With respect to Securities for which no Registration Statement is filed with the Commission, you will furnish to us, to the extent made available to you by the Issuer, copies of any offering circular or other offering materials to be used in connection with the offering of the Securities and of each amendment thereto (the "Offering Circular"). 3. PUBLIC OFFERING. The sale of the Securities to the public shall --------------- commence as soon as you deem advisable. We will not sell any Securities until they are released by you for that purpose. When notified by you that the Securities are released for sale, we will offer to the public in conformity with the terms of offering set forth in the Prospectus or Offering Circular, such of the Securities to be purchased by us ("our Securities") as are not reserved for our account for sale to Selected Dealers and others pursuant to Section 5. After the initial public offering, the public offering price and the concession and discount therefrom may be changed by you by notice to the Underwriters, and we agree to be bound by any such change. If, in accordance with the terms of offering set forth in the Prospectus or Offering Circular, the offering of the Securities is not at a fixed price but at varying prices set by individual Underwriters based on market prices or at negotiated prices, the provisions above relating to your right to change the public offering price and concession and discount to dealers shall not apply, and other references in this Section and elsewhere in this Agreement to the public offering price or Selected Dealers' concession shall be deemed to mean the prices and concessions determined by you from time to time in your discretion. If so directed in the Invitation, we will not sell any Securities to any account over which we have discretionary authority. We will also comply with any other restrictions which may be set forth in the Invitation. The initial public advertisement with respect to the Securities shall appear on such date, and shall include the names of such of the Underwriters, as you may determine. Thereafter, any Underwriter may advertise at its own expense. 4. DELAYED DELIVERY ARRANGEMENTS. We authorize you to act on our ----------------------------- behalf in making all arrangements for the solicitation 5 of offers to purchase Securities from the Issuer pursuant to Delayed Delivery Contracts, and we agree that all such arrangements will be made only through you (directly or through Underwriters or Selected Dealers). You may allow to Selected Dealers in respect of such Securities a commission equal to the concession allowed to Selected Dealers pursuant to Section 5. The obligations of the Underwriters shall be reduced in the aggregate by the principal amount of Securities covered by Delayed Delivery Contracts made by the Issuer, the obligation of each Underwriter to be reduced by the principal amount of such Securities, if any, allocated by you to such Underwriter. Your determination of the allocation of Securities covered by Delayed Delivery Contracts among the several Underwriters shall be final and conclusive, and we agree to be bound by any notice delivered by you to the Issuer setting forth the amount of the reduction in our obligation as a result of Delayed Delivery Contracts. Upon receiving payment from the Issuer of the fee for arranging Delayed Delivery Contracts, you will credit our account with the portion of such fee applicable to the Securities covered by Delayed Delivery Contracts allocated to us. You will charge our account with any commission allocated to Selected Dealers in respect of Securities covered by Delayed Delivery Contracts allocated to us. 5. OFFERING TO SELECTED DEALERS AND OTHERS; MANAGEMENT OF OFFERING. --------------------------------------------------------------- We authorize you, for our account, to reserve for sale and to sell to dealers ("Selected Dealers"), among whom any of the Underwriters may be included, such amount of our Securities as you shall determine. Reservations for sales to Selected Dealers for our account need not be in proportion to our underwriting obligation, but sales of Securities reserved for our account for sale to Selected Dealers shall be made as nearly as practicable in the ratio which the amount of Securities reserved for our account bears to the aggregate amount of Securities reserved for the account of all Underwriters, as calculated from day to day. The price to Selected Dealers initially shall be in the public offering price less a concession not in excess of the Selected Dealers concession set forth in the Invitation. Selected Dealers shall be actually engaged in the investment banking or securities business and shall be either members in good standing of the National Association of Securities Dealers, Inc. (the "NASD") or dealers with their principal place of business located outside the United States, its territories and its possessions and not registered under the 1934 Act who agree to make no sales within the United States, its territories or its possessions or to persons who are nationals thereof or residents therein. Each Selected Dealer shall agree to comply with the provisions of Section 24 of Article III of the Rules of Fair Practice of the NASD, and each foreign Selected Dealer who is not a member of the NASD also shall agree to comply with the NASD's interpretation with respect to free-riding and withholding, to comply, as though it were a member of the NASD, with the provisions of Sections 8 6 and 36 of Article III of such Rules of Fair Practice, and to comply with Section 25 of Article III thereof as that Section applies to a non-member foreign dealer. With your consent, the Underwriters may allow, and Selected Dealers may reallow, a discount on sales to any dealer who meets the above NASD requirements in an amount not in excess of the amount set forth in the Invitation. Upon your request, we will advise you of the identity of any dealer to whom we allow such a discount and any Underwriter or Selected Dealer from whom we receive such a discount. We also authorize you, for our account, to reserve for sale and to sell our Securities at the public offering price to others, including institutions and retail purchasers. Except for such sales which are designated by a purchaser to be for the account of a particular Underwriter, such reservations and sales shall be made as nearly as practicable in proportion to our underwriting obligation, unless you agree to a smaller proportion at our request. At or before the time the Securities are released for sale, you shall notify us of the amount of our Securities which have not been reserved for our account for sale to Selected Dealers and others and which is to be retained by us for direct sale. We will from time to time, upon your request, report to you the amount of Securities retained by us for direct sale which remains unsold and, upon your request, deliver to you for our account, or sell to you for the account of one or more of the Underwriters, such amount of our unsold Securities as you may designate at the public offering price less an amount determined by you not in excess of the concession to Selected Dealers. You may also repurchase Securities from other Underwriters and Selected Dealers, for the account of one or more of the Underwriters, at prices determined by you not in excess of the public offering price less the concession to Selected Dealers. You may from time to time deliver to any Underwriter, for carrying purposes or for sale by such Underwriter, any of the Securities then reserved for sale to, but not purchased and paid for by, Selected Dealers or others as above provided, but to the extent that Securities are so delivered for sale by such Underwriter, the amount of Securities then reserved for the account of such Underwriter shall be correspondingly reduced. Securities delivered for carrying purposes only shall be redelivered to you upon demand. The Underwriters and Selected Dealers may, with your consent, purchase Securities from and sell Securities to each other at the public offering price less a concession not in excess of the concession to Selected Dealers. 7 6. REPURCHASE OF SECURITIES NOT EFFECTIVELY PLACED. In recognition ----------------------------------------------- of the importance of distributing the Securities to bona fide investors, we agree to repurchase on demand any Securities sold by us, except through you, which are purchased by you in the open market or otherwise during a period terminating as provided in Section 16, at a price equal to the cost of such purchase, including accrued interest, amortization of original issue discount or dividends, commissions and transfer and other taxes, if any, on redelivery. The certificates delivered to us need not be the identical certificates delivered to you in respect of the Securities purchased. In lieu of requiring repurchase, you may, in your discretion, sell such Securities for our account at such prices, upon such terms and to such persons, including any of the other Underwriters, as you may determine, charging the amount of any loss and expense, or crediting the amount of any net profit, resulting from such sale, to our account, or you may charge our account with an amount determined by you not in excess of the concession to Selected Dealers. 7. STABILIZATION AND OVER-ALLOTMENT. In order to facilitate the -------------------------------- distribution of the Securities, we authorize you, in your discretion, to purchase and sell Securities, any securities into which the Securities are convertible or for which the Securities are exchangeable, and any other securities of the Issuer or any guarantor of the Securities specified in the Invitation, in the open market or otherwise, for long or short account, at such prices as you may determine, and, in arranging for sales to Selected Dealers or others, to over-allot. You may liquidate any long position or cover any short position incurred pursuant to this Section at such prices as you may determine. You shall make such purchases and sales (including over-allotments) for the accounts of the Underwriters as nearly as practicable in proportion to their respective underwriting obligations. It is understood that, in connection with any particular offering of Securities to which this Agreement applies, you may have made purchases of any such securities for stabilizing purposes prior to the time when we became one of the Underwriters, and we agree that any such securities so purchased shall be treated as having been purchased for the respective accounts of the Underwriters pursuant to the foregoing authorization. At the close of business on any day our net commitment, either for long or short account, resulting from such purchases or sales (including over-allotments) shall not exceed 15% (or such other amount as may be specified in the Invitation) of our underwriting obligation, except that such percentage may be increased with the approval of a majority in interest of the Underwriters. We will take up at cost on demand any Securities or any such other securities so sold or over-allotted for our account, including accrued interest, amortization of original issue discount or dividends, and we will pay to you on demand the amount of any losses or expenses incurred for our account pursuant to this Section. In the event of default by any Underwriter in respect of its obligations under this Section, each non-defaulting Underwriter shall assume its share of the 8 obligations of such defaulting Underwriter in the proportion that its underwriting obligation bears to the underwriting obligations of all non- defaulting Underwriters without relieving such defaulting Underwriter of its liability hereunder. If you effect any stabilizing purchase pursuant to this Section, you shall promptly notify us of the date and time of the first stabilizing purchase and the date and time when stabilizing was terminated. You shall prepare and maintain such records as are required to be maintained by you as manager pursuant to Rule 17a-2 under the 1934 Act. 8. RULE 10B-6. We represent and agree that in connection with the ---------- offering of Securities we have complied and will comply with the provisions of Rule 10b-6 under the 1934 Act as they apply to the offering of the Securities. 9. PAYMENT AND DELIVERY. At or before such time, on such dates and -------------------- at such places as you may specify in the Invitation, we will deliver to you a certified or official bank check in such funds as are specified in the Invitation, payable to the order of Smith Barney, Harris Upham & Co. Incorporated (unless otherwise specified in the Invitation) in an amount equal to, as you direct, either (i) the public offering price or prices plus accrued interest, amortization or original issue discount or dividends, if any, set forth in the Prospectus or Offering Circular less the concession to Selected Dealers in respect of the amount of Securities to be purchased by us in accordance with the terms of this Agreement, or (ii) the amount set forth in the Invitation with respect to the Securities to be purchased by us. We authorize you to make payment for our account of the purchase price for the Securities to be purchased by us against delivery to you of such Securities (which, in the case of Securities which are debt obligations, may be in temporary form), and the difference between such purchase price of the Securities and the amount of our funds delivered to you therefor shall be credited to our account. Delivery to us of Securities retained by us for direct sale shall be made by you as soon as practicable after your receipt of the Securities. Upon termination of the provisions of this Agreement as provided in Section 16, you shall deliver to us any Securities reserved for our account for sale to Selected Dealers and others which remain unsold at that time. If, upon termination of the provisions of this Agreement specified in Section 16 hereof, an aggregate of not more than 10% of the Securities remains unsold, you may, in your discretion, sell such Securities at such prices as you may determine. If we are a member of The Depository Trust Company or any other depository or similar facility, you are authorized to make appropriate arrangements for payment for and/or delivery through its facilities of the Securities to be purchased by us, or, if we are not a member, settlement may be made through a 9 correspondent that is a member pursuant to our timely instructions to you. Upon receiving payment for Securities sold for our account to Selected Dealers and others, you shall remit to us an amount equal to the amount paid by us to you in respect of such Securities and credit or charge our account with the difference, if any, between such amount and the price at which such Securities were sold. In the event that the Underwriting Agreement for an offering provides for the payment of a commission or other compensation to the Underwriters, we authorize you to receive such commission or other compensation for our account. 10. MANAGEMENT COMPENSATION. As compensation for your services in ----------------------- the management of the offering, we will pay you an amount equal to the management fee specified in the Invitation in respect of the Securities to be purchased by us pursuant to the Underwriting Agreement, and we authorize you to charge our account with such amount. If there is more than one Representative, such compensation shall be divided among the Representatives in such proportions as they may determine. 11. AUTHORITY TO BORROW. We authorize you to advance your own funds ------------------- for our account, charging current interest rates, or to arrange loans for our account or the account of the Underwriters, as you may deem necessary or advisable for the purchase, carrying, sale and distribution of the Securities. You may execute and deliver any notes or other instruments required in connection therewith and may hold or pledge as security therefor all or any part of the Securities which we or such Underwriters have agreed to purchase. The obligations of the Underwriters under loans arranged on their behalf shall be several in proportion to their respective participations in such loans, and not joint. Any lender is authorized to accept your instructions as to the disposition of the proceeds of any such loans. You shall credit each Underwriter with the proceeds of any loans made for its account. 12. BLUE SKY QUALIFICATION. You shall inform us, upon request, of ---------------------- the states and other jurisdictions of the United States in which it is believed that the Securities are qualified for sale under, or are exempt from the requirements of, their respective securities laws, but you assume no responsibility with respect to our right to sell Securities in any jurisdiction. You are authorized to file with the Department of State of the State of New York a Further State Notice with respect to the Securities, if necessary. If we propose to offer Securities outside the United States, its territories or its possessions, we will take, at our own expense, such action, if any, as may be necessary to comply 10 with the laws of each foreign jurisdiction in which we propose to offer Securities. 