<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 22, 1996
SECURITIES ACT REGISTRATION NO. 333-09521
INVESTMENT COMPANY ACT REGISTRATION NO. 811-07747
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-14
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
(Check Appropriate Box or Boxes)
/X/ Pre-Effective Amendment No. 1
/ / Post-Effective Amendment No.
NUVEEN FLAGSHIP MULTISTATE TRUST I
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
333 West Wacker Drive, Chicago, Illinois 60606
(Address of Principal Executive Offices: Number, Street, City, State, Zip Code)
Registrant's Telephone Number, Including Area Code: (312) 917-7700
Copies to:
<TABLE>
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James J. Wesolowski, Esq. Cathy G. O'Kelly
Vice President and Secretary Vedder, Price, Kaufman & Kammholz
333 West Wacker Drive 222 North LaSalle Street
Chicago, Illinois 60606 Chicago, Illinois 60601
(Name and Address of Agent for Service)
</TABLE>
Philip H. Harris
Skadden, Arps, Slate, Meagher & Flom
919 Third Avenue
New York, New York 10022
Approximate Date of Proposed Public Offering:
As soon as practicable after this Registration Statement becomes effective
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PURSUANT TO RULE 24F-2 UNDER THE INVESTMENT COMPANY ACT OF 1940, REGISTRANT
HEREBY DECLARES THAT AN INDEFINITE NUMBER OR AMOUNT OF SHARES ARE BEING
REGISTERED UNDER THE SECURITIES ACT OF 1933. A REGISTRATION FILING FEE OF
$500.00 WAS PAID WITH THE FILING OF THE INITIAL REGISTRATION STATEMENT.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
CROSS REFERENCE SHEET
(as required by Rule 481(a))
PART A
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<CAPTION>
LOCATION IN JOINT PROXY
ITEM NO. ITEM CAPTION OF FORM N-14 STATEMENT -- PROSPECTUS
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Item 1. Beginning of Registration Statement and
Outside Front Cover Page of
Prospectus.............................. Cover Page
Item 2. Beginning and Outside Back Cover Page of
Prospectus.............................. Cover Page; Table of Contents
Item 3. Synopsis Information and Risk Factors... Summary; Comparative Fee Table; Risks and
Special Considerations
Item 4. Information about the Transaction....... Proposal No. 4 -- The Reorganizations
Item 5. Information about the Registrant........ Available Information; Proposal No. 4 -- The
Reorganizations; Proposal No. 1 -- Election of
Trustees; Annex A
Item 6. Information about the Company being
Acquired................................ Available Information; Proposal No. 4 -- The
Reorganizations
Item 7. Voting Information...................... The Meetings; Proposal No. 1 -- Election of
Trustees; Proposal No. 2 -- Investment
Advisory Agreements; Proposal No. 3 -- Rule
12b-1 Plan; Proposal No. 4 -- The
Reorganizations
Item 8. Interest of Certain Persons and
Experts................................. Legal Opinions; Experts
Item 9. Additional Information Required for
Reoffering by Persons Deemed to be
Underwriters............................ Not Applicable
</TABLE>
PART B
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<CAPTION>
LOCATION IN JOINT PROXY
STATEMENT -- PROSPECTUS ("PROSPECTUS") OR
STATEMENT OF ADDITIONAL
INFORMATION ("SAI")(1)
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Item 10. Cover Page.............................. SAI -- Cover Page
Item 11. Table of Contents....................... SAI -- Cover Page
Item 12. Additional Information about the
Registrant.............................. SAI
Item 13. Additional Information about the Company
being Acquired.......................... Annex B; Annex C
Item 14. Financial Statements.................... SAI -- Financial Statements; SAI -- Pro Forma
Financial Statements; Annex B; Annex C
</TABLE>
PART C
Information required to be included in Part C is set forth under the appropriate
item, so numbered, in Part C of this Registration Statement.
- ---------------
(1) Some of the information to be included in Part B is contained in the
Prospectus.
<PAGE> 3
[FLAGSHIP LOGO]
October , 1996
DEAR FLAGSHIP SHAREHOLDER:
We are pleased to announce that Flagship Resources, Inc., plans to merge with
The John Nuveen Company. The merger with Nuveen will help Flagship serve a
broader set of investors' needs, providing a range of investment products and
services for conservative investors and the financial advisers who serve them.
A special meeting of shareholders will be held Thursday, December 12, 1996, at
10:00 a.m., Chicago time, in the 31st floor conference room of John Nuveen & Co.
Incorporated, 333 W. Wacker Drive, Chicago, Illinois. Subject to shareholder
approval at this meeting, your fund will be reorganized and combined with a
similar Nuveen fund into a new fund that will be part of the Nuveen Flagship
Multistate Trust I.
THE BOARD OF TRUSTEES OF YOUR FUND HAS UNANIMOUSLY AGREED THAT THE PROPOSAL YOU
WILL VOTE ON IS ADVISABLE AND IN THE BEST INTERESTS OF ALL SHAREHOLDERS. THE
REORGANIZATIONS SHOULD LEAD TO THE FOLLOWING BENEFITS:
- Increased fund administration and operating efficiencies
- Access to a wider range of investment products
- Greater choices in the method for purchasing shares
THE ATTACHED JOINT PROXY STATEMENT-PROSPECTUS DESCRIBES THIS AND OTHER PROPOSALS
IN GREATER DETAIL.
WHETHER OR NOT YOU PLAN TO JOIN US AT THE MEETING, PLEASE COMPLETE, DATE AND
SIGN YOUR PROXY CARD AND RETURN IT IN THE ENCLOSED ENVELOPE SO THAT YOUR VOTE
WILL BE COUNTED.
WE APPRECIATE YOUR CONTINUED SUPPORT AND CONFIDENCE IN FLAGSHIP AND OUR FAMILY
OF INVESTMENTS.
Very truly yours,
Bruce P. Bedford
Bruce P. Bedford
Chairman of the Board
Flagship Financial One S. Main Street Dayton, OH 45402
<PAGE> 4
nuveen logo
October , 1996
DEAR NUVEEN SHAREHOLDER:
As recently announced, The John Nuveen Company plans to acquire Flagship
Resources Inc., a highly regarded sponsor of 27 municipal mutual funds. The
purchase of Flagship will help Nuveen serve a broader set of investors' needs,
providing a range of investment products and services for conservative
investors and the financial advisers who serve them.
A special meeting of shareholders will be held Thursday, December 12, 1996, at
10:00 a.m., Chicago time, in the 31st floor conference room of John Nuveen & Co.
Incorporated, 333 W. Wacker Drive, Chicago, Illinois. At this meeting, you will
be asked to vote on a proposal to reorganize your fund and combine it with a
similar Flagship fund, facilitating the integration of the Nuveen and Flagship
mutual fund families.
THE BOARD OF YOUR FUND HAS UNANIMOUSLY AGREED THAT THIS PROPOSAL IS IN THE BEST
INTERESTS OF SHAREHOLDERS AND URGES YOU TO VOTE IN FAVOR OF THE PROPOSAL. THE
INTEGRATION OF NUVEEN AND FLAGSHIP SHOULD LEAD TO THE FOLLOWING BENEFITS:
- Lower operating costs
- Access to a wider range of investment products
- Greater choices in the method for purchasing shares
The enclosed proxy statement describes these proposals in greater detail.
WHETHER OR NOT YOU PLAN TO JOIN US AT THE MEETING, PLEASE COMPLETE, DATE AND
SIGN YOUR PROXY CARD AND RETURN IT IN THE ENCLOSED ENVELOPE SO THAT YOUR VOTE
WILL BE COUNTED.
We appreciate your continued support and confidence in Nuveen and our family of
investments.
Very truly yours,
JOHN NUVEEN & CO. INCORPORATED
Timothy R. Schwertfeger
Timothy R. Schwertfeger
Chairman of the Board
<PAGE> 5
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NOTICE OF SPECIAL MEETING One Dayton Centre
OF SHAREHOLDERS One South Main Street
DECEMBER 12, 1996 Dayton, Ohio 45402
</TABLE>
FLAGSHIP TAX EXEMPT FUNDS TRUST
FLAGSHIP ARIZONA DOUBLE TAX EXEMPT FUND
FLAGSHIP FLORIDA DOUBLE TAX EXEMPT FUND
FLAGSHIP PENNSYLVANIA TRIPLE TAX EXEMPT FUND
FLAGSHIP VIRGINIA DOUBLE TAX EXEMPT FUND
TO THE SHAREHOLDERS:
Notice is hereby given that a Special Meeting of Shareholders of each of
Flagship Arizona Double Tax Exempt Fund, Flagship Florida Double Tax Exempt
Fund, Flagship Pennsylvania Triple Tax Exempt Fund and Flagship Virginia Double
Tax Exempt Fund (each a "Flagship Fund"), each of which is a series of the
Flagship Tax Exempt Funds Trust ("Flagship Trust"), a Massachusetts business
trust, will be held in the 31st floor conference room of John Nuveen & Co.
Incorporated, 333 West Wacker Drive, in Chicago on Thursday, December 12, 1996,
at 10:00, a.m., Central Time, for the following purposes:
1. Proposal 1A. - To elect eight (8) trustees to the Board of Trustees.
2. Proposal 2. - To approve a new investment advisory agreement with Nuveen
Advisory Corp.
3. Proposal 3. - To approve a new Rule 12b-1 Plan.
4. Proposal 4. - To approve an Agreement and Plan of Reorganization and the
transactions contemplated thereby, the net effect of which would be to
combine the Flagship Fund, along with a corresponding fund portfolio of
the Nuveen Multistate Tax-Free Trust (the "Nuveen Fund") into a new
series ("New Fund") of Nuveen Flagship Multistate Trust I, a newly
created investment company.
5. To transact such other business as may properly come before the meeting.
Shareholders of record at the close of business on October 18, 1996 are entitled
to notice of and to vote at the Meeting.
THE BOARD OF TRUSTEES UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR ALL PROPOSALS.
Michael D. Kalbfleisch
Secretary
<PAGE> 6
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NOTICE OF SPECIAL MEETING 333 West Wacker Drive
OF SHAREHOLDERS Chicago, Illinois
DECEMBER 12, 1996 60606
800-621-7227
</TABLE>
NUVEEN MULTISTATE TAX-FREE TRUST
NUVEEN ARIZONA TAX-FREE VALUE FUND
NUVEEN FLORIDA TAX-FREE VALUE FUND
NUVEEN PENNSYLVANIA TAX-FREE VALUE FUND
NUVEEN VIRGINIA TAX-FREE VALUE FUND
TO THE SHAREHOLDERS:
Notice is hereby given that a Special Meeting of Shareholders of each of Nuveen
Arizona Tax-Free Value Fund, Nuveen Florida Tax-Free Value Fund, Nuveen
Pennsylvania Tax-Free Value Fund and Nuveen Virginia Tax-Free Value Fund (each a
"Nuveen Fund"), each of which is a series of the Nuveen Multistate Tax-Free
Trust ("Nuveen Trust"), a Massachusetts business trust, will be held in the 31st
floor conference room of John Nuveen & Co. Incorporated, 333 West Wacker Drive,
in Chicago on Thursday, December 12, 1996, at 10:00, a.m., Central Time, for the
following purposes:
1. Proposal 1B. - To elect eight (8) trustees to the Board of Trustees.
2. Proposal 4. - To approve an Agreement and Plan of Reorganization and the
transactions contemplated thereby, the net effect of which would be to
combine the Nuveen Fund, along with a corresponding fund portfolio of
the Flagship Tax-Exempt Funds Trust (the "Flagship Fund") into a new
series ("New Fund") of Nuveen Flagship Multistate Trust I, a newly
created investment company.
3. To transact such other business as may properly come before the meeting.
Shareholders of record at the close of business on October 18, 1996 are entitled
to notice of and to vote at the Meeting.
THE BOARD OF TRUSTEES UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR ALL PROPOSALS.
James J. Wesolowski
Secretary
<PAGE> 7
<TABLE>
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JOINT PROXY STATEMENT 333 West Wacker Drive
MEETINGS OF SHAREHOLDERS Chicago, Illinois
TO BE HELD DECEMBER 12, 1996 60606
800-621-7277
One South Main Street
Dayton, Ohio 45402
800-414-7447
</TABLE>
NUVEEN MULTISTATE TAX-FREE TRUST
NUVEEN ARIZONA TAX-FREE VALUE FUND
NUVEEN FLORIDA TAX-FREE VALUE FUND
NUVEEN PENNSYLVANIA TAX-FREE VALUE FUND
NUVEEN VIRGINIA TAX-FREE VALUE FUND
FLAGSHIP TAX EXEMPT FUNDS TRUST
FLAGSHIP ARIZONA DOUBLE TAX EXEMPT FUND
FLAGSHIP FLORIDA DOUBLE TAX EXEMPT FUND
FLAGSHIP PENNSYLVANIA TRIPLE TAX EXEMPT FUND
FLAGSHIP VIRGINIA DOUBLE TAX EXEMPT FUND
PROSPECTUS
NUVEEN FLAGSHIP MULTISTATE TRUST I
NUVEEN FLAGSHIP ARIZONA MUNICIPAL BOND FUND
NUVEEN FLAGSHIP FLORIDA MUNICIPAL BOND FUND
NUVEEN FLAGSHIP PENNSYLVANIA MUNICIPAL BOND FUND
NUVEEN FLAGSHIP VIRGINIA MUNICIPAL BOND FUND
This Joint Proxy Statement-Prospectus is being furnished to shareholders of
Nuveen Arizona Tax-Free Value Fund ("Nuveen Arizona"), Nuveen Florida Tax-Free
Value Fund ("Nuveen Florida"), Nuveen Pennsylvania Tax-Free Value Fund ("Nuveen
Pennsylvania") and Nuveen Virginia Tax-Free Value Fund ("Nuveen Virginia") (each
a "Fund," an "Acquired Fund" or a "Nuveen Fund"), each of which is a series of
the Nuveen Multistate Tax-Free Trust (the "Trust" or "Nuveen Trust"), a
Massachusetts business trust, and Flagship Arizona Double Tax Exempt Fund
("Flagship Arizona"), Flagship Florida Double Tax Exempt Fund ("Flagship
Florida"), Flagship Pennsylvania Triple Tax Exempt Fund ("Flagship
Pennsylvania") and Flagship Virginia Double Tax Exempt Fund ("Flagship
Virginia") (each a "Fund," an "Acquired Fund" or a "Flagship Fund"), each of
which is a series of the Flagship Tax Exempt Funds Trust (the "Trust" or
"Flagship Trust"), a Massachusetts business trust, in connection with the
solicitation of proxies by each Trust's Board of Trustees for use at a special
meeting of shareholders to be held on Thursday, December 12, 1996, at 10:00
a.m., Central Time, and at any and all adjournments thereof.
At the meetings shareholders of the Nuveen Funds and the Flagship Funds will be
asked to approve the following:
(1) To elect eight (8) trustees:
(a) for the Flagship Funds, to the Board of the Flagship Trust,
(b) for the Nuveen Funds, to the Board of the Nuveen Trust;
(2) For the Flagship Funds, to approve a new investment advisory agreement
with Nuveen Advisory Corp.;
(3) For the Flagship Funds, to approve a new Rule 12b-1 Plan;
(4) Reorganizations as follows:
(a) shareholders of Nuveen Arizona and Flagship Arizona will be asked to
approve an Agreement and Plan of Reorganization (the "Arizona
Agreement") whereby substantially all the assets and liabilities of
Nuveen Arizona and Flagship Arizona will be acquired by Nuveen
Flagship Arizona Municipal Bond Fund ("New Arizona"), in exchange for
shares of New Arizona;
(b) shareholders of Nuveen Florida and Flagship Florida will be asked to
approve an Agreement and Plan of Reorganization (the "Florida
Agreement") whereby substantially all the assets and liabilities of
Nuveen Florida and Flagship Florida will be acquired by Nuveen
Flagship Florida Municipal Bond Fund ("New Florida") in exchange for
Shares of New Florida;
(c) shareholders of Nuveen Pennsylvania and Flagship Pennsylvania will be
asked to approve an Agreement and Plan of Reorganization (the
"Pennsylvania Agreement") whereby substantially all the assets and
liabilities of Nuveen Pennsylvania and Flagship Pennsylvania will be
acquired by Nuveen Flagship Pennsylvania Municipal Bond Fund ("New
Pennsylvania") in exchange for shares of New Pennsylvania; and
(d) shareholders of Nuveen Virginia and Flagship Virginia will be asked
to approve an Agreement and Plan of Reorganization (the "Virginia
Agreement") whereby substantially all the assets and liabilities of
Nuveen Virginia and Flagship Virginia will be acquired by Nuveen
Flagship Virginia Municipal Bond Fund ("New Virginia") in exchange
for shares of New Virginia.
<PAGE> 8
The Arizona Agreement, the Florida Agreement, the Pennsylvania Agreement and the
Virginia Agreement are each referred to as an "Agreement."
New Arizona, New Florida, New Pennsylvania and New Virginia (the "New Funds")
are new series of the Nuveen Flagship Multistate Trust I (the "Trust" or "New
Trust"), a new open-end, management investment company, which is authorized to
issue shares of beneficial interest in separate series. The transactions
contemplated by each Agreement are referred to herein as a "Reorganization." For
purposes of reporting the financial statements and performance status of each
New Fund after the Reorganization, the financial statements and performance
history of the Flagship Fund will be adopted.
Each New Fund is designed to provide as high a level of current interest income
exempt from both regular federal income tax and the applicable state personal
income tax (or intangibles tax, if any) as is consistent, in the view of the
Fund's management, with preservation of capital. Each New Fund invests in
investment grade quality, long-term municipal obligations judged by the Fund's
investment adviser to offer the best values among municipal obligations of
similar credit quality.
This Joint Proxy Statement-Prospectus sets forth the information that
shareholders of the Nuveen Funds and the Flagship Funds should know before
voting on the proposed Reorganization. It should be read and retained for future
reference. A Statement of Additional Information dated October , 1996 relating
to this Joint Proxy Statement--Prospectus has been filed with the Securities and
Exchange Commission and is incorporated herein by reference. A copy of the
Statement of Additional Information may be obtained without charge by mailing a
written request to John Nuveen & Co. Incorporated, 333 West Wacker Drive,
Chicago, Illinois 60606 or by calling 1-800-621-7227. The Nuveen Funds'
Prospectus dated May 31, 1996, as supplemented August 26, 1996, contains
additional information about the Nuveen Funds, has been filed with the
Securities and Exchange Commission, is incorporated herein by reference and is
available without charge by writing to the above address or by calling
1-800-621-7227. The Flagship Funds' Prospectus dated September 26, 1996 contains
additional information about the Flagship Funds, has been filed with the
Securities and Exchange Commission, is incorporated herein by reference and is
available by writing Flagship Funds Inc., One Dayton Centre, One South Main
Street, Dayton, Ohio 45402 or by calling 1-800-414-7447.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE. SHARES IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY BANK SELLING THE SHARES, NOR ARE THEY FEDERALLY
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD,
OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT RISKS INCLUDE THE POSSIBLE LOSS OF
PRINCIPAL. THE VALUE OF THE INVESTMENT AND ITS RETURN WILL FLUCTUATE AND ARE NOT
GUARANTEED. WHEN SOLD, THE VALUE OF THE INVESTMENT MAY BE HIGHER OR LOWER THAN
THE AMOUNT ORIGINALLY INVESTED.
THE DATE OF THIS JOINT PROXY STATEMENT-PROSPECTUS IS OCTOBER , 1996.
<PAGE> 9
TABLE OF CONTENTS
<TABLE>
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PAGE
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SUMMARY......................................... 1
The Flagship Acquisition.................... 1
The Reorganizations......................... 1
Federal Income Tax Consequences............. 1
Comparison of Funds......................... 1
Investment Objectives and Policies..... 1
Management of the Funds and Management
Fees................................. 2
Trustees and Officers.................. 2
Distributor of the Funds............... 2
Distributions.......................... 3
Purchase Procedures and Exchange
Rights............................... 3
Redemption Procedures.................. 3
Transfer Agent and Custodian........... 4
Auditors............................... 4
Organization........................... 4
Costs of the Reorganizations................ 4
Board Recommendation that Shareholders
Approve the Agreement..................... 4
COMPARATIVE FEE TABLE........................... 5
RISKS AND SPECIAL CONSIDERATIONS................ 10
General..................................... 10
Arizona..................................... 10
Florida..................................... 10
Virginia.................................... 10
Comparative Considerations.................. 11
THE MEETINGS.................................... 11
General..................................... 11
Voting; Proxies............................. 13
AVAILABLE INFORMATION........................... 13
PROPOSAL NO. 1--ELECTION OF TRUSTEES............ 14
PROPOSAL 1A. FLAGSHIP FUNDS..................... 14
Officers............................... 15
PROPOSAL 1B. NUVEEN FUNDS....................... 15
Officers............................... 17
Votes Required.............................. 18
PROPOSAL NO. 2--INVESTMENT ADVISORY
AGREEMENTS.................................... 18
Reasons for Shareholders Vote............... 18
Flagship--Acquisition.................. 18
Board Recommendation........................ 19
Investment Advisory Agreement............... 19
The New Advisory Agreement.................. 20
Information Concerning Flagship, Nuveen and
the Acquisition........................... 21
Flagship.................................... 21
Nuveen Advisory............................. 21
Votes Required.............................. 22
PROPOSAL NO. 3--RULE 12B-1 PLAN................. 22
Description of the New Rule 12b-1 Plan...... 22
Existing 12b-1 Plan.................... 23
Board Recommendation........................ 23
Votes Required.............................. 23
PROPOSAL NO. 4--THE REORGANIZATIONS............. 24
General..................................... 24
Terms of Each Reorganization................ 24
Reasons for the Reorganization.............. 25
Board Recommendation........................ 26
<CAPTION>
PAGE
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Votes Required.............................. 26
Description of the Shares to be Issued in
the Reorganization........................ 27
General................................ 27
Distributions.......................... 27
Comparison of Rights of Holders of the
Funds..................................... 27
Comparison of the Investment Objectives and
Policies.................................. 28
Diversification........................ 28
Investment Grade Quality............... 28
Average Maturity....................... 28
AMT Bonds.............................. 28
Concentration.......................... 28
Lease Obligations...................... 28
Temporary Investments.................. 28
Futures and Options.................... 29
Borrowing.............................. 29
Illiquid Securities.................... 29
Other Investment Restrictions.......... 29
Comparison of Management.................... 29
Comparison of Distribution.................. 30
Waiver Comparison........................... 31
Certain Provisions in the New Trust's
Declaration
of Trust.................................. 31
Other Comparisons........................... 31
Trustees and Officers.................. 31
Fiscal Year............................ 31
Purchase, Exchange and Redemption
Features and Privileges.............. 31
Transfer Agent and Custodian........... 32
Auditors............................... 32
Organization........................... 32
Surrender and Exchange of Acquired Fund
Share Certificates................... 32
Costs Associated with the Reorganizations... 33
Appraisal Rights............................ 33
Tax Consequences of the Reorganizations..... 33
Capitalization.............................. 34
Comparative Performance Information......... 36
LEGAL OPINIONS.................................. 36
EXPERTS......................................... 37
SHAREHOLDER PROPOSALS........................... 37
GENERAL......................................... 37
ANNEX A
ADDITIONAL INFORMATION ABOUT THE NEW FUNDS...... A-1
ANNEX B
FORM OF AGREEMENT AND PLAN OF REORGANIZATION AND
LIQUIDATION................................... B-1
ANNEX C
HOLDERS OF MORE THAN 5% OF ANY CLASS OF A FUND'S
SHARES........................................ C-1
ANNEX D
FORM OF NEW INVESTMENT ADVISORY AGREEMENT....... D-1
ANNEX E
FORM OF NEW RULE 12B-1 PLAN..................... E-1
</TABLE>
<PAGE> 10
SUMMARY
This summary is qualified in its entirety by reference to the additional
information contained elsewhere in this Joint Proxy Statement--Prospectus, the
Agreement (a form of which is attached to this Joint Proxy Statement--Prospectus
as Annex B) and the Prospectuses of the Nuveen Funds and the Flagship Funds,
which are incorporated herein by reference.
THE FLAGSHIP ACQUISITION
The John Nuveen Company has entered into an Agreement and Plan of Merger dated
July 16, 1996 (the "Acquisition Agreement") to acquire Flagship Resources Inc.
and its subsidiaries, Flagship Financial Inc. and Flagship Funds Inc. (the
"Acquisition" or the "Flagship Acquisition"). It is currently contemplated that
the Acquisition will occur on December 31, 1996. Subsequent to the Acquisition,
The John Nuveen Company will consider reorganizations or consolidations of the
businesses and operations of Flagship Financial Inc. ("Flagship"), the
investment adviser of the Flagship Funds, and Flagship Funds Inc., the
distributor of the Flagship Funds. Each of the proposals contained in this Joint
Proxy Statement--Prospectus is contingent upon the consummation of the
Acquisition.
Consummation of the Acquisition would constitute an "assignment," as that term
is defined in the Investment Company Act of 1940 (the "1940 Act") of each
Flagship Fund's current investment advisory agreement with Flagship. As required
by the 1940 Act, each current investment advisory agreement provides for its
automatic termination in the event of its assignment. In anticipation of the
Acquisition, a new investment advisory agreement for each Flagship Fund is being
proposed for approval by shareholders of each Flagship Fund, along with other
matters triggered by the Acquisition.
THE REORGANIZATIONS
The Reorganizations are being proposed to consolidate the respective Nuveen and
Flagship Funds into a single family of mutual funds that will be advised by
Nuveen Advisory Corp. ("Nuveen Advisory") and distributed by John Nuveen & Co.
Incorporated ("Nuveen") and that will feature a uniform set of investment
objectives and policies, shareholder purchase options and shareholder account
privileges.
Each Agreement provides for the transfer of substantially all the assets of the
respective Nuveen Fund and the Flagship Fund to the corresponding New Fund in
exchange for shares of the New Fund and the assumption by the New Fund of
substantially all the liabilities of the Acquired Funds. As a result of each
Reorganization each shareholder of an Acquired Fund will become the owner of
that number of full and fractional shares of the same class of the corresponding
New Fund having an aggregate value equal to the aggregate value of the
shareholder's shares of the Acquired Fund as of the effective time of the
Reorganization.
As a result of the Reorganizations, similar Flagship and Nuveen Funds each would
be combined into a single, larger New Fund with broader and enhanced
distribution and the potential for administrative and operating efficiencies,
which will help maintain and potentially improve the competitive position of
each Fund. It is currently contemplated that the Reorganizations would occur on
January 31, 1997.
FEDERAL INCOME TAX CONSEQUENCES
Each Fund's Reorganization will qualify as a tax-free reorganization under
Section 368(a)(1) of the Internal Revenue Code of 1986, as amended (the "Code").
Accordingly, no Fund will recognize gain or loss for federal income tax purposes
as a result of the Reorganization. In addition, shareholders of an Acquired Fund
who receive corresponding New Fund shares pursuant to the Reorganization will
recognize no gain or loss for federal income tax purposes. Provided that each
Fund qualifies as a qualified investment fund under applicable state tax law and
that the proposed Reorganization qualifies as a tax-free reorganization under
the Code, no Fund will recognize any gain or loss for applicable state income
tax purposes as a result of the Reorganization and shareholders of an Acquired
Fund who receive corresponding New Fund shares pursuant to the Reorganization
will recognize no gain or loss for applicable state income tax purposes.
COMPARISON OF FUNDS
INVESTMENT OBJECTIVES AND POLICIES. The investment objectives of each New Fund
are identical to those of the Nuveen Funds and substantially similar to those of
the Flagship Funds. Each Fund seeks high current interest income exempt from
both regular federal income tax and the applicable state personal income tax (or
intangibles tax), consistent with preservation of capital, by investing in
municipal obligations. The Flagship Funds, in addition, provide that the income
sought be consistent with liquidity in addition to preservation of capital.
The investment policies of the New Funds are similar to those of the Nuveen
Funds and the Flagship Funds. The salient differences, which are set forth under
"Comparison of the Investment Objectives and Policies," include:
- - Diversification. New Virginia and New Pennsylvania are "non-diversified" under
the 1940 Act; New Arizona, New Florida, the Nuveen Funds and the Flagship
Funds are "diversified." Being non-diversified, New Virginia and New
Pennsylvania
1
<PAGE> 11
will be able to invest more than 5% of its assets in the obligations of an
issuer, subject to the diversification requirements of Subchapter M of the
Code. This allows each of New Virginia and New Pennsylvania, as to 50% of its
total assets, to invest more than 5%, but not have more than 25%, in the
securities of a single issuer. A "diversified" fund, on the other hand, may
not, with respect to 75% of its total assets, invest more than 5% in the
securities of a single issuer. Since New Virginia and New Pennsylvania may
invest a relatively high percentage of its assets in the obligations of a
limited number of issuers, they may be more susceptible to any single
economic, political or regulatory occurrence than the Nuveen Funds and the
Flagship Funds.
- - Definition of Investment Grade Quality. The New Funds and the Flagship Funds
may rely on ratings from Moody's Investor Service, Inc., (the "Moody's"),
Standard & Poor's Rating Group ("S&P") and Fitch Investors Service, Inc.
("Fitch"), while the Nuveen Funds may not presently rely on ratings by Fitch.
The Nuveen Funds may only invest up to 20% in unrated securities, while the
New Funds and the Flagship Funds have no such restriction. The New Funds may,
therefore, invest in an unlimited amount of Fitch-only rated securities and
unrated securities, whereas the Nuveen Funds may only invest up to 20% in
Fitch-only rated securities and unrated securities. The market for Fitch-only
rated securities and unrated securities may be less broad than for Moody's
and/or S&P rated securities. In addition, with unrated securities, a Fund is
more dependant upon the investment manager's credit analysis.
- - Average Maturity. The New Funds seek an average maturity of between 15 to 30
years as compared to the Nuveen Funds' goal of 20 to 30 years and Flagship
Funds' goal of 15 to 25 years. Generally, securities with longer maturities
are more volatile than those with shorter maturities.
- - AMT Bonds. The New Funds do not have a restriction on the amount of AMT Bonds
purchased; the Nuveen Funds and the Flagship Funds do not allow more than 20%
to be invested in AMT Bonds. AMT Bonds are Municipal Obligations, the interest
on which is a specific tax preference item for purposes of computing the
alternative minimum tax on corporations and individuals. For shareholders
whose tax liability is determined under the alternative minimum tax, such
shareholders will be taxed on their share of the Fund's exempt-interest
dividends that were paid from income earned on AMT Bonds. In addition, the
alternative minimum taxable income for corporations is increased by 75% of the
difference between an alternative measure of income ("adjusted current
earnings") and the amount otherwise determined to be alternative minimum
taxable income. Interest on all Municipal Obligations and therefore all
distributions by the Fund that would otherwise be tax exempt is included in
calculating a corporation's adjusted current earnings.
- - Concentration. The New Funds and the Nuveen Funds may not invest more than 25%
in any one industry, with the exception of investments in Municipal
Obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. The Flagship Funds are permitted to invest more than 25% of
their assets in a particular segment of the municipal bond market, such as
Hospital Revenue Bonds, Housing Agency Bonds, Industrial Development Bonds,
Airport Bonds or U.S. Territorial Bonds.
- - Municipal Leases. The New Funds and the Flagship Funds have no percentage
limitation on non-appropriation lease obligations, whereas the Nuveen Funds
are limited to investing no more than 10% of their assets in non-appropriation
lease obligations. Certain "non-appropriation" lease obligations may present
special risks because the municipality's obligation to make future lease or
installment payments depends on money being appropriated each year for this
purpose. If an issuer stopped making payment on a lease obligation held by a
Fund, the lease obligation would lose some or all of its value. Some lease
obligations may be illiquid under certain circumstances.
- - Illiquid Securities. The New Funds may not invest more than 15% of their net
assets in illiquid securities. The Nuveen Funds limit investment in illiquid
securities to 10% of assets. The Flagship Funds have no stated limitation on
investment in illiquid securities; however, the Flagship Funds have generally
followed the Commission guidelines, which provide that the usual limit on
aggregate holdings of illiquid securities is 15% of net assets.
MANAGEMENT OF THE FUNDS AND MANAGEMENT FEES. Nuveen Advisory will serve as the
investment adviser to each New Fund, and the portfolio manager of each Flagship
Fund is expected to serve as the portfolio manager for the corresponding New
Fund. Subject to normal personnel turnover, the Flagship portfolio management
team is anticipated to be employed by Nuveen Advisory and to manage the New
Funds. For management services provided, Nuveen Advisory will receive a fee
accrued daily and payable monthly, on a graduated declining basis that starts at
an annual rate of .55% of average net assets. Nuveen Advisory also serves as the
investment adviser to each Nuveen Fund for the same fee. Flagship currently
serves as the investment adviser to each Flagship Fund, although a new
investment advisory agreement with Nuveen Advisory is being proposed. For
management services provided, Flagship receives a fee accrued daily and payable
monthly at an annual rate of .50% of average net assets. See Proposal No.
2--Investment Advisory Agreements.
TRUSTEES AND OFFICERS. The trustees and officers of each of the New Trust, the
Nuveen Trust and the Flagship Trust differ. See Proposal No. 1--Election of
Trustees and the Statement of Additional Information.
DISTRIBUTOR OF THE FUNDS. Nuveen will serve as the sponsor and principal
underwriter for each New Fund. Nuveen serves in the same capacity for each
Nuveen Fund. Flagship Funds Inc. serves as the exclusive selling agent and
distributor of each Flagship Fund's shares. Class A Shares of all Funds are
generally subject to an initial sales load. Class A Shares of the
2
<PAGE> 12
Flagship Funds are, and of the New Funds will be, sold at the applicable net
asset value plus an initial sales charge based upon a schedule that begins at
4.20% for purchases of less than $50,000 and declines thereafter. The schedule
for the Nuveen Funds currently begins at 4.50% for purchases of less than
$50,000 and declines thereafter. See "Comparison of Distribution."
Pursuant to Rule 12b-1 under the 1940 Act, the New Funds have adopted a Plan of
Distribution and Service ("Plan") which provides that each class of shares
(other than Class R) will pay Nuveen a service fee of up to .20%, to be used to
compensate authorized dealers, including Nuveen, in connection with the
provision of ongoing account services to shareholders. The Nuveen Funds
currently have a service fee of up to .25%; the Flagship Funds currently have a
service fee of .20%.
The New Fund's Plan also provides for a distribution fee, payable to Nuveen, to
be used to reimburse for services and expenses incurred in connection with
distribution of Class B and Class C shares. Class A shares have no distribution
fee, Class B shares have a .75% distribution fee, and Class C shares have a .55%
distribution fee. This is lower than the current distribution fees for the
Flagship Funds, which are .20% for Class A and .75% for Class C, and equal to or
lower than the current fees for Nuveen Funds, which are 0% for Class A and .75%
for Class C. Neither the Nuveen Funds nor the Flagship Funds currently offer
Class B shares.
See "Comparative Fee Table" for a comparison of these fees.
DISTRIBUTIONS.
The Nuveen Funds currently, and the New Funds currently intend to, declare and
pay dividends monthly. The Flagship Funds currently declare dividends daily and
pay dividends monthly. The New Trust's Board will seek to maintain a relatively
stable monthly distribution. In addition, Nuveen Advisory will periodically
undertake to waive fees and reimburse expenses of the New Funds to the extent
necessary to maintain a competitive distribution rate. The current expenses, fee
waivers and reimbursements are set forth in the "Comparative Fee Table." Actual
amounts may be greater or less than those shown. There is no assurance that the
New Funds' actual expenses will be equal to or less than the current actual
expenses of the Nuveen Funds or the Flagship Funds and, in some cases, are
currently estimated to be higher; actual expenses of the New Funds will be a
function of the extent to which fee waivers and reimbursements are necessary to
maintain a competitive dividend rate consistent with the past practice of
Flagship.
PURCHASE PROCEDURES AND EXCHANGE RIGHTS.
The expenses associated with the purchase of each class of shares of each Fund
are set forth in the Comparative Fee Table.
The New Funds allow a minimum initial investment of $3,000, except for Class R,
which requires a minimum initial investment of $1 million unless purchased by
fee-based advisers, wrap accounts and certain specified categories of investors,
such as Nuveen employees and registered representatives of authorized dealers.
The New Funds offer four alternative classes of shares for purchase: Class A,
Class B, Class C and Class R. Class B Shares convert automatically into Class A
Shares eight years after purchase. Class C shares have no conversion feature;
except that Class C shareholders who originally acquired their shares from the
Nuveen Fund will retain the option to convert their shares to Class A shares at
the end of their six-year holding period on the same basis as described below,
although the conversion will no longer occur automatically. Such shareholders
will need to exercise this conversion feature if they so desire. Shares may be
purchased through authorized dealers or Nuveen by check or payment may be wired.
The New Funds offer two different systematic investment programs: the Automatic
Deposit Plan and the Payroll Direct Deposit Plan. In addition, shareholders may
exchange shares for shares of the same or equivalent class of another Nuveen
Mutual Fund with reciprocal exchange privileges at net asset value without sales
charge. In addition, the New Funds offer a reinstatement privilege and a Fund
Direct privilege to enable shareholders to send money electronically between
their accounts and their bank.
The Nuveen Funds offer the same rights and privileges as are available with the
New Funds, with the exception of Class B Shares, which are not offered by the
Nuveen Funds. In addition, Class C Shares of the Nuveen Funds currently convert
automatically to Class A Shares six years after purchase, which eliminates the
ongoing 12b-1 distribution fee. Also, the Nuveen Funds allow a minimum
investment of $1,000, whereas the New Funds allow a minimum initial investment
of $3,000.
The Flagship Funds allow a minimum initial investment of $3,000. The Flagship
Funds offer two alternative classes of shares for purchase: Class A and Class C.
There is no conversion of Class C Shares into Class A Shares. Shares may be
purchased through an authorized dealer, by mail or by wire. The Flagship Funds
offer shareholders who receive a quarterly statement from Flagship a monthly
automatic investment plan. Shares may be exchanged for shares of another fund
within the Flagship Trust at net asset value without a sales charge. In
addition, the Flagship Funds offer a reinstatement privilege. All privileges
currently offered by a Flagship Fund will also be offered by the corresponding
New Fund.
3
<PAGE> 13
REDEMPTION PROCEDURES.
The redemption charges associated with each class of shares for each Fund are
set forth in the Comparative Fee Table. The New Funds allow a variety of
redemption options, including: by orders placed with an authorized dealer; by
written request; by TEL-A-CHECK; by TEL-A-WIRE or Fund Direct; or through an
automatic withdrawal plan. The Nuveen Funds offer the same redemption options as
the New Funds. The Flagship Funds also offer essentially the same redemption
options, allowing shareholders to place an order for redemption with a financial
consultant, by written request, by telephone, through a systematic withdrawal
plan or by direct deposit into a bank account.
TRANSFER AGENT AND CUSTODIAN.
State Street Bank and Trust Company, 225 Franklin Street, Boston, MA 02106, will
be the transfer agent and custodian for the New Funds. It currently serves as
the transfer agent and custodian for the Flagship Funds. Shareholder Services,
Inc. serves as transfer agent for the Nuveen Funds, and Chase Manhattan Bank
serves as custodian for the Nuveen Funds.
AUDITORS.
The auditors for the New Funds and the Flagship Trust are Deloitte & Touche LLP.
The auditors for the Nuveen Trust are Arthur Andersen LLP.
ORGANIZATION.
The Nuveen Trust, the Flagship Trust and the New Trust are all Massachusetts
business trusts.
COSTS OF THE REORGANIZATIONS.
The costs associated with the Reorganizations for both the Nuveen Funds and
Flagship Funds will be borne by and allocated between Flagship and Nuveen
Advisory.
BOARD RECOMMENDATION THAT SHAREHOLDERS APPROVE THE AGREEMENT.
THE BOARD OF TRUSTEES OF EACH OF THE NUVEEN TRUST AND THE FLAGSHIP TRUST HAVE
DETERMINED THAT THE TRANSACTIONS CONTEMPLATED BY THE AGREEMENT ARE ADVISABLE AND
IN THE BEST INTERESTS OF EACH FUND'S SHAREHOLDERS.
THE BOARDS ARE UNANIMOUSLY RECOMMENDING THAT THE SHAREHOLDERS APPROVE THE
AGREEMENT BY VOTING FOR PROPOSAL 4.
In making this recommendation, the Boards considered the following factors,
among others:
- - Portfolio Management -- The Boards evaluated the qualifications and
capabilities of Nuveen Advisory to serve as investment adviser, noting that
Nuveen Advisory has extensive experience managing municipal bond investment
companies with approximately $30 billion under management. In addition, Nuveen
Advisory is a part of an organization that provides investment advice to or
credit surveillance for a large number of open-end and exchange-traded funds
and unit trusts. Total assets under management or credit surveillance by
Nuveen and affiliates is in excess of $45 billion.
- - Investment Objectives and Policies -- The investment objectives and policies
of each corresponding Fund are similar, each having a value-investing
orientation, commitment to research, and a focus on capital preservation.
Thus, the New Funds are expected to be managed prospectively in substantially
the same manner as the Nuveen Funds and the Flagship Funds are currently
managed.
- - Increased Investment Choices -- The New Funds would offer additional classes
of shares, which would provide existing and future shareholders the benefit of
an expanded set of purchase options.
In addition, the Flagship Trust Board considered, among other things:
- - Administrative and Operating Efficiencies -- The Board determined that Nuveen
has access to a broad array of distribution channels and that Fund
shareholders would potentially benefit from Nuveen's national sales
organization. Broader distribution should result in administrative and
operating efficiencies to the Funds from asset growth.
- - Reorganization Costs and Tax Consequences -- The costs and expenses of the
Reorganizations would be borne by Flagship and Nuveen Advisory, and will not
be borne by shareholders. In addition, the Reorganizations should not result
in any material adverse Federal income tax consequences for the Funds or their
shareholders.
- - Continuity of Portfolio Management and Distribution Personnel -- It is
expected that the current portfolio managers for the Flagship Funds will
continue as managers of the New Funds and senior personnel have agreed to sign
long-term employment contracts with Nuveen.
4
<PAGE> 14
In addition, the Nuveen Board considered, among other things:
- - Increased Distribution Capabilities -- Nuveen Funds will gain broader
distribution with brokers and have the potential to expand distribution with
financial planners and financial institutions based on a wider product line
offering. This, in turn, creates the potential for asset growth and
administrative and operating efficiencies.
- - Increased Investment Products -- Nuveen Fund shareholders will have access to
an expanded selection of investment products in the combined Nuveen Flagship
family of funds.
COMPARATIVE FEE TABLE
The purpose of the following tables is to assist shareholders of the Acquired
Funds in understanding the costs and expenses that a shareholder in the
corresponding New Fund would bear directly or indirectly.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
-----------------------------------------
SHAREHOLDER TRANSACTION EXPENSES EACH FUND
(AS A PERCENTAGE OF OFFERING PRICE) CLASS A CLASS B CLASS C CLASS R
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maximum Sales Load Imposed on Purchases
Nuveen 4.50%(1) -- None None
Flagship 4.20%(1) -- None --
New 4.20%(1) None None None
Maximum Sales Load Imposed on Reinvested Dividends
Nuveen None -- None None
Flagship None -- None --
New None None None None
Redemption Fees
Nuveen None -- None None
Flagship None -- None --
New None None None None
Exchange Fees
Nuveen None -- None None
Flagship None -- None --
New None None None None
Deferred Sales Charge (as a percentage of lesser of purchase price
or redemption proceeds)
Nuveen None(2) -- Yes(4) None
Flagship None(2) -- Yes(4) --
New None(2) Yes(3) Yes(4) None
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Reduced sales charges apply to purchases of $50,000 or more. Purchases of $1
million or more have no initial sales load imposed on purchases, but may be
subject to a contingent deferred sales charge.
(2) Class A purchases of $1 million or more at net asset value in a Nuveen Fund,
a Flagship Fund or a New Fund may be subject to a 1% contingent deferred sales
charge if redeemed within 18 months of purchase.
(3) Class B Shares are assessed a declining contingent deferred sales load if
redeemed within six years of purchase based on the following yearly schedule:
5%, 4%, 4%, 3%, 2% and 1% for years one through six, respectively.
(4) Class C Shares redeemed within one year of purchase are subject to a 1%
contingent deferred sales charge.
The fees and expenses for the Acquired Funds are based upon the actual expenses
for their last fiscal year, which was January 31, 1996 for the Nuveen Funds and
May 31, 1996 for the Flagship Funds, except for the last column which reflects
the total expenses, after fees, waivers and expense reimbursements for the
one-day period ended June 1, 1996 (annualized). The fees and expenses for the
New Funds are based upon estimated expenses, waivers and reimbursements for
their first full fiscal year.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES,
AFTER FEE WAIVERS
TOTAL EXPENSES, AND EXPENSE
OTHER AFTER FEE WAIVERS REIMBURSEMENTS
ANNUAL OPERATING EXPENSES MANAGEMENT 12B-1 OPERATING TOTAL AND EXPENSE (JUNE 1, 1996)
(AS A PERCENTAGE OF NET ASSETS) FEES FEES EXPENSES EXPENSES REIMBURSEMENTS* (ANNUALIZED)*
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ARIZONA
Class A
Nuveen .55% .25% .51% 1.31% 1.00% 1.00%
Flagship .50% .40% .17% 1.07% .69% .80%
New .55% .20% .17% .92% .87% .87%
Class B
Nuveen -- -- -- -- -- --
Flagship -- -- -- -- -- --
</TABLE>
5
<PAGE> 15
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES,
AFTER FEE WAIVERS
TOTAL EXPENSES, AND EXPENSE
OTHER AFTER FEE WAIVERS REIMBURSEMENTS
ANNUAL OPERATING EXPENSES MANAGEMENT 12B-1 OPERATING TOTAL AND EXPENSE (JUNE 1, 1996)
(AS A PERCENTAGE OF NET ASSETS) FEES FEES EXPENSES EXPENSES REIMBURSEMENTS* (ANNUALIZED)*
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
New .55% .95% .17% 1.67% 1.62% 1.62%
Class C
Nuveen .55% 1.00% .56% 2.11% 1.75% 1.75%
Flagship .50% .95% .18% 1.63% 1.23% 1.34%
New .55% .75% .17% 1.47% 1.42% 1.42%
Class R
Nuveen .55% None .60% 1.15% .75% .75%
Flagship -- -- -- -- -- --
New .55% None .17% .72% .67% .67%
FLORIDA
Class A
Nuveen .55% .25% .41% 1.21% 1.00% 1.00%
Flagship .50% .40% .12% 1.02% .83% .85%
New .54% .20% .12% .86% .86% .86%
Class B
Nuveen -- -- -- -- -- --
Flagship -- -- -- -- -- --
New .54% .95% .12% 1.61% 1.61% 1.61%
Class C
Nuveen .55% 1.00% .61% 2.16% 1.75% 1.75%
Flagship .50% .95% .10% 1.55% 1.38% 1.40%
New .54% .75% .12% 1.41% 1.41% 1.41%
Class R
Nuveen .55% None .33% .88% .75% .75%
Flagship -- -- -- -- -- --
New .54% None .12% .66% .66% .66%
PENNSYLVANIA
Class A
Nuveen .55% .25% .50% 1.30% 1.00% 1.00%
Flagship .50% .40% .23% 1.13% .79% .85%
New .55% .20% .16% .91% .72% .72%
Class B
Nuveen -- -- -- -- -- --
Flagship -- -- -- -- -- --
New .55% .95% .16% 1.66% 1.47% 1.47%
Class C
Nuveen .55% 1.00% .59% 2.14% 1.75% 1.75%
Flagship .50% .95% .23% 1.68% 1.34% 1.40%
New .55% .75% .16% 1.46% 1.27% 1.27%
Class R
Nuveen .55% None .41% .96% .75% .75%
Flagship -- -- -- -- -- --
New .55% None .16% .71% .52% .52%
VIRGINIA
Class A
Nuveen .55% .25% .40% 1.20% 1.00% 1.00%
Flagship .50% .40% .16% 1.06% .83% .80%
New .55% .20% .13% .88% .82% .82%
Class B
Nuveen -- -- -- -- -- --
Flagship -- -- -- -- -- --
New .55% .95% .13% 1.63% 1.57% 1.57%
Class C
Nuveen .55% 1.00% .37% 1.92% 1.75% 1.75%
Flagship .50% .95% .15% 1.60% 1.38% 1.35%
New .55% .75% .13% 1.43% 1.37% 1.37%
Class R
Nuveen .55% None .39% .94% .75% .75%
Flagship -- -- -- -- -- --
New .55% None .13% .68% .62% .62%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Actual amounts may be greater or less than those shown. There is no assurance
that the New Funds' actual expenses will be equal to or less than the current
actual expenses of the Nuveen Funds or the Flagship Funds and, in some cases,
are currently estimated to be higher; actual expenses of the New
6
<PAGE> 16
Funds will be a function of the extent to which fee waivers and reimbursements
are necessary to maintain a competitive dividend rate consistent with the past
practice of Flagship.
7
<PAGE> 17
EXAMPLE
The following example shows what you would pay on a $1,000 investment over
various time periods, assuming (1) a 5% annual rate of return and (2) redemption
at the end of each time period. This example is based upon the actual (or
estimated) expenses, after reimbursement, for each Fund as listed under "Total
Expenses, After Fee Waivers and Expense Reimbursements" above.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
1 YEAR 10 YEARS
3 YEARS 5 YEARS
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ARIZONA
Class A
Nuveen $55 $75 $ 98 $162
Flagship $49 $63 $ 79 $124
New $51 $69 $ 88 $145
Class B
Nuveen -- -- -- --
Flagship -- -- -- --
New $66(d) $73(d) $111(d) $172(a)
Class C
Nuveen $28(b) $55 $ 95 $168(c)
Flagship $23(b) $39 $ 68 $149(c)
New $25(b) $45 $ 78 $170(c)
Class R
Nuveen $ 8 $24 $ 42 $ 93
Flagship -- -- -- --
New $ 7 $21 $ 37 $ 83
FLORIDA
Class A
Nuveen $55 $75 $ 98 $162
Flagship $50 $67 $ 86 $140
New $50 $68 $ 88 $144
Class B
Nuveen -- -- -- --
Flagship -- -- -- --
New $66(d) $93(d) $110(d) $171(a)
Class C
Nuveen $28(b) $55 $ 95 $168(c)
Flagship $24(b) $44 $ 76 $166(c)
New $24(b) $45 $ 77 $169(c)
Class R
Nuveen $ 8 $24 $ 42 $ 93
Flagship -- -- -- --
New $ 7 $21 $ 37 $ 82
PENNSYLVANIA
Class A
Nuveen $55 $75 $ 98 $162
Flagship $50 $66 $ 84 $136
New $49 $64 $ 80 $128
Class B
Nuveen -- -- -- --
Flagship -- -- -- --
New $64(d) $89(d) $103(d) $155(a)
Class C
Nuveen $28(b) $55 $ 95 $168(c)
Flagship $24(b) $42 $ 73 $161(c)
New $23(b) $40 $ 70 $153(c)
Class R
Nuveen $ 8 $24 $ 42 $ 93
Flagship -- -- -- --
New $ 5 $17 $ 29 $ 65
</TABLE>
8
<PAGE> 18
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
VIRGINIA
Class A
Nuveen $55 $75 $ 98 $162
Flagship $50 $67 $ 86 $140
New $50 $67 $ 86 $139
Class B
Nuveen -- -- -- --
Flagship -- -- -- --
New $65(d) $92(d) $108(d) $167(a)
Class C
Nuveen $28(b) $55 $ 95 $168(c)
Flagship $24(b) $44 $ 76 $166(c)
New $24(b) $43 $ 75 $165(c)
Class R
Nuveen $ 8 $24 $ 42 $ 93
Flagship -- -- -- --
New $ 6 $20 $ 35 $ 77
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The ten-year figure for the Class B Shares of the New Funds reflects the
automatic conversion of Class B shares into Class A Shares eight years after
purchased.
(b) Assumes that the shareholder redeemed on the last day of the year and the
contingent deferred sales charge (1% if redeemed within the first year) was
applicable. If the shareholder had redeemed on the first day of the next year,
the expenses for the Nuveen Funds would have been $18 and the expenses for the
Flagship Funds would have been $13 for Flagship Arizona and $14 for Flagship
Florida, Flagship Pennsylvania and Flagship Virginia. The expenses for New Funds
would have been $14 for Arizona, Florida and Virginia and $13 for Pennsylvania.
(c) The ten-year figure for the Class C Shares of the Nuveen Funds reflects the
automatic conversion of Class C Shares into Class A Shares six years after
purchase. The Flagship Funds has no conversion privilege. The New Funds have no
conversion privilege; except that Class C shareholders who originally acquired
their shares from the Nuveen Fund will retain the option to convert their shares
to Class A Shares at the end of their six-year holding period. The ten-year
figure for the former Nuveen Class C shareholders of the New Fund does not
reflect this conversion. Had this conversion been reflected the expenses would
have been as follows: $142 for Arizona, $140 for Florida, $124 for Pennsylvania
and $136 for Virginia.
(d) Assumes that the shareholder redeemed on the last day of the year and the
contingent deferred sales charge was applied as follows: 1 year (5%), 3 years
(4%) and 5 years (2%). If instead the shareholder had redeemed on the first day
of the next year, the expenses would have been as follows: 1 year - $56 for the
New Arizona, New Florida and New Virginia and $55 for the New Pennsylvania, 3
years - $83 for New Arizona and New Florida, $78 for New Pennsylvania and $81
for New Virginia, and 5 years - $100 for New Arizona, $99 for New Florida, $92
for New Pennsylvania and $97 for New Virginia. See "How to Buy Fund
Shares -- Class B Shares."
This example does not represent past or future expenses. ACTUAL EXPENSES MAY BE
GREATER OR LESS THAN THOSE SHOWN. Moreover, a Fund's actual rate of return may
be greater or less than the hypothetical 5% return shown in this example. This
example assumes that the percentage amounts listed under "Total Expenses, After
Fee Waivers and Expense Reimbursements" remain the same in each of the periods.
9
<PAGE> 19
RISKS AND SPECIAL CONSIDERATIONS
GENERAL
As with other bond mutual funds or any long-term, fixed income investment, the
value of each New Fund's portfolio will tend to vary inversely with changes in
prevailing interest rates. Accordingly, each New Fund should be considered a
long-term investment, designed to provide the best results when held for a
multi-year period. A New Fund may not be suitable if you have a short-term
investment horizon. Additionally, each New Fund's portfolio may be susceptible
to political, economic or regulatory developments affecting issuers of Municipal
Obligations in its state. New Virginia and New Pennsylvania are
"non-diversified," and, therefore may be more susceptible to any single
economic, political or regulatory occurrence than a "diversified fund." The New
Funds also have the ability to engage in certain investment practices, including
the purchase of Municipal Obligations that pay interest subject to the federal
alternative minimum tax, the purchase or sale of securities on a when-issued or
delayed delivery basis, the purchase or sale of municipal lease and installment
purchase obligations, and the purchase or sale of futures or options for hedging
purposes. As described elsewhere in this Joint Proxy Statement-Prospectus, the
New Funds have no present intention of purchasing or selling futures or options.
In addition, the following information is a brief summary of special factors
that affect the risk of investing in Municipal Obligations issued within each
New Fund's state. This information was obtained from official statements of
issuers located in these states as well as from other publicly available
official documents and statements and is not intended to be a complete
description. The New Funds have not independently verified any of the
information contained in these statements and documents. See the Statement of
Additional Information for further information relating to current political,
economic or regulatory risk factors as well as information relating to legal
proceedings which may adversely affect a state's financial position.
ARIZONA
Arizona is the nation's sixth largest state in terms of area. Arizona's main
economic sectors are services, tourism and manufacturing. The unemployment rate
in Arizona for 1995 was 5.1% and for 1994 was 6.3%. Slower construction and real
estate activity is at the heart of the current weakness in the State's financial
sector. In recent years, revenue and budgeted expenditures for the State and its
political subdivisions have been limited due to reduced federal funds for
states, by Constitutional restrictions on ad valorem taxes and by adverse
economic conditions.
FLORIDA
Florida is the nation's fourth most populous state, and has averaged 2.3% annual
population growth over the last decade. National demographic trends may slow
Florida's population growth over the next decade, however. Tourism continues its
recent slight decline, but is expected to increase by 4.5% in 1996-97. Florida's
unemployment rate is currently projected to be 5.9% in 1996-97. The State's
Constitution mandates a balanced budget. Florida retains a bond rating of Aa and
AA from Moody's and S&P, respectively, on the majority of its general obligation
bonds.
PENNSYLVANIA
The Commonwealth of Pennsylvania and certain of its municipal subdivisions,
including the City of Philadelphia, have undergone the financial difficulties
and pressures that accompany a decline in economic conditions. As the heavy
industries historically associated with Pennsylvania have declined with
increasing competition from foreign producers, the services sector, including
trade, medical and health services, education and financial institutions, has
provided major new sources of growth. Agriculture related industries continue to
be an important part of Pennsylvania's economy. Both the Commonwealth and the
City of Philadelphia have historically experienced significant revenue
shortfalls. On the other hand, rising demands on state programs, particularly
for medical assistance and cash assistance programs, and the increased cost of
special education programs and correction facilities and programs, have
contributed to increased expenditures. In response, the Commonwealth and the
City of Philadelphia have, in recent years, sought to balance budgets with a
combination of tax increases and expenditure restraints. Although there can be
no assurance that such conditions will continue, all outstanding general
obligation bonds of the Commonwealth are currently rated at AA- by S&P and A1 by
Moody's. [Any Fitch rating?]
VIRGINIA
Virginia's financial condition is supported by a broad-based economy, including
manufacturing, tourism, agriculture, ports, mining and fisheries. Manufacturing
continues to be a major source of employment, ranking behind only services,
wholesale and retail trade, and government (federal, state and local). Defense
activity is an important component of Virginia's economy; however, defense
employment in Virginia can be expected to continue to decline as previously
announced base closures are implemented and the military downsizes. Economic
growth continued in fiscal year 1995 and employment continued to give brighter
news. Unemployment dropped to 4.7%, compared to the national rate of 5.7%. Per
capita income of $22,501 was 104% of the national figure. While Virginia has
nearly completed an economic recovery from the 1990-91 recession, the
implementation of cutbacks and the duration of the period of economic growth are
continuing sources of
10
<PAGE> 20
concern. Growing interest in Virginia by major corporations as a site for new
facilities is the brightest hope for the future of the state economy. Although
there can be no assurance that such will continue, the Commonwealth of Virginia
has consistently maintained ratings of AAA by S&P and Aaa by Moody's on its
general obligation indebtedness, reflecting in part its sound fiscal management,
diversified economic base and low debt ratios.
COMPARATIVE CONSIDERATIONS
The portfolio characteristics of the New Funds will reflect the blended
characteristics of corresponding Nuveen Funds and Flagship Funds that are
proposed to be combined into the New Fund. The following characteristics are as
of May 31, 1996 for the Nuveen Funds and for the Flagship Funds, and for the New
Funds, reflect the blended characteristics of the Nuveen Funds and the Flagship
Funds as of that same date.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
AVG. AVG. PORTFOLIO QUALITY(3)
SEC MATURITY(2) DURATION(2) -------------------------------------------------------
YIELD(1) (YEARS) (YEARS) AAA AA A BBB UNRATED
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ARIZONA
Nuveen 4.60% 18.90 8.52 56.70% 16.20% 13.90% 11.50% 1.70%
Flagship 5.16% 13.59 8.40 74.77% 4.10% 14.51% 4.72% 1.90%
New (Pro
forma)(4) 4.95% 14.77 8.43 70.75% 6.79% 14.37% 6.23% 1.86%
FLORIDA
Nuveen 4.47% 19.95 7.60 69.40% 20.60% 7.80% 2.20% --
Flagship 4.93% 20.83 8.86 62.24% 9.24% 12.89% 10.09% 5.54%
New (Pro
forma)(4) 4.88% 20.69 8.66 63.38% 11.06% 12.08% 8.83% 4.65%
PENNSYLVANIA
Nuveen 4.72% 20.70 8.43 65.40% 6.90% 11.80% 13.30% 2.60%
Flagship 5.31% 21.74 8.90 48.70% 2.11% 22.59% 23.11% 3.49%
New (Pro
forma)(4) 5.25% 21.16 8.64 58.08% 4.80% 16.53% 17.60% 2.99%
VIRGINIA
Nuveen 4.75% 21.04 8.48 23.40% 42.30% 29.20% 2.40% 2.70%
Flagship 5.01% 20.42 8.12 24.31% 25.63% 31.78% 10.00% 8.28%
New (Pro
forma)(4) 4.78% 20.63 8.24 24.01% 31.20% 30.92% 7.46% 6.41%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The SEC yield provided for each Fund represents the SEC yield for Class A
Shares for the 30 days ended May 31, 1996. The SEC yield is computed by dividing
the net investment income per share earned during a specified one month or
30-day period by the maximum offering price per share on the last day of the
period.
(2) Both dollar-weighted average maturity and duration reflect the sensitivity
of a Fund to interest rate fluctuations, whereby a Fund with a longer maturity
and duration reacts more strongly to interest rate changes than a Fund with a
shorter maturity and duration. The average dollar-weighted maturity of a Fund is
the dollar-weighted average of the stated maturities of all debt instruments
held by the Fund. Duration is the weighted present value of principal and
interest payments expressed in years and may more accurately measure a Fund's
sensitivity to incremental changes in interest rates than average maturity. For
example, a Fund with a duration of 5.0 should have half the interest rate
sensitivity of a Fund with a duration of 10.0.
(3) Represents the higher of ratings by Moody's and S&P in the case of the
Nuveen Funds, and the higher of the ratings of Moody's, S&P and Fitch in the
case of the Flagship Funds and the New Funds. See Annex A to the Statement of
Additional Information for a general description of Moody's, S&P's and Fitch's
ratings of Municipal Obligations.
(4) Reflects the blended characteristics of the Nuveen Fund and the Flagship
Fund as of May 31, 1996.
THE MEETINGS
GENERAL
This Joint Proxy Statement--Prospectus is furnished in connection with the
solicitation by the Boards of the Trusts of proxies to be voted at the Acquired
Funds' Special Meetings to be held in the 31st floor conference room of John
Nuveen & Co. Incorporated, 333 West Wacker Drive, Chicago, Illinois 60606 on
Thursday, December 12, 1996, at 10:00 a.m., and at any and all adjournments. At
the meetings, shareholders of the Nuveen Funds and the Flagship Funds will be
asked to approve the following:
(1) To elect eight (8) trustees:
(a) for the Flagship Funds, to the Board of the Flagship Trust,
(b) for the Nuveen Funds, to the Board of the Nuveen Trust;
(2) For the Flagship Funds, to approve a new investment advisory agreement
with Nuveen Advisory Corp.;
(3) For the Flagship Funds, to approve a new Rule 12b-1 Plan;
11
<PAGE> 21
(4) Reorganizations as follows:
(a) shareholders of Nuveen Arizona and Flagship Arizona will be asked to
approve an Agreement and Plan of Reorganization (the "Arizona
Agreement") whereby substantially all the assets and liabilities of
Nuveen Arizona and Flagship Arizona will be acquired by Nuveen Flagship
Arizona Municipal Bond Fund ("New Arizona"), in exchange for shares of
New Arizona;
(b) shareholders of Nuveen Florida and Flagship Florida will be asked to
approve an Agreement and Plan of Reorganization (the "Florida
Agreement") whereby substantially all the assets and liabilities of
Nuveen Florida and Flagship Florida will be acquired by Nuveen Flagship
Florida Municipal Bond Fund ("New Florida") in exchange for shares of
New Florida;
(c) shareholders of Nuveen Pennsylvania and Flagship Pennsylvania will
be asked to approve an Agreement and Plan of Reorganization (the
"Pennsylvania Agreement") whereby substantially all the assets and
liabilities of Nuveen Pennsylvania and Flagship Pennsylvania will be
acquired by Nuveen Flagship Pennsylvania Municipal Bond Fund ("New
Pennsylvania") in exchange for shares of New Pennsylvania; and
(d) shareholders of Nuveen Virginia and Flagship Virginia will be asked
to approve an Agreement and Plan of Reorganization (the "Virginia
Agreement") whereby substantially all the assets and liabilities of
Nuveen Virginia and Flagship Virginia will be acquired by Nuveen
Flagship Virginia Municipal Bond Fund ("New Virginia") in exchange for
shares of New Virginia.
The Arizona Agreement, the Florida Agreement, the Pennsylvania Agreement and the
Virginia Agreement are each referred to as an "Agreement."
The following table indicates which shareholders are solicited with respect to
each proposal:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
FLAGSHIP FLAGSHIP FLAGSHIP FLAGSHIP NUVEEN NUVEEN NUVEEN NUVEEN
PROPOSAL ARIZONA FLORIDA PENNSYLVANIA VIRGINIA ARIZONA FLORIDA PENNSYLVANIA VIRGINIA
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1) Election of Trustees X X X X X X X X
2) Investment Advisory Agreements X X X X
3) Rule 12b-1 Plan X X X X
4) Reorganizations X X X X X X X X
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The cost of preparing, printing and mailing the enclosed proxy, accompanying
notice and Joint Proxy Statement--Prospectus, and all other costs in connection
with the solicitation of proxies for the Acquisition and the Reorganizations
will be paid for by and allocated between Nuveen Advisory and Flagship and, with
respect to the Nuveen Funds, to the extent the costs are incremental and relate
to matters other than the Acquisition or the Reorganizations, they will be paid
by the Nuveen Funds.
Additional solicitation may be made by letter, telephone or telegraph by
officers of the Trusts, by officers or employees of Flagship or Nuveen Advisory,
or by dealers and their representatives, who will receive no extra compensation
for their services. In addition, Flagship and Nuveen Advisory may retain a firm
to assist in the solicitation of proxies, the costs and expenses of which will
be paid by Flagship and Nuveen Advisory.