13. MEMBERSHIP IN NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.; --------------------------------------------------------------- FOREIGN UNDERWRITERS. We understand that you are a member in good standing of - -------------------- the NASD. We confirm that we are actually engaged in the investment banking or securities business and are either (i) a member in good standing of the NASD or (ii) a dealer with its principal place of business located outside the United States, its territories and its possessions and not registered under the 1934 Act who hereby agrees to make no sales within the United States, its territories or its possessions or to persons who are nationals thereof or residents therein (except that we may participate in sales to Selected Dealers and others under Section 5 of this Agreement). We hereby agree to comply with Section 24 of Article III of the Rules of Fair Practice of the NASD, and if we are a foreign dealer and not a member of the NASD we also hereby agree to comply with the NASD's interpretation with respect to free-riding and withholding, to comply, as though we were a member of the NASD, with the provisions of Sections 8 and 36 of Article III of such Rules of Fair Practice, and to comply with Section 25 of Article III thereof as that Section applies to a non-member foreign dealer. 14. DISTRIBUTION OF PROSPECTUSES; OFFERING CIRCULARS. We are ------------------------------------------------ familiar with Securities Act of 1933 Release No. 4968 and Rule 15c2-8 under the 1934 Act, relating to the distribution of preliminary and final prospectuses, and we confirm that we will comply therewith, to the extent applicable, in connection with any sale of Securities. You shall cause to be made available to us, to the extent made available to you by the Issuer, such number of copies of the Prospectus as we may reasonably request for purposes contemplated by the 1933 Act, the 1934 Act and the rules and regulations thereunder. If an Invitation states that the offering is subject to the 48-hour prospectus delivery requirement set forth in Rule 15c2-8(b), our Acceptance of the Invitation shall be deemed to constitute confirmation that we have delivered (or we will deliver) a copy of the preliminary prospectus to all persons to whom we expect to confirm a sale of Securities and that such delivery was effected (or will be effected) at least 48 hours prior to the mailing of such confirmations of sale. Our Acceptance of an Invitation relating to an offering made pursuant to an Offering Circular shall constitute our agreement that, if requested by you, we will furnish a copy of any amendment to a preliminary or final Offering Circular to each person to whom we shall have furnished a previous preliminary or final Offering Circular. Our Acceptance shall constitute our confirmation that we have delivered and our agreement that we will deliver all preliminary and final Offering Circulars required for compliance with the applicable federal and state laws and the applicable rules and regulations of any regulatory 11 body promulgated thereunder governing the use and distribution of offering circulars by underwriters and, to the extent consistent with such laws, rules and regulations, our Acceptance shall constitute our confirmation that we have delivered and our agreement that we will deliver all preliminary and final Offering Circulars which would be required if the provisions of Rule 15c2-8 (or any successor provision) under the 1934 Act applied to such offering. 15. NET CAPITAL. The incurrence by us of our obligations hereunder ----------- and under the Underwriting Agreement in connection with the offering of the Securities will not place us in violation of the capital requirements of Rule 15c3-1 under the 1934 Act. 16. TERMINATION. With respect to each offering of Securities to ----------- which this Agreement applies, all limitations in this Agreement on the price at which the Securities may be sold, the period of time referred to in Section 6, the authority granted by the first sentence of Section 7, and the restrictions contained in Section 8 shall terminate at the close of business on the 45th day after the commencement of the offering of such Securities. You may terminate nay or all of such provisions at any time prior thereto by notice to the Underwriters. All other provisions of this Agreement shall remain operative and in full force and effect with respect to such offering. 17. EXPENSES AND SETTLEMENT. You may charge our account with any ----------------------- transfer taxes on sales of Securities made for our account and with our proportionate share (based upon our underwriting obligation) of all other expenses incurred by you under this Agreement or otherwise in connection with the purchase, carrying, sale or distribution of the Securities. With respect to each offering of Securities to which this Agreement applies, the respective accounts of the Underwriters shall be settled as promptly as practicable after the termination of all the provisions of this Agreement as provided in Section 16, but you may reserve such amount as you may deem advisable for additional expenses. Your determination of the amount to be paid to or by us shall be conclusive. You may at any time make partial distributions of credit balances or call for payment of debit balances. Any of our funds in your hands may be held with your general funds without accountability for interest. Notwithstanding any settlement, we will remain liable for any taxes on transfers for our account and for our proportionate share (based upon our underwriting obligation) of all expenses and liabilities which may be incurred by or for the accounts of the Underwriters with respect to each offering of Securities to which this Agreement applies. 18. INDEMNIFICATION. With respect to each offering of Securities --------------- pursuant to this Agreement, we will indemnify and hold harmless each other Underwriter and each person, if any, who controls each other Underwriter within the meaning of Section 15 12 of the 1933 Act, to the extent that and on the terms upon which we agree to indemnify and hold harmless the Issuer and other specified persons as set forth in the Underwriting Agreement. 19. CLAIMS AGAINST UNDERWRITERS. With respect to each offering of --------------------------- Securities to which this Agreement applies, if at any time any person other than an Underwriter asserts a claim (including any commenced or threatened investigation or proceeding by any government agency or body) against one or more of the Underwriters or against you as Representative(s) of the Underwriters arising out of an alleged untrue statement or omission in the Registration Statement (or any amendment thereto) or in any preliminary prospectus or the Prospectus or any amendment or supplement thereto, or in any preliminary or final Offering Circular, or relating to any transaction contemplated by this Agreement, we authorize you to make such investigation, to retain such counsel for the Underwriters and to take such action in the defense of such claim as you may deem necessary or advisable. You may settle such claim with the approval of a majority in interest of the Underwriters. We will pay our proportionate share (based upon our underwriting obligation) of all expenses incurred by you (including the fees and expenses of counsel for the Underwriters) in investigating and defending against such claim and our proportionate share of the aggregate liability incurred by all Underwriters in respect of such claim (after deducting any contribution indemnification obtained pursuant to the Underwriting Agreement, or otherwise, from persons other than Underwriters), whether such liability is the result of a judgment against one or more of the Underwriters or the result of any settlement. Any Underwriter may retain separate counsel at its own expense. A claim against or liability incurred by a person who controls an Underwriter shall be deemed to have been made against or incurred by such Underwriter. In the event of default by any Underwriter in respect of its obligations under this Section, the non-defaulting Underwriters shall be obligated to pay the full amount thereof in the proportions that their respective underwriting obligations bear to the underwriting obligations of all non-defaulting Underwriters without relieving such defaulting Underwriter of its liability hereunder. 20. DEFAULT BY UNDERWRITERS. Default by any Underwriter in respect ----------------------- of its obligations hereunder or under the Underwriting Agreement shall not release us from any of our obligations or in any way affect the liability of such defaulting Underwriter to the other Underwriters for damages resulting from such default. If one or more Underwriters default under the Underwriting Agreement, if provided in the Underwriting Agreement you may (but shall not be obligated to) arrange for the purchase by others, which may include yourselves or other non-defaulting Underwriters, of all or a portion of the Securities not taken up by the defaulting Underwriters. 13 In the event that such arrangements are made, the respective underwriting obligations of the non-defaulting Underwriters and the amounts of the Securities to be purchased by others, if any, shall be taken as the basis for all rights and obligations hereunder, but this shall not in any way affect the liability of any defaulting Underwriter to the other Underwriters for damages resulting from its default, nor shall any such default relieve any other Underwriter of any of its obligations hereunder or under the Underwriting Agreement except as herein or therein provided. In addition, in the event of default by one or more Underwriters in respect of their obligations under the Underwriting Agreement to purchase the Securities agreed to be purchased by them thereunder and, to the extent that arrangements shall not have been made by you for any person to assume the obligations of such defaulting Underwriter or Underwriters, we agree, if provided in the Underwriting Agreement, to assume our proportionate share, based upon our underwriting obligation, of the obligations of each such defaulting Underwriter (subject to the limitations contained in the Underwriting Agreement) without relieving such defaulting Underwriter of its liability therefor. In the event of default by one or more Underwriters in respect of their obligations under this Agreement to take up and pay for any securities purchased, or to deliver any securities sold or over-allotted, by you for the respective accounts of the Underwriters, or to bear their proportion of expenses or liabilities pursuant to this Agreement, and to the extent that arrangements shall not have been made by you for any persons to assume the obligations of such defaulting Underwriter or Underwriters, we agree to assume our proportionate share, based upon our underwriting obligation, of the obligations of each defaulting Underwriter without relieving any such defaulting Underwriter of its liability therefor. 21. LEGAL RESPONSIBILITY. As Representative(s) of the Underwriters, -------------------- you shall have no liability to us, except for your lack of good faith and for obligations assumed by you in this Agreement and except that we do not waive any rights that we may have under the 1933 Act or the 1934 Act or the rules and regulations thereunder. No obligations not expressly assumed by you in this Agreement shall be implied herefrom. Nothing herein contained shall constitute the Underwriters an association, or partners, with you, or with each other, or, except as otherwise provided herein or in the Underwriting Agreement, render any Underwriter liable for the obligations of any other Underwriter, and the rights, obligations and liabilities of the Underwriters are several in accordance with their respective underwriting obligations, and not joint. If the Underwriters are deemed to constitute a partnership for federal income tax purposes, we elect to be excluded from the application of Subchapter K, Chapter 1, Subtitle A, of the Internal Revenue Code of 1954, as amended, and 14 agree not to take any position inconsistent with such election, and you, as Representative(s), are authorized, in your discretion, to execute on behalf of the Underwriters such evidence of such election as may be required by the Internal Revenue Service. Unless we have promptly notified you in writing otherwise, our name as it should appear in the Prospectus or Offering Circular and our address are set forth below. 22. NOTICES. Any notice from you shall be deemed to have been duly ------- given if mailed or transmitted to us at our address appearing below. 23. GOVERNING LAW. This Agreement shall be governed by the laws of ------------- the State of New York applicable to agreements made and to be performed in said State. Please confirm this Agreement and deliver a copy to us. Very truly yours, Name of Firm: By _________________________________ Authorized Officer or Partner Address: --------------------------------- --------------------------------- --------------------------------- Confirmed as of the date first above written. Smith Barney, Harris Upham & Co. Incorporated By ______________________________ Managing Director EXHIBIT A --------- MASTER UNDERWRITERS' QUESTIONNAIRE ---------------------------------- In connection with each offering of Securities pursuant to the Smith Barney, Harris Upham & Co. Incorporated Master Agreement Among Underwriters, dated July 18, 1985 (the "Agreement"), each Underwriter confirms the following information, except as indicated in such Underwriter's Acceptance or other written communication furnished to Smith Barney, Harris Upham & Co. Incorporated. Defined terms used herein have the same meaning as defined terms in the Master Agreement Among Underwriters. (a) Neither such Underwriter nor any of its directors, officers or partners have any material (as defined in Regulation C under the 1933 Act) relationship with the Issuer, its parent (if any), any other seller of the Securities or any guarantor of the Securities. (b) Except as described or to be described in the Agreement, the Underwriting Agreement or the Invitation, such Underwriter does not know: (i) of any discounts or commissions to be allowed or paid to dealers, including all cash, securities, contracts, or other consideration to be received by any dealer in connection with the sale of the Securities, or of any other discounts or commissions to be allowed or paid to the Underwriters or of any other items that would be deemed by the NASD to constitute underwriting compensation for purposes of the NASD's Rules of Fair Practice, (ii) of any intention to over-allot, or (iii) that the price of any security may be stabilized to facilitate the offering of the Securities. (c) No report or memorandum has been prepared for external use (i.e., outside such Underwriter's organization) by such Underwriter in connection with the proposed offering of Securities and, in the case of a Registered Offering, where the Registration Statement is on Form S-1, such Underwriter has not prepared or had prepared for it any engineering, management or similar report or memorandum relating to the broad aspects of the business, operations or products of the Issuer, its parent (if any) or any guarantor of the Securities within the past twelve months. If any such report or memorandum has been prepared, furnish to Smith Barney, Harris Upham & Co. Incorporated three copies thereof, together with a statement as to the distribution of the report or memorandum, identifying each class of persons to whom the report or memorandum was distributed, the number of copies distributed to each class and the period of distribution. (d) If the Securities are debt securities to be issued under an indenture to be qualified under the Trust Indenture Act of 1939, neither such Underwriter nor any of its directors, officers or partners is an "affiliate", as that term is defined under the Trust Indenture Act of 1939, of the Trustee for the 2 Securities as specified in the Invitation, or of its parent (if any); neither the Trustee nor its parent (if any) nor any of their directors or executive officers is a director, officer, partner, employee, appointee or representative of such Underwriter as those terms are defined in the Trust Indenture Act of 1939 or in the relevant instructions to Form T-1; neither such Underwriter nor any of its directors, partners or executive officers, separately or as a group, owns beneficially 1% or more of the shares of any class of voting securities of the Trustee or of its parent (if any); and if such Underwriter is a corporation, it does not have outstanding nor has it assumed or guaranteed any securities issued otherwise than in its present corporate name, and neither the Trustee nor its parent (if any) is a holder of any such securities. (e) If the Issuer is a public utility, such Underwriter is not a "holding company" or a "subsidiary company" or an "affiliate" of a "holding company" or of a "public utility company", each as defined in the Public Utility Holding Company Act of 1935. (f) Neither such Underwriter nor any "group" (as that term is defined in Section 13(d)(3) of the 1934 Act) of which it is a member is the beneficial owner (determined in accordance with Rule 13d-3 under the 1934 Act) of more than 5% of any class of voting securities of the Issuer, its parent (if any), any other seller of the Securities or any guarantor of the Securities nor does it have any knowledge that more than 5% of any class of voting securities of the Issuer is held or to be held subject to any voting trust or other similar agreement. EX-99.H.4 6 0006.txt FORM OF SALOMON SMITH BARNEY LETTER AGREEMENT Nuveen Investments 333 West Wacker Drive Chicago, IL 60606 ________, 2001 Mr. William G. McCoy Managing Director, Equity Capital Markets Salomon Smith Barney Inc. 388 Greenwich Street New York, NY 10013 Dear Mr. McCoy: Reference is made to Nuveen Ohio Dividend Advantage Municipal Fund, Nuveen California Dividend Advantage Municipal Fund 2, Nuveen Pennsylvania Dividend Advantage Municipal Fund, Nuveen New Jersey Dividend Advantage Municipal Fund, Nuveen New York Dividend Advantage Municipal Fund 2 and Nuveen Dividend Advantage Municipal Fund 2. Each such fund currently is making an initial public offering of its common shares of beneficial interest (the "Shares") through several underwriters. Such offerings are referred to herein, collectively, as the "Offerings" and, individually, as an "Offering". You are acting as lead manager and representative (the "Representative") of the underwriters of each Offering and we are participating as a manager and underwriter of each Offering. We have requested that we be able to offer certain broker-dealers the opportunity to participate as selling dealers in one or more of the Offerings. This letter is to confirm our agreement with you as to the terms and conditions on which we may offer to sell, and sell, Shares to broker-dealers with whom we regularly transact business (collectively, the "Nuveen Selected Dealers" and, individually, a "Nuveen Selected Dealer"): a. each Nuveen Selected Dealer to whom we offer to sell, or sell, Shares shall have entered into a master selected dealer agreement ("Selected Dealer Agreement") with Nuveen, the form of which is attached hereto as Exhibit A; b. before offering to sell, or selling, Shares to a Nuveen Selected Dealer, Nuveen will carry out such independent investigations as it deems necessary to determine that such dealer satisfies the criteria set forth in Section 6 of the Selected Dealer Agreement; c. we will act under and enforce each Selected Dealer Agreement only with your consent (which shall not be unreasonably withheld) or upon your instruction; d. we shall not allow to any Nuveen Selected Dealer purchasing Shares in an Offering a selling concession that is in an amount in excess of the maximum selling concession set by you for selected dealers for that Offering; and e. we agree upon instruction from you, subject to the other terms of the Offerings, to pay for and purchase all Shares that we reserve in the Offerings, whether such Shares are reserved by us for our own account or for the account of one or more Nuveen Selected Dealers, and we agree to make all purchases of Shares in accordance with Master Agreement among Underwriters dated July 18, 1985 between the Representatives and Nuveen and the underwriting agreement for the Offering of such Shares. If the foregoing correctly sets forth our understanding regarding the matters described herein, please so indicate by signing a copy of this letter where indicated below and returning the signed copy of this letter to us. For your convenience, a duplicate copy of this letter has been included. NUVEEN INVESTMENTS By____________________________ Name: Title: 2 Acknowledged and agreed to as of this __ day of ___, 2001 on behalf of themselves and, in respect of an Offering, the other underwriters of the Offering. by: SALOMON SMITH BARNEY INC. SALOMON SMITH BARNEY INC., as Representative of the Underwriters By___________________________________ Name: William McCoy Title: Managing Director, Equity Capital Markets 3 EX-99.J 7 0007.txt FORM OF EXCHANGE TRADED FUND CUSTODY AGREEMENT EXCHANGE TRADED FUND CUSTODY AGREEMENT THIS AGREEMENT is made this ___ day of March, 2001 by and between NUVEEN CALIFORNIA DIVIDEND ADVANTAGE MUNICIPAL FUND 2, a closed-end investment company organized as a Massachusetts business trust (the "Fund"), and THE CHASE MANHATTAN BANK, a New York banking corporation ("Chase"). W I T N E S S E T H WHEREAS, the Fund is registered as a closed-end non-diversified, management investment company under the Investment Company act of 1940 (the "1940 Act") WHEREAS, the Fund desires to retain Chase to serve as the Fund's custodian and Chase is willing to act as custodian hereunder. NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, it is agreed between the parties hereto as follows: 1. Appointment. The Fund hereby appoints Chase to act as custodian of its portfolio securities, cash and other property on the terms set forth in this Agreement. Chase accepts such appointment and agrees to furnish the services herein set forth in return for the compensation as provided in Section 23 of this Agreement. 2. Delivery of Documents. The Fund has furnished Chase with copies properly certified or authenticated of each of the following: (a) Resolutions of the Fund's Board of Trustees authorizing the appointment of Chase as Custodian of the portfolio securities, cash and other property of the Fund and approving this Agreement; (b) Incumbency and signature certificates identifying and containing the signatures of the Fund's officers and/or the persons authorized to sign Proper Instructions, as hereinafter defined, on behalf of the Fund; (c) The Fund's Declaration of Trust filed with the Commonwealth of Massachusetts and all amendments thereto (such Declaration of Trust as currently in effect and from time to time, be amended, are herein called the "Declaration"); (d) The Fund's By-Laws and all amendments thereto (such By-Laws, as currently in effect and as they shall from time to time be amended, are herein called the "By-Laws"), (e) Resolutions of the Fund's Board of Trustees appointing the investment advisor of the Fund and resolutions of the Fund's Board of Trustees and the Fund's Shareholders approving the proposed Investment Advisory Agreement between the Fund and the advisor (the "Advisory Agreement"); (f) The Advisory Agreement (g) The Fund's Notification of Registration filed pursuant to Section 8(a) of the 1940 Act and the Securities Act of 1933, as amended ("the 1933 Act") with the SEC; and (h) The Fund's most recent prospectus and statement including all amendments and supplements thereto (the "Prospectus"). Upon request the Fund will furnish Chase with copies of all amendments of or supplements to the foregoing, if any. The Fund will also furnish Chase upon request with a copy of the opinion of counsel for the Fund with respect to the validity of the Shares of the Fund and the status of such Shares under the 1933 Act filed with the SEC, and any other applicable federal law or regulation. 3. Definitions. (a) "Authorized Person". As used in this Agreement, the term "Authorized Person" means the Fund's President, Treasurer and any other person, whether or not any such person is an officer or employee of the Fund, duly authorized by the Board of Trustees of the Fund to give Proper Instructions on behalf of the Fund as set forth in resolutions of the Fund's Board of Trustees. (b). "Book-Entry System". As used in this Agreement, the term "Book-Entry System" means a book-entry system authorized by the U.S. Department of Treasury, its successor or successors and its nominee or nominees. (c) "Proper Instructions". Proper Instructions as used herein means a writing signed or initialed by two or more persons as the Board of Trustees shall have from time to time authorized. Each such writing shall set forth the specific transaction or type of transaction involved, including a specific statement of the purpose for which such action is requested. Oral instructions will be considered Proper Instructions if Chase reasonably believes them to have been given by a person authorized to give such instructions with respect to the transaction involved. The Fund shall cause all such oral instructions to be confirmed in writing. Upon receipt of a certificate of the Secretary or an Assistant Secretary as to the authorization by the Board of Trustees of the Fund accompanied by a detailed description of procedures approved by the Board of Trustees, Proper Instructions may include communications effected directly between electro-mechanical or electronic devices provided that the Board of Trustees and Chase are satisfied that such procedures afford adequate safeguards for the Fund's assets. For purposes of this Section, Proper 2 Instructions shall include instructions received by Chase pursuant to any three- party agreement which requires a segregated asset account in accordance with Section 9. (d) "Property". The term "Property", as used in this Agreement, means: (i) any and all securities and other property of the Fund which the Fund may from time to time deposit, or cause to be deposited, with Chase or which Chase may from time to time hold for the Fund; (ii) all income in respect of any such securities or other property; and (iii) all proceeds of the sales of any of such securities or other property. (e) "Securities Depository". As used in this Agreement, the term "Securities Depository" shall mean The Depository Trust Company, a clearing agency registered with the SEC or its successor or successors and its nominee or nominees; and shall also mean any other registered clearing agency, its successor or successors specifically identified in a certified copy of a resolution of the Company's Board of Trustees approving deposits by Chase therein. 4. Delivery and Registration of the Property. The Fund will deliver or cause to be delivered to Chase all securities and all moneys owned by it, including payments of interest, principal and capital distributions and cash received by it from the issuance of its Shares, at any time during the period of this Agreement, except for securities and monies to be delivered to any subcustodian appointed pursuant to Section 7 hereof. Chase will not be responsible for such securities and such monies until actually received by it. All securities delivered to Chase or to any such subcustodian (other than in bearer form) shall be registered in the name of the Fund or in the name of a nominee of the Fund or in the name of Chase or any nominee of Chase (with or without indication of fiduciary status) or in the name of any subcustodian or any nominee of such subcustodian appointed pursuant to Paragraph 7 hereof, or with a Securities Depository or its nominee pursuant to Section 8 hereof, or shall be properly endorsed and in form for transfer satisfactory to Chase. 5. Voting Rights. With respect to all securities, however registered, it is understood that the voting and other rights and powers shall be exercised by the Fund. Chase's only duty shall be to mail for delivery on the next business day to the Fund any documents received, including proxy statements and offering circulars, with any proxies for securities registered in a nominee name executed by such nominee. Where warrants, options, tenders or other securities have fixed expiration dates, the Fund understands that in order for Chase to act, Chase must receive the Fund's instructions at its offices in New York, addressed as Chase may from time to time request, by no later than noon (NY City time) at least two business days prior to the last scheduled date to act with respect thereto 3 (or such earlier date or time as Chase may reasonably notify the Fund). Absent Chase's timely receipt of such instructions, such instruments will expire without liability to Chase. 6. Receipt and Disbursement of Money. (a) Chase shall open and maintain a custody account for the Fund, subject only to draft or order by Chase acting pursuant to the terms of this Agreement, and shall hold in such account, subject to the provisions hereof, all cash received by it from or for the Fund other than cash maintained by the Fund in a bank account established and used in accordance with Rule 17f-3 under the 1940 Act. Funds held by Chase for the Fund may be deposited by Chase to the Fund's credit at Chase or in such other banks or trust companies as Chase may in its discretion deem necessary or desirable; provided, however, that every such bank or trust company shall be qualified to act as a custodian under the 1940 Act, and that each such bank or trust company shall be approved by vote of a majority of the Board of Trustees of the Fund. Such funds shall be deposited by Chase in its capacity as Custodian and shall be withdrawable by Chase only in that capacity. (b) Upon receipt of Proper Instructions (which may be continuing instructions as deemed appropriate by the parties) Chase shall make payments of cash to, or for the account of, the Fund from such cash only (i) for the purchase of securities, options, futures contracts or options on futures contracts for the Fund as provided in Section 13 hereof; (ii) in the case of a purchase of securities effected through a Book-Entry System or Securities Depository, in accordance with the conditions set forth in Section 8 hereof; (iii) in the case of repurchase agreements entered into between the Fund and Chase, or another bank, or a broker-dealer which is a member of The National Association of Securities Dealers, Inc. ("NASD"), either (a) against delivery of the securities either in certificate form or through an entry crediting Chase's account at the Federal Reserve Bank with such securities or (b) against delivery of the receipt evidencing purchase by the Fund of securities owned by Chase along with written evidence of the agreement by Chase to repurchase such securities from the Fund; (iv) for transfer to a time deposit account of the Fund in any bank, whether domestic or foreign; such transfer may be effected prior to receipt of a confirmation from a broker and/or the applicable bank pursuant to Proper Instructions from the Fund; (v) for the payment of dividends or other distributions on shares declared pursuant to the governing documents of the Fund, or for the payment of interest, taxes, administration, distribution or advisory fees or expenses which are to be borne by the Fund under the terms of this Agreement, any Advisory Agreement, or any administration agreement; (vi) for payments in connection with the conversion, exchange or surrender of securities owned or subscribed to by the Fund and held by or to be delivered to Chase; (vii) to a subcustodian pursuant to Section 7 hereof; (viii) for such common expenses incurred by the Fund in the ordinary course of its business, including but not limited to printing and mailing expenses, legal fees, 4 accountants fees, exchange fees; or (ix) for any other proper purpose, but only upon receipt of Proper Instructions. (c) Chase is hereby authorized to endorse and collect all checks, drafts or other orders for the payment of money received as custodian for the Fund. 6A. Advances by Custodian. The Fund may from time to time purchase securities for settlement payable in "next day" funds and provide for payment for such transactions by selling securities for settlement in "same day" funds settling on the day after settlement of the Fund's purchase transaction. Under these circumstances the Fund may require the Custodian to advance funds in amounts not exceeding 20% of the value of the Fund's assets at the time of the advance for payment of the securities purchase transaction, and the Custodian shall recover an amount equal to its advance, with interest at the rate it customarily charges for such transactions, from the proceeds of the securities sale. In addition to the foregoing, the Custodian may from time to time agree to advance cash to the Fund, with interest, for the Fund's other proper corporate purposes. If the Custodian advances cash for any purpose, the Fund shall and hereby does grant to the Custodian a security interest in Fund securities equal in value to the amount of the cash advance but in no event shall the value of securities in which a security interest has been granted exceed 20% of the value of the Fund's total assets at the time of the pledge; should the Fund fail to repay the Custodian promptly, the Custodian shall be entitled to utilize available cash and to reasonably dispose of any securities in which it has a security interest to the extent necessary to obtain reimbursement. 