The Board of each Trust has fixed the close of business on October 18, 1996 as
the record date (the "Record Date") for determining holders of the Fund's shares
entitled to notice of and to vote at the Meeting. Each shareholder will be
entitled to one vote for each share held. At the close of business on the Record
Date, the following shares were outstanding:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
CLASS A CLASS C CLASS R
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NUVEEN TRUST
Nuveen Arizona
Nuveen Florida
Nuveen Pennsylvania
Nuveen Virginia
FLAGSHIP TRUST
Flagship Arizona
Flagship Florida
Flagship Pennsylvania
Flagship Virginia
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
This Joint Proxy Statement--Prospectus is first being mailed to shareholders of
the Acquired Funds on or about November , 1996. EACH ACQUIRED FUND WILL
FURNISH, WITHOUT CHARGE, A COPY OF ITS ANNUAL REPORT UPON REQUEST. SUCH WRITTEN
OR ORAL REQUEST SHOULD BE DIRECTED, FOR THE NUVEEN FUNDS, TO JOHN NUVEEN & CO.
INCORPORATED AT 333 WEST WACKER DRIVE, CHICAGO, ILLINOIS 60606 OR BY CALLING
1-800-621-7277 AND, FOR THE FLAGSHIP FUNDS, TO FLAGSHIP FINANCIAL INC. AT ONE
SOUTH MAIN STREET, DAYTON, OHIO 45402 OR BY CALLING 1-800-414-7447.
12
<PAGE> 22
VOTING; PROXIES
Shares of each Acquired Fund entitled to vote at the meeting that are
represented by properly executed proxies will, unless such proxies have been
revoked, be voted in accordance with the shareholder's instructions indicated on
such proxies. If no contrary instructions are indicated, all such shares will be
voted FOR the election of the persons who have been nominated as Trustees for
the applicable Trust and FOR Proposals 2, 3 and 4.
For the Flagship Funds, a quorum of shareholders of the Flagship Trust is
required to take action at the meeting. For the Nuveen Funds, a quorum of
shareholders of the Nuveen Trust is required to take action at the meeting. A
majority of the shares entitled to vote at each meeting, represented in person
or by proxy, will constitute a quorum of shareholders.
Votes cast by proxy or in person at each meeting will be tabulated by the
inspectors of election appointed for that meeting. The inspectors of election
will determine whether or not a quorum is present at that meeting. The
inspectors of election will treat abstentions and "broker non-votes" (i.e.,
shares held by brokers or nominees, typically in "street name," as to which (i)
instructions have not been received from the beneficial owners or persons
entitled to vote and (ii) the broker or nominee does not have discretionary
voting power on a particular matter) as present for purposes of determining a
quorum.
For purposes of determining the approval of the matters submitted to
shareholders for a vote, (i) abstentions and broker non-votes will have the same
effect as a vote against Proposals 2, 3 and 4 and (ii) abstentions and broker
non-votes will have no effect on the election of Trustees. Proxies solicited and
signed in accordance with voting instructions given by telephone or
electronically transmitted instruments may be counted if obtained pursuant to
procedures designed to verify that such instructions have been authorized.
The details of each proposal to be voted upon by shareholders of the Acquired
Funds and the vote required for approval of each proposal are set forth under
the description of each proposal below. Shareholders of any Acquired Fund who
execute proxies may revoke them at any time before they are voted by filing with
such Acquired Fund a written notice of revocation, by delivering a duly executed
proxy bearing a later date or by attending the meeting and voting in person.
If, by the time scheduled for the meeting, a quorum of shareholders of a Trust
is not present or if a quorum is present but sufficient votes in favor of any of
the items are not received, the persons named as proxies may propose one or more
adjournments of the meeting for the Trust to permit further soliciting of
proxies from shareholders of the Trust. Any such adjournment will require the
affirmative vote of a majority of the shares of the Trust (or Fund) present (in
person or by proxy) at the session of the meeting to be adjourned. The persons
named as proxies will vote in favor of any such adjournment if they determine
that such adjournment and additional solicitation are reasonable and in the
interest of the Trust's shareholders.
AVAILABLE INFORMATION
The Acquired Funds and the New Funds are subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the 1940 Act and in accordance therewith are required to file
reports, proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). Any such reports, proxy statements and other
information can be inspected and copied at the public reference facilities of
the Commission, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the Commission's Northeast Regional Office, Suite 1300, Seven World Trade
Center, New York, New York 10048 and Midwest Regional Office, Suite 1400,
Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661-2511. Copies
of such materials can be obtained from the Public Reference Branch, Office of
Consumer Affairs and Information Services of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates.
The New Trust has filed with the Commission a registration statement on Form
N-14 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), relating to the New Funds shares to be issued pursuant to the
Reorganization. This Joint Proxy Statement--Prospectus and the related Statement
of Additional Information does not contain all of the information set forth in
the Registration Statement, certain parts of which are omitted in accordance
with the rules and regulations of the Commission. For further information with
respect to the New Funds shares to be issued pursuant to the Reorganization,
reference is hereby made to the Registration Statement. Statements contained in
the Joint Proxy Statement--Prospectus and the related Statement of Additional
Information as to the content of any contract or other document referred to are
not necessarily complete, and in each instance reference is made to the copy of
such contract or other document included as an Annex hereto or filed as an
exhibit to the Registration Statement.
The information in this Joint Proxy Statement--Prospectus concerning the New
Funds has been furnished by the New Funds, and the information concerning the
Acquired Funds have been furnished by the Acquired Funds. This Joint Proxy
Statement--Prospectus constitutes a prospectus of the New Funds with respect to
the New Funds shares issued pursuant to the Reorganization.
13
<PAGE> 23
PROPOSAL NO. 1--ELECTION OF TRUSTEES
PROPOSAL 1A. FLAGSHIP FUNDS
A condition to the consummation of the Flagship Acquisition is that the
composition of the Flagship Trust's Board of Trustees must comply with Section
15(f) of the 1940 Act. Section 15(f) provides, in pertinent part, that for a
period of three years after the Acquisition, at least 75% of the members of the
Board may not be "interested persons" (as defined in the 1940 Act) of Flagship
or Nuveen.
In order to meet the requirements of Section 15(f), eight (8) persons have been
nominated to the Board. The nominees include two of the Trust's current
disinterested Trustees (Robert P. Bremner and William J. Schneider), four
additional disinterested nominees (all four of whom also serve as disinterested
members of the boards of the New Trust, the Nuveen Trust and other mutual funds
managed by Nuveen Advisory) and two nominees who are directors of Nuveen
Advisory and who also serve as board members of Nuveen affiliated funds. R.
Bremner and W. Schneider have also been nominated to serve as board members of
other mutual funds managed by Nuveen Advisory.
The nominees, if elected, will take office upon the consummation of the
Acquisition and their election and qualification is contingent upon consummation
of the Acquisition. The term of each person elected as Trustee will be from the
date of the consummation of the Acquisition until the next meeting held for the
purpose of electing Trustees and until his or her successor is elected and
qualified. If the Acquisition is not consummated, the current Trustees of the
Flagship Trust will continue to serve as the Flagship Trust's Board.
All of the nominees have consented to serve as Trustees. However, if any nominee
is not available for election at the time of the meeting, the proxies may be
voted for such other person(s) as shall be determined by the persons acting
under the proxies in their discretion.
The following table shows each nominee who is standing for election and such
nominee's age, principal occupation or employment during the past five years and
other board memberships. The table also shows the year in which the nominee was
first elected or appointed to the Board of Trustees of the Flagship Trust, in
addition to shareholdings in each Flagship Fund.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
SHARES/PERCENTAGE
NAME, AGE AND LENGTH OF BENEFICIALLY OWNED AS OF
FIVE-YEAR BUSINESS EXPERIENCE SERVICE JULY 31, 1996 BY FUND
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Robert P. Bremner (56) Since 1983 None
Private Investor and Management Consultant
William J. Schneider (52) Since 1983 None
Senior Partner, Miller-Valentine Partners, Vice President,
Miller-Valentine Realty, Inc.
Lawrence H. Brown (61) Nominee None
Retired in August 1989 as Senior Vice President of The Northern
Trust Company
*Anthony T. Dean (51) Nominee None
Director and (since July 1996) President of The John Nuveen
Company, John Nuveen & Co. Incorporated, Nuveen Advisory Corp. and
Nuveen Institutional Advisory Corp.; prior thereto, Executive Vice
President of The John Nuveen Company, John Nuveen & Co.
Incorporated, Nuveen Advisory Corp. and Nuveen Institutional
Advisory Corp.
Anne E. Impellizzeri (63) Nominee None
President and Chief Executive Officer of Blanton-Peale Institute
(since December 1990); prior thereto, Vice President of New York
City Partnership (from 1987 to 1990) and Vice President of
Metropolitan Life Insurance Company (from 1980 to 1987)
Margaret K. Rosenheim (69) Nominee None
Helen Ross Professor of Social Welfare Policy, School of Social
Service Administration, University of Chicago
Peter R. Sawers (63) Nominee None
Adjunct Professor of Business and Economics, University of Dubuque,
Iowa; Adjunct Professor, Lake Forest Graduate School of Management,
Lake Forest, Illinois (since January 1992); prior thereto,
Executive Director, Towers Perrin Australia (management
consultant); Chartered Financial Analyst; Certified Management
Consultant
*Timothy R. Schwertfeger (47) Nominee None
Chairman (since July 1996) and Director of The John Nuveen Company,
John Nuveen & Co. Incorporated, Nuveen Advisory Corp. and Nuveen
Institutional Advisory Corp.; prior thereto Executive Vice
President of The John Nuveen Company, John Nuveen & Co.
Incorporated, Nuveen Advisory Corp. and Nuveen Institutional
Advisory Corp.
- --------------------------------------------------------------------------------------------------------------
</TABLE>
* Trustees who are or would be "interested persons" as defined in the Investment
Company Act of 1940.
R. Bremner and W. Schneider serve as board members of two registered investment
companies advised by Flagship. L. Brown, A. Dean, A. Impellizzeri, M. Rosenheim,
P. Sawers and T. Schwertfeger serve as board members of 61 registered
14
<PAGE> 24
investment companies advised by Nuveen Advisory. In addition, A. Dean and T.
Schwertfeger serve as board members of six registered investment companies
advised by Nuveen Institutional Advisory Corp. The current trustees of the
Flagship Trust are Robert Bremner, William Schneider, Richard P. Davis, Bruce P.
Bedford, Joseph F. Castellano and Paul F. Nezi.
The Board met seven times during the Trust's fiscal year ended May 31, 1996.
Each then current trustee attended 75% or more of the respective meetings of the
Board and the committees of which he was a member.
The Trust currently pays each disinterested trustee $3,750 per quarter plus an
additional $1,500 per meeting. As reflected above, the trustees currently serve
as board members of one other investment company for which Flagship serves as
investment adviser. Trustees or officers who are "interested persons" receive no
compensation from the Trust.
The table below shows, for each disinterested trustee, the aggregate
compensation paid or accrued by the Trust for the fiscal year ended May 31, 1996
and the total compensation that all Flagship Funds paid to each trustee during
the calendar year 1995.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
TOTAL COMPENSATION
AGGREGATE FROM TRUST AND
COMPENSATION FUND COMPLEX
TRUSTEES FROM TRUST PAID TO TRUSTEES
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Robert P. Bremner $20,500 $25,500
Joseph F. Castellano $21,500 $26,500
William J. Schneider $21,500 $26,500
Paul F. Nezi $21,500 $26,500
- --------------------------------------------------------------------------------------------------------------
</TABLE>
OFFICERS. Information about the executive officers of the Trust, with their ages
and term of office indicated, is set forth below.
<TABLE>
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
Bruce P. Bedford (56) Chairman since 1983 Chairman and Chief Executive Officer of Flagship,
Flagship Funds Inc. and Flagship Resources Inc.
Richard P. Davis (47) President since 1988 President and Chief Operating Officer of Flagship,
Flagship Funds Inc. and Flagship Resources Inc.
M. Patricia Madden (60) Vice President since Vice President, Operations Flagship Funds Inc.
1992
Michael D. Kalbfleisch (37) Treasurer and Secretary Vice President and Chief Financial Officer of Flagship,
since 1986 Flagship Funds Inc. and Flagship Resources Inc.
LeeAnne G. Sparling (33) Controller since 1995 Director of Portfolio Operations of Flagship.
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
It is anticipated that, after completion of the Acquisition, the restructured
Board will elect new officers who are expected to include persons affiliated
with Nuveen and Flagship.
As of July 31, 1996, the trustees and executive officers of the Flagship Trust
as a group beneficially did not own any shares of the Flagship Funds and owned
371,154 shares of the Flagship Trust. As of July 31, 1996, no person is known to
the Flagship Trust to have owned beneficially more than five percent of the
shares of any class of any Flagship Fund, except as set forth in Annex C.
PROPOSAL 1B. NUVEEN FUNDS
In order to conform the board memberships of the Nuveen family of mutual funds
after the Acquisition, the same eight (8) persons as shown above for the
Flagship Trust have been nominated to the Nuveen Trust's Board. The nominees
include the Trust's current four disinterested Trustees, the Trust's current two
interested Trustees, and two additional disinterested nominees (both of whom
serve as disinterested members of the boards of other mutual funds managed by
Flagship).
The nominees, if elected, will take office upon the consummation of the Flagship
Acquisition and their election and qualification is contingent upon consummation
of the Acquisition. The term of each person elected as Trustee will be from the
date of the consummation of the Acquisition until the next meeting held for the
purpose of electing Trustees and until his or her successor is elected and
qualified. If the Flagship Acquisition is not consummated, the current Trustees
of the Nuveen Trust will continue to serve as the Nuveen Trust's Board.
15
<PAGE> 25
All of the nominees have consented to serve as Trustees. However, if any nominee
is not available for election at the time of the Meeting, the proxies may be
voted for such other person(s) as shall be determined by the persons acting
under the proxies in their discretion.
The following table shows each nominee and the year in which the nominee was
first elected or appointed to the Board of Trustees of the Nuveen Trust, in
addition to shareholdings in each Nuveen Fund.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
SHARES/PERCENTAGE
BENEFICIALLY OWNED AS OF
NAME LENGTH OF SERVICE JULY 31, 1996 BY FUND
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Robert P. Bremner Nominee None
William J. Schneider Nominee None
Lawrence H. Brown Since 1993 None
*Anthony T. Dean Since 1996 None
Anne E. Impellizzeri Since 1994 None
Margaret K. Rosenheim Since 1991 None
Peter R. Sawers Since 1991 None
*Timothy R. Schwertfeger Since 1994 None
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
* Trustees who are or would be "interested persons" as defined in the Investment
Company Act of 1940.
L. Brown, A. Dean, A. Impellizzeri, M. Rosenheim, P. Sawers and T. Schwertfeger
serve as board members of 61 registered investment companies advised by Nuveen
Advisory. In addition, A. Dean and T. Schwertfeger serve as board members of six
registered investment companies advised by Nuveen Institutional Advisory Corp.
R. Bremner and W. Schneider serve as board members of two registered investment
companies advised by Flagship. The current Trustees of the Nuveen Trust are L.
Brown, A. Dean, A. Impellizzeri, M. Rosenheim, P. Sawers and T. Schwertfeger.
A. Dean, M. Rosenheim and T. Schwertfeger currently serve as members of the
executive committee of the Nuveen Trust's Board. The executive committee, which
meets between regular meetings of the Board, is authorized to exercise all of
the powers of the Board. The executive committee held twelve meetings for the
fiscal year ended January 31, 1996. All the executive committee meetings for the
Trust were held for the sole purpose of declaring dividends.
The Board has an audit committee composed of L. Brown, A. Impellizzeri, M.
Rosenheim and P. Sawers, disinterested Trustees of the Nuveen Trust. The audit
committee reviews the work and any recommendations of the Trust's independent
public auditors. Based on such review, it is authorized to make recommendations
to the Board. The audit committee of the Nuveen Trust held three meetings for
the fiscal year ended January 31, 1996.
Nomination of those Trustees who are disinterested Trustees of the Nuveen Trust
is the responsibility of a nominating committee composed of the disinterested
Trustees. It identifies and recommends individuals to be nominated for election
as disinterested Trustees. The nominating committee held one meeting for the
fiscal year ended January 31, 1996. No policy or procedure has been established
as to the recommendation of nominees by shareholders.
The Board of the Trust held five meetings for the fiscal year ended January 31,
1996. During the fiscal year, each Trustee attended 75% or more of the Trust's
Board meetings and the committee meetings (if a member thereof).
The interested Trustees serve without any compensation from the Trust. The
disinterested Trustees receive a $45,000 annual retainer for serving as a board
member of all funds sponsored by Nuveen and managed by Nuveen Advisory and a
$1,000 fee per day plus expenses for attendance at all meetings held on a day on
which a regularly scheduled Board meeting is held, a $1,000 fee per day plus
expenses for attendance in person or a $500 fee per day plus expenses for
attendance by telephone at a meeting held on a day on which no regular Board
meeting is held, and a $250 fee per day plus expenses for attendance in person
or by telephone at a meeting of the executive committee. The annual retainer,
fees and expenses are allocated among the funds managed by Nuveen Advisory on
the basis of relative net asset sizes. The Nuveen Trust has adopted a Directors'
Deferred Compensation Plan pursuant to which a Trustee may elect to have all or
a portion of the Trustee's fee deferred. Trustees may defer fees for any
calendar year by the execution of a Participation Agreement prior to the
beginning of the calendar year during which the Trustee wishes to begin
deferral.
16
<PAGE> 26
The table below shows, for each disinterested Trustee, the aggregate
compensation paid or accrued by the Trust for the fiscal year ended January 31,
1996 and the total compensation that all Nuveen Funds paid to each Trustee
during the calendar year 1995.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
TOTAL COMPENSATION
AGGREGATE FROM TRUST AND
COMPENSATION FUND COMPLEX
TRUSTEES FROM TRUST PAID TO TRUSTEES
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Lawrence H. Brown $1,873 $55,500
Anne E. Impellizzeri $1,873 $63,000
Margaret K. Rosenheim $1,971 $62,322(1)
Peter R. Sawers $1,873 $55,500
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes $1,572 in interest accrued on deferred compensation from prior
years.
OFFICERS. Information about the executive officers of the Trust, with their ages
and term of office indicated, is set forth below.
<TABLE>
- -------------------------------------------------------------------------------------------------------
<S> <C>
William M. Fitzgerald, 32 Vice President
Vice President of Nuveen Advisory Corp. (since December 1995); (since 1996)
prior thereto, Assistant Vice President (from September 1992 to
December 1995) and Assistant Portfolio Manager (from June 1988 to
September 1992) of Nuveen Advisory Corp., Chartered Financial
Analyst.
Kathleen M. Flanagan, 49 Vice President
Vice President of John Nuveen & Co. Incorporated and (since 1996) (since 1994)
Vice President of Nuveen Advisory Corp. and Nuveen Institutional
Advisory Corp.
J. Thomas Futrell, 41 Vice President
Vice President of Nuveen Advisory Corp.; Chartered Financial (since the Trust's organization)
Analyst.
Steven J. Krupa, 38 Vice President
Vice President of Nuveen Advisory Corp. (since the Trust's organization)
Anna R. Kucinskis, 50 Vice President
Vice President of John Nuveen & Co. Incorporated (since the Trust's organization)
Larry W. Martin, 45 Vice President (since 1993) &
Vice President (since September 1992), Assistant Secretary and Assistant Secretary (since the
Assistant General Counsel of John Nuveen & Co. Incorporated; Vice Trust's organization)
President (since May 1993) and Assistant Secretary of Nuveen
Advisory Corp.; Vice President (since May 1993) and Assistant
Secretary (since January 1992) of Nuveen Institutional Advisory
Corp.; Assistant Secretary (since February 1993) of The John Nuveen
Company; Director of Nuveen Duff & Phelps Investment Advisors
(since January 1995).
O. Walter Renfftlen, 57 Vice President & Controller
Vice President and controller of The John Nuveen Company (since (since the Trust's organization)
March 1992), John Nuveen & Co. Incorporated, Nuveen Advisory Corp.
and Nuveen Institutional Advisory Corp.
Thomas C. Spalding, Jr., 45 Vice President
Vice President of Nuveen Advisory Corp. and Nuveen Institutional (since the Trust's organization)
Advisory Corp.; Chartered Financial Analyst.
H. William Stabenow, 62 Vice President & Treasurer
Vice President and Treasurer of The John Nuveen Company (since (since the Trust's organization)
March 1992), John Nuveen & Co. Incorporated, Nuveen Advisory Corp.
and Nuveen Institutional Advisory Corp. (since January 1992).
James J. Wesolowski, 46 Vice President & Secretary
Vice President, General Counsel and Secretary of The John Nuveen (since the Trust's organization)
Company (since March 1992), John Nuveen & Co. Incorporated, Nuveen
Advisory Corp. and Nuveen Institutional Corp.
Gifford R. Zimmerman, 39 Vice President (since 1993) &
Vice President (since September 1992); Assistant Secretary and Assistant Secretary (since the
Assistant General Counsel of John Nuveen & Co. Incorporated; Vice Trust's organization)
President (since May 1993) and Assistant Secretary of Nuveen
Advisory Corp.; Vice President (since May 1993) and Assistant
Secretary (since January 1992) of Nuveen Institutional Advisory
Corp.; Assistant Secretary of The John Nuveen Company (since May
1994)
- -------------------------------------------------------------------------------------------------------
</TABLE>
It is anticipated that, after completion of the Acquisition, the restructured
Board will elect new officers who are expected to include persons affiliated
with Nuveen and Flagship.
17
<PAGE> 27
As of July 31, 1996, the Trustees and executive officers of the Nuveen Trust as
a group did not own beneficially any shares of the Nuveen Funds or the Nuveen
Trust.
As of July 31, 1996, no person is known to the Nuveen Trust to have owned
beneficially more than five percent of any class of the shares of any Nuveen
Fund, except as set forth on Annex C.
VOTES REQUIRED
On Proposal 1, all the series of the Nuveen Trust and all the series of the
Flagship Trust, respectively, will vote in the aggregate, and not by Fund,
including other series to which this Joint Proxy Statement--Prospectus does not
relate.
For the Nuveen Trust, election of trustees requires an affirmative vote of a
plurality of the shares of the Nuveen Trust present and entitled to vote at the
meeting.
For the Flagship Trust, election of trustees requires an affirmative vote of a
plurality of the shares of the Flagship Trust present and entitled to vote at
the meeting.
PROPOSAL NO. 2--INVESTMENT ADVISORY AGREEMENTS
[FOR FLAGSHIP FUNDS ONLY]
REASONS FOR SHAREHOLDERS VOTE
Upon the acquisition of Flagship Resources Inc., as described below, the
investment advisory agreement for each of the Flagship Funds will immediately
terminate, by operation of law. In order for the Flagship Funds to receive
advisory services from Nuveen Advisory, shareholders must approve a new
investment advisory agreement. The terms of the proposed investment advisory
agreements are described below.
FLAGSHIP--ACQUISITION
The John Nuveen Company, the parent company of Nuveen Advisory and Nuveen, has
entered into an Agreement and Plan of Merger dated July 16, 1996 (the
"Acquisition Agreement") to acquire Flagship Resources Inc. and its
subsidiaries, Flagship and Flagship Funds Inc. (the "Acquisition" or the
"Flagship Acquisition"). Subsequent to the Acquisition, The John Nuveen Company
will consider reorganizations or consolidations of the businesses and operations
of Flagship Financial Inc. ("Flagship"), the investment adviser of the Flagship
Funds and Flagship Funds Inc. ("Flagship"), the distributor of the Flagship
Funds. In consideration for the Acquisition, shareholders of Flagship will
receive in the aggregate $18 million in cash plus shares of Nuveen valued at $45
million (plus or minus certain adjustments based on the total assets under
management as of the closing date), plus up to $20 million of additional
contingent merger consideration based on the cumulative performance of the
combined municipal bond mutual fund business, commencing January 1, 1997 and
concluding December 31, 2000 (the "Contingent Payment Period"). Specifically,
the additional contingent consideration will be paid (i) if the municipal bond
mutual fund business and managed account business achieves 15% annual growth in
assets under management over the Contingent Payment Period, (ii) if operating
margins and pricing for such business over such period remains at least as
favorable to Flagship and Nuveen as current operating margins and pricing, and
(iii) if certain aggregate cost savings are achieved in such business over such
period. Bruce P. Bedford (Chairman and Chief Executive Officer of Flagship) and
Richard P. Davis (President and Chief Operating Officer of Flagship) have agreed
to sign long-term employment contracts with Nuveen upon consummation of the
Acquisition that provide that Mr. Bedford shall serve as an Executive Vice
President and Director of Product Management of Nuveen and that Mr. Davis shall
serve as a Vice President of Nuveen, Director of the Broker-Dealer Group of
Nuveen and General Manager of Nuveen's Dayton operations. In addition, both Mr.
Bedford and Mr. Davis will serve on Nuveen's Management Committee.
Consummation of the Acquisition would constitute an "assignment," as that term
is defined in the 1940 Act of each Flagship Fund's current investment advisory
agreement with Flagship. As required by the 1940 Act, each current investment
advisory agreement provides for its automatic termination in the event of its
assignment. Consummation of the Acquisition is conditioned upon a number of
things, including the receipt of shareholder approval by funds for which
Flagship provides investment advisory services that represent at least 92.5% of
the assets of all such funds of new investment advisory agreements with Nuveen
Advisory and underwriting agreements with Nuveen. In addition, the Acquisition
is conditioned upon investment advisory clients (other than the funds), which
represent at least 92.5% of the assets for which any Flagship company provides
investment advisory services, consenting to the assignment of their contracts.
In anticipation of the Acquisition, a new investment advisory agreement with
Nuveen Advisory is being proposed for approval by shareholders of each Flagship
Fund. A copy of the form of new investment advisory agreement is attached hereto
as Annex D.
18
<PAGE> 28
BOARD RECOMMENDATION
The Flagship Trust's Board met on a number of occasions in connection with
consideration of the Acquisition and its anticipated effects upon the Flagship
Funds. On July 15, 1996, the Board, including a majority of the Trustees who are
not parties to such agreement or interested persons of any such party, voted to
approve the new investment advisory agreement and to recommend it to
shareholders for approval. For information about the Board's deliberations and
the reasons for its recommendation, please also see Proposal No. 4--The
Reorganizations.
The Flagship Board recommends that shareholders vote FOR approval of the new
investment advisory agreement with Nuveen Advisory.
INVESTMENT ADVISORY AGREEMENT
Flagship acts as investment adviser to the Flagship Trust and each Flagship Fund
pursuant to separate Investment Advisory Agreements with each Flagship Fund.
Flagship's administrative obligations include: (i) assisting in supervising all
aspects of the Trust's operations; (ii) providing the Trust, at Flagship's
expense, with the services of persons competent to perform such administrative
and clerical functions as are necessary in order to provide effective corporate
administration; and (iii) providing the Trust, at the Flagship's expense, with
adequate office space and related services.
As compensation for the services rendered by Flagship under the Advisory
Agreements, Flagship is paid a fee, computed daily and payable monthly with
respect to each Fund on a separate basis, at an annual rate of .50% of the
average daily net assets of such Fund.
Each Advisory Agreement will terminate automatically upon its assignment and its
continuance must be approved annually by the Board or a majority of the
particular Fund's outstanding voting shares and in either case, by a majority of
the Board's disinterested trustees. Each Advisory Agreement is terminable at any
time without penalty by the trustees or by a vote of a majority of the
particular Fund's outstanding voting shares on 60 days' written notice to
Flagship, or by Flagship on 60 days' written notice to the Trust.
Flagship has advanced all organization expenses of the Trust and each Fund,
which include printing of documents, fees and disbursements to the Trust's
counsel and accountants, registration fees under the Securities Act of 1933, the
1940 Act, and state securities laws, as well as the initial fees of the Trust's
custodian and transfer agent. Such fees aggregated approximately $98,000 for
Flagship Arizona, $285,000 for Flagship Florida, $198,000 for Flagship
Pennsylvania and $95,000 for Flagship Virginia. In addition, Flagship has
advanced all expenses associated with the reorganization of Flagship
Pennsylvania as a Massachusetts business trust, which include printing of
documents, fees and disbursements to Flagship Pennsylvania's counsel and
accountants, registration fees under the Securities Act of 1933, the 1940 Act,
and state and securities laws. Such fees aggregated approximately $63,000 for
Flagship Pennsylvania. Each of these expenses are being reimbursed to Flagship
by uniform pro rata deductions from the net asset value of Flagship Pennsylvania
accrued daily and paid monthly over the five-year period which commenced June 1,
1991 and January 1, 1996, respectively. Flagship has agreed that in the event
the operating expenses of a series (including fees paid to Flagship and payments
to Flagship Funds Inc. but excluding taxes, interest, brokerage and
extraordinary expenses) for any fiscal year ending on a date on which the
related Advisory Agreement is in effect, exceed the expense limitations imposed
by applicable state securities laws or any regulations thereunder, it will, up
to the amount of its fee, reduce its fee or reimburse the Fund in the amount of
such excess.
Flagship has acted as investment adviser for each Flagship Fund since each Fund
commenced operations as shown below. Also shown below is the date of each
current investment advisory agreement, the date when the current investment
advisory agreement was last approved by the Flagship Trust's Board and the
shareholders of each Flagship Fund, the purpose of the last submission to
shareholders of the current investment advisory agreement and the date to which
the current investment advisory agreement continues.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
APPROVAL OF CURRENT
CURRENT AGREEMENT AGREEMENT
COMMENCEMENT DATE OF CURRENT ------------------------------------------- CONTINUED BY
FUND OF OPERATIONS AGREEMENT BOARD SHAREHOLDERS TRUSTEES TO
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Arizona October 29, 1986 July 25, 1986 August 23, 1996 October 13, 1987(1) August 23, 1997
Florida June 15, 1990 July 14, 1987 August 23, 1996 December 16, 1991(1) August 23, 1997
Pennsylvania October 29, 1986 April 21, 1995 August 23, 1996 October 13, 1987(1) August 23, 1997
Virginia March 27, 1986 November 21, 1985 August 23, 1996 January 30, 1987(1) August 23, 1997
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The current investment advisory agreement was last submitted to the public
shareholders for approval after commencement of operations.
19
<PAGE> 29
THE NEW ADVISORY AGREEMENT
The New Advisory Agreement provides that Nuveen Advisory will act as investment
advisor for and manage the investment and reinvestment of the assets of each of
the Funds. Nuveen Advisory also will administer the Funds' business affairs, and
provide office facilities and equipment and certain clerical, bookkeeping and
administrative services. For the services and facilities furnished by Nuveen
Advisory, each Flagship Fund would pay an annual management fee as follows:
<TABLE>
<CAPTION>
--------------------------------------------------
AVERAGE DAILY NET ASSET VALUE MANAGEMENT FEE
--------------------------------------------------
<S> <C>
For the first $125 million .5500 of 1%
For the next $125 million .5375 of 1%
For the next $250 million .5250 of 1%
For the next $500 million .5125 of 1%
For the next $1 billion .5000 of 1%
For net assets over $2 billion .4750 of 1%
--------------------------------------------------
</TABLE>
The new investment advisory agreement will be dated as of the date of the
consummation of the Flagship Acquisition. The Flagship Acquisition is currently
expected to close on December 31, 1996. The new investment advisory agreement
will be in effect for an initial two-year term, and may continue thereafter from
year to year if at least annually by a vote of "a majority of the outstanding
voting securities" of such Fund, as defined in the 1940 Act, or by the Flagship
Trust's Board and, in either event, the vote of a majority of the trustees who
are not parties to the agreement or interested persons of any such party, cast
in person at a meeting called for such purpose. Notwithstanding the above, if
the Reorganization is approved, the new investment advisory agreement would
terminate as of the Closing of the Reorganization.
As noted under Item 3, it is also proposed that each Flagship Fund's Rule 12b-1
Plan be amended to authorize the payment to John Nuveen & Co. Incorporated, as
distributor of the Class A, Class B and Class C shares of the Fund pursuant to a
Distribution Agreement dated as of the date of the consummation of the
Acquisition. Such compensation will be in the form of servicing and distribution
fees on the three classes of shares of the Fund. The current distribution plan
only authorizes the Fund to reimburse any underwriter, distributor or selling
agent for out-of-pocket costs and expenditures actually incurred for financing
or assisting in the financing of any activity which is primarily intended to
result in the sale of the shares of the Fund.
The table below shows the current fee arrangements applicable to each Flagship
Fund and illustrates the pro forma effect that the New Advisory Agreement and
the new 12b-1 fees would have had on fees payable by each Fund if such Agreement
and 12b-1 Plans had been in effect during the Fund's fiscal year ended May 31,
1996.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
FUND MANAGEMENT FEES 12B-1 FEES
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Arizona
Class A
Current .50% $ 411,209 .40% $ 328,091
Pro forma .55% $ 452,330 .20% $ 164,034
Class C
Current .50% $ 8,830 .95% $ 16,707
Pro forma .55% $ 9,713 .75% $ 13,208
Florida
Class A
Current .50% $1,664,274 .40% $1,328,070
Pro forma .54% $1,794,424 .20% $ 663,891
Class C
Current .50% $ 1,695 .95% $ 3,169
Pro forma .54% $ 1,827 .75% $ 2,542
Pennsylvania
Class A
Current .50% $ 214,303 .40% $ 170,972
Pro forma .55% $ 235,733 .20% $ 85,487
Class C
Current .50% $ 18,971 .95% $ 35,903
Pro forma .55% $ 20,868 .75% $ 28,379
Virginia
Class A
Current .50% $ 582,198 .40% $ 464,378
Pro forma .55% $ 640,418 .20% $ 232,243
Class C
Current .50% $ 40,111 .95% $ 75,853
Pro forma .55% $ 44,123 .75% $ 60,003
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE> 30
INFORMATION CONCERNING FLAGSHIP, NUVEEN AND THE ACQUISITION
FLAGSHIP
Flagship is 100% owned by Flagship Resources, Inc., which in turn is owned by
the families of Bruce P. Bedford and Richard P. Davis and various trusts
organized for their benefit. Flagship Resources Inc. is owned 50% by Richard P.
Davis Trust, 25% by Susan Logan Bedford and 25% by Julie A. Bedford. The address
of Flagship, Flagship Resources Inc., the Richard P. Davis Trust, Susan Logan
Bedford and Julie A. Bedford is One Dayton Centre, One South Main Street,
Dayton, OH 45402.
The names, addresses and principal occupations of the principal executive
officers and the directors of Flagship are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
NAME AND ADDRESS PRINCIPAL OCCUPATION
- --------------------------------------------------------------------------------------------------------
<S> <C>
Bruce P. Bedford Chairman and Chief Executive Officer of
Director Flagship, Flagship Funds Inc. and Flagship
One Dayton Centre Resources Inc.
One South Main Street
Dayton, Ohio 45402-2030
Richard P. Davis President and Chief Operating Officer of
Director Flagship, Flagship Funds Inc. and Flagship
One Dayton Centre Resources Inc.
One South Main Street
Dayton, Ohio 45402-2030
Michael D. Kalbfleisch Vice President and Chief Financial Officer of
Treasurer, Vice President and Chief Executive Officer Flagship, Flagship Funds Inc. and Flagship
One Dayton Centre Resources Inc.
One South Main Street
Dayton, Ohio 45402-2030
James P. Dunmyer Controller of Flagship, Flagship Funds Inc. and
Controller Flagship Resources Inc.
One Dayton Centre
One South Main Street
Dayton, Ohio 45402-2030
- --------------------------------------------------------------------------------------------------------
</TABLE>
NUVEEN ADVISORY
Nuveen Advisory is a wholly-owned subsidiary of Nuveen, located at 333 West
Wacker Drive, Chicago, Illinois 60606, the oldest and largest investment banking
firm specializing in the underwriting and distribution of tax-exempt securities.
Nuveen, which maintains the largest research department of all investment
banking firms devoted exclusively to municipal securities, has issued over $30
billion of tax-exempt unit trusts since 1961 and currently sponsors 82
management investment company portfolios with approximately $31.6 billion in
tax-exempt securities under management. Over 1,000,000 individuals have invested
to date in Nuveen's tax-exempt funds and trusts. Founded in 1898, Nuveen is a
majority-owned subsidiary of The John Nuveen Company, which, in turn, is
approximately 78% owned by The St. Paul Companies, Inc., 385 Washington Street,
St. Paul, Minnesota 55102, a management company of St. Paul, Minnesota,
principally engaged in providing property-liability insurance through
subsidiaries.
21
<PAGE> 31
The names, addresses and principal occupations of the principal executive
officers and the directors of Nuveen Advisory are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
NAME AND ADDRESS PRINCIPAL OCCUPATION
- -------------------------------------------------------------------------------------------------------
<S> <C>
Timothy R. Schwertfeger Chairman of the Board and Director, John Nuveen & Co. Incorporated
Chairman of the Board and
Director
(Principal Executive Officer)
333 West Wacker Drive
Chicago, Illinois 60606
Anthony T. Dean President and Director, John Nuveen & Co. Incorporated
President and Director
333 West Wacker Drive
Chicago, Illinois 60606
John P. Amboian Executive Vice President, John Nuveen & Co. Incorporated
Executive Vice President
333 West Wacker Drive
Chicago, Illinois 60606
- -------------------------------------------------------------------------------------------------------
</TABLE>
VOTES REQUIRED
Approval of the new investment advisory agreement for each Flagship Fund
requires the affirmative vote of a "majority of the outstanding voting
securities" of that Fund. The term "majority of the outstanding voting
securities" as defined in the 1940 Act means: the affirmative vote of the lesser
of (1) 67% of the voting securities of the Fund present at the meeting if more
than 50% of the outstanding shares of the Fund are present in person or by proxy
or (2) more than 50% of the outstanding shares of the Fund.
PROPOSAL NO. 3--RULE 12B-1 PLAN
FOR FLAGSHIP FUNDS ONLY
In anticipation of the Acquisition, a new Rule 12b-1 plan is being submitted for
shareholder approval, as described below.
Rule 12b-1 under the 1940 Act (the "Rule") provides, among other things, that an
investment company (mutual fund) may bear expenses of distributing its shares
only pursuant to a plan (a "Rule 12b-1 Plan") adopted in accordance with the
Rule. Flagship Funds Inc., acting as principal underwriter and distributor for
the Trust, distributes each Fund's Class A Shares and Class C Shares.
In anticipation of the Acquisition, a new Rule 12b-1 Plan is being submitted for
shareholder approval of each Fund's Class A and Class C shareholders. A form of
the new Rule 12b-1 Plan for each Fund is attached hereto as Annex E.
On July 15, 1996, the Board, including all of the disinterested Trustees, voted
to approve the new Rule 12b-1 Plan for each Fund, and directed that it be
submitted to the Class A and Class C shareholders of each Fund at the Meeting,
along with a recommendation that such shareholders approve such Rule 12b-1 Plan.
If the new Rule 12b-1 Plan is approved by a class, it will become effective for
that class and will replace the current Rule 12b-1 Plan upon consummation of the
Acquisition. If the shareholders of a class of a Fund do not approve the new
Rule 12b-1 Plan, the Board would consider appropriate action.
DESCRIPTION OF THE NEW RULE 12B-1 PLAN
As noted above, a form of the new Rule 12b-1 Plan is attached as Annex E and
this summary is qualified in its entirety by reference to Annex E.
Under the new Plan, the Fund is authorized to compensate Nuveen, as distributor
of the Class A, Class B and Class C shares of the Fund pursuant to a
Distribution Agreement dated as of the date of the consummation of the Flagship
Acquisition. The distributor's compensation will be: a service fee of .20% of
the average net assets of the Class A shares of the Fund; a service fee of .20%
of the average net assets of the Class B shares of the Fund, plus a distribution
fee of .75% of the average daily net assets of the Class B shares of the Fund;
and a service fee of .20% of the average net assets of the Class C shares of the
Fund, plus a distribution fee of .55% of the average daily net assets of the
Class C shares the Fund. Such compensation will be accrued daily and paid
quarterly. Such fees may be in addition to fees paid to Nuveen or to other
authorized dealers and brokers for providing other services to shareholders of
the Fund.
The services for which such authorized dealers will be compensated include, but
are not limited to, maintaining account records for shareholders who
beneficially own shares; answering inquiries relating to shareholders' accounts,
the policies of the Fund and the performance of their investment; providing
assistance and handling the transmission of funds in connection
22
<PAGE> 32
with the purchase, redemption and exchange orders for shares; providing
assistance in connection with changing account setups and enrolling in various
optional fund services; producing and disseminating shareholder communications
or servicing materials; the ordinary or capital expenses, such as equipment,
rent, fixtures, salaries, bonuses, reporting and recordkeeping and third party
consultancy or similar expenses, relating to any activity for which payment is
authorized by the Board.
Existing 12b-1 Plan. The existing Plan authorizes the Fund to reimburse any
underwriter, distributor or selling agent (a "Seller") for out-of-pocket costs
and expenditures actually incurred for financing or assisting in the financing
of any activity which is primarily intended to result in the sale of the shares
of the Fund. The services for which any such Seller is reimbursed under the
existing Plan is substantially similar to that under the new Plan. The existing
Plan also authorizes the payment of monthly fees to non-affiliated entities who
provide marketing and distribution services to the Fund. Reimbursement is made
only to Sellers with which the Fund has entered into a Distribution Agreement.
Such authority is subject to the discretion of the Board.
The table below shows, as to the Rule 12b-1 Plan for Class A Shares and the
Class C Shares of each Fund, the date adopted, the date of last amendment (if
any), the date last approved by the trustees and the date to which it continues.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
CLASS A AND CLASS C RULE 12B-1 PLAN
-----------------------------------------------------------------------------------
APPROVAL DATE
FUND DATE ADOPTED AMENDED BY TRUSTEES CONTINUED TO
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Arizona July 25, 1986 September 3, 1992 August 23, 1996 August 23, 1997
Florida July 14, 1987 September 3, 1992 August 23, 1996 August 23, 1997
Pennsylvania May 15, 1992 April 21, 1995 August 23, 1996 August 23, 1997
Virginia November 21, 1985 September 3, 1992 August 23, 1996 August 23, 1997
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
The table below shows the fees paid by each Fund to Flagship Funds Inc. for its
Class A Shares and Class C Shares for the fiscal year ended May 31, 1996.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
CLASS A RULE 12B-1 PLAN FEES CLASS C RULE 12B-1 PLAN FEES
FUND PAID TO FLAGSHIP FUNDS INC. BY FUND PAID TO FLAGSHIP FUNDS INC. BY FUND
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Arizona $ 328,091 $16,707
Florida $1,328,070 $ 3,169
Pennsylvania $ 170,972 $35,903
Virginia $ 464,378 $75,853
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
The new Rule 12b-1 Plan will be in effect for an initial one-year term beginning
upon the date of the consummation of the Acquisition and may continue thereafter
from year to year for a class if specifically approved at least annually by vote
of "a majority of the outstanding voting securities" of that class, as defined
under the 1940 Act, or by the Board, including, in either event, the vote of a
majority of the "non-interested" trustees, cast in person at a meeting called
for such purpose.
Pursuant to the new Rule 12b-1 Plan, Nuveen will prepare reports to the Board on
a quarterly basis for the Fund's Class A, Class B and Class C Shares showing the
amounts paid to the various firms and such other information as from time to
time the Board may reasonably request. The Rule requires the Board to review
such reports at least quarterly.
In approving the new Rule 12b-1 Plan, the Board determined, as with the current
Rule 12b-1 Plan, that there is a reasonable likelihood that the new Rule 12b-1
Plan would benefit the Fund and its shareholders. In doing so, the Board
considered several factors, including that the new Rule 12b-1 Plan would (i)
enable investors to choose the purchasing option best suited to their individual
situations, thereby encouraging current shareholders to make additional
investments in each Fund and attracting new investors and assets to the Funds to
the benefit of each Fund and its shareholders, (ii) facilitate distribution of
each Fund's shares, (iii) help maintain the competitive position of each Fund in
relation to other funds that have implemented or are seeking to implement
similar distribution arrangements, and (iv) permit possible administrative and
operating efficiencies through increased Fund size.
BOARD RECOMMENDATION
As a result of its consideration of the foregoing factors, the Board voted to
approve the new Rule 12b-1 Plans and to submit them to the shareholders for
their approval.
The Board recommends that shareholders vote FOR approval of the new Rule 12b-1
Plans.
VOTES REQUIRED
Class A Shares and Class C Shares of each Flagship Fund will vote separately by
class on the new Rule 12b-1 plan for their respective classes. Approval of the
new Rule 12b-1 plan for each class of each Flagship Fund requires the
affirmative vote of
23
<PAGE> 33
a "majority of the outstanding voting securities" of the class. The term
"majority of the outstanding voting securities" as defined in the 1940 Act
means: the affirmative vote of the lesser of (1) 67% of the voting securities of
the class present at the meeting if more than 50% of the outstanding shares of
the class are present in person or by proxy or (2) more than 50% of the
outstanding shares of the class.
PROPOSAL NO. 4--THE REORGANIZATIONS
The terms and conditions of each Reorganization are set forth in the Agreement
and Plan of Reorganization and Liquidation. Significant provisions of the
Agreement are summarized below; however, this summary is qualified in its
entirety by reference to the Agreement, a form of which is attached as Annex B
to this Joint Proxy Statement--Prospectus.
GENERAL
The Agreement sets forth the terms of each Reorganization, under which (a) the
New Fund would acquire substantially all of the assets of the corresponding
Acquired Funds in exchange for newly issued shares of the New Fund and the New
Fund's assumption of substantially all the liabilities of such Acquired Funds;
and (b) each Acquired Fund would liquidate and distribute to its shareholders
pro rata by class the New Fund shares received. As a result of each
Reorganization, the assets of the Acquired Funds would be combined into the New
Fund and shareholders of the Acquired Funds would become shareholders of the New
Fund. Under the Agreement, Class A, Class C and Class R shareholders of the
Nuveen Fund will receive Class A, Class C and Class R shares of the New Fund,
respectively, and Class A and Class C shareholders of the Flagship Fund will
receive Class A and Class C shares of the New Fund, respectively. The investment
objectives of each New Fund are identical to those of the Nuveen Funds and are
substantially similar to those of the Flagship Funds, the policies of each New
Fund are similar to those of the respective Acquired Funds and the general
portfolio characteristics of each New Fund, after the Reorganization, would be
similar to those of each of the respective Acquired Funds. If the proposals
relating to the Agreement are approved, the Effective Time is expected to be the
close of business on January 31, 1997.
TERMS OF EACH REORGANIZATION
If the Reorganization is approved and the other conditions are satisfied or
waived, at the Effective Time the New Fund will acquire substantially all of the
assets of the corresponding Acquired Funds, including cash (other than cash to
make final distributions to shareholders), cash equivalents, Municipal
Obligations and other securities, receivables and other property owned by such
Acquired Funds. In exchange, the New Fund would assume from each such Acquired
Fund substantially all debts, liabilities, obligations and duties of the
Acquired Fund, and the New Fund would issue to each Acquired Fund shares of the
New Fund. The number of New Fund shares to be issued to the Acquired Fund would
be that number having an aggregate per share net asset value equal to the
aggregate value of that Acquired Fund's assets transferred to, net of the
Acquired Fund's liabilities assumed by, the New Fund as of the Effective Time.
The value of an Acquired Fund's assets to be acquired and liabilities to be
assumed by the New Fund, and the net asset value per share to be issued by the
New Fund, will be determined by the valuation procedures set forth in the
particular Acquired Fund's prospectus and for the New Fund, as set forth in this
Joint Proxy Statement-Prospectus.
In the event a Reorganization is consummated, as soon as practicable after the
Effective Time, each Acquired Fund will liquidate and distribute pro rata to its
shareholders of record the New Fund shares it receives. Such liquidation and
distribution will be accomplished by opening accounts on the books of the New
Fund in the names of the shareholders of the Acquired Fund and transferring to
those shareholder accounts the New Fund shares previously credited on those
books to the account of the Acquired Fund. Each shareholder account will receive
the respective pro rata number of New Fund shares of the appropriate class.
Following the Reorganization, every shareholder of an Acquired Fund would own
shares of the New Fund that will have an aggregate per share net asset value
immediately after the Effective Time equal to the aggregate per share net asset
value of that shareholder's Acquired Fund shares immediately prior to the
Effective Time. See "Description of Shares to be Issued in the Reorganization"
for a description of the rights of such shareholders. Since the New Fund shares
issued to the shareholders of the Acquired Fund would be issued at net asset
value in exchange for net assets of the Acquired Fund having a value equal to
the aggregate per share net asset value of those New Fund shares so issued, the
net asset value of the New Fund shares should remain virtually unchanged by the
Reorganization. Thus, the Reorganization should result in no dilution of net
asset value of any shareholder's holdings. See "Pro Forma Financial Information"
in the Statement of Additional Information.
See "Surrender and Exchange of Acquired Fund Share Certificates" for a
description of the procedures to be followed by Acquired Fund shareholders to
obtain certificates representing their New Fund shares.
Each Agreement may be terminated and the Reorganization abandoned, whether
before or after approval by the Acquired Funds' shareholders, at any time prior
to the Effective Time (a) by the written consent of the Boards of the Nuveen
Trust, the Flagship Trust and the New Trust, (b) by either Acquired Fund or the
New Fund if any condition to that Fund's obligations
24
<PAGE> 34
under the Agreement has not been satisfied or waived and it reasonably appears
that such condition will not be satisfied or (c) by any Fund if the
Reorganization has not occurred by June 30, 1997.
The transactions contemplated by the Agreement were presented to the Board of
Trustees of the Flagship Trust for consideration at numerous Board meetings held
between May and July, 1996. The Board of Trustees concluded unanimously that the
Reorganization is in the best interests of the Flagship Trust, each Flagship
Fund and the shareholders of the Flagship Funds.
The transactions contemplated by the Agreement were presented to the Board of
Trustees of the Nuveen Trust for consideration at numerous Board meetings held
in June, July and October, 1996. The Board of Trustees concluded unanimously
that the Reorganization is in the best interests of the Nuveen Trust, each
Nuveen Fund and the shareholders of the Nuveen Funds.
REASONS FOR THE REORGANIZATION
During its review and deliberations, the Board of Trustees of both the Flagship
Trust and Nuveen Trust evaluated the potential benefits, detriments and costs to
each Fund and its shareholders of the proposed Reorganization. Each Board
received information regarding the new advisory agreement that would be entered
into by each New Fund, including a comparison of the proposed fee structure and
expense ratios with the existing structures and ratios. The Board of the
Flagship Trust requested and received substantial information from Nuveen
Advisory and Nuveen regarding their management, history, qualifications and
other relevant information, including portfolio transaction practices.
Representatives of Nuveen made presentations to the disinterested Trustees of
the Flagship Trust on Nuveen's investment, administration and distribution
operations and the proposed integration of Flagship's existing investment and
distribution capabilities into Nuveen's operations. The Flagship Trust's Board
visited Nuveen's Chicago headquarters and met with representatives of Nuveen and
the Nuveen Fund's disinterested trustees. In addition, the disinterested
Trustees of the Flagship Trust Board engaged special legal counsel to advise
them in their deliberations, conduct an independent due diligence investigation
and assist them in evaluating the appropriateness of the proposed agreements.
The Boards considered the qualifications and capabilities of Nuveen Advisory to
serve as investment adviser for the New Funds. In this regard, the Boards noted
the fact that Nuveen Advisory has been in operation since 1976 and has extensive
experience managing municipal bond investment companies, with approximately $30
billion in assets under management. In addition, Nuveen Advisory is a part of a
larger organization that provides investment advice to or credit surveillance
for a large number of registered investment companies, including open-end funds
and exchange-traded funds. Total assets under management or credit surveillance
by Nuveen and its affiliates is in excess of $45 billion.
In evaluating the Reorganization, including the new advisory agreement with the
New Funds, the Flagship Funds' Board determined that Fund shareholders
potentially would benefit from affiliation with the Nuveen organization for
several reasons, including the greater financial strength of the sponsoring
entity, access to enhanced credit research from a research department that is
the largest in the investment banking industry devoted exclusively to tax-exempt
securities, and Nuveen's larger technological infrastructure. In addition, the
Flagship Trust's Board considered that Bruce P. Bedford and Richard P. Davis
have agreed to sign long-term employment contracts with Nuveen that provide that
Mr. Bedford shall serve as an Executive Vice President and Director of Product
Management of Nuveen and that Mr. Davis shall serve as a Vice President of
Nuveen, Director of the Broker-Dealer Group of Nuveen and General Manager of
Nuveen's Dayton operations. In addition, both Mr. Bedford and Mr. Davis will
serve on Nuveen's Management Committee. The Board also considered the fact that
potential benefits from the larger Nuveen organization were being obtained with
the expected retention of the current portfolio managers for each of the Funds
as a member of the Nuveen organization. Similarly, the benefits will be obtained
with no significant changes in the portfolio management and operations of the
Funds. The Board considered the similarities between the investment objectives
and policies of the New Funds as compared to the Nuveen Funds and the Flagship
Funds and concluded that the objectives are identical to those of the Nuveen
Funds and substantially similar to those of the Flagship Funds. In addition, the
Boards concluded that the investment policies of the New Funds are similar to
those of the Acquired Funds. Moreover, with the proposed change in the
investment adviser, Fund shareholders would gain access to a broader array of
investments products through the Fund's exchange privilege.
In evaluating the Reorganization, the Boards also considered the qualifications
and capabilities of Nuveen to serve as principal underwriter for the New Funds
and, with respect to certain classes of Fund shares, to receive Rule 12b-1
payments. In this regard, the Boards noted the fact that Nuveen has been in
operation since 1898 and serves as the principal underwriter for open-end funds
with assets in excess of $6 billion and has served as co-managing underwriter
for approximately $25 billion of exchange-traded funds. The Board of the
Flagship Funds determined that Fund shareholders potentially would benefit from
the proposed change in distribution in that Nuveen brings a national sales
organization and multi-channel distribution system to the Funds, which should
result in greater distribution, with resulting administrative and operating
efficiencies to the Funds from asset growth. The disinterested Trustees of the
Flagship Trust Board also considered the proposed continuing role of senior
Flagship personnel in distribution of the New Funds. The Board of the Nuveen
Funds recognized that the Nuveen Funds will gain broader distribution with
brokers and have the potential to expand distribution with financial planners
and financial institutions based on a wider product line offering. This, in
turn, creates the potential
25
<PAGE> 35
for asset growth and administrative and operating efficiencies. Nuveen Fund
shareholders will also have access to an expanded selection of investment
products in the combined Nuveen Flagship family of funds. In addition, following
the Reorganization, the Funds would offer additional classes of shares, which
would provide existing and future shareholders the benefit of an expanded set of
purchase options and should enhance the distribution capabilities of the Funds
with the attendant potential for growth and administrative and operating
efficiencies. The Boards noted the costs associated with sponsoring classes of
shares that require the financing of distribution expenses, which costs would be
borne by Nuveen.
The Boards considered Nuveen Advisory's recommendation for service providers to
the Funds and agreed with Nuveen Advisory's recommendation that it was
beneficial that, at least during a transition period, the New Funds would
continue to be serviced by the Flagship Funds' current custodian and transfer
agent.
Specifically with regard to fees and expenses, the Boards considered the current
fee and expense structure, historical expense ratios, expense limitations and
voluntary reimbursements as compared to the fee and expense structure proposed.
See the Comparative Fee Table for a comparison of the current and proposed fee
and expense structures. The Boards also reviewed the proposed fees as compared
to those of comparable funds. The Boards determined that the proposed agreements
were beneficial and in the best interests of the Funds in that the contractual
rates for investment advisory fees, Rule 12b-1 services and Rule 12b-1
distribution fees were within the range of rates for comparable funds and, in
addition, the aggregate would be lower than the current fee structure for each
current class of each Fund's shares. The Flagship Trust's Board specifically
considered the proposed increase in the investment advisory fee from an annual
rate of .50% of average daily net assets to a graduated rate that starts at .55%
of average daily net assets. In evaluating the Reorganizations, the Boards
considered the nature and quality of services to be provided; the performance of
Nuveen Advisory with other comparable funds; the proposed investment advisory
fee and expense ratios for the Fund and for comparable investment companies,
including those currently advised by Nuveen Advisory and the anticipated
profitability to Nuveen Advisory from managing the Fund. The Boards also
considered the undertaking by Nuveen Advisory to continue the policy followed by
Flagship with regard to the Flagship Funds to waive fees or reimburse expenses
to the extent necessary to maintain a competitive distribution rate.
Flagship and Nuveen have assured the Flagship Trust's Board that they intend to
comply with Section 15(f) of the 1940 Act. Section 15(f) provides a
non-exclusive safe harbor for an investment adviser to an investment company or
any of its affiliated persons to receive any amount or benefit in connection
with a change in control of the investment adviser so long as two conditions are
met. First, for a period of three years after the Acquisition, at least 75% of
the board members of the investment company must not be interested persons of
Flagship or Nuveen. The New Trust would be in compliance with this provision of
Section 15(f). Second, an "unfair burden" must not be imposed upon the
investment company as a result of such transaction or any express or implied
terms, conditions or understandings applicable thereto. The term "unfair burden"
is defined in Section 15(f) to include any arrangement during the two-year
period after the merger whereby the investment adviser, or any interested person
of any such adviser, receives or is entitled to receive any compensation,
directly or indirectly, from the investment company or its shareholders (other
than fees for bona fide investment advisory or other services) or from any
person in connection with the purchase or sale of securities or other property
to, from or on behalf of the investment company (other than bona fide ordinary
compensation as principal underwriter for such investment company). Flagship and
Nuveen are not aware of any express or implied term, condition, arrangement or
understanding that would impose an "unfair burden" on the Funds as a result of
the Acquisition. Nuveen has agreed that it, and its affiliates, will take no
action that would have the effect of imposing an "unfair burden" on the Funds as
a result of the Acquisition, and will indemnify the shareholders of Flagship and
the disinterested Trustees of the Flagship Trust for any losses from imposition
of an unfair burden.
BOARD RECOMMENDATION
Based upon its evaluation of the relevant information presented to them, and in
light of their fiduciary duties under federal and state law, the Board of
Trustees, including all its disinterested trustees, of each Trust, unanimously
determined that the Reorganization, including the new advisory agreement and the
new Plan and related agreements for the New Funds, are advisable and in the best
interests of each Flagship Fund and each Nuveen Fund and their shareholders.
The Board recommends that shareholders vote FOR approval of the Agreement.
VOTES REQUIRED
For each Nuveen Fund, approval of the Agreement requires the affirmative vote of
a "majority of the outstanding voting securities" of that Fund. The term
"majority of the outstanding voting securities" as defined in the 1940 Act
means: the affirmative vote of the lesser of (1) 67% of the voting securities of
the Fund present at the meeting if more than 50% of the outstanding shares of
the Fund are present in person or by proxy or (2) more than 50% of the
outstanding shares of the Fund.
For each Flagship Fund, approval of the Agreement requires the affirmative vote
of the holders of a majority of the shares present at the meeting.
26
<PAGE> 36
DESCRIPTION OF THE SHARES TO BE ISSUED IN THE REORGANIZATION
GENERAL
The Declaration of Trust (the "Declaration") of the New Trust authorizes the
issuance of an unlimited number of shares in four classes. As of October 16,
1996, there were issued and outstanding the following shares of each New Fund:
<TABLE>
<S> <C>
NEW ARIZONA
Class A 834
Class B 834
Class C 834
Class R 834
NEW FLORIDA
Class A 834
Class B 834
Class C 834
Class R 834
NEW PENNSYLVANIA
Class A 834
Class B 834
Class C 834
Class R 834
NEW VIRGINIA
Class A 834
Class B 834
Class C 834
Class R 834
</TABLE>
If a Reorganization is approved, at the Effective Time the New Fund will issue
additional shares. The number of such additional New Fund shares will be based
on the relative aggregate per share net asset values of the respective classes
of shares of the New Fund and the Acquired Funds, in each case, as of the
Effective Time.
DISTRIBUTIONS
It is each New Fund's policy, which may be changed by the Board of the New
Trust, to make regular monthly cash distributions to the holders of its shares
of net investment income at a level rate that reflects past and projected net
income of the Fund, which over time will result in the distribution of all net
investment income of each New Fund and to distribute at least annually net
capital gains, if any. Each New Fund's distribution level will be determined by
the Board of the New Trust after giving consideration to a number of factors,
including the New Fund's undistributed net investment income and historical and
projected investment income and expenses (including the effects of fee waivers
and expense reimbursements). Net income for each New Fund consists of all
interest income accrued on portfolio assets less all net expenses of the New
Fund. Expenses of each New Fund are accrued each day.
Each New Fund may from time to time 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. As a
result, the distributions paid by each New Fund for any particular monthly
period may be more or less than the amount of net investment income actually
earned by the New Fund during such period. In addition, Nuveen Advisory will
periodically undertake to waive fees and reimburse expenses of the New Fund to
the extent necessary to maintain a competitive distribution rate. This practice
may produce a higher monthly distribution than would otherwise be the case. The
current expenses, fee waivers and reimbursements are set forth in the
"Comparative Fee Table." Actual amounts may be greater or less than those shown.
There is no assurance that the New Funds' actual expenses will be equal to or
less than the current actual expenses of the Nuveen Funds or the Flagship Funds
and, in some cases, are currently estimated to be higher; actual expenses of the
New Funds will be a function of the extent to which fee waivers and
reimbursements are necessary to maintain a competitive dividend rate consistent
with the past practice of Flagship.
COMPARISON OF RIGHTS OF HOLDERS OF THE FUNDS
The Nuveen Trust, the Flagship Trust and the New Trust are each organized as a
business trust under the laws of the Commonwealth of Massachusetts. The
provisions of the Declaration of the New Trust are substantially similar to the
provisions of the respective Declarations of the Nuveen Trust and the Flagship
Trust as described under "Certain Provisions in the New Trust's Declaration of
Trust" below except; the Declarations of the New Trust and Nuveen Trust provide
that 10% of the Shareholders can call a shareholder meeting, whereas a majority
of shareholders must act to call a shareholders meeting of the Flagship Trust;
under the New Trust, 30% of the outstanding shares constitutes a quorum whereas
under the Nuveen Trust and the Flagship Trust, a majority of the outstanding
shares is necessary for a quorum at shareholder's meetings; under the New Trust
and the Nuveen Trust, the Trust (or a series) can be terminated (i) by the
Trustees, upon
27
<PAGE> 37
notice to the shareholders, (ii) by a majority vote of shareholders when
recommended by the Trustees, or (iii) by 66 2/3% of the shareholders, whereas
the Declaration of the Flagship Trust provides that a majority of shareholders
must consent to such termination only after the trustees favorably recommend it;
the Declarations of the New Trust and the Nuveen Trust (other than the Articles
regarding Trustees which can only be amended by a 66 2/3% vote of shareholders)
can be amended by vote of a majority of trustees and a majority of the
shareholders, whereas an amendment to the Declaration of the Flagship Trust
would require a 66 2/3% vote of the shareholders if the amendment would change
material rights (such as preferences) with respect to shares, distributions or
liquidation rights. The full text of each Declaration is on file with the
Commission and may be obtained as described under "Available Information."
See also "Other Comparisons--Purchase, Exchange and Redemption Features and
Privileges" for differences in Class C share conversion features.
COMPARISON OF THE INVESTMENT OBJECTIVES AND POLICIES
The investment objectives of each of the Nuveen Funds are identical to those of
the corresponding New Funds. The investment objectives of each of the Flagship
Funds are substantially similar to those of the corresponding New Funds.
The investment objective of both the New Funds and the Nuveen Funds is to
provide as high a level of current interest income exempt from both regular
federal income tax and the applicable state personal income tax as is
consistent, in the view of the Fund's management, with preservation of capital.
The investment objective of the Flagship Funds is to seek high current after tax
income free from ordinary income tax consistent with liquidity and preservation
of capital.
The investment policies of the New Funds are similar to those of the Nuveen
Funds and the Flagship Funds, with the following salient differences:
Diversification. New Virginia and New Pennsylvania are "non-diversified" under
the 1940 Act; New Arizona, New Florida, the Nuveen Funds and the Flagship Funds
are "diversified." Being non-diversified, New Virginia and New Pennsylvania will
be able to invest more than 5% of its assets in the obligations of an issuer,
subject to the diversification requirements of Subchapter M of the Code. This
allows New Virginia and New Pennsylvania, as to 50% of their total assets, to
invest more than 5%, but not have more than 25%, in the securities of a single
issuer. A "diversified" fund, on the other hand, may not, with respect to 75% of
its total assets, invest more than 5% in the securities of a single issuer.
Since the New Virginia and New Pennsylvania may invest a relatively high
percentage of its assets in the obligations of a limited number of issuers, they
may be more susceptible to any single economic, political or regulatory
occurrence than the Nuveen Funds and the Flagship Funds, which are diversified.
Investment Grade Quality. The New Funds and the Flagship Funds may rely on
ratings from Moody's Investor Service, Inc., (the "Moody's"), Standard & Poor's
Rating Group ("S&P") and Fitch Investors Service, Inc. ("Fitch"), while the
Nuveen Funds may not presently rely on ratings by Fitch. The Nuveen Funds may
only invest up to 20% in unrated securities, while the New Funds and the
Flagship Funds have no such restriction. The New Funds may, therefore, invest in
an unlimited amount of Fitch-only rated securities and unrated securities,
whereas the Nuveen Funds may only invest up to 20% in Fitch-only rated
securities and unrated securities. The market for Fitch-only rated securities
and unrated securities may be less broad than for Moody's and/or S&P rated
securities. In addition, with unrated securities, a fund is more dependant upon
the investment manager's credit analysis.
Average Maturity. The New Funds seek an average maturity of between 15 to 30
years as compared to the Nuveen Funds' goal of 20 to 30 years and Flagship
Funds' goal of 15 to 25 years. Generally, securities with longer maturities are
more volatile than those with shorter maturities.