7. Receipt and Delivery of Securities. (a) Except as provided by Section 8 hereof, Chase shall hold and physically segregate all securities and noncash Property received by it for the Fund. All such securities and non-cash Property are to be held or disposed of by Chase for the Fund pursuant to the terms of this Agreement. In the absence of Proper Instructions, Chase shall have no power or authority to withdraw, deliver, assign, hypothecate, pledge or otherwise dispose of any such securities and investments, except in accordance with the express terms provided for in this Agreement. In no case may any trustee, officer, employee or agent of the Fund withdraw any securities. In connection with its duties under this Section 7, Chase may, at its own expense, enter into subcustodian agreements with other banks or trust companies for the receipt of certain securities and cash to be held by Chase for the account of the Fund pursuant to this Agreement; provided that each such bank or trust company has an aggregate capital, surplus and undivided profits, as shown by its last published report, of not less than twenty million dollars ($20,000,000. Chase will be liable for acts or omissions of any subcustodian. Chase shall employ sub-custodians upon receipt of Proper Instructions. 5 (b) Promptly after the close of business on each day Chase shall furnish the Fund with confirmations and a summary of all transfers to or from the account of the Fund during said day. Where securities are transferred to the account of the Fund established at a Securities Depository or Book Entry System pursuant to Section 8 hereof, Chase shall also by book-entry or otherwise identify as belonging to such Fund the quantity of securities in a fungible bulk of securities registered in the name of Chase (or its nominee) or shown in Chase's account on the books of a Securities Depository or Book-Entry System. At least monthly and from time to time, Chase shall furnish the Fund with a detailed statement of the Property held for the Fund under this Agreement. 8. Use of Securities Depository or Book-Entry System. The Fund shall deliver to Chase a certified resolution of the Board of Trustees of the Fund approving, authorizing and instructing Chase on a continuous and ongoing basis until instructed to the contrary by Proper Instructions actually received by Chase (i) to deposit in a Securities Depository or Book-Entry System all securities of the Fund eligible for deposit therein and (ii) to utilize a Securities Depository or Book-Entry System to the extent possible in connection with the performance of its duties hereunder, including without limitation settlements of purchases and sales of securities by the Fund, and deliveries and returns of securities collateral in connection with borrowings. Without limiting the generality of such use, it is agreed that the following provisions shall apply thereto: (a) Securities and any cash of the Fund deposited in a Securities Depository or Book-Entry System will at all times (1) be represented in an account of Chase in the Securities Depository or Book Entry System (the "Account") and (2) be segregated from any assets and cash controlled by Chase in other than a fiduciary or custodian capacity but may be commingled with other assets held in such capacities. Chase will effect payment for securities and receive and deliver securities in accordance with accepted industry practices as set forth in (b) below, unless the Fund has given Chase Proper Instructions to the contrary. The records of Chase with respect to securities of the Fund maintained in a Securities Depository or Book Entry System shall identify by book entry those securities belonging to the Fund. (b) Chase shall pay for securities purchased for the account of the Fund upon (i) receipt of advice from the Securities Depository or Book Entry System that such securities have been transferred to the Account, and (ii) the making of an entry on the records of Chase to reflect such payment and transfer for the account of the Fund. Upon receipt of Proper Instructions, Chase shall transfer securities sold for the account of the Fund upon (i) receipt of advice from the Securities Depository or Book Entry System that payment for such securities has been transferred to the Account, and (ii) the making of an entry on the records of Chase to reflect such transfer and payment for the account of the Fund. Copies of all advices from the Securities Depository or Book Entry System of transfers of securities for the account of the Fund shall identify the Fund, be maintained for the Fund by Chase and be provided to the Fund at its request. Upon request, Chase shall furnish the Fund confirmation of each transfer to or from the account of the Fund in 6 the form of a written advice or notice and shall furnish to the Fund copies of daily transaction sheets reflecting each day's transactions in a Securities Depository or Book Entry System for the account of the Fund. (c) Chase shall provide the Fund with any report obtained by Chase on the Securities Depository or Book Entry System's accounting system, internal accounting control and procedures for safeguarding securities deposited in the Securities Depository or Book Entry System. (d) All Books and records maintained by Chase which relate to the Fund participation in a Securities Depository or Book-Entry System will at all times during Chase's regular business hours be open to the inspection of the Fund's duly authorized employees or agents, and the Fund will be furnished with all information in respect of the services rendered to it as it may require. (e) Anything to the contrary in this Agreement notwithstanding, Chase shall be liable to the Fund for any loss or damage to the Fund resulting from any negligence, misfeasance or misconduct of Chase or any of its agents or of any of its or their employees in connection with its or their use of the Securities Depository or Book Entry Systems or from failure of Chase or any such agent to enforce effectively such rights as it may have against such Securities Depository or Book Entry System. 9. Segregated Account. Chase shall upon receipt of Proper Instructions establish and maintain a segregated account or accounts for and on behalf of the Fund, into which account or accounts may be transferred cash and/or securities, including securities maintained in an account by Chase pursuant to Section 8 hereof, (i) in accordance with the provisions of any agreement among the Fund, Chase and a broker dealer registered under the Securities and Exchange Act of 1934 and a member of the NASD (or any futures commission merchant registered under the Commodity Exchange Act), relating to compliance with the rules of The Options Clearing Corporation and of any registered national securities exchange (or the Commodity Futures Trading Commission or any registered contract market), or of any similar organization or organizations, regarding escrow or other arrangements in connection with transactions by the Fund, (ii) for purposes of segregating cash or government securities in connection with options purchased, sold or written by the Fund or commodity futures contracts or options thereon purchased or sold by the Fund, and (iii) for other proper corporate purposes, but only, in the case of clause (iv), upon receipt of Proper Instructions. 10. Instructions Consistent With The Declaration, etc. (a) Unless otherwise provided in this Agreement, Chase shall act only upon Proper Instructions. Chase may assume that any Proper Instructions received hereunder are not in any way inconsistent with any provision of the Declaration or By-Laws or any 7 vote or resolution of the Fund's Board of Trustees or any committee thereof. Chase shall be entitled to rely upon any Proper Instructions actually received by Chase pursuant to this Agreement. The Fund agrees that Chase shall incur no liability for following Proper Instructions given to Chase regardless of any allegation or claim by the Fund or its Trsutee or any third party that Chase's compliance therewith constituted negligence or was otherwise wrongful, it being understood nevertheless, that Chase will be responsible to the extent provided in Section 25 of this Agreement for its execution or performance of Proper Instructions. In accord with instructions from the Fund, as required by accepted industry practice or as Chase may elect in effecting the execution of Fund instructions, advances of cash or other Property made by Chase, arising from the purchase, sale, redemption, transfer or other disposition of Property of the Fund, or in connection with the disbursement of funds to any party, or in payment of fees, expenses, claims or liabilities owed to Chase by the Fund, or to any other party which has secured judgment in a court of law against the Fund which creates an overdraft in the accounts or over-delivery of Property, shall be deemed a loan by Chase to the Fund, payable on demand, bearing interest at such rate customarily charged by Chase for similar loans. (b) The Fund agrees that test arrangements, authentication methods or other security devices to be used with respect to instructions which the Fund may give by telephone, telex, TWX, facsimile transmission, bank wire or other teleprocess, or through an electronic instruction system, shall be processed in accordance with terms and conditions for the use of such arrangements, methods or devices as Chase may put into effect and modify from time to time. The Fund shall safeguard any test keys, identification codes or other security devices which Chase makes available to the Fund and agrees that the Fund shall be responsible for any loss, liability or damage incurred by Chase or by the Fund as a result of Chase's acting in accordance with instructions from any unauthorized person using the proper security device, unless such unauthorized use is a result of Chase's negligence or willful misconduct. Chase may electronically record, but shall not be obligated to so record, any instructions given by telephone and any other telephone discussions with respect to the Fund. In the event that the Fund uses Chase's Asset Management system or any successor electronic communications or information system, the Fund agrees that Chase is not responsible for the consequences of the failure of that system to perform for any reason, beyond the reasonable control of Chase, or the failure of any communications carrier, utility, or communications network. In the event that system is inoperable, the Fund agrees that it will accept the communication of transaction instructions by telephone, facsimile transmission on equipment compatible to Chase's facsimile receiving equipment or by letter, at no additional charge to the Fund. (c) Chase shall transmit promptly to the Fund all written information received by Chase's Corporate Actions Department from issuers of the securities being held for the Fund. With respect to tender or exchange offers, Chase shall transmit promptly by facsimile to the Fund all written information received by Chase's Corporate Actions Department from issuers of the securities whose tender or exchange is sought and from the party (or his agents) making the tender or exchange offer. If the Fund desires to take action with respect to any tender offer, exchange offer or any other similar transaction, 8 the Fund shall notify Chase's Corporate Actions Department at least three business days prior to the date on which Chase is to take such action or upon the date such notification is first received by the Fund, if later. If any Property registered in the name of a nominee of Chase is called for partial redemption by the issuer of such property, Chase is authorized to allot the called portion to the respective beneficial holders of the Property in such manner deemed to be fair and equitable by Chase in its sole discretion. 11. Transactions Not Requiring Instructions. Chase is authorized to take the following action without Proper Instructions: (a) Collection of Income and Other Payments. Chase shall: (i) collect and receive on a timely basis for the account of the Fund, all income and other payments and distributions, including (without limitation) stock dividends, rights, warrants and similar items, included or to be included in the Property of the Fund, and promptly advise the Fund of such receipt and shall credit such income, as collected, to the Fund. From time to time, Chase may elect, but shall not be obligated, to credit the account with interest, dividends or principal payments on payable or contractual settlement date, in anticipation of receiving same from a payor, central depository, broker or other agent employed by the Fund or Chase. Any such crediting and posting shall be at the Fund's sole risk, and Chase shall be authorized to reverse any such advance posting in the event it does not receive good funds from any such payor, central depository, broker or agent of the Customer. Chase agrees to promptly notify the Fund of the reversal of any such advance posting; (ii) endorse and deposit for collection in the name of the Fund, checks, drafts, or other orders for the payment of money on the same day as received; (iii) receive and hold for the account of the Fund all securities received by the Fund as a result of a stock dividend, share split-up or reorganization, merger, recapitalization, readjustment or other rearrangement or distribution of rights or similar securities issued with respect to any portfolio securities of the Fund held by Chase hereunder; (iv) present for payment and collect the amount payable upon all securities which may mature or be called, redeemed or retired, or otherwise become payable on the date such securities become payable; (v) take any action which may be necessary and proper in connection with the collection and receipt of such income and other payments and the endorsement for collection of checks, drafts and other negotiable instruments; and (vi) to effect an exchange of the securities where the par value is changed, and to surrender securities at maturity or upon an earlier call for redemption, or when 9 securities otherwise become payable, against payment therefore in accordance with accepted industry practice. If any Property registered in the name of a nominee of Chase is called for partial redemption by the issuer of such property, Chase is authorized to allot the called portion to the respective beneficial holders of the Property in such manner deemed to be fair and equitable by Chase in its sole discretion. (b) Miscellaneous Transactions. Chase is authorized to deliver or cause to be delivered Property against payment or other consideration or written receipt therefor for examination by a dealer selling for the account of the Fund in accordance with street delivery custom. 12. Transactions Requiring Instructions. In addition to the actions requiring Proper Instructions set forth herein, upon receipt of Proper Instructions and not otherwise, Chase, directly or through the use of a Securities Depository or Book-Entry System, shall: (a) Execute and deliver to such persons as may be designated in such Proper Instructions, proxies, consents, authorizations, and any other instruments whereby the authority of the Fund as owner of any securities may be exercised; (b) Deliver any securities held for the Fund against receipt of other securities or cash issued or paid in connection with the liquidation, reorganization, refinancing, merger, consolidation or recapitalization of any issuer of securities or corporation, or the exercise of any conversion privilege; (c) Deliver any securities held for the Fund to any protective committee, reorganization committee or other person in connection with the reorganization, refinancing, merger, consolidation, recapitalization or sale of assets of any issuer of securities or corporation, against receipt of such certificates of deposit, interim receipts or other instruments or documents, and cash, if any, as may be issued to it to evidence such delivery; (d) Make such transfers or exchanges of the assets of the Fund and take such other steps as shall be stated in said instructions to be for the purpose of effectuating any duly authorized plan of liquidation, reorganization, merger, consolidation or recapitalization of the Fund; (e) Release securities belonging to the Fund to any bank or trust company for the purpose of pledge or hypothecation to secure any loan incurred by the Fund; provided, however, that securities shall be released only upon payment to Chase of the monies borrowed, or upon receipt of adequate collateral as agreed upon by the Fund and Chase which may be in the form of cash or obligations issued by the U.S. government, its agencies or instrumentalities, except that in cases where additional collateral is required to secure a borrowing already made, subject to proper prior authorization, further 10 securities may be released for that purpose; and pay such loan upon re-delivery to it of the securities pledged or hypothecated therefore and upon surrender of the note or notes evidencing the loan; (f) Deliver securities in accordance with the provisions of any agreement among the Fund, Chase and a broker-dealer registered under the Securities Exchange Act of 1934 (the "Exchange Act") and a member of The National Association of Securities Dealers, Inc. ("NASD"), relating to compliance with the rules of The Options Clearing Corporation and of any registered national securities exchange, or of any similar organization or organizations, regarding escrow or other arrangements in connection with transactions by the Funds; (g) Deliver securities in accordance with the provisions of any agreement among the Fund, Chase and a Futures Commission Merchant registered under the Commodity Exchange Act, relating to compliance with the rules of the Commodity Futures Trading Commission and/or any Contract Market, or any similar organization or organizations, regarding account deposits in connection with transactions by the Fund; (h) Deliver securities against payment or other consideration or written receipt therefore for transfer of securities into the name of the Fund or Chase or a nominee of either, or for exchange or securities for a different number of bonds, certificates, or other evidence, representing the same aggregate face amount or number of units bearing the same interest rate, maturity date and call provisions, if any; provided that, in any such case, the new securities are to be delivered to Chase; (i) Exchange securities in temporary form for securities in definitive form; (j) Surrender, in connection with their exercise, warrants, rights or similar securities, provided that in each case, the new securities and cash, if any, are to be delivered to Chase; (k) Deliver securities upon receipt of payment in connection with any repurchase agreement related to such securities entered into by the Fund; and (l) Deliver securities pursuant to any other proper corporate purpose, but only upon receipt of, in addition to Proper Instructions, a certified copy of a resolution of the Board of Trustees or of the Executive Committee signed by an officer of the Funds and certified by the Secretary or an Assistant Secretary, specifying the securities to be delivered, setting forth the purpose for which such delivery is to be made, declaring such purpose to be a proper corporate purpose, and naming the person or persons to whom delivery of such securities shall be made. 13. Purchase of Securities. Promptly after each purchase of securities, options, futures contracts or options on futures contracts by the investment advisor, the 11 Fund shall deliver to Chase (as Custodian) Proper Instructions specifying with respect to each such purchase: (a) the name of the issuer and the title of the securities, (b) the number of shares of the principal amount purchased and accrued interest, if any, (c) the dates of purchase and settlement, (d) the purchase price per unit, (e) the total amount payable upon such purchase, (f) the name of the person from whom or the broker through whom the purchase was made and (g) the Fund name. Chase shall upon receipt of securities purchased by or for the Fund registered in the name of the Fund or in the name of a nominee of Chase or of the Fund or in proper form for transfer or upon receipt of evidence of title to options, futures contracts or options on futures contracts purchased by the Fund, pay out of the moneys held for the account of the Fund the total amount payable to the person from whom or the broker through whom the purchase was made, provided that the same conforms to the total amount payable as set forth in such Proper Instructions. Except as specifically stated otherwise in this Agreement, in any and every case where payment for purchase of securities for the account of the Fund is made by Chase in advance of receipt of the securities purchased in the absence of specific written instructions from the Fund to so pay in advance, Chase shall be absolutely liable to the Fund for such securities to the same extent as if the securities had been received by Chase. 14. Sale of Securities. Promptly after each sale of securities by the Fund at the instruction of the investment advisor, the Fund shall deliver to Chase (as Custodian) Proper Instructions, specifying with respect to each such sale; (a) the name of the issuer and the title of the security, (b) the number of shares or principal amount sold, and accrued interest, if any, (c) the date of sale, (d) the sale price per unit, (e) the total amount payable to the Fund upon such sale, (f) the name of the broker through whom or the person to whom the sale was made and (g) the Fund name. Chase shall deliver the securities upon receipt of the total amount payable to the Fund upon such sale, provided that the same conforms to the total amount payable as set forth in such Proper Instructions. Subject to the foregoing, Chase may accept payment in such form as shall be satisfactory to it, and may deliver securities and arrange for payment in accordance with the customs prevailing among dealers in securities. 15. Not in Use. 16. Records. Chase shall preserve the books and records relating to the Fund's securities for the period required by Rule31a-2 of the 1940 Act. The Fund, or the Fund's authorized representative, shall have access to such books and records at all times during Chase's normal business hours. Upon reasonable request of the Fund and at the Fund's expense, copies of any such books and records shall be provided by Chase to the Fund or the Fund's authorized representative. 12 17. Cooperation with Accountants. Chase shall cooperate with the Fund's independent certified public accountants and shall take all reasonable action in the performance of its obligations under this Agreement to assure that the necessary information is made available to such accountants for the expression of their unqualified opinion, including but not limited to the opinion included in the Fund's Form N-1A, Form N-SAR and other reports to the Securities and Exchange Commission and with respect to any other requirement of such Commission. 18. Reports to Fund by Independent Public Accountants. Chase shall provide the Fund, at such times as the Fund may reasonably require, with reports by independent public accountants on the accounting system, internal accounting control and procedures for safeguarding securities, futures contracts and options on futures contracts, including securities deposited and/or maintained in a Securities Depository or Book Entry System, relating to the services provided by Chase under this Agreement; such reports, shall be of sufficient scope and in sufficient detail, as may reasonably be required by the Fund to provide reasonable assurance that any material inadequacies would be disclosed by such examination, and, if there are no such inadequacies, the reports shall so state. 19. Confidentiality. Chase agrees on behalf of itself and its employees to treat confidentially and as the proprietary information of the Fund all information relative to the Fund's assets held under this Agreement, and not to use such information for any purpose other than performance of its responsibilities and duties hereunder, except after prior notification to and approval in writing by the Fund, which approval shall not be unreasonably withheld and may not be withheld where Chase may be exposed to civil or criminal contempt proceedings for failure to comply, when requested to divulge such information by duly constituted authorities, or when so requested by the Fund. 20. Equipment Failures. In the event of equipment failures beyond Chase's control, Chase shall, at no additional expense to the Fund, take reasonable steps to minimize service interruptions but shall not have liability with respect thereto. Chase shall maintain a disaster recovery program, that includes back-up systems, reasonably designed to minimize the interruption of custody service to clients. 21. Right to Receive Advice. (a) Advice of Fund. If Chase shall be in doubt as to any action to be taken or omitted by it, it may request, and shall receive, from the Fund clarification or advice. (b) Advice of Counsel. If Chase shall be in doubt as to any question of law involved in any action to be taken or omitted by Chase, it may request advice at its own 13 cost from counsel of its own choosing (who may be counsel for the Fund or Chase, at the option of Chase). (c) Conflicting Advice. In case of conflict between directions or advice received by Chase pursuant to sub-paragraph (a) of this paragraph and advice received by Chase pursuant to subparagraph (b) of this paragraph, Chase shall be entitled to rely on and follow the advice received pursuant to the latter provision alone. (d) Protection of Chase. Chase shall be protected in any action or inaction which it takes or omits to take in reliance on any directions or advice received pursuant to subparagraphs (a) or (b) of this section which Chase, after receipt of any such directions or advice, in good faith believes to be consistent with such directions or advice. However, nothing in this paragraph shall be construed as imposing upon Chase any obligation (i) to seek such directions or advice, or (ii) to act in accordance with such directions or advice when received, unless, under the terms of another provision of this Agreement, the same is a condition to Chase's properly taking or omitting to take such action. Nothing in this subsection shall excuse Chase when an action or omission on the part of Chase constitutes willful misfeasance, bad faith, negligence or reckless disregard by Chase of its duties under this Agreement. 22. Not in Use. 23. Compensation. As compensation for the services rendered by Chase during the term of this Agreement, the Fund will pay to Chase, in addition to reimbursement of its out-of-pocket expenses, monthly fees as outlined in Exhibit A. 24. Indemnification; Limitation of Liability. (a) The Fund, as sole owner of the Property, agrees to indemnify and hold Chase and Chase's directors, officers, agents and employees (collectively the "Indemnitees") harmless from and against any and all claims, liabilities, losses, damages, fines, penalties, and expenses, including out-of- pocket and incidental expenses and legal fees ("Losses") that may be imposed on, incurred by, or asserted against, the Indemnitees or any of them for following any instructions or other directions upon which Chase is authorized to rely pursuant to the terms of this Agreement. (b) In addition to and not in limitation of paragraph (a) immediately above, the Fund also agrees to indemnify and hold the Indemnitees and each of them harmless from and against any and all Losses that may be imposed on, incurred by, or asserted against, the Indemnitees or any of them in connection with or arising out of Chase's performance under this Agreement, provided the Indemnitees have not acted with negligence or bad faith or engaged in willful misconduct. 14 (c) Chase shall indemnify and hold the Fund harmless from and against any and all Losses, but excluding attorneys' fees and expenses, arising out of or attributable to Chase's breach of any material terms of this Agreement or Chase's bad faith, negligence or willful misconduct; provided the Fund in respect of such Losses, has not acted in bad faith or with negligence or engaged in willful misconduct. (d) Anything in this Agreement to the contrary notwithstanding in no event shall Chase be liable for incidental, indirect, special, or consequential losses or damages of any kind whatsoever, even if Chase is advised of the likelihood of any such loss or damage and regardless of the form of action in which any such loss or damage may be claimed. 25. Responsibility of Chase. In the performance of its duties hereunder, Chase shall be obligated to exercise care and diligence and to act in good faith to insure the accuracy and completeness of all services performed under this Agreement. Chase shall be responsible for its own negligent failure or that of any subcustodian it shall appoint to perform its duties under this Agreement. Chase shall not be liable for any act or omission which does not constitute willful misconduct, bad faith, or negligence on the part of Chase or such subcustodian or reckless disregard of such duties, obligations and responsibilities. Chase shall not be under any duty or obligation to inquire into and shall not be liable for or in respect of (a) the validity or invalidity or authority or lack thereof of any advice, direction, notice or other instrument which conforms to the applicable requirements of this Agreement, if any, and which Chase believes to be genuine, (b) the validity of the issue of any securities purchased or sold by the Fund, the legality of the purchase or sale thereof or the propriety of the amount paid or received therefor, (c) the legality of the issue or sale of any Shares of the Fund, or the sufficiency of the amount to be received therefore, (d) the legality of the redemption of any Shares of the Fund, or the propriety of the amount to be paid therefor, (e) the legality of the declaration or payment of any dividend or distribution on Shares, or (f) delays or errors or loss of data occurring by reason of circumstances beyond Chase's control, including acts of civil or military authority, national emergencies, labor difficulties, fire, mechanical breakdown (except as provided in Section 20), flood or catastrophe, acts of God, insurrection, war, riots, or failure of the mail, transportation, communication or power supply. 26. Collection of Income. Chase shall collect on a timely basis all income and other payments with respect to registered securities held hereunder to which the Fund shall be entitled either by law or pursuant to custom in the securities business, and shall collect on a timely basis all income and other payments with respect to bearer securities if, on the date of payment by the issuer, such securities are held by Chase or its agent thereof and shall credit such income, as collected, to the Fund's custodian account. Without limiting the generality of the foregoing, Chase shall detach and present for payment all coupons and other income items requiring presentation as and when they 15 become due and shall collect interest when due on securities held hereunder. Income due the Fund on securities loaned pursuant to the provisions of Section 9 shall be the responsibility of the Fund. Chase will have no duty or responsibility in connection therewith, other than to provide the Fund with such information or data as may be necessary to assist the Fund in arranging for the timely delivery to the Custodian of the income to which the Fund is properly entitled. 27. Ownership Certificates for Tax Purposes. Chase shall execute ownership and other certificates and affidavits for all federal and state tax purposes in connection with receipt of income or other payments with respect to securities of the Fund held by it and in connection with transfers of securities. 28. Effective Period; Termination and Amendment. This Agreement shall become effective as of its execution, shall continue in full force and effect until terminated as hereinafter provided, may be amended at any time by mutual agreement of the parties hereto and may be terminated by either party by an instrument in writing delivered or mailed, postage prepaid to the other party, such termination to take effect not sooner than thirty (30) days after the date of such delivery or mailing. Upon termination of the Agreement, the Fund shall pay to Chase such compensation as may be due as of the date of such termination and shall likewise reimburse Chase for its costs, expenses and disbursements. 