AMT Bonds. The New Funds do not have a restriction on the amount of AMT Bonds
purchased; the Nuveen Funds and the Flagship Funds do not allow more than 20% to
be invested in AMT Bonds. AMT Bonds are Municipal Obligations, the interest on
which is a specific tax preference item for purposes of computing the
alternative minimum tax on corporations and individuals. For shareholders whose
tax liability is determined under the alternative minimum tax, such shareholders
will be taxed on their share of the Fund's exempt-interest dividends that were
paid from income earned on AMT Bonds. In addition, the alternative minimum
taxable income for corporations is increased by 75% of the difference between an
alternative measure of income ("adjusted current earnings") and the amount
otherwise determined to be alternative minimum taxable income. Interest on all
Municipal Obligations and therefore all distributions by the Fund that would
otherwise be tax exempt is included in calculating a corporation's adjusted
current earnings.
Concentration. The New Funds and the Nuveen Funds may not invest more than 25%
of their total assets in securities of issuers in any one industry, provided,
however, that such limitation does not apply to Municipal Obligations issued by
governments or their political subdivisions, and obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities. The
Flagship Fund may invest more than 25% of their assets in a particular segment
of the municipal bond market, such as Hospital Revenue Bonds, Housing Agency
Bonds, Industrial Development Bonds, Airport Bonds or U.S. Territorial Bonds.
28
<PAGE> 38
Lease Obligations. The New Funds and the Flagship Funds have no percentage
limitations on non-appropriation lease obligations, whereas the Nuveen Funds are
limited to investing no more than 10% of their assets in non-appropriation lease
obligations. Municipal Leases that include non-appropriation clauses provide
that the governmental issuers have no obligation to make payments unless money
is appropriated for that purpose. Certain "non-appropriation" lease obligations
may present special risks because the municipality's obligation to make future
lease or installment payments depends on money being appropriated each year for
this purpose. If an issuer stopped making payment on a lease obligation held by
a Fund, the lease obligation would lose some or all of its value. Some lease
obligations may be illiquid under certain circumstances.
Temporary Investments. The New Funds and the Nuveen Funds permit, under normal
circumstances, up to 20% of their net assets to be invested in temporary
investments, provided that temporary investments subject to regular federal
income tax may not comprise more than 20% of each Fund's net assets. For
defensive purposes, however, each New Fund and Nuveen Fund may invest without
limit in temporary investments. For the New Funds, temporary investments
include: short-term securities the interest on which is exempt from regular
federal income tax, but may be subject to state income tax; and U.S. Government
securities and other taxable securities rated within the two highest grades by
Moody's, S&P or Fitch, and that mature within one year from the date of purchase
or carry a variable or floating rate of interest. For the Nuveen Funds,
temporary investments include the same, except that non-U.S. Government taxable
securities are limited to those that are within the highest grade by Moody's or
S&P. The New Funds and the Nuveen Funds may invest in taxable securities only to
the extent that federally tax-exempt securities temporary investments are not
available at reasonable prices and yields.
The Flagship Funds do not restrict, under normal circumstances, the percentage
of investments that may be made in short-term municipal obligations except to
the extent that an average maturity of 15 to 25 years is sought. Short-term
notes must be rated SP-1 through SP-2 by S&P or MIG 1 through MIG 4 by Moody's,
and tax-exempt commercial paper must be rated A-1+ through A-2 by S&P or Prime-1
through Prime-2 by Moody's. For temporary defensive purposes, the Flagship Funds
may invest up to 20% of its assets in obligations issued or guaranteed by the
U.S. Government or its agencies or instrumentalities, including up to 5% in
related, adequately collateralized repurchase agreements.
Futures and Options. Although the New Funds do not currently intend to do so,
both the New Funds and the Nuveen Funds reserve the right to engage in certain
hedging transactions involving the use of financial futures or options based on
either an index of long-term tax-exempt securities or on debt securities whose
prices, in the opinion of the adviser, correlate with the prices of the Fund's
investments. The Flagship Funds currently engage to a limited extent in futures
and options transactions, but only for hedging purposes.
Borrowing. The New Funds and the Nuveen Funds are permitted to borrow from banks
up to 10% for temporary or emergency purposes and up to 1/3 of the value of
total assets in order to meet redemption requests. The Flagship Funds are
limited to borrowing 10% for any purpose.
Illiquid Securities. The New Funds may not invest more than 15% of their net
assets in illiquid securities. The Nuveen Funds limit investment in illiquid
securities to 10% of assets. The Flagship Funds have no stated limitation on
investment in illiquid securities; however, the Flagship Funds have generally
followed the Commission guidelines, which provide that the usual limit on
aggregate holdings of illiquid securities is 15% of net assets.
COMPARISON OF MANAGEMENT
The New Funds will be managed by Nuveen Advisory. Nuveen Advisory will act as
investment adviser for and manage the investment and reinvestment of the assets
of each of the New Funds. Nuveen Advisory also will administer the New Funds'
business affairs, and provide office facilities and equipment and certain
clerical, bookkeeping and administrative services. For the services and
facilities furnished by Nuveen Advisory, each New Fund has agreed to pay an
annual management fee as follows:
<TABLE>
<CAPTION>
--------------------------------------------------
AVERAGE DAILY NET ASSET VALUE MANAGEMENT FEE
--------------------------------------------------
<S> <C>
For the first $125 million .5500 of 1%
For the next $125 million .5375 of 1%
For the next $250 million .5250 of 1%
For the next $500 million .5125 of 1%
For the next $1 billion .5000 of 1%
For net assets over $2 billion .4750 of 1%
--------------------------------------------------
</TABLE>
The Nuveen Funds are also managed by Nuveen Advisory under the same terms and
conditions.
The Flagship Funds are managed by Flagship Financial Inc. ("Flagship"). Flagship
renders investment supervisory and corporate administrative services to the
Flagship Funds. As compensation for the services rendered by Flagship, each
Flagship Fund pays a management fee of 0.50% of the average daily net assets of
such Fund computed daily, payable monthly.
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<PAGE> 39
The portfolio managers for the New Funds are expected to be the current
portfolio managers for the Flagship Funds. Following the Acquisition it is
expected that they will be employed by Nuveen Advisory and continue their
current responsibilities. Michael Davern, Vice President of Flagship, currently
manages eight portfolios for Flagship, including Flagship Florida and Flagship
Pennsylvania. Prior to joining Flagship in 1991, he was Assistant Vice
President, Van Kampen Merritt Inc. (Chicago, IL). Mr. Davern is expected to
manage New Florida and New Pennsylvania. Thomas Futrell is the current manager
of Nuveen Florida. Thomas J. O'Shaughnessy is the current manager of Nuveen
Pennsylvania. Richard Huber, Vice President of Flagship, currently manages ten
portfolios for Flagship, including Flagship Virginia. Mr. Huber joined Flagship
in 1987. Mr. Huber is expected to manage New Virginia. William Fitzgerald is the
current manager of Nuveen Virginia. Jan Terbrueggen, Vice President of Flagship,
currently manages five portfolios for Flagship, including Flagship Arizona.
Prior to joining Flagship in 1991, he was Vice President, Todd Investment
Advisers (Louisville, KY). Mr. Terbrueggen is expected to manage New Arizona.
Steven Krupa is the current manager of Nuveen Arizona.
COMPARISON OF DISTRIBUTION
Nuveen will serve as the sponsor and principal underwriter for each New Fund.
Class A Shares are sold at a public offering price equal to the applicable net
asset value per share plus an up-front sales charge based on the following
schedule:
NEW FUNDS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
SALES CHARGE AS SALES CHARGE AS REALLOWANCE
% OF PUBLIC % OF NET % OF PUBLIC
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000 4.20% 4.38% 3.70%
$50,000 but less than $100,000 4.00% 4.18% 3.50%
$100,000 but less than $250,000 3.50% 3.63% 3.00%
$250,000 but less than $500,000 2.50% 2.56% 2.00%
$500,000 but less than $1,000,000 2.00% 2.04% 1.50%
$1,000,000 and above 0.00%* 0.00% **
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
*NAV trades subject to a 1.00% CDSC for shares redeemed within 18 months of
purchase.
**Commission may be payable by Nuveen as follows: Nuveen pays Authorized Dealers
of record on such Class A purchases a commission in an amount equal to the sum
of 1% of the first $2.5 million, plus .50% of the next $2.5 million, plus .25%
of purchases over $5 million.
This up-front sales charge is lower than that currently imposed on Class A
Shares of Nuveen Funds, which is based on the following schedule:
NUVEEN FUNDS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
SALES CHARGE AS SALES CHARGE AS REALLOWANCE AS
% OF PUBLIC % OF PUBLIC % OF PUBLIC
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000 4.50% 4.71% 4.00%
$50,000 but less than $100,000 4.25% 4.44% 3.75%
$100,000 but less than $250,000 3.50% 3.63% 3.25%
$250,000 but less than $500,000 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000 2.00% 2.04% 1.75%
$1,000,000 and above 0.00%* 0.00% **
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
*NAV trades subject to a 1.00% CDSC for shares redeemed within 18 months of
purchase.
**Commission may be payable by Nuveen as follows: Nuveen pays Authorized Dealers
of record on such Class A purchases a commission in an amount equal to the sum
of 1% of the first $2.5 million, plus .50% of the next $2.5 million, plus .25%
of purchases over $5 million.
FLAGSHIP FUNDS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
SALES CHARGE AS SALES CHARGE AS REALLOWANCE AS
% OF PUBLIC % OF PUBLIC % OF PUBLIC
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000 4.20% 4.38% 3.70%
$50,000 to $100,000 4.00% 4.18% 3.50%
$100,000 to $250,000 3.50% 3.63% 3.00%
$250,000 to $500,000 2.50% 2.56% 2.00%
$500,000 to $1,000,000 2.00% 2.04% 1.50%
$1,000,000 and above 0.00%* 0.00% **
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
*NAV trades subject to a 1.00% CDSC for shares redeemed within 18 months of
purchase.
**Commission may be payable by Flagship as follows: Flagship pays Authorized
Dealers of record on such Class A purchases a commission in an amount equal to
the sum of 1% of the first $2.5 million, plus .50% of the next $2.5 million,
plus .25% of purchases over $5 million.
30
<PAGE> 40
Pursuant to Rule 12b-1 under the 1940 Act, the New Funds have adopted a Plan of
Distribution and Service ("Plan") which provides that each class of shares
(other than Class R) will pay Nuveen a service fee of up to .20%, to be used to
compensate authorized dealers, including Nuveen, in connection with the
provision of ongoing account services to shareholders. The Nuveen Funds
currently have a service fee of up to .25%; the Flagship Funds currently have a
service fee of .20%.
The New Fund's Plan also provides for a distribution fee, payable to Nuveen, to
be used to reimburse for services and expenses incurred in connection with
distribution of Class B and Class C shares. Class A shares have no distribution
fee, Class B shares have a .75% distribution fee, and Class C shares have a .55%
distribution fee. This is lower than the current distribution fees for the
Flagship Funds, which are .20% for Class A and .75% for Class C, and equal to or
lower than the current fees for Nuveen Funds, which are 0% for Class A and .75%
for Class C. Neither the Nuveen Funds nor the Flagship Funds currently offer
Class B shares.
See "Comparative Fee Table" for a comparison of these fees.
WAIVER COMPARISON
Flagship Funds have a policy of waiving fees and reimbursing expenses in order
to maintain a competitive distribution rate. Nuveen Funds reimburse expenses or
waives fees so that total expenses, excluding 12b-1 distribution and service
fees, do not exceed .75%. The New Funds will undertake to continue Flagship's
policy of waiving fees and reimbursing expenses in order to maintain a
competitive distribution rate. The current expenses, fee waivers and
reimbursements are set forth in the "Comparative Fee Table." Actual amounts may
be greater or less than those shown. There is no assurance that the New Funds'
actual expenses will be equal to or less than the current actual expenses of the
Nuveen Funds or the Flagship Funds and, in some cases, are currently estimated
to be higher; actual expenses of the New Funds will be a function of the extent
to which fee waivers and reimbursements are necessary to maintain a competitive
dividend rate consistent with the past practice of Flagship.
CERTAIN PROVISIONS IN THE NEW TRUST'S DECLARATION OF TRUST
Under Massachusetts law, shareholders of a New Fund could, under certain
circumstances, be held personally liable for the obligations of that Fund.
However, the New Trust's Declaration contains an express disclaimer of
shareholder liability for acts or obligations of a New Fund and requires that
notice of such disclaimer be given in each agreement, obligation or instrument
entered into or executed by the New Trust or the trustees. The New Trust's
Declaration further provides for indemnification out of the assets and property
of the New Trust for all loss and expense of any shareholder held personally
liable for the obligations of the New Trust. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the New Trust would be unable to meet its obligations.
The New Trust believes that the likelihood of such circumstances is remote.
The New Trust's Declaration provides that the obligations of the New Trust are
not binding upon the trustees individually, but only upon the assets and
property of the New Trust, and that the trustees shall not be liable for errors
of judgment or mistakes of fact or law. Nothing in the New Trust's Declaration,
however, protects a trustee against any liability to which he or she 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 or
her office.
OTHER COMPARISONS
TRUSTEES AND OFFICERS
The Trustees and officers of the New Trust differ from those of the Nuveen Trust
and the Flagship Trust. The Trustees of the New Trust are currently L. Brown, A.
Dean, A. Impellizzeri, M. Rosenheim, P. Sawers and T. Schwertfeger. In addition,
R. Bremner and W. Schneider have been elected to the Board of the New Trust to
take office upon the consummation of the Acquisition and their election and
qualification is contingent upon consummation of the Acquisition. See Proposal
No. 1--Election of Trustees and the Statement of Additional Information for
further information.
FISCAL YEAR
The New Trust currently intends to have a May 31 fiscal year-end. The Flagship
Trust has a May 31 fiscal year-end and the Nuveen Trust has a January 31 fiscal
year-end.
PURCHASE, EXCHANGE AND REDEMPTION FEATURES AND PRIVILEGES
The expenses associated with the purchase of each class of shares of each Fund
are set forth in the Comparative Fee Table.
31
<PAGE> 41
The New Funds allow a minimum initial investment of $3,000, except for Class R,
which requires a minimum initial investment of $1 million, except for fee-based
advisers, wrap accounts and Nuveen employees and registered representatives of
authorized dealers. The New Funds offer four alternative classes of shares for
purchase: Class A, Class B, Class C and Class R. Class B Shares convert
automatically into Class A Shares eight years after purchase. Class C shares
have no conversion feature; except that Class C shareholders who originally
acquired their shares from the Nuveen Fund will retain the option to convert
their shares to Class A Shares at the end of their six-year holding period on
the same basis as described below, although the conversion will no longer occur
automatically. Such shareholders will need to exercise this conversion feature
if they so desire. Shares may be purchased through authorized dealers or Nuveen
or by check or wire. The New Funds offer two different systematic investment
programs: the Automatic Deposit Plan and the Payroll Direct Deposit Plan. In
addition, shareholders may exchange shares for shares of the same or equivalent
class of another Nuveen Mutual Fund with reciprocal exchange privileges at net
asset value without sales charge. In addition, the New Funds offer a
reinstatement privilege and a Fund Direct privilege to enable shareholders to
send money electronically between their accounts and their bank.
The Nuveen Funds offer the same rights and privileges as are available with the
New Funds, with the exception of Class B Shares, which are not offered by the
Nuveen Funds. In addition, Class C Shares of the Nuveen Funds convert
automatically to Class A Shares six years after purchase, which eliminates the
ongoing 12b-1 distribution fee.
The Flagship Funds allow a minimum initial investment of $3,000. The Flagship
Funds offer two alternative classes of shares for purchase: Class A and Class C.
There is no conversion of Class C Shares into Class A Shares. Shares may be
purchased through authorized dealers, by mail or by wire. The Flagship Funds
offer shareholders who receive a quarterly statement from Flagship a monthly
automatic investment plan. Shares may be exchanged for shares of another
Flagship fund at net asset value without a sales charge. In addition, the
Flagship Funds offer a reinstatement privilege.
The redemption charges associated with each class of shares for each Fund are
set forth in the Comparative Fee Table. The New Funds allow a variety of
redemption options, including: by orders placed with an authorized dealer; by
written request; by TEL-A-CHECK; by TEL-A-WIRE or Fund Direct; or through an
automatic withdrawal plan. The Nuveen Funds offer the same redemption options as
the New Funds. The Flagship Funds offer essentially the same redemption options,
allowing you to place an order for redemption with your financial consultant, by
written request, by telephone, through a systematic withdrawal plan or by direct
deposit into your bank account.
TRANSFER AGENT AND CUSTODIAN.
State Street Bank and Trust Company, 225 Franklin Street, Boston, MA 02106, will
be the transfer agent and custodian for the New Funds. It currently serves as
the transfer agent and custodian for the Flagship Funds. Shareholder Services,
Inc. serves as transfer agent for the Nuveen Funds and the Chase Manhattan Bank
serves as custodian for the Nuveen Funds.
AUDITORS.
The auditors for the New Funds and the Flagship Trust are Deloitte & Touche LLP.
The auditors for the Nuveen Trust are Arthur Andersen LLP.
ORGANIZATION.
The Nuveen Trust, the Flagship Trust and the New Trust are all Massachusetts
business trusts.
SURRENDER AND EXCHANGE OF ACQUIRED FUND SHARE CERTIFICATES
After the Effective Time, each holder of an outstanding certificate or
certificates formerly representing shares of an Acquired Fund ("Acquired Fund
Shares") will be entitled to receive, upon surrender of his or her certificates,
a certificate or certificates representing the number of New Fund Shares
distributable with respect to such holder's Acquired Fund Shares. Promptly after
the Effective Time, the New Fund's Transfer Agent will mail to each holder of
certificates formerly representing Acquired Fund Shares a letter of transmittal
for use in surrendering his or her certificates for certificates representing
New Fund Shares.
Please do not send in any share certificates at this time. Upon consummation of
the Reorganization, holders of Acquired Fund Shares will be furnished
instructions for exchanging their Acquired Fund Share certificates for New Fund
Share certificates.
From and after the Effective Time, certificates formerly representing Acquired
Fund Shares will be deemed for all purposes to evidence ownership of the number
of New Fund shares distributable with respect to such Acquired Fund Shares in
the Reorganization, provided that until such Acquired Fund Share certificates
have been so surrendered, no dividends payable to the holders of record of New
Fund Shares as of any date subsequent to the liquidation of the Acquired Fund
are required to be paid to the holders of such outstanding Acquired Fund Share
certificates. Unpaid dividends on New Fund Shares to holders of record as of any
date after the liquidation of the Acquired Fund and prior to the exchange of
certificates by any
32
<PAGE> 42
Acquired Fund shareholder will be paid to such shareholder, without interest, at
the time such shareholder surrenders his or her Acquired Fund Share certificates
for exchange.
From and after the Effective Time, there will be no transfers on the record
transfer books of the Acquired Fund. If, after the Effective Time, certificates
representing Acquired Fund Shares are presented to the Acquired Fund, they will
be cancelled and exchanged for certificates representing the New Fund Shares
distributable with respect to such Acquired Fund Shares in the Reorganization.
COSTS ASSOCIATED WITH THE REORGANIZATIONS
The costs associated with the Reorganizations for both the Nuveen Funds and the
Flagship Funds will be borne by and allocated between Flagship and Nuveen
Advisory.
NO APPRAISAL RIGHTS
None of the Funds have dissenters' rights of appraisal with respect to the
Reorganizations.
TAX CONSEQUENCES OF THE REORGANIZATIONS
The Funds have received opinions of Vedder, Price, Kaufman & Kammholz to the
effect that each Reorganization will qualify as a tax-free reorganization under
Section 368(a)(1) of the Code. Accordingly, no Fund will recognize gain or loss
for federal income tax purposes as a result of the Reorganization. The following
discussion summarizes the anticipated federal and applicable state income tax
treatment to shareholders of the Acquired Fund.
A shareholder of an Acquired Fund who receives shares of the New Fund pursuant
to the Reorganization will recognize no gain or loss for federal income tax
purposes. Shareholders of Flagship Arizona and Nuveen Arizona who receive shares
of New Arizona pursuant to the Reorganization will recognize no gain or loss for
Arizona income taxes purposes. Shareholders of Flagship Florida and Nuveen
Florida who receive shares of New Florida pursuant to the Reorganization will
recognize no gain or loss for Florida income taxes purposes. Shareholders of
Flagship Pennsylvania and Nuveen Pennsylvania who receive shares of New
Pennsylvania pursuant to the Reorganization will recognize no gain or loss for
Pennsylvania income tax purposes. Shareholders of Flagship Virginia and Nuveen
Virginia who receive shares of New Virginia pursuant to the Reorganization will
recognize no gain or loss for Virginia income tax purposes.
The aggregate basis of the New Fund Shares received by a shareholder of an
Acquired Fund will be the same as the shareholder's aggregate basis in the
Acquired Fund Shares surrendered in exchange therefor.
The holding period of the New Fund Shares received by a shareholder of an
Acquired Fund will include the period during which the shareholder's Acquired
Fund Shares were held, provided such Acquired Fund Shares were held as a capital
asset at the Effective Time.
For federal income tax reasons, each Acquired Fund must declare a distribution
to its shareholders of all net tax-exempt income, net ordinary taxable income
and net capital gain income, if any, prior to the end of its fiscal year, which
declaration will occur at or prior to the Effective Time.
THE FOREGOING IS INTENDED TO BE ONLY A SUMMARY OF THE PRINCIPAL FEDERAL INCOME
TAX CONSEQUENCES AND ARIZONA, FLORIDA, PENNSYLVANIA OR VIRGINIA INCOME TAX
CONSEQUENCES, AS THE CASE MAY BE, OF THE REORGANIZATIONS AND SHOULD NOT BE
CONSIDERED TO BE TAX ADVICE. THERE CAN BE NO ASSURANCE THAT THE INTERNAL REVENUE
SERVICE OR THE ARIZONA DEPARTMENT OF REVENUE, THE FLORIDA DEPARTMENT OF REVENUE,
THE PENNSYLVANIA DEPARTMENT OF REVENUE OR THE VIRGINIA DEPARTMENT OF TAXATION
WILL CONCUR ON ALL OR ANY OF THE ISSUES DISCUSSED ABOVE. ACQUIRED FUND
SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISERS REGARDING THE FEDERAL,
STATE AND LOCAL TAX CONSEQUENCES WITH RESPECT TO THE FOREGOING MATTERS AND ANY
OTHER CONSIDERATIONS WHICH MAY BE APPLICABLE TO THEM.
33
<PAGE> 43
CAPITALIZATION
The following table sets forth the unaudited capitalization of the Acquired
Funds as of May 31, 1996 and the pro forma combined capitalization of the New
Fund as if the Reorganization had occurred on that date. See "Pro Forma
Financial Information" included in the Statement of Additional Information.
PRO FORMA CAPITALIZATION AS OF MAY 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
FLAGSHIP NUVEEN NEW NEW
ARIZONA ARIZONA ARIZONA ARIZONA
(ACTUAL) (ACTUAL) (PRO FORMA) (AS ADJUSTED)(1)
----------- ----------- ----------- ----------------
<S> <C> <C> <C> <C>
NEW ARIZONA
Common shares, $.01 par value per share $ -- $ 22,926 $ 33 $ 105,463 (2)
Paid-in surplus 78,032,113 23,222,609 33,327 101,205,545 (3)
Balance of undistributed net investment income -- 7,592 -- -- (4)
Accumulated net realized gain (loss) from
investment
transactions 120,690 (72,175) -- (72,175)(5)
Net unrealized appreciation of investments 3,911,607 313,005 -- 4,224,612
----------- ----------- ------- ------------
Net assets $82,064,410 $23,493,957 $33,360 $105,463,445
=========== =========== ======= ============
</TABLE>
(1) The adjusted balances are presented as if the Reorganization was effective
as of May 31, 1996 for information purposes only. The actual Effective Time of
the Reorganization is expected to be January 31, 1997 at which time the results
would be reflective of the actual composition of shareholders' equity at that
date.
(2) Assumes the issuance of 7,997,646 and 432,436 class A shares, 196,726 and
39,086 class C shares and 1,877,115 class R shares of New Arizona in exchange
for the net assets of class A, C and R of Flagship Arizona and Nuveen Arizona,
respectively. These numbers are based on the net assets of each class of
Flagship Arizona and Nuveen Arizona, and the net asset values of each respective
class of New Arizona, as of May 31, 1996, after adjustment for the distributions
referred to in (4) and (5) below. The issuance of such number of New Arizona
shares would result in the distribution of 1.0716064 and 1.0299230 class A
shares, 1.0715685 and 1.0216149 class C shares and 1.0232653 class R shares for
each share of each respective class of Flagship Arizona and Nuveen Arizona,
respectively, upon liquidation of each respective class of Flagship Arizona and
Nuveen Arizona.
(3) Includes the impact of $82,504 due to the effect of the exchange ratios on
the value of new shares issued in excess of the value of shares liquidated and
the effect of assigning a par value equal to .01 per share for each New Arizona
share issued in exchange for each Flagship Arizona share.
(4) Assumes Nuveen Arizona distributes all of its undistributed net investment
income to shareholders.
(5) Assumes Flagship Arizona distributes all of its net realized gains from
investment transactions to shareholders and Nuveen Arizona carries forward its
net realized losses from investment transactions to New Arizona, as permitted
under applicable tax regulations.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
FLAGSHIP NUVEEN NEW NEW
FLORIDA FLORIDA FLORIDA FLORIDA
(ACTUAL) (ACTUAL) (PRO FORMA) (AS ADJUSTED)(1)
------------ ----------- ----------- ----------------
<S> <C> <C> <C> <C>
NEW FLORIDA
Common shares, $.01 par value per share $ -- $ 59,819 $ 33 $ 380,449 (2)
Paid-in surplus 308,648,791 59,879,819 33,327 368,241,340 (3)
Balance of undistributed net investment income -- 10,128 -- -- (4)
Accumulated net realized gain (loss) from
investment
transactions (1,318,032) (318,841) -- (1,636,873)(5)
Net unrealized appreciation of investments 12,300,285 1,163,492 -- 13,463,777
------------- ------------ --- -------------
Net assets $319,631,044 $60,794,417 $33,360 $380,448,693
============= ============ === =============
</TABLE>
(1) The adjusted balances are presented as if the Reorganization was effective
as of May 31, 1996 for information purposes only. The actual Effective Time of
the Reorganization is expected to be January 31, 1997 at which time the results
would be reflective of the actual composition of shareholders' equity at that
date.
(2) Assumes the issuance of 31,845,644 and 757,595 class A shares, 117,460 and
19,246 class C shares and 5,301,589 class R shares of New Florida in exchange
for the net assets of class A, C and R of Flagship Florida and Nuveen Florida,
respectively. These numbers are based on the net assets of each class of
Flagship Florida and Nuveen Florida, and the net asset values of each respective
class of New Florida, as of May 31, 1996, after adjustment for the distributions
referred to in (4) below. The issuance of such number of New Florida shares
would result in the distribution of 1.0389326 and 1.0152648 class A shares,
1.0391472 and 1.0113344 class C shares and 1.0162795 class R shares for each
share of each respective class of Flagship Florida and Nuveen Florida,
respectively, upon liquidation of each respective class of Flagship Florida and
Nuveen Florida.
(3) Includes the impact of $320,596 due to the effect of the exchange ratios on
the value of new shares issued in excess of the value of shares liquidated and
the effect of assigning a par value equal to .01 per share for each New Florida
share issued in exchange for each Flagship Florida share.
(4) Assumes Nuveen Florida distributes all of its undistributed net investment
income to shareholders.
(5) Assumes Flagship Florida and Nuveen Florida carry forward their net realized
losses from investment transactions to New Florida, as permitted under
applicable tax regulations.
34
<PAGE> 44
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
FLAGSHIP NUVEEN NEW NEW
PENNSYLVANIA PENNSYLVANIA PENNSYLVANIA PENNSYLVANIA
(ACTUAL) (ACTUAL) (PRO FORMA) (AS ADJUSTED)(1)
------------ ------------ ------------ ----------------
<S> <C> <C> <C> <C>
NEW PENNSYLVANIA
Common shares, $.01 par value per share $ -- $ 61,557 $ 33 $ 111,574(2)
Paid-in surplus 47,936,238 62,062,278 33,327 110,048,499(3)
Balance of undistributed net investment income -- 36,663 -- --(4)
Accumulated net realized gain (loss) from
investment transactions (102,860) (543,477) -- (646,337)(5)
Net unrealized appreciation or depreciation of
investments 1,000,252 1,059,722 -- 2,059,974
----------- ----------- ------- ------------
Net assets $48,833,630 $62,676,743 $ 33,360 $111,573,710
=========== =========== ======= ============
</TABLE>
(1) The adjusted balances are presented as if the Reorganization was effective
as of May 31, 1996 for information purposes only. The actual Effective Time of
the Reorganization is expected to be January 31, 1997 at which time the results
would be reflective of the actual composition of shareholders' equity at that
date.
(2) Assumes the issuance of 4,439,204 and 693,742 class A shares, 444,159 and
105,270 class C shares and 5,464,996 class R shares of New Pennsylvania in
exchange for the net assets of class A, C and R of Flagship Pennsylvania and
Nuveen Pennsylvania, respectively. These numbers are based on the net assets of
each class of Flagship Pennsylvania and Nuveen Pennsylvania, and the net asset
values of each respective class of New Pennsylvania, as of May 31, 1996, after
adjustment for the distributions referred to in (4) below. The issuance of such
number of New Pennsylvania shares would result in the distribution of .9995335
and 1.0200372 class A shares, .9991940 and 1.0085467 class C shares and
1.0174526 class R shares for each share of each respective class of Flagship
Pennsylvania and Nuveen Pennsylvania, respectively, upon liquidation of each
respective class of Flagship Pennsylvania and Nuveen Pennsylvania.
(3) Includes the impact of $49,917 due to the effect of the exchange ratios on
the value of new shares issued in excess of the value of shares liquidated and
the effect of assigning a par value equal to .01 per share for each New
Pennsylvania share issued in exchange for each Flagship Pennsylvania share.
(4) Assumes Nuveen Pennsylvania distributes all of its undistributed net
investment income to shareholders.
(5) Assumes Flagship Pennsylvania and Nuveen Pennsylvania carry forward their
net realized losses from investment transactions to New Pennsylvania, as
<TABLE>
<CAPTION>
permitted under applicable tax regulations.
- ---------------------------------------------------------------------------------------------------------------------
FLAGSHIP NUVEEN NEW NEW
VIRGINIA VIRGINIA VIRGINIA VIRGINIA
(ACTUAL) (ACTUAL) (PRO FORMA) (AS ADJUSTED)(1)
------------ ----------- ----------- ----------------
<S> <C> <C> <C> <C>
NEW VIRGINIA
Common shares, $.01 par value per share $ -- $ 63,461 $ 33 $ 193,416(2)
Paid-in surplus 126,593,242 63,007,742 33,327 189,504,389(3)
Balance of undistributed net investment income -- 23,985 -- --(4)
Accumulated net realized gain (loss) from
investment transactions (1,051,577) (89,289) -- (1,140,866)(5)
Net unrealized appreciation of investments 3,113,668 1,745,764 -- 4,859,432
------------ ----------- ------- ------------
Net assets $128,655,333 $64,751,663 $33,360 $193,416,371
============ =========== ======= ============
</TABLE>
(1) The adjusted balances are presented as if the Reorganization was effective
as of May 31, 1996 for information purposes only. The actual Effective Time of
the Reorganization is expected to be January 31, 1997, 1996 at which time the
results would be reflective of the actual composition of shareholders' equity at
that date.
(2) Assumes the issuance of 11,767,721 and 723,156 class A shares, 1,097,812 and
88,830 class C shares and 5,660,782 class R shares of New Virginia in exchange
for the net assets of class A, C and R of Flagship Virginia and Nuveen Virginia,
respectively. These numbers are based on the net assets of each class of
Flagship Virginia and Nuveen Virginia, and the net asset values of each
respective class of New Virginia, as of May 31, 1996, after adjustment for the
distributions referred to in (4) below. The issuance of such number of New
Virginia shares would result in the distribution of 1.0395161 and 1.0202061
class A shares, 1.0389710 and 1.0173542 class C shares and 1.0199618 class R
shares for each share of each respective class of Flagship Virginia and Nuveen
Virginia, respectively, upon liquidation of each respective class of Flagship
Virginia and Nuveen Virginia.
(3) Includes the impact of $129,922 due to the effect of the exchange ratios on
the value of new shares issued in excess of the value of shares liquidated and
the effect of assigning a par value equal to .01 per share for each New Virginia
share issued in exchange for each Flagship Virginia share.
(4) Assumes Nuveen Virginia distributes all of its undistributed net investment
income to shareholders.
(5) Assumes Flagship Virginia and Nuveen Virginia carry forward their net
realized losses from investment transactions to New Virginia, as permitted under
applicable tax regulations.
35
<PAGE> 45
COMPARATIVE PERFORMANCE INFORMATION
Comparative investment performance for the Funds for certain periods ended May
31, 1996 are shown below:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
----------------------------------------------------------------------- INCEPTION
LIFE OF DATE OF
1 YEAR 3 YEARS 5 YEARS 10 YEARS FUND CLASS
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ARIZONA
Class A(1)
Nuveen 3.30% N/A N/A N/A 6.85% 9/6/94
Flagship 4.21% 5.33% 7.87% N/A 7.66% 10/29/86
Class C
Nuveen 2.60% N/A N/A N/A 6.34% 9/9/94
Flagship 3.75% N/A N/A N/A 3.18% 2/7/94
Class R
Nuveen 3.60% 5.06% N/A N/A 7.21% 12/13/91
Flagship N/A N/A N/A N/A N/A N/A
FLORIDA
Class A(1)
Nuveen 3.11% N/A N/A N/A 6.67% 9/6/94
Flagship 3.14% 4.49% 7.22% N/A 7.63% 6/15/90
Class C
Nuveen 2.14% N/A N/A N/A 6.79% 9/16/94
Flagship N/A N/A N/A N/A .93% 9/14/95
Class R
Nuveen 3.34% 4.85% N/A N/A 6.75% 12/13/91
Flagship N/A N/A N/A N/A N/A N/A
PENNSYLVANIA
Class A(1)
Nuveen 3.70% N/A N/A N/A 6.93% 9/6/94
Flagship 3.83% 4.78% 7.10% N/A 7.05% 10/29/86
Class C
Nuveen 2.92% N/A N/A N/A 5.62% 9/6/94
Flagship 3.16% N/A N/A N/A 2.47% 2/2/94
Class R
Nuveen 3.95% 4.89% N/A N/A 6.96% 12/13/91
Flagship N/A N/A N/A N/A N/A N/A
VIRGINIA
Class A(1)
Nuveen 4.07% N/A N/A N/A 6.83% 9/6/94
Flagship 4.03% 4.86% 7.22% 7.87% 7.45% 3/27/86
Class C
Nuveen 3.31% N/A N/A N/A 6.26% 9/8/94
Flagship 3.37% N/A N/A N/A 2.67% 10/4/93
Class R
Nuveen 4.32% 5.07% N/A N/A 7.09% 12/13/91
Flagship N/A N/A N/A N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Total return calculations based on net asset value which does not reflect
the effect of the applicable front-end sales charge. The total returns based on
net asset value for the funds including the applicable sales charge are as
follows; one year and life of fund for Nuveen Arizona (1.35)% and 4.05%,
respectively; one year, three years, five years and life of fund for Flagship
Arizona (.16)%, 3.84%, 6.95% and 7.18%, respectively; one year and life of fund
for Nuveen Florida (1.53)% and 3.87%, respectively; one year, three years, five
years and life of fund for Flagship Florida (1.19)%, 3.00%, 6.30% and 6.86%,
respectively; one year and life of fund for Nuveen Pennsylvania (.97)% and
4.13%, respectively; one year, three years, five years and life of fund for
Flagship Pennsylvania (.53)%, 3.30%, 6.18% and 6.57%, respectively; one year and
life of fund for Nuveen Virginia (.61)% and 4.03%, respectively; one year, three
years, five years, ten years and life of fund for Flagship Virginia (.34)%,
3.37%, 6.31%, 7.40% and 7.00%, respectively.
Average Annual Total Return is the combination of reinvested dividend income,
reinvested capital gains distributions, if any, and changes in net asset value
per share. Inception dates, for Life of Fund numbers, are shown in brackets.
Past performance information is not necessarily indicative of future results.
LEGAL OPINIONS
Certain legal matters in connection with the shares of the New Funds to be
issued pursuant to the Reorganizations will be passed upon by Vedder, Price,
Kaufman & Kammholz, Chicago, Illinois. Vedder, Price, Kaufman & Kammholz will
rely as to certain matters of Massachusetts law on the opinion of Bingham, Dana
& Gould LLP, Boston, Massachusetts. Certain legal matters with respect to the
Flagship Funds will be passed upon by Skadden, Arps, Slate, Meagher & Flom.
36
<PAGE> 46
EXPERTS
The financial highlights of the Nuveen Funds appearing in the Nuveen Funds'
prospectus, and the financial statements of the Nuveen Funds appearing in the
Statement of Additional Information, have been audited by Arthur Andersen LLP,
independent auditors, as set forth in their reports thereon appearing elsewhere
herein, and are included in reliance upon such reports given upon the authority
of such firm as experts in accounting and auditing. Arthur Andersen LLP audits
and reports on the Nuveen Funds' annual financial statements, reviews certain
regulatory reports and the Nuveen Funds' Federal income tax returns, and
performs other professional accounting, auditing, tax and advisory services when
engaged to do so by the Nuveen Funds.
The Statement of Net Assets of the New Funds appearing in the Statement of
Additional Information and the financial highlights of the Flagship Funds
appearing in the Flagship Funds' prospectus, and the financial statements of the
Flagship Funds appearing in the Statement of Additional Information, have been
audited by Deloitte & Touche LLP, independent auditors, as set forth in their
reports thereon appearing elsewhere herein, and are included in reliance upon
such reports given upon the authority of such firm as experts in accounting and
auditing. Deloitte & Touche LLP audits and reports on the New and the Flagship
Funds' annual financial statements, reviews certain regulatory reports and the
New and the Flagship Funds' Federal income tax returns, and performs other
professional accounting, auditing, tax and advisory services when engaged to do
so by the New and the Flagship Funds.
SHAREHOLDER PROPOSALS
The Acquired Funds are not required to hold annual shareholder meetings, but
each will hold special meetings as required or deemed desirable. Since the
Acquired Funds do not hold regular meetings of shareholders, the anticipated
date of the next special shareholders meeting cannot be provided. Any
shareholder proposal that may properly be included in the proxy solicitation
material for a special shareholder meeting must be received by the applicable
Acquired Fund no later than four months prior to the date when proxy statements
are mailed to shareholders.
GENERAL
Management of the Acquired Funds does not intend to present and does not have
reason to believe that others will present any items of business at the
meetings, except as described in this Joint Proxy Statement--Prospectus.
However, if other matters are properly presented at the meetings for a vote, the
proxies will be voted upon such matters in accordance with the judgment of the
persons acting under the proxies.
IF YOU CANNOT BE PRESENT IN PERSON, YOU ARE REQUESTED TO FILL IN, SIGN AND
RETURN THE ENCLOSED PROXY PROMPTLY. NO POSTAGE IS REQUIRED IF MAILED IN THE
UNITED STATES.
James J. Wesolowski
Secretary
Nuveen Multistate Tax-Free Trust
Michael D. Kalbfleisch
Secretary
Flagship Tax-Exempt Funds Trust
37
<PAGE> 47
ANNEX A
ADDITIONAL INFORMATION ABOUT THE NEW FUNDS
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of each Fund is to provide as high a level of current
interest income exempt from both regular federal income tax and the applicable
state personal income tax (or intangibles tax) as is consistent, in the view of
the Fund's management, with preservation of capital. In Florida, which presently
has no state personal income tax, Florida Fund shares are exempt from the
Florida intangible personal property tax. The investment objective is a
fundamental policy of each Fund and may not be changed without the approval of
the holders of a majority of the shares of that Fund. There can be no assurance
that the investment objective of any Fund will be achieved.
VALUE INVESTING. Nuveen Advisory believes that in any market environment there
are quality Municipal Obligations whose current price, yield, credit quality and
future prospects make them seem underpriced or exceptionally attractive when
compared with other Municipal Obligations in the market. In selecting
investments for the Funds, Nuveen Advisory will attempt to identify and purchase
those undervalued or underrated Municipal Obligations of investment grade
quality that offer the best values among Municipal Obligations of similar credit
quality. By selecting these Municipal Obligations, each Fund will seek to
provide attractive current tax-free income and to protect the Fund's net asset
value in both rising and declining markets. In this way, regardless of the
direction the market may move, value investing, if successful, will better
position each Fund to achieve its investment objective of as high a level of
current interest income exempt from both regular federal income tax and the
applicable state personal income tax as is consistent, in the view of the Fund's
management, with preservation of capital. Any net capital appreciation realized
by a Fund will generally result in the distribution of taxable capital gains to
Fund shareholders. See "Distributions and Taxes."
THE IMPORTANCE OF THOROUGH RESEARCH. Successful value investing depends on
identifying and purchasing undervalued or underrated securities before the rest
of the marketplace finds them. Nuveen Advisory believes the municipal market
provides these opportunities, in part because of the relatively large number of
issuers of tax-exempt securities and the relatively small number of full-time,
professional municipal market analysts. For example, there are currently about
7,500 common stocks that are followed by about 23,000 analysts. By contrast,
there are about 60,000 entities that issue tax-exempt securities and less than
1,000 professional municipal market analysts.
Nuveen and Nuveen Advisory believe that together they employ the largest number
of research analysts in the investment banking industry devoted exclusively to
the review and surveillance of tax-exempt securities. Their team of more than 40
individuals has over 350 years of combined municipal market experience. Nuveen
and Nuveen Advisory have access to information on approximately 60,000 municipal
issuers, and review annually more than $100 billion of tax-exempt securities
sold in new issue and secondary markets.
WHICH MUNICIPAL OBLIGATIONS ARE SELECTED AS INVESTMENTS? Each Fund will invest
primarily in Municipal Obligations issued within its respective state so that
the interest income on the Municipal Obligations will be exempt from both
regular federal and applicable state personal income taxes (or intangibles
taxes). Because of the different credit characteristics of governmental
authorities in each of the states and because of differing supply and demand
factors for each state's Municipal Obligations, there may be differences in the
yields on each Fund's classes of shares and in the degree of market and
financial risk to which each Fund is subject.
Each Fund's investment assets will consist of:
- - Municipal Obligations rated investment grade at the time of purchase (Baa or
better by Moody's Investors Service, Inc. ("Moody's") or BBB or better by
Standard and Poor's Corporation ("S&P") or Fitch Investors Service, Inc.
("Fitch"));
- - unrated Municipal Obligations of investment grade quality in the opinion of
Nuveen Advisory, with no fixed percentage limitations on these unrated
Municipal Obligations; and
- - temporary investments within the limitations and for the purposes described
below.
Municipal Obligations rated Baa are considered by Moody's to be medium grade
obligations which lack outstanding investment characteristics and in fact have
speculative characteristics as well, Municipal Obligations rated BBB are
regarded by S&P as having an adequate capacity to pay principal and interest and
Municipal Obligations rated BBB are regarded by Fitch to be investment grade and
of satisfactory credit quality with an adequate capacity to pay principal and
interest. Each Fund may invest in Municipal Obligations that pay interest
subject to the federal alternative minimum tax ("AMT Bonds").
Under ordinary circumstances, each Fund will invest substantially all (at least
80%) of its net assets in its respective state's Municipal Obligations, and not
more than 20% of its net assets in "temporary investments," described below,
provided that temporary investments subject to regular federal income tax may
not comprise more than 20% of each Fund's net assets. For defensive purposes,
however, in order to limit the exposure of its portfolio to market risk from
temporary imbalances of
A-1
<PAGE> 48
supply and demand or other temporary circumstances affecting the municipal
market, each Fund may invest without limit in temporary investments. A Fund will
not be in a position to achieve its investment objective of tax-exempt income to
the extent it invests in taxable temporary investments.
The foregoing investment policies are fundamental policies of each Fund and may
not be changed without the approval of the holders of a majority of the shares
of that Fund.
The Funds intend to emphasize investments in Municipal Obligations with
long-term maturities in order to maintain an average portfolio maturity of 15-30
years, but the average maturity may be shortened from time to time depending on
market conditions in order to help limit each Fund's exposure to market risk. As
a result, each Fund's portfolio at any given time may include both long-term and
intermediate-term Municipal Obligations.
NON-DIVERSIFIED. The Virginia and Pennsylvania Funds are "non-diversified" under
the 1940 Act. Being non-diversified, the Virginia and Pennsylvania Funds will be
able to invest more than 5% of their total assets in the obligations of a single
issuer, subject to the diversification requirements of Subchapter M of the Code.
This allows the Virginia and Pennsylvania Funds, as to 50% of their total
assets, to invest more than 5%, but not have more than 25%, in the securities of
a single issuer. Since the Virginia and Pennsylvania Funds may invest a
relatively high percentage of its assets in the obligations of a limited number
of issuers, the Funds may be more susceptible to any single economic, political
or regulatory occurrence than a diversified Fund.
The Arizona and Florida Funds are "diversified" under the 1940 Act. As
diversified funds, the Arizona and Florida Funds each may not invest more than
5% of its total assets in securities of any one issuer, except that this
limitation does not apply to securities of the U.S. government, its agencies and
instrumentalities or to the investment of 25% of the Fund's assets.
MUNICIPAL OBLIGATIONS. Municipal Obligations, as the term is used in this
Prospectus, are federally tax-exempt debt obligations issued by states, cities
and local authorities and by certain U.S. possessions or territories to obtain
funds for various public purposes, such as the construction of public
facilities, the payment of general operating expenses and the refunding of
outstanding debts. They may also be issued to obtain funding for various private
activities, including loans to finance the construction of housing, educational
and medical facilities or privately owned industrial development and pollution
control project.
The two principal classifications of Municipal Obligations are general
obligation and revenue bonds. GENERAL OBLIGATION bonds are secured by the
issuer's pledge of its full faith, credit and taxing power for the payment of
principal and interest. REVENUE bonds are payable only from the revenues derived
from a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise or other specific revenue source. Industrial
development and pollution control bonds are in most cases revenue bonds and do
not generally constitute the pledge of the credit or taxing power of the issuer
of these bonds.
Municipal Obligations may also include participation in lease obligations or
installment purchase contract obligations (collectively, "lease obligations") of
municipal authorities or entities. Certain "non-appropriation" lease obligations
may present special risks because the municipality's obligation to make future
lease or installment payments depends on money being appropriated each year for
this purpose. If an issuer stopped making payment on a lease obligation held by
a Fund, the lease obligation would lose some or all of its value. The Funds
seeks to mitigate that risk by investing only in non-appropriation leases where
Nuveen Advisory has determined that the issuer has a strong incentive to
continue making appropriations and timely payment until the security's maturity.
Some lease obligations may be illiquid under certain circumstances. See the
Statement of Additional Information for further information about lease
obligations and illiquid securities.
The yields on Municipal Obligations depend on a variety of factors, including
the condition of financial markets in general and the municipal market in
particular, as well as the size of a particular offering, the maturity of the
obligation and the rating of the issue. Certain Municipal Obligations may pay
variable or floating rates of interest based upon certain market rates or
indexes such as a bank prime rate or a tax-exempt money market index. The
ratings of Moody's, S&P and Fitch represent their opinions as to the quality of
the Municipal Obligations that they undertake to rate. It should be emphasized,
however, that ratings are general and are not absolute standards of quality.
Consequently, Municipal Obligations with the same maturity, coupon and rating
may have different yields, while those having the same maturity and coupon with
different ratings may have the same yield. The market value of Municipal
Obligations will vary with changes in prevailing interest rate levels and as a
result of changing evaluations of the ability of their issuers to meet interest
and principal payments. Similarly, the market value and net asset value of
shares of the Funds will change in response to interest rate changes; they will
tend to decrease when interest rates rise and increase when interest rates fall.
TEMPORARY INVESTMENTS. As described above, each Fund under ordinary
circumstances may invest up to 20% of its net assets in "temporary investment,"
but may invest without limit in temporary investments during temporary defensive
periods. Each fund will seek to make temporary investments in short-term
securities the interest on which is exempt from regular federal income tax, but
may be subject to state income tax in the Fund's respective state. If suitable
federally tax-exempt temporary investments are not available at reasonable
prices and yields, a Fund may make temporary investments in
A-2
<PAGE> 49
taxable securities whose interest is subject to both state and federal income
tax. A Fund will invest only in those taxable temporary investments that are
either U.S. Government securities or are rated within the two highest grades by
Moody's, S&P or Fitch, and mature within one year from the date of purchase or
carry a variable or floating rate of interest. See the Statement of Additional
Information for further information about the temporary investments in which the
Funds may invest.
Because each Fund will concentrate its investments in Municipal Obligations
issued within a single state, a Fund may be affected by political, economic or
regulatory factors that may impair the ability of issuers in that state to pay
interest on or to repay the principal of their debt obligations. These special
factors are briefly described for each Fund's respective state in this Joint
Proxy Statement--Prospectus. See the Statement of Additional Information for
further information about these factors.
PORTFOLIO TRADING AND TURNOVER. Each Fund will make changes in its investment
portfolio from time to time in order to take advantage of opportunities in the
municipal market and to limit exposure to market risk. A Fund may engage to a
limited extent in short-term trading consistent with its investment objective.
Changes in a Fund's investments are known as "portfolio turnover." Actual
portfolio turnover rates are impossible to predict, and although they are not
expected to generally exceed 75%, they may exceed 75% in particular years
depending upon market conditions.
WHEN-ISSUED OR DELAYED DELIVERY TRANSACTIONS. A Fund may purchase and sell
Municipal Obligations on a when-issued or delayed delivery basis, which calls
for the Fund to make payment or take delivery at a future date, normally 15-45
days after the trade date. The commitment to purchase securities on a
when-issued or delayed delivery basis may involve an element of risk because the
value of the securities is subject to market fluctuation, no interest accrues to
the purchaser prior to settlement of the transaction, and at the time of
delivery the market value may be less than cost. A Fund commonly engages in
when-issued transactions in order to purchase or sell newly issued Municipal
Obligations, and may engage in delayed delivery transactions in order to manage
its operations more effectively. See the Statement of Additional Information for
further information about when-issued and delayed delivery transactions.
FINANCIAL FUTURES AND OPTIONS TRANSACTIONS. Although the Funds have no present
intent to do so, each Fund reserves the right to engage in certain hedging
transactions involving the use of financial futures contracts, options on
financial futures or options based on either an index of long-term tax-exempt
securities or on debt securities whose prices, in the opinion of Nuveen
Advisory, correlate with the prices of the Fund's investments. These hedging
transactions are designed to limit the risk of fluctuations in the prices of a
Fund's investments. See the Statement of Additional Information for further
information on futures and options and associated risks.
OTHER INVESTMENT POLICIES AND RESTRICTIONS. Each of the Funds has adopted
certain fundamental policies intended to limit the risk of its investment
portfolio. In accordance with these policies, each Fund may not:
- - invest more than 25% of its total assets in securities of issuers in any one
industry, provided, however, that such imitations shall not be applicable to
Municipal Obligations issued by governments or political subdivisions of
governments, and obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities; or
- - borrow money, except from banks for temporary or emergency purposes and then
only in an amount not exceeding (a) 10% of the value of its total assets at
the time of borrowing or (b) one-third of the value of its total assets,
including the amount borrowed, in order to meet redemption requests which
might otherwise require the untimely disposition of securities.
In addition, the Arizona Fund and the Florida Fund, each may not:
- - invest more than 5% of its total assets in securities of any one issuer,
except that this limitation shall not apply to securities of the U.S.
Government, its agencies and instrumentalities, or to the investment of 25% of
the Fund's assets.
In applying these policies, the "issuer" of a security is deemed to be the
entity whose assets and revenues are committed to the payment of principal and
interest on that security, provided that the guarantee of an instrument will
generally be considered a separate security.
In addition, each of the Funds may not, as a non-fundamental policy:
- - invest more than 15% of its assets in illiquid securities (including
repurchase agreements maturing in more than seven days).
Except as specifically noted above or in the Statement of Additional
Information, each Fund's investment policies are not fundamental and may be
changed without shareholder approval. For a more complete description of
investment restrictions that may be changed without a shareholder vote, see the
Statement of Additional Information.
A-3
<PAGE> 50
FLEXIBLE PRICING PROGRAM
Each Fund has adopted a Flexible Pricing Program that offers you four
alternative ways to purchase Fund shares (Classes A, B, C and R), each with a
different combination of sales charges, ongoing fees, eligibility requirements,
and other features. The Program is designed to permit you and your financial
adviser to choose the method of purchasing shares that you believe is most
beneficial given the amount of your purchase and current investment, the length
of time you expect to hold your investment, and other relevant circumstances. A
summary of the four alternatives is set forth below:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
CONTINGENT DEFERRED
UP-FRONT SALES SALES CHARGE ANNUAL 12B-1 ANNUAL 12B-1
CHARGE "CDSC" DISTRIBUTION FEE SERVICE FEE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A 4.20% maximum(1) None(1) None .20%
Class B None Maximum 5%, declining to 0% .75%(2) .20%
after six years
Class C None 1% if shares redeemed within .55% .20%
12 months of purchase
Class R None None None None
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Initial sales charge waived or reduced for certain purchases. Class A
purchases at net asset value of $1 million or more may be subject to a 1% CDSC
if redeemed within 18 months of purchase.
(2) Class B Shares convert to Class A Shares after eight years.
For more information regarding features of each class, see "How to Buy Fund
Shares," "How to Redeem Fund Shares" and "Distribution and Service Plan" below.
When you purchase Class A Shares, you will normally pay an up-front sales
charge. As a result, you will have less money invested initially and you will
own fewer Class A Shares than you would in the absence of an up-front sales
charge. Alternatively, when you purchase Class B or Class C Shares, you will not
pay an up-front sales charge and all of your monies will be fully invested at
the time of purchase. However, Class B and Class C Shares are subject to an
annual distribution fee, as reflected in the preceding table. In addition, Class
B Shares are subject to a maximum 5% CDSC, which declines over time, if the
shares are redeemed within the first six years after purchase, and Class C
Shares are subject to a CDSC of 1% if redeemed within 12 months of purchase.
Class B Shares automatically convert to Class A Shares eight years after
purchase, which results in a reduction in the annual expenses borne by the
shareholder. Because Class C Shares purchased after the effective date of the
Reorganization do not convert to Class A Shares and continue to pay the annual
distribution fee, Class C Shares would normally not be the optimal class for an
investor who expects to hold shares for significantly longer than eight years.
Class A, Class B and Class C Shares are subject to annual service fees, which
are identical in amount and are used to compensate Authorized Dealers for
providing you with ongoing account services. You may qualify for a reduced sales
charge or a sales charge waiver on a purchase of Class A Shares, as described
below under "How the Sales Charge on Class A Shares May Be Reduced or Waived."
Under certain limited circumstances, Class R Shares are available for purchase
at a price equal to their net asset value.
In deciding whether to purchase Class A, Class B, Class C or Class R Shares, you
should consider all relevant factors, including the dollar amount of your
purchase, the length of time you expect to hold the shares and whether a CDSC
would apply, the amount of any applicable up-front sales charge, the amount of
any applicable distribution or service fee that may be incurred while you own
the shares, whether or not you will be reinvesting income or capital gain
distributions in additional shares, whether or not you meet applicable
eligibility requirements or qualify for a sales charge waiver or reduction, and
the relative level of services that your financial adviser may provide to
different classes. Authorized Dealers and other persons distributing the Fund's
shares may receive different compensation for selling different classes of
shares.
Differences Between the Classes of Shares. Each class of shares represents an
interest in the same portfolio of investments. Each class of shares is identical
in all respects except that each class has its own sales charge structure, each
class bears its own class expenses, including distribution and service expenses,
and each class has exclusive voting rights with respect to any distribution or
service plan applicable to its shares. In addition, the Class B Shares are
subject to a conversion feature. As a result of the differences in the expenses
borne by each class of shares, and differences in the purchase and redemption
activity for each class, net income per share, dividends per share and net asset
value per share will vary among the Fund's classes of shares.
Dealer Incentives. Upon notice to all Authorized Dealers, Nuveen may reallow to
Authorized Dealers electing to participate up to the full applicable Class A
Share sales charge during periods and for transactions specified in the notice.
In those situations where there is no retained underwriting commission, i.e., on
the sale of Class B or Class C Shares, Nuveen will periodically pay for similar
activities at its own expense. The staff of the Securities and Exchange
Commission takes the position that dealers who receive 90% or more of the
applicable sales charge may be deemed underwriters under the Securities Act of
1933, as amended.
A-4
<PAGE> 51
Nuveen may also periodically undertake sales promotion programs with
broker-dealers with whom they have Distribution Agreements, in which they will
grant a partial or full reallowance of its retained underwriting commission for
fund sales as permitted by applicable rules. In addition, Nuveen will support
those firms' efforts in sales training seminars, management meetings, and broker
roundtables where it has the opportunity to present Nuveen's products and
services. Nuveen may also provide recognition for outstanding sales achievements
during a year through membership in its recognition clubs which includes a
membership plaque and a recognition memento. In addition, Nuveen provides
recognition through the awarding of imprinted nominal promotional items; client
leads; as well as "thank you" dinners and entertainment. Its agents also
typically provide food for office meetings. Under appropriate terms it will
share with broker-dealers a portion of the cost of prospecting seminars and
shareholder gatherings. In those situations where there is no retained
underwriting commission, i.e., on the sale of Class B, Class C Shares, or Class
R Shares, Nuveen will periodically pay for similar activities at their own
expense.
HOW TO BUY FUND SHARES
You may purchase Class A Shares at a public offering price equal to the
applicable net asset value per share plus an up-front sales charge imposed at
the time of purchase as set forth below. You may qualify for a reduced sales
charge, or the sales charge may be waived in its entirety, as described below
under "How the Sales Charge on Class A Shares May Be Reduced or Waived." Class A
Shares are also subject to an annual service fee. See "Flexible Pricing Program"
and "Distribution and Service Plan."
The up-front sales charges for Class A Shares are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
SALES CHARGE AS SALES CHARGE AS REALLOWANCE
% OF PUBLIC % OF NET % OF PUBLIC
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000 4.20% 4.38% 3.70%
$50,000 but less than $100,000 4.00% 4.18% 3.50%
$100,000 but less than $250,000 3.50% 3.63% 3.00%
$250,000 but less than $500,000 2.50% 2.56% 2.00%
$500,000 but less than $1,000,000 2.00% 2.04% 1.50%
$1,000,000 and above 0.00%* 0.00% **
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
* NAV trades subject to a 1.00% CDSC for shares redeemed within 18 months of
purchase.
** Commission may be payable by Nuveen as follows: Nuveen pays Authorized
Dealers of record on such Class A purchases a commission in an amount equal to
the sum of 1% of the first $2.5 million, plus .50% of the next $2.5 million,
plus .25% of purchases over $5 million.
The Fund receives the entire net asset value of all Class A Shares that are
sold. Nuveen retains the full applicable sales charge from which it pays the
uniform reallowances shown above to Authorized Dealers. See "Flexible Sales
Charge Program--Dealer Incentives" above for more information about reallowances
and other compensation to Authorized Dealers.
Certain commercial banks may make Class A Shares of the Fund available to their
customers on an agency basis. Pursuant to the agreements between Nuveen and
these banks, some or all of the sales charge paid by a bank customer in
connection with a purchase of Class A Shares may be retained by or paid to the
bank. Certain banks and other financial institutions may be required to register
as securities dealers in certain states.
HOW THE UP-FRONT SALES CHARGE ON CLASS A SHARES MAY BE REDUCED OR WAIVED
There are several ways to reduce or eliminate the up-front sales charge:
- - rights of accumulation;
- - letter of intent;
- - purchases with monies representing distributions from Nuveen-sponsored UITs;
- - broker-dealer sponsored mutual fund purchase programs;
- - group purchase programs;
- - reinvestment of redemption proceeds from non-affiliated funds; and
- - special sales charge waivers for certain categories of investors.
Rights of Accumulation. You may qualify for a reduced sales charge as shown
above on a purchase of Class A Shares if the amount of your purchase, when added
to the value that day of all of your prior purchases of shares of the Fund or of
another Nuveen Mutual Fund, or units of a Nuveen UIT, on which an up-front sales
charge or ongoing distribution fee is imposed, falls within the amounts stated
in the table. You or your financial adviser must notify Nuveen or Boston
Financial of any
A-5
<PAGE> 52
cumulative discount whenever you plan to purchase Class A Shares of the Fund
that you wish to qualify for a reduced sales charge.
Letter of Intent. You may qualify for a reduced sales charge on a purchase of
Class A Shares if you plan to purchase Class A Shares of Nuveen Mutual Funds
over the next 13 months and the total amount of your purchases would, if
purchased at one time, qualify you for one of the reduced sales charges shown
above. In order to take advantage of this option, you must complete the
applicable section of the Application Form or sign and deliver either to an
Authorized Dealer or to Boston Financial a written Letter of Intent in a form
acceptable to Nuveen. A Letter of Intent states that you intend, but are not
obligated, over the next 13 months to purchase a stated total amount of Class A
Shares that would qualify you for a reduced sales charge shown above. You may
count shares of a Nuveen Mutual Fund that you already own on which you paid an
up-front sales charge or an ongoing distribution fee and any Class B and Class C
Shares of a Nuveen Mutual Fund that you purchase over the next 13 months towards
completion of your investment program, but you will receive a reduced sales
charge only on new Class A Shares you purchase with a sales charge over the 13
months. You cannot count towards completion of your investment program Class A
Shares that you purchase without a sales charge through investment of
distributions from a Nuveen Mutual Fund or a Nuveen UIT, or otherwise.
By establishing a Letter of Intent, you agree that your first purchase of Class
A Shares following execution of the Letter of Intent will be at least 5% of the
total amount of your intended purchases. You further agree that shares
representing 5% of the total amount of your intended purchases will be held in
escrow pending completion of these purchases. All dividends and capital gains
distributions on Class A Shares held in escrow will be credited to your account.
If total purchases, less redemptions, prior to the expiration of the 13 month
period equal or exceed the amount specified in your Letter of Intent, the Class
A Shares held in escrow will be transferred to your account. If the total
purchases, less redemptions, exceed the amount specified in your Letter of
Intent and thereby qualify for a lower sales charge than the sales charge
specified in your Letter of Intent, you will receive this lower sales charge
retroactively, and the difference between it and the higher sales charge paid
will be used to purchase additional Class A Shares on your behalf. If the total
purchases, less redemptions, are less than the amount specified, you must pay
Nuveen an amount equal to the difference between the amounts paid for these
purchases and the amounts that would have been paid if the higher sales charge
had been applied. If you do not pay the additional amount within 20 days after
written request by Nuveen or your financial adviser, Nuveen will redeem an
appropriate number of your escrowed Class A Shares to meet the required payment.
By establishing a Letter of Intent, you irrevocably appoint Nuveen as attorney
to give instructions to redeem any or all of your escrowed shares, with full
power of substitution in the premises.
You or your financial adviser must notify Nuveen or Boston Financial whenever
you make a purchase of Fund shares that you wish to be covered under the Letter
of Intent option.
Reinvestment of Nuveen Unit Trust Distributions. You may purchase Class A Shares
without an up-front sales charge by reinvestment of distributions from any of
the various unit investment trusts sponsored by Nuveen. There is no initial or
subsequent minimum investment requirement for such reinvestment purchases.
Group Purchase Programs. If you are a member of a qualified group, you may
purchase Class A Shares of the Fund or of another Nuveen Mutual Fund at the
reduced sales charge applicable to the group's purchases taken as a whole. A
"qualified group" is one which has previously been in existence, has a purpose
other than investment, has 10 or more participating members, has agreed to
comply with certain administrative requirements relating to its group purchases.
Under any group purchase program, the minimum monthly investment in Class A
Shares of any particular fund or portfolio by each participant is $50, and the
minimum monthly investment in Class A Shares of any particular fund or portfolio
for all participants in the program combined is $3,000. No certificates will be
issued for any participant's account. All dividends and other distributions by
the Fund will be reinvested in additional Class A Shares of the Fund. No
participant may utilize a systematic withdrawal program.
To establish a group purchase program, both the group itself and each
participant must fill out special application materials. See the Statement of
Additional Information for more complete information about "qualified groups"
and group purchase programs.
Reinvestment of Redemption Proceeds from Unrelated Funds. You may also purchase
Class A Shares at net asset value without a sales charge if the purchase takes
place through a broker-dealer and represents the reinvestment of the proceeds of
the redemption of shares of one or more registered investment companies not
affiliated with Nuveen. You must provide appropriate documentation that the
redemption occurred not more than one year prior to the reinvestment of the
proceeds in Class A Shares, and that you either paid an up-front sales charge or
were subject to a contingent deferred sales charge in respect of the redemption
of such shares of such other investment company.
Special Sales Charge Waivers. Class A Shares of the Fund may be purchased at net
asset value without a sales charge and in any amount by officers, trustees and
former trustees of the Nuveen or Flagship Funds; bona fide, full-time and
retired employees of Nuveen, any parent company of Nuveen, and subsidiaries
thereof, or their immediate family members (as
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defined below); any person who, for at least 90 days, has been an officer,
director or bona fide employee of any Authorized Dealer, or their immediate
family members; officers and directors of bank holding companies that make Fund
shares available directly or through subsidiaries or bank affiliates; bank or
broker-affiliated trust departments; clients of broker-dealers that sponsor
mutual fund purchase programs on a periodic fee, asset-based "wrap" fee or no
transaction fee basis; and clients of investment advisers, financial planners or
other financial intermediaries that charge periodic or asset-based "wrap" fees
for their services.
Any Class A Shares purchased pursuant to a special sales charge waiver must be
acquired for investment purposes and on the condition that they will not be
transferred or resold except through redemption by the Fund. You or your
financial adviser must notify Nuveen or Boston Financial whenever you make a
purchase of Class A Shares that you wish to be covered under these special sales
charge waivers. All purchases under the Special Sales Charge Waivers will be
subject to minimum purchase requirements as established by the Fund. Many of the
above categories of investors are also eligible to purchase Class R Shares, as
described below under "Class R Shares." Finally, Class A Shares may be issued at
net asset value without a sales charge in connection with the acquisition by the
Fund of another investment company.
In determining the amount of your purchases of Class A Shares that may qualify
for a reduced sales charge, the following purchases may be combined: (1) all
purchases by a trustee or other fiduciary for a single trust estate or fiduciary
account; (2) all purchases by individuals and their immediate family members
(i.e., their spouses, their parents and their children); or (3) all purchases
made through a group purchase program as described above.
The reduced sales charge programs may be modified or discontinued by the Fund at
any time upon prior written notice to shareholders of the Fund.
CLASS B SHARES
You may purchase Class B Shares at a public offering price equal to the
applicable net asset value per share without any up-front sales charge, although
a CDSC may be imposed if you redeem shares within a specified period after
purchase, as shown in the table below. Since Class B Shares are sold without an
initial sales charge, the full amount of your purchase payment will be invested
in Class B Shares.
Class B Shares are subject to an annual distribution fee to compensate Nuveen
for its costs in distributing Class B shares, and Class B Shares are also
subject to an annual service fee to compensate Authorized Dealers for providing
you with ongoing financial advice and other account services. See "Flexible
Pricing Program" and "Distribution and Service Plan." Nuveen compensates
Authorized Dealers for sales of Class B Shares at the time of sale at the rate
of 4.00% of the amount of Class B Shares purchased, which represents a sales
commission of 3.80% plus an advance of the first year's annual service fee of
.20%.
If redeemed prior to the end of the sixth year after purchase, Class B Shares
may be subject to a CDSC, as set forth below:
<TABLE>
<CAPTION>
- -----------------------------------
YEAR OF REDEMPTION SALES CHARGE
AFTER PURCHASE (CDSC)
- -----------------------------------
<S> <C>
First 5%
Second 4%
Third 4%
Fourth 3%
Fifth 2%
Sixth 1%
- -----------------------------------
</TABLE>
Class B Shares acquired through the reinvestment of dividends and capital gains
distributions are not subject to a CDSC. Any CDSC will be imposed on the
aggregate net asset value of redeemed shares at the time of redemption or the
original cost of such shares, whichever is less. For more information regarding
the imposition of the CDSC, see "How to Redeem Fund Shares--Class B Shares,"
below.
Class B Shares will automatically convert to Class A Shares eight years after
purchase. All conversions will be done at net asset value without the imposition
of any sales load, fee, or other charge, so that the value of each shareholder's
account immediately before conversion will be the same as the value of the
account immediately after conversion. Class B Shares acquired through
reinvestment of distributions will convert into Class A Shares based on the date
of the initial purchase to which such shares relate. For this purpose, Class B
Shares acquired through reinvestment of distributions will be attributed to
particular purchases of Class B Shares in accordance with such procedures as the
Board of Trustees may determine from time to time. Class B Shares that are
converted to Class A Shares will be subject to a reduced annual distribution
fee, but they will remain subject to an annual service fee that is identical in
amount for both Class B Shares and Class A Shares. Since net asset value per
share of the Class B Shares and the Class A Shares may differ at the time of
conversion, a shareholder may receive more or fewer Class A Shares than the
number of Class B Shares converted. Any conversion of Class B Shares into Class
A Shares will be subject to the continuing availability of an opinion of counsel
or a private letter
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ruling from the Internal Revenue Service to the effect that the conversion of
shares would not constitute a taxable event under federal income tax law.
Conversion of Class B Shares into Class A Shares might be suspended if such an
opinion or ruling were no longer available.
CLASS C SHARES
You may purchase Class C Shares at a public offering price equal to the
applicable net asset value per share without any up-front sales charge. Class C
Shares are subject to an annual distribution fee to compensate Nuveen for its
costs of distributing Class C Shares. Class C Shares are also subject to an
annual service fee of .20% to compensate Authorized Dealers for providing you
with ongoing financial advice and other account services. Nuveen compensates
Authorized Dealers for sales of Class C Shares at the time of the sale at a rate
of 1.00% of the amount of Class C Shares purchased, which represents a sales
commission of .80% plus an advance on the first year's annual service fee of
.20%. See "Flexible Pricing Program" and "Distribution and Service Plan."
An investor purchasing Class C Shares pays a CDSC of 1% of the purchase price or
redemption proceeds, whichever is less, if the Class C Shares are redeemed
within 12 months of purchase. See "How to Redeem Fund Shares--Class C Shares."
If your Class C Shares were acquired in connection with the reorganization of
certain Nuveen funds on January 31, 1997, you have the option to convert your
shares to Class A Shares at the end of your six-year holding period based upon
your original purchase date. If you are so eligible and wish to exercise this
conversion feature, call Nuveen toll-free at 800-414-7447.
CLASS R SHARES
You may purchase Class R Shares with monies representing dividends and capital
gain distributions on Class R Shares of the Fund. Also, you may purchase Class R
Shares if you are within the following specified categories of investors who are
also eligible to purchase Class A Shares at net asset value without an up-front
sales charge: officers, current and former trustees of the Nuveen or Flagship
Funds; bona fide, full-time and retired employees of Nuveen, any parent company
of Nuveen, and subsidiaries thereof, or their immediate family members; any
person who, for at least 90 days, has been an officer, director or bona fide
employee of any Authorized Dealer, or their immediate family members; officers
and directors of bank holding companies that make Fund shares available directly
or through subsidiaries or bank affiliates; and bank or broker-affiliated trust
departments; persons investing $1 million or more in Class R Shares; and clients
of investment advisers, financial planners or other financial intermediaries
that charge periodic or asset-based "wrap" fees for their services.
If you are eligible to purchase either Class R Shares or Class A Shares without
a sales charge at net asset value, you should be aware of the differences
between these two classes of shares. Class A Shares are subject to an annual
distribution fee to compensate Nuveen for distribution costs associated with the
Funds and to an annual service fee to compensate Authorized Dealers for
providing you with ongoing account services. Class R Shares are not subject to a
distribution or service fee and, consequently, holders of Class R Shares may not
receive the same types or levels of services from Authorized Dealers. In
choosing between Class A Shares and Class R Shares, you should weigh the
benefits of the services to be provided by Authorized Dealers against the annual
service fee imposed upon the Class A Shares.
INITIAL AND SUBSEQUENT PURCHASES OF SHARES
You may buy Fund shares through Authorized Dealers or by calling or directing
your financial adviser to call Nuveen toll-free at 800-414-7447. You may pay for
your purchase by Federal Reserve draft or by check made payable to "(Name of
Fund), Class (A), (B), (C), (R)," delivered to the financial adviser through
whom the investment is to be made for forwarding to the Fund's shareholder
services agent, Boston Financial. When making your initial investment, you must
also furnish the information necessary to establish your Fund account by
completing and enclosing with your payment the attached Application Form. After
your initial investment, you may make subsequent purchases at any time by
forwarding to Boston Financial a check in the amount of your purchase made
payable to "(Name of Fund), Class (A), (B), (C), (R)," and indicating on the
check your account number. All payments must be in U.S. dollars and should be
sent directly to State Street at its address listed on the back cover of this
Prospectus. A check drawn on a foreign bank or payable to a third party will not
be acceptable. You may also wire Federal Funds directly to Boston Financial, but
you may be charged a fee for this. For instructions on how to make Fund
purchases by wire transfer, call Nuveen toll-free at 800-414-7447.
PURCHASE PRICE
The price at which the purchase of Fund shares is effected is based on the next
calculation of the Fund's net asset value after the order is placed. See "Net
Asset Value," below for a description of how net asset value is calculated.
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<PAGE> 55
MINIMUM INVESTMENT REQUIREMENTS
Generally, your first purchase of any class of the Fund's shares must be for
$3,000 or more. Additional purchases may be in amounts of $50 or more. These
minimums may be changed at any time by the Fund. There are exceptions to these
minimums for shareholders who qualify under one or more of the Fund's automatic
deposit, group purchase or reinvestment programs.
SYSTEMATIC INVESTMENT PROGRAMS
The Fund offers you several opportunities to capture the benefits of "dollar
cost averaging" through systematic investment programs. In a regularly followed
dollar cost averaging program, you would purchase more shares when Fund share
prices are lower and fewer shares when Fund share prices are higher, so that the
average price paid for Fund shares is less than the average price of the Fund
shares over the same time period. Dollar cost averaging does not assure profits
or protect against losses in a steadily declining market. Since dollar cost
averaging involves continuous investment regardless of fluctuating price levels,
you should consider your financial ability to continue investing in declining as
well as rising markets before deciding to invest in this way. The Fund offers
two different types of systematic investment programs:
Automatic Deposit Plan. Once you have established a Fund account you may make
regular investments in an amount of $50 or more each month by authorizing Boston
Financial to make transfers from your bank account. There is no obligation to
continue payments and you may terminate your participation at any time at your
discretion. No charge in addition to the applicable sales charge is made in
connection with this Plan, and there is no cost to the Fund.
Payroll Direct Deposit Plan. Once you have established a Fund account, you may,
with your employer's consent, make regular investments in Fund shares of $50 or
more per pay period by authorizing your employer to deduct this amount
automatically from your paycheck and forward the same amount to the Fund. There
is no obligation to continue payments and you may terminate your participation
at any time at your discretion. No charge in addition to the applicable sales
charge is made for this Plan, and there is no cost to the Fund.
OTHER SHAREHOLDER PROGRAMS
Exchange Privilege. You may exchange shares of a class of the Fund for shares of
the same class of any other Nuveen Mutual Fund with reciprocal exchange
privileges, by calling or sending a written request to the Fund, c/o Boston
Financial, P.O. Box 8509, Boston, MA 02266-8509. The shares to be purchased must
be offered in your state of residence and you must have held the shares you are
exchanging for at least 15 days. Class A Shares of the Fund may be exchanged for
Class A Shares of any other Nuveen Mutual Fund at net asset value without a
sales charge. Similarly, Class A Shares of other Nuveen Mutual Funds purchased
subject to a sales charge may be exchanged for Class A Shares of the Fund at net
asset value without a sales charge. Shares of any Nuveen Mutual Fund purchased
through dividend reinvestment or through investment of Nuveen UIT distributions
may be exchanged for shares of the Fund or any other Nuveen Mutual Fund without
a sales charge. Exchanges of shares from any Nuveen money market fund will be
made into Class A Shares, Class B Shares or Class C Shares of the Fund or any
other Nuveen Mutual Fund at the public offering price, which includes an
up-front sales charge in the case of Class A Shares, a contingent deferred sales
charge in the case of Class B Shares and Class C Shares, and will be subject to
any applicable annual distribution fee. If, however, a sales charge has
previously been paid on the investment represented by the exchanged shares
(i.e., the shares to be exchanged were originally issued in exchange for shares
on which a sales charge was paid), the exchange of shares from a Nuveen money
market fund will be made into Class A Shares at net asset value without any
up-front sales charge. Class A Shares or Class C Shares may be exchanged for
shares of any Nuveen money market fund. Class B Shares of the Fund may be
exchanged for Class B Shares of any other Nuveen Mutual Fund. Class R Shares of
the Fund may be exchanged for Class R Shares of any other Nuveen Mutual Fund or
any Nuveen money market fund.
No CDSC will be charged on the exchange of shares of a class of the Fund for the
same class of any other Nuveen Mutual Fund or, in the case of Class A Shares,
Class B Shares and Class C Shares, for shares of any Nuveen money market fund.
The holding period for purposes of the CDSC applicable to Class A Shares, Class
B Shares or Class C Shares will continue to run during any period during which
such exchanged shares are held.
The total value of exchanged shares must at least equal the minimum investment
requirement of the Nuveen Mutual Fund being purchased. For federal income tax
purposes, any exchange constitutes a sale and purchase of shares and may result
in capital gain or loss. Before making any exchange, you should obtain the
Prospectus for the Nuveen Mutual Fund you are purchasing and read it carefully.
If the registration of the account for the Fund you are purchasing is not
exactly the same as that of the fund account from which the exchange is made,
written instructions from all holders of the account from which the exchange is
being made must be received, with signatures guaranteed by a member of an
approved Medallion Guarantee Program or in such other manner as may be
acceptable to the Fund. You may also exchange shares by telephone if you have
elected the telephone exchange privilege. The exchange privilege may be modified
or discontinued by the Fund at any time upon prior written notice to
shareholders of the Fund.
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<PAGE> 56
Shareholders with the desire to automatically exchange shares of a predetermined
amount on a monthly, quarterly, or annual basis, may take advantage of the
systematic exchange plan. Please refer to the account application to establish
this plan.
The exchange privilege is not intended to permit the Fund to be used as a
vehicle for short-term trading. Excessive exchange activity may interfere with
portfolio management, raise expenses, and otherwise have an adverse effect on
all shareholders. In order to limit excessive exchange activity and in other
circumstances where Fund management believes doing so would be in the best
interest of the Fund, the Fund reserves the right to revise or terminate the
exchange privilege, or limit the amount or number of exchanges or reject any
exchange. Shareholders would be notified of any such action to the extent
required by law.
Fund Direct. Fund Direct links your Fund account to your account at your bank or
other financial institution to enable you to send money electronically between
those accounts to perform a number of types of account transactions. These
include [purchases of shares by telephone,] investments under Automatic Deposit
Plan, and sending dividends and distributions, redemption payments or Automatic
Withdrawal Plan payments directly to your bank account. Please refer to the
Application for details or call Nuveen for more information.
Fund Direct privileges must be requested via an Application you obtain by
calling 800-414-7447, or on your dealer's settlement instructions if you buy
your shares through your dealer. After your account is established, you can
request Fund Direct privileges on signature-guaranteed instructions to Boston
Financial. Fund Direct privileges will apply to each shareholder listed in the
registration on your account as well as to your dealer representative of record
unless and until Boston Financial receives written instructions terminating or
changing those privileges. After you establish Fund Direct for your account, any
change of bank account information must be made by signature-guaranteed
instructions to Boston Financial signed by all shareholders who own the account.
Purchases may be made by telephone only after your account has been established.
To purchase shares in amounts up to $250,000 through a telephone representative,
call Boston Financial at 800-225-8530. The purchase payment will be debited from
your bank account.
Reinstatement Privilege. If you have redeemed Class A Shares of a Fund or Class
A Shares of any other Nuveen Mutual Fund that were subject to a sales charge,
you may reinvest without any added sales charge up to the full amount of the
redemption in Class A Shares of the Fund at net asset value at the time of
reinvestment. A shareholder of a Fund or other Nuveen Mutual Fund who redeems
Class A Shares purchased pursuant to the waiver of the up-front sales load for
purchases of $1 million or more or purchases Class B or Class C Shares and
incurs a CDSC, may reinvest up to the full amount redeemed at net asset value at
the time of reinvestment, in Class A, Class B or Class C Shares, as the case may
be. The amount of any CDSC that was charged at the time of redemption will be
reinvested at the time of reinstatement. This reinstatement privilege can be
exercised only once for all or a portion of the Class A, Class B or Class C
Shares you redeemed and must be exercised within one year of the date of the
redemption. As applied to Class B Shares of the Fund, this reinstatement
privilege, if exercised within one year of the date of the redemption, will
preserve the period of time credited to your ownership of Class B Shares for
purposes of the conversion of these Class B Shares to Class A Shares. The
federal income tax consequences of any capital gain realized on a redemption
will not be affected by reinstatement, but a capital loss may be disallowed in
whole or in part depending on the timing and amount of the reinvestment.
ADDITIONAL INFORMATION
If you choose to invest in the Fund, an account will be opened and maintained
for you by Boston Financial, the Fund's shareholder services agent. Share
certificates will be issued to you only upon written request to Boston
Financial, and no certificates will be issued for fractional shares. The Fund
reserves the right to reject any purchase order and to waive or increase minimum
investment requirements. A change in registration or transfer of shares held in
the name of your financial adviser's firm can only be made by an order in good
form from the financial adviser acting on your behalf.
Subject to the rules and regulations of the Securities and Exchange Commission,
the Fund reserves the right to suspend the continuous offering of its shares at
any time, but no suspension shall affect your right of redemption as described
below.
DISTRIBUTION AND SERVICE PLAN
The Fund has adopted a plan (the "Plan") pursuant to Rule 12b-1 under the
Investment Company Act of 1940, which provides that Class B and Class C Shares
will be subject to an annual distribution fee and Class A, Class B and Class C
Shares will be subject to an annual service fee. Class R Shares will not be
subject to either distribution or service fees.
The distribution fee applicable to Class B and Class C Shares under the Plan
will be payable to reimburse Nuveen for services and expenses incurred in
connection with the distribution of such Shares. These expenses include, without
limitation, expenses of printing and distributing prospectuses to persons other
than shareholders of the Fund, expenses of preparing, printing and distributing
advertising and sales literature and reports to shareholders used in connection
with the sale of such Shares, certain other expenses associated with the
distribution of such Shares, and any distribution-related
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expenses that may be authorized from time to time by the Board of Trustees. In
addition, the distribution fee reimburses Nuveen for providing compensation to
Authorized Dealers either at the time of sale or on an ongoing basis.
The service fee applicable to Class A, Class B and Class C Shares under the Plan
will be payable to Nuveen, to be used to compensate Authorized Dealers in
connection with the provision of ongoing account services to shareholders. These
services may include establishing and maintaining shareholder accounts,
answering shareholder inquiries and providing other personal services to
shareholders.
The Fund may spend up to .20 of 1% per year of the average daily net assets of
Class A Shares as a service fee under the Plan applicable to Class A Shares. The
Fund may spend up to .75 of 1% per year of the average daily net assets of Class
B Shares as a distribution fee and up to .20 of 1% per year of the average daily
net assets of Class B Shares as a service fee under the Plan applicable to Class
B Shares. The Fund may spend up to .55 of 1% per year of the average daily net
assets of Class C Shares as a distribution fee and up to .20 of 1% per year of
the average daily net assets of Class C Shares as a service fee under the Plan
applicable to Class C Shares.
HOW TO REDEEM FUND SHARES
You may require the Fund at any time to redeem for cash your shares of the Fund
at the net asset value next computed after instructions and required documents
and certificates, if any, are received in proper form, as described below. There
is no charge for the redemption of Class R Shares.
CLASS A SHARES
Class A Shares are normally redeemed at net asset value, without any contingent
deferred sales charge. However, in the case of purchases at net asset value of
Class A shares of $1 million or more, where the dealer of record has not waived
the sales commission, a CDSC of 1% may be imposed on any redemptions within 18
months of purchase.
CLASS B SHARES
A contingent deferred sales charge may be imposed upon redemption of Class B
Shares. The rate of the CDSC is determined by how long you have owned your
shares, as described under "How to Buy Fund Shares--Class B Shares," above. The
CDSC may be waived under certain special circumstances, as described in the
Statement of Additional Information.
CLASS C SHARES
Class C Shares are redeemed at net asset value, without any contingent deferred
sales charge, except for shares that are redeemed within 12 months of purchase.
In the case of Class C Shares that are redeemed within 12 months of purchase, an
investor will be charged a CDSC of 1%. The CDSC may be waived under certain
special circumstances, as described in the Statement of Additional Information.
There is no CDSC on Class C Shares held more than 12 months.
OPERATION OF THE CDSC
In determining whether a CDSC is payable, a Fund will first redeem shares not
subject to any charge, except if another order of redemption would result in a
lower charge or you specify another order. No CDSC is charged on shares
purchased as a result of automatic reinvestment of dividends or capital gains
paid. In addition, no CDSC will be charged on exchanges of Shares into another
Nuveen Mutual Fund or money market fund. Your holding period is calculated on a
monthly basis and begins the first day of the month in which the order for
investment is received. The CDSC is calculated based on the lower of the
original Shares' cost or net asset value at the time of the redemption. Nuveen
receives the amount of any CDSC you pay. The CDSC may be waived under certain
special circumstances, as described in the Statement of Additional Information.
By Written Request. You may redeem shares by sending a written request for
redemption directly to the Fund, c/o Boston Financial, P.O. Box 8509, Boston, MA
02266-8509. Requests for redemption must be signed by each shareholder and
accompanied by certificates, if issued. If the redemption proceeds exceed
$50,000 or are payable other than to the shareholder of record at the address of
record (which address may not have changed in the preceding 60 days), the
signature must be guaranteed by a member of an approved Medallion Guarantee
Program or other eligible guarantors which include member firms of a domestic
stock exchange, commercial banks, trust companies, savings associations and
credit unions as defined by the Federal Deposit Insurance Act. You will receive
payment based on the net asset value per share next determined after receipt by
the Fund of a properly executed redemption request in proper form. A check for
the redemption proceeds will be mailed to you within seven days after receipt of
your redemption request. However, if any shares to be redeemed were purchased by
check within 15 days prior to the date the redemption request is received, the
Fund will not mail the redemption proceeds until the check received for the
purchase of shares has cleared, which may take up to 15 days.
By TEL-A-CHECK. If you have authorized telephone redemption and your account
address has not changed within the last 60 days, you can redeem shares that are
held in non-certificate form and that are worth $50,000 or less by calling
Boston Financial at 800-225-8530. While you or anyone authorized by you may make
telephone redemption requests, redemption checks will be issued only in the name
of the shareholder of record and will be mailed to the address of record. If
your telephone request is received prior to 4:00 p.m. eastern time, the
redemption check will normally be mailed the next
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business day. For requests received after 4:00 p.m. eastern time, the check will
be mailed on the second business day after the request.
By TEL-A-WIRE or Fund Direct. If you have authorized TEL-A-WIRE redemption, you
can take advantage of the following expedited redemption procedures to redeem
shares held in noncertificate form that are worth at least $1,000. If you have
established Fund Direct and wish to redeem shares held in noncertificate form,
there is no minimum requirement. You may make TEL-A-WIRE or Fund Direct
redemption requests through a phone representative by calling Boston Financial
at 800-225-8530. If a redemption request is received by 4:00 p.m. eastern time,
the redemption will be made as of 4:00 p.m. that day. If the redemption request
is received after 4:00 p.m. eastern time, the redemption will be made as of 4:00
p.m. the following business day. Proceeds of redemptions through TEL-A-WIRE will
normally be wired on the business day following the redemption, but may be
delayed one additional business day if the Federal Reserve Bank of Boston or the
Federal Reserve Bank of New York is closed on the day redemption proceeds would
ordinarily be wired. The Fund reserves the right to charge a fee for TEL-A-WIRE.
Proceeds of redemptions through Fund Direct will normally be wired to your Fund
Direct bank account on the next business day after the redemption.
Before you may redeem shares by TEL-A-WIRE or Fund Direct, you must complete the
telephone redemption authorization section of the Application Form and return it
to Nuveen or State Street. If you did not authorize telephone redemption when
you opened your account, you may obtain a telephone redemption authorization
form by writing the Fund or by calling Nuveen toll-free at 800-225-8530.
Proceeds of share redemptions made by TEL-A-WIRE will be transferred by Federal
Reserve wire only to the commercial bank account specified by the shareholder on
the application form. You must send a written request to Nuveen or Boston
Financial in order to establish multiple accounts, or to change the account or
accounts designated to receive redemption proceeds. These requests must be
signed by each account owner with signatures guaranteed by a member of an
approved Medallion Guarantee Program or in such other manner as may be
acceptable to the Fund. Further documentation may be required from corporations,
executors, trustees or personal representatives.
For the convenience of shareholders, the Fund has authorized Nuveen as its agent
to accept orders from financial advisers by wire or telephone for the redemption
of Fund shares. The redemption price is the first net asset value determined
following receipt of an order placed by the financial adviser. The Fund makes
payment for the redeemed shares to the securities representatives who placed the
order promptly upon presentation of required documents with signatures
guaranteed as described above. Neither the Fund nor Nuveen charges any
redemption fees. However, your financial adviser may charge you for serving as
agent in the redemption of shares.
The Fund reserves the right to refuse telephone redemptions and, at its option,
may limit the timing, amount or frequency of these redemptions. This procedure
may be modified or terminated at any time, on 30 days' notice, by the Fund. The
Fund, State Street, and Nuveen will not be liable for following telephone
instructions reasonably believed to be genuine. The Fund employs procedures
reasonably designed to confirm that telephone instructions are genuine. These
procedures include recording all telephone instructions and requiring up to
three forms of identification prior to acting upon a caller's instructions. If
the Fund does not follow reasonable procedures for protecting shareholders
against loss on telephone transactions, it may be liable for any losses due to
unauthorized or fraudulent telephone instructions.
Systematic Withdrawal Plan. If you own Fund shares currently worth at least
$10,000, you may establish a Systematic Withdrawal Plan by completing an
application form for the Plan. You may obtain an application form by calling
Nuveen toll-free at 800-414-7447.
The Plan permits you to request periodic withdrawals on a monthly, quarterly,
semi-annual or annual basis in an amount of $50 or more. Depending upon the size
of the withdrawals requested under the Plan and fluctuations in the net asset
value of Fund shares, these withdrawals may reduce or even exhaust your account.
The purchase of Class A Shares, other than through reinvestment, while you are
participating in the Systematic Withdrawal Plan with respect to Class A Shares
will usually be disadvantageous because you will be paying a sales charge on any
Class A Shares you purchase at the same time you are redeeming shares.
Similarly, use of the Systematic Withdrawal Plan for Class B Shares held for
less than six years or Class C Shares held 12 months or less may be
disadvantageous because the newly-purchased Class B or Class C Shares will be
subject to the CDSC.
General. The Fund may suspend the right of redemption of Fund shares or delay
payment more than seven days (a) during any period when the New York Stock
Exchange is closed (other than customary weekend and holiday closings), (b) when
trading in the markets the Fund normally utilizes is restricted, or an emergency
exists as determined by the Securities and Exchange Commission so that trading
of the Fund's investments or determination of its net asset value is not
reasonably practicable, or (c) for any other periods that the Securities and
Exchange Commission by order may permit for protection of Fund shareholders.
The Fund may, from time to time, establish a minimum total investment for Fund
shareholders, and the Fund reserves the right to redeem your shares if your
investment is less than the minimum after giving you at least 30 days' notice.
If any minimum total investment is established, and if your account is below the
minimum, you will be allowed 30 days following the notice in which to purchase
sufficient shares to meet the minimum. Accounts with balances of less than $25
will be
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redeemed without written notice. No CDSC will be imposed on involuntary
redemptions. So long as the Fund continues to offer shares at net asset value to
holders of Nuveen UITs who are investing their Nuveen UIT distributions, no
minimum total investment will be established for the Fund for such holders of
Nuveen UITs.
DISTRIBUTIONS AND TAXES
Each Fund will pay monthly dividends to shareholders at a level rate that
reflects the past and projected net income of the Fund and that results, over
time, in the distribution of all of the Fund's net income. Net income of each
Fund consists of all interest income accrued on its portfolio less all expenses
of the Trust accrued daily that are applicable to that Fund. To maintain a more
stable monthly distribution, each Fund may from time to time distribute less
than the entire amount of net income earned in a particular period. This
undistributed net income would be available to supplement future distributions,
which might otherwise have been reduced by a decrease in a Fund's monthly net
income due to fluctuations in investment income or expenses. As a result, the
distributions paid by a Fund for any particular monthly period may be more or
less than the amount of net income actually earned by a Fund during such period.
Undistributed net income is included in a Fund's net asset value and,
correspondingly, distributions from previously undistributed net income are
deducted from a Fund's net asset value. It is not expected that this dividend
policy will impact the management of the Fund's portfolios.
Nuveen Advisory will periodically undertake to waive fees and reimburse expenses
of a Fund to the extent necessary to maintain a competitive distribution rate.
This practice may produce a higher monthly distribution than would otherwise be
the case.
Dividends paid by a Fund with respect to each class of shares will be calculated
in the same manner and at the same time, and will be paid in the same amount
except that different distribution and service fees and any other expense,
relating to a specific class of shares will be borne exclusively by that class.
As a result, dividends per share will vary among a Fund's classes of shares.
Each Fund currently intends to declare dividends on the 9th of each month (or if
the 9th is not a business day, on the immediately preceding business day),
payable to shareholders of record as of the close of business on that day. This
distribution policy is subject to change, however, by the Board of Trustees of
the Trust without prior notice to or approval by shareholders. Dividends will be
paid on the first business day of the following month and are reinvested in
additional shares of a Fund at net asset value unless you have elected that your
dividends be paid in cash. Net realized capital gains, if any, will be paid not
less frequently than annually and will be reinvested at net asset value in
additional shares of the Fund unless you have elected to receive capital gains
distributions in cash.
TAX MATTERS
The following federal and state tax discussion is intended to provide you with
an overview of the impact on the Funds and their shareholders of federal as well
as state and local income tax provisions. These tax provisions are subject to
change by legislative or administrative action, and any changes may be applied
retroactively. Because the Fund's taxes are a complex matter, you should consult
your tax adviser for more detailed information concerning the taxation of the
Funds and the federal, state and local tax consequences to Fund shareholders.
Federal Income Tax. Each Fund intends to qualify under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"), for tax treatment as a
regulated investment company. In order to qualify for treatment as a regulated
investment company, a Fund must satisfy certain requirements relating to the
sources of its income, diversification of its assets and distribution if its
income to shareholders. As a regulated investment company, a Fund will not be
subject to federal income tax on the portion of its net investment income and
net realized capital gains that is currently distributed to shareholders. Each
Fund also intends to satisfy conditions that will enable it to pay
"exempt-interest dividends" to its shareholders. This means that you will not be
subject to regular federal income tax on Fund dividends you receive from income
on Municipal Obligations.
Your share of a Fund's taxable income, if any, from income on taxable temporary
investments and net short-term capital gains, will be taxable to you as ordinary
income. Distributions, if any, of net long-term capital gains are taxable as
long-term capital gains, regardless of the length of time you have owned shares
of the Fund. You will be required to pay tax on all taxable distributions even
if these distributions are automatically reinvested in additional Fund shares.
Certain distributions paid by a Fund in January of a given year may be taxable
to shareholders as if received the prior December 31. As long as a Fund
qualifies as a regulated investment company under the Code, taxable
distributions will not qualify for the dividends received deduction for
corporate shareholders. Investors should consider the tax implications of buying
shares immediately prior to a distribution. Investors who purchase shares
shortly before the record date for a distribution will pay a per share price
that includes the value of the anticipated distributions and will be taxed on
the distribution (unless it is exempt from tax) even though the distribution
represents a return of a portion of the purchase price.
If in any year a 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 taxable income for that year, and the
entire amount of your distributions would be taxable as ordinary income.
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The Code does not permit you to deduct the interest on borrowed monies used to
purchase or carry tax-free investments, such as shares of a Fund. Under Internal
Revenue Service rules, the purchase of Fund shares may be considered to have
been made with borrowed monies even though those monies are not directly
traceable to the purchase of those shares.
Because the net asset value of each Fund's shares includes net tax-exempt
interest earned by the Fund but not yet declared as an exempt interest dividend,
each time an exempt-interest dividend is declared, the net asset value of the
Fund's shares will decrease in an amount equal to the amount of the dividend.
Accordingly, if you redeem shares of a Fund immediately prior to or on the
record date of a monthly exempt-interest dividend, you may realize a taxable
gain even though a portion of the redemption proceeds may represent your pro
rata share of undistributed tax-exempt interest earned by the Fund.
The redemption or exchange of Fund shares normally will result in capital gain
or loss to shareholders. Any loss you may realize on the redemption or exchange
of shares of a Fund held for six months or less will be disallowed to the extent
of any distribution of exempt-interest dividends received on these shares and
will be treated as a long-term capital loss to the extent of any distribution of
long-term capital gain received on these shares.
If you receive social security or railroad retirement benefits, you should note
that tax-exempt income is taken into account in calculating the amount of these
benefits that may be subject to federal income tax.
The Funds may invest in private activity bonds, the interest on which is not
exempt from federal income tax to "substantial users" of the facilities financed
by these bonds or "related person" of such substantial users. Therefore, the
Funds may not be appropriate investments for you if you are considered either a
substantial user or a related person.
Each Fund may invest an unlimited amount of its net assets in AMT Bonds, the
interest on which is a specific tax preference item for purposes of computing
the alternative minimum tax on corporations and individuals. If your tax
liability is determined under the alternative minimum tax, you will be taxed on
your share of the Fund's exempt-interest dividends that were paid from income
earned on AMT Bonds. In addition, the alternative minimum taxable income for
corporations is increased by 75% of the difference between an alternative
measure of income ("adjusted current earnings") and the amount otherwise
determined to be alternative minimum taxable income. Interest on all Municipal
Obligations, and therefore all distributions by the Fund that would otherwise be
tax exempt, is included in calculating a corporation's adjusted current
earnings.
Each Fund is required in certain circumstances to withhold 31% of taxable
dividends and certain other payments paid to non-corporate holders of shares who
have not furnished to the Fund their correct taxpayer identification number (in
the case of individuals, their social security number) and certain
certifications, or who are otherwise subject to back-up withholding.
Each January, your Fund will notify you of the amount and tax status of Fund
distributions for the preceding year.
State Income Tax Matters. Under the laws of the respective state of each Fund,
dividends you receive from income earned by the Fund on Municipal Obligations
issued by the Fund's respective state or a political subdivision thereof will be
exempt from that state's applicable personal income tax. The exemption from
state personal income tax applies whether you receive a Fund's dividends in cash
or reinvest them in additional shares of the Fund. Dividends paid by a Fund
representing interest payments on particular categories of Municipal Obligations
may, under some circumstances, also be exempt from income taxes imposed by
political subdivisions of that Fund's respective state. In Florida, which
presently has no state personal income tax, Florida Fund shares are exempt from
the Florida intangible personal property tax.
DESCRIPTION OF STATE TAX TREATMENT
The following state tax information applicable to each Fund and its shareholders
is based upon the advice of each Fund's special state tax counsel, and
represents a summary of certain provisions of each State's tax laws presently in
effect. These provisions are subject to change by legislative or administrative
action, which may be applied retroactively to Fund transactions. The state tax
information below assumes that each Fund qualifies as a regulated investment
company for federal income tax purposes under the Code, and that amounts so
designated by each Fund to its shareholders qualify as "exempt-interest
dividends" under Section 852(b)(5) of the Code. You should consult your own tax
adviser for more detailed information concerning state taxes to which you may be
subject.
ARIZONA
Exempt-interest dividends attributable to Arizona Municipal Obligations will be
exempt from Arizona income tax when received by a shareholder of the Arizona
Fund to the same extent as if interest on such Obligations were received
directly by the shareholder. Other dividends by the Arizona Fund, including
capital gain distributions, if any, or additional amounts includable in the
gross income of the shareholders for federal income tax purposes (including
gains realized upon the redemption or exchange of shares of the Arizona Fund)
will be subject to Arizona income tax.
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FLORIDA
Florida does not impose an income tax on individuals. Neither the Florida Fund
nor its shareholders will be subject to the Florida intangible personal property
tax on the Florida Municipal Obligations or the shares of the Florida Fund,
respectively, with respect to any calendar year so long as at the close of the
preceding calendar year and on January 1 of the then current year, the Florida
Fund's portfolio assets consist solely of Florida Municipal Obligations or other
assets exempt from the Florida intangible personal property tax. Corporate
shareholders may be subject to corporate income tax.
PENNSYLVANIA
Shares of New Pennsylvania are not subject to any of the personal property taxes
presently in effect in Pennsylvania to the extent of that portion of the
Pennsylvania Fund represented by Pennsylvania Municipal Obligations. The portion
of interest income representing interest income from Pennsylvania Municipal
Obligations received by the Fund and distributed to shareholders of the
Pennsylvania Fund is not taxable under the Pennsylvania Personal Income Tax or
under the Corporate Net Income Tax, nor will such interest be taxable under the
Philadelphia School District Investment Income Tax imposed on Philadelphia
resident individuals. The disposition by the Pennsylvania Fund of a Pennsylvania
Municipal Obligation (whether by sale, exchange, redemption or payment at
maturity), as well as the distribution of the proceeds of such disposition, will
not constitute a taxable event to a shareholder under the Pennsylvania Personal
Income Tax if the Pennsylvania Municipal Obligation was issued prior to February
1, 1994. Further, although there is no published authority on the subject,
special Pennsylvania counsel is of the opinion that an individual shareholder of
the Pennsylvania Fund will not have a taxable event under the Pennsylvania state
and local income taxes referred to above upon the redemption or exchange of his
shares to the extent that the Pennsylvania Fund is then composed of Pennsylvania
Municipal Obligations issued prior to February 1, 1994.
VIRGINIA
Shareholders who are subject to income tax in Virginia will not be taxed on that
portion of any distribution that is attributable to the interest earned by the
Virginia Fund on Virginia Municipal Obligations; however, these shareholders
will generally have taxable income for Virginia income tax purposes to the
extent of any portion of a distribution that is taxable for federal income tax
purposes, except as it relates to interest or dividends on obligations of the
United States or instrumentalities thereof exempt from state income taxation
under the laws of the United States. To the extent distributions to shareholders
are attributable to interest on Municipal Obligations other than Virginia
Municipal Obligations, such distributions will be included in the shareholder's
Virginia taxable income. Virginia income tax exemption is also independently
provided for interest on certain obligations. Where an independent exemption is
provided, interest on those obligations is exempt from Virginia income taxation
without regard to any exemption from federal income taxes. As a general rule, to
the extent that any gain realized (whether as a result of the redemption or
exchange of Virginia Municipal Obligations by the Virginia Fund or as a result
of the sale of shares by the shareholder) is subject to federal income taxation,
this gain will be included in the shareholder's Virginia taxable income. Under
the language of certain enabling legislation, however, gain realized on the sale
of obligations issued thereunder is exempt from Virginia income taxation.
NET ASSET VALUE
Net Asset value of the shares of a Fund will be determined separately for each
class of shares. The net asset value per share of a class of shares will be
computed by dividing the value of the Fund's assets attributable to the class,
less the liabilities attributable to the class, by the total number of shares of
the class outstanding. The net asset value per share is expected to vary among a
Fund's Class A Shares, Class B, Class C Shares and Class R Shares, principally
due to the differences in sales charges, distribution and service fees and other
class expenses borne by each class.
The net asset value of the shares of each Fund will be determined by State
Street, the Fund's custodian, as of 4:00 p.m. eastern time on each day the New
York Stock Exchange is normally open for trading. In determining the net asset
value, the custodian uses the valuations of portfolio securities furnished by a
pricing service approved by the Board of Trustees. The pricing service values
portfolio securities at the mean between the quoted bid and asked prices or the
yield equivalent when quotations are readily available. Securities for which
quotations are not readily available (which are expected to constitute a
majority of the securities held by the Funds) are valued at fair value as
determined by the pricing service using methods that include consideration of
the following: yields or prices of municipal bonds of comparable quality, type
of issue, coupon, maturity and rating; indications as to value from securities
dealers; and general market conditions. The pricing service may employ
electronic data processing techniques and/or a matrix system to determine
valuations. The procedures of the pricing service and its valuations are
reviewed by the officers of the Trust under the general supervision of its Board
of Trustees.
GENERAL INFORMATION
If you have any questions about the Trust, the Funds or other Nuveen Mutual
Funds, call Nuveen toll-free at 800-414-7447.
Custodian and Transfer and Shareholder Services Agent. The Custodian of the
assets of the Funds is State Street Bank and Trust Company ("State Street"),
P.O. Box 8509, Boston, MA 02266-8509. State Street is also the Funds' transfer,
shareholder
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services and dividend paying agent and, as such, it performs bookkeeping, data
processing and administrative services for the maintenance of shareholder
accounts.
Organization. The Trust is an open-end management series investment company
under the Investment Company Act of 1940. Each Fund constitutes a separate
series of the Trust and is an open-end management mutual fund; the Arizona Fund
and the Florida Fund are "diversified" and the Virginia and Pennsylvania Funds
are "non-diversified." The Trust was organized as a Massachusetts business trust
on July 1, 1996, pursuant to a Declaration of Trust. The Board of Trustees of
the Trust is authorized to issue an unlimited number of shares, $.01 par value,
representing interests in separate series of the Trust. The Trust currently has
nine authorized series. The shares of each series of the Trust are divided into
four classes of shares designated as Class A Shares, Class B Shares, Class C
Shares and Class R Shares. Each class of shares represents an interest in the
same portfolio of investments and has equal rights as to voting, redemption,
dividends and liquidation, except that each bears different class expenses,
including different distribution and service fees, and each has exclusive voting
rights with respect to any distribution or service plan applicable to its
shares. These are no conversion, preemptive or other subscription rights, except
that Class B Shares of a Fund automatically convert to Class A Shares of the
same Fund, as described above. The Board of Trustees has the right to establish
additional series and classes of shares in the future, to change those series or
classes and to determine the preferences, voting powers, rights and privileges
thereof. The Funds are not required and do not intend to hold annual meetings of
the shareholders.
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ANNEX B
FORM OF AGREEMENT AND PLAN OF REORGANIZATION AND LIQUIDATION
AGREEMENT AND PLAN OF REORGANIZATION AND LIQUIDATION ("Agreement") is made as of
the 15th day of October, 1996 by and between the Nuveen Multistate Tax-Free
Trust (the "Nuveen Trust"), a Massachusetts business trust, on behalf of its
series of shares designated (the "Nuveen Fund"), the Flagship
Tax Exempt Funds Trust (the "Flagship Trust"), a Massachusetts business trust,
on behalf of its series of shares designated (the "Flagship
Fund"), and the Nuveen Flagship Multistate Trust I (the "New Trust"), a
Massachusetts business trust, on behalf of its series of shares
designated (the "New Fund"). The Nuveen Trust and the Flagship
Trust are referred to as the "Acquired Trusts," and, collectively, with the New
Trust as the "Trusts," and the Nuveen Fund and the Flagship Fund are referred to
as the "Acquired Funds," and, collectively, with the New Funds as the "Funds."
This Agreement is intended to be, and is adopted as, a plan of reorganization
(the "Reorganization") pursuant to Section 368(a)(1) of the Internal Revenue
Code of 1986, as amended (the "Internal Revenue Code"). The Reorganization will
consist of (a) the acquisition by the New Fund of substantially all the assets
of the Acquired Funds in exchange solely for shares of the New Fund ("New Fund
Shares"), and the assumption by the New Fund of substantially all the
liabilities of the Acquired Funds; and (b) the pro rata distribution, after the
Closing Date hereinafter referred to, of such New Fund Shares to the
shareholders of the Acquired Funds in liquidation of the Acquired Funds as
provided herein, all upon the terms and conditions hereinafter set forth in this
Agreement.
In consideration of the premises and of the covenants and agreements set forth
herein, the parties covenant and agree as follows:
1. TRANSFER OF ASSETS OF THE ACQUIRED FUND IN EXCHANGE FOR SHARES OF THE NEW
FUND AND ASSUMPTION OF LIABILITIES, IF ANY; LIQUIDATION OF THE ACQUIRED FUND.
1.1 Subject to the terms and conditions herein set forth and on the basis of
the representations and warranties contained herein, each Acquired Fund
agrees to sell, assign, transfer and deliver, as of the close of
business on the Closing Date (the "Effective Time"), substantially all
its assets as set forth in paragraph 1.2 to the New Fund, free and clear
of all liens and encumbrances, except as otherwise provided herein, and
in exchange therefor the Acquiring Fund agrees (a) to assume
substantially all the liabilities, if any, of each Acquired Fund, as set
forth in paragraph 1.3 and (b) to issue and deliver to each Acquired
Fund, for distribution in accordance with paragraph 1.5 to such Acquired
Fund's shareholders, the number of New Fund Shares, Class A, C and/or R,
having an aggregate net asset value equal to the value of the assets,
less the liabilities, of such Acquired Fund of the same class so
transferred, assigned and delivered, all determined in the manner and as
of the date and time provided in paragraph 2. Such transactions shall
take place at the closing provided for in paragraph 3.1 (the "Closing").
1.2 Except as otherwise provided herein, as of the Effective Time, the New
Fund shall acquire the assets of each Acquired Fund (consisting without
limitation of all cash, cash equivalents, municipal obligations and
other portfolio securities, receivables (including interest and
dividends receivable) and any deferred or prepaid expenses shown as
assets) as set forth in the respective Statement of Net Assets referred
to in paragraph 7.3 as of the Closing Date. Notwithstanding the
foregoing, the assets to be acquired will not include cash in the amount
necessary to pay the dividends and/or other distributions contemplated
by paragraph 1.4. No Acquired Fund has any plan or intent to sell or
otherwise dispose of any of its assets, other than in the ordinary
course of business, including without limitation, sale or disposition of
assets to comply with the provisions of paragraph 4.1.17.
1.3 Except as otherwise provided herein, as of the Effective Time, the New
Fund will assume from each Acquired Fund all debts, liabilities,
obligations and duties of such Acquired Fund of whatever kind or nature,
whether absolute, accrued, contingent or otherwise, arising in the
ordinary course of business, whether or not determinable as of the
Effective Time and whether or not specifically referred to in this
Agreement. Notwithstanding the foregoing, the New Fund will not assume
any Acquired Fund's obligation to pay the dividends and/or other
distributions contemplated by paragraph 1.4; and further provided that
each Acquired Fund agrees to utilize its best efforts to discharge all
of its known debts, liabilities, obligations and duties (other than
pursuant to paragraph 1.4) prior to the Effective Time. Without limiting
the generality of the foregoing, it is understood that recourse for the
Acquired Funds liabilities assumed by the New Fund shall, at and after
the Closing Date, be limited to the assets of the New Fund.
1.4 Prior to the Effective Time, each Acquired Fund will declare a dividend
and/or other distribution to be paid within 30 days after the Closing
Date to its shareholders of record so that, upon such payment, it will
have distributed all of its investment company taxable income (computed
without regard to any deduction for dividends paid), net tax-exempt
income and realized net capital gains, if any, through and including the
Closing Date.
1.5 On a date as soon after the Closing Date as is conveniently practicable
(the "Liquidation Date"), each Acquired Fund will liquidate and
distribute (a) pro rata to its shareholders of record, determined as of
the Effective Time, each class of the New Fund Shares received by such
Acquired Fund pursuant to paragraph 1.1 (together with any
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dividends declared with respect thereto to holders of record as
of a time after the Effective Time and prior to the Liquidation Date
("Interim Dividends")), in exchange for shares of such Acquired Fund of
the same class held by the shareholders of such Acquired Fund. Such
liquidation and distribution will be accomplished by opening accounts
on the books of the New Fund in the names of the shareholders of each
Acquired Fund and transferring to each account such shareholder's pro
rata share of each class of New Fund Shares received by such Acquired
Fund of such class held by such shareholder, and by paying to the
shareholders of such Acquired Fund any Interim Dividends on such
transferred shares.
1.6 After the Liquidation Date, each holder of an outstanding certificate or
certificates representing shares of an Acquired Fund will be entitled to
receive, upon surrender of his or her certificates, a certificate or
certificates representing the number of New Fund Shares of each class
distributable with respect to the shares of such Acquired Fund of the
same class that are surrendered. No dividends or other distributions
payable to the holders of record of the New Fund Shares as of a date on
or after the Liquidation Date are required to be paid to any shareholder
holding certificates representing shares of an Acquired Fund ("Acquired
Fund Share Certificates") as of the Closing Date until the New Fund is
notified by such Acquired Fund's transfer agent that such shareholder
has surrendered his or her outstanding Acquired Fund Share Certificates
or, in the event of lost, stolen or destroyed Acquired Fund Share
Certificates, posted adequate bond or submitted an affidavit of lost
certificate, or both. Each Acquired Fund will request its shareholders
to surrender their outstanding Acquired Fund Share Certificates, post
adequate bond and/or submit an affidavit of lost certificate, as the
case may be. Upon the surrender of Acquired Fund Share Certificates (or,
if applicable, after the posting of a bond and/or submission of an
affidavit of lost certificate), there shall be paid to the shareholder
in whose name the New Fund Shares shall be registered all dividends or
other distributions that shall have become payable with respect to such
New Fund Shares between the Liquidation Date and the time of such
surrender. In no event shall the shareholder entitled to receive such
dividends and distributions be entitled to receive interest thereon. No
redemption or repurchase of any New Fund Shares distributable with
respect to the shares of an Acquired Fund represented by such Acquired
Fund Share Certificates shall be permitted until the Acquired Fund
Certificates are surrendered (or, if applicable, after the posting of a
bond and/or submission of an affidavit of lost certificate).
1.7 Any transfer taxes payable upon issuance of New Fund Shares in a name
other than the registered holder of the Acquired Fund shares surrendered
in exchange therefor on the books of the applicable Acquired Fund as of
that time shall be paid by the person to whom such New Fund Shares are
to be issued as a condition to the registration of such transfer.
1.8 Any reporting responsibility of any Acquired Fund with the Securities
and Exchange Commission (the "SEC"), or any state securities commission
is and shall remain the responsibility of such Acquired Fund up to and
including the Liquidation Date.
1.9 All books and records of each Acquired Fund, including all books and
records required to be maintained under the Investment Company Act of
1940, as amended (the "Investment Company Act"), and the rules and
regulations thereunder, shall be available to the New Fund from and
after the Closing Date and shall be turned over to the New Fund on or
prior to the Liquidation Date.
1.10 Promptly following the Liquidation Date, each Acquired Fund will
terminate.
2. VALUATION
2.1 The value of each Acquired Fund's assets and liabilities to be acquired
and assumed, respectively, by the New Fund shall be computed as of the
Effective Time, using the valuation procedures set forth in such
Acquired Fund's prospectus.
2.2 The net asset value of each class of a New Fund Share shall be computed
as of the Effective Time by dividing the value of the New Fund's total
assets attributable to the class by the number of outstanding shares of
the class (excluding shares issuable pursuant to the Reorganization),
using the valuation procedures set forth in the Joint Proxy
Statement--Prospectus.
2.3 The number (calculated to the third decimal place) of New Fund Shares of
each class to be issued in exchange for each Acquired Fund's net assets
of that class shall be calculated by dividing the net asset value of
each class of each Acquired Fund (determined in accordance with
paragraph 2.1) by the net asset value per share of such class of the New
Fund (determined in accordance with paragraph 2.2).
3. CLOSING AND CLOSING DATE
3.1 The Closing Date shall be January 31, 1997 or such later date as the
parties may agree in writing. All acts taking place at the Closing shall
be deemed to take place simultaneously as of the Effective Time unless
otherwise provided. The Closing shall be at the office of the New Trust
or at such other place as the parties may agree.
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3.2 The custodian for each Acquired Fund, shall deliver to the New Fund at
the Closing a certificate of an authorized officer stating that (a) the
Acquired Fund's portfolio securities, cash and any other assets have
been transferred in proper form to the New Fund on the Closing Date and
(b) all necessary taxes, if any, have been paid, or provision for
payment has been made, in conjunction with the delivery of portfolio
securities.
3.3 In the event that on the proposed Closing Date (a) the New York Stock
Exchange ("NYSE") is closed to trading or trading thereon is restricted
or (b) trading or the reporting of trading on the NYSE or elsewhere is
disrupted so that accurate appraisal of the value of the net assets of
any class of any Acquired Fund or of the net asset value per share of
the New Fund Share is impracticable, the Closing Date shall be postponed
until the first business day after the date when such trading shall have
been fully resumed and such reporting shall have been restored.
3.4 Each Acquired Fund shall deliver to the New Fund on or prior to the
Liquidation Date a list of the names and addresses of its shareholders
and the number of outstanding shares of such Acquired Fund owned by each
such shareholder (the "Shareholder Lists"), all as of the Effective
Time, certified by the Secretary or Assistant Secretary of the Acquired
Fund. The New Fund shall issue and deliver to each Acquired Fund at the
Closing a confirmation or other evidence satisfactory to such Acquired
Fund that New Fund Shares have been or will be credited to such Acquired
Fund's account on the books of the New Fund. At the Closing each party
shall deliver to the other such bills of sale, checks, assignments,
stock certificates, receipts and other documents as such other party or
its counsel may reasonably request to effect the transactions
contemplated by this Agreement.
4. REPRESENTATIONS AND WARRANTIES
4.1 Each Acquired Trust represents and warrants as follows:
4.1.1 The Acquired Trust is a business trust duly organized, validly
existing and in good standing under the laws of the Commonwealth
of Massachusetts and has the power to own all of its properties
and assets and, subject to approval of the shareholders of the
Acquired Fund, to carry out the Agreement.
4.1.2 The Acquired Trust is an open-end management investment company
duly registered under the Investment Company Act, and such
registration is in full force and effect.
4.1.3 The Acquired Trust is not, and the execution, delivery and
performance of this Agreement will not result, in violation of any
provision of the Declaration of Trust or By-Laws of the Acquired
Trust or of any material agreement, indenture, instrument,
contract, lease or other undertaking to which the Acquired Trust
is a party or by which the Acquired Trust is bound.
4.1.4 The Acquired Trust has no material contracts or other commitments
with respect to the Acquired Fund (except this Agreement and the
obligations to pay the dividends and/or distributions contemplated
by paragraph 1.4) that will not be terminated on or prior to the
Closing Date without any liability or penalty to the Acquired Fund
or the New Fund.
4.1.5 No material litigation or administrative proceeding or
investigation of or before any court or governmental body is
presently pending or, to the knowledge of the Acquired Fund,
threatened against the Acquired Fund or any of its properties or
assets. The Acquired Fund knows of no facts that might form the
basis for the institution of such proceedings, and the Acquired
Fund is not a party to or subject to the provisions of any order,
decree or judgment of any court or governmental body that
materially and adversely affects its business or its ability to
consummate the transactions herein contemplated.
4.1.6a NUVEEN TRUST: The audited Statement of Net Assets, Statement of
Operations, Statement of Changes in Net Assets, Financial
Highlights and Portfolio of Investments of the Nuveen Fund at
January 31, 1996 and for the period then ended (copies of which
have been furnished to the New Fund) have been prepared in
accordance with generally accepted accounting principles
consistently applied and present fairly, in all material respects,
the financial condition of the Nuveen Fund as of such date, and
there are no known material liabilities of the Nuveen Fund
(contingent or otherwise) not disclosed therein.
4.1.6b FLAGSHIP TRUST: The audited Statement of Net Assets, Statement of
Operations, Statement of Changes in Net Assets, Financial
Highlights and Portfolio of Investments of the Flagship Fund at
May 31, 1996 and for the period then ended (copies of which have
been furnished to the New Fund) have been prepared in accordance
with generally accepted accounting principles consistently applied
and present fairly, in all material respects, the financial
condition of the Flagship Fund as of such date, and there are no
known material liabilities of the Flagship Fund (contingent or
otherwise) not disclosed therein.
4.1.7a NUVEEN TRUST: Since January 31, 1996 there has not been any
materially adverse change in the Nuveen Fund's financial
condition, assets, liabilities or business, other than changes
occurring in the ordinary course of business, or any incurrence by
the Nuveen Fund of indebtedness maturing more than one year from
the date such indebtedness was incurred, except as otherwise
disclosed to and accepted by the New Fund. For the purposes of
this paragraph 4.1.7a, a decline in net asset value or net asset
value per share
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of any class of the Nuveen Fund as a result of changes in the
value of investments held by the Nuveen Fund or a distribution or
payment of dividends shall not constitute a materially adverse
change.
4.1.7b FLAGSHIP TRUST: Since May 31, 1996 there has not been any
materially adverse change in the Flagship Fund's financial
condition, assets, liabilities or business, other than changes
occurring in the ordinary course of business, or any incurrence by
the Flagship Fund of indebtedness maturing more than one year from
the date such indebtedness was incurred, except as otherwise
disclosed to and accepted by the New Fund. For the purposes of
this paragraph 4.1.7b, a decline in net asset value or net asset
value per share of any class of the Flagship Fund as a result of
changes in the value of investments held by the Flagship Fund or a
distribution or payment of dividends shall not constitute a
materially adverse change.
4.1.8 All federal, state and other tax returns and reports of the
Acquired Fund required by law to have been filed or furnished by
the date hereof have been filed or furnished, and all federal,
state and other taxes, interest and penalties shown as due on said
returns and reports have been paid insofar as due, or provision
has been made for the payment thereof, and, to the best of the
Acquired Trust's knowledge, no such return is currently under
audit and no assessment has been asserted with respect to such
returns or reports.
4.1.9 Since it commenced operations, the Acquired Fund has met the
requirements of Subchapter M of the Internal Revenue Code for
qualification and treatment as a regulated investment company and
intends to meet those requirements for the current taxable year.
4.1.10 The authorized capital of the Acquired Trust consists of an
unlimited number of shares. All issued and outstanding shares of
the Acquired Fund are duly and validly issued and outstanding,
fully paid and non-assessable, except that shareholders of the
Acquired Fund may under certain circumstances be held personally
liable for its obligations. All issued and outstanding shares of
the Acquired Fund will, at the time of the Closing, be held by the
persons and in the amounts set forth in the applicable Shareholder
List submitted to the New Fund in accordance with the provisions
of paragraph 3.4. The Acquired Fund does not have outstanding any
options, warrants or other rights to subscribe for or purchase any
shares of the Acquired Fund, nor is there outstanding any security
convertible into shares of the Acquired Fund, except for the
conversion feature described in the Joint Proxy
Statement--Prospectus.
4.1.11 At the Closing Date, the Acquired Fund will have good and
marketable title to the assets to be transferred to the New Fund
pursuant to paragraph 1.1 and full right, power and authority to
sell, assign, transfer and deliver such assets hereunder free of
any liens or other encumbrances, and, upon delivery and payment
for such assets, the New Fund will acquire good and marketable
title thereto.
4.1.12 The execution, delivery and performance of this Agreement has been
duly authorized by the Board of Trustees of the Acquired Trust and
by all necessary action, other than shareholder approval, and,
subject to shareholder approval, this Agreement constitutes a
valid and binding obligation of the Acquired Fund.
4.1.13 The information furnished and to be furnished by the Acquired
Trust for use in applications for orders, registration statements,
proxy materials and other documents which may be necessary in
connection with the transactions contemplated hereby is, and shall
be, accurate and complete in all material respects and is in
compliance, and shall comply, in all material respects with
applicable federal securities and other laws and regulations.
4.1.14 On the effective date of the Registration Statement referred to in
paragraph 5.4, at the time of the Special Meeting of the Acquired
Fund's shareholders and on the Closing Date, the Joint Proxy
Statement-- Prospectus (a) will comply in all material respects
with the provisions and regulations of the Securities Act of 1933,
as amended (the "1933 Act"), the Securities Exchange Act of 1934,
as amended (the "1934 Act"), and the Investment Company Act and
the rules and regulations thereunder and (b) will not contain any
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 light of the circumstances under which they
were made, not misleading; provided, however, that the
representations and warranties in this paragraph 4.1.14 shall not
apply to statements in or omissions from the Joint Proxy
Statement--Prospectus made in reliance upon and in conformity with
information furnished by the New Trust or any other Acquired Trust
for use therein.
4.1.15 No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by the
Acquired Fund of the transactions contemplated by this Agreement,
except such as have been obtained under the 1933 Act, the 1934 Act
and the Investment Company Act, and such as may be required under
state securities laws.
4.1.16 There are no brokers or finder's fees payable on behalf of the
Acquired Fund in connection with the transactions provided for
herein.
4.1.17 At the Closing Date, all portfolio securities and other
investments included in the Acquired Fund's assets shall be
permissible investments for the New Fund under the investment
objective, policies and limitations
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set forth in the New Fund's registration statement and
under applicable law. From the date of this Agreement to an
including the Closing Date, the Acquired Fund shall confer and
cooperate fully with the New Fund with respect to the management
of the Acquired Fund to ensure that the Acquired Fund's
obligations under this paragraph are duly met.
4.1.18 The Acquired Trust will call a meeting of shareholders of the
Acquired Fund to consider and act upon this Agreement and the
transactions contemplated herein and to take all other action
necessary to obtain approval of the transactions contemplated
hereby.
4.2 The New Trust represents and warrants as follows:
4.2.1 The New Trust is a business trust duly organized, validly existing
and in good standing under the laws of the Commonwealth of
Massachusetts and has the power to own all of its properties and
assets and to carry out the Agreement.
4.2.2 The New Trust is or will be on the effective date of the
Registration Statement referred to in paragraph 5.4 an open-end
management investment company duly registered under the Investment
Company Act, and such registration is or will be in full force and
effect.
4.2.3 The New Trust is not, and the execution, delivery and performance
of this Agreement will not result, in violation of any provision
of the Declaration of Trust or By-Laws of the New Trust or of any
material agreement, indenture, instrument, contract, lease or
other undertaking to which the New Trust is a party or by which
the New Trust is bound.
4.2.4 No material litigation or administrative proceeding or
investigation of or before any court or governmental body is
presently pending or, to the knowledge of the New Trust,
threatened against the New Fund or any of its properties or
assets. The New Trust knows of no facts that might form the basis
for the institution of such proceedings, and the New Trust is not
a party to or subject to the provisions of any order, decree or
judgment of any court or governmental body that materially and
adversely affects its business or its ability to consummate the
transactions herein contemplated.
4.2.5 The New Trust shall deliver to each Acquired Fund an audited
Statement of Net Assets and Portfolio of Investments of the New
Fund at , 1996, which have been prepared in
accordance with generally accepted accounting principles and
present fairly, in all material respects, the financial condition
of the New Fund as of such date, and there are no known material
liabilities of the New Fund (contingent or otherwise) not
disclosed therein.
4.2.6 No federal, state or other tax returns or reports of the New Fund
were required by law to have been filed or furnished by the date
hereof.
4.2.7 The Acquiring Fund intends to meet the requirements of Subchapter
M of the Internal Revenue Code for qualification and treatment as
a regulated investment company for its first taxable year and each
succeeding taxable year.
4.2.8 The authorized capital of the New Trust consists of an unlimited
number of shares. All issued and outstanding New Fund Shares are,
and all New Fund Shares to be issued in exchange for the net
assets of the Acquired Funds pursuant to this Agreement will be
when so issued, duly and validly issued and outstanding, fully
paid and non-assessable, except that shareholders of the New Fund
may under certain circumstances be held personally liable for its
obligations. Except as contemplated by this Agreement, the New
Fund does not have outstanding any options, warrants or other
rights to subscribe for or purchase any New Fund Shares, nor is
there outstanding any security convertible into any New Fund
Shares, except for the conversion feature described in the Joint
Proxy Statement-Prospectus.
4.2.9 The execution, delivery and performance of this Agreement has been
duly authorized by the Board of Trustees of the New Trust and by
all necessary action, and this Agreement constitutes a valid and
binding obligation of the New Trust.
4.2.10 The information furnished and to be furnished by the New Trust for
use in applications for orders, registration statements, proxy
materials and other documents which may be necessary in connection
with the transactions contemplated hereby is, and shall be,
accurate and complete in all material respects and is in
compliance, and shall comply, in all material respects with
applicable federal securities and other laws and regulations.
4.2.11 On the effective date of the Registration Statement, at the time
of the Special Meeting of each Acquired Fund's shareholders and on
the Closing Date, the Registration Statement and the Joint Proxy
Statement--Prospectus (a) will comply in all material respects
with the provisions of the 1933 Act, the 1934 Act and the
Investment Company Act and the rules and regulations thereunder
and (b) will not contain any 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 light of the
circumstances under which they were made, not misleading;
provided, however, that the representations and warranties in this
paragraph 4.2.11 shall not
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apply to statements in or omissions from the Joint Proxy
Statement--Prospectus and the Registration Statement made in
reliance upon and in conformity with information furnished by the
Acquired Trusts for use therein.
4.2.12 No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by the New
Trust of the transactions contemplated by this Agreement, except
such as have been obtained under the 1933 Act, the 1934 Act and
the Investment Company Act, and such as may be required under
state securities laws.
4.2.13 There are no brokers' or finders' fees payable on behalf of the
New Fund in connection with the transactions provided for herein.
5. COVENANTS OF THE NEW TRUST AND THE ACQUIRED TRUSTS
5.1 Except as may otherwise be required by paragraph 1.4, each Trust will
operate its respective business in the ordinary course between the date
hereof and the Closing Date.
5.2 Each Acquired Trust will assist the New Trust in obtaining such
information as the New Trust reasonably requests concerning the
beneficial ownership of each Acquired Fund's shares.
5.3 Subject to the provisions of this Agreement, each Trust will take or
cause to be taken all action, and will do or cause to be done all
things, reasonably necessary, proper or advisable to consummate and make
effective the transactions contemplated by this Agreement.
5.4 Each Acquired Trust will prepare and file with the SEC the Joint Proxy
Statement--Prospectus, and the New Trust will prepare and file with the
SEC a registration statement on Form N-14 relating to the New Fund
Shares to be issued hereunder (together with any amendments thereof and
supplements thereto, the "Registration Statement"), in compliance with
the 1933 Act, the 1934 Act and the Investment Company Act and the rules
and regulations thereunder. Each Acquired Trust and the New Trust have
cooperated and shall continue to cooperate with each other, and have
furnished information and shall continue to furnish information relating
to itself to be included in the Form N-14.
5.5 Each Acquired Trust will, from time to time, as and when requested by
any other Trust, execute and deliver or cause to be executed and
delivered all such assignments and other instruments, and will take or
cause to be taken such further action, as the other Trust may deem
necessary or desirable in order to (a) vest in and confirm to the New
Fund title to and possession of all the assets of the Acquired Funds to
be sold, assigned, transferred and delivered to the New Fund pursuant to
this Agreement, (b) vest in and confirm to the Acquired Funds title to
and possession of all the New Fund Shares to be transferred to the
Acquired Funds pursuant to this Agreement, (c) assume all of the
Acquired Funds' liabilities in accordance with this Agreement, and (d)
otherwise to carry out the intent and purpose of this Agreement.
5.6 The New Trust will use all reasonable efforts to obtain the approvals
and authorizations required by the 1933 Act, the Investment Company Act
and such of the state Blue Sky or securities laws as it may deem
appropriate in order to continue its operations after the Closing Date.