29. Successor Custodian If a successor custodian shall be appointed by the Board of Trustees of the Fund, Chase shall, upon termination, deliver to such successor custodian at the office of the custodian, duly endorsed and in the form for transfer, all securities then held by it hereunder and shall transfer to an account of the successor custodian all of the Fund's securities held in a Securities Depository or Book Entry System. If no such successor custodian shall be appointed, Chase shall, in like manner, upon receipt of a certified copy of a vote of the Board of Trustees of the Fund, deliver at the office of the Custodian and transfer such securities, funds and other properties in accordance with such vote. In the event that no written order designating a successor custodian or certified copy of a vote of the Board of Trustees shall have been delivered to Chase on or before the date when such termination shall be come effective, then Chase shall have the right to deliver to a bank or trust company, which is a "bank" as defined in the 1940 Act, doing business in New York, New York, of its own selection, having an aggregate capital, surplus, and undivided profits, as shown by its last published report, of not less than $25,000,000, all securities, funds and other properties held by Chase and all instruments held by Chase relative thereto and all other property held by it under this Agreement and to transfer to an account of such successor custodian all of the Fund's securities held in any Securities Depository or Book Entry System. Thereafter, such bank or trust company shall be the successor of the Custodian under this Agreement. 16 In the event that securities, funds and other properties remain in the possession of Chase after the date of termination hereof owing to failure of the Fund to procure the certified copy of the vote referred to or of the Board of Trustees to appoint a successor custodian, Chase's sole obligation to the Fund shall be to safekeep the Fund's assets until they are transferred as directed by the Fund and Chase shall be entitled to fair compensation for its services during such period as Chase retains possession of such securities, funds and other properties and the provisions of this Agreement relating to the Chase's rights shall remain in full force and effect. 30. Notices. All notices and other communications (collectively referred to as "Notice" or "Notices") in this section hereunder shall be in writing and shall be first sent by telegram, cable, telex, or facsimile sending device and thereafter by overnight mail for delivery on the next business day. Notices shall be addressed (a) if to Chase, at Chase's address, 4 New York Plaza, 3rd floor, New York, New York 10004, attention Mutual Fund Custody, facsimile number (212) 623-8997; (b) if to the Fund, at the address of the Fund Attention: Portfolio Manager, facsimile number (312) 917-8211; or (c) if to neither of the foregoing, at such other address as shall have been notified to the sender of any such Notice or other communication. Notices sent by overnight mail shall be deemed to have been given the next business day. Notices sent by messenger shall be deemed to have been given on the day delivered, and notices sent by confirming telegram, cable, telex or facsimile sending device shall be deemed to have been given immediately. All postage, cable, telegram, telex and facsimile sending device charges arising from the sending of a Notice hereunder shall be paid by the sender. 31 Further Actions. Each party agrees to perform such further acts and execute such further documents as are necessary to effectuate the purposes hereof. 32. Amendments. This Agreement or any part hereof may be changed or waived only by an instrument in writing signed by the party against which enforcement of such change or waiver is sought. 33. Miscellaneous. This Agreement embodies the entire Agreement and understanding between the parties hereto, and supersedes all prior agreements and understandings relating to the subject matter hereof. The captions in this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect. This Agreement shall be deemed to be a contract made in New York and governed by New York law. If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby. This Agreement shall be binding upon and shall insure to the benefit of the parties hereto and their respective successors. 17 34. The Fund's Declaration of Trust is on file with the Secretary of the Commonwealth of Massachusetts. This agreement is executed on behalf of the Fund by the Fund's officers and not individually and the obligations imposed upon the Fund by this Agreement are not binding upon any of the Fund's Trustees, officers or shareholders individually but are binding only upon the assets and property of the Fund. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their officers designated below as of the day and year first above written. THE CHASE MANHATTAN BANK Attest: ___________________________ By:___________________________ NUVEEN CALIFORNIA DIVIDEND ADVANTAGE MUNICIPAL FUND 2 Attest: __________________________ By:___________________________ [TITLE] 18 EX-99.K.1 8 0008.txt FORM OF SHAREHOLDER TRANSFER AGENCY AGREEMENT SHAREHOLDER TRANSFER AGENCY AGREEMENT This Agreement is made this _____ day of March, 2001 by and between The Chase Manhattan Bank ("Chase") a banking corporation organized under the laws of the State of New York having an office at 4 New York Plaza, New York, New York 10004, and Nuveen California Dividend Advantage Municipal Fund 2, a closed-end investment company organized as a business trust under the laws of the Commonwealth of Massachusetts (the "Fund"). I SERVICES -------- Commencing on the date first herein-above written and in accordance with procedures established from time to time by the Fund and Chase, Chase shall perform the (i) shareholder account maintenance services, (ii) mailing and reporting services, (iii) dividend and distribution payment and reinvestment services and (iv) recordkeeping services (collectively, the "Standard Services") in connection with the Fund's shares of common shares, par value $.01 per share (the "Shares"), as more fully described herein. A. Account Maintenance Services. Chase shall perform transfer agent, ---------------------------- registrar and other shareholder account maintenance services in connection with the Shares. Such services are composed of (i) registering Share issuance, redemption and transfers on the Fund's records of the holders of Shares (the "Shareholders") upon receipt of instructions from, in the case of issuance and redemption, the Fund, and in the case of a transfer, the transferor and documentation in proper form to effect a transfer of Shares; (ii) canceling the certificates representing such Shares, if any, and if so requested, countersigning, registering, issuing and mailing by insured first class mail new certificates for the same or a smaller whole number of Shares, (iii) issuing replacement certificates in lieu of certificates which have been lost, stolen or destroyed upon receipt of a properly executed affidavit with respect top such loss, theft or destruction and a lost certificate bond in form satisfactory to Chase; (iv) combining certificates into larger denominations; (v) maintaining stop transfer orders, including placing and removing the same; (vi) processing new Shareholder accounts; (vii) posting address changes; and (viii) researching and responding to Shareholder inquiries. Shares will be transferred and new certificates issued in transfer upon surrender of the old certificates in form deemed by Chase to be properly endorsed for transfer accompanied by delivery of such documents, certifications and opinions Chase may deem necessary to evidence the authority of the person making the transfer and payment of any applicable stock transfer tax. Chase reserves the right to refuse to transfer Shares until it is satisfied that the endorsement or signature on any document is valid and genuine, and for that purpose it will require a signature guarantee by a member or participant in the Securities Transfer Agents Medallion Program or such other guarantor previously approved by Chase. Chase shall _______________________________________ /1/ All references to certificates will include book entry services. 1 not be required to effect any transfer unless and until it has received the approvals, documents, certifications and opinions provided for herein. Chase's sole responsibility in connection with any redemption of Shares shall be to register the same on the Fund's records upon receipt of instruction from the Fund. B. Mailing. Mailing services provided to the Fund shall consist of (i) ------- annual preparation of a list of Shareholders owning Shares, (ii) semi-annual distribution of a report to Shareholders, (iii) mailing proxies, (iv) receiving and tabulating proxies and mailing Shareholder reports to current Shareholders, (v) certifying Share vote totals, (vi) assisting with the annual meeting of Shareholders , if any, and (vii) upon request of the Fund, mailing to each Shareholder such other information relating to the Fund as the Fund may reasonably request. C. Dividend and Distribution Payment Services. ------------------------------------------ (1) Upon the declaration of any dividend or distribution payable either in Shares or cash, the Fund shall notify Chase in writing setting forth the date of payment (the "Payment Date") of such dividend or distribution, the record date as of which Shareholders entitled to payment thereof shall be determined (the "Record Date"), and the amount payable per Share to Shareholders of record as of the Record Date. In the case of dividends at regular intervals, such notification may be a standing notification setting forth the method of calculating such dividends and the Fund or its agent shall advise Chase of the amount of such dividend at the appropriate intervals. Chase shall notify the Fund and the entity then acting as the custodian (which entity may be an affiliate of Chase) for the portfolio securities and cash of the Fund (the "Custodian") of the amount of cash required to pay the dividend or distribution so that the Fund may instruct the custodian to make sufficient funds available on or before the Payment Date. Upon receipt by Chase or a drawee bank selected by Chase of such funds from the Custodian, Chase shall prepare and mail to Shareholders, who are not participants in the Dividend Reinvestment Plan, at their addresses as they appear on the records maintained by Chase or pursuant to any written order of a Shareholder on file with Chase, checks representing any dividend or distributions to which they are entitled, and an accompanying distribution statement. (2) In addition to the forgoing, dividend and distribution payment services are composed of (i) inserting any enclosure supplied by the Fund with each dividend or distribution check; (ii) replacing lost dividend checks; (iii) providing photocopies of canceled checks when requested by Shareholders; (iv) reconciling paid and outstanding checks; (v) coding as "undeliverable" certain accounts to suppress mailing of dividend checks to same; (vi) processing and record keeping of accumulated uncashed dividends; (vii) furnishing requested dividend and distribution information to Shareholders; and (viii) withholding from such payments any taxes required to be withheld by Chase under, and remitting the same in accordance with, applicable provisions of the Internal Revenue Code. 2 D. Dividend reinvestment Plan Services. Chase will act as agent for ----------------------------------- shareholders under the Dividend Reinvestment Plan, a copy of which is attached hereto as Exhibit D. E. Recordkeeping Services. ---------------------- (1) Chase shall keep records relating to the Standard Services to be performed hereunder, in such form and manner as it may deem advisable. To the extent required by Section 31 of the Investment Company Act of 1940, as amended, and the rules promulgated thereunder, Chase agrees that all such records prepared or maintained by Chase relating to the service to be performed by Chase hereunder are the property of the Fund and will be preserved for the periods prescribed under Rule 31a-2 of said rules and made available in accordance with such section and rules. Chase shall forthwith upon the Fund's demand surrender promptly to the Fund and cease to retain in its files those records and documents created and maintained by Chase pursuant to this Agreement. (2) Chase and the Fund agree that all books, records, information and data pertaining to the business of the other party which are exchanged or received pursuant to the negotiation or the carrying out of this Agreement shall remain confidential, and shall not be voluntarily disclosed to any other person, except as may be required by law. (3) In case of any requests or demands for the inspection of the Shareholder records of the Fund, Chase will endeavor to notify the Fund and to secure instructions from an authorized officer of the Fund as to such inspection. Chase reserves the right, however, to exhibit the Shareholder records to any person whenever it is advised by its counsel that it may be held liable for the failure to exhibit the Shareholder records to such person. II SHARE CERTIFICATES ------------------ The Fund shall supply Chase with sufficient blank Share certificates. Such blank Share certificates shall be properly signed, manually or by facsimile signature, by duly authorized officers of the Fund. Notwithstanding the death, resignation or removal of any officer of the Fund authorized to sign such share certificates, Chase may continue to countersign certificates which bear the manual or facsimile signature of such officer until otherwise directed by the Fund. Chase shall establish and maintain facilities and procedures reasonably acceptable to the Fund for the safekeeping of Shares certificates and facsimile signature imprinting devices, if any, and for the preparation or use and for keeping account of such certificates and devices. Chase agrees to establish and maintain facilities and procedures that are reasonably acceptable to the Fund and Chase for safekeeping of stock certificates, check forms and facsimile signature imprinting devices, if any, and for the preparation or use, and for keeping account of, such certificates, forms and devices. 3 III FEES AND EXPENSES ----------------- For the services to be performed by Chase pursuant to this Agreement, the Fund shall pay to Chase all fees and expenses described herein: A. Shareholder Services Fee. The Fund shall pay Chase a service fee (the ------------------------ "Shareholder Service Fee") in the amount set forth in Exhibit B hereto. The Shareholder Service Fee is payable quarterly and shall be prorated for any period less than a full calendar quarter. B. Out-of-Pocket Expenses. The Fund agrees to reimburse Chase for any ---------------------- and all out-of-pocket expenses, including, without limiting the preceding, the expenses described and listed in Exhibit B. C. Additional Services. The Fund may request additional processing, ------------------- special reports, or other additional services. The Fund shall submit such requests for additional services in writing together with such specifications as may be reasonably required by Chase, and Chase shall respond to such requests in the form of a price quotation. The Fund's written acceptance of the quotation must be received prior to implementation of such request. D. Terms of Payment. All fees, out-of-pocket expenses, or additional ---------------- charges of Chase shall be billed on a quarterly basis and shall be due and payable within 15 days after receipt of the invoice. Chase will render, after the close of each quarter in which services have been furnished, a statement reflecting all of the charges for such quarter. E. Taxes. In addition to any other charges specified hereunder, the Fund ----- shall pay any sales tax, use tax, transfer tax, excise tax, tariff, duty, or any other tax or payment in lieu thereof imposed by any governmental authority or agency as a direct result of the provision by Chase of goods or services hereunder, except for taxes based on Chase's net income. IV REPRESENTATIONS AND WARRANTIES ------------------------------ A. Chase. Chase represents and warrants to the Fund that: (1) It is a duly organized and existing corporation having the powers of a trust company under the laws of the State of New York; (2) It is empowered under applicable laws and by its charter and by-laws to enter into and perform this Agreement; (3) All requisite corporate proceedings have been taken to authorize it to enter into and perform this Agreement; 4 (4) Its entering into this Agreement shall not cause a material breach or be in material conflict with any other agreement or obligation of Chase; and (5) It has and will continue to have access to the necessary facilities, equipment and personnel to perform its duties and obligations under this Agreement. B. The Fund. The Fund represents and warrants to Chase that: -------- (1) It is a business trust duly organized and existing and in good standing under the laws of the Commonwealth of Massachusetts; (2) It is empowered under applicable laws and by its Declaration of Trust, its by-laws, and the Resolutions of the Board of Trustees (the "Organization Documents") to enter into and perform this Agreement; (3) All requisite proceedings have been taken to authorize it to enter into and perform this Agreement; (4) Its entering into this Agreement shall not cause a material breach or be in material conflict with any other agreement or obligation of the Fund; and (5) The Fund is validly registered as a non-diversified, closed-end management investment company under the Investment Company Act of 1940, as amended, and the issuance of Shares to subscribers at closing will be in compliance with applicable securities laws or qualify for exemption therefrom. V DOCUMENTS FURNISHED BY THE FUND ---------------------------------- A. Initially Furnished Documents. The Fund has furnished to Chase the ----------------------------- following documents: (1) A copy of the Organization Documents of the Fund, attached hereto as Exhibit A; (2) Copies of the Fund's notice of registration on Form N-8A attached hereto as Exhibit C; (3) A certificate signed by an officer of the Fund specifying: the number of authorized Shares, the number of such authorized Shares issued and currently outstanding, and the names, Share amounts and other applicable information required for issuance of Shares to subscribers; and (4) An opinion of counsel to the Fund with respect to the validity of the authorized and outstanding Shares and whether such Shares are fully paid and non-assessable. B. Prospectively Furnished Documents. The Fund shall furnish the following --------------------------------- documents upon request by Chase: (1) Copies of all amendments to the Organization Documents of the Fund; (2) Copies of all subsequent amendments to the Fund's registration statement; and (3) Such other certificates, documents and opinions as Chase shall deem to be appropriate or necessary for the proper performance of its duties hereunder. 5 VI INDEMNIFICATION --------------- A. Fund Indemnification Obligation. Chase shall not be responsible for, ------------------------------- and the Fund shall indemnify and hold Chase harmless from, any and all losses, damages, costs, charges, reasonable attorneys' fees, payments, expenses and liability arising out of or attributable to: (1) All actions of Chase or its agents or subcontractors required to be taken pursuant to this Agreement unless such actions are taken in bad faith or with negligence or willful misconduct; (2) The Fund's refusal or failure to comply with the terms of this Agreement, or the Fund's lack of good faith, negligence or willful misconduct, or the breach of any representation or warranty of the Fund hereunder; (3) The reliance on or use by Chase or its agents or subcontractors of information, records or documents which are received by Chase or its agents or subcontractors and furnished to it by or on behalf of the Fund, and which have been prepared or maintained by the Fund or any other person or firm (other than Chase or its agents or subcontractors) on behalf of the Fund; (4) The reliance on, or the carrying out by Chase or its agents or subcontractors of, any instructions or requests of the Fund which are reasonably believed to bear the proper manual or facsimile signatures of the officers of the Fund; and (5) The offer or sale of Shares by the Fund in violation of any requirement under the federal securities laws or regulations or the securities laws or regulations of any state, or in violation of any stop order or other determination or ruling by any federal agency or any state agency with respect to the offer or sale of such Shares in such state. B. Chase Indemnification Obligation. Chase shall indemnify and hold the -------------------------------- Fund harmless from and against any and all losses, damages, costs, and charges, but excluding attorneys fee, payments and expenses, arising out of or attributable to Chase's material breach of this Agreement, or Chase's bad faith, negligence or willful misconduct C. Claims. Upon the assertion of a claim for which either Chase or the ------ Fund may be required to indemnify the other, the party seeking indemnification shall promptly notify the other party of such assertion and shall keep the other party advised with respect to all developments concerning such claim, but the failure to give such notice shall not affect rights to indemnification hereunder except to the extent that the indemnifying party demonstrates actual damage caused by such failure. The party who may be required to indemnify shall have the option to participate with the party seeking indemnification in the defense of such claim but not to control such defense. The party seeking indemnification shall in no case confess any claim or make any compromise in any case in which the other party may be required to indemnify it, except with the indemnifying party's prior written consent, which consent shall not be withheld unreasonably. 6 D. Chase's Limitation of Liability. Anything in this agreement to the ------------------------------- contrary notwithstanding, in no event shall Chase be liable for special, indirect, or consequential losses or damages of any kind whatsoever whether or not Chase has been advised as to the possibility of such losses or damages and regardless of the form of action in which any such claim for losses or damages may be made. E. Force Majeure. In the event either Chase or the Fund is unable to ------------- perform its obligations under the terms of this Agreement because of acts of God, strikes, interruption of electrical power or other utilities, equipment or transmission failure or damage reasonably beyond its control, or other causes reasonably beyond its control, such party shall not be liable to the other for any damages resulting from such failure to perform or otherwise from such causes. Chase shall use all reasonable efforts to minimize the likelihood of all damage, loss of data, delays and errors resulting from uncontrollable events, and should such damage, loss of data, delays or errors occur, Chase shall use its reasonable efforts to mitigate the effects of such occurrence. VII TERM AND TERMINATION -------------------- A. Notice. This Agreement shall remain in effect until terminated by any ------ party, without penalty, upon 90 days' prior written notice. B. Breach. This Agreement may be terminated by any non-breaching party if ------ a party is in material breach of this Agreement. In order to so terminate this Agreement, written notice shall be given to an officer of the party in breach of the non-breaching party's intention to terminate due to a failure to comply with, or breach of, a material term or condition of this Agreement. Said written notice shall specifically state the material term or condition claimed to be breached and shall provide at least 15 days in which to correct such alleged breach. If such breach is not corrected in the time period allowed, then any non-breaching may terminate this Agreement immediately, upon written notice to the other parties. C. Expenses. Should this Agreement be terminated, all out-of-pocket -------- expenses reasonably incurred by Chase in connection with the movement of records and materials to its successor or to the Fund shall be borne by the Fund. VIII USE OF CHASE NAME ----------------- The Fund shall not use Chase's name in any offering material, Shareholder report, advertisement or other material relating to the Fund, other than for the purpose of merely identifying and describing the functions of Chase hereunder, in a manner not approved by Chase in writing prior to such use; provided, however, that Chase shall consent to all uses of its name required by the Securities and Exchange Commission, any state securities commission, or any federal or state regulatory authority; and provided, further, that in no case will such approval be unreasonably withheld. 7 IX ASSIGNMENT ---------- Except as hereunder provided, neither this Agreement nor any rights or obligations hereunder may be assigned by any party without the written consent of the other parties. This Agreement shall inure to the benefit of and be binding upon the parties and their respective permitted successors and assigns. Chase may, with the Fund's consent, subcontract for the performance hereof with any subsidiary or other affiliate of Chase, and may, with the Fund's consent, subcontract for the performance hereof with third parties other than a subsidiary or affiliate of Chase; provided, however, that Chase shall be as fully responsible to the Fund for the acts or omissions of any subcontractor as it is for its own acts and omissions and shall be responsible for its choice of subcontractor. X CONFIDENTIALITY --------------- The information contained in this Agreement is confidential and proprietary in nature. By receiving this Agreement, the Fund agrees that none of its trustees, officers, employees, or agents, without the prior written consent of Chase, will divulge, furnish or make accessible to any third party, except as required by law or any regulatory authority or as permitted by the next sentence, any part of this Agreement or information in connection therewith which has been or may be made available to it. The Fund agrees that it will limit access to the Agreement and such information to only those officers or employees with responsibilities for analyzing the Agreement, to its counsel, to such independent consultants hired expressly for the purpose of assisting in such analysis, and to governmental agencies. In addition, the Fund agrees that any person to whom such information is properly disclosed shall be informed of the confidential nature of the Agreement and the information relating thereto, and shall be directed to treat the same appropriately. The terms set forth in this Article X shall continue without termination. XI. MISCELLANEOUS ------------- This Agreement shall be governed by and construed in accordance with the laws of the State of New York. The captions in this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which taken together shall constitute the entire Agreement between the parties hereto and supersede [text continued on next page] 8 any prior oral or written Agreement with respect to the subject matter hereof. This Agreement may not be amended or modified in any manner except by written instrument executed by both parties. The Fund's Declaration of Trust is on file with the Secretary of the Commonwealth of Massachusetts. This agreement is executed on behalf of the Fund by the Fund's officers as officers and not individually and the obligations imposed upon the Fund by this agreement are not binding upon any of the Fund's Trustees, officers or shareholders individually but are binding only upon the assets and property of the Fund. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their officers thereunto duly authorized as of the date first above written. THE CHASE MANHATTAN BANK By _____________________ Name: Title: NUVEEN CALIFORNIA DIVIDEND ADVANTAGE MUNICIPAL FUND 2 By ___________________________ Name: Title: 9 EX-99.K.2 9 0009.txt EXPENSE REIMBURSEMENT AGREEMENT EXPENSE REIMBURSEMENT AGREEMENT ------------------------------- AGREEMENT made this 20/th/ day of February, 2001, by and between NUVEEN CALIFORNIA DIVIDEND ADVANTAGE MUNICIPAL FUND 2, a Massachusetts business trust (the "Fund"), and NUVEEN ADVISORY CORP., a Delaware corporation (the "Adviser"). W I T N E S S E T H ------------------- WHEREAS, the Fund and the Adviser have separately entered into an Investment Management Agreement of even date herewith (the "Management Agreement"); In consideration of the mutual covenants hereinafter contained, and in connection with the establishment and commencement of operations of the Fund, it is hereby agreed by and between the parties hereto as follows: 1. For the period from the commencement of the Fund's operations through March 31, 2001 and for the 12 month periods ending March 31 in each indicated year during the term of the Management Agreement (including any continuation done in accordance with Section 15(c) of the Investment Company Act of 1940), the Adviser agrees to reimburse expenses (including the management fee and other expenses) in the amounts determined by applying the following annual rates to the average daily net assets of the Fund:
Period Ending Period Ending March 31, Reimbursement March 31, Reimbursement --------- ------------- --------- ------------- 2001* .30% 2002 .30% 2007 .25% 2003 .30% 2008 .20% 2004 .30% 2009 .15% 2005 .30% 2010 .10% 2006 .30% 2011 .05%
*From the commencement of operations. 2. To effect the expense reimbursement provided for in this Agreement, the Fund may offset the appropriate amount of the reimbursement contemplated hereunder against the management fee payable under the Management Agreement. 3. This Agreement, and the Adviser's obligation to so reimburse expenses hereunder, shall terminate on the earlier of (a) March 31, 2011 or (b) termination of the Management Agreement. 4. Except as provided in paragraph 3, above, this Agreement may be terminated only by the vote of (a) the Board of Trustees of the Fund, including the vote of the members of the Board who are not "interested persons" within the meaning of the Investment Company Act of 1940, and (b) a majority of the outstanding voting securities of the Fund. 5. If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule, or otherwise, the remainder shall not be thereby affected. 2 6. The Fund's Declaration of Trust is on file with the Secretary of the Commonwealth of Massachusetts. This Agreement is executed on behalf of the Fund by the Fund's officers as officers and not individually and the obligations imposed upon the Fund by this Agreement are not binding upon any of the Fund's Trustees, officers or shareholders individually but are binding only upon the assets and property of the Fund. IN WITNESS WHEREOF, the Fund and the Adviser have caused this Agreement to be executed on the day and year above written. NUVEEN CALIFORNIA DIVIDEND ADVANTAGE MUNICIPAL FUND 2 by: /s/ Gifford R. Zimmerman ---------------------------------------- Vice President Attest: /s/ Virginia L. O'Neal ------------------------- Assistant Secretary NUVEEN ADVISORY CORP. by: /s/ William M. Fitzgerald ---------------------------------------- Vice President Attest: /s/ Nicholas Dalmaso ------------------------- Assistant Secretary 3 EX-99.L.3 10 0010.txt CONSENT OF BELL, BOYD & LLOYD BELL, BOYD & LLOYD LLC Three First National Plaza 70 West Madison Street, Suite 3300 Chicago, Illinois 60602-4207 312 372-1121 Fax 312 372-2098 March 21, 2001 As counsel for Nuveen California Dividend Advantage Municipal Fund 2 (the "Registrant"), we consent to the incorporation by reference of our opinion, filed with pre-effective amendment no. 2 to the Registrant's registration statement on Form N-2 (File Nos. 333-49242 and 811-10197) on February 22, 2001. In giving this consent we do not admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act of 1933. Very truly yours, /s/ Bell, Boyd & Lloyd LLC EX-99.L.4 11 0011.txt CONSENT OF BINGHAM DANA LLP BINGHAM DANA LLP 150 Federal Street Boston, Massachusetts 02110-1726 617 951-8000 Fax 617-951-8736 March 21, 2001 As special Massachusetts counsel for Nuveen California Dividend Advantage Municipal Fund 2 (the "Registrant"), we consent to the incorporation by reference of our opinion, filed with pre-effective amendment no. 2 to the Registrant's registration statement on Form N-2 on February 22, 2001. In giving this consent we do not admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act of 1933. Very truly yours, /s/ BINGHAM DANA LLP EX-99.N 12 0012.txt CONSENT OF INDEPENDENT AUDITORS CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated March 6, 2001 in the Registration Statement (Form N-2) and related prospectus and statement of additional information of the Nuveen California Dividend Advantage Municipal Fund 2 filed with the Securities and Exchange Commission in the Pre-Effective Amendment No. 3 to the Registration Statement under the Securities Act of 1933 (File No. 333-49242) and in this Amendment No. 3 to the Registration Statement under the Investment Company Act of 1940 (File No. 811-10197). /s/ ERNST & YOUNG LLP Chicago, Illinois March 21, 2001 EX-99.P 13 0013.txt FORM OF SUBSCRIPTION AGREEMENT NUVEEN CALIFORNIA DIVIDEND ADVANTAGE MUNICIPAL FUND 2 Subscription Agreement ---------------------- This Agreement made this 5/th/ day of March, 2001 by and between Nuveen California Dividend Advantage Municipal Fund 2, a Massachusetts business trust (the "Fund"), and Nuveen Advisory Corp., a Delaware corporation (the "Subscriber"); WITNESSETH: WHEREAS, the Fund has been formed for the purposes of carrying on business as a closed-end non-diversified management investment company; and WHEREAS, the Subscriber has been selected by the Fund's Board of Trustees to serve as investment adviser to the Fund; and WHEREAS, the Subscriber wishes to subscribe for and purchase, and the Fund wishes to sell to the Subscriber, 7,000 common shares for a purchase price of $14.325 per share; NOW THEREFORE, IT IS AGREED: 1. The Subscriber subscribes for and agrees to purchase from the Fund 7,000 common shares for a purchase price of $14.325 per share. Subscriber agrees to make payment for these shares at such time as demand for payment may be made by an officer of the Fund. 2. The Fund agrees to issue and sell said shares to Subscriber promptly upon its receipt of the purchase price. 3. To induce the Fund to accept its subscription and issue the shares subscribed for, the Subscriber represents that it is informed as follows: (a) That the shares being subscribed for have not been and will not be registered under the Securities Act of l933 ("Securities Act"); (b) That the shares will be sold by the Fund in reliance on an exemption from the registration requirements of the Securities Act; (c) That the Fund's reliance upon an exemption from the registration requirements of the Securities Act is predicated in part on the representations and agreements contained in this Subscription Agreement; 2 (d) That when issued, the shares will be "restricted securities" as defined in paragraph (a)(3) of Rule l44 of the General Rules and Regulations under the Securities Act ("Rule l44") and cannot be sold or transferred by Subscriber unless they are subsequently registered under the Securities Act or unless an exemption from such registration is available; (e) That there do not appear to be any exemptions from the registration provisions of the Securities Act available to the Subscriber for resale of the shares. In the future, certain exemptions may possibly become available, including an exemption for limited sales including an exemption for limited sales in accordance with the conditions of Rule l44. The Subscriber understands that a primary purpose of the information acknowledged in subparagraphs (a) through (e) above is to put it on notice as to restrictions on the transferability of the shares. 4. To further induce the Fund to accept its subscription and issue the shares subscribed for, the Subscriber: (a) Represents and warrants that the shares subscribed for are being and will be acquired for investment for its own account and not on behalf of any other person or persons and not with a view to, or for sale in connection with, any public distribution thereof; and (b) Agrees that any certificates representing the shares subscribed for may bear a legend substantially in the following form: The shares represented by this certificate have been acquired for investment and have not been registered under the Securities Act of l933 or any other federal or state securities law. These shares may not be offered for sale, sold or otherwise transferred unless registered under said securities laws or unless some exemption from registration is available. 5. This Subscription Agreement and all of its provisions shall be binding upon the legal representatives, heirs, successors and assigns of the parties hereto. 3 6. The Fund's Declaration of Trust is on file with the Secretary of the Commonwealth of Massachusetts. This Agreement is executed on behalf of the Fund by the Fund's officers as officers and not individually and the obligations imposed upon the Fund by this Agreement are not binding upon any of the Fund's Trustees, officers or shareholders individually but are binding only upon the assets and property of the Fund. IN WITNESS WHEREOF, this Subscription Agreement has been executed by the parties hereto as of the day and date first above written. NUVEEN CALIFORNIA DIVIDEND ADVANTAGE MUNICIPAL FUND 2 By: /s/ Gifford R. Zimmerman ------------------------------- Gifford R. Zimmerman NUVEEN ADVISORY CORP. By: /s/ William M. Fitzgerald ------------------------------- William M. Fitzgerald EX-99.S 14 0014.txt POWER OF ATTORNEY NUVEEN MISSOURI DIVIDEND ADVANTAGE MUNICIPAL FUND NUVEEN CALIFORNIA DIVIDEND ADVANTAGE MUNICIPAL FUND 2 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a trustee of the above- referenced organizations, hereby constitutes and appoints ALAN G. BERKSHIRE, LARRY W. MARTIN and GIFFORD R. ZIMMERMAN, and each of them (with full power to each of them to act alone) his true and lawful attorney-in-fact and agent, for him on his behalf and in Registration Statements on Form N-2 under the Securities Act of l933 and the Investment Company Act of l940, including any amendment or amendments thereto, with all exhibits, and any and all other documents required to be filed with any regulatory authority, federal or state, relating to the registration thereof, or the issuance of shares thereof, without limitation, granting unto said attorneys, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same as fully to all intents and purposes as he might or could do if personally present, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned trustee of the above-referenced organizations has hereunto set his hand this 2nd day of November, 2000. /s/ Timothy R. Schwertfeger --------------------------- Timothy R. Schwertfeger STATE OF ILLINOIS ) ---------------- )SS COUNTY OF COOK ) -------------- On this 2nd day of November, 2000, personally appeared before me, a Notary Public in and for said County and State, the person named above who is known to me to be the person whose name and signature is affixed to the foregoing Power of Attorney and who acknowledged the same to be his voluntary act and deed for the intent and purposes therein set forth. "OFFICIAL SEAL" Virginia L. Corcoran /s/ Virginia L. Corcoran Notary Public, State of Illinois ------------------------ My Commission Expires: 10/27/01 Notary Public NUVEEN MISSOURI DIVIDEND ADVANTAGE MUNICIPAL FUND NUVEEN CALIFORNIA DIVIDEND ADVANTAGE MUNICIPAL FUND 2 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a trustee of the above- referenced organizations, hereby constitutes and appoints TIMOTHY R. SCHWERTFEGER, ALAN G. BERKSHIRE, LARRY W. MARTIN and GIFFORD R. ZIMMERMAN, and each of them (with full power to each of them to act alone) his true and lawful attorney-in-fact and agent, for him on his behalf and in his name, place and stead, in any and all capacities, to sign and file one or more Registration Statements on Form N-2 under the Securities Act of l933 and the Investment Company Act of l940, including any amendment or amendments thereto, with all exhibits, and any and all other documents required to be filed with any regulatory authority, federal or state, relating to the registration thereof, or the issuance of shares thereof, without limitation, granting unto said attorneys, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same as fully to all intents and purposes as he might or could do if personally present, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned trustee of the above-referenced organization has hereunto set his hand this 2nd day of November, 2000. /s/ Robert P. Bremner --------------------- Robert P. Bremner STATE OF ILLINOIS ) ---------------- )SS COUNTY OF COOK ) -------------- On this 2nd day of November, 2000, personally appeared before me, a Notary Public in and for said County and State, the person named above who is known to me to be the person whose name and signature is affixed to the foregoing Power of Attorney and who acknowledged the same to be his voluntary act and deed for the intent and purposes therein set forth. "OFFICIAL SEAL" Virginia L. Corcoran /s/ Virginia L. Corcoran Notary Public, State of Illinois ------------------------ My Commission Expires: 10/27/01 Notary Public NUVEEN MISSOURI DIVIDEND ADVANTAGE MUNICIPAL FUND NUVEEN CALIFORNIA DIVIDEND ADVANTAGE MUNICIPAL FUND 2 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a trustee of the above- referenced organizations, hereby constitutes and appoints TIMOTHY R. SCHWERTFEGER, ALAN G. BERKSHIRE, LARRY W. MARTIN and GIFFORD R. ZIMMERMAN, and each of them (with full power to each of them to act alone) his true and lawful attorney-in-fact and agent, for him on his behalf and in his name, place and stead, in any and all capacities, to sign and file one or more Registration Statements on Form N-2 under the Securities Act of l933 and the Investment Company Act of l940, including any amendment or amendments thereto, with all exhibits, and any and all other documents required to be filed with any regulatory authority, federal or state, relating to the registration thereof, or the issuance of shares thereof, without limitation, granting unto said attorneys, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same as fully to all intents and purposes as he might or could do if personally present, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned trustee of the above-referenced organization has hereunto set his hand this 2nd day of November, 2000. /s/ Lawrence H. Brown --------------------- Lawrence H. Brown STATE OF ILLINOIS ) ---------------- )SS COUNTY OF COOK ) -------------- On this 2nd day of November, 2000, personally appeared before me, a Notary Public in and for said County and State, the person named above who is known to me to be the person whose name and signature is affixed to the foregoing Power of Attorney and who acknowledged the same to be his voluntary act and deed for the intent and purposes therein set forth. "OFFICIAL SEAL" Virginia L. Corcoran /s/ Virginia L. Corcoran Notary Public, State of Illinois ------------------------ My Commission Expires: 10/27/01 Notary Public NUVEEN MISSOURI DIVIDEND ADVANTAGE MUNICIPAL FUND NUVEEN CALIFORNIA DIVIDEND ADVANTAGE MUNICIPAL FUND 2 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a trustee of the above- referenced organizations, hereby constitutes and appoints TIMOTHY R. SCHWERTFEGER, ALAN G. BERKSHIRE, LARRY W. MARTIN and GIFFORD R. ZIMMERMAN, and each of them (with full power to each of them to act alone) her true and lawful attorney-in-fact and agent, for her on her behalf and in her name, place and stead, in any and all capacities, to sign and file one or more Registration Statements on Form N-2 under the Securities Act of l933 and the Investment Company Act of l940, including any amendment or amendments thereto, with all exhibits, and any and all other documents required to be filed with any regulatory authority, federal or state, relating to the registration thereof, or the issuance of shares thereof, without limitation, granting unto said attorneys, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same as fully to all intents and purposes as he might or could do if personally present, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned trustee of the above-referenced organization has hereunto set her hand this 2nd day of November, 2000. /s/ Anne E. Impellizzeri ------------------------ Anne E. Impellizzeri STATE OF ILLINOIS ) ---------------- )SS COUNTY OF COOK ) -------------- On this 2nd day of November, 2000, personally appeared before me, a Notary Public in and for said County and State, the person named above who is known to me to be the person whose name and signature is affixed to the foregoing Power of Attorney and who acknowledged the same to be his voluntary act and deed for the intent and purposes therein set forth. "OFFICIAL SEAL" Virginia L. Corcoran /s/ Virginia L. Corcoran Notary Public, State of Illinois ------------------------ My Commission Expires: 10/27/01 Notary Public NUVEEN MISSOURI DIVIDEND ADVANTAGE MUNICIPAL FUND NUVEEN CALIFORNIA DIVIDEND ADVANTAGE MUNICIPAL FUND 2 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a trustee of the above- referenced organizations, hereby constitutes and appoints TIMOTHY R. SCHWERTFEGER, ALAN G. BERKSHIRE, LARRY W. MARTIN and GIFFORD R. ZIMMERMAN, and each of them (with full power to each of them to act alone) his true and lawful attorney-in-fact and agent, for him on his behalf and in his name, place and stead, in any and all capacities, to sign and file one or more Registration Statements on Form N-2 under the Securities Act of l933 and the Investment Company Act of l940, including any amendment or amendments thereto, with all exhibits, and any and all other documents required to be filed with any regulatory authority, federal or state, relating to the registration thereof, or the issuance of shares thereof, without limitation, granting unto said attorneys, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same as fully to all intents and purposes as he might or could do if personally present, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned trustee of the above-referenced organization has hereunto set his hand this 2nd day of November, 2000. /s/ Peter R. Sawers ------------------- Peter R. Sawers STATE OF ILLINOIS ) ---------------- )SS COUNTY OF COOK ) -------------- On this 2nd day of November, 2000, personally appeared before me, a Notary Public in and for said County and State, the person named above who is known to me to be the person whose name and signature is affixed to the foregoing Power of Attorney and who acknowledged the same to be his voluntary act and deed for the intent and purposes therein set forth. "OFFICIAL SEAL" Virginia L. Corcoran /s/ Virginia L. Corcoran Notary Public, State of Illinois ------------------------ My Commission Expires: 10/27/01 Notary Public NUVEEN MISSOURI DIVIDEND ADVANTAGE MUNICIPAL FUND NUVEEN CALIFORNIA DIVIDEND ADVANTAGE MUNICIPAL FUND 2 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a trustee of the above- referenced organizations, hereby constitutes and appoints TIMOTHY R. SCHWERTFEGER, ALAN G. BERKSHIRE, LARRY W. MARTIN and GIFFORD R. ZIMMERMAN, and each of them (with full power to each of them to act alone) his true and lawful attorney-in-fact and agent, for him on his behalf and in his name, place and stead, in any and all capacities, to sign and file one or more Registration Statements on Form N-2 under the Securities Act of l933 and the Investment Company Act of l940, including any amendment or amendments thereto, with all exhibits, and any and all other documents required to be filed with any regulatory authority, federal or state, relating to the registration thereof, or the issuance of shares thereof, without limitation, granting unto said attorneys, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same as fully to all intents and purposes as he might or could do if personally present, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned trustee of the above-referenced organization has hereunto set his hand this 2nd day of November, 2000. /s/ William J. Schneider ------------------------ William J. Schneider STATE OF ILLINOIS ) ---------------- )SS COUNTY OF COOK ) -------------- On this 2nd day of November, 2000, personally appeared before me, a Notary Public in and for said County and State, the person named above who is known to me to be the person whose name and signature is affixed to the foregoing Power of Attorney and who acknowledged the same to be his voluntary act and deed for the intent and purposes therein set forth. "OFFICIAL SEAL" Virginia L. Corcoran /s/ Virginia L. Corcoran Notary Public, State of Illinois ------------------------ My Commission Expires: 10/27/01 Notary Public NUVEEN MISSOURI DIVIDEND ADVANTAGE MUNICIPAL FUND NUVEEN CALIFORNIA DIVIDEND ADVANTAGE MUNICIPAL FUND 2 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a trustee of the above- referenced organizations, hereby constitutes and appoints TIMOTHY R. SCHWERTFEGER, ALAN G. BERKSHIRE, LARRY W. MARTIN and GIFFORD R. ZIMMERMAN, and each of them (with full power to each of them to act alone) her true and lawful attorney-in-fact and agent, for her on her behalf and in her name, place and stead, in any and all capacities, to sign and file one or more Registration Statements on Form N-2 under the Securities Act of l933 and the Investment Company Act of l940, including any amendment or amendments thereto, with all exhibits, and any and all other documents required to be filed with any regulatory authority, federal or state, relating to the registration thereof, or the issuance of shares thereof, without limitation, granting unto said attorneys, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same as fully to all intents and purposes as he might or could do if personally present, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned trustee of the above-referenced organization has hereunto set her hand this 2nd day of November, 2000. /s/ Judith M. Stockdale ----------------------- Judith M. Stockdale STATE OF ILLINOIS ) ---------------- )SS COUNTY OF COOK ) -------------- On this 2nd day of November, 2000, personally appeared before me, a Notary Public in and for said County and State, the person named above who is known to me to be the person whose name and signature is affixed to the foregoing Power of Attorney and who acknowledged the same to be his voluntary act and deed for the intent and purposes therein set forth. "OFFICIAL SEAL" Virginia L. Corcoran /s/ Virginia L. Corcoran Notary Public, State of Illinois ------------------------ My Commission Expires: 10/27/01 Notary Public -----END PRIVACY-ENHANCED MESSAGE-----