5.7 The costs associated with the Reorganization will be borne by and
allocated between the Flagship Financial Inc. and Nuveen Advisory Corp.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRED TRUSTS
The obligations of each Acquired Trust to consummate the transactions provided
for herein shall, at its election, be subject to the performance by the New
Trust of all the obligations to be performed by it hereunder on or before the
Closing Date and the following further conditions.
6.1 All representations and warranties of the New Trust contained in this
Agreement shall be true and correct in all material respects as of the
date hereof and, except as they may be affected by the transactions
contemplated by this Agreement, as of the Closing Date with the same
force and effect as if made on and as of the Closing Date.
6.2 The New Trust shall have delivered to the Acquired Trust a certificate
executed in its name by the President or a Vice President of the New
Trust in form and substance satisfactory to the Acquired Trust and dated
as of the Closing Date, to the effect that the representations and
warranties of the New Trust in this Agreement are true and correct at
and as of the Closing Date except as they may be affected by the
transactions contemplated by this Agreement, and as to such other
matters as the Acquired Trust shall reasonably request.
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6.3 The Acquired Trust shall have received an opinion from Vedder, Price,
Kaufman & Kammholz, dated as of the Closing Date, to the effect that:
6.3.1 The New Trust has been duly organized and is validly existing as a
business trust in good standing under the laws of the Commonwealth
of Massachusetts with requisite power and authority to own its
properties and, to the knowledge of such counsel, to carry on its
business as presently conducted;
6.3.2 This Agreement has been duly authorized, executed and delivered by
the New Trust and, assuming due authorization, execution and
delivery of the Agreement by the Acquired Trust, constitutes a
valid and binding obligation of the New Trust enforceable in
accordance with its terms, subject to bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and similar laws
of general applicability relating to or affecting creditors'
rights and to general equitable principles;
6.3.3 The New Fund Shares, to be distributed to shareholders of the
Acquired Fund under this Agreement will, when issued in exchange
for the net assets of the Acquired Fund as contemplated by this
Agreement, be validly issued and outstanding and fully paid and
non-assessable (except that shareholders of the New Fund may under
certain circumstances be held personally liable for its
obligations) and free of preemptive rights;
6.3.4 Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby violate (i)
the New Trust's Declaration of Trust or By-Laws or (ii) any
federal law of the United States, the laws of the State of
Illinois or the laws of the Commonwealth of Massachusetts
applicable to the New Trust; provided, however, that such counsel
may state that it expresses no opinion with respect to federal or
state securities laws, other antifraud laws and fraudulent
transfer laws; and provided, further that insofar as performance
by the New Trust of its obligations under this Agreement is
concerned such counsel may state that it expresses no opinion as
to bankruptcy, insolvency, reorganization, moratorium or similar
laws of general applicability relating to or affecting creditors'
rights;
6.3.5 All regulatory consents, authorizations, approvals and filings
required to be obtained or made by the New Trust under the federal
laws of the United States and the laws of the Commonwealth of
Massachusetts for the consummation of the transactions
contemplated by this Agreement have been obtained or made;
6.3.6 The New Trust has been registered with the SEC as an investment
company and, to the knowledge of such counsel, no order has been
issued or proceeding instituted to suspend such registration; and
6.3.7 To the knowledge of such counsel, (a) no litigation or
administrative proceeding or investigation of or before any court
or governmental body is presently pending or threatened as to the
New Trust or the New Fund or any of its properties or assets, and
(b) the New Trust or the New Fund is not a party to or subject to
the provision of any order, decree or judgment of any court or
governmental body, which materially and adversely affects its
business.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE NEW TRUST
The obligations of the New Trust to consummate the transactions provided for
herein with respect to any Acquired Trust shall, at its election, be subject to
the performance by the Acquired Trust of all the obligations to be performed by
it hereunder on or before the Closing Date and the following further conditions:
7.1 All representations and warranties of the Acquired Trust contained in
this Agreement shall be true and correct in all material respects as of
the date hereof and, except as they may be affected by the transactions
contemplated by this Agreement, as of the Closing Date with the same
force and effect as if made on and as of the Closing Date.
7.2 The Acquired Trust shall have delivered to the Acquiring Fund a
certificate executed in its name by the President or Vice President of
the Acquired Trust, in form and substance satisfactory to the New Trust
and dated as of the Closing Date, to the effect that the representations
and warranties of the Acquired Trust in this Agreement are true and
correct at and as of the Closing Date except as they may be affected by
the transactions contemplated by this Agreement, and as to such other
matters as the New Trust shall reasonably request.
7.3 The Acquired Trust shall have delivered to the New Trust on the Closing
Date a Statement of Net Assets, which Statement shall be prepared in
accordance with generally accepted accounting principles consistently
applied, together with a list of the portfolio securities of the
Acquired Fund showing the adjusted tax bases and holding periods of such
securities as of the Closing Date, certified by the Treasurer of the
Acquired Trust.
7.4 On or immediately prior to the Closing Date, the Acquired Fund shall
have declared the dividends and/or distributions contemplated by
paragraph 1.4.
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7.5 The New Trust shall have received an opinion from Vedder, Price, Kaufman
& Kammholz with respect to the Nuveen Trust, dated as of the Closing
Date, to the effect that:
7.5.1 The Acquired Trust has been duly organized and is validly existing
as a business trust in good standing under the laws of the
Commonwealth of Massachusetts with requisite power and authority
to own its properties and, to the knowledge of such counsel, to
carry on its business as presently conducted;
7.5.2 This Agreement has been duly authorized, executed and delivered by
the Acquired Trust and, assuming due authorization, execution and
delivery of the Agreement by the New Trust, constitutes a valid
and binding obligation of the Acquired Trust enforceable in
accordance with its terms, subject to bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and similar laws
of general applicability relating to or affecting creditors'
rights and to general equitable principles;
7.5.3 Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby violate (i)
the Acquired Trust's Declaration of Trust or By-Laws or (ii) any
federal law of the United States, the laws of the State of
Illinois or the laws of the Commonwealth of Massachusetts
applicable to the Acquired Trust; provided, however, that such
counsel may state that it expresses no opinion with respect to
federal or state securities laws, other antifraud laws and
fraudulent transfer laws; and provided, further that insofar as
performance by the Acquired Trust of its obligations under this
Agreement is concerned such counsel may state that it expresses no
opinion as to bankruptcy, insolvency, reorganization, moratorium
or similar laws of general applicability relating to or affecting
creditors' rights;
7.5.4 All regulatory consents, authorizations, approvals and filings
required to be obtained or made by the Acquired Trust under the
federal laws of the United States and the laws of the Commonwealth
of Massachusetts for the consummation of the transactions
contemplated by this Agreement have been obtained or made;
7.5.5 The Acquired Trust has been registered with the SEC as an
investment company, and, to the knowledge of such counsel, no
order has been issued or proceeding instituted to suspend such
registration; and
7.5.6 To the knowledge of such counsel, (a) no litigation or
administrative proceeding or investigation of or before any court
or governmental body is presently pending or threatened as to the
Acquired Trust or the Acquired Fund or any of its properties or
assets, and (b) the Acquired Trust or the Acquired Fund is not a
party to or subject to the provision of any order, decree or
judgment of any court or governmental body, which materially and
adversely affects its business.
7.6 The New Trust shall have received an opinion from Skadden, Arps, Slate,
Meagher & Flom with respect to the Flagship Trust, dated as of the
Closing Date, to the effect that:
7.6.1 The Acquired Trust has been duly organized and is validly existing
as a business trust in good standing under the laws of the
Commonwealth of Massachusetts with requisite power and authority
to own its properties and, to the knowledge of such counsel, to
carry on its business as presently conducted;
7.6.2 This Agreement has been duly authorized, executed and delivered by
the Acquired Trust and, assuming due authorization, execution and
delivery of the Agreement by the New Trust, constitutes a valid
and binding obligation of the Acquired Trust enforceable in
accordance with its terms, subject to bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and similar laws
of general applicability relating to or affecting creditors'
rights and to general equitable principles;
7.6.3 Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby violate (i)
the Acquired Trust's Declaration of Trust or By-Laws or (ii) any
federal law of the United States, the laws of the State of
Illinois or the laws of the Commonwealth of Massachusetts
applicable to the Acquired Trust; provided, however, that such
counsel may state that it expresses no opinion with respect to
federal or state securities laws, other antifraud laws and
fraudulent transfer laws; and provided, further that insofar as
performance by the Acquired Trust of its obligations under this
Agreement is concerned such counsel may state that it expresses no
opinion as to bankruptcy, insolvency, reorganization, moratorium
or similar laws of general applicability relating to or affecting
creditors' rights;
7.6.4 All regulatory consents, authorizations, approvals and filings
required to be obtained or made by the Acquired Trust under the
federal laws of the United States and the laws of the Commonwealth
of Massachusetts for the consummation of the transactions
contemplated by this Agreement have been obtained or made;
7.6.5 The Acquired Trust has been registered with the SEC as an
investment company, and, to the knowledge of such counsel, no
order has been issued or proceeding instituted to suspend such
registration; and
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7.6.6 To the knowledge of such counsel, (a) no litigation or
administrative proceeding or investigation of or before any court
or governmental body is presently pending or threatened as to the
Acquired Trust or the Acquired Fund or any of its properties or
assets, and (b) the Acquired Trust or the Acquired Fund is not a
party to or subject to the provision of any order, decree or
judgment of any court or governmental body, which materially and
adversely affects its business.
7.7 The New Trust shall receive from the independent auditor of each
Acquired Fund ("auditor") on the Closing Date a comfort letter dated as
of the Closing Date, to the effect that the auditor has performed a
limited review in accordance with the Statement of Auditing Standards
No. 36 of the AICPA, and on the basis of such limited review, nothing
came to the attention of the auditor that caused the auditor to believe
that the Statement of Net Assets referred to in paragraph 7.3 was not in
conformity with generally accepted accounting principles.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE TRUSTS
The obligations of each Trust hereunder are subject to the further conditions
that on or before the Closing Date:
8.1 This Agreement and the transactions contemplated herein shall have been
approved by the requisite votes of (a) the Board of Trustees of each
Trust and (b) the holders of the outstanding shares of each Acquired
Fund in accordance with the provisions of each Acquired Trust's
Declaration of Trust and By-Laws, and each Trust shall have delivered
certified copies of the resolutions evidencing such approvals to the
other Trusts.
8.2 On the Closing Date no action, suit or other proceeding shall be pending
before any court or governmental agency in which it is sought to
restrain or prohibit, or obtain damages or other relief in connection
with, this Agreement or the transactions contemplated herein.
8.3 All consents of other parties and all consents, orders and permits of
federal, state and local regulatory authorities (including those of the
SEC and of state Blue Sky or securities authorities, including
"no-action" positions of such federal or state authorities) deemed
necessary by the each Trust to permit consummation, in all material
respects, of the transactions contemplated hereby shall have been
obtained, except where failure to obtain any such consent, order or
permit would not involve a risk of a materially adverse effect on the
assets or properties of the New Fund or any Acquired Fund, provided that
either party hereto may waive any part of this condition as to itself.
8.4 The Registration Statement shall have become effective under the 1933
Act, and no stop order suspending the effectiveness thereof shall have
been issued, and, to the best knowledge of the Funds no investigation or
proceeding under the 1933 Act for that purpose shall have been
instituted or be pending, threatened or contemplated.
8.5 The Trusts shall have received an opinion of Vedder, Price, Kaufman &
Kammholz satisfactory to the Trusts and based upon such reasonably
requested representations and warranties as requested by counsel,
substantially to the effect that, for federal income tax purposes:
8.5.1 The acquisition by the New Fund of all the assets of each Acquired
Fund in exchange solely for New Fund Shares and the assumption by
the New Fund of each Acquired Fund's liabilities, if any, followed
by the distribution by the Acquired Funds of the New Fund Shares
to the shareholders of the Acquired Fund in exchange for their
Acquired Fund shares in complete liquidation of the Acquired
Funds, will constitute a "reorganization" within the meaning of
Section 368(a)(1) of the Internal Revenue Code, and the New Fund
and the Acquired Funds each will be "a party to a reorganization"
within the meaning of Section 368(b) of the Internal Revenue Code;
8.5.2 An Acquired Fund's shareholders will recognize no gain or loss
upon the exchange of all of their Acquired Fund shares for New
Fund Shares in complete liquidation of the Acquired Fund.
8.5.3 No gain or loss will be recognized by any Acquired Fund upon the
transfer of all its assets to the New Fund in exchange solely for
New Fund Shares and the assumption by the New Fund of the Acquired
Fund's liabilities, if any, and with respect to the subsequent
distribution of those New Fund Shares to the Acquired Fund
shareholders in complete liquidation of the Acquired Fund;
8.5.4 No gain or loss will be recognized by the New Fund upon the
acquisition of any Acquired Fund's assets in exchange solely for
New Fund Shares and the assumption of the Acquired Fund's
liabilities, if any;
8.5.5 The basis of the assets acquired by the New Fund will be, in each
instance, the same as the basis of those assets when held by any
Acquired Fund immediately before the transfer, and the holding
period of such assets acquired by the New Fund will include the
holding period thereof when held by such Acquired Fund;
8.5.6 The basis of the New Fund Shares to be received by an Acquired
Fund's shareholders upon liquidation of the Acquired Fund will be,
in each instance, the same as the basis of the Acquired Fund
shares surrendered in exchange therefor, decreased by any cash
received and increased by the amount of gain recognized on the
exchange; and
B-9
<PAGE> 72
8.5.7 The holding period of the New Fund Shares to be received by an
Acquired Fund's shareholders will include the period during which
the Acquired Fund shares to be surrendered in exchange therefor
were held, provided such Acquired Fund shares were held as capital
assets by those shareholders on the date of the exchange.
8.6 All conditions to the closing of the Agreement and Plan of Merger by and
among The John Nuveen Company, Flagship Resources Inc. and others dated
July 16, 1996 shall have been satisfied or waived.
9. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
9.1 This Agreement constitutes the entire agreement between the Trusts.
9.2 The representations, warranties and covenants contained in this
Agreement or in any document delivered pursuant hereto or in connection
herewith shall survive the consummation of the transactions contemplated
hereby.
10. TERMINATION
This Agreement may be terminated at any time prior to the Effective Time,
whether before or after approval of the shareholders of the Funds:
10.1 By mutual agreement of the Trusts;
10.2 By any Trust, if a condition to the obligations of such Trust shall not
have been met and it reasonably appears that it will not or cannot be
met; or
10.3 By any Trust, if the Closing shall not have occurred on or before June
30, 1997;
In the event of any such termination, there shall be no liability for damages on
the part of any Trust or any Trustee or officer of any Trust.
11. AMENDMENT
This Agreement may be amended, modified or supplemented only in writing by the
parties; provided, however, that following the shareholders' meetings called by
the Trusts pursuant to paragraph 4.1.18, no such amendment may have the effect
of changing the provisions for determining the number of New Fund Shares to be
distributed to the Acquired Funds' shareholders under this Agreement without
their further approval and the further approval of the Trusts Boards of Trustees
and provided further that nothing contained in this paragraph 11 shall be
construed as requiring additional approval to amend this Agreement to change the
Closing Date or the Effective Time.
12. NOTICES
Any notice, report, demand or other communication required or permitted by any
provision of this Agreement shall be in writing and shall be given by hand
delivery, prepaid certified mail or overnight delivery service addressed to:
Nuveen Trust, c/o John Nuveen & Co. Incorporated, 333 West Wacker Drive,
Chicago, Illinois 60606, Attention: James J. Wesolowski
Flagship Trust, c/o Flagship Financial, Inc., One Dayton Centre, One South
Main Street, Dayton, Ohio 45402, Attention: Michael D. Kalbfleisch
New Trust, c/o John Nuveen & Co. Incorporated, 333 West Wacker Drive,
Chicago, Illinois 60606, Attention: James J. Wesolowski
13. HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT
13.1 The paragraph headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
13.2 This Agreement may be executed in any number of counterparts, each of
which will be deemed an original.
13.3 This Agreement shall be governed by and construed in accordance with the
laws of the State of Illinois.
13.4 This Agreement shall bind and inure to the benefit of the parties and
their respective successors and assigns, and no assignment or transfer
hereof or of any rights or obligations hereunder shall be made by either
party without the written consent of the other party. Nothing herein
expressed or implied is intended or shall be construed to confer upon or
give any person, firm or corporation other than the parties and their
respective successors and assigns any rights or remedies under or by
reason of this Agreement.
B-10
<PAGE> 73
13.5 All persons dealing with the New Trust must look solely to the property
of the New Fund for the enforcement of any claims against the New Trust
as neither the Trustees, officers, agents or shareholders of the New
Trust assume any personal liability for obligations entered into on
behalf of the New Fund.
13.6 All persons dealing with any Acquired Trust must look solely to the
property of the applicable Acquired Fund for the enforcement of any
claims against the Acquired Trust as neither the Trustees, officers,
agents or shareholders of the Acquired Trust assume any personal
liability for obligations entered into on behalf of such Acquired Fund.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be executed
by the President or Vice President of each Trust.
NUVEEN MULTISTATE TAX-FREE TRUST
By:
------------------------------------
President
FLAGSHIP TAX-EXEMPT FUNDS TRUST
By:
------------------------------------
President
NUVEEN FLAGSHIP MULTISTATE TRUST I
By:
------------------------------------
President
B-11
<PAGE> 74
ANNEX C
HOLDERS OF MORE THAN 5% OF ANY CLASS OF A FUND'S SHARES
<TABLE>
<CAPTION>
NAME OF FUND AND CLASS NAME AND ADDRESS OF OWNER PERCENTAGE OF OWNERSHIP
- ---------------------------------------------- ---------------------------------------------- -----------------------
<S> <C> <C>
Flagship Arizona
Class A..................................... Merrill Lynch Pierce Fenner & Smith 97393 21.03%
Attn: Book Entry
P.O. Box 45286
Jacksonville, FL 32232-5286
Flagship Arizona
Class C..................................... Merrill Lynch Pierce Fenner & Smith 97393 35.16%
Attn: Book Entry
P.O. Box 45286
Jacksonville, FL 32232-5286
Jill Mahew 6.37%
3451 N. 35th Ave.
Phoenix, AZ 85017-4406
Prudential Securities FBO 5.13%
Ethel M. Crawford
Albert B. Crawford Jr. Co Ttees
Ethel M. Crawford
8736 N. 68th St.
Paradise Valley, AZ 85253-2703
Prudential Securities FBO 6.20%
Viola J. Bagley
Richard F. Bagley Jr. Jt Ten
8643 E. Via De Viva
Scottsdale, AZ 85258-4005
Flagship Florida
Class A..................................... Merrill Lynch Pierce Fenner & Smith 97393 56.18%
Attn: Book Entry
P.O. Box 45286
Jacksonville, FL 32232-5286
Flagship Florida
Class C..................................... Merrill Lynch Pierce Fenner & Smith 97393 91.48%
Attn: Book Entry
P.O. Box 45286
Jacksonville, FL 32232-5286
Flagship Pennsylvania
Class A..................................... Merrill Lynch Pierce Fenner & Smith 97393 60.56%
Attn: Book Entry
P.O. Box 45286
Jacksonville, FL 32232-5286
Flagship Pennsylvania
Class C..................................... Merrill Lynch Pierce Fenner & Smith 97393 71.62%
Attn: Book Entry
P.O. Box 45286
Jacksonville, FL 32232-5286
Key Clearing Corp. 10.58%
A/C 6028-2544
P.O. Box 93971
Cleveland, OH 44101-5971
Flagship Virginia
Class A..................................... Merrill Lynch Pierce Fenner & Smith 97393 31.82%
Attn: Book Entry
P.O. Box 45286
Jacksonville, FL 32232-5286
Flagship Virginia
Class C..................................... Merrill Lynch Pierce Fenner & Smith 97393 70.61%
Attn: Book Entry
P.O. Box 45286
Jacksonville, FL 32232-5286
Nuveen Arizona
Class A..................................... Donaldson Lufkin Jenrette Securities 12.60%
Corporation, Inc.
P.O. Box 2052
Jersey City, NJ 07303-9998
Merrill Lynch Pierce Fenner & Smith, Inc. 12.05%
97E76
Attn: Book Entry Dept.
4800 Deer Lake Dr. E. Fl. 3
Jacksonville, FL 32246-6484
</TABLE>
C-1
<PAGE> 75
<TABLE>
<CAPTION>
NAME OF FUND AND CLASS NAME AND ADDRESS OF OWNER PERCENTAGE OF OWNERSHIP
- ---------------------------------------------- ---------------------------------------------- -----------------------
<S> <C> <C>
Nuveen Arizona
Class C..................................... Prudential Securities FBO 28.46%
Janet Irving Ttee
Janet Irving Trust UA DTD 05/27/82
Sun City West, AZ 85375-5172
Louis J. Baniecki & Nancy L. Baniecki 21.12%
Jt Ten Wros Not TC
Sunbird Golf Resort
1963 E. Buena Vista Dr.
Chandler, AZ 85249-8610
PaineWebber For The Benefit of Elisabeth A. 5.48%
Lang
Sole & Separate Property
1453 W. Orchid Lane
Chandler, AZ 85224-8658
Prudential Securities FBO 5.57%
Mr. Evans Robert Woodhouse &
Mrs. Elizabeth Biron Woodhouse
JT Ten
3138 N. 17th Dr.
Phoenix, AZ 85015-5807
Leonidas K. Springer & 7.60%
Beverly J. Springer
Jt Ten Wros Not Tc
4720 W. Greenway Rd.
Glendale, AZ 85306-3518
Erasmo Ysasi Tr 5.50%
UA Apr 07 95
FBO Erasmo Ysasi Trust
1754 E. Carson Rd.
Phoenix, AZ 85040-5747
Nuveen Florida
Class A..................................... Smith Barney, Inc. 00142430433 6.38%
388 Greenwich Street
New York, New York 10013
Nuveen Florida
Class C..................................... Roland C. White & Arlene I. White 9.18%
JT Ten Wros Not TC
961 Tarrson Blvd.
Lady Lake, FL 32159-2363
PaineWebber for the Benefit of Clarence W. 8.55%
Hebert
11 Hunthurst Circle
Worcester, MA 01602-2830
NFSC FEBO #0C8-344680 20.58%
Adelaide Knupp
Gail A. Duffill
1910 S. Ocean Blvd.
Delray Beach, FL 33483
Norman Rudolph 10.89%
1168 Lake Breeze Dr.
West Palm Beach, FL 33414-7945
PaineWebber for the Benefit of 5.48%
Mary Rogers and Pamela Anne Rogers JT Wros
3070 Wedgewood Blvd.
Delray Beach, FL 33445-5748
Monica Hart & Melissa J. Hart TR 24.74%
UA Mar 23 83
Robert J. Hart Trust
251 Algiers Ave.
Fort Lauderdale, FL 33308-4434
Prudential Securities Inc. FBO 12.49%
Clarence L. Lacroix
Louise Lacroix Co-TTees
The Lacroix Family TR
UA DTD 12/07/92
Stockton, CA 95203-2616
</TABLE>
C-2
<PAGE> 76
<TABLE>
<CAPTION>
NAME OF FUND AND CLASS NAME AND ADDRESS OF OWNER PERCENTAGE OF OWNERSHIP
- ---------------------------------------------- ---------------------------------------------- -----------------------
<S> <C> <C>
Nuveen Pennsylvania
Class C..................................... Hani J. Tuffaha & Eiman H. Tuffaha 6.46%
JT Ten Wros Not TC
25 Selkirk Rd.
Williamsport, PA 17701-1810
NFSC FEBO # 0C8-576255 6.59%
Charles E. Bruce
Carolyn L. Bruce
590 Flora Lane
York, PA 17403
George D. Hawthorne & Barbara Ann Berline & 8.18%
Virginia M. Hawthorne
JT Ten Wros Not TC
2408 Linden Dr.
Allison Park, PA 15101-3454
Ruth W. McHenry 5.62%
3900 Trout Run Rd.
York, PA 17402-8325
Nuveen Virginia
Class A..................................... Merrill Lynch Pierce Fenner & Smith Inc. 97E81 11.50%
Attn: Book Entry Dept
4800 Deer Lake Dr. E. Fl.3
Jacksonville, FL 32246-6484
Nuveen Virginia
Class C..................................... NFSC FEBO #A1F-435902 23.92%
Richard U. Cogswell
350 S. Vandorn St. Apt. Q 216
Alexandria, VA 22304
Rhoda Kroll 5.18%
2134 Sanctuary Ct.
Virginia Beach, VA 23454-2258
Muriel S. Fleming & David M. Fleming II 10.17%
Apt. 221
14303 Brandermill Woods Trl.
Midlothian, VA 23112-4171
Donaldson Lufkin Jenrette Securities 7.51%
Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303-9998
John T. E. Cribb Jr. & Kirsten Brandt Cribb 5.20%
JT Ten Wros Not TC
712 N. Oakland St.
Arlington, VA 22203-2223
Nuveen Virginia
Class R..................................... Merrill Lynch Pierce Fenner & Smith Inc. 979D8 6.71%
Attn: Book Entry Dept.
4800 Deer Lake Dr. E. Fl. 3
Jacksonville, FL 32246-6484
</TABLE>
C-3
<PAGE> 77
ANNEX D
FORM OF NEW INVESTMENT ADVISORY AGREEMENT
INVESTMENT MANAGEMENT AGREEMENT
AGREEMENT made this day of , 1996, by and between FLAGSHIP TAX
EXEMPT FUNDS TRUST, 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 each of the
Fund's portfolios as may exist from time to time in accordance with the
Fund's investment objective and policies and limitations relating to such
portfolio, 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 assets of
each portfolio shall be subject to the Fund's policies, restrictions and
limitations with respect to securities investments as set forth in the
Fund's registration statement on Form N-1A under the Securities Act of 1933
and the Investment Company Act of 1940 covering the Fund's shares of
beneficial interest, including the Prospectus and Statement of Additional
Information forming a part thereof, all as filed with the Securities and
Exchange Commission and as from time to time amended, and all applicable
laws and the regulations of the Securities and Exchange Commission relating
to the management of registered open-end 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 (other than such services, if any,
provided by the Fund's transfer agent and shareholder service 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
related to each of the Fund's portfolios. For each portfolio, calculated
separately, the fees shall be computed at the rate of:
<TABLE>
<CAPTION>
----------------------------------------------------
AVERAGE DAILY NET ASSET VALUE RATE
<S> <C>
----------------------------------------------------
For the first $125 million .5500 of 1%
For the next $125 million .5375 of 1%
For the next $250 million .5250 of 1%
For the next $500 million .5125 of 1%
For the next $1 billion .5000 of 1%
For net assets over $2 billion .4750 of 1%
----------------------------------------------------
</TABLE>
For the month and year in which this Agreement becomes effective, or
terminates, and for any month and year in which a portfolio is added or
eliminated from the Fund, there shall be an appropriate proration on the
basis of the number of days that the Agreement shall have been in effect, or
the portfolio shall have existed, 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.
Regardless of any of the above provisions, the Adviser guarantees that the
total expenses of the Fund in any fiscal year, exclusive of taxes, interest,
brokerage commissions, and extraordinary expenses such as litigation costs,
shall not exceed, and the Adviser undertakes to pay or refund to the Fund
any amount up to but not greater than the aggregate fees received by the
Adviser under this Agreement for such fiscal year, the limitation imposed by
any jurisdiction in which the Fund continues to offer and sell its shares
after exceeding such limitation.
The net asset value of the Fund shall be calculated as provided in the
Declaration of Trust of the Fund. On each day when net asset value is not
calculated, the net asset value of a share of beneficial interest of the
Fund shall be deemed to be the net asset value of such share as of the close
of business on the last day on which such calculation was made for the
purpose of the foregoing computations.
D-1
<PAGE> 78
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 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 a Fund portfolio may also be appropriate for other Fund
portfolios or 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 Fund's
portfolios and the portfolios of its other investment accounts and funds
purchasing securities whenever decisions are made to purchase or sell
securities by a Fund portfolio and another Fund's portfolio or one or more
of such 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 portfolio or portfolios purchasing such
securities 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 portfolios and such other accounts and funds, the
size of investment commitments generally held by the Fund portfolios 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 [ ], 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 1940.
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, with respect to any Fund portfolio, by vote of a majority of the
outstanding voting securities of that portfolio, 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, with respect to any Fund
portfolio, by vote of a majority of the outstanding voting securities of
that portfolio, 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 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. The Adviser and its affiliates reserve the right to grant, at any time, the
use of the name "Nuveen" or the name "Flagship", or any approximation or
abbreviation thereof, to any other investment company or business
enterprise. Upon termination of this Agreement by either party, or by its
terms, the Fund shall thereafter refrain from using any name of the Fund
which includes "Nuveen" or "Flagship" or any approximation or abbreviation
thereof, or is sufficiently similar to such name as to be likely to cause
confusion with such name, and shall not allude in any public statement or
advertisement to the former association.
10. 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.
11. 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.
D-2
<PAGE> 79
IN WITNESS WHEREOF, the Fund and the Adviser have caused this Agreement to be
executed on the day and year above written.
<TABLE>
<S> <C>
FLAGSHIP TAX EXEMPT FUNDS TRUST NUVEEN ADVISORY CORP.
by: by:
- -------------------------------------------- Vice --------------------------------------------
President Vice President
Attest: Attest:
- -------------------------------------------- --------------------------------------------
Assistant Secretary Assistant Secretary
</TABLE>
D-3
<PAGE> 80
ANNEX E
FORM OF NEW RULE 12B-1 PLAN
PLAN OF DISTRIBUTION AND SERVICE
PURSUANT TO RULE 12B-1
, 1996
WHEREAS, Flagship Tax Exempt Funds Trust, a Massachusetts business trust (the
"Fund") engages in business as an open-end management investment company and is
registered under the Investment Company Act of 1940, as amended (the "Act");
WHEREAS, the Fund currently has series with shares outstanding: [Name(s)
of series] (the "Series");
WHEREAS, the Fund, on behalf of each Series, employs John Nuveen & Co.
Incorporated (the "Distributor") as distributor of the shares of the Series (the
"Shares") pursuant to a Distribution Agreement dated as of , 1996;
WHEREAS, the Fund is authorized to issue Shares in four different classes
("Classes"): Class A, Class B, Class C and Class R.
WHEREAS, the Fund, on behalf of each Series, desires to adopt a Plan of
Distribution and Service pursuant to Rule 12b-1 under the Act ("Rule 12b-1"),
and the Board of Trustees of the Fund has determined that there is a reasonable
likelihood that adoption of this Plan of Distribution and Service will benefit
the Fund and its shareholders;
WHEREAS, the Fund, on behalf of each Series, has adopted a Multiple Class Plan
Pursuant to Rule 18f-3 (the "Rule 18f-3 Plan") to enable the various Classes of
Shares to be granted different rights and privileges and to bear different
expenses, and has an effective registration statement on file with the SEC
containing a Prospectus describing such Classes of Shares;
WHEREAS, as described in the Rule 18f-3 Plan, the purchase of Class A Shares is
generally subject to an up-front sales charge, as set forth in the Fund's
Prospectus and Statement of Additional Information, and the purchase of Class B
and Class C Shares will not be subject to an up-front sales charge, but in lieu
thereof the Class B Shares will be subject to a declining contingent deferred
sales charge and Class C Shares will be subject to an asset-based distribution
fee, as described below; and
WHEREAS, Shares representing an investment in Class B will automatically convert
to Class A Shares 8 years after the investment, as described in the Prospectus
for the Shares;
NOW, THEREFORE, the Fund, on behalf of each Series, hereby adopts, and the
Distributor hereby agrees to the terms of, this Plan of Distribution and Service
(the "Plan") in accordance with Rule 12b-1, on the following terms and
conditions:
1. (a) The Fund, on behalf of each Series, is authorized to compensate the
Distributor for services performed and expenses incurred by the Distributor
in connection with the distribution of Shares of Class A, Class B and Class C
of the Fund and the servicing of accounts holding such Shares.
(b) The amount of such compensation paid during any one year shall consist
(i) with respect to Class A Shares of a Service Fee not to exceed .20% of
average daily net assets of the Class A Shares of the Fund;
(ii) with respect to Class B Shares of a Service Fee not to exceed .20% of
average daily net assets of the Class B Shares of the Fund, plus a
Distribution Fee not to exceed .75% of average daily net assets of the
Class B Shares of the Fund; and
(iii) with respect to Class C Shares of a Service Fee not to exceed .20% of
average daily net assets of the Class C Shares of the Fund, plus a
Distribution Fee not to exceed .55% of average daily net assets of the
Class C Shares of the Fund. Such compensation shall be calculated and
accrued daily and paid quarterly or at such other intervals as the Board of
Trustees may determine.
(c) With respect to Class A Shares, the Distributor shall pay any Service
Fees it receives under the Plan for which a particular underwriter, dealer,
broker, bank or selling entity having a Dealer Agreement in effect
("Authorized Dealer", which may include the Distributor) is the dealer of
record to such Authorized Dealers to compensate such organizations for
providing services to shareholders relating to their investment. The
Distributor may retain any Service Fees not so paid.
(d) With respect to the Class B Shares, the Distributor:
(i) shall retain the Distribution Fee to compensate it for costs associated
with the distribution of the Class B Shares, including the payment of
broker commissions to Authorized Dealers (which may include the
Distributor) who were the dealer of record with respect to the purchase of
those shares; and
E-1
<PAGE> 81
(ii) shall pay any Service Fees it receives under the Plan for which a
particular Authorized Dealer is the dealer of record (which may include the
Distributor) to such Authorized Dealers to compensate such organizations
for providing services to shareholders relating to their investment;
provided, however, that the Distributor shall be entitled to retain, for
the first year after purchase of the Class B Shares, the Service Fee to the
extent that it may have pre-paid the Service Fee to the Authorized Dealer
of record.
The Distributor may retain any Distribution or Service Fees not so paid.
(e) With respect to the Class C Shares, the Distributor:
(i) shall pay the Distribution Fee it receives under the Plan with respect
to Class C Shares for which a particular Authorized Dealer is the dealer of
record (which may include the Distributor) to such Authorized Dealers to
compensate such organizations in connection with such share sales;
provided, however, that the Distributor shall be entitled to retain, for
the first year after purchase of the Class C Shares, the Distribution Fee
to the extent that it may have pre-paid the Distribution Fee to the
Authorized Dealer of record; and
(ii) shall pay any Service Fees it receives under the Plan for which a
particular Authorized Dealer is the dealer of record (which may include the
Distributor) to such Authorized Dealers to compensate such organizations
for providing services to shareholders relating to their investment;
provided, however, that the Distributor shall be entitled to retain, for
the first year after purchase of the Class B Shares, the Service Fee to the
extent that it may have pre-paid the Service Fee to the Authorized Dealer
of record.
The Distributor may retain any Distribution or Service Fees not so paid.
(f) Services for which such Authorized Dealers may receive Service Fee
payment include any or all of the following: maintaining account records for
shareholders who beneficially own Shares; answering inquiries relating to the
shareholders' accounts, the policies of the Fund and the performance of their
investment; providing assistance and handling transmission of funds in
connection with purchase, redemption and exchange orders for Shares;
providing assistance in connection with changing account setups and enrolling
in various optional fund services; producing and disseminating shareholder
communications or servicing materials; the ordinary or capital expenses, such
as equipment, rent, fixtures, salaries, bonuses, reporting and recordkeeping
and third party consultancy or similar expenses, relating to any activity for
which payment is authorized by the Board; and the financing of any other
activity for which payment is authorized by the Board.
(g) Payments of Distribution or Service Fees to any organization as of any
quarter-end will not exceed the appropriate amount based on the annual
percentages set forth in subparagraphs (c), (d) and (e) above, based on
average net assets of accounts for which such organization appeared on the
records of the Fund and/or its transfer agent as the organization of record
during the preceding quarter.
2. This Plan shall not take effect until the Plan, together with any related
agreement(s), has been approved by votes of a majority of both (a) the Board
of Trustees of the Fund, and (b) those Trustees of the Fund who are not
"interested persons" of the Fund (as defined in the Act) and who have no
direct or indirect financial interest in the operation of the Plan or any
agreements related to it (the "Rule 12b-1 Trustees") cast in person at a
meeting (or meetings) called for the purpose of voting on the Plan and such
related Agreement(s).
3. This Plan shall remain in effect until , and shall
continue in effect thereafter so long as such continuance is specifically
approved at least annually in the manner provided for approval of this Plan
in paragraph 2.
4. The Distributor shall provide to the Board of Trustees of the Fund and the
Board shall review, at least quarterly, a written report of distribution- and
service-related activities, Distribution Fees, Service Fees, and the purposes
for which such activities were performed and expenses incurred.
5. This Plan may be terminated at any time by vote of a majority of the Rule
12b-1 Trustees or by vote of a majority (as defined in the Act) of the
outstanding voting Shares of a Series of the Fund.
6. This Plan may not be amended to increase materially the amount of
compensation payable by a Series with respect to Class A, Class B or Class C
Shares under paragraph 1 hereof unless such amendment is approved by a vote
of at least a majority (as defined in the Act) of the outstanding voting
Shares of that Class of Shares of the Series. No material amendment to the
Plan shall be made unless approved in the manner provided in paragraph 2
hereof.
7. While this Plan is in effect, the selection and nomination of the Trustees
who are not interested persons (as defined in the Act) of the Fund shall be
committed to the discretion of the Trustees who are not such interested
persons.
8. The Fund shall preserve copies of this Plan and any related agreements and
all reports made pursuant to paragraph 4 hereof, for a period of not less
than six years from the date of the Plan, any such agreement or any such
report, as the case may be, the first two years in an easily accessible
place.
E-2
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NUVEEN FLAGSHIP MULTISTATE TRUST I
Nuveen Flagship Arizona Municipal Bond Fund
Nuveen Flagship Florida Municipal Bond Fund
Nuveen Flagship Pennsylvania Municipal Bond Fund
Nuveen Flagship Virginia Municipal Bond Fund
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus. This
Statement of Additional Information should be read in conjunction with the Joint
Proxy Statement-Prospectus of the Nuveen Flagship Multistate Trust I (the "New
Trust") dated October , 1996. The Joint Proxy Statement-Prospectus may be
obtained without charge by mailing a written request to the New Trust,
Attention: Secretary, 333 West Wacker Drive, Chicago, Illinois 60606 or by
calling (800) 621-7227.
The Statement of Additional Information for the Nuveen Multistate Tax-Free
Trust dated May 31, 1996 and the Statement of Additional Information for the
Flagship Tax Exempt Funds Trust dated September 26, 1996 accompany this
Statement of Additional Information and are incorporated herein by reference.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Investment Policies and Investment Portfolio.............................................. S-2
Management................................................................................ S-20
Investment Adviser and Investment Management Agreement.................................... S-21
Portfolio Transactions.................................................................... S-22
Net Asset Value........................................................................... S-23
Tax Matters............................................................................... S-23
Performance Information................................................................... S-29
Additional Information on the Purchase and Redemption of Fund Shares...................... S-32
Distribution and Service Plans............................................................ S-33
Independent Public Accountants and Custodian.............................................. S-34
Financial Statements...................................................................... S-35
Pro Forma Financial Information........................................................... P-1
Annex A -- Ratings of Investments......................................................... A-1
Annex B -- Statement of Additional Information -- Nuveen Trust............................ B-1
Annex C -- Statement of Additional Information -- Flagship Trust.......................... C-1
</TABLE>
THE DATE OF THIS STATEMENT OF ADDITIONAL INFORMATION IS OCTOBER , 1996.
<PAGE> 83
INVESTMENT POLICIES AND INVESTMENT PORTFOLIO
INVESTMENT POLICIES
The investment objective and certain fundamental investment policies of
each Fund are described in the Prospectus. Each of the Funds, as a fundamental
policy, may not, without the approval of the holders of a majority of the shares
of that Fund:
(1) Invest in securities other than Municipal Obligations and
temporary investments, as those terms are defined in the Prospectus;
(2) Borrow money, except from banks for temporary or emergency
purposes and not for investment purposes and then only in an amount not
exceeding (a) 10% of the value of its total assets at the time of borrowing
or (b) one-third of the value of the Fund's total assets including the
amount borrowed, in order to meet redemption requests which might otherwise
require the untimely disposition of securities. While any such borrowings
exceed 5% of such Fund's total assets, no additional purchases of
investment securities will be made by such Fund. If due to market
fluctuations or other reasons, the value of the Fund's assets falls below
300% of its borrowings, the Fund will reduce its borrowings within 3
business days. To do this, the Fund may have to sell a portion of its
investments at a time when it may be disadvantageous to do so;
(3) Pledge, mortgage or hypothecate its assets, except that, to
secure borrowings permitted by subparagraph (2) above, it may pledge
securities having a market value at the time of pledge not exceeding 10% of
the value of the Fund's total assets;
(4) Issue senior securities as defined in the Investment Company Act
of 1940, except to the extent such issuance might be involved with respect
to borrowings described under item (2) above or with respect to
transactions involving futures contracts or the writing of options within
the limits described in the Prospectus and this Statement of Additional
Information;
(5) Underwrite any issue of securities, except to the extent that the
purchase of Municipal Obligations in accordance with its investment
objective, policies and limitations, may be deemed to be an underwriting;
(6) Purchase or sell real estate, but this shall not prevent any Fund
from investing in Municipal Obligations secured by real estate or interests
therein or foreclosing upon and selling such security;
(7) Purchase or sell commodities or commodities contracts or oil, gas
or other mineral exploration or development programs, except for
transactions involving futures contracts within the limits described in the
Prospectus and this Statement of Additional Information;
(8) Make loans, other than by entering into repurchase agreements and
through the purchase of Municipal Obligations or temporary investments in
accordance with its investment objective, policies and limitations;
(9) Make short sales of securities or purchase any securities on
margin, except for such short-term credits as are necessary for the
clearance of transactions;
(10) Write or purchase put or call options, except to the extent that
the purchase of a stand-by commitment may be considered the purchase of a
put, and except for transactions involving options within the limits
described in the Prospectus and this Statement of Additional Information;
(11) Invest more than 25% of its total assets in securities of issuers
in any one industry; provided, however, that such limitations shall not be
applicable to Municipal Obligations issued by governments or political
subdivisions of governments, and obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities; and
(12) Purchase or retain the securities of any issuer other than the
securities of the Fund if, to the Fund's knowledge, those trustees of the
Trust, or those officers and directors of Nuveen Advisory Corp. ("Nuveen
Advisory"), who individually own beneficially more than 1/2 of 1% of the
outstanding securities of such issuer, together own beneficially more than
5% of such outstanding securities.
In addition, the Arizona Fund and the Florida Fund each, as a fundamental
policy, may not, without the approval of the holders of a majority of the shares
of the Fund, invest more than 5% of its total assets in securities of any one
issuer, except that this limitation shall not apply to securities of the United
States government, its agencies and instrumentalities or to the investment of
25% of the Fund's assets.
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<PAGE> 84
In addition, each of the Funds, as a non-fundamental policy, may not:
(i) invest more than 15% of its net assets in "illiquid securities";
and
(ii) purchase more than 3% of the stock of another investment company
or purchase stock of other investment companies equal to more than 5% of
the Fund's total assets (valued at time of purchase) in the case of any one
other investment company and 10% of such assets (valued at time of
purchase) in the case of all other investment companies in the aggregate,
except for securities acquired as part of a merger, consolidation or
acquisition of assets.
For the purpose of applying the limitations set forth in paragraph (11)
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 user, 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 user, then such non-governmental user would be deemed to be
the sole issuer. Where a security is also backed by the enforceable obligation
of a superior or unrelated governmental entity 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. Where a security is insured
by bond insurance, it shall not be considered a security issued or guaranteed by
the insurer; instead the issuer of such security will be determined in
accordance with the principles set forth above. The foregoing restrictions do
not limit the percentage of a Fund's assets that may be invested in securities
insured by any single insurer.
The foregoing restrictions and limitations, as well as the Funds' policies
as to ratings of portfolio investments, will apply only at the time of purchase
of securities, and the percentage limitations will not be considered violated
unless an excess or deficiency occurs or exists immediately after and as a
result of an acquisition of securities, unless otherwise indicated.
The foregoing fundamental investment policies, together with the investment
objective of each Fund, cannot be changed without approval by holders of a
"majority of the Fund's outstanding voting shares." As defined in the Investment
Company Act of 1940, this means the vote of (i) 67% or more of the Fund's shares
present at a meeting, if the holders of more than 50% of the Fund's shares are
present or represented by proxy, or (ii) more than 50% of the Fund's shares,
whichever is less.
The Trust is an open-end management series company under SEC Rule 18f-2.
Each Fund is a separate series issuing its own shares. The Arizona and Florida
Funds are "diversified" and the Virginia and Pennsylvania Funds are
"non-diversified". Certain matters under the Investment Company Act of 1940
which must be submitted to a vote of the holders of the outstanding voting
securities of a series company shall not be deemed to have been effectively
acted upon unless approved by the holders of a majority of the outstanding
voting securities of each series affected by such matter.
PORTFOLIO SECURITIES
As described in the Prospectus, each Fund invests primarily in Municipal
Obligations that are issued within the Fund's respective state. In general,
Municipal Obligations include debt obligations issued by states, cities and
local authorities to obtain funds for various public purposes, including
construction of a wide range of public facilities such as airports, bridges,
highways, hospitals, housing, mass transportation, schools, streets and water
and sewer works. Industrial development bonds and pollution control bonds that
are issued by or on behalf of public authorities to finance various
privately-rated facilities are included within the term Municipal Obligations if
the interest paid thereon is exempt from federal income tax. Municipal
Obligations in which each Fund will primarily invest are issued by that Fund's
respective state and local authorities in that state, and bear interest that, in
the opinion of bond counsel to the issuer, is exempt from federal income tax and
from personal income tax imposed by the respective state.
The investment assets of each Fund will consist of (1) Municipal
Obligations which are rated at the time of purchase within the four highest
grades (Baa or BBB or better) by Moody's Investors Service, Inc. ("Moody's"), by
Standard and Poor's Corporation ("S&P") or by Fitch Investors Service, Inc.
("Fitch"), (2) unrated Municipal Obligations which, in the opinion of Nuveen
Advisory, have credit characteristics equivalent to bonds rated within the four
highest grades by Moody's, S&P or Fitch, with no fixed percentage limitations on
these unrated Municipal Obligations; and (3) temporary investments as described
below, the income from which may be subject to state income tax or to both
federal and state income taxes.
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<PAGE> 85
As described in the Prospectus, each Fund may invest in Municipal
Obligations that constitute participations in a lease obligation or installment
purchase contract obligation (hereafter collectively called "lease obligations")
of a municipal authority or entity. Although lease obligations do not constitute
general obligations of the municipality for which the municipality's taxing
power is pledged, a lease obligation is ordinarily backed by the municipality's
covenant to budget for, appropriate and make the payments due under the lease
obligation. However, certain 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. Although nonappropriation lease obligations are
secured by the leased property, disposition of the property in the event of
foreclosure might prove difficult. Each Fund will seek to minimize the special
risks associated with such securities by only investing in those
nonappropriation leases where Nuveen Advisory has determined that the issuer has
a strong incentive to continue making appropriations and timely payment until
the security's maturity. Some lease obligations may be illiquid under certain
circumstances. Lease obligations provide a premium interest rate which along
with regular amortization of the principal may make them attractive for a
portion of the assets of the Funds.
Obligations of issuers of Municipal Obligations are subject to the
provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the Federal 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 and/or interest, 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 Obligations may be materially affected.
PORTFOLIO TRADING AND TURNOVER
Each Fund will make changes in its investment portfolio from time to time
in order to take advantage of opportunities in the municipal market and to limit
exposure to market risk. A Fund may also engage to a limited extent in
short-term trading consistent with its investment objective. Securities may be
sold in anticipation of market decline or purchased in anticipation of market
rise and later sold. 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 disparity in the normal yield
relationship between the two securities. A Fund may make changes in its
investment portfolio in order to limit its exposure to changing market
conditions. Changes in a Fund's investments are known as "portfolio turnover."
While it is impossible to predict future portfolio turnover rates, each Fund's
annual portfolio turnover rate is generally not expected to exceed 75%. However,
each Fund reserves the right to make changes in its investments whenever it
deems such action advisable, and therefore, a Fund's annual portfolio turnover
rate may exceed 75% in particular years depending upon market conditions.
WHEN-ISSUED SECURITIES
Each Fund may purchase and sell Municipal Obligations on a when-issued or
delayed delivery basis. When-issued and delayed delivery transactions arise when
securities are purchased or sold with payment and delivery beyond the regular
settlement date. (When-issued transactions normally settle within 15-45 days.)
On such transactions the payment obligation and the interest rate are fixed at
the time the buyer enters into the commitment. The commitment to purchase
securities on a when-issued or delayed delivery basis may involve an element of
risk because the value of the securities is subject to market fluctuation, no
interest accrues to the purchaser prior to settlement of the transaction, and at
the time of delivery the market value may be less than cost. At the time a Fund
makes the commitment to purchase a Municipal Obligation on a when-issued or
delayed delivery basis, it will record the transaction and reflect the amount
due and the value of the security in determining its net asset value. Likewise,
at the time a Fund makes the commitment to sell a Municipal Obligation on a
delayed delivery basis, it will record the transaction and include the proceeds
to be received in determining its net asset value; accordingly, any fluctuations
in the value of the Municipal Obligation sold pursuant to a delayed delivery
commitment are ignored in calculating net asset value so long as the commitment
remains in effect. The Fund will maintain designated readily marketable assets
at least equal in value to commitments to purchase when-issued or delayed
delivery securities, such assets to be segregated by the Custodian specifically
for the settlement of such commitments. A Fund will only make commitments to
purchase Municipal Obligations on a when-issued or delayed delivery basis with
the intention of actually acquiring the securities, but each Fund reserves the
right to sell these securities before the settlement date if it is deemed
advisable. If a when-issued security is sold before delivery any gain or loss
would not be tax-exempt. A Fund commonly engages in when-issued transactions in
order to
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<PAGE> 86
purchase or sell newly-issued Municipal Obligations, and may engage in delayed
delivery transactions in order to manage its operations more effectively.
SPECIAL CONSIDERATIONS RELATING TO MUNICIPAL OBLIGATIONS OF DESIGNATED STATES
Except for investments in temporary investments, each of the Funds will
invest substantially all of its net assets in its respective state's Municipal
Obligations. Each Fund is therefore more susceptible to political, economic or
regulatory factors adversely affecting issuers of Municipal Obligations in its
state. Brief summaries of these factors are contained in the Prospectus. Set
forth below is additional information that bears upon the risk of investing in
Municipal Obligations issued by public authorities in the states of currently
offered Funds. This information was obtained from official statements of issuers
located in the respective states as well as from other publicly available
official documents and statements. The Funds have not independently verified any
of the information contained in such statements and documents.
FACTORS PERTAINING TO ARIZONA
As described above, except to the extent the Arizona Fund invests in
temporary investments, the Arizona Fund will invest substantially all of its net
assets in Arizona Municipal Obligations. The Arizona Fund is therefore
susceptible to political, economic or regulatory factors affecting issuers of
Arizona Municipal Obligations. The information set forth below is derived from
official statements prepared in connection with the issuance of Arizona
Municipal Obligations and other sources that are generally available to
investors. The information is provided as general information intended to give a
recent historical description and is not intended to indicate future or
continuing trends in the financial or other positions of The State of Arizona
(the "State"). This information has not been independently verified.
There can be no assurance that future statewide or regional economic
difficulties, and the resulting impact on State or local governmental finances
generally, will not adversely affect the market value of Arizona Municipal
Obligations held in the portfolio of the Arizona Fund or the ability of
particular obligors to make timely payments of debt service on (or relating to)
those obligations.
General Economic Conditions. Arizona is the nation's sixth largest state in
terms of area. Arizona's main economic/employment sectors include services,
tourism and manufacturing. Mining and agriculture are also significant, although
they tend to be more capital than labor intensive. Services is the single
largest economic sector. Many of these jobs are directly related to tourism.
The unemployment rate in Arizona for 1995 was 5.1% and for 1994 was 6.3%
compared to a national rate of 5.6% in 1995 and 6.1% in 1994. Job growth may be
adversely affected by the closing of a major air force base near Phoenix.
Budgetary Process. Arizona operates on a fiscal year beginning July 1 and
ending June 30. Fiscal year 1996 refers to the year ending June 30, 1996.
Total General Fund revenues of $4.5 billion are expected during fiscal year
1996. Approximately 47% of this budgeted revenue comes from sales and use taxes,
35% from income taxes (both individual and corporate) and 4% from property
taxes. All taxes total approximately $4.1 billion, or 92% of the General Fund
revenues. Non-tax revenue includes items such as income from the state lottery,
licenses, fees and permits, and interest.
For fiscal year 1995, the budget called for expenditures of approximately
$4.7 billion. These expenditures fell into the following major categories:
education (52%), health and welfare (24%), protection and safety (4%), general
government (15%) and inspection and regulation, natural resources,
transportation and other (6%). The State's general fund expenditures for fiscal
year 1996 are budgeted at approximately $4.5 billion. Fiscal year 1996's
proposed expenditures fall into the following major categories: education (52%),
health and welfare (23%), protection and safety (4%), general government (15%)
and inspection and regulation, natural resources, transportation and other (6%).
For fiscal year 1997, a general fund budget of $4.77 billion has been adopted.
Most or all of the Arizona Municipal Obligations are not obligations of the
State of Arizona and are not supported by the State's taxing powers. The
particular source of payment and security for each of the Arizona Municipal
Obligations is detailed in the instruments themselves and in related offering
materials. There can be no assurances with respect to whether the market value
or marketability of any of the Arizona Municipal Obligations issued by an entity
other than the State of Arizona will be affected by financial or other
conditions of the State or of any entity located within the State. In addition,
it should be noted that the State of Arizona, as well as counties,
municipalities, political subdivisions and other public authorities of the
State, are subject to limitations imposed by
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<PAGE> 87
Arizona's Constitution with respect to ad valorem taxation, bonded indebtedness
and other matters. For example, the State legislature cannot appropriate
revenues in excess of 7% of the total personal income of the State in any fiscal
year. These limitations may affect the ability of the issuers to generate
revenues to satisfy their debt obligations.
Local governments have experienced many of the same fiscal difficulties for
many of the same reasons and, in several cases, have been prevented by
Constitutional limitations on bonded indebtedness and declining assessed
property values from securing necessary funds to undertake street, utility and
other infrastructure expansions, improvements and renovations in order to meet
the need of rapidly increasing populations. Maricopa County, Arizona has
encountered financial difficulties related to declines in assessed property
values and budgetary deficits and its general obligation bonds have received
rating downgrades. Maricopa County, Arizona is analyzing various budget options
to deal with its existing deficit.
Although most of the Arizona Municipal Obligations are revenue obligations
of local governments or authorities in the State, there can be no assurance that
the fiscal and economic conditions referred to above will not affect the market
value or marketability of the Arizona Municipal Obligations or the ability of
the respective obligors to pay principal of and interest on the Arizona
Municipal Obligations when due.
On July 21, 1994, the Arizona Supreme Court rendered its opinion in
Roosevelt Elementary School District Number 66, et al v.c. Dianne Bishop, et al
(the "Roosevelt Opinion"). In this opinion, the Arizona Supreme Court held that
the present statutory financing scheme for public education in the State of
Arizona does not comply with the Arizona constitution. Subsequently, the Arizona
School Boards Association, with the approval of the appellants and the appellees
to the Roosevelt Opinion, and certain Arizona school districts, filed with the
Arizona Supreme Court motions for clarification of the Roosevelt Opinion,
specifically with respect to seeking prospective application of the Roosevelt
Opinion. On July 29, 1994, the Arizona Supreme Court clarified the Roosevelt
Opinion to hold that such opinion will have prospective effect only. The impact
of the Roosevelt Opinion on Arizona school finances or budgets cannot be
determined at this time.
Taxpayers within another school district, Creighton Elementary School
District No. 14 of Maricopa County, Arizona (the "Creighton District") have been
granted a summary judgment by the Superior Court of Maricopa County on February
15, 1996, against the Creighton District to the effect that the outstanding
principal amount of bonds theretofore issued by the Creighton District, together
with premium received in connection with the issuance of such bonds, be treated
as debt for constitutional and statutory debt limit purposes. A significant
number of other Arizona school district have issued bonds with premiums and did
not treat such premium as debt for purposes of applicable debt limitations. It
is not known if the judgment against the Creighton District, when final, will
result in similar applicability to other school districts or political
subdivisions or will cause all or part of any premium to be subject to
constitutional and statutory requirements other than debt limits, such as the
requirement for voter authorization. Such judgment could potentially adversely
impact the secondary market for Arizona school district bonds. Proposed
legislation may affect the method of calculating outstanding debt and may affect
the bonding capacity of all Arizona cities, towns, school districts and other
political subdivisions.
Certain other circumstances are relevant to the market value, marketability
and payment of any hospital and health care revenue bonds in the Fund. The
Arizona Legislature has in the past sought to enact health care cost control
legislation. Certain other health care regulatory laws have expired. It is
expected that the Arizona Legislature will at future sessions continue to
attempt to adopt legislation concerning health care cost control and related
regulatory matters. The effect of any such legislation or of the continued
absence of any legislation restricting hospital bed increases and limiting new
hospital construction on the ability of Arizona hospitals and other health care
providers to pay debt service on their revenue bonds cannot be determined at
this time.
Arizona does not participate in the federally administered Medicaid
program. Instead, the State administers an alternative program, AHCCCS, which
provides health care to indigent persons meeting certain financial eligibility
requirements through managed care programs. In fiscal year 1996, AHCCCS was
financed approximately 61% by Federal funds, 28% by State funds and 11% by
county funds.
Under State law, hospitals retain the authority to raise rates with
notification and review by, but not approval from, the Department of Health
Services. Hospitals in Arizona have experienced profitability problems along
with those in other states. At least two Phoenix based hospitals have defaulted
on or reported difficulties in meeting their bond obligations during the past
five years.
Insofar as tax-exempt Arizona investor-owned public utility pollution
control revenue bonds are concerned, the issuance of such bonds and the periodic
rate increases needed to cover operating costs and debt service are generally
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<PAGE> 88
subject to regulation by the Arizona Corporation Commission. On July 15, 1991,
several creditors of Tucson Electric Power Company ("Tucson Electric") filed
involuntary petitions under Chapter 11 of the U.S. Bankruptcy Code to force
Tucson Electric to reorganize under the supervision of the bankruptcy court. On
December 31, 1991, the Bankruptcy Court approved the utility's motion to dismiss
the July petition after five months of negotiations between Tucson Electric and
its creditors to restructure the utility's debt and other obligations. In
December 1992, Tucson Electric announced that it had completed financial
restructuring. In January 1993 Tucson Electric asked the Arizona Corporation
Commission for a 9.3% average rate increase. The Arizona Corporation Commission
approved a rate increase of 4.2%. Tucson Electric serves approximately 270,000
customers, primarily in the Tucson area. Inability of any regulated public
utility to secure necessary rate increases could adversely affect, to an
indeterminable extent, its ability to pay debt service on its pollution control
revenue bonds.
FACTORS PERTAINING TO FLORIDA
As described above, except to the extent the Florida Fund invests in
temporary investments, the Florida Fund will invest substantially all of its net
assets in Florida Municipal Obligations. The Florida Fund is therefore
susceptible to political, economic or regulatory factors affecting issuers of
Florida Municipal Obligations. The following information provides only a brief
summary of some of the complex factors affecting the financial situation in
Florida (the "State"). This information is derived from sources that are
generally available to investors and is believed to be accurate. It is based in
part on information obtained from various State and local agencies in Florida,
some of which information is related to periods prior to the onset of the recent
national recession, the effects of which are not necessarily reflected in the
information. No independent verification has been made of the accuracy or
completeness of the following information.
There can be no assurance that current or future statewide or regional
economic difficulties, and the resulting impact on State or local governmental
finances generally, will not adversely affect the market value of Florida
Municipal Obligations held in the portfolio of the Florida Fund or the ability
of particular obligors to make timely payments of debt service on (or relating
to) those obligations.
State Economy. Florida's economy tracked the national economy through the
recent national recession and subsequent recovery. While expected to decelerate
in the near-term, the State's economy is predicted to continue to outperform the
U.S. as a whole, driven by the service and trade sectors.
Since 1986, the State's job creation rate was well over twice the rate for
the nation as a whole. While the State's historically strong job growth rate
weakened somewhat in the 1980's, the non-farm growth rate is projected at 3.1%
in 1995-96, and 2.8% in 1996-97, reaching an average employment at the end of
1996-97 of 6.3 million. Trade and services account for more than half of total
non-farm employment. Trade-related employment is expected to expand 3.1% in
1995-96 and 2.5% in 1996-97, while service sector employment is expected to
increase 5.6% and 4.9% for the same periods. The State's unemployment rate is
currently projected to be 5.9% in both 1995-96, and 1996-97.
The State's economy has in the past been highly dependent on the
construction industry and construction-related manufacturing. While this
dependence has declined, construction remains an important sector. In 1995-96,
single and multi-family housing starts are projected to reach a combined level
of 117,500 units, but dropping to 108,900 in 1996-97.
The important tourism sector is expected to decline 4.7% in 1995-96
although various important tourist destinations report recent growth. 4.5%
growth is projected for 1996-97. In addition to lingering crime concerns,
analysts have pointed to "product maturity" of a Florida vacation package,
higher prices, and increasing competition from other resort areas to explain the
recent decline.
For 1995, the State's per capita personal income of $22,916 was slightly
above the national average of $22,788, and significantly ahead of that for the
southeastern United States, which was $20,645. Real personal income per capita
is expected to increase 2.9% in 1995-1996 and 1.9% in 1996-97 while real
personal income is expected to grow 4.7% in 1995-96 and 3.8% in 1996-97.
State Budget. In fiscal year 1994-95, approximately 66% of the State's
total direct revenue to its operating funds was derived from State taxes, with
Federal grants and other special revenue accounting for the balance. State sales
and use tax, corporate income tax, intangible personal property tax and beverage
tax amounted to 67%, 7%, 4% and 4%, respectively, of total receipts by the
General Revenue Fund during fiscal 1994-95. In that same year, expenditures for
education, health and welfare and public safety amounted to 49%, 32% and 11%,
respectively, of total expenditures from the General Revenue Fund. At the end of
fiscal 1994, $6.1 billion in principal amount of
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debt secured by the full faith and credit of the State was outstanding. As of
August 7, 1996, Florida's outstanding full faith and credit obligations totalled
approximately $10.3 billion.
1995-96 fiscal year. Currently estimated available revenues (estimated
revenues, plus the balance forwarded from 1994-95, transfers from other accounts
and other miscellaneous amounts) are approximately $15.3 billion, an increase of
3.3% over comparable 1994-95 figures. Estimated (revised) revenues of
approximately $14.5 billion represent an increase of 6.5% over comparable
1994-95 figures. Total effective appropriations for 1995-96 are $14.8 billion,
an increase of 3.5% over comparable 1994-95 figures.
1996-97 fiscal year. Preliminary estimated available revenues are now set
at $16.1 billion, an increase of 5.1% over comparable 1995-96 figures. Governor
Chiles has proposed his fiscal 1997-98 budget at $39.6 billion, without new tax
revenue. This represents a 1.0% increase over 1995-96. A supplemental budget
recommendation from the Governor has withdrawn approximately $58 million in
increased business fees included in the earlier proposal.
Revenue Generating Measures. Florida's Constitution allows the issuance of
full faith and credit bonds generally only upon approval of the electorate and
in an aggregate amount not exceeding 50% of the State's total tax revenues for
the preceding two years. A number of exceptions to the election requirement have
been enacted, allowing the issuance of full faith and credit bonds in addition
to a primary pledge of a separately identifiable revenue source for certain uses
such as road and bridge projects, education and environmental facilities and
projects.
In 1987, the State Legislature passed a major revenue enhancement bill
resulting in the largest tax increase in State history. In order to balance the
budget, as required by the State's Constitution, a 5% sales tax was imposed on
nearly all services sold or used in the State. However, the tax was challenged
by numerous national groups and repealed, effective January 1, 1988. At the same
time the tax was replaced by a one cent ($.01) increase, from 5% to 6%, in the
general sales tax on goods and rentals. The one cent ($.01) increase became
effective February 1, 1988. The sales and use tax currently accounts for the
State's single largest source of tax receipts. For the fiscal year ended June
30, 1995, sales and use tax receipts (exclusive of the tax on gasoline and
special fuels) totalled approximately $10.7 billion, an increase of
approximately 6.0% from fiscal year 1993-94.
In 1992, Florida voters approved a new constitutional amendment that limits
homestead (residential) property tax increases to the lower of 3% per year or
the increase in the consumer price index, until the next transfer of ownership
of the property. The cap took effect January 1, 1994, and could have an adverse
effect on local revenues, which are largely dependent on the property tax for
operating funds. Whether this measure will have any adverse effect on municipal
obligations is not known at this time.
In 1994, Florida voters approved another amendment to the Florida
Constitution which will limit the rate of growth of general state revenues
beginning in 1995 to the growth rate of personal income in Florida. If more
revenue is collected than permitted by the limit, the excess will be placed in
the "Budget Stabilization Fund" unless, the Legislature decides otherwise by a
two-thirds vote of both houses. The revenue limit is determined by multiplying
the average annual growth rate in Florida personal income over the previous five
years by the maximum amount permitted under the cap of the previous year. The
amendment does not limit the imposition of any tax nor does it repeal any
existing tax levy. It also has no direct impact on local taxation, but it may
affect the sharing of state revenues with local governments.
Another 1994 Florida constitutional amendment limits the application of the
"single subject" requirement used by the courts to test citizen initiative
constitutional proposals. Under the amendment, citizens' initiatives seeking to
limit the ability of government to increase taxes or otherwise raise revenue are
exempt from the single-subject restriction of the Florida Constitution. This
amendment will probably encourage further efforts to limit and cap the
government's revenue generating power.
In 1988, the State began its own lottery. State law requires that lottery
revenues be distributed 50% to the public in prizes, 38% for use in enhancing
education, and the balance, 12%, to retailers as commission for their services
and for administration of the lottery. While Florida's lottery remains in the
top five state lotteries, annual ticket sales have flattened at slightly less
than $2.2 billion; sales rose slightly in 1994-95 to approximately $2.19
billion, but fell 3% in 1995-96. Education has been receiving in excess of $800
million per year from lottery sales.
Litigation. Currently under litigation are several issues relating to State
actions or State taxes that put at risk substantial amounts of General Revenue
Fund monies. Accordingly, there is no assurance that the resolution of any of
such matters, individually or in the aggregate, will not have a material adverse
effect on the State's financial position. This discussion omits any case for
which the State's estimate of exposure is less than $50 million.
The Florida Supreme Court recently declared unconstitutional the $295
"impact fee" on cars purchased out of state and registered in Florida. Void from
its inception in 1990, the total cost to the state is estimated to be in excess
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of $180 million in real dollars being refunded plus losses of estimated revenue
collections through the next fiscal year.
The State recently settled virtually all pending lawsuits challenging
certain premium taxes imposed on certain motor vehicle service agreement
companies. The one remaining case is estimated to have a potential refund
exposure of approximately $150 million.
A challenge to the Florida intangible tax law, which currently raises over
$783 million per year, was recently resolved by a per curiam affirmance by the
United States Supreme Court of a Florida court decision upholding the tax. Other
challenges to that tax, involving refund claims in excess of $25 million for
later years, are now proceeding.
The State was challenged on its imposition of a gross receipts tax on
hospitals. The trial court denied the plaintiffs' refund request and upheld the
tax. An appeal is pending. The Florida Agency for Health Care Administration has
now calculated the cost to the State of an unfavorable result as approximately
$116 million.
The State has been involved in litigation relating to the implementation of
a Department of Health and Rehabilitative Services computer system. While the
trial court's dismissal of DHRS' motion to dismiss was pending appeal, the
parties jointly submitted the case to a Special Master, who recommended against
DHRS. If the appeal by DHRS is unsuccessful, the exposure to the State,
including accrued interest, is estimated at $50 million.
The constitutionality of the Public Medical Assistance Trust Fund's annual
assessment on revenue of certain out-patient facilities has been challenged. An
unfavorable outcome could expose the State to refund claims estimated at $70
million.
State Bond Rating. The State maintains a bond rating of Aa and AA from
Moody's and S&P, respectively, on the majority of its general obligation bonds,
although the rating of a particular series of revenue bonds relates primarily to
the project, facility or other revenue source from which such series derives
funds for repayment. See "Investment Objectives and Policies--Municipal
Obligations." It should also be noted that the creditworthiness of obligations
issued by local Florida issuers may be unrelated to the creditworthiness of
obligations issued by the State of Florida, and that there is no obligation on
the part of the State to make payment on such local obligations in the event of
default. At least one analyst has predicted that various fiscal factors,
including over-reliance on tourism, aging population, high crime rate, and an
unrealistic tax system, will combine to cause a drop in these ratings to the A
level by the end of the decade.
Other Issuers of Florida 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.
FACTORS PERTAINING TO PENNSYLVANIA
As described above, except to the extent the Pennsylvania Fund invests in
temporary investments, the Pennsylvania Fund will invest substantially all of
its net assets in Pennsylvania Municipal Obligations. The Pennsylvania Fund is
therefore susceptible to political, economic or regulatory factors affecting
issuers of Pennsylvania Municipal Obligations. Without intending to be complete,
the following briefly summarizes some of these difficulties and the current
financial situation, as well as some of the complex factors affecting the
financial situation in the Commonwealth of Pennsylvania (the "Commonwealth" or
"Pennsylvania"). It is derived from sources that are generally available to
investors and is based in part on information obtained from various agencies in
the Commonwealth. No independent verification has been made of the accuracy or
completeness of the following information.
Prospective investors should consider the financial difficulties and
pressures which the Commonwealth and certain of its municipal subdivisions have
undergone. Both the Commonwealth and the City of Philadelphia have historically
experienced significant revenue shortfalls. There can be no assurance that
current or future statewide or regional economic difficulties, and the resulting
impact on State or local governmental finances generally, will not adversely
affect the market value of Pennsylvania Municipal Obligations held in the
portfolio of the Pennsylvania Fund or the ability of particular obligors to make
timely payments of debt service on (or relating to) those obligations.
State Economy. Pennsylvania has been historically identified as a
heavy-industry state although that reputation has changed recently as the
industrial composition of the Commonwealth diversified when the coal, steel and
railroad industries began to decline. The major new sources of growth in
Pennsylvania are in the service sector,
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including trade, medical and the health services, education and financial
institutions. Pennsylvania's agricultural industries are also an important
component of the Commonwealth's economic structure, accounting for more than
$3.6 billion in crop and livestock products annually while agribusiness and food
related industries support $39 billion in economic activity annually.
Employment within the Commonwealth increased steadily from 1984 to 1990.
From 1991 to 1994, employment in the Commonwealth declined 1.2%. The change in
employment experienced in the Commonwealth during such periods is comparable to
the change in employment in the Middle Atlantic region of the United States.
Non-manufacturing employment in the Commonwealth has increased steadily since
1980 to its 1994 level of 82.0% of total Commonwealth employment. Manufacturing,
which contributed 18.0% of 1994 non-agricultural employment, has fallen behind
both the services sector and the trade sector as the largest single source of
employment within the Commonwealth. In 1994, the services sector accounted for
29.9% of all non-agricultural employment in the Commonwealth while the trade
sector accounted for 22.9%.
The Commonwealth recently experienced a slowdown in its economy. Moreover,
economic strengths and weaknesses vary in different parts of the Commonwealth.
In general, heavy industry and manufacturing have been facing increasing
competition from foreign producers. During 1995, the annual average unemployment
rate in Pennsylvania was 5.9% compared to 5.6% for the United States. For
January 1996 the unadjusted unemployment rate was 6.7% in the Commonwealth and
6.3% in the United States, while the seasonally adjusted unemployment rate for
the Commonwealth was 6.1% and for the United States was 5.8%.
State Budget. The Commonwealth operates under an annual budget that is
formulated and submitted for legislative approval by the Governor each February.
The Pennsylvania Constitution requires that the Governor's budget proposal
consist of three parts: (i) a balanced operating budget setting forth proposed
expenditures and estimated revenues from all sources and, if estimated revenues
and available surplus are less than proposed expenditures, recommending specific
additional sources of revenue sufficient to pay the deficiency; (ii) a capital
budget setting forth proposed expenditures to be financed from the proceeds of
obligations of the Commonwealth or its agencies or from operating funds; and
(iii) a financial plan for not less than the succeeding five fiscal years,
including for each year projected operating expenditures and estimated revenues
and projected expenditures for capital projects. The General Assembly may add,
change or delete any items in the budget prepared by the Governor, but the
Governor retains veto power over the individual appropriations passed by the
legislature. The Commonwealth's fiscal year begins on July 1 and ends on June
30.
All funds received by the Commonwealth are subject to appropriation in
specific amounts by the General Assembly or by executive authorization by the
Governor. Total appropriations enacted by the General Assembly may not exceed
the ensuing year's estimated revenues, plus (less) the unappropriated fund
balance (deficit) of the preceding year, except for constitutionally authorized
debt service payments. Appropriations from the principal operating funds of the
Commonwealth (the General Fund, the Motor License Fund and the State Lottery
Fund) are generally made for one fiscal year and are returned to the
unappropriated surplus of the fund if not spent or encumbered by the end of the
fiscal year. The Constitution specifies that a surplus of operating funds at the
end of a fiscal year must be appropriated for the ensuing year.
Pennsylvania uses the "fund" method of accounting for receipts and
disbursements. In the Commonwealth, over 150 funds have been established by
legislative enactment or in certain cases by administrative action for the
purpose of recording the receipt and disbursement of monies received by the
Commonwealth. Annual budgets are adopted each fiscal year for the principal
operating funds of the Commonwealth and several other special revenue funds.
Expenditures and encumbrances against these funds may only be made pursuant to
appropriation measures enacted by the General Assembly and approved by the
Governor. The General Fund, the Commonwealth's largest fund, receives all tax
revenues, non-tax revenues and federal grants and entitlements that are not
specified by law to be deposited elsewhere. The majority of the Commonwealth's
operating and administrative expenses are payable from the General Fund. Debt
service on all bond indebtedness of the Commonwealth, except that issued for
highway purposes or for the benefit of other special revenue funds, is payable
from the General Fund.
Financial information for the principal operating funds of the Commonwealth
are maintained on a budgetary basis of accounting, which is used for the purpose
of ensuring compliance with the enacted operating budget. The Commonwealth also
prepares annual financial statements in accordance with generally accepted
accounting principles ("GAAP"). Budgetary basis financial reports are based on a
modified cash basis of accounting as opposed to a modified accrual basis of
accounting prescribed by GAAP. Financial information is adjusted at fiscal
year-end to reflect appropriate accruals for financial reporting in conformity
with GAAP.
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Recent Financial Results. From fiscal 1984, when the Commonwealth first
prepared its financial statements on a GAAP basis, through fiscal 1989, the
Commonwealth reported a positive unreserved-undesignated fund balance for its
governmental fund types at each fiscal year end. Slowing economic growth during
1990, leading to a national economic recession beginning in fiscal 1991, reduced
revenue growth and increased costs of certain governmental programs and
contributed to negative unreserved-undesignated fund balances at the end of the
1990 and 1991 fiscal years. The negative unreserved-undesignated fund balance
was due largely to operating deficits in the General Fund and the State Lottery
Fund during those fiscal years. Actions taken during fiscal 1992 to bring the
General Fund back into balance, including tax increases and expenditure
restraints, resulted in a $1.1 billion reduction to the unreserved-undesignated
fund deficit for combined governmental fund types and a return to a positive
fund balance. Financial performance continued to improve during the 1993 and
1994 fiscal years. The fund balance for the governmental fund types increased
from $1,692.8 million on June 30, 1993, as restated, to $1,982.0 million on June
30, 1994, an increase of $289.2 million. An unreserved-undesignated fund balance
of $334.7 million was recorded for fiscal 1994 year end.
The Commonwealth experienced a $454 million General Fund deficit as of the
end of its 1991 fiscal year. The deficit reflected higher than budgeted
expenditures, below-estimate economic activity and growth rates of economic
indicators and total tax revenue shortfalls below those assumed in the enacted
budget. Rising demands on state programs caused by the economic recession,
particularly for medical assistance and cash assistance programs, and the
increased costs of special education programs and correction facilities and
programs, contributed to increased expenditures in fiscal 1991, while tax
revenues for the 1991 fiscal year were severely affected by the economic
recession. Total corporation tax receipts and sales and use tax receipts during
fiscal 1991 were, respectively, 7.3 percent and 0.9 percent below amounts
collected during fiscal 1990. Personal income tax receipts also were affected by
the recession but not to the extent of the other major General Fund taxes,
increasing only 2.0 percent over fiscal 1990 collections. A number of actions
were taken throughout the fiscal year by the Commonwealth to mitigate the
effects of the recession on budget revenues and expenditures. The Commonwealth
initiated a number of cost-saving measures, including the firing of 2,000 state
employees, deferral of paychecks and reduction of funds to state universities,
which resulted in approximately $871 million cost savings.
Actions taken during fiscal 1992 to bring the General Fund budget back into
balance, including tax increases and expenditure restraints, resulted in a $1.1
billion reduction for the unreserved-undesignated fund deficit for combined
governmental fund types and a return to a positive fund balance. Total general
fund revenues for fiscal 1992 were $14,516.8 million which is approximately 22
percent higher than fiscal 1991 revenues of $11,877.3 million due in large part
to tax increases. The increased revenues funded substantial increases in
education, social services and corrections programs. As a result of the tax
increases and certain appropriation lapses, fiscal 1992 ended with an $8.8
million surplus after having started the year with an unappropriated balance
deficit of $454 million.
Fiscal 1993 closed with revenues higher than anticipated and expenditures
approximately as projected, resulting in an ending unappropriated balance
surplus of $242.3 million. A deduction in the personal income tax rate in July
1992 and the one-time receipt of revenues from retroactive corporate tax
increases in fiscal 1992 were responsible, in part, for the low growth in fiscal
1993.
Financial performance continued to improve during fiscal 1994. Commonwealth
revenues during the 1994 fiscal year totaled $15,210.7 million, $38.6 million
above the fiscal year estimate, and 3.9 percent over Commonwealth revenues
during the 1993 fiscal year. The sales tax was an important contributor to the
higher than estimated revenues. The strength of collections from the sales tax
offset the lower than budgeted performance of the personal income tax that ended
the 1994 fiscal year $74.4 million below estimate. The shortfall in the personal
income tax was largely due to shortfalls in income not subject to withholding
such as interest, dividends and other income. Expenditures, excluding pooled
financing expenditures and net of all fiscal 1994 appropriation lapses, totaled
$14,934.4 million representing a 7.2 percent increase over fiscal 1993
expenditures. Medical assistance and prisons spending contributed to the rate of
spending growth for the 1994 fiscal year. The Commonwealth maintained an
operating balance on a budgetary basis for fiscal 1994 producing a fiscal year
ending unappropriated surplus of $335.8 million.
Commonwealth revenues for the 1995 fiscal year were above estimate and
exceeded fiscal year expenditures and encumbrances. Fiscal 1995 was the fourth
consecutive fiscal year the Commonwealth reported an increase in the fiscal
year-end unappropriated balance. Prior to reserves for transfer to the Tax
Stabilization Reserve Fund, the fiscal 1995 closing unappropriated surplus was
$540.0 million, an increase of $204.2 million over the fiscal 1994 closing
unappropriated surplus prior to transfers. Commonwealth revenues during the 1995
fiscal year were $459.4 million, 2.9 percent, above the estimate of revenues
used at the time the 1995 fiscal year budget was enacted. Corporation taxes
contributed $329.4 million of the additional receipts largely due to higher
receipts from the
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corporate net income tax. Fiscal 1995 revenues from the corporate net income tax
were 22.6 percent over collections in fiscal 1994 and include the effects of the
reduction of the tax rate from 12.25 percent to 11.99 percent that became
effective with tax years beginning on and after January 1, 1994. The sales and
use tax and miscellaneous revenues also showed strong year-over-year growth that
produced above-estimate revenue collections. Sales and use tax revenues were
$5,526.9 million, $128.8 million above the enacted budget estimate and 7.9
percent over fiscal 1994 collections. Tax receipts from both motor vehicle and
non-motor vehicle sales contributed to the higher collections. Miscellaneous
revenue collections for fiscal 1995 were $183.5 million, $44.9 million above
estimate and were largely due to additional investment earnings, escheat
revenues and other miscellaneous revenues.
Fiscal 1996 Budget. On June 30, 1995, the Governor signed a $16.2 billion
general fund budget, an increase of approximately 2.7 percent over the total
appropriations from Commonwealth revenues in the fiscal 1995 budget. The
appropriations increase for fiscal 1996 is one of the lowest rates in recent
years. Areas receiving the largest budgetary increases are medical assistance
and basic education. In addition, the budget accelerated corporate net income
tax rate reductions eliminated the inheritance tax paid by a surviving spouse on
jointly owned property, and made other business tax reductions.
Fiscal 1997 Budget. On February 6, 1996, the Governor submitted to the
General Assembly his fiscal 1997 budget that proposes $31.761 billion in total
spending including a $16.19 billion General Fund budget, a 0.2% decrease from
the fiscal 1996 budget. The proposed fiscal 1997 budget represents the first
time since 1970 that a Pennsylvania Governor has proposed a budget with less
spending than the prior year. The proposed fiscal 1997 budget contains modest
business tax reductions.
Debt Limits and Outstanding Debt. The Constitution of Pennsylvania permits
the issuance of the following types of debt: (i) debt to suppress insurrection
or rehabilitate areas affected by disaster; (ii) electorate approved debt; (iii)
debt for capital projects subject to an aggregate outstanding debt limit of 1.75
times the annual average tax revenues of the preceding five fiscal years; and
(iv) tax anticipation notes payable in the fiscal year of issuance.
Under the Pennsylvania Fiscal Code, the Auditor General is required
annually to certify to the Governor and the General Assembly certain information
regarding the Commonwealth's indebtedness. According to the February 29, 1996
Auditor General certificate, the average annual tax revenues deposited in all
funds in the five fiscal years ended June 30, 1995 was approximately $17.7
billion, and, therefore, the net debt limitation for the 1996 fiscal year is
$30.9 billion. Outstanding net debt totaled $3.9 billion at June 30, 1995,
approximately equal to the net debt at June 30, 1994. At February 29, 1996, the
amount of debt authorized to be issued, but not yet incurred was $16.5 billion.
Outstanding general obligation debt totaled $5,045.4 million at June 30,
1995, a decrease of $30.4 million from June 30, 1994. Over the ten-year period
ending June 30, 1995, total outstanding general obligation debt increased at an
annual rate of 1.1 percent. Within the most recent five-year period, outstanding
general obligation debt has grown at an annual rate of 1.7 percent.
Debt Ratings. All outstanding general obligation bonds of the Commonwealth
are rated AA- by S&P and A1 by Moody's.
City of Philadelphia. The City of Philadelphia is the largest city in the
Commonwealth with an estimated population of 1,585,577, according to the 1990
census. Philadelphia experienced a series of general fund deficits for fiscal
years 1988 through 1992 which have culminated in the City's present serious
financial difficulties. In its 1992 Comprehensive Annual Financial Report, the
City reported a cumulative general fund deficit of $71.4 million for fiscal year
1992.
In June 1991, the Pennsylvania legislature established the Pennsylvania
Intergovernmental Cooperation Authority ("PICA"), a five-member board to assist
Philadelphia in remedying fiscal emergencies. PICA is designed to provide
assistance through the issuance of funding debt and to make factual findings and
recommendations to Philadelphia concerning its budgetary and fiscal affairs. The
legislation empowers PICA to issue notes and bonds on behalf of Philadelphia,
and also authorizes Philadelphia to levy a one-percent sales tax, the proceeds
of which would be used to pay off the bonds. In return for PICA's fiscal
assistance, Philadelphia is required, among other things, to establish five-year
financial plans that include balanced annual budgets. Under the legislation, if
Philadelphia does not comply with such requirements, PICA may withhold bond
revenues and certain state funding. At this time, the City is operating under a
five-year fiscal plan approved by PICA on April 17, 1995. Technical
modifications were made to that plan as of July 12, 1995 and the revised plan,
incorporating such technical modifications, was approved by PICA on July 18,
1995. As of November 15, 1995, PICA has issued approximately $1,418.7 million of
its Special Tax Revenue Bonds.
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No further PICA bonds are to be issued by PICA for the purpose of financing
a capital project or deficit as the authority for such bond sales expired on
December 31, 1994. PICA's authority to issue debt for the purpose of financing a
cash flow deficit expires on December 31, 1996. Its ability to refund existing
outstanding debt is unrestricted.
In January 1993, Philadelphia anticipated a cumulative general fund budget
deficit of $57 million for the 1993 fiscal year. In response to the anticipated
deficit, the Mayor unveiled a financial plan eliminating the budget deficit for
the 1993 budget year through significant service cuts that included a plan to
privatize certain city-provided services. Due to an upsurge in tax receipts,
cost-cutting and additional PICA borrowings, Philadelphia completed the 1993
fiscal year with a balanced general fund budget. The audit findings for fiscal
year 1993 show a cumulative general fund surplus of approximately $3 million for
the fiscal year ended June 30, 1993.
In January 1994, the Mayor proposed a $2.3 billion city general fund budget
that included no tax increases, no significant service cuts and a series of
modest health and welfare program increases. At that time, the Mayor also
unveiled a $2.2 billion program (the "Philadelphia Economic Stimulus Program")
designed to stimulate Philadelphia's economy and stop the loss of 1,000 jobs a
month. In its 1994 Comprehensive Annual Financial Report, Philadelphia reported
a cumulative general fund surplus of approximately $15.4 million for the fiscal
year ended June 30, 1994, up from approximately $3 million as of June 30, 1993.
Philadelphia's preliminary unaudited General Fund financial statements at June
30, 1995 project a surplus approximating $59.6 million.
S&P's rating on Philadelphia's general obligation bonds is BBB-. Moody's
rating is currently Baa.
Litigation. The Commonwealth is a party to numerous lawsuits in which an
adverse final decision could materially affect the Commonwealth's governmental
operations and consequently its ability to pay debt service on its obligations.
The Commonwealth also faces tort claims made possible by the limited waiver of
sovereign immunity effected by Act 152, approved September 28, 1978, as amended.
Under Act 152, damages for any loss are limited to $250,000 per person and $1
million for each accident.
Other Issuers of Pennsylvania Municipal Obligations. There are a number of
state agencies, instrumentalities and political subdivisions of the Commonwealth
that issue Municipal Obligations, some of which may be conduit revenue
obligations payable from payments from private borrowers. These entities are
subject to various economic risks and uncertainties, and the credit quality of
the securities issued by them may vary considerably from the credit quality of
obligations backed by the full faith and credit of the Commonwealth.
FACTORS PERTAINING TO VIRGINIA
As described above, except to the extent the Virginia Fund invests in
temporary investments, the Virginia Fund will invest substantially all of its
net assets in Virginia Municipal Obligations. The Virginia Fund is therefore
susceptible to political, economic or regulatory factors affecting issuers of
Virginia Municipal Obligations. Without intending to be complete, the following
briefly summarizes some of these difficulties and the current financial
situation, as well as some of the complex factors affecting the financial
situation, in the Commonwealth of Virginia (the "Commonwealth" or "Virginia").
It is derived from sources that are generally available to investors and is
based in part on information obtained from various agencies in Virginia. No
independent verification has been made of the accuracy or completeness of the
following information.
There can be no assurance that current or future statewide or regional
economic difficulties, and the resulting impact on State or local governmental
finances generally, will not adversely affect the market value of Virginia
Municipal Obligations held in the portfolio of the Virginia Fund or the ability
of particular obligors to make timely payments of debt service on (or relating
to) those obligations.
The Commonwealth's financial condition is supported by a broad-based
economy, including manufacturing, tourism, agriculture, ports, mining and
fisheries. Manufacturing continues to be a major source of employment, ranking
behind only services, wholesale and retail trade, and government (federal, state
and local). Defense activity is an important component of Virginia's economy.
The Commonwealth accounted for 9.6 percent of all military and civilian U.S.
Department of Defense (DOD) employees and ranked first in per capita defense
spending in federal fiscal year 1994, while ranking second in total defense
spending. Northern Virginia and the Hampton Roads area accounted for 91.5
percent of DOD employment in Virginia in 1994. However, for federal fiscal year
1994, total DOD employment in Virginia decreased 2.2 percent from the previous
year and can be expected to continue to decline as previously announced base
closures are implemented and the military downsizes.
Economic growth continued in fiscal year 1995, mimicking neither the boom
of the late 1980's nor the 1990-1991 recession. Personal income continued to
rise in real terms during the first three quarters of the fiscal year but at
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only 1.1 percent in the first quarter of calendar year 1995. Employment
continued to give brighter news and unemployment dropped to 4.7 percent compared
to the national rate of 5.7 percent. While recent decisions by large private
firms to locate or expand in Virginia provide encouragement, additional company
downsizings and defense cutbacks have now been joined by the prospect of major
cuts in federal employment as threats to the Commonwealth's economic health.
Personal income figures for Virginia have generally followed national
trends. Changes in the Commonwealth personal income were generally higher than
the U.S. figures in the 1980's. Since then, the Commonwealth and the nation have
grown at similar rates. Virginia's per capita income of $22,501 for 1994 was 104
percent of the national figure, as in the previous two years. At 106 percent of
the South Atlantic region's per capita income for both 1993 and 1994, the ratio
remains lower than at any other time since 1980.
Virginia's nonagricultural employment has also reflected that of the
national economy. For fiscal year 1994 Virginia's nonagricultural employment
rose 2.3 percent, as did U.S. employment; however, the rate of growth was less
than the Commonwealth's 2.9 percent rate for the previous year. Total
nonagricultural employment for Virginia in June 1995 was a record high. During
the 1980's, the Commonwealth growth rate outpaced the nation, but since then it
has been close to the national average. The South Atlantic region continued to
outpace Virginia in growth of nonagricultural employment and seemed to be
widening the gap.
The unemployment picture brightened in Virginia in fiscal year 1995. For
the first 10 months of 1994, Virginia's unemployment rate of 5 percent was 21
percent below the national average of 6.3 percent. Virginia's unemployment rate
has typically been one of the lowest in the nation, largely as a result of the
balance found in Virginia's economy, and has remained consistently below the
national rate. Rates of unemployment in excess of 9 percent were found in
southwest Virginia where mining jobs have been lost and the lowest unemployment
rates were seen in the Northern Virginia, Charlottesville and Richmond areas at
under 4 percent.
Employment trends in Virginia have varied from sector to sector. The growth
patterns were similar to those in fiscal year 1994. Employment grew in seven of
ten sectors. This past fiscal year's growth was led by a 6.3 percent employment
jump in the construction sector and 5.4 percent in services. Federal civilian
employment slipped 2.3 percent, the result of continued defense cutbacks and an
effort to downsize. The drop in mining employment accelerated to 9.8 percent
from 7.7 percent in the previous year. Manufacturing has lost 25,100 jobs during
the five-year period beginning in 1991, emphasizing dramatic evidence of the
shift to a service economy from a goods-producing one. Employment trends also
varied among regions. All of the Commonwealth's metropolitan statistical areas
showed increased employment from fiscal year 1994 to fiscal year 1995, ranging
from .7 percent to 4.3 percent, with most employment increases being experienced
in metropolitan areas.
While Virginia has nearly completed an economic recovery from the 1990-91
recession, its period of eclipsing national and South Atlantic regional economic
outcomes may be over. In both measures of income and particularly of employment
the South Atlantic region seems to be gaining. Virginia continues to lead the
U.S. as a whole in per capita income but no longer exceeds the nation in
year-to-year changes in income and level of employment. The implementation of
announced defense cutbacks, the duration of the period of economic growth, and
the impact of potential cuts in federal spending are continuing sources of
concern. Dependence of Virginia's international trade upon tobacco exports is
worrisome for the long term. Growing interest in Virginia by major corporations
as a site for new facilities is the brightest hope for the future of the state
economy.
The Commonwealth of Virginia has historically operated on a fiscally
conservative basis and is required by its Constitution to have a balanced
biennial budget. At the end of the June 30, 1995 fiscal year, the General Fund
had an ending fund balance, computed on a budgetary cash basis, of $350.7
million, of which $151.6 million was in required reserves. $199.1 million of the
general fund balance was designated for expenditure during the next fiscal year,
leaving no undesignated, unreserved fund balance. This is the first year since
fiscal year 1991 that there has not been an undesignated fund balance at year
end. Computed on a modified accrual basis in accordance with generally accepted
accounting principles, the General Fund balance at the end of the fiscal year
ended June 30, 1995, was negative $86.4 million, compared with a General Fund
balance of $185.3 million at the end of the fiscal year ended June 30, 1994. The
fiscal year 1995 deficit in the General Fund is the result of a settlement and
subsequent ruling by the Virginia Supreme Court in the case of Harper v.
Department of Taxation relating to the tax treatment of federal retirees'
benefits.
As of June 30, 1995, total debt of the Commonwealth aggregated $9.3
billion. Of that amount, $2.7 billion was tax-supported. Outstanding general
obligation debt backed by the full faith and credit of the Commonwealth was $963
million at June 30, 1995. Of that amount, $524 million was also secured by
revenue producing capital projects.
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<PAGE> 96
The Virginia Constitution contains limits on the amount of general
obligation bonds which the Commonwealth can issue. These limits are
substantially in excess of current levels of outstanding bonds, and at June 30,
1995 would permit an additional total of approximately $6.0 billion of bonds
secured by revenue-producing projects and approximately $6.1 billion of
unsecured general obligation bonds for capital projects, with not more than
approximately $1.0 billion of the latter to be issued in any four-year period.
Bonds which are not secured by revenue-producing projects must be approved in a
state-wide election.
The Commonwealth of Virginia maintains a AAA bond rating from Standard &
Poor's Corporation, Moody's Investors Service and Fitch Investors Service on its
general obligation indebtedness, reflecting in part its sound fiscal management,
diversified economic base and low debt ratios. There can be no assurances that
these conditions will continue. Nor are these same conditions necessarily
applicable to securities which are not general obligations of the Commonwealth.
Securities issued by specific municipalities, governmental authorities or
similar issuers may be subject to economic risks or uncertainties peculiar to
the issuers of such securities or the sources from which they are to be paid,
and the credit quality of the securities issued by them may vary considerably
from the credit quality of obligations backed by the full faith and credit of
the Commonwealth.
CONSIDERATIONS RELATING TO FINANCIAL FUTURES AND OPTION CONTRACTS
Each of the Funds may purchase and sell financial futures contracts,
options on financial futures or related options for the purpose of hedging its
portfolio securities against declines in the value of such securities, and to
hedge against increases in the cost of securities the Fund intends to purchase.
To accomplish such hedging, a Fund may take an investment position in a futures
contract or in an option which is expected to move in the opposite direction
from the position being hedged. Futures or options utilized for hedging purposes
would either be based on an index of long-term Municipal Obligations (i.e.,
those with remaining maturities averaging 15-30 years) or relate to debt
securities whose prices are anticipated by Nuveen Advisory to correlate with the
prices of the Municipal Obligations owned by a Fund. The sale of financial
futures or the purchase of put options on financial futures or on debt
securities or indexes is a means of hedging against the risk that the value of
securities owned by a Fund may decline on account of an increase in interest
rates, and the purchase of financial futures or of call options on financial
futures or on debt securities or indexes is a means of hedging against increases
in the cost of the securities a Fund intends to purchase as a result of a
decline in interest rates. Writing a call option on a futures contract or on
debt securities or indexes may serve as a hedge against a modest decline in
prices of Municipal Obligations held in a Fund's portfolio, and writing a put
option on a futures contract or on debt securities or indexes may serve as a
partial hedge against an increase in the value of Municipal Obligations a Fund
intends to acquire. The writing of such options provides a hedge to the extent
of the premium received in the writing transaction. Regulations of the Commodity
Futures Trading Commission ("CFTC") applicable to the Funds require that
transactions in futures and options on futures be engaged in only for bona-fide
hedging purposes, or if the aggregate initial margin deposits and premiums paid
by that Fund do not exceed 5% of the market value of the Fund's assets. A Fund
will not purchase futures unless it has segregated cash, government securities
or high grade liquid debt equal to the contract price of the futures less any
margin on deposit, or unless the long futures position is covered by the sale of
a put option. A Fund will not sell futures unless the Fund owns the instruments
underlying the futures or owns options on such instruments or owns a portfolio
whose market price may be expected to move in tandem with the market price of
the instruments or index underlying the futures. In addition, each Fund is
subject to the tax requirement that less than 30% of its gross income may be
derived from the sale or disposition of securities held for less than three
months. With respect to its engaging in transactions involving the purchase or
writing of put and call options on debt securities or indexes, a Fund will not
purchase such options if more than 5% of its assets would be invested in the
premiums for such options, and it will only write "covered" or "secured"
options, wherein the securities or cash required to be delivered upon exercise
are held by a Fund, with such cash being maintained in a segregated account.
These requirements and limitations may limit a Fund's ability to engage in
hedging transactions.
Description of Financial Futures and Options. A futures contract is a
contract between a seller and a buyer for the sale and purchase of specified
property at a specified future date for a specified price. An option is a
contract that gives the holder of the option the right, but not the obligation,
to buy (in the case of a call option) specified property from, or to sell (in
the case of a put option) specified property to, the writer of the option for a
specified price during a specified period prior to the option's expiration.
Financial futures contracts and options cover specified debt securities (such as
U.S. Treasury securities) or indexes designed to correlate with price movements
in certain categories of debt securities. At least one exchange trades futures
contracts on an index designed to correlate with the long-term municipal bond
market. Financial futures contracts and options on financial futures contracts
are traded on exchanges regulated by the CFTC. Options on certain financial
instruments and financial indexes are traded in securities markets regulated by
the Securities and Exchange Commission. Although futures contracts and
S-15
<PAGE> 97
options on specified financial instruments call for settlement by delivery of
the financial instruments covered by the contracts, in most cases positions in
these contracts are closed out in cash by entering into offsetting, liquidating
or closing transactions. Index futures and options are designed for cash
settlement only.
Risks of Futures and Options Transactions. There are risks associated with
the use of futures contracts and options for hedging purposes. Investment in
futures contracts and options involves the risk of imperfect correlation between
movements in the price of the futures contract and options and the price of the
security being hedged. The hedge will not be fully effective where there is
imperfect correlation between the movements in the two financial instruments.
For example, if the price of the futures contract moves more than the price of
the hedged security, a Fund will experience either a loss or gain on the future
which is not completely offset by movements in the price of the hedged
securities. Further, even where perfect correlation between the price movements
does occur, a Fund will sustain a loss at least equal to the commissions on the
financial futures transaction. To compensate for imperfect corrections, the
Funds may purchase or sell futures contracts in a greater dollar amount than the
hedged securities if the volatility of the hedged securities is historically
greater than the volatility of the futures contracts. Conversely, the Funds may
purchase or sell fewer futures contracts if the volatility of the price of the
hedged securities is historically less than that of the futures contracts.
Because of low initial margin deposits made upon the opening of a futures
position, futures transactions involve substantial leverage. As a result,
relatively small movements in the price of the futures contract can result in
substantial unrealized gains or losses. Because the Funds will engage in the
purchase and sale of financial futures contracts solely for hedging purposes,
however, any losses incurred in connection therewith should, if the hedging
strategy is successful, be offset in whole or in part by increases in the value
of securities held by the Funds or decreases in the price of securities the
Funds intend to acquire.
The Funds expect to liquidate a majority of the financial futures contracts
they enter into through offsetting transactions on the applicable contract
market. There can be no assurance, however, that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be possible to close a futures position. In the event of adverse price
movements, the Funds would continue to be required to make daily cash payments
of variation margin. In such situations, if a Fund has insufficient cash, it may
be required to sell portfolio securities to meet daily variation margin
requirements at a time when it may be disadvantageous to do so. The inability to
close out futures positions also could have an adverse impact on a Fund's
ability to hedge its portfolio effectively and may expose the Fund to risk of
loss. The Funds will enter into a futures position only if, in the judgment of
Nuveen Advisory, there appears to be an actively traded secondary market for
such futures contracts.
The liquidity of a secondary market in a futures contract may be adversely
affected by "daily price fluctuation limits" established by commodity exchanges
which limit the amount of fluctuation in a futures contract price during a
single trading day. Once the daily limit has been reached in the contract, no
trades may be entered into at a price beyond the limit, thus preventing the
liquidation of open futures positions. Prices have in the past moved the daily
limit on a number of consecutive trading days.
The successful use of transactions in futures also depends on the ability
of Nuveen Advisory to forecast the direction and extent of interest rate
movements within a given time frame. To the extent these prices remain stable
during the period in which a futures contract is held by a Fund or moves in a
direction opposite to that anticipated, the Fund may realize a loss on the
hedging transaction which is not fully or partially offset by an increase in the
value of portfolio securities. As a result, the Fund's total return for such
period may be less than if it had not engaged in the hedging transaction.
The ability of each of the Funds to engage in transactions in futures
contracts may be limited by the federal income tax requirement that it have less
than 30% of its gross income derived from the sale or other disposition of stock
or securities held for less than three months. Gain from transactions in futures
contracts will be taxable to a Fund's shareholders partially as short-term and
partially as long-term capital gain.
TEMPORARY INVESTMENTS
The Joint Proxy Statement-Prospectus discusses briefly the ability of each
Fund to invest a portion of its assets in federally tax-exempt or taxable
"temporary investments." Temporary investments will not exceed 20% of any Fund's
assets except when made for defensive purposes. The Funds will invest only in
taxable temporary investments that are either U.S. Government securities or are
rated within the two highest grades by Moody's, S&P or Fitch, and mature within
one year from the date of purchase or carry a variable or floating rate of
interest.
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<PAGE> 98
The Funds may invest in the following federally tax-exempt temporary
investments:
Bond Anticipation Notes (BANs) are usually general obligations of state and
local governmental issuers which are sold to obtain interim financing for
projects that will eventually be funded through the sale of long-term debt
obligations or bonds. The ability of an issuer to meet its obligations on its
BANs is primarily dependent on the issuer's access to the long-term municipal
bond market and the likelihood that the proceeds of such bond sales will be used
to pay the principal and interest on the BANs.
Tax Anticipation Notes (TANs) are issued by state and local governments to
finance the current operations of such governments. Repayment is generally to be
derived from specific future tax revenues. Tax anticipation notes 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 as
those described above to commercial banks as evidence of borrowings. The
purposes for which the notes are issued are varied but they are frequently
issued to meet short-term working capital or capital-project needs. These notes
may have risks similar to the risks associated with TANs and RANs.
Tax-Exempt Commercial Paper (Municipal Paper) represents very short-term
unsecured, negotiable promissory notes, issued by states, municipalities and
their agencies. Payment of principal and interest on issues of municipal paper
may be made from various sources, to the extent the funds are available
therefrom. Maturities of municipal paper generally will be shorter than the
maturities of TANs, BANs or RANs. There is a limited secondary market for issues
of municipal paper.
Certain Municipal Obligations 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 these various types of notes as a group represent the major portion
of the tax-exempt note market, other types of notes are occasionally available
in the marketplace and each Fund may invest in such other types of notes to the
extent permitted under its investment objective, policies and limitations. Such
notes may be issued for different purposes and may be secured differently from
those mentioned above.
The Funds may also invest in the following taxable temporary investments:
U.S. Government Direct Obligations are issued by the United States Treasury
and include bills, notes and bonds.
-- Treasury bills are issued with maturities of up to one year. They are
issued in bearer form, are sold on a discount basis and are payable at
par value at maturity.
-- Treasury notes are longer-term interest bearing obligations with
original maturities of one to seven years.
-- Treasury bonds are longer-term interest-bearing obligations with
original maturities from five to thirty years.
U.S. Government Agencies Securities--Certain federal agencies have been
established as instrumentalities of the United States Government to supervise
and finance certain types of activities. These agencies include, but are not
limited to, the Bank for Cooperatives, Federal Land Banks, Federal Intermediate
Credit Banks, Federal Home Loan Banks, Federal National Mortgage Association,
Government National Mortgage Association, Export-Import Bank of the United
States, and Tennessee Valley Authority. Issues of these agencies, while not
direct obligations of the United States Government, are either backed by the
full faith and credit of the United States or are guaranteed by the Treasury or
supported by the issuing agencies' right to borrow from the Treasury. There can
be no assurance that the United States Government itself will pay interest and
principal on securities as to which it is not legally so obligated.
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<PAGE> 99
Certificates of Deposit (CDs)--A certificate of deposit is a negotiable
interest bearing instrument with a specific maturity. CDs are issued by banks in
exchange for the deposit of funds and normally can be traded in the secondary
market, prior to maturity. The Funds will only invest in U.S. dollar denominated
CDs issued by U.S. banks with assets of $1 billion or more.
Commercial Paper--Commercial paper is the term used to designate unsecured
short-term promissory notes issued by corporations. Maturities on these issues
vary from a few days to nine months. Commercial paper may be purchased from U.S.
corporations.
Other Corporate Obligations--The Funds may purchase notes, bonds and
debentures issued by corporations if at the time of purchase there is less than
one year remaining until maturity or if they carry a variable or floating rate
of interest.
Repurchase Agreements--A repurchase agreement is a contractual agreement
whereby the seller of securities (U.S. Government or Municipal Obligations)
agrees to repurchase the same security at a specified price on a future date
agreed upon by the parties. The agreed upon repurchase price determines the
yield during a Fund's holding period. Repurchase agreements are considered to be
loans collateralized by the underlying security that is the subject of the
repurchase contract. The Funds will only enter into repurchase agreements with
dealers, domestic banks or recognized financial institutions that in the opinion
of Nuveen Advisory present minimal credit risk. The risk to the Funds 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 Funds 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 Funds may be delayed or limited. Nuveen Advisory will monitor
the value of 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 the value always equals or exceeds the agreed upon price. In the
event the value of the collateral declined below the repurchase price, Nuveen
Advisory will demand additional collateral from the issuer to increase the value
of the collateral to at least that of the repurchase price. A Fund will not
invest more than 10% of its assets in repurchase agreements maturing in more
than seven days.
RATINGS OF INVESTMENTS
The four highest ratings of Moody's for Municipal Obligations are Aaa, Aa,
A and Baa. Municipal Obligations rated Aaa are judged to be of the "best
quality." The rating of Aa is assigned to Municipal Obligations which are of
"high quality by all standards," but as to which margins of protection or other
elements make long-term risks appear somewhat larger than in Aaa rated Municipal
Obligations. The Aaa and Aa rated Municipal Obligations comprise what are
generally known as "high grade bonds." Municipal Obligations that are rated A by
Moody's possess many favorable investment attributes and are considered upper
medium grade obligations. Factors giving security to principal and interest of A
rated Municipal Obligations are considered adequate, but elements may be
present, which suggest a susceptibility to impairment sometime in the future.
Municipal Obligations rated Baa by Moody's are considered medium grade
obligations (i.e., they are neither highly protected nor poorly secured). Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well. Moody's bond rating symbols may contain numerical
modifiers of a generic rating classification. The modifier 1 indicates that the
bond ranks at the high end of its category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks in the lower end of
its general rating category.
The four highest ratings of S&P for Municipal Obligations are AAA, AA, A
and BBB. Municipal Obligations rated AAA have a strong capacity to pay principal
and interest. The rating of AA indicates that capacity to pay principal and
interest is very strong and such bonds differ from AAA issues only in small
degree. The category of A describes bonds which have a strong capacity to pay
principal and interest, although such bonds are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions. The BBB
rating is the lowest "investment grade" security rating by S&P. Municipal
Obligations rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas such bonds normally exhibit adequate protection
parameters, adverse economic conditions are more likely to lead to a weakened
capacity to pay principal and interest for bonds in this category than for bonds
in the A category.
The four highest ratings of Fitch for Municipal Obligations are AAA, AA, A
and BBB. Municipal Obligations rated AAA are considered to be investment grade
and of the highest credit quality. The obligor has an exceptionally strong
ability to pay interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
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<PAGE> 100
Municipal Obligations rated AA are considered to be investment grade and of very
high quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA." Because Municipal
Obligations rated in the "AAA" and "AA" categories are not significantly
vulnerable to foreseeable future developments, short-term debt of these issuers
is generally rated "F-1+." Municipal Obligations rated A are considered to be
investment grade and of high credit quality. The obligor's ability to pay
interest and repay principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and circumstances than
bonds with higher ratings. Municipal Obligations rated BBB are considered to be
investment grade and of satisfactory credit quality. The obligor's ability to
pay interest and repay principal is considered to be adequate. Adverse changes
in economic conditions and circumstances, however, are more likely to have
adverse impact on these bonds, and therefore impair timely payment. The
likelihood that the ratings of these bonds will fall below investment grade is
higher than for bonds with higher ratings.
The "Other Corporate Obligations" category of temporary investments are
corporate (as opposed to municipal) debt obligations rated AAA by S&P or Aaa by
Moody's. Corporate debt obligations rated AAA by S&P have an extremely strong
capacity to pay principal and interest. The Moody's corporate debt rating of Aaa
is comparable to that set forth above for Municipal Obligations.
Subsequent to its purchase by a Fund, an issue may cease to be rated or its
rating may be reduced below the minimum required for purchase by such Fund.
Neither event requires the elimination of such obligation from the Fund's
portfolio, but Nuveen Advisory will consider such an event in its determination
of whether the Fund should continue to hold such obligation.
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<PAGE> 101
MANAGEMENT
The management of the Trust, including general supervision of the duties
performed for the Funds under the Investment Management Agreement, is the
responsibility of its Board of Trustees. The Trust currently has six trustees,
two of whom are "interested persons" (as the term "interested persons" is
defined in the Investment Company Act of 1940) and four of whom are
"disinterested persons." As noted in the Joint Proxy Statement -- Prospectus, at
and contingent upon the Flagship Acquisition, the size of the Board of Trustees
will be expanded to eight and R. Bremner and W. Schneider will take office and
serve as disinterested persons ("trustee-elect"). The names and business
addresses of the trustees and trustees-elect and officers of the Trust and their
principal occupations and other affiliations during the past five years are set
forth below as of July 31, 1996.
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND ADDRESS AGE OFFICES WITH TRUST DURING PAST FIVE YEARS
- ------------------------------- --- ---------------------- ---------------------------------------------------------------
<S> <C> <C> <C>
Timothy R. Schwertfeger*....... 47 Chairman and Trustee Chairman (since July 1996) and Director of The John Nuveen
333 West Wacker Drive Company, John Nuveen & Co. Incorporated, Nuveen Advisory Corp.
Chicago, IL 60606 and Nuveen Institutional Advisory Corp.; prior thereto
Executive Vice President of The John Nuveen Company, John
Nuveen & Co. Incorporated, Nuveen Advisory Corp. and Nuveen
Institutional Advisory Corp.
Anthony T. Dean*............... 51 President and Director and (since July 1996) President of The John Nuveen
333 West Wacker Drive Trustee Company, John Nuveen & Co. Incorporated, Nuveen Advisory Corp.
Chicago, IL 60606 and Nuveen Institutions Advisory Corp.; prior thereto,
Executive Vice President of The John Nuveen Company, John
Nuveen & Co. Incorporated, Nuveen Advisory Corp. and Nuveen
Institutional Advisory Corp.
Robert P. Bremner**............ 56 Trustee Private Investor and Management Consultant.
3725 Huntington Street, NW
Washington, DC 20015
Lawrence H. Brown.............. 61 Trustee Retired (August 1989) as Senior Vice President of The Northern
201 Michigan Avenue Trust Company.
Highwood, IL 60040
Anne E. Impellizzeri........... 63 Trustee President and Chief Executive Officer of Blanton-Peale
3 West 29th Street Institute (since December 1990); prior thereto, Vice President
New York, NY 10001 of New York City Partnership (from 1987 to 1990).
Margaret K. Rosenheim.......... 69 Trustee Helen Ross Professor of Social Welfare Policy, School of Social
969 East 60th Street Service Administration, University of Chicago.
Chicago, IL 60637
Peter R. Sawers................ 63 Trustee Adjunct Professor of Business and Economics, University of
22 The Landmark Dubuque, Iowa; Adjunct Professor, Lake Forest Graduate School
Northfield, IL 60093 of Management, Lake Forest, Illinois (since January 1992);
prior thereto, Executive Director, Towers Perrin Australia
(management consultant); Chartered Financial Analyst; Certified
Management Consultant.
William J. Schneider**......... 52 Trustee Senior Partner, Miller-Valentine Partners, Vice President,
4000 Miller-Valentine Ct. Miller- Valentine Realty, Inc.
P.O. Box 744
Dayton, OH 45401
William M. Fitzgerald.......... 32 Vice President Vice President of Nuveen Advisory Corp. (since December 1995);
333 West Wacker Drive Assistant Vice President of Nuveen Advisory Corp. (from
Chicago, IL 60606 September 1992 to December 1995), prior thereto Assistant
Portfolio Manager of Nuveen Advisory Corp. (from June 1988 to
September 1992).
Kathleen M. Flanagan........... 49 Vice President Vice President of John Nuveen & Co. Incorporated and (since
333 West Wacker Drive 1996) Vice President of Nuveen Advisory Corp. and Nuveen
Chicago, IL 60606 Institutional Advisory Corp.
J. Thomas Futrell.............. 41 Vice President Vice President of Nuveen Advisory Corp.
333 West Wacker Drive
Chicago, IL 60606
Steven J. Krupa................ 38 Vice President Vice President of Nuveen Advisory Corp.
333 West Wacker Drive
Chicago, IL 60606
Anna R. Kucinskis.............. 50 Vice President Vice President of John Nuveen & Co. Incorporated.
333 West Wacker Drive
Chicago, IL 60606
Larry W. Martin................ 45 Vice President and Vice President (since September 1992), Secretary and Assistant
333 West Wacker Drive Assistant Secretary General Counsel of John Nuveen & Co. Incorporated; Vice
Chicago, IL 60606 President (since May 1993) and Assistant Secretary of Nuveen
Advisory Corp; Vice President (since May 1993) and Assistant
Secretary (since January 1992) of Nuveen Institutional Advisory
Corp.; Assistant Secretary of The John Nuveen Company (since
February 1993).
</TABLE>
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<PAGE> 102
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND ADDRESS AGE OFFICES WITH TRUST DURING PAST FIVE YEARS
- ------------------------------- --- ---------------------- ---------------------------------------------------------------
<S> <C> <C> <C>
O. Walter Renfftlen............ 57 Vice President and Vice President and Controller of The John Nuveen Company (since
333 West Wacker Drive Controller March 1992), John Nuveen & Co. Incorporated, Nuveen Advisory
Chicago, IL 60606 Corp. and Nuveen Institutional Advisory Corp.
Thomas C. Spalding, Jr......... 45 Vice President Vice President of Nuveen Advisory Corp. and Nuveen
333 West Wacker Drive Institutional Advisory Corp.; Chartered Financial Analyst.
Chicago, IL 60606
H. William Stabenow............ 62 Vice President and Vice President and Treasurer of The John Nuveen Company (since
333 West Wacker Drive Treasurer March 1992), John Nuveen & Co. Incorporated, Nuveen Advisory
Chicago, IL 60606 Corp. and Nuveen Institutional Advisory Corp, (since January
1992).
James J. Wesolowski............ 46 Vice President and Vice President, General Counsel and Secretary of The John
333 West Wacker Drive Secretary Nuveen Company (since March 1992), John Nuveen & Co.
Chicago, IL 60606 Incorporated, Nuveen Advisory Corp. and Nuveen Institutional
Advisory Corp.
Gifford R. Zimmerman........... 39 Vice President and Vice President (since September 1992), Assistant Secretary and
333 West Wacker Drive Assistant Secretary Assistant General Counsel of John Nuveen & Co. Incorporated;
Chicago, IL 60606 Vice President (since May 1993) and Assistant Secretary of
Nuveen Advisory Corp.; Vice President (since May 1993) and
Assistant Secretary (since January 1992) of Nuveen
Institutional Advisory Corp.; Assistant Secretary of The John
Nuveen Company (since May 1994).
</TABLE>
- ------------------------
* "Interested Persons" of the Trust.
** Trustees-elect.
Anthony Dean, Margaret Rosenheim and Timothy Schwertfeger serve as members
of the Executive Committee of the Board of Trustees. The Executive Committee,
which meets between regular meetings of the Board of Trustees, is authorized to
exercise all of the powers of the Board of Trustees.
The following table sets forth estimated compensation to be paid or accrued
by the Trust to each of the trustees of the Trust for the first full fiscal year
and the total compensation that all Nuveen Funds paid to each trustee during the
calendar year 1995. The Trust has no retirement or pension plans. The officers
and trustees affiliated with Nuveen serve without any compensation from the
Trust.
<TABLE>
<CAPTION>
TOTAL
COMPENSATION
AGGREGATE FROM TRUST
COMPENSATION AND FUND COMPLEX
NAME OF TRUSTEE FROM THE TRUST PAID TO TRUSTEES
------------------------------------------------------------- -------------- ----------------
<S> <C> <C>
Robert P. Bremner............................................ --
Lawrence H. Brown............................................ $ 55,500
Anne E. Impellizzeri......................................... $ 63,000
Margaret K. Rosenheim........................................ $ 62,322(1)
Peter R. Sawers.............................................. $ 55,500
William J. Schneider......................................... --
</TABLE>
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(1) Includes $1,572 in interest accrued on deferred compensation from prior
years.
Each trustee who is not affiliated with Nuveen or Nuveen Advisory receives
a $45,000 annual retainer for serving as a board member of all funds sponsored
by Nuveen and managed by Nuveen Advisory and a $1,000 fee per day plus expenses
for attendance at all meetings held on a day on which a regularly scheduled
Board meeting is held, a $1,000 fee per day plus expenses for attendance in
person or a $500 fee per day plus expenses for attendance by telephone at a
meeting held on a day on which no regular Board meeting is held, and a $250 fee
per day plus expenses for attendance in person or by telephone at a meeting of
the executive committee. The annual retainer, fees and expenses are allocated
among the funds managed by Nuveen Advisory on the basis of relative net asset
sizes. The Trust has adopted a Directors' Deferred Compensation Plan pursuant to
which a trustee may elect to have all or a portion of the trustee's fee
deferred. Trustees may defer fees for any calendar year by the execution of a
Participation Agreement prior to the beginning of the calendar year during which
the trustee wishes to begin deferral. The Trust requires no employees other than
its officers, all of whom are compensated by Nuveen.
On October 16, 1996, all of the shares of each Fund were owned by Nuveen
Advisory.
INVESTMENT ADVISER AND INVESTMENT MANAGEMENT AGREEMENT
Nuveen Advisory Corp. acts as investment adviser for and manages the
investment and reinvestment of the assets of each of the Funds. Nuveen Advisory
also administers the Trust's business affairs, provides office facilities and
equipment and certain clerical, bookkeeping and administrative services, and
permits any of its officers or employees to serve without compensation as
trustees or officers of the Trust if elected to such positions.
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Pursuant to an investment management agreement between Nuveen Advisory and
the Trust, each Fund has agreed to pay an annual management fee at the rates set
forth below:
<TABLE>
<CAPTION>
MANAGEMENT
AVERAGE DAILY NET ASSET VALUE FEE
-------------------------------------------------------------------- -----------
<S> <C>
For the first $125 million.......................................... .5500 of 1%
For the next $125 million........................................... .5375 of 1%
For the next $250 million........................................... .5250 of 1%
For the next $500 million........................................... .5125 of 1%
For the next $1 billion............................................. .5000 of 1%
For net assets over $2 billion...................................... .4750 of 1%
</TABLE>
Nuveen Advisory is a wholly owned subsidiary of John Nuveen & Co.
Incorporated ("Nuveen"), the Funds' principal underwriter. Founded in 1898,
Nuveen is the oldest and largest investment banking firm specializing in the
underwriting and distribution of tax-exempt securities and maintains the largest
research department in the investment banking community devoted exclusively to
the analysis of municipal securities. In 1961, Nuveen began sponsoring the
Nuveen Tax-Exempt Unit Trust and since that time has issued more than $36
billion in tax-exempt unit trusts, including over $12 billion in tax-exempt
insured unit trusts. In addition, Nuveen open-end and closed-end funds held
approximately $31 billion in tax-exempt securities under management as of the
date of this Statement. Over 1,000,000 individuals have invested to date in
Nuveen's tax-exempt funds and trusts. Nuveen is a subsidiary of The John Nuveen
Company which, in turn, is approximately 78% owned by The St. Paul Companies,
Inc. ("St. Paul"). St. Paul is located in St. Paul, Minnesota and is principally
engaged in providing property-liability insurance through subsidiaries.
Nuveen Advisory's portfolio managers call upon the resources of Nuveen's
Research Department, the largest in the investment banking industry devoted
exclusively to tax-exempt securities. Nuveen's Research Department was selected
in 1996 by Research & Ratings Review, a municipal industry publication, as one
of the leading research teams in the municipal industry, based on an extensive
industry-wide poll of portfolio managers, department heads and bond buyers. The
Nuveen Research Department reviews more than $100 billion in tax-exempt bonds
every year.
The Funds, the other Nuveen funds, Nuveen Advisory, and other related
entities have adopted a code of ethics which essentially prohibits all Nuveen
fund management personnel, including Nuveen fund portfolio managers, from
engaging in personal investments which compete or interfere with, or attempt to
take advantage of, a Fund's anticipated or actual portfolio transactions, and is
designed to assure that the interests of Fund shareholders are placed before the
interests of Nuveen personnel in connection with personal investment
transactions.
PORTFOLIO TRANSACTIONS
Nuveen Advisory, in effecting purchases and sales of portfolio securities
for the account of each Fund, will place orders in such manner as, in the
opinion of management, will offer the best price and market for the execution of
each transaction. Portfolio securities will normally be purchased directly from
an underwriter or in the over-the-counter market from the principal dealers in
such securities, unless it appears that a better price or execution may be
obtained elsewhere. Portfolio securities will not be purchased from Nuveen or
its affiliates except in compliance with the Investment Company Act of 1940.
The Funds expect that all portfolio transactions will be effected on a
principal (as opposed to an agency) basis and, accordingly, do 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. Given the best price
and execution obtainable, it will be the practice of the Funds 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 Funds, 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.
Nuveen Advisory reserves the right to, and does, manage other investment
accounts and investment companies for other clients, which may have investment
objectives similar to the Funds. Subject to applicable laws and regulations,
Nuveen Advisory will attempt to allocate equitably portfolio transactions among
the Funds and the
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portfolios of its other clients purchasing or selling securities whenever
decisions are made to purchase or sell securities by a Fund and one or more of
such other clients simultaneously. In making such allocations the main factors
to be considered will be the respective investment objectives of the Fund and
such other clients, the relative size of portfolio holdings of the same or
comparable securities, the availability of cash for investment by the Fund and
such other clients, the size of investment commitments generally held by the
Fund and such other clients and opinions of the persons responsible for
recommending investments to the Fund and such other clients. While this
procedure could have a detrimental effect on the price or amount of the
securities available to a Fund from time to time, it is the opinion of the Board
of Trustees that the benefits available from Nuveen Advisory's organization will
outweigh any disadvantage that may arise from exposure to simultaneous
transactions.
Under the Investment Company Act of 1940, the Funds 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 Obligations purchased by a Fund, the amount of Municipal Obligations
which may be purchased in any one issue and the assets of a Fund which may be
invested in a particular issue. In addition, purchases of securities made
pursuant to the terms of the Rule must be approved at least quarterly by the
Board of Trustees, including a majority of the trustees who are not interested
persons of the Trust.
NET ASSET VALUE
As stated in the Joint Proxy Statement-Prospectus, the net asset value of
the shares of each Fund will be determined separately for each class of a Fund's
shares by State Street Bank and Trust Company, the Trust's custodian, as of the
close of trading (normally, 4:00 p.m. Eastern Time) on each day on which the New
York Stock Exchange (the "Exchange") is normally open for trading. The Exchange
is not open for trading on New Year's Day, Washington's Birthday, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
The net asset value per share of a class of shares of a Fund will be computed by
dividing the value of the Fund's assets attributable to the class, less the
liabilities attributable to the class, by the number of shares of the class
outstanding.
In determining net asset value for each of the Funds, the Trust's custodian
utilizes the valuations of portfolio securities furnished by a pricing service
approved by the trustees. The pricing service values portfolio securities at the
mean between the quoted bid and asked price or the yield equivalent when
quotations are readily available. Securities for which quotations are not
readily available (which constitute a majority of the securities held by these
Funds) are valued at fair value as determined by the pricing service using
methods which include consideration of the following: yields or prices of
municipal bonds of comparable quality, type of issue, coupon, maturity and
rating; indications as to value from dealers; and general market conditions. The
pricing service may employ electronic data processing techniques and/or a matrix
system to determine valuations. The procedures of the pricing service and its
valuations are reviewed by the officers of the Trust under the general
supervision of the Board of Trustees.
TAX MATTERS
FEDERAL INCOME TAX MATTERS
The following discussion of federal income tax matters is based upon the
advice of Vedder, Price, Kaufman & Kammholz.
Each Fund intends to qualify under Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code") for tax treatment as a regulated
investment company. In order to qualify as a regulated investment company, a
Fund must satisfy certain requirements relating to the source of its income,
diversification of its assets, and distributions of its income to shareholders.
First, a Fund must derive at least 90% of its annual gross income (including
tax-exempt interest) from dividends, interest, payments with respect to
securities loans, gains from the sale or other disposition of stock or
securities, foreign currencies or other income (including but not limited to
gains from options and futures) derived with respect to its business of
investing in such stock or securities (the "90% gross income test"). Second, a
Fund must derive less than 30% of its annual gross income from the sale or other
disposition of any of the following which was held for less than three months:
(i) stock or securities and (ii) certain options, futures, or forward contracts
(the "short-short test"). Third, a Fund must diversify its holdings so that, at
the close of each quarter of its taxable year, (i) at least 50% of the value of
its total assets is comprised of cash, cash items, United States Government
securities, securities of other regulated investment companies and other
securities limited in respect of any one issuer to an amount not greater in
value than 5% of the value of a Fund's total assets and to not more than 10% of
the outstanding voting securities of such issuer, and (ii) not more than 25% of
the value of the total assets is invested in the securities of any one issuer
(other than United States Government
S-23
<PAGE> 105
securities and securities of other regulated investment companies) or two or
more issuers controlled by a Fund and engaged in the same, similar or related
trades or businesses.
As a regulated investment company, a Fund will not be subject to federal
income tax in any taxable year for which it distributes at least 90% of the sum
of (i) its "investment company taxable income" (which includes dividends,
taxable interest, taxable original issue discount and market discount income,
income from securities lending, net short-term capital gain in excess of
long-term capital loss, and any other taxable income other than "net capital
gain" (as defined below) and is reduced by deductible expenses) and (ii) its net
tax-exempt interest (the excess of its gross tax-exempt interest income over
certain disallowed deductions). A Fund may retain for investment its net capital
gain (which consists of the excess of its net long-term capital gain over its
net short-term capital loss). However, if a Fund retains any net capital gain or
any investment company taxable income, it will be subject to tax at regular
corporate rates on the amount retained. If a Fund retains any capital gain, such
Fund 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 shares of such undistributed amount,
and (ii) will be entitled to credit their proportionate shares of the tax paid
by such Fund against their federal income tax liabilities if any, and to claim
refunds to the extent the credit exceeds such liabilities. For federal income
tax purposes, the tax basis of shares owned by a shareholder of the Fund will be
increased by an amount equal under current law to 65% of the amount of
undistributed capital gains included in the shareholder's gross income. Each
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, i.e., the excess of
net long-term capital gain over net short-term capital loss for any taxable
year, to elect (unless it has made a taxable year election for excise tax
purposes as discussed below) to treat all or part of any net capital loss, any
net long-term capital loss or any net foreign currency loss incurred after
October 31 as if they had been incurred in the succeeding year.
Each Fund also intends to satisfy conditions (including requirements as to
the proportion of its assets invested in Municipal Obligations) that will enable
it to designate distributions from the interest income generated by investments
in Municipal Obligations, which is exempt from regular federal income tax when
received by such Fund, as exempt-interest dividends. Shareholders receiving
exempt-interest dividends will not be subject to regular federal income tax on
the amount of such dividends. Insurance proceeds received by a Fund under any
insurance policies in respect of scheduled interest payments on defaulted
Municipal Obligations generally will be excludable from federal gross income
under Section 103(a) of the Code. In the case of non-appropriation by a
political subdivision, however, there can be no assurance that payments made by
the insurer representing interest on "non-appropriation" lease obligations will
be excludable from gross income for federal income tax purposes. See "Investment
Policies and Investment Portfolio; Portfolio Securities."
Distributions by each Fund of net interest received from certain taxable
temporary investments (such as certificates of deposit, commercial paper and
obligations of the U.S. Government, its agencies and instrumentalities) and net
short-term capital gains realized by a Fund, if any, will be taxable to
shareholders as ordinary income whether received in cash or additional shares.1
If a Fund purchases a Municipal Obligation at a market discount, any gain
realized by the Fund upon sale or redemption of the Municipal Obligation will be
treated as taxable interest income to the extent such gain does not exceed the
market discount, and any gain realized in excess of the market discount will be
treated as capital gains. Any net long-term capital gains realized by a Fund and
distributed to shareholders in cash or additional shares, will be taxable to
shareholders as long-term capital gains regardless of the length of time
investors have owned shares of a Fund. Distributions by a Fund that do not
constitute ordinary income dividends, exempt-interest dividends, or capital gain
dividends will be treated as a return of capital to the extent of (and in
reduction of) the 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.
- ---------------
(1)If a Fund has both tax-exempt and taxable income, it will use the
"average annual" method for determining the designated percentage that is
taxable income and designate the use of such method within 60 days after the
end of the Fund's taxable year. Under this method, one designated percentage is
applied uniformly to all distributions made during the Fund's taxable year.
The percentage of income designated as tax-exempt for any particular
distribution may be substantially different from the percentage of the Fund's
income that was tax-exempt during the period covered by the distribution.
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If any of the Funds engages in hedging transactions involving financial
futures and options, these transactions will be subject to special tax rules,
the effect of which may be to accelerate income to a Fund, defer a Fund's
losses, cause adjustments in the holding periods of a Fund's securities, convert
long-term capital gains into short-term capital gains and convert short-term
capital losses into long-term capital losses. These rules could therefore affect
the amount, timing and character of distributions to shareholders.
Because the taxable portion of each Fund's investment income consists
primarily of interest, none of its dividends, whether or not treated as
exempt-interest dividends, is expected to qualify under the Internal Revenue
Code for the dividends received deduction available to corporate shareholders.
Prior to purchasing shares in one of the Funds, the impact of dividends or
distributions which are expected to be or have been declared, but not paid,
should be carefully considered. 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 each Fund (and received
by the shareholders) on December 31.
The redemption or exchange of the shares of a Fund normally will result in
capital gain or loss to the shareholders. Generally, a shareholder's gain or
loss will be long-term gain or loss if the shares have been held for more than
one year. Present law taxes both long- and short-term capital gains of
corporations at the rates applicable to ordinary income. For non-corporate
taxpayers, however, net capital gains (i.e., the excess of net long-term capital
gain over net short-term capital loss) will be taxed at a maximum marginal rate
of 28%, while short-term capital gains and other ordinary income will be taxed
at a maximum marginal rate of 39.6%. 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 load paid in purchasing shares of a Fund 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 a Fund or another fund are subsequently acquired without payment of a
sales load pursuant to the reinvestment or exchange privilege. Any disregarded
portion of such load will result in an increase in the shareholder's tax basis
in the shares subsequently acquired. Moreover, losses recognized by a
shareholder on the redemption or exchange of shares of a Fund held for six
months or less are disallowed to the extent of any distribution of
exempt-interest dividends received with respect to such shares and, if not
disallowed, such losses are treated as long-term capital losses to the extent of
any distributions of long-term capital gains made with respect to such shares.
In addition, no loss will be allowed on the redemption or exchange of shares of
a Fund if the shareholder purchases other shares of such Fund (whether through
reinvestment of distributions or otherwise) or the shareholder acquires or
enters into a contract or option to acquire securities that are substantially
identical to shares of a Fund within a period of 61 days beginning 30 days
before and ending 30 days after such redemption or exchange. If disallowed, the
loss will be reflected in an adjustment to the basis of the shares acquired.
It may not be advantageous from a tax perspective for shareholders to
redeem or exchange shares after tax-exempt income has accrued but before the
record date for the exempt-interest dividend representing the distribution of
such income. Because such accrued tax-exempt income is included in the net asset
value per share (which equals the redemption or exchange value), such a
redemption could result in treatment of the portion of the sales or redemption
proceeds equal to the accrued tax-exempt interest as taxable gain (to the extent
the redemption or exchange price exceeds the shareholder's tax basis in the
shares disposed of) rather than tax-exempt interest.
In order to avoid a 4% federal excise tax, each Fund must distribute or be
deemed to have distributed by December 31 of each calendar year at least 98% of
its taxable ordinary income for such year, at least 98% of the excess of its
realized capital gains over its realized capital losses (generally computed on
the basis of the one-year period ending on October 31 of such year) and 100% of
any taxable ordinary income and the excess of realized capital gains over
realized capital losses for the prior year that was not distributed during such
year and on which such 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 Funds intend to make timely distributions in
compliance with these requirements and consequently it is anticipated that they
generally will not be required to pay the excise tax.
If in any year a Fund should fail to qualify under Subchapter M for tax
treatment as a regulated investment company, the Fund would incur a regular
corporate federal income tax upon its income for that year (other than
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interest income from Municipal Obligations), and distributions to its
shareholders would be taxable to shareholders as ordinary dividend income for
federal income tax purposes to the extent of the Fund's available earnings and
profits.
Among the requirements that a Fund must meet in order to qualify under
Subchapter M in any year is that less than 30% of its gross income must be
derived from the sale or other disposition of securities and certain other
assets held for less than three months.
Because the Funds may invest in private activity bonds, the interest on
which is not federally tax-exempt to persons who are "substantial users" of the
facilities financed by such bonds or "related persons" of such "substantial
users," the Funds may not be an appropriate investment for shareholders who are
considered either a "substantial user" or a "related person" within the meaning
of the Code. For additional information, investors should consult their tax
advisers before investing in one of the Funds.
Federal tax law imposes an alternative minimum tax with respect to both
corporations and individuals. Interest on certain Municipal Obligations, such as
bonds issued to make loans for housing purposes or to private entities (but not
for certain tax-exempt organizations such as universities and non-profit
hospitals), is included as an item of tax preference in determining the amount
of a taxpayer's alternative minimum taxable income. To the extent that a Fund
receives income from Municipal Obligations subject to the federal alternative
minimum tax, a portion of the dividends paid by it, although otherwise exempt
from federal income tax, will be taxable to shareholders to the extent that
their tax liability is determined under the alternative minimum tax regime. The
Funds will annually supply shareholders with a report indicating the percentage
of Fund income attributable to Municipal Obligations subject to the federal
alternative minimum tax.
In addition, the alternative minimum taxable income for corporations is
increased by 75% of the difference between an alternative measure of income
("adjusted current earnings") and the amount otherwise determined to be the
alternative minimum taxable income. Interest on all Municipal Obligations, and
therefore all distributions by the Funds that would otherwise be tax-exempt, is
included in calculating a corporation's adjusted current earnings.
Tax-exempt income, including exempt-interest dividends paid by the Fund,
will be added to the taxable income of individuals receiving social security or
railroad retirement benefits in determining whether a portion of that benefit
will be subject to federal income tax.
The Code requires that interest on indebtedness incurred or continued to
purchase or carry shares of any Fund is not deductible. Under rules used by the
IRS for determining when borrowed funds are considered used for the purpose of
purchasing or carrying particular assets, the purchase of shares of a Fund may
be considered to have been made with borrowed funds even though such funds are
not directly traceable to the purchase of shares.
The Funds are 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 Funds their correct taxpayer identification number (in
the case of individuals, their social security number) and certain
certifications, or who are otherwise subject to backup withholding.
The foregoing is a general and abbreviated summary of the provisions of the
Code and Treasury Regulations presently in effect as they directly govern the
taxation of the Funds and their 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. Shareholders are advised to consult their own tax advisers for
more detailed information concerning the federal taxation of the Funds and the
tax consequences to their shareholders.
STATE TAX MATTERS
The following state tax information applicable to each Fund and its
shareholders is based upon the advice of each Fund's special state tax counsel,
and represents a summary of certain provisions of each state's tax laws
presently in effect. These provisions are subject to change by legislative or
administrative action, which may be applied retroactively to Fund transactions.
You should consult your own tax adviser for more detailed information concerning
state taxes to which you may be subject.
NUVEEN FLAGSHIP ARIZONA MUNICIPAL BOND FUND
The following is based upon the advice of Chapman and Cutler, special state
tax counsel to the Arizona Fund.
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Assuming that the Arizona Fund qualifies as a "regulated investment
company" for federal income tax purposes under Subchapter M of the Code and that
amounts so designated by the Arizona Fund to its shareholders qualify as
"exempt-interest dividends" under Section 852(b)(5) of the Code, such
exempt-interest dividends attributable to Arizona Municipal Obligations will be
exempt from Arizona income tax when received by a shareholder of the Arizona
Fund to the same extent as interest on the Arizona Municipal Obligations would
be exempt from Arizona income tax if received directly by such shareholder.
Other dividends by the Arizona Fund, including capital gain distributions, if
any, or additional amounts includable in the gross income of the shareholders
for federal income tax purposes (including gains realized upon the redemption or
exchange of shares of the Fund) will be subject to Arizona income tax.
Assuming that the Arizona Fund will be classified as a "diversified
management company" under Section 5(b)(1) of the Investment Company Act of 1940
and registered as such thereunder, the Arizona Fund will be exempt from Arizona
income tax.
Interest on indebtedness incurred or continued by a shareholder in
connection with the purchase or carrying of shares in the Arizona Fund will not
be deductible for Arizona income tax purposes. Neither the Arizona Municipal
Obligations purchased by the Arizona Fund nor the shares in the Arizona Fund
owned by a shareholder will be subject to Arizona property taxes, sales or use
taxes.
Chapman and Cutler has expressed no opinion with respect to taxation under
any other provision of Arizona law. Ownership of the Units may result in
collateral Arizona tax consequences to certain taxpayers. Prospective investors
should consult their tax advisors as to the applicability of any such collateral
consequences.
NUVEEN FLAGSHIP FLORIDA MUNICIPAL BOND FUND
The following is based upon the advice of Baker & McKenzie, special state
tax counsel to the Florida Fund.
Florida does not impose an income tax on individuals. All corporate
shareholders will be subject to Florida income taxation on (a) their apportioned
share of the income characterized as business income of such shareholders under
the Florida Income Tax Code ("Florida Code") realized by the Florida Fund and
distributed to them notwithstanding the tax exempt character of the interest
received from Florida Municipal Obligations under Section 103(a) of the Code or
any other federal law and (b) on gains realized from a redemption or exchange of
the Florida Fund shares to the extent characterized as business income. Only a
corporate shareholder that has its commercial domicile in Florida will be
taxable under the Florida Code on its respective share of the Florida Fund's
capital gains and interest income that constitute nonbusiness income of such
shareholder and that is distributed to it, and on gains realized from a
redemption or exchange of the Florida Fund shares that constitute nonbusiness
income. Certain trusts, excluding private and testamentary trusts, may be
subject to the Florida corporate income tax.
Neither the Florida Fund nor its shareholders will be subject to the
Florida intangible personal property tax on Florida Municipal Obligations or the
Shares of the Florida Fund, respectively, with respect to any calendar year so
long as at the close of the preceding calendar year and on January 1 of the then
current year, the Florida Fund's portfolio of assets consisted solely of Florida
Municipal Obligations or other assets exempt from the Florida intangible
personal property tax. If the Florida Fund holds any other types of assets on
that date, then the entire value of the Fund's shares (except for the portion of
the value of the shares attributable to U.S. Government Obligations) will be
subject to the intangible personal property tax.
Shares of the Florida Fund will be subject to Florida estate tax only if
owned by Florida residents, certain natural persons not residents of Florida, or
certain natural persons not residents of the United States. The Florida estate
tax is limited, however, to the amount of the credit allowable under the
applicable Federal Revenue Act (currently Section 2011 and in some cases Section
2102 of the Code) for state death taxes actually paid to the several states.
For Florida state income tax purposes, the Florida Fund should not be
liable for Florida corporate income tax imposed by the Florida Code so long as
the Florida Fund does not have taxable nexus with Florida. Assuming that the
Fund will not have an office or other place of business in Florida, nor any
employees or salespersons in Florida, nor any tangible property in Florida, nor
any private loans secured by a mortgage, deed of trust or other lien on real or
tangible personal property there should be no taxable nexus with Florida for
corporate income tax purposes. If there is taxable nexus with Florida, the
Florida Fund's "taxable income" will be its investment company taxable income,
increased by the excess of net long-term capital gains for the year over the
amount of capital gain dividends attributable to the year.
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Shares of the Florida Fund will not be subject to the Florida ad valorem
property tax or Florida sales and use tax, assuming the Florida Fund owns no
Florida tangible property. The transfer of the Fund Shares will not be subject
to the Florida Documentary Stamp Tax.
NUVEEN FLAGSHIP PENNSYLVANIA MUNICIPAL BOND FUND
The following is based upon the advice of Dechert Price & Rhoads, special
state tax counsel to the Pennsylvania Fund.
Shares of the Pennsylvania Fund are not subject to any of the personal
property taxes presently in effect in Pennsylvania to the extent of that
proportion of the Pennsylvania Fund represented by Pennsylvania Municipal
Obligations. The taxes referred to above include the County Personal Property
Tax, the additional personal property taxes imposed on Pittsburgh residents by
the School District of Pittsburgh and by the City of Pittsburgh. Shares of the
Pennsylvania Fund may be taxable under the Pennsylvania inheritance and estate
taxes.
The proportion of interest income representing interest income from
Pennsylvania Municipal Obligations received by the Fund and distributed to
shareholders of the Pennsylvania Fund is not taxable under the Pennsylvania
Personal Income Tax or under the Corporate Net Income Tax, nor will such
interest be taxable under the Philadelphia School District Investment Income Tax
imposed on Philadelphia resident individuals.
The disposition by the Pennsylvania Fund of a Pennsylvania Municipal
Obligation (whether by sale, exchange, redemption or payment at maturity), as
well as the distribution of the proceeds of such disposition, will not
constitute a taxable event to a shareholder under the Pennsylvania Personal
Income Tax if the Pennsylvania Municipal Obligation was issued prior to February
1, 1994. Further, although there is no published authority on the subject,
special Pennsylvania counsel is of the opinion that (i) a shareholder of the
Pennsylvania Fund will not have a taxable event under the Pennsylvania state and
local income taxes referred to in the preceding paragraph (other than the
Corporate Net Income Tax) upon the redemption or exchange of his or her shares
to the extent that the Pennsylvania Fund is then composed of Pennsylvania
Municipal Obligations issued prior to February 1, 1994 and (ii) the dispositions
by the Pennsylvania Fund of a Pennsylvania Municipal Obligations (whether by
sale, exchange, redemption or payment at maturity), as well as the distribution
of the proceeds of such disposition, will not constitute a taxable event to a
shareholder under the Philadelphia School District Investment Income Tax if the
Pennsylvania Municipal Obligation was issued prior to February 1, 1994. (The
School District tax has no application to gain on the disposition of property
held by the taxpayer for more than six months.)
The Pennsylvania Fund is not subject to the Pennsylvania Corporate Net
Income Tax or Capital Stock-Franchise Tax.
If a shareholder is a corporation subject to the Pennsylvania Capital
Stock-Franchise Tax, the value of the Pennsylvania Fund shares owned by such
shareholder and income derived from their ownership may be taken into account in
determining the "capital stock value" of such shareholder.
NUVEEN FLAGSHIP VIRGINIA MUNICIPAL BOND FUND
The following is based upon the advice of Christian & Barton, L.L.P.,
special state tax counsel to the Virginia Fund. It assumes that the Virginia
Fund qualifies for treatment as a regulated investment company under Subchapter
M of the Code, that it will satisfy conditions that will enable it to avoid
liability for federal income taxation on its investment income, that it will
designate distributions from the income generated by the Virginia Municipal
Obligations as exempt-interest dividends and that amounts so designated qualify
as exempt-interest dividends under the Code.
Under existing Virginia law, as long as the Virginia Fund qualifies as a
regulated investment company under the Code, it will be exempt from Virginia
income taxation and dividends received from the Virginia Fund that are allocable
to interest received by the Virginia Fund on Virginia Municipal Obligations will
be exempt from Virginia income taxes.
In this regard, notwithstanding the fact that income on certain of the
obligations in the Virginia Fund may be subject to federal income taxes,
interest on certain federal obligations is exempt from Virginia income taxation.
Distributions to shareholders that are attributable to interest on federal
obligations that are exempt from Virginia income taxation would be exempt from
Virginia income taxes. Further, to the extent distributions to shareholders are
attributable to interest on Municipal Obligations other than Virginia Municipal
Obligations, such distributions will be included in the shareholder's Virginia
taxable income.
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As a general rule, to the extent that gain (whether as a result of the sale
of Virginia Municipal Obligations by the Virginia Fund or as a result of the
redemption or exchange of a share by the shareholder) is subject to federal
income tax, such gain will be included in the shareholder's Virginia taxable
income. Under the language of certain enabling legislation, however, such as the
Virginia Industrial Development and Revenue Bond Act, the Virginia Resources
Authority Act and the Virginia Housing Development Authority Act, gain made on
the sale of obligations issued thereunder is expressly exempt from Virginia
income taxation. Distributions to shareholders that are attributable to such
gain would be exempt from Virginia income taxes.
Although certain counties and cities in the Commonwealth are authorized to
levy a local income tax upon Virginia taxable income, to date, none has
undertaken to do so.
The Commonwealth does not impose a gift tax. The Commonwealth imposes an
estate tax on the transfer of a resident's federal taxable estate and a
non-resident's federal taxable estate located in the Commonwealth.
PERFORMANCE INFORMATION
The historical investment performance of the Funds may be shown in the form
of "yield," "taxable equivalent yield," "average annual total return,"
"cumulative total return" and "taxable equivalent total return" figures, each of
which will be calculated separately for each class of shares.
In accordance with a standardized method prescribed by rules of the
Securities and Exchange Commission ("SEC"), yield is computed by dividing the
net investment income per share earned during the specified one month or 30-day
period by the maximum offering price per share on the last day of the period,
according to the following formula:
a-b 6
Yield = 2 [(--- +1) - 1]
cd
In the above formula, a = dividends and interest earned during the period;
b = expenses accrued for the period (net of reimbursements); c = the average
daily number of shares outstanding during the period that were entitled to
receive dividends; and d = the maximum offering price per share on the last day
of the period. In the case of Class A shares, the maximum offering price
includes the current maximum sales charge of 4.20%.
In computing yield, the Funds follow certain standardized accounting
practices specified by SEC rules. These practices are not necessarily consistent
with those that the Funds use to prepare their annual and interim financial
statements in conformity with generally accepted accounting principles. Thus,
yield may not equal the income paid to shareholders or the income reported in a
Fund's financial statements.
Taxable equivalent yield is computed by dividing that portion of the yield
which is tax-exempt by the remainder of (1 minus the stated combined federal and
state income tax rate, taking into account the deductibility of state taxes for
federal income tax purposes) and adding the product to that portion, if any, of
the yield that is not tax exempt.
Each Fund may from time to time in its advertising and sales materials
report a quotation of the current distribution rate. The distribution rate
represents a measure of dividends distributed for a specified period.
Distribution rate is computed by taking the most recent monthly tax-free income
dividend per share, multiplying it by 12 to annualize it, and dividing by the
appropriate price per share (e.g., net asset value for purchases to be made
without a load such as reinvestments from Nuveen UITs, or the maximum public
offering price). The distribution rate differs from yield and total return and
therefore is not intended to be a complete measure of performance. Distribution
rate may sometimes be higher than yield because it may not include the effect of
amortization of bond premiums to the extent such premiums arise after the bonds
were purchased.
Average annual total return quotation is computed in accordance with a
standardized method prescribed by SEC rules. The average annual total return for
a specific period is found by taking a hypothetical, $1,000 investment ("initial
investment") in Fund shares on the first day of the period, reducing the amount
to reflect the maximum sales charge, and computing the "redeemable value" of
that investment at the end of the period. The redeemable value is then divided
by the initial investment, and this quotient is taken to the Nth root (N
representing the number of years in the period) and 1 is subtracted from the
result, which is then expressed as a percentage. The calculation assumes that
all income and capital gains distributions have been reinvested in Fund shares
at net asset value on the reinvestment dates during the period.
Calculation of cumulative total return is not subject to a prescribed
formula. Cumulative total return for a specific period is calculated by first
taking a hypothetical initial investment in Fund shares on the first day of the
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period, deducting (in some cases) the maximum sales charge, and computing the
"redeemable value" of that investment at the end of the period. The cumulative
total return percentage is then determined by subtracting the initial investment
from the redeemable value and dividing the remainder by the initial investment
and expressing the result as a percentage. The calculation assumes that all
income and capital gains distributions by the Fund have been reinvested at net
asset value on the reinvestment dates during the period. Cumulative total return
may also be shown as the increased dollar value of the hypothetical investment
over the period. Cumulative total return calculations that do not include the
effect of the sales charge would be reduced if such charge were included.
Calculation of taxable equivalent total return is also not subject to a
prescribed formula. Taxable equivalent total return for a specific period is
calculated by first taking a hypothetical initial investment in Fund shares on
the first day of the period, computing the total return for each calendar year
in the period in the manner described above, and increasing the total return for
each such calendar year by the amount of additional income that a taxable fund
would need to have generated to equal the income on an after-tax basis, at a
specified income tax rate (usually the highest marginal federal tax rate),
calculated as described above under the discussion of "taxable equivalent
yield." The resulting amount for the calendar year is then divided by the
initial investment amount to arrive at a "taxable equivalent total return
factor" for the calendar year. The taxable equivalent total return factors for
all the calendar years are then multiplied together and the result is then
annualized by taking its Nth root (N representing the number of years in the
period) and subtracting 1, which provides a taxable equivalent total return
expressed as a percentage.
From time to time, a Fund may compare its risk-adjusted performance with
other investments that may provide different levels of risk and return. For
example, a Fund may compare its risk level, as measured by the variability of
its periodic returns, or its RISK-ADJUSTED TOTAL RETURN, with those of other
funds or groups of funds. Risk-adjusted total return would be calculated by
adjusting each investment's total return to account for the risk level of the
investment.
A Fund may also compare its TAX-ADJUSTED TOTAL RETURN with that of other
funds or groups of funds. This measure would take into account the tax-exempt
nature of exempt-interest dividends and the payment of income taxes on a fund's
distributions of net realized capital gains and ordinary income.
The risk level for a class of shares of a Fund, and any of the other
investments used for comparison, would be evaluated by measuring the variability
of the investment's return, as indicated by the annualized standard deviation of
the investment's monthly returns over a specified measurement period (e.g.,
three years). An investment with a higher annualized standard deviation of
monthly returns would indicate that a fund had greater price variability, and
therefore greater risk, than an investment with a lower annualized standard
deviation.
THE RISK-ADJUSTED TOTAL RETURN for a class of shares of a Fund and for
other investments over a specified period would be evaluated by dividing (a) the
remainder of the investment's annualized three-year total return minus the
annualized total return of an investment in short-term tax-exempt securities
(essentially a risk-free return) over that period, by (b) the annualized
standard deviation of the investment's monthly returns for the period. This
ratio is sometimes referred to as the "Sharpe measure" of return. An investment
with a higher Sharpe measure would be regarded as producing a higher return for
the amount of risk assumed during the measurement period than an investment with
a lower Sharpe measure.
Class A Shares of the Funds are sold at net asset value plus a current
maximum sales charge of 4.50% of the offering price. This current maximum sales
charge will typically be used for purposes of calculating performance figures.
Yield, returns and net asset value of each class of shares of the Funds will
fluctuate. Factors affecting the performance of the Funds include general market
conditions, operating expenses and investment management. Any additional fees
charged by a securities representative or other financial services firm would
reduce returns described in this section. Shares of the Funds are redeemable at
net asset value, which may be more or less than original cost.
In reports or other communications to shareholders or in advertising and
sales literature, the Funds may also compare their performance with that of: (1)
the Consumer Price Index or various unmanaged bond indexes such as the Lehman
Brothers Municipal Bond Index and the Salomon Brothers High Grade Corporate Bond
Index and (2) other fixed income or municipal bond mutual funds or mutual fund
indexes as reported by Lipper Analytical Services, Inc. ("Lipper"), Morningstar,
Inc. ("Morningstar"), Wiesenberger Investment Companies Service ("Wiesenberger")
and CDA Investment Technologies, Inc. ("CDA") or similar independent services
which monitor the performance of mutual funds, or other industry or financial
publications such as Barron's, Changing Times, Forbes and Money Magazine.
Performance comparisons by these indexes, services or publications may rank
mutual funds over different periods of time by means of aggregate, average,
year-by-year, or other types of total
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<PAGE> 112
return and performance figures. Any given performance quotation or performance
comparison should not be considered as representative of the performance of the
Funds for any future period.
There are differences and similarities between the investments which the
Funds may purchase and the investments measured by the indexes and reporting
services which are described herein. The Consumer Price Index is generally
considered to be a measure of inflation. The CDA Mutual Fund-Municipal Bond
Index is a weighted performance average of other mutual funds with a federally
tax-exempt income objective. The Salomon Brothers High Grade Corporate Bond
Index is an unmanaged index that generally represents the performance of high
grade long-term taxable bonds during various market conditions. The Lehman
Brothers Municipal Bond Index is an unmanaged index that generally represents
the performance of high grade intermediate and long-term municipal bonds during
various market conditions. Lipper, Morningstar, Wiesenberger and CDA are widely
recognized mutual fund reporting services whose performance calculations are
based upon changes in net asset value with all dividends reinvested and which do
not include the effect of any sales charges. The market prices and yields of
taxable and tax-exempt bonds will fluctuate. The Funds primarily invest in
investment grade Municipal Obligations in pursuing their objective of as high a
level of current interest income which is exempt from federal and state income
tax as is consistent, in the view of the Funds' management, with preservation of
capital.
The Funds may also compare their taxable equivalent total return
performance to the total return performance of taxable income funds such as
treasury securities funds, corporate bond funds (either investment grade or high
yield), or Ginnie Mae funds. These types of funds, because of the character of
their underlying securities, differ from municipal bond funds in several
respects. The susceptibility of the price of treasury bonds to credit risk is
far less than that of municipal bonds, but the price of treasury bonds tends to
be slightly more susceptible to change resulting from changes in market interest
rates. The susceptibility of the price of investment grade corporate bonds and
municipal bonds to market interest rate changes and general credit changes is
similar. High yield bonds are subject to a greater degree of price volatility
than municipal bonds resulting from changes in market interest rates and are
particularly susceptible to volatility from credit changes. Ginnie Mae bonds are
generally subject to less price volatility than municipal bonds from credit
concerns, due primarily to the fact that the timely payment of monthly
installments of principal and interest are backed by the full faith and credit
of the U.S. Government, but Ginnie Mae bonds of equivalent coupon and maturity
are generally more susceptible to price volatility resulting from market
interest rate changes. In addition, the volatility of Ginnie Mae bonds due to
changes in market interest rates may differ from municipal bonds of comparable
coupon and maturity because bonds of the sensitivity of Ginnie Mae prepayment
experience to change in interest rates.
S-31
<PAGE> 113
ADDITIONAL INFORMATION ON THE PURCHASE AND
REDEMPTION OF FUND SHARES
As described in the Prospectus, each Fund has adopted a Flexible Pricing
Program which provides you with alternative ways of purchasing Fund shares based
upon your individual investment needs and preferences.
Each class of shares of a Fund represents an interest in the same portfolio
of investments. Each class of shares is identical in all respects except that
each class bears its own class expenses, including distribution and
administration expenses, and each class has exclusive voting rights with respect
to any distribution or service plan applicable to its shares. As a result of the
differences in the expenses borne by each class of shares, net income per share,
dividends per share and net asset value per share will vary among a Fund's
classes of shares.
Shareholders of each class will share expenses proportionately for services
that are received equally by all shareholders. A particular class of shares will
bear only those expenses that are directly attributable to that class, where the
type or amount of services received by a class varies from one class to another.
For example, class-specific expenses generally will include distribution and
service fees.
Special Sales Charge Waivers. Class A Shares of the Funds may be purchased
at net asset value without a sales charge, and Class R Shares may be purchased,
by the following categories of investors:
- officers, trustees and former trustees of the Nuveen and Flagship Funds;
- bona fide, full-time and retired employees of Nuveen, any parent company
of Nuveen, and subsidiaries thereof, or their immediate family members;
- any person who, for at least 90 days, has been an officer, director or
bona fide employee of any Authorized Dealer, or their immediate family
members;
- officers and directors of bank holding companies that make Fund shares
available directly or through subsidiaries or bank affiliates;
- bank or broker-affiliated trust departments investing funds over which
they exercise exclusive discretionary investment authority and that are
held in a fiduciary, agency, advisory, custodial or similar capacity;
- investors purchasing through a mutual fund purchase program sponsored by
a broker-dealer that offers a selected group of mutual funds either
without a transaction fee or with an asset-based fee or a fixed fee that
does not vary with the amount of the purchase. In order to qualify, such
purchase program must offer a full range of mutual fund related services
and shareholder account servicing capabilities, including establishment
and maintenance of shareholder accounts, addressing investor inquiries
regarding account activity and investment performances, processing of
trading and dividend activity and generation of monthly account
statements and year-end tax reporting; and
- registered investment advisers, certified financial planners and
registered broker-dealers who in each case either charge periodic fees to
their customers for financial planning, investment advisory or asset
management services, or provide such services in connection with the
establishment of an investment account for which a comprehensive "wrap
fee" charge is imposed.
The Funds may encourage registered representatives and their firms to help
apportion their assets among bonds, stocks and cash, and may seek to participate
in programs that recommend a portion of their assets be invested in tax-free,
fixed income securities.
To help advisers and investors better understand and most efficiently use
the Funds to reach their investment goals, the Funds may advertise and create
specific investment programs and systems. For example, this may include
information on how to use the Funds to accumulate assets for future education
needs or periodic payments such as insurance premiums. The Funds may produce
software or additional sales literature to promote the advantages of using the
Funds to meet these and other specific investor needs.
Exchanges of shares of a Fund for shares of a Nuveen money market fund may
be made on days when both funds calculate a net asset value and make shares
available for public purchase. Shares of the Nuveen money market funds may be
purchased on days on which the Federal Reserve Bank of Boston is normally open
for business. In addition to the holidays observed by the Fund, the Nuveen money
market funds observe and will not make fund shares available for purchase on the
following holidays: Martin Luther King's Birthday, Columbus Day and Veterans
Day.
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For more information on the procedure for purchasing shares of the Funds
and on the special purchase programs available thereunder, see "How to Buy Fund
Shares" in the Joint Proxy Statement-Prospectus.
Nuveen serves as the principal underwriter of the shares of each of the
Funds pursuant to a "best efforts" arrangement as provided by a distribution
agreement with the Trust, dated October 15, 1996 ("Distribution Agreement").
Pursuant to the Distribution Agreement, the Trust appointed Nuveen to be its
agent for the distribution of the Funds' shares on a continuous offering basis.
Nuveen sells shares to or through brokers, dealers, banks or other qualified
financial intermediaries (collectively referred to as "Dealers"), or others, in
a manner consistent with the then effective registration statement of the Trust.
Pursuant to the Distribution Agreement, Nuveen, at its own expense, finances
certain activities incident to the sale and distribution of the Funds' shares,
including printing and distributing of prospectuses and statements of additional
information to other than existing shareholders, the printing and distributing
of sales literature, advertising and payment of compensation and giving of
concessions to Dealers. Nuveen receives for its services the excess, if any, of
the sales price of the Funds' shares less the net asset value of those shares,
and reallows a majority or all of such amounts to the Dealers who sold the
shares; Nuveen may act as such a Dealer. Nuveen also receives compensation
pursuant to a distribution plan adopted by the Trust pursuant to Rule 12b-1 and
described herein under "Distribution and Service Plan." Nuveen receives any
CDSCs imposed on redemptions of Shares. Nuveen and Nuveen Advisory may also make
payments, from their own resources, to broker-dealers, banks and institutions
for the sales of the Funds' shares.
DISTRIBUTION AND SERVICE PLAN
Each Fund has adopted a plan (the "Plan") pursuant to Rule 12b-1 under the
Investment Company Act of 1940, which provides that Class B Shares and Class C
Shares will be subject to an annual distribution fee, and that Class A Shares,
Class B Shares and Class C Shares will be subject to an annual service fee.
Class R Shares will not be subject to either distribution or service fees.
The distribution fee applicable to Class B and Class C Shares under each
Fund's Plan will be payable to reimburse Nuveen for services and expenses
incurred in connection with the distribution of Class B and Class C Shares,
respectively. These expenses include payments to Authorized Dealers, including
Nuveen, who are brokers of record with respect to the Class B and Class C
Shares, as well as, without limitation, expenses of printing and distributing
prospectuses to persons other than shareholders of the Fund, expenses of
preparing, printing and distributing advertising and sales literature and
reports to shareholders used in connection with the sale of Class B and Class C
Shares, certain other expenses associated with the distribution of Class B and
Class C Shares, and any distribution-related expenses that may be authorized
from time to time by the Board of Trustees.
The service fee applicable to Class A Shares, Class B Shares and Class C
Shares under each Fund's Plan will be payable to Authorized Dealers in
connection with the provision of ongoing account services to shareholders. These
services may include establishing and maintaining shareholder accounts,
answering shareholder inquiries and providing other personal services to
shareholders.
Each Fund may spend up to .20 of 1% per year of the average daily net
assets of Class A Shares as a service fee under the Plan applicable to Class A
Shares. Each Fund may spend up to .75 of 1% per year of the average daily net
assets of Class B Shares as a distribution fee and up to .20 of 1% per year of
the average daily net assets of Class B Shares as a service fee under the Plan
applicable to Class B Shares. Each Fund may spend up to .55 of 1% per year of
the average daily net assets of Class C Shares as a distribution fee and up to
.20 of 1% per year of the average daily net assets of Class C Shares as a
service fee under the Plan applicable to Class C Shares.
Under each Fund's Plan, the Fund will report quarterly to the Board of
Trustees for its review all amounts expended per class of shares under the Plan.
The Plan may be terminated at any time with respect to any class of shares,
without the payment of any penalty, by a vote of a majority of the trustees who
are not "interested persons" and who have no direct or indirect financial
interest in the Plan or by vote of a majority of the outstanding voting
securities of such class. The Plan may be renewed from year to year if approved
by a vote of the Board of Trustees and a vote of the non-interested trustees who
have no direct or indirect financial interest in the Plan cast in person at a
meeting called for the purpose of voting on the Plan. The Plan may be continued
only if the trustees who vote to approve such continuance conclude, in the
exercise of reasonable business judgment and in light of their fiduciary duties
under applicable law, that there is a reasonable likelihood that the Plan will
benefit the Fund and its shareholders. The Plan may not be amended to increase
materially the cost which a class of shares may bear under the Plan without the
approval of the shareholders of the affected class, and any other material
amendments of the Plan must be approved by the non-interested trustees by a vote
cast in person at a meeting called for the purpose of
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considering such amendments. During the continuance of the Plan, the selection
and nomination of the non-interested trustees of the Trust will be committed to
the discretion of the non-interested trustees then in office.
INDEPENDENT PUBLIC ACCOUNTANTS AND CUSTODIAN
Deloitte & Touche LLP, 1700 Courthouse Plaza NE, Dayton, Ohio 45402 have
been selected as auditors for the Trust. In addition to audit services, Deloitte
& Touche, will provide consultation and assistance on accounting, internal
control, tax and related matters.
The custodian of the assets of the Funds is State Street Bank and Trust
Company, 225 Franklin Street, Boston, Massachusetts 02106. The custodian
performs custodial, fund accounting and portfolio accounting services.
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INDEPENDENT AUDITORS' REPORT
To the Shareholders and Trustees
Nuveen Flagship Multistate Trust I
We have audited the accompanying statement of net assets of the Nuveen Flagship
Multistate Trust I (a Massachusetts business trust comprising the Nuveen
Flagship Arizona Municipal Bond Fund, the Nuveen Flagship Florida Municipal Bond
Fund, the Nuveen Flagship Pennsylvania Municipal Bond Fund and the Nuveen
Flagship Virginia Municipal Bond Fund) as of October 16, 1996. This financial
statement is the responsibility of the Trust's management. Our responsibility is
to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
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 evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, such statement of net assets presents fairly, in all material
respects, the financial position of the Nuveen Flagship Multistate Trust I at
October 16, 1996, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dayton, Ohio
October 16, 1996
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NUVEEN FLAGSHIP MULTISTATE TRUST I
STATEMENT OF NET ASSETS
OCTOBER 16, 1996
<TABLE>
<CAPTION>
ARIZONA FLORIDA PENNSYLVANIA VIRGINIA
------- ------- ------------ --------
<S> <C> <C> <C> <C>
ASSETS:
Cash....................................................... $33,360 $33,360 $ 33,360 $ 33,360
Deferred organization costs (note 2)....................... None None None None
------- ------- ------- -------
Total assets.......................................... 33,360 33,360 33,360 33,360
------- ------- ------- -------
LIABILITIES................................................ None None None None
------- ------- ------- -------
NET ASSETS................................................. $33,360 $33,360 $ 33,360 $ 33,360
======= ======= ======= =======
Shares of beneficial interest ("shares") issued and
outstanding; unlimited shares authorized (note 1):
Class A shares........................................... 834 834 834 834
Class B shares........................................... 834 834 834 834
Class C shares........................................... 834 834 834 834
Class R shares........................................... 834 834 834 834
Net asset value and redemption price per share:
Class A, B, C and R shares............................... $ 10.00 $ 10.00 $ 10.00 $ 10.00
======= ======= ======= =======
Offering price per share:
Class B, C and R shares, at net asset value.............. $ 10.00 $ 10.00 $ 10.00 $ 10.00
======= ======= ======= =======
Class A shares at net asset value plus maximum sales
charge of 4.20% of offering price..................... $ 10.44 $ 10.44 $ 10.44 $ 10.44
======= ======= ======= =======
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Trust:
The Trust was organized as a Massachusetts business trust on July 1, 1996 and
has been inactive since that date except for matters relating to its
organization, its registration as an open-end series investment company and the
registration of its shares under the Investment Company Act of 1940, as amended,
and the Securities Act of 1933, as amended, and the sale of the outstanding
shares to Nuveen Advisory Corp. The Trust's shares are issued in separate series
covering separate designated State Funds. At October 16, 1996, the authorized
designated State Funds include the Nuveen Flagship Arizona Municipal Bond Fund,
the Nuveen Flagship Florida Municipal Bond Fund, the Nuveen Flagship
Pennsylvania Municipal Bond Fund and the Nuveen Flagship Virginia Municipal Bond
Fund. Additional State Funds may be added in the future. Each State Fund is a
separate series issuing its own shares, at a price equal to net asset value for
the Class B, C and R shares and at varying sales charges for the Class A shares.
Pursuant to the Agreement and Plan of Reorganization and Liquidation, each State
Fund will acquire substantially all of the assets and assume substantially all
of the liabilities of certain series of Nuveen Multistate Tax-Free Trust (the
Nuveen Funds) and the Flagship Tax Exempt Funds Trust (the Flagship Funds). The
number of each State Fund shares to be issued will be that number having an
aggregate per share net asset value equal to the aggregate value of the Nuveen
Funds' and Flagship Funds' assets transferred to it net of the Nuveen Funds' and
Flagship Funds' liabilities assumed.
(2) Deferred Organization Costs:
Costs incurred in connection with the organization of The Trust will be borne by
Nuveen Advisory Corp. and Flagship Financial Inc.
(3) Related Parties:
Nuveen Advisory Corp. will act as investment adviser for and manage the
investment and reinvestment of the assets of each designated State Fund and will
administer each of their business affairs. For these services each State Fund
has agreed to pay an annual management fee.
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PRO FORMA FINANCIAL INFORMATION
NEW ARIZONA
PRO FORMA CAPITALIZATION AS OF MAY 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
FLAGSHIP NUVEEN
ARIZONA ARIZONA NEW ARIZONA NEW ARIZONA
(ACTUAL) (ACTUAL) (PRO FORMA) (AS ADJUSTED)(1)
----------- ----------- ----------- ----------------
<S> <C> <C> <C> <C>
Common shares, $.01 par value per share....................... $ -- $ 22,926 $ 33 $ 105,463 (2)
Paid-in surplus............................................... 78,032,113 23,222,609 33,327 101,205,545 (3)
Balance of undistributed net investment income................ -- 7,592 -- -- (4)
Accumulated net realized gain (loss) from investment
transactions................................................ 120,690 (72,175) -- (72,175)(5)
Net unrealized appreciation of investments.................... 3,911,607 313,005 -- 4,224,612
----------- ----------- ------- ------------
Net assets................................................ $82,064,410 $23,493,957 $33,360 $105,463,445
=========== =========== ======= ============
</TABLE>
(1) The adjusted balances are presented as if the Reorganization was effective
as of May 31, 1996 for information purposes only. The actual Effective Time
of the Reorganization is expected to be January 31, 1997 at which time the
results would be reflective of the actual composition of shareholders'
equity at that date.
(2) Assumes the issuance of 7,997,646 and 432,436 class A shares, 196,726 and
39,086 class C shares and 1,877,115 class R shares of New Arizona in
exchange for the net assets of class A, C and R of Flagship Arizona and
Nuveen Arizona, respectively. These numbers are based on the net assets of
each class of Flagship Arizona and Nuveen Arizona, and the net asset values
of each respective class of New Arizona, as of May 31, 1996, after
adjustment for the distributions referred to in (4) and (5) below. The
issuance of such number of New Arizona shares would result in the
distribution of 1.0716064 and 1.0299230 class A shares, 1.0715685 and
1.0216149 class C shares and 1.0232653 class R shares for each share of each
respective class of Flagship Arizona and Nuveen Arizona, respectively, upon
liquidation of each respective class of Flagship Arizona and Nuveen Arizona.
(3) Includes the impact of $82,504 due to the effect of the exchange ratios on
the value of new shares issued in excess of the value of shares liquidated
and the effect of assigning a par value equal to .01 per share for each New
Arizona share issued in exchange for each Flagship Arizona share.
(4) Assumes Nuveen Arizona distributes all of its undistributed net investment
income to shareholders.
(5) Assumes Flagship Arizona distributes all of its net realized gains from
investment transactions to shareholders and Nuveen Arizona carries forward
its net realized losses from investment transactions to New Arizona, as
permitted under applicable tax regulations.
PRO FORMA CONDENSED BALANCE SHEET AS OF MAY 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
FLAGSHIP NUVEEN
ARIZONA ARIZONA NEW ARIZONA PRO FORMA NEW ARIZONA
(ACTUAL) (ACTUAL) (PRO FORMA) ADJUSTMENTS (AS ADJUSTED)
----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Investments in municipal securities, at market
value........................................... $82,163,084 $22,884,269 $ -- $(125,000)(1) $104,922,353
Temporary investments in short-term municipal
securities, at amortized cost................... -- 500,000 -- -- 500,000
Cash.............................................. -- 47,583 33,360 (3,282)(2) 77,661
Other assets less liabilities..................... (98,674) 62,105 -- -- (36,569)
------------ ------------ -------- ---------- ------------
Net assets........................................ $82,064,410 $23,493,957 $33,360 $(128,282) $105,463,445
============ ============ ======== ========== ============
Class A Shares:
Net assets........................................ $80,094,252 $ 4,325,756 $ 8,340 $(119,190) $ 84,309,158
============ ============ ======== ========== ============
Shares outstanding................................ 7,463,231 419,872 834 546,979 (3) 8,430,916
============ ============ ======== ========== ============
Net asset value and redemption price per share.... $ 10.73 $ 10.30 $ 10.00 $ 10.00
============ ============ ======== ============
Offering price per share (net asset value per
share plus maximum sales charge of 4.20%, 4.50%,
4.20% and 4.20%, respectively, of offering
price).......................................... $ 11.20 $ 10.79 $ 10.44 $ 10.44
============ ============ ======== ============
Class B Shares:
Net assets........................................ N/A N/A $ 8,340 $ 8,340
============ ============ ======== ============
Shares outstanding................................ N/A N/A 834 834
============ ============ ======== ============
Net asset value................................... N/A N/A $ 10.00 $ 10.00
============ ============ ======== ============
Class C Shares:
Net assets........................................ $ 1,970,158 $ 390,986 $ 8,340 $ (3,024) $ 2,366,460
============ ============ ======== ========== ============
Shares outstanding................................ 183,587 38,259 834 13,966 (3) 236,646
============ ============ ======== ========== ============
Net asset value, offering and redemption price per
share........................................... $ 10.73 $ 10.22 $ 10.00 $ 10.00
============ ============ ======== ============
Class R Shares:
Net assets........................................ N/A $18,777,215 $ 8,340 $ (6,068) $ 18,779,487
============ ============ ======== ========== ============
Shares outstanding................................ N/A 1,834,436 834 42,679 (3) 1,877,949
============ ============ ======== ========== ============
Net asset value and redemption price per share.... N/A $ 10.24 $ 10.00 $ 10.00
============ ============ ======== ============
</TABLE>
(1) See note (1) to Pro Forma Capitalization table above as to the Effective
Time of the Reorganization. Assumes sales of investments in municipal
securities to provide additional cash needed to fully distribute all net
investment income and net realized capital gains of Nuveen Arizona and
Flagship Arizona, respectively.
(2) Net effect on cash after sales of municipal securities and distribution of
net investment income and net realized gains of Nuveen Arizona and Flagship
Arizona, respectively.
(3) See note (1) to Pro Forma Capitalization table. Based on the issuance of
7,997,646 and 432,436 class A shares, 196,726 and 39,086 class C shares and
1,877,115 class R shares of New Arizona and the cancellation of all shares
of each class of Flagship Arizona and Nuveen Arizona, respectively.
P-1
<PAGE> 119
PRO FORMA FINANCIAL INFORMATION
NEW ARIZONA
PRO FORMA CONDENSED INCOME STATEMENT FOR THE TWELVE MONTHS ENDED MAY 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
FLAGSHIP NUVEEN
ARIZONA ARIZONA PRO FORMA NEW ARIZONA
(ACTUAL) (ACTUAL) ADJUSTMENTS (AS ADJUSTED)
---------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
Investment Income:
Tax-exempt interest income....................................... $4,932,741 $1,274,977 $ -- $ 6,207,718
---------- ---------- --------- ----------
Expenses:
Management fees(1)............................................. 420,039 120,691 40,536 581,266
12b-1 fees(2).................................................. 344,798 9,958 (169,680) 185,076
Other expenses................................................. 159,034 110,103 (71,689)(3) 197,448
---------- ---------- --------- ----------
Total expenses............................................... 923,871 240,752 (200,833) 963,790
Expense waiver/reimbursement from investment adviser(4)........ (353,918) (66,215) 175,329 (244,804)
---------- ---------- --------- ----------
Net expenses................................................. 569,953 174,537 (25,504) 718,986
---------- ---------- --------- ----------
Net investment income.............................................. 4,362,788 1,100,440 25,504 5,488,732
---------- ---------- --------- ----------
Realized and Unrealized Gain (Loss) from Investments:
Net realized gain from investment transactions, net of taxes, if
applicable..................................................... 317,259 64,931 -- 382,190
Net change in unrealized appreciation or depreciation of
investments.................................................... (1,200,471) (446,401) -- (1,646,872)
---------- ---------- --------- ----------
Net gain (loss) from investments............................. (883,212) (381,470) -- (1,264,682)
---------- ---------- --------- ----------
Net increase in net assets from operations......................... $3,479,576 $ 718,970 $ 25,504 $ 4,224,050
========== ========== ========= ==========
</TABLE>
(1) Reflects a management fee of .50% of net assets for Flagship Arizona and
.55% of net assets for the first $125 million for Nuveen Arizona and New
Arizona (as adjusted).
(2) Reflects a 12b-1 service fee of .20% of net assets for classes A and C of
Flagship Arizona and .25% of net assets for classes A and C of Nuveen
Arizona. New Arizona (as adjusted) reflects a 12b-1 service fee of .20% of
net assets for classes A and C. Also included is a 12b-1 distribution fee
of .20% and .75% of net assets of class A and C, respectively, of Flagship
Arizona. Class C of Nuveen Arizona is subject to a 12b-1 distribution fee
of .75% of net assets. New Arizona (as adjusted) reflects a 12b-1
distribution fee of .55% of net assets for class C. Class R is not subject
to a 12b-1 service or distribution fee.
(3) Represents estimated reduction in operating expenses, including audit,
legal, custodian, transfer agency and report printing. New Arizona (as
adjusted) would have a much larger asset base than either Fund currently
has. Certain operating expenses would have been reduced had they been
applied to the larger asset base for one Fund, rather than to two smaller
separate Funds.
(4) Reflects an expense waiver/reimbursement of .42% of net assets of Flagship
Arizona and .30% of net assets of Nuveen Arizona. New Arizona (as adjusted)
reflects an expense waiver/reimbursement of .23% of net assets.
P-2
<PAGE> 120
PRO FORMA FINANCIAL INFORMATION
NEW ARIZONA
PRO FORMA PORTFOLIO OF INVESTMENTS
MAY 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
FLAGSHIP NUVEEN PRO FORMA
PRINCIPAL MARKET MARKET MARKET
AMOUNT DESCRIPTION VALUE VALUE VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 700,000 Apache County Public Finance Corporation Certificates of
Participation, 5.500%, 5/01/10.................................. $ -- $ 700,189 $ 700,189
Arizona Board of Regents, Arizona State University, System Revenue
Refunding Bonds, Series 1992-A:
500,000 5.750%, 7/01/12................................................... -- 498,155 498,155
500,000 5.500%, 7/01/19................................................... -- 465,120 465,120
250,000 Arizona Certificates of Participation, 6.250%, 9/01/10............ -- 260,175 260,175
570,000 Arizona Educational Loan Marketing Corporation, 7.000%, 3/01/05
(Alternative Minimum Tax)....................................... 391,279 211,852 603,131
100,000 Arizona Educational Loan Marketing Corporation, Educational Loan
Revenue Bonds, 6.375%, 9/01/05 (Alternative Minimum Tax)........ -- 103,084 103,084
300,000 Arizona Health Facilities Authority, Hospital System Revenue
Refunding Bonds (Phoenix Baptist Hospital and Medical Center,
Inc. and Medical Environments, Inc.), Series 1992, 6.250%,
9/01/11......................................................... -- 310,644 310,644
1,250,000 Arizona Health Facilities Authority Revenue--Arizona Voluntary
Hospital Federation Pooled Loan Program--Series 1985 B, 7.250%,
10/01/13........................................................ 1,345,062 -- 1,345,062
200,000 Arizona Municipal Financing Program, Certificates of
Participation, Series 20, 7.700%, 8/01/10....................... -- 235,534 235,534
225,000 Arizona State Municipal Financing Program--Certificates of
Participation--Series 11, 8.000%, 08/01/17...................... 292,784 -- 292,784
500,000 Arizona State Transportation Board--Highway Revenue--Series 1990,
7.000%, 07/01/09................................................ 546,580 -- 546,580
500,000 Arizona State University Research Park, Development Refunding
Bonds, Series 1995, 5.000%, 7/01/21............................. -- 441,145 441,145
300,000 Arizona State University Revenues, 7.000%, 07/01/15............... 335,685 -- 335,685
1,500,000 Arizona Student Loan Acquisition Authority, 6.600%, 5/01/10
(Alternative Minimum Tax)....................................... 1,040,500 521,575 1,562,075
175,000 Arizona Wastewater Management Authority, 5.950%, 7/01/12.......... -- 178,416 178,416
250,000 Arizona Wastewater Management Authority, 5.750%, 7/01/15.......... -- 244,465 244,465
965,000 Bullhead City, AZ Parkway Improvement District, 6.100%,
01/01/13........................................................ 948,170 -- 948,170
250,000 Business Development Finance Corporation, Tucson (Arizona), Local
Development Lease Revenue Refunding Bonds, Series 1992, 6.250%,
7/01/12......................................................... -- 260,023 260,023
250,000 Casa Grande, AZ Industrial Development Authority Revenue--Frito-
Lay/PepsiCo Pollution Control Project--Series 1984 A, 6.650%,
12/01/14........................................................ 263,118 -- 263,118
2,190,000 Central Arizona Water Conservation District (Central Arizona
Project), Contract Revenue Bonds, Series B 1991, 6.500%,
11/01/11 (Pre-refunded to 5/01/01).............................. 2,171,637 212,490 2,384,127
500,000 Central Arizona Water Conservation District Revenue--Central
Arizona Project--Contract Revenue--Series 1993A, 5.500%,
11/01/10........................................................ 497,515 -- 497,515
5,000 Central Arizona Water Conservation District Revenue--Series 1991
B, 6.500%, 11/01/11............................................. 5,334 -- 5,334
800,000 Chandler, AZ General Obligation, 7.000%, 07/01/12................. 868,968 -- 868,968
1,750,000 Chandler, AZ Water and Sewer Revenue, 6.750%, 07/01/06............ 1,875,895 -- 1,875,895
550,000 City of Douglas (Arizona), Municipal Property Corporation,
Municipal Facilities Excise Tax Revenue Bonds, Series 1995,
5.750%, 7/01/15................................................. -- 537,213 537,213
1,000,000 City of Phoenix Civic Improvement Corporation (Arizona),
Wastewater System Lease Revenue Refunding Bonds, Series 1993,
5.000%, 7/01/18................................................. -- 880,120 880,120
400,000 City of Phoenix (Arizona), Civic Improvement Corporation,
Wastewater System Lease Revenue Bonds, Series 1993, 6.125%,
7/01/23 (Pre-refunded to 7/01/03)............................... -- 434,436 434,436
300,000 City of Phoenix, Arizona, Junior Lien Street and Highway User
Revenue Refunding Bonds, Series 1992, 6.250%, 7/01/11........... -- 311,436 311,436
500,000 City of Tucson, Arizona, General Obligation Bonds, Series 1984-G
(1994), 6.250%, 7/01/18......................................... -- 513,700 513,700
1,670,000 Cochise County, AZ Industrial Development Authority
Revenue--Sierra Vista Care Center--Series 1994 A, 6.750%,
11/20/19........................................................ 1,753,483 -- 1,753,483
250,000 Cochise County, AZ Sierra Unified School District No. 68--General
Obligation--Series 1992, 7.500%, 07/01/09....................... 297,225 -- 297,225
300,000 Cochise County Unified School District No. 68 General Obligation,
7.500%, 7/01/10................................................. -- 358,098 358,098
</TABLE>
P-3
<PAGE> 121
PRO FORMA FINANCIAL INFORMATION
<TABLE>
<CAPTION>
FLAGSHIP NUVEEN PRO FORMA
PRINCIPAL MARKET MARKET MARKET
AMOUNT DESCRIPTION VALUE VALUE VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 250,000 Coconino and Yavapai Counties, AZ Unified School District Number
9--Sedona--Oak Creek--Series 1992 A, 6.700%, 07/01/06........... $ 266,975 $ -- $ 266,975
250,000 Coconino and Yavapai Counties Joint Unified School District No. 9,
6.750%, 7/01/07................................................. -- 268,045 268,045
500,000 Cottonwood, AZ Sewer Revenue--Series 1992, 6.900%, 07/01/03....... 541,495 -- 541,495
100,000 Cottonwood, AZ Sewer Revenue--Series 1992, 7.000%, 07/01/06....... 107,255 -- 107,255
100,000 Cottonwood, AZ Sewer Revenue--Series 1992, 7.000%, 07/01/07....... 106,671 -- 106,671
280,000 Eloy Municipal Property Corporation, 7.000%, 7/01/11.............. -- 295,226 295,226
760,000 Flagstaff, AZ Junior Lien and Highway User Revenue--Series 1992,
5.900%, 07/01/10................................................ 788,584 -- 788,584
35,000 Glendale, AZ Municipal Property Corporation, 8.850%, 07/01/08..... 35,847 -- 35,847
300,000 Maricopa County Hospital District No. 1, 6.250%, 6/01/10.......... -- 313,476 313,476
50,000 Maricopa County School District No. 28 General Obligation, 6.000%,
7/01/12......................................................... -- 50,952 50,952
265,000 Maricopa County School District No. 28, 6.000%, 7/01/12
(Pre-refunded to 7/01/02)....................................... -- 281,234 281,234
3,000,000 Maricopa County, AZ Glendale Elementary School District Number
40--School Improvement--Series 1995, 6.250%, 07/01/10........... 3,035,670 -- 3,035,670
1,750,000 Maricopa County, AZ Glendale Elementary School District Number
40--School Improvement--Series 1995, 6.300%, 07/01/11........... 1,770,755 -- 1,770,755
500,000 Maricopa County, AZ Glendale Elementary School District Number
40--School Improvement--Series 1995, 6.200%, 07/01/09........... 505,560 -- 505,560
395,000 Maricopa County, AZ Hospital Revenue--St. Luke's Hospital Medical
Center, 8.750%, 02/01/10........................................ 464,619 -- 464,619
10,800,000 Maricopa County, AZ Industrial Development Authority--Single
Family Mortgage Revenue, 0.000%, 02/01/16....................... 3,262,680 -- 3,262,680
750,000 Maricopa County, AZ Industrial Development Authority Hospital
Facility Revenue--John C. Lincoln Hospital, 7.500%, 12/01/13.... 828,420 -- 828,420
135,000 Maricopa County, AZ Industrial Development Authority Hospital
Facility Revenue--Samaritan Health Services, 12.000%,
01/01/08........................................................ 144,987 -- 144,987
1,250,000 Maricopa County, AZ Industrial Development Authority--Mercy Health
System Revenue, 7.150%, 07/01/12................................ 1,365,875 -- 1,365,875
255,000 Maricopa County, AZ Industrial Development Authority--Single
Family Mortgage Revenue--Series 1991 A, 7.500%, 08/01/12........ 266,279 -- 266,279
2,000,000 Maricopa County, AZ Paradise Valley Unified School District Number
69-- Series 1995, 7.000%, 07/01/12.............................. 2,287,280 -- 2,287,280
500,000 Maricopa County, AZ School District Number 80--Chandler--Series
1994, 6.250%, 07/01/11.......................................... 535,415 -- 535,415
575,000 Maricopa County, AZ School District Number 214--Tolleson Union
High, 6.500%, 07/01/09.......................................... 617,774 -- 617,774
300,000 Maricopa County, AZ School District Number 214--Tolleson Union
High, 6.500%, 07/01/10.......................................... 322,317 -- 322,317
2,460,000 Maricopa County, AZ School District Number 28--Kyrene
Elementary--Series 1993 C, 0.000%, 07/01/08..................... 1,242,989 -- 1,242,989
4,000,000 Maricopa County, AZ School District Number 28--Kyrene
Elementary--Series 1993 C, 0.000%, 07/01/07..................... 2,161,760 -- 2,161,760
3,805,000 Maricopa County, AZ School District Number 28--Kyrene
Elementary--Series 1993 C, 0.000%, 01/01/10..................... 1,743,223 -- 1,743,223
1,870,000 Maricopa County, AZ School District Number 28--Kyrene
Elementary--Series 1993 C, 0.000%, 01/01/09..................... 918,563 -- 918,563
6,000,000 Maricopa County, AZ School District Number 28--Kyrene
Elementary--Series 1993 C, 0.000%, 01/01/11..................... 2,558,820 -- 2,558,820
515,000 Maricopa County, AZ School District Number 68--Alhambra
Elementary-- Series 1994 A, 6.750%, 07/01/14.................... 557,189 -- 557,189
1,275,000 Maricopa County, AZ School District Number 98--Fountain Hills--
Series 1992, 0.000%, 07/01/06................................... 736,300 -- 736,300
750,000 Maricopa County, AZ School District Number 11--Peoria--Series
1992, 6.400%, 07/01/10.......................................... 783,532 -- 783,532
675,000 Maricopa County, AZ School District Number 11--Peoria--Series
1992, 0.000%, 07/01/06.......................................... 389,806 -- 389,806
2,000,000 Maricopa County, AZ Unified School District Number
41--Gilbert--Series 1994, 0.000%, 01/01/06...................... 1,197,980 -- 1,197,980
500,000 Maricopa County, AZ Unified School District Number
41--Gilbert--Series 1995 D, 6.250%, 07/01/15.................... 491,770 -- 491,770
13,040,000 Maricopa County, AZ Industrial Development Authority--Single
Family Mortgage Revenue--Series 1983, 0.000%, 12/31/14.......... 4,209,442 -- 4,209,442
375,000 Maricopa Rural Road Improvement District, 6.900%, 7/01/05......... -- 391,065 391,065
1,000,000 Mesa, AZ Industrial Development Authority--TRW Vehicle Safety
Systems, Inc., 7.250%, 10/15/04................................. 1,026,330 -- 1,026,330
</TABLE>
P-4
<PAGE> 122
PRO FORMA FINANCIAL INFORMATION
<TABLE>
<CAPTION>
FLAGSHIP NUVEEN PRO FORMA
PRINCIPAL MARKET MARKET MARKET
AMOUNT DESCRIPTION VALUE VALUE VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 500,000 Mohave County, AZ Industrial Development Authority
Revenue--Citizens Utility Company Project, 7.150%, 02/01/26..... $ 528,770 $ -- $ 528,770
500,000 Mohave County Industrial Development Authority (Citizens Utilities
Company), 6.600%, 5/01/29 (Alternative Minimum Tax)............. -- 509,975 509,975
1,195,000 Navajo County, Arizona, Pollution Control Corporation, Pollution
Control Revenue Refunding Bonds (Arizona Public Service
Company), 1993 Series A, 5.875%, 8/15/28........................ 181,535 934,820 1,116,355
1,000,000 Navajo County, Arizona, Pollution Control Corporation, Pollution
Control Revenue Refunding Bonds (Arizona Public Service
Company), 1993 Series A, 5.500%, 8/15/28........................ -- 936,390 936,390
125,000 Navajo County, AZ Unified School District Number 2--Joseph
City--Series 1992 A, 6.800%, 07/01/01........................... 132,910 -- 132,910
375,000 Navajo County, AZ Unified School District Number 2--Joseph City--
Series 1992 A, 6.800%, 07/01/02................................. 398,302 -- 398,302
365,000 Nogales, AZ Street and Highway Users Revenue--Series 1993, 5.500%,
07/01/12........................................................ 337,804 -- 337,804
350,000 Nogales, AZ Street and Highway Users Revenue--Series 1993, 5.500%,
07/01/11........................................................ 326,522 -- 326,522
1,250,000 Northern Arizona University Revenue, 7.500%, 06/01/08............. 1,355,238 -- 1,355,238
425,000 Peoria Improvement District (North Valley Power Center), 7.300%,
1/01/12......................................................... -- 447,364 447,364
460,000 Peoria, AZ Improvement District Number 8801--North Valley Power
Center, 7.300%, 01/01/13........................................ 493,787 -- 493,787
700,000 Peoria, AZ Municipal Development Authority Facilities Revenue,
7.000%, 07/01/10................................................ 761,817 -- 761,817
500,000 Phoenix, AZ Street and Highway User Revenue--Series 1992, 6.250%,
07/01/11........................................................ 521,770 -- 521,770
500,000 Phoenix, AZ Airport Revenue--Series 1994 D, 6.400%, 07/01/12...... 517,610 -- 517,610
425,000 Phoenix, AZ Industrial Development Authority Revenue--Chris Ridge
Village--Series 1992, 6.800%, 11/01/25.......................... 437,572 -- 437,572
250,000 Phoenix Civic Improvement Corporation, Airport Terminal Excise
Tax, 7.800%, 7/01/11 (Alternative Minimum Tax).................. -- 262,900 262,900
295,000 Phoenix Housing Finance Corporation (Arizona), Mortgage Revenue
Refunding Bonds, Series 1992A (FHA Insured Mortgage
Loans-Section 8 Assisted Projects), 6.500%, 7/01/24............. -- 300,667 300,667
500,000 Phoenix Industrial Development Authority GNMA Collateralized
(Meadow Glen Apartments), 5.800%, 8/20/28....................... -- 476,875 476,875
200,000 Phoenix Industrial Development Authority (FHA Insured Chris Ridge
Village Project), 6.750%, 11/01/12.............................. -- 208,596 208,596
485,000 Phoenix Industrial Development Authority, Single Family, 6.150%,
12/01/08 (Alternative Minimum Tax).............................. -- 482,745 482,745
Phoenix Industrial Development Authority (John C. Lincoln Hospital
and Health Center):
500,000 6.000%, 12/01/10.................................................. -- 490,525 490,525
500,000 6.000%, 12/01/14.................................................. -- 473,315 473,315
290,000 Pima County Industrial Development Authority (Tucson Electric),
7.250%, 7/15/10................................................. -- 316,579 316,579
465,000 Pima County Single Family Mortgage, 6.500%, 2/01/17............... -- 472,696 472,696
500,000 Pima County, AZ Industrial Development Authority
Revenue--Carondelet Health Care Corporation--Series 1993,
5.250%, 07/01/12................................................ 475,980 -- 475,980
540,000 Pima County, AZ Sewer Revenue--Series 1991, 6.750%, 07/01/15...... 572,659 -- 572,659
460,000 Pima County, AZ Sewer Revenue--Series 1991, 6.750%, 07/01/15...... 504,063 -- 504,063
500,000 Pima County, AZ Unified School District Number 13--Tanque Verde--
Series 1994, 6.700%, 07/01/10................................... 543,440 -- 543,440
1,000,000 Pima County, AZ Unified School District Number 1--Tucson--Series
1992, 7.500%, 07/01/10.......................................... 1,190,930 -- 1,190,930
650,000 Pima County, AZ Unified School District Number 1--Tucson, 7.200%,
07/01/09........................................................ 713,810 -- 713,810
Pinal County Certificates of Participation:
300,000 6.375%, 6/01/06................................................... -- 318,981 318,981
200,000 6.500%, 6/01/09................................................... -- 211,810 211,810
1,500,000 Price-Elliott Research Park, Incorporated--Arizona State
University Research Park Development--Series 1991, 7.000%,
07/01/21........................................................ 1,671,510 -- 1,671,510
375,000 Salt River Pima--Maricopa Indian Community--Arizona Special
Obligation Revenue--Phoenix Cement Company, 7.750%, 02/15/97.... 383,749 -- 383,749
280,000 Salt River Project Agricultural Improvement and Power District,
Arizona, Salt River Project Electric System Revenue Bonds, 1986
Series C, 5.750%, 1/01/20....................................... -- 268,318 268,318
</TABLE>
P-5
<PAGE> 123
PRO FORMA FINANCIAL INFORMATION
<TABLE>
<CAPTION>
FLAGSHIP NUVEEN PRO FORMA
PRINCIPAL MARKET MARKET MARKET
AMOUNT DESCRIPTION VALUE VALUE VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 300,000 Salt River Project Agricultural Improvement and Power District,
Arizona, Salt River Project Electric System Revenue Bonds, 1992
Series D, 5.750%, 1/01/19....................................... $ -- $ 289,872 $ 289,872
500,000 Salt River Project--Arizona Agricultural Improvement and Power
District--Electric System Refunding Revenue--Series 1993 A,
5.750%, 01/01/10................................................ 508,470 -- 508,470
300,000 Salt River Project--Arizona Agricultural Improvement and Power
District-- Electric System Revenue--Series A, 7.500%,
01/01/27........................................................ 312,432 -- 312,432
100,000 Salt River Project--Arizona Agricultural Improvement and Power
District-- Electric System Revenue--Series E, 8.250%,
01/01/28........................................................ 106,537 -- 106,537
100,000 Salt River Project--Arizona Agricultural Improvement and Power
District--Electric System Revenue--Series E, 8.250%, 01/01/13... 106,537 -- 106,537
1,100,000 Santa Cruz, AZ Nogales Unified School District Number 1--General
Obligation--Series 1995, 0.000%, 01/01/09....................... 540,331 -- 540,331
450,000 Scottsdale, AZ Certificates of Participation--Scottsdale Municipal
Property Corporation, 7.875%, 11/01/14.......................... 466,659 -- 466,659
1,000,000 Scottsdale, AZ Industrial Development Authority Hospital
Revenue--Scottsdale Memorial Hospital--1987 A, 8.500%,
09/01/17........................................................ 1,066,770 -- 1,066,770
1,500,000 Scottsdale, AZ Industrial Development Authority Hospital
Revenue--Scottsdale Memorial Hospital--Series 1993, 5.500%,
09/01/12........................................................ 1,473,015 -- 1,473,015
315,000 Scottsdale, AZ Mountain Community Facilities District--General
Obligation--Series 1993A, 6.200%, 07/01/17...................... 319,561 -- 319,561
800,000 Sedona, AZ Sewer Revenue--Series 1992, 7.000%, 07/01/12........... 838,280 -- 838,280
1,925,000 Tatum Ranch, AZ Community Facilities District--Phoenix, Arizona--
General Obligation--Series 1991 A, 6.875%, 07/01/16............. 2,072,282 -- 2,072,282
225,000 Tempe General Obligation, 6.000%, 7/01/08......................... -- 233,181 233,181
500,000 Tempe Industrial Development Authority Multifamily FHA-Insured
(Quadrangles Village Apartments), 6.250%, 6/01/26............... -- 501,705 501,705
600,000 Tempe Union High School District No. 213 of Maricopa County,
Arizona, School Improvement and Refunding Bonds, Series 1994,
6.000%, 7/01/12................................................. -- 617,100 617,100
600,000 The Industrial Development Authority of the County of Maricopa,
Arizona, Baptist Hospital System Revenue Refunding Bonds, Series
1995, 5.500%, 9/01/16........................................... -- 570,774 570,774
500,000 The Industrial Development Authority of the County of Maricopa
(Arizona), Insured Health Facility Revenue Bonds (Catholic
Healthcare West), 1993 Series A, 5.625%, 7/01/23................ -- 474,065 474,065
2,775,000 The Industrial Development Authority of the County of Maricopa
(Arizona), Samaritan Health Services, Hospital System Revenue
Refunding Bonds, Series 1990A, 7.000%, 12/01/16................. 2,657,359 585,725 3,243,084
640,000 The Industrial Development Authority of the County of Pima,
Arizona, Health Care System Revenue Bonds, Carondelet Health
Care Corporation of Arizona Issue, Series 1993, 5.250%,
7/01/13......................................................... -- 607,110 607,110
575,000 Tucson Airport Authority, Inc. (Arizona), Airport Revenue Bonds,
Refunding Series 1993, 5.700%, 6/01/13.......................... -- 563,972 563,972
500,000 Tucson, AZ Airport Authority Revenue--Series B, 7.125%,
06/01/15........................................................ 537,245 -- 537,245
850,000 Tucson, AZ Certificates of Participation--Series 1994, 6.375%,
07/01/09........................................................ 900,804 -- 900,804
1,000,000 Tucson, AZ Water System Revenue--Series 1993, 5.500%, 07/01/10.... 991,250 -- 991,250
850,000 Tucson, AZ Water System Revenue, 7.700%, 07/01/15................. 869,762 -- 869,762
500,000 Tucson, AZ Water System Revenue--Series 1991, 6.700%, 07/01/12.... 538,240 -- 538,240
300,000 Tucson Unified School District No. 1 of Pima County, Arizona,
School Improvement Bonds, Project of 1989, Series D (1992),
6.100%, 7/01/12................................................. -- 309,138 309,138
390,000 Tucson Water Revenue Bonds 1994A, 6.000%, 7/01/21................. -- 393,814 393,814
10,320,000 Tucson and Pima County, AZ Industrial Development
Authority--Single Family Mortgage Revenue--Series 1983 A,
0.000%, 12/01/14................................................ 3,348,943 -- 3,348,943
300,000 University of Arizona, 6.250%, 6/01/11............................ -- 312,534 312,534
1,370,000 University of Arizona Foundation Lease Revenue, 7.750%,
07/01/07........................................................ 1,442,898 -- 1,442,898
1,085,000 University of Arizona Medical Center Corporation--Tucson,
Arizona--Hospital Revenue--Series 1986, 8.100%, 07/01/16........ 1,151,673 -- 1,151,673
1,000,000 University of Arizona Medical Center Corporation--Tucson,
Arizona--Hospital Revenue--Series 1987, 8.100%, 07/01/16........ 1,064,101 -- 1,064,101
</TABLE>
P-6
<PAGE> 124
PRO FORMA FINANCIAL INFORMATION
<TABLE>
<CAPTION>
FLAGSHIP NUVEEN PRO FORMA
PRINCIPAL MARKET MARKET MARKET
AMOUNT DESCRIPTION VALUE VALUE VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 335,000 Yavapai County Community College District, 6.000%, 7/01/12........ $ -- $ 336,724 $ 336,724
675,000 Yuma County Union High School District No. 70 General Obligations,
5.700%, 7/01/06................................................. -- 698,131 698,131
875,000 Commonwealth of Puerto Rico Public Building Authority Guaranteed
Public Education and Health Facilities--Series M, 3.750%,
07/01/16........................................................ 769,760 -- 769,760
- -------------------------------------------------------------------------------------------------------------------------------
$136,480,000 Total Investments--(Cost $100,697,741)--99.4%..................... $82,038,084 $22,884,269 104,922,353
=========== ---------------------------------------------------------------------------------------------------------------
Temporary Investments in Short-Term Municipal Securities--0.5%
$ 500,000
-----------
-----------
Maricopa County, Arizona Pollution Control Corporation, Pollution
Control Revenue Refunding Bonds, (Arizona Public Service Company
Palo Verde Project), 1994 Series F, Variable Rate Demand Bonds,
3.650%, 5/01/29+................................................
$ -- $ 500,000 500,000
---------------------------------------------------------------------------------------------------------------
Other Assets Less Liabilities--0.1%............................... 41,092
---------------------------------------------------------------------------------------------------------------
Net Assets--100%.................................................. $105,463,445
===============================================================================================================
</TABLE>
* Optional Call Provisions: Dates (month and year) and prices of the earliest
optional call or redemption. There may be other call provisions at varying
prices at later dates.
** Ratings: Using the higher of Standard & Poor's or Moody's rating.
N/R--Investment is not rated.
+ The security has a maturity of more than one year, but has variable rate and
demand features which qualify it as a short-term security. The rate disclosed
is that currently in effect. This rate changes periodically based on market
conditions or a specified market index.
P-7
<PAGE> 125
PRO FORMA FINANCIAL INFORMATION
NEW FLORIDA
PRO FORMA CAPITALIZATION AS OF MAY 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
FLAGSHIP NUVEEN
FLORIDA FLORIDA NEW FLORIDA NEW FLORIDA
(ACTUAL) (ACTUAL) (PRO FORMA) (AS ADJUSTED)(1)
------------ ----------- ----------- ----------------
<S> <C> <C> <C> <C>
Common shares, $.01 par value per share................. $ -- $ 59,819 $ 33 $ 380,449 (2)
Paid-in surplus......................................... 308,648,791 59,879,819 33,327 368,241,340 (3)
Balance of undistributed net investment income.......... -- 10,128 -- -- (4)
Accumulated net realized gain (loss) from investment
transactions.......................................... (1,318,032) (318,841) -- (1,636,873)(5)
Net unrealized appreciation of investments.............. 12,300,285 1,163,492 -- 13,463,777
------------ ----------- ------- ------------
Net assets.......................................... $319,631,044 $60,794,417 $33,360 $380,448,693
============ =========== ======= ============
</TABLE>
(1) The adjusted balances are presented as if the Reorganization was effective
as of May 31, 1996 for information purposes only. The actual Effective Time
of the Reorganization is expected to be January 31, 1997 at which time the
results would be reflective of the actual composition of shareholders'
equity at that date.
(2) Assumes the issuance of 31,845,644 and 757,595 class A shares, 117,460 and
19,246 class C shares and 5,301,589 class R shares of New Florida in
exchange for the net assets of class A, C and R of Flagship Florida and
Nuveen Florida, respectively. These numbers are based on the net assets of
each class of Flagship Florida and Nuveen Florida, and the net asset values
of each respective class of New Florida, as of May 31, 1996, after
adjustment for the distributions referred to in (4) below. The issuance of
such number of New Florida shares would result in the distribution of
1.0389326 and 1.0152648 class A shares, 1.0391472 and 1.0113344 class C
shares and 1.0162795 class R shares for each share of each respective class
of Flagship Florida and Nuveen Florida, respectively, upon liquidation of
each respective class of Flagship Florida and Nuveen Florida.
(3) Includes the impact of $320,596 due to the effect of the exchange ratios on
the value of new shares issued in excess of the value of shares liquidated
and the effect of assigning a par value equal to .01 per share for each New
Florida share issued in exchange for each Flagship Florida share.
(4) Assumes Nuveen Florida distributes all of its undistributed net investment
income to shareholders.
(5) Assumes Flagship Florida and Nuveen Florida carry forward their net realized
losses from investment transactions to New Florida, as permitted under
applicable tax regulations.
PRO FORMA CONDENSED BALANCE SHEET AS OF MAY 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
FLAGSHIP NUVEEN
FLORIDA FLORIDA NEW FLORIDA PRO FORMA NEW FLORIDA
(ACTUAL) (ACTUAL) (PRO FORMA) ADJUSTMENTS (AS ADJUSTED)
------------ ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Investments in municipal securities, at market
value.............................................. $320,272,636 $60,475,872 $ -- $ -- $380,748,508
Temporary investments in short-term municipal
securities, at amortized cost...................... -- 1,600,000 -- (20,000)(1) 1,580,000
Cash................................................. 97,112 -- 33,360 9,872 (2) 140,344
Other assets less liabilities........................ (738,704) (1,281,455) -- -- (2,020,159)
------------- ------------ -------- ----------- -------------
Net assets........................................... $319,631,044 $60,794,417 $33,360 $ (10,128) $380,448,693
============= ============ ======== =========== =============
Class A Shares:
Net assets........................................... $318,456,444 $ 7,577,209 $ 8,340 $ (1,262) $326,040,731
============= ============ ======== =========== =============
Shares outstanding................................... 30,652,271 746,204 834 1,204,764 (3) 32,604,073
============= ============ ======== =========== =============
Net asset value and redemption price per share....... $ 10.39 $ 10.15 $ 10.00 $ 10.00
============= ============ ======== =============
Offering price per share (net asset value per share
plus maximum sales charge of 4.20%, 4.50%, 4.20%
and 4.20%, respectively, of offering price)........ $ 10.85 $ 10.63 $ 10.44 $ 10.44
============= ============ ======== =============
Class B Shares:
Net assets........................................... N/A N/A $ 8,340 $ 8,340
============= ============ ======== =============
Shares outstanding................................... N/A N/A 834 834
============= ============ ======== =============
Net asset value...................................... N/A N/A $ 10.00 $ 10.00
============= ============ ======== =============
Class C Shares:
Net assets........................................... $ 1,174,600 $ 192,489 $ 8,340 $ (32) $ 1,375,397
============= ============ ======== =========== =============
Shares outstanding................................... 113,035 19,030 834 4,641 (3) 137,540
============= ============ ======== =========== =============
Net asset value, offering and redemption price per
share.............................................. $ 10.39 $ 10.12 $ 10.00 $ 10.00
============= ============ ======== =============
Class R Shares:
Net assets........................................... N/A $53,024,719 $ 8,340 $ (8,834) $ 53,024,225
============= ============ ======== =========== =============
Shares outstanding................................... N/A 5,216,664 834 84,925 (3) 5,302,423
============= ============ ======== =========== =============
Net asset value and redemption price per share....... N/A $ 10.16 $ 10.00 $ 10.00
============= ============ ======== =============
</TABLE>
(1) See note (1) to Pro Forma Capitalization table above as to the Effective
Time of the Reorganization. Assumes sales of temporary investments to
provide additional cash needed to fully distribute all net investment income
of Nuveen Florida.
(2) Net effect on cash after sales of temporary investments and distribution of
net investment income of Nuveen Florida.
(3) See note (1) to Pro Forma Capitalization table. Based on the issuance of
31,845,644 and 757,595 class A shares, 117,460 and 19,246 class C shares and
5,301,589 class R shares of New Florida and the cancellation of all shares
of each class of Flagship Florida and Nuveen Florida, respectively.
P-8
<PAGE> 126
PRO FORMA FINANCIAL INFORMATION
NEW FLORIDA
PRO FORMA CONDENSED INCOME STATEMENT FOR THE TWELVE MONTHS ENDED MAY 31,
1996 (UNAUDITED)
<TABLE>
<CAPTION>
FLAGSHIP NUVEEN
FLORIDA FLORIDA PRO FORMA NEW FLORIDA
(ACTUAL) (ACTUAL) ADJUSTMENTS (AS ADJUSTED)
------------ ---------- ----------- -------------
<S> <C> <C> <C> <C>
Investment Income:
Tax-exempt interest income.................................... $ 20,541,373 $3,355,242 $ -- $ 23,896,615
------------- ----------- ---------- -------------
Expenses:
Management fees(1).......................................... 1,665,969 322,145 110,929 2,099,043
12b-1 fees(2)............................................... 1,331,239 13,359 (666,558) 678,040
Other expenses.............................................. 446,874 180,616 (103,578)(3) 523,912
------------- ----------- ---------- ------------
Total expenses............................................ 3,444,082 516,120 (659,207) 3,300,995
Expense waiver/reimbursement from investment adviser(4)..... (733,912) (63,472) 683,255 (114,129)
------------- ----------- ---------- ------------
Net expenses.............................................. 2,710,170 452,648 24,048 3,186,866
------------- ----------- ---------- ------------
Net investment income........................................... 17,831,203 2,902,594 (24,048) 20,709,749
------------- ----------- ---------- ------------
Realized and Unrealized Gain (Loss) from Investments:
Net realized gain (loss) from investment transactions, net of
taxes, if applicable........................................ 4,828,780 (268,019) -- 4,560,761
Net change in unrealized appreciation or depreciation of
investments................................................. (12,275,838) (737,963) -- (13,013,801)
------------- ----------- ---------- ------------
Net gain (loss) from investments.......................... (7,447,058) (1,005,982) -- (8,453,040)
------------- ----------- ---------- ------------
Net increase (decrease) in net assets from operations........... $ 10,384,145 $1,896,612 $ (24,048) $ 12,256,709
============= =========== ========== ============
</TABLE>
(1) Reflects a management fee of .50% of net assets of Flagship Florida and .55%
of net assets for the first $125 million of Nuveen Florida. Also reflects a
management fee of .55% of net assets for the first $125 million, .5375% of
net assets for the next $125 million and .525% of net assets over $250
million of New Florida (as adjusted).
(2) Reflects a 12b-1 service fee of .20% of net assets for classes A and C of
Flagship Florida and .25% of net assets for classes A and C of Nuveen
Florida. New Florida (as adjusted) reflects a 12b-1 service fee of .20% of
net assets for classes A and C. Also included is a 12b-1 distribution fee of
.20% and .75% of net assets of class A and C, respectively, of Flagship
Florida. Class C of Nuveen Florida is subject to a 12b-1 distribution fee of
.75% of net assets. New Florida (as adjusted) reflects a 12b-1 distribution
fee of .55% of net assets for class C. Class R is not subject to a 12b-1
service or distribution fee.
(3) Represents estimated reduction in operating expenses, including audit,
legal, custodian, transfer agency and report printing. New Florida (as
adjusted) would have a much larger asset base than either Fund currently
has. Certain operating expenses would have been reduced had they been
applied to the larger asset base for one Fund, rather than to two smaller
separate Funds.
(4) Reflects an expense waiver/reimbursement of .22% of net assets of Flagship
Florida and .11% of net assets of Nuveen Florida. New Florida (as adjusted)
reflects an expense waiver/reimbursement of .03% of net assets.
P-9
<PAGE> 127
PRO FORMA FINANCIAL INFORMATION
NEW FLORIDA
PRO FORMA PORTFOLIO OF INVESTMENTS
MAY 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
FLAGSHIP NUVEEN PRO FORMA
PRINCIPAL MARKET MARKET MARKET
AMOUNT DESCRIPTION VALUE VALUE VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 3,000,000 Alliance Airport Authority, Incorporated, TX--Special Facilities
Revenue-- Federal Express Corporation Project--Series 1996,
6.375%, 04/01/21.................................................. $ 2,911,380 $ -- $ 2,911,380
3,750,000 Auburndale, FL Water and Sewer Revenue--Series 1995, 5.250%,
12/01/25.......................................................... 3,396,675 -- 3,396,675
500,000 Brevard County, FL School Board--Certificates of Participation--
Series 1996 A and B, 5.400%, 07/01/11............................. 489,085 -- 489,085
500,000 Brevard County, FL School Board--Certificates of
Participation--Series 1996 A and B, 5.400%, 07/01/12.............. 486,055 -- 486,055
1,100,000 Brevard County, FL School Board--Certificates of
Participation--Series 1996 A and B, 5.500%, 07/01/21.............. 1,034,495 -- 1,034,495
300,000 Brevard County Education Facilities Authority (Florida Institute of
Technology), 6.875%, 11/01/22..................................... -- 304,758 304,758
600,000 Broward County Housing Finance Authority (Lakeside Apartments),
7.000%, 2/01/25................................................... -- 634,584 634,584
1,500,000 Broward County, FL School Board--Certificates of Participation,
7.125%, 07/01/10.................................................. 1,662,600 -- 1,662,600
4,565,000 Broward County, FL Resource Recovery Revenue--SES Broward Company,
L.P. South Project--Series 1984, 7.950%, 12/01/08................. 5,026,887 -- 5,026,887
1,995,000 Broward County, FL Housing Finance Authority Revenue--Single
Family--Series 1990 A, 7.900%, 03/01/23........................... 2,100,675 -- 2,100,675
5,425,000 Broward County, FL Housing Finance Authority Revenue--Single
Family--Series 1985, 0.000%, 04/01/16............................. 686,371 -- 686,371
1,925,000 Boynton Beach, FL Water and Sewer System Utility Revenue--Series
1990, 7.400%, 11/01/15............................................ 2,167,627 -- 2,167,627
5,500,000 Cape Coral, FL Health Facilities Authority--First Mortgage
Revenue--Gulf Care, Incorporated--Series 1995 A, 6.000%,
10/01/25.......................................................... 5,373,390 -- 5,373,390
190,000 Cape Coral Health Facilities Authority (Cape Coral Medical Center),
8.125%, 11/01/08.................................................. -- 202,285 202,285
6,000,000 Citrus County, FL Pollution Control Revenue-- Florida Power
Corporation-- Crystal River Power Plant--Series 1992A, 6.625%,
01/01/27.......................................................... 6,255,060 -- 6,255,060
250,000 City of Hollywood, Florida, Water and Sewer Revenue Bonds, Series
1991, 6.875%, 10/01/21 (Pre-refunded to 10/01/01)................. -- 279,270 279,270
630,000 City of St. Petersburg Health Facilities Authority (Florida),
Revenue Bonds, Series 1985A (Allegany Health System Loan Program),
7.000%, 12/01/15.................................................. -- 689,182 689,182
165,000 City of Tampa, Florida, Water and Sewer Systems Revenue Bonds,
Series 1992, 6.000%, 10/01/17..................................... -- 166,218 166,218
335,000 City of Tampa, Florida, Water and Sewer Systems Revenue Bonds,
Series 1992, 6.000%, 10/01/17 (Pre-refunded to 10/01/02).......... -- 359,850 359,850
2,500,000 Clay County, FL Housing Finance Authority Revenue--Single Family
Mortgage--Series 1995, 6.550%, 03/01/28........................... 2,520,775 -- 2,520,775
750,000 Clay County, FL Industrial Development Authority Revenue--Cargill
Project--Series 1992, 6.400%, 03/01/11............................ 780,038 -- 780,038
15,000,000 Colquitt County, GA Development Authority Revenue--Southern Care
Corporation--Series 1991 A, 0.000%, 12/01/21...................... 2,476,350 -- 2,476,350
7,585,000 Dade County, FL Aviation Revenue--Series 1996 A and B, 5.600%,
10/01/26.......................................................... 7,182,995 -- 7,182,995
4,000,000 Dade County, FL Aviation Revenue--Series 1995 A, B and C, 5.750%,
10/01/25.......................................................... 3,873,080 -- 3,873,080
1,500,000 Dade County, FL Health Facilities Authority Revenue--Baptist
Hospital of Miami Project, 5.750%, 05/01/21....................... 1,494,990 -- 1,494,990
2,735,000 Dade County, FL Health Facilities Authority Revenue--Catholic Health
and Rehabilitation Inc. , 7.125%, 08/15/09........................ 2,901,507 -- 2,901,507
300,000 Dade County Health Facilities Authority (North Shore Medical
Center), 6.500%, 8/15/15.......................................... -- 311,442 311,442
250,000 Dade County Health Facilities Authority (South Miami Hospital),
7.000%, 10/01/18 (Pre-refunded to 10/01/99)....................... -- 273,803 273,803
2,600,000 Dade County, FL Health Facilities Authority Revenue--South Miami
Hospital--Series 1991 A, 6.750%, 10/01/20......................... 2,886,624 -- 2,886,624
290,000 Dade County, FL Housing Finance Authority--Single Family--Series B,
7.750%, 03/01/17.................................................. 305,298 -- 305,298
</TABLE>
P-10
<PAGE> 128
PRO FORMA FINANCIAL INFORMATION
<TABLE>
<CAPTION>
FLAGSHIP NUVEEN PRO FORMA
PRINCIPAL MARKET MARKET MARKET
AMOUNT DESCRIPTION VALUE VALUE VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 1,355,000 Dade County, FL Housing Finance Authority--Single Family--Series D,
6.950%, 12/15/12.................................................. $ 1,422,059 $ -- $ 1,422,059
40,000 Dade County, FL Housing Finance Authority--Single Family--Series E,
7.000%, 03/01/24.................................................. 41,537 -- 41,537
1,000,000 Dade County, FL Housing Finance Authority--Single Family Mortgage
Revenue--Series 1995, 6.700%, 04/01/28............................ 1,007,460 -- 1,007,460
1,000,000 Dade County (Miami International Airport), 6.550%, 10/01/13
(Alternative Minimum Tax)......................................... -- 1,052,620 1,052,620
7,600,000 Dade County, FL Professional Sports Franchise Facilities Tax
Revenue-- Series 1995, 0.000%, 10/01/27........................... 1,178,152 -- 1,178,152
6,730,000 Dade County, FL Professional Sports Franchise Facilities Tax
Revenue-- Series 1995, 5.250%, 10/01/30........................... 6,052,424 -- 6,052,424
2,480,000 Dade County, Florida, Public Facilities Revenue Refunding Bonds
(Jackson Memorial Hospital), Series 1993A, 4.875%, 6/01/15........ -- 2,175,158 2,175,158
1,000,000 Dade County, FL Seaport General Obligation--Series 1996, 5.125%,
10/01/26.......................................................... 878,350 -- 878,350
470,000 Dade County, Florida, Special Housing Revenue Bonds (City of Miami
Developments-Indenture VIII), Series A, 12.000%, 7/01/12.......... -- 482,309 482,309
255,000 Dade County, Florida, Special Obligation Bonds, (Courthouse Center
Project), Series 1994, 6.300%, 4/01/14............................ -- 265,299 265,299
2,500,000 Dade County, FL Water and Sewer System Revenue--Series 1995, 5.500%,
10/01/25.......................................................... 2,341,275 -- 2,341,275
1,000,000 Davie Water and Sewer System, 6.250%, 10/01/17...................... -- 1,024,990 1,024,990
600,000 Daytona Beach Water and Sewer System, 6.000%, 11/15/14.............. -- 604,920 604,920
700,000 Detroit, MI Downtown Development Authority--Tax Increment
Development Area Number 1 Projects--Series 1996 B, C-1, C-2 and D,
6.250%, 07/01/25.................................................. 683,466 -- 683,466
1,600,000 Dunedin (Mease Health Care), 5.375%, 11/15/13....................... -- 1,524,240 1,524,240
215,000 Duval County, FL Housing Finance Authority--Single Family--Series A,
7.850%, 12/01/22.................................................. 226,468 -- 226,468
425,000 Duval County, FL Housing Finance Authority--Single Family--Series B,
7.500%, 06/01/15.................................................. 448,447 -- 448,447
520,000 Duval County, FL Housing Finance Authority--Single Family--Series C,
7.650%, 09/01/10.................................................. 549,453 -- 549,453
735,000 Duval County, FL Housing Finance Authority Revenue--Single
Family--Series 1994, 6.550%, 10/01/15............................. 743,048 -- 743,048
2,700,000 Duval County, FL Housing Finance Authority--Multifamily Housing
Revenue--Greentree Place--Series 1995, 6.750%, 04/01/25........... 2,725,056 -- 2,725,056
325,000 Escambia County Housing Finance Authority, Single Family Mortgage,
6.900%, 4/01/20 (Alternative Minimum Tax)......................... -- 334,932 334,932
2,000,000 Escambia County Housing Finance Authority, Single Family, 6.950%,
10/01/27 (Alternative Minimum Tax)................................ -- 2,024,780 2,024,780
1,690,000 Escambia County, FL Housing Finance Authority--Single Family,
7.400%, 10/01/23.................................................. 1,761,301 -- 1,761,301
5,500,000 Escambia County, FL Pollution Control Revenue--Champion
International Corporation--Series 1994, 6.900%, 08/01/22.......... 5,704,655 -- 5,704,655
500,000 Escambia County School Board Certificates of Participation, 6.375%,
2/01/12........................................................... -- 516,220 516,220
2,000,000 Escambia County, FL Utilities Authority--System Revenue--Series 1992
B, 0.000%, 01/01/15............................................... 666,680 -- 666,680
300,000 Florida Department of General Services General Obligation, 6.600%,
7/01/17........................................................... -- 320,529 320,529
2,500,000 Florida Housing Finance Agency, 6.875%, 8/01/26 (Alternative Minimum
Tax).............................................................. -- 2,643,975 2,643,975
750,000 Florida Housing Finance Agency, General Mortgage Revenue Refunding
Bonds, 1992 Series A, 6.400%, 6/01/24............................. -- 761,258 761,258
5,000 Florida Housing Finance Agency, Home Ownership (GNMA), 8.595%,
11/01/18 (Alternative Minimum Tax)................................ -- 5,177 5,177
1,000,000 Florida Housing Finance Agency--Multifamily Housing Revenue--Antigua
Club Apartments--Series 1995 A1, 6.750%, 08/01/14................. 1,053,520 -- 1,053,520
1,115,000 Florida Housing Finance Agency--Multifamily Housing
Revenue--Brittany of Rosemont Apartments--Series 1995 C1, 6.875%,
08/01/26.......................................................... 1,176,537 -- 1,176,537
1,260,000 Florida Housing Finance Agency Revenue--Vinyards Project--Series
1995 H, 6.400%, 11/01/15.......................................... 1,246,127 -- 1,246,127
1,660,000 Florida Housing Finance Agency Revenue--Vinyards Project--Series
1995 H, 6.500%, 11/01/25.......................................... 1,649,110 -- 1,649,110
1,425,000 Florida Housing Finance Agency--Single Family Revenue--Series 1994,
6.250%, 07/01/11.................................................. 1,443,183 -- 1,443,183
</TABLE>
P-11
<PAGE> 129
PRO FORMA FINANCIAL INFORMATION
<TABLE>
<CAPTION>
FLAGSHIP NUVEEN PRO FORMA
PRINCIPAL MARKET MARKET MARKET
AMOUNT DESCRIPTION VALUE VALUE VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 715,000 Florida Housing Finance Agency--Single Family Mortgage
Revenue--Series 1995 A, 6.550%, 07/01/14.......................... $ 724,910 $ -- $ 724,910
715,000 Florida Housing Finance Agency--Single Family Mortgage
Revenue--Series 1995 A, 6.650%, 01/01/24.......................... 723,609 -- 723,609
1,000,000 Florida Housing Finance Agency--Homeowner Mortgage Revenue--Series
1995 2B, 5.950%, 07/01/14......................................... 998,840 -- 998,840
1,440,000 Florida Housing Finance Agency Multi-Family Housing Rev Bonds. 1989
Ser I (GNMA - Driftwood Terrace Apts), 7.650%, 12/20/31
(Alternative Minimum Tax)......................................... -- 1,527,250 1,527,250
1,000,000 Florida Municipal Power Agency, All-Requirements Power Supply
Project Revenue Bonds, Series 1992, 6.250%, 10/01/21 (Pre-refunded
to 10/01/02)...................................................... -- 1,094,550 1,094,550
1,145,000 Florida Municipal Power Agency, Stanton II Project Revenue Bonds,
Series 1992, 6.000%, 10/01/27 (Pre-refunded to 10/01/02).......... -- 1,238,432 1,238,432
2,165,000 Florida State Board of Education Capital Outlay--Series 1985,
9.125%, 06/01/14.................................................. 2,959,663 -- 2,959,663
335,000 Florida State Board of Education Capital Outlay, 9.125%, 06/01/14... 458,380 -- 458,380
5,000,000 Florida State Board of Education Capital Outlay--Series 1991 B,
6.700%, 06/01/22.................................................. 5,475,050 -- 5,475,050
3,000,000 Florida State Board of Education Capital Outlay--Series 1992 C,
6.625%, 06/01/17.................................................. 3,305,070 -- 3,305,070
4,000,000 Florida State Broward County Expressway Authority--Series 1984,
9.875%, 07/01/09.................................................. 5,612,280 -- 5,612,280
1,000,000 Florida State Broward County Expressway Authority--Series 1984,
10.000%, 07/01/14................................................. 1,465,060 -- 1,465,060
1,500,000 Florida State Department of Corrections--Certificates of
Participation-- Series 1994, 6.000%, 03/01/14..................... 1,514,160 -- 1,514,160
3,500,000 Florida State Department of Correctional Privatization Commission--
Certificates of Participation--350 Bed Youth--Series 1995, 5.000%,
08/01/17.......................................................... 3,106,285 -- 3,106,285
2,500,000 Florida State Department of Transportation--Turnpike Revenue--
Series 1989 A, 7.500%, 07/01/19................................... 2,757,900 -- 2,757,900
530,000 Florida State Department of Transportation--Turnpike Revenue--
Series 1992A, 6.350%, 07/01/22.................................... 543,303 -- 543,303
1,650,000 Florida Turnpike Authority, Department of Transportation, Turnpike
Revenue Bonds, Series 1992 A, 6.350%, 7/01/22 (Pre-refunded to
7/01/02).......................................................... -- 1,798,104 1,798,104
2,000,000 Florida Village Center Community Development District--Water and
Sewer Utility Revenue--Series 1993, 5.000%, 11/01/13.............. 1,785,620 -- 1,785,620
500,000 Gainesville Utility System, 6.500%, 10/01/22........................ -- 552,590 552,590
55,000 Greater Orlando Aviation Authority--Airport Facilities Revenue--City
of Orlando, FL, 8.000%, 10/01/18.................................. 60,488 -- 60,488
3,105,000 Gulf Breeze, FL Local Government Loan Program Floating Rate Demand
Revenue--Series 1985 A through E, 7.750%, 12/01/15................ 3,439,967 -- 3,439,967
1,000,000 Gulf Breeze, FL Local Government Loan Program Floating Rate Demand
Revenue--Series 1985 B, 5.900%, 12/01/11.......................... 1,017,310 -- 1,017,310
5,000,000 Hernando County, FL Revenue Criminal Justice Complex, 7.650%,
07/01/16.......................................................... 6,143,150 -- 6,143,150
1,020,000 Hillsborough County, FL Capital Improvement Program Revenue--Series
1994, 6.400%, 08/01/09............................................ 1,121,510 -- 1,121,510
250,000 Hillsborough County, Capital Improvement (Museum of Science and
Industry), 6.400%, 1/01/12 (Pre-refunded to 1/01/00).............. -- 268,560 268,560
2,990,000 Hillsborough County, FL Environmentally Sensitive Lands Acquisition
and Protection Program--Series 1992, 6.250%, 07/01/08............. 3,085,381 -- 3,085,381
2,500,000 Hillsborough County, FL Industrial Development Authority Pollution
Control Revenue--Tampa Electric Company, 7.875%, 08/01/21......... 2,871,400 -- 2,871,400
1,200,000 Hillsborough County Industrial Development Authority, Pollution
Control Revenue Refunding Bonds (Tampa Electric Company Project)
Series 1992, 8.000%, 5/01/22...................................... -- 1,405,032 1,405,032
1,000,000 Hillsborough County, FL Port District Revenue--Tampa Port
Authority-- Series 1990, 8.250%, 06/01/09......................... 1,151,670 -- 1,151,670
1,635,000 Hillsborough County, FL Utility Revenue--Series A, 7.000%,
08/01/14.......................................................... 1,812,986 -- 1,812,986
2,250,000 Hillsborough County, FL Utility Revenue--Series A, 6.500%,
08/01/16.......................................................... 2,334,398 -- 2,334,398
3,500,000 Hillsborough County, FL Utility Revenue--Series B, 6.500%,
08/01/16.......................................................... 3,631,285 -- 3,631,285
745,000 Housing Finance Authority of Dade County (Florida), Single Family
Mortgage Revenue Bonds, Series B, 7.250%, 9/01/23 (Alternative
Minimum Tax)...................................................... 651,578 119,129 770,707
</TABLE>
P-12
<PAGE> 130
PRO FORMA FINANCIAL INFORMATION
<TABLE>
<CAPTION>
FLAGSHIP NUVEEN PRO FORMA
PRINCIPAL MARKET MARKET MARKET
AMOUNT DESCRIPTION VALUE VALUE VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 1,000,000 Housing Finance Authority of Manatee County, Florida, Single Family
Mortgage Revenue Bonds, Series 1994-Sub Series 3, 7.600%, 11/01/26
(Alternative Minimum Tax)......................................... $ -- $ 1,089,880 $ 1,089,880
470,000 Jacksonville Electric Authority, 7.500%, 10/01/02................... -- 492,179 492,179
500,000 Jacksonville Electric Authority, 5.500%, 10/01/14................... -- 474,780 474,780
1,810,000 Jacksonville, FL Electric Authority--Bulk Power Supply System
Revenue-- Scherer 4 Project--Series 1991 A, 7.000%, 10/01/12...... 1,995,036 -- 1,995,036
3,000,000 Jacksonville, FL Electric Authority--St. Johns River Power System
Revenue-- Issue 2--Series 11, 5.250%, 10/01/20.................... 2,671,620 -- 2,671,620
250,000 Jacksonville Excise Taxes, 6.500%, 10/01/13......................... -- 262,673 262,673
500,000 Jacksonville, FL Excise Taxes Revenue--Series 1996 A, 5.000%,
10/01/16.......................................................... 447,070 -- 447,070
605,000 Jacksonville Health Facilities Authority, Health Facilities Revenue
Refunding Bonds, Daughters of Charity National Health System,
Inc., St. Vincent's Medical Center Issue Series 1990, 7.500%,
11/01/15 (Pre-refunded to 11/01/00)............................... -- 683,106 683,106
1,750,000 Jacksonville Health Facilities Authority Hospital Revenue (New
Children's Hospital at Baptist Medical Center), 7.000%, 6/01/21... -- 1,904,123 1,904,123
3,000,000 Jacksonville, FL Health Facilities Authority Hospital Revenue--St.
Luke's Hospital, 7.125%, 11/15/20................................. 3,236,220 -- 3,236,220
600,000 Jacksonville, FL Industrial Development Revenue--Cargill
Project--Series 1992, 6.400%, 03/01/11............................ 623,592 -- 623,592
4,000,000 Jacksonville, FL Port Authority--Port Facilities Revenue--Series
1996, 5.625%, 11/01/18 (WI)....................................... 3,770,160 -- 3,770,160
375,000 Jacksonville Water and Sewer (Jacksonville Suburban Utilities
Corporation), 6.750%, 6/01/22 (Alternative Minimum Tax)........... -- 403,399 403,399
500,000 Jacksonville, FL District Water and Sewer Revenue--Series 1996,
5.000%, 10/01/20.................................................. 436,400 -- 436,400
250,000 Jupiter Water System, 6.250%, 10/01/18.............................. -- 255,348 255,348
2,000,000 Key West, FL Utility Board Electric System Revenue--Series 1991,
0.000%, 10/01/14.................................................. 676,600 -- 676,600
2,500,000 Key West, FL Utility Board Electric System Revenue--Series 1991,
0.000%, 10/01/17.................................................. 707,425 -- 707,425
1,300,000 Kissimmee Utility Authority (Florida), Electric System Improvement
and Refunding Revenue Bonds, Series 1993, 5.375%, 10/01/12........ -- 1,254,968 1,254,968
1,500,000 Lady Lake, FL Industrial Development Revenue--Sunbelt Utilities,
9.625%, 07/01/15.................................................. 1,791,585 -- 1,791,585
6,000,000 Lakeland, FL Hospital Revenue--Lakeland Regional Medical Center
Project-- Series 1996, 5.250%, 11/15/25........................... 5,427,120 -- 5,427,120
2,125,000 Lee County, FL Solid Waste System Revenue--Series A, 7.000%,
10/01/11.......................................................... 2,294,022 -- 2,294,022
435,000 Leon County, FL Housing Finance Authority Revenue--Single Family,
7.300%, 04/01/21.................................................. 450,751 -- 450,751
3,000,000 Leon County, FL Housing Finance Authority Revenue--Single
Family--Series 1995, 7.300%, 01/01/28............................. 3,229,890 -- 3,229,890
1,850,000 Manatee County, FL Public Utilities Revenue--Series 1991 C, 0.000%,
10/01/08.......................................................... 935,027 -- 935,027
2,800,000 Manatee County, FL Public Utilities Revenue--Series 1991 C, 0.000%,
10/01/09.......................................................... 1,320,032 -- 1,320,032
2,320,000 Martin County, FL Health Facilities Authority Hospital
Revenue--Martin Memorial Hospital--Series A, 7.125%, 11/15/04..... 2,545,063 -- 2,545,063
1,000,000 Martin County, FL Health Facilities Authority Hospital
Revenue--Martin Memorial Hospital--Series B, 7.100%, 11/15/20..... 1,086,830 -- 1,086,830
2,000,000 Martin County, FL Pollution Control Revenue--Florida Power and Light
Company--Series 1990, 7.300%, 07/01/20............................ 2,197,460 -- 2,197,460
1,010,000 Martin County, FL Tropical Farms Water and Sewer Special Assessment
District--Series 1995, 5.900%, 11/01/11........................... 1,023,039 -- 1,023,039
1,000,000 Metropolitan Atlanta Rapid Transit Authority--Georgia Sales Tax
Revenue-- Series 1992 P, 6.250%, 07/01/20......................... 1,049,930 -- 1,049,930
6,050,800 Miami Beach Water and Sewer System, 5.375%, 9/01/15................. 3,297,560 2,409,546 5,707,106
3,000,000 Mobile, AL General Obligation Warrants--Series 1996, 5.000%,
02/15/16.......................................................... 2,700,540 -- 2,700,540
1,050,000 Naples, FL Hospital Revenue--Naples Community Hospital, 7.200%,
10/01/19.......................................................... 1,171,989 -- 1,171,989
5,500,000 New York City, NY General Obligation--Series 1996 F and G, 5.750%,
02/01/19.......................................................... 4,941,750 -- 4,941,750
3,000,000 New York City, NY General Obligation--Series 1996 H and I, 5.875%,
03/15/18.......................................................... 2,743,710 -- 2,743,710
1,500,000 Nassau County, FL Pollution Control Revenue--ITT Rayonier Project--
Series 1993, 6.200%, 07/01/15..................................... 1,457,475 -- 1,457,475
</TABLE>
P-13
<PAGE> 131
PRO FORMA FINANCIAL INFORMATION
<TABLE>
<CAPTION>
FLAGSHIP NUVEEN PRO FORMA
PRINCIPAL MARKET MARKET MARKET
AMOUNT DESCRIPTION VALUE VALUE VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 250,000 North Broward Hospital District (Florida), Hospital Revenue
Refunding Bonds, Series 1992A, 6.250%, 1/01/12.................... $ -- $ 259,523 $ 259,523
1,330,000 North Miami, FL Health Facilities Authority Revenue--Bon Secours
Health System--Villa Maria Nursing Center, 7.500%, 09/01/12....... 1,442,186 -- 1,442,186
3,400,000 North Springs, FL Improvement District Water and Sewer
Revenue--Broward County--Series 1991, 8.000%, 10/01/16............ 3,971,336 -- 3,971,336
85,000 Orange County, FL Capital Improvement Revenue--Series A, 7.700%,
10/01/18.......................................................... 92,189 -- 92,189
15,000 Orange County, FL Capital Improvement Revenue--Series A, 7.700%,
10/01/18.......................................................... 16,439 -- 16,439
2,500,000 Orange County, FL Health Facilities Authority Revenue--Adventist
Health/ Sunbelt--Series 1991, 6.875%, 11/15/15.................... 2,692,325 -- 2,692,325
8,895,000 Orange County, FL Health Facilities Authority Revenue--Adventist
Health System/Sunbelt--Series 1995, 5.250%, 11/15/20.............. 8,023,735 -- 8,023,735
2,500,000 Orange County, FL Health Facilities Authority Revenue--Adventist
Health/ Sunbelt--Series 1991, 6.750%, 11/15/21.................... 2,665,600 -- 2,665,600
1,000,000 Orange County, FL Health Facilities Authority Revenue--Adventist
Health System/Sunbelt--Series 1995, 5.750%, 11/15/25.............. 964,270 -- 964,270
280,000 Orange County, FL Housing Finance Authority Revenue--Series A,
7.600%, 01/01/24.................................................. 295,778 -- 295,778
1,330,000 Orange County, FL Housing Finance Authority Revenue--Series B,
8.100%, 11/01/21.................................................. 1,408,124 -- 1,408,124
420,000 Orlando-Orange County, FL Expressway Authority Revenue--Series 1990,
6.500%, 10/01/20.................................................. 455,574 -- 455,574
145,000 Orange County Sales Tax, 6.125%, 1/01/19............................ -- 154,735 154,735
1,500,000 Orange County, Florida, Sales Tax Revenue Bonds, Series 1993B,
5.375%, 1/01/24................................................... -- 1,394,250 1,394,250
1,750,000 Orange County, FL Tourist Development Tax Revenue, 7.250%,
10/01/10.......................................................... 1,956,710 -- 1,956,710
500,000 Orange County, Florida, Water Utilities System Revenue Bonds, Series
1992, 6.250%, 10/01/17............................................ -- 511,900 511,900
1,000,000 Orlando-Orange County Expressway, 5.125%, 7/01/20................... -- 893,320 893,320
1,000,000 Orange County Housing Finance Authority (Ashley Point Apartments),
7.100%, 10/01/24 (Alternative Minimum Tax)........................ -- 1,022,310 1,022,310
1,000,000 Orlando and Orange County Expressway Authority, 5.500%, 7/01/18..... -- 951,510 951,510
1,000,000 Orlando, FL Utilities Commission--Water and Electric Revenue--
Series 1989 D, 6.750%, 10/01/17................................... 1,116,630 -- 1,116,630
375,000 Orlando, FL Utilities Commission--Water and Electric Revenue--
Series 1989 D, 5.000%, 10/01/23................................... 317,801 -- 317,801
1,000,000 Orlando Utilities Commission, Water and Electric Subordinated
Revenue Bonds, Series 1989D, 5.500%, 10/01/20..................... -- 922,560 922,560
1,250,000 Orlando (Florida) Utilities Commission, Water and Electric
Subordinated Revenue Bonds, Series 1992A, 6.000%, 10/01/20........ -- 1,242,750 1,242,750
1,550,000 Osceola County, FL Industrial Development Authority
Revenue--Evangelical Lutheran Society Project, 6.750%, 05/01/16... 1,653,354 -- 1,653,354
2,475,000 Palm Beach County, FL Airport System Revenue, 7.500%, 10/01/00...... 2,729,356 -- 2,729,356
Palm Beach County Criminal Justice Facilities:
1,000,000 5.300%, 6/01/05..................................................... -- 1,014,650 1,014,650
1,000,000 5.375%, 6/01/10..................................................... -- 985,510 985,510
1,750,000 Palm Beach County, FL Criminal Justice Facilities Revenue , 7.250%,
06/01/11.......................................................... 1,944,828 -- 1,944,828
1,055,000 Palm Beach County, FL Housing Finance Authority--Single Family
Mortgage Revenue, 7.600%, 03/01/23................................ 1,111,759 -- 1,111,759
1,000,000 Palm Beach County, FL School Board--Certificates of Participation--
Series 1994 A, 6.375%, 08/01/15................................... 1,033,880 -- 1,033,880
5,050,000 Palm Beach County, FL School Board--Certificates of Participation--
Series 1995 A, 5.375%, 08/01/15................................... 4,742,102 -- 4,742,102
2,700,000 Palm Beach County, FL Solid Waste Industrial Development Revenue--
Okeelanta Power--Series 1993 A, 6.375%, 02/15/07.................. 2,671,056 -- 2,671,056
2,000,000 Palm Beach County, FL Solid Waste Industrial Development Revenue--
Okeelanta Power--Series 1993 A, 6.700%, 02/15/15.................. 1,960,100 -- 1,960,100
7,500,000 Palm Beach County, FL Solid Waste Industrial Development
Revenue--Okeelanta Power--Series 1993 A, 6.850%, 02/15/21......... 7,358,925 -- 7,358,925
1,000,000 Palm Beach Gardens, FL Special Obligation Revenue, 7.250%,
07/01/15.......................................................... 1,083,960 -- 1,083,960
4,580,000 Pembroke Pines, FL Special Assessment Number 94-1--Series 1995,
5.750%, 11/01/05.................................................. 4,517,666 -- 4,517,666
</TABLE>
P-14
<PAGE> 132
PRO FORMA FINANCIAL INFORMATION
<TABLE>
<CAPTION>
FLAGSHIP NUVEEN PRO FORMA
PRINCIPAL MARKET MARKET MARKET
AMOUNT DESCRIPTION VALUE VALUE VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 2,000,000 Pensacola Health Facilities Authority (Daughters of Charity--Sacred
Heart), 5.250%, 1/01/11........................................... $ -- $ 1,897,340 $ 1,897,340
4,000,000 Pinellas County, FL Pollution Control Revenue--Florida Power
Corporation-- Anclote and Bartow Power Plants, 7.200%, 12/01/14... 4,269,240 -- 4,269,240
2,000,000 Pinellas County (Florida), Health Facilities Authority, Hospital
Revenue Bonds, Series 1993 (Morton Plant Health System Project),
5.500%, 11/15/18.................................................. -- 1,890,400 1,890,400
2,000,000 Pinellas County, FL Housing Finance Authority Revenue--Single
Family-- Series 1995 A, 6.650%, 08/01/21.......................... 2,019,840 -- 2,019,840
1,160,000 Polk County, FL Housing Finance Authority--Single Family
Revenue--Series A, 7.150%, 09/01/23............................... 1,208,210 -- 1,208,210
1,650,000 Polk County, FL Industrial Development Authority Revenue--Winter
Haven Hospital--Series 1985-2, 6.250%, 09/01/15................... 1,688,164 -- 1,688,164
1,000,000 Saint Johns County, FL Industrial Development Authority--Hospital
Revenue--Flagler Hospital--Series 1992, 6.000%, 08/01/22.......... 929,120 -- 929,120
3,000,000 Sanford Airport Authority, Florida--Industrial Development Revenue
Bonds-- (Central Florida Terminals, Inc. Project)--Series 1995 A
and B, 7.500%, 05/01/15........................................... 2,765,940 -- 2,765,940
3,270,000 Sanford Airport Authority, Florida--Industrial Development Revenue
Bonds-- (Central Florida Terminals, Inc. Project)--Series 1995 A
and B, 7.750%, 05/01/21........................................... 2,993,848 -- 2,993,848
855,000 Sarasota County, FL Health Facilities Authority Revenue--Sunnyside
Properties Project--Series 1995, 5.500%, 05/15/01................. 840,456 -- 840,456
540,000 Sarasota County, FL Health Facilities Authority Revenue--Sunnyside
Properties Project--Series 1995, 5.500%, 05/15/02................. 525,053 -- 525,053
570,000 Sarasota County, FL Health Facilities Authority Revenue--Sunnyside
Properties Project--Series 1995, 5.500%, 05/15/03................. 548,021 -- 548,021
600,000 Sarasota County, FL Health Facilities Authority Revenue--Sunnyside
Properties Project--Series 1995, 5.500%, 05/15/04................. 569,946 -- 569,946
170,000 Sarasota County, FL Health Facilities Authority Revenue--Sunnyside
Properties Project--Series 1995, 5.500%, 05/15/05................. 159,576 -- 159,576
1,000,000 Sarasota County, FL Health Facilities Authority Revenue--Sunnyside
Properties Project--Series 1995, 6.000%, 05/15/10................. 930,280 -- 930,280
2,000,000 Sarasota County, FL Solid Waste System Revenue--Series 1996, 5.500%,
10/01/21.......................................................... 1,887,800 -- 1,887,800
1,000,000 Sarasota County, FL Utility System Revenue--Series 1994, 6.500%,
10/01/22.......................................................... 1,114,380 -- 1,114,380
1,000,000 Sarasota Water and Sewer System, 7.625%, 10/01/08 (Pre-refunded to
10/01/96)......................................................... -- 1,031,580 1,031,580
2,500,000 Seminole County, FL School Board--Certificates of
Participation--Series 1994 B, 6.750%, 07/01/14.................... 2,808,175 -- 2,808,175
6,500,000 Southern Minnesota Municipal Power Agency--Power Supply System
Revenue--Series 1994 A, 0.000%, 01/01/21.......................... 1,477,840 -- 1,477,840
565,000 St. Lucie County Solid Waste System, 6.000%, 9/01/15 (Pre-refunded
to 9/01/99)....................................................... -- 591,617 591,617
3,000,000 St. Lucie County, FL Solid Waste Disposal Revenue--Florida Power and
Light Company, 7.150%, 02/01/23................................... 3,235,740 -- 3,235,740
2,000,000 St. Lucie County, FL Solid Waste Disposal Revenue--Florida Power and
Light Company--Series 1992, 6.700%, 05/01/27...................... 2,090,920 -- 2,090,920
2,000,000 St. Petersburg, FL Health Facilities Authority Revenue--Allegheny
Health System--St. Anthony's Health Care Center, 6.750%,
12/01/21.......................................................... 2,137,120 -- 2,137,120
1,610,000 St. Petersburg, FL Health Facilities Authority Revenue--Allegheny
Health System--St. Mary's Hospital, 7.000%, 12/01/21.............. 1,757,621 -- 1,757,621
1,160,000 State of Florida, Faith and Credit, State Board of Education, Public
Education Capital Outlay Bonds, Series 1986-C, 7.100%, 6/01/07.... -- 1,222,489 1,222,489
460,000 State of Florida, Full Faith and Credit, State Board of Education,
Public Education Capital Outlay Bonds, Series 1989-A (Refunding
Bonds), 7.250%, 6/01/23 (Pre-refunded to 6/01/00)................. -- 511,658 511,658
2,680,000 State of Florida, Full Faith and Credit, State Board of Education,
Public Education Capital Outlay Bonds. Series 1989-A (Refunding
Bonds), 7.250%, 6/01/23........................................... -- 2,957,139 2,957,139
1,735,000 State of Florida, Full Faith and Credit, Jacksonville Transportation
Authority, Senior Lien Bonds. Series 1990, 7.375%, 7/01/20
(Pre-refunded to 7/01/00)......................................... 614,790 1,325,766 1,940,556
2,250,000 State of Florida, Full Faith and Credit, State Board of Education,
Public Education Capital Outlay Bonds, 1994 Series B, 5.875%,
6/01/20........................................................... -- 2,207,453 2,207,453
</TABLE>
P-15
<PAGE> 133
PRO FORMA FINANCIAL INFORMATION
<TABLE>
<CAPTION>
FLAGSHIP NUVEEN PRO FORMA
PRINCIPAL MARKET MARKET MARKET
AMOUNT DESCRIPTION VALUE VALUE VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 5,000,000 Sunrise Lakes, FL Phase 4 Recreation District--General Obligation
and Revenue--Series 1995 A and B, 6.750%, 08/01/24................ $ 5,202,300 $ -- $ 5,202,300
2,570,000 Sunrise, FL Utility System Revenue--Capital Appreciation--Series
1992 B, 0.000%, 10/01/13.......................................... 930,186 -- 930,186
1,000,000 Tampa, FL Allegany Health System Revenue--St. Joseph's Hospital,
Incorporated--Series 1991, 6.750%, 12/01/17....................... 1,071,510 -- 1,071,510
2,000,000 Tampa, FL Allegany Health System Revenue--St. Joseph's
Hospital--Series 1994, 6.500%, 12/01/23........................... 2,084,980 -- 2,084,980
3,400,000 Tulsa, OK Municipal Airport Trustees Trust Revenue--AMR
Corporation-- Series 1995, 6.250%, 06/01/20....................... 3,320,780 -- 3,320,780
1,000,000 Turtle Run Community Development District, 6.400%, 5/01/11.......... -- 1,034,590 1,034,590
400,000 Wisconsin Center District--Junior Dedicated Tax Revenue--Series 1996
B, 5.700%, 12/15/20............................................... 386,320 -- 386,320
1,900,000 Commonwealth of Puerto Rico Electric Power Authority--Series P,
7.000%, 07/01/21.................................................. 2,125,473 -- 2,125,474
2,500,000 Commonwealth of Puerto Rico, Public Improvement Bonds of 1996,
(General Obligation Bonds), 5.400%, 7/01/25....................... -- 2,261,374 2,261,374
10,500,000 Puerto Rico Highway and Transportation Authority Revenue--Series
1996 Y and Z, 5.500%, 07/01/36.................................... 9,530,640 -- 9,530,640
1,000,000 Puerto Rico Highway and Transportation Authority Revenue--Series
1996 Y and Z, 5.000%, 07/01/36.................................... 833,270 -- 833,270
- -------------------------------------------------------------------------------------------------------------------------------
$410,920,000 Total Investments--(cost $367,284,731)--100.1%...................... $320,272,636 $60,475,872 380,748,508
=========== ----------------------------------------------------------------------------------------------------------------
Temporary Investments in Short-Term Municipal Securities--0.4%
$ 1,080,000 Jacksonville Health Facilities Authority, Hospital Revenue Bonds,
(Baptist Medical Center Project), Series 1993, Variable Rate
Demand Bonds, 3.650%, 6/01/08+.................................... $ -- $ 1,080,000 1,080,000
500,000 The University Athletic Association, Inc., Capital Improvement
Revenue Bonds, Series 1990, Variable Rate Demand Bonds, 3.750%,
2/01/20+.......................................................... -- 500,000 500,000
- -------------------------------------------------------------------------------------------------------------------------------
$ 1,580,000 Total Temporary Investments--0.4%................................... $ -- $ 1,580,000 1,580,000
=========== ----------------------------------------------------------------------------------------------------------------
Other Assets Less Liabilities--(0.5)%............................... (1,879,815)
----------------------------------------------------------------------------------------------------------------
Net Assets--100%.................................................... $380,448,693
================================================================================================================
</TABLE>
* Optional Call Provisions: Dates (month and year) and prices of the
earliest optional call or redemption. There may be other call provisions
at varying prices at later dates.
** Ratings: Using the higher of Standard & Poor's or Moody's rating.
(WI) Securities purchased on a "when-issued" basis.
+ The security has a maturity of more than one year, but has variable rate
and demand features which qualify it as a short-term security. The rate
disclosed is that currently in effect. This rate changes periodically
based on market conditions or a specified market index.
P-16
<PAGE> 134
PRO FORMA FINANCIAL INFORMATION
NEW PENNSYLVANIA
PRO FORMA CAPITALIZATION AS OF MAY 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
FLAGSHIP NUVEEN NEW NEW
PENNSYLVANIA PENNSYLVANIA PENNSYLVANIA PENNSYLVANIA
(ACTUAL) (ACTUAL) (PRO FORMA) (AS ADJUSTED)(1)
------------ ------------ ------------ ----------------
<S> <C> <C> <C> <C>
Common shares, $.01 par value per share......................... $ -- $ 61,557 $ 33 $ 111,507 (2)
Paid-in surplus................................................. 47,936,238 62,062,278 33,327 109,981,926 (3)
Balance of undistributed net investment income.................. -- 36,663 -- -- (4)
Accumulated net realized gain (loss) from investment
transactions.................................................. (102,860) (543,477) -- (646,337)(5)
Net unrealized appreciation of investments...................... 1,000,252 1,059,722 -- 2,059,974
----------- ----------- -------- ------------
Net assets.................................................. $48,833,630 $62,676,743 $ 33,360 $111,507,070
=========== =========== ======== ============
</TABLE>
(1) The adjusted balances are presented as if the Reorganization was effective
as of May 31, 1996 for information purposes only. The actual Effective Time
of the Reorganization is expected to be January 31, 1997 at which time the
results would be reflective of the actual composition of shareholders'
equity at that date.
(2) Assumes the issuance of 4,439,204 and 693,742 class A shares, 444,159 and
105,270 class C shares and 5,464,996 class R shares of New Pennsylvania in
exchange for the net assets of class A, C and R of Flagship Pennsylvania and
Nuveen Pennsylvania, respectively. These numbers are based on the net assets
of each class of Flagship Pennsylvania and Nuveen Pennsylvania, and the net
asset values of each respective class of New Pennsylvania, as of May 31,
1996, after adjustment for the distributions referred to in (4) below. The
issuance of such number of New Pennsylvania shares would result in the
distribution of .9995335 and 1.0200372 class A shares, .9991940 and
1.0085467 class C shares and 1.0174526 class R shares for each share of each
respective class of Flagship Pennsylvania and Nuveen Pennsylvania,
respectively, upon liquidation of each respective class of Flagship
Pennsylvania and Nuveen Pennsylvania.
(3) Includes the impact of $49,917 due to the effect of the exchange ratios on
the value of new shares issued in excess of the value of shares liquidated
and the effect of assigning a par value equal to .01 per share for each New
Pennsylvania share issued in exchange for each Flagship Pennsylvania share.
(4) Assumes Nuveen Pennsylvania distributes all of its undistributed net
investment income to shareholders.
(5) Assumes Flagship Pennsylvania and Nuveen Pennsylvania carry forward their
net realized losses from investment transactions to New Pennsylvania, as
permitted under applicable tax regulations.
PRO FORMA CONDENSED BALANCE SHEET AS OF MAY 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
FLAGSHIP NUVEEN NEW NEW
PENNSYLVANIA PENNSYLVANIA PENNSYLVANIA PRO FORMA PENNSYLVANIA
(ACTUAL) (ACTUAL) (PRO FORMA) ADJUSTMENTS (AS ADJUSTED)
------------ ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Investments in municipal securities, at market value... $48,130,638 $60,573,875 $ -- $ -- $108,704,513
Temporary investments in short-term municipal
securities, at amortized cost........................ -- 3,800,000 -- (50,000)(1) 3,750,000
Cash................................................... -- -- 33,360 13,337 (2) 46,697
Other assets less liabilities.......................... 702,992 (1,697,132) -- -- (994,140)
----------- ----------- -------- -------- ------------
Net assets............................................. $48,833,630 $62,676,743 $ 33,360 $ (36,663) $111,507,070
=========== =========== ======== ======== ============
Class A Shares:
Net assets............................................. $44,392,043 $ 6,941,476 $ 8,340 $ (4,060) $ 51,337,799
=========== =========== ======== ======== ============
Shares outstanding..................................... 4,441,276 680,114 834 11,556(3) 5,133,780
=========== =========== ======== ======== ============
Net asset value and redemption price per share......... $ 10.00 $ 10.21 $ 10.00 $ 10.00
=========== =========== ======== ============
Offering price per share (net asset value per share
plus maximum sales charge of 4.20%, 4.50%, 4.20% and
4.20%, respectively, of offering price).............. $ 10.44 $ 10.69 $ 10.44 $ 10.44
=========== =========== ======== ============
Class B Shares:
Net assets............................................. N/A N/A $ 8,340 $ 8,340
=========== =========== ======== ============
Shares outstanding..................................... N/A N/A 834 834
=========== =========== ======== ============
Net asset value........................................ N/A N/A $ 10.00 $ 10.00
=========== =========== ======== ============
Class C Shares:
Net assets............................................. $ 4,441,587 $ 1,053,317 $ 8,340 $ (616) $ 5,502,628
=========== =========== ======== ======== ============
Shares outstanding..................................... 444,517 104,378 834 534(3) 550,263
=========== =========== ======== ======== ============
Net asset value, offering and redemption price per
share................................................ $ 9.99 $ 10.09 $ 10.00 $ 10.00
=========== =========== ======== ============
Class R Shares:
Net assets............................................. N/A $54,681,950 $ 8,340 $ (31,987) $ 54,658,303
=========== =========== ======== ======== ============
Shares outstanding..................................... N/A 5,371,254 834 93,742(3) 5,465,830
=========== =========== ======== ======== ============
Net asset value and redemption price per share......... N/A $ 10.18 $ 10.00 $ 10.00
=========== =========== ======== ============
</TABLE>
(1) See note (1) to Pro Forma Capitalization table above as to the Effective
Time of the Reorganization. Assumes sales of temporary investments to
provide additional cash needed to fully distribute all net investment income
of Nuveen Pennsylvania.
(2) Net effect on cash after sales of temporary investments and distribution of
net investment income of Nuveen Pennsylvania.
(3) See note (1) to Pro Forma Capitalization table. Based on the issuance of
4,439,204 and 693,742 class A shares, 444,159 and 105,270 class C shares and
5,464,996 class R shares of New Pennsylvania and the cancellation of all
shares of each class of Flagship Pennsylvania and Nuveen Pennsylvania,
respectively.
P-17
<PAGE> 135
PRO FORMA FINANCIAL INFORMATION -- (CONTINUED)
PRO FORMA CONDENSED INCOME STATEMENT FOR THE TWELVE MONTHS ENDED MAY 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
FLAGSHIP NUVEEN NEW
PENNSYLVANIA PENNSYLVANIA PRO FORMA PENNSYLVANIA
(ACTUAL) (ACTUAL) ADJUSTMENTS (AS ADJUSTED)
------------ ------------ ----------- -------------
<S> <C> <C> <C> <C>
Investment Income:
Tax-exempt interest income........................................ $ 3,049,939 $ 3,586,366 $ -- $ 6,636,305
----------- ----------- --------- -----------
Expenses:
Management fees (1)............................................... 233,274 338,539 22,035 593,848
12b-1 fees (2).................................................... 206,875 21,432 (97,766) 130,541
Other expenses.................................................... 119,267 240,715 (143,781)(3) 216,201
----------- ----------- --------- -----------
Total expenses................................................ 559,416 600,686 (219,512) 940,590
Expense waiver reimbursement from investment adviser (4).......... (178,769) (119,985) 241,503 (57,251)
----------- ----------- --------- -----------
Net expenses.................................................. 380,647 480,701 21,991 883,339
----------- ----------- --------- -----------
Net investment income............................................... 2,669,292 3,105,665 (21,991) 5,752,966
----------- ----------- --------- -----------
Realized and Unrealized Gain (Loss) from Investments
Net realized gain (loss) from investment transactions, net of
taxes, if applicable............................................ 714,271 603,004 -- 1,317,275
Net change in unrealized appreciation or depreciation of
investments..................................................... (1,775,459) (1,391,015) -- (3,166,474)
----------- ----------- --------- -----------
Net gain (loss) from investments.......................... (1,061,188) (788,011) -- (1,849,199)
----------- ----------- --------- -----------
Net increase (decrease) in net assets from operations............... $ 1,608,104 $ 2,317,654 $ (21,991) $ 3,903,767
=========== =========== ========= ===========
</TABLE>
(1) Reflects a management fee of .50% of net assets of Flagship Pennsylvania and
.55% of net assets for the first $125 million of Nuveen Pennsylvania and
New Pennsylvania (as adjusted).
(2) Reflects a 12b-1 service fee of .20% of net assets for classes A and C of
Flagship Pennsylvania and .25% of net assets for classes A and C of Nuveen
Pennsylvania. New Pennsylvania (as adjusted) reflects a 12b-1 service fee
of .20% of net assets for classes A and C. Also included is a 12b-1
distribution fee of .20% and .75% of net assets of class A and C,
respectively, of Flagship Pennsylvania. Class C of Nuveen Pennsylvania is
subject to a 12b-1 distribution fee of .75% of net assets. New Pennsylvania
(as adjusted) reflects a 12b-1 distribution fee of .55% of net assets for
class C. Class R is not subject to a 12b-1 service or distribution fee.
(3) Represents estimated reduction in operating expenses, including audit,
legal, custodian, transfer agency and report printing. New Pennsylvania (as
adjusted) would have a much larger asset base than either Fund currently
has. Certain operating expenses would have been reduced had they been
applied to the larger asset base for one Fund, rather than to two smaller
separate Funds.
(4) Reflects an expense waiver/reimbursement of .38% of net assets of Flagship
Pennsylvania and .20% of net assets of Nuveen Pennsylvania. New
Pennsylvania (as adjusted) reflects an expense waiver/reimbursement of .05%
of net assets.
P-18
<PAGE> 136
PRO FORMA FINANCIAL INFORMATION
NEW PENNSYLVANIA
PRO FORMA PORTFOLIO OF INVESTMENTS
MAY 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
FLAGSHIP NUVEEN PRO FORMA
PRINCIPAL MARKET MARKET MARKET
AMOUNT DESCRIPTION VALUE VALUE VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 1,000,000 Allegheny County (Greater Pittsburgh International Airport)
Alternative Minimum Tax, 7.000%, 1/01/18 (Alternative Minimum
Tax)............................................................. $ -- $ 1,036,790 $ 1,036,790
1,060,000 Allegheny County, Pennsylvania, Higher Education Building Authority
University Revenue Bonds (Duquesne University Project), Series A
of 1996, 6.500%, 3/01/09......................................... -- 1,164,813 1,164,813
3,000,000 Allegheny County, PA Higher Education Building Authority Revenue--
Robert Morris College--Series 1996 A, 6.250%, 02/15/26........... 2,793,870 -- 2,793,870
1,475,000 Allegheny County Hospital Development Authority (Allegheny County,
Pennsylvania), Hospital Revenue Bonds, Series Q (Allegheny Valley
Hospital, Sublessee), 7.000%, 8/01/15............................ -- 1,619,771 1,619,771
1,500,000 Allegheny County Hospital Development Authority (Rehabilitation
Institute of Pittsburgh), 7.000%, 6/01/22........................ -- 1,509,105 1,509,105
200,000 Allegheny County, PA Hospital Development Authority--St. Margaret
Memorial Hospital--Series 1991A, 7.125, 10/01/21................. 205,624 -- 205,624
296,000 Allegheny County, PA Industrial Development Authority--Solid Waste
Disposal--Conversion Systems, Inc.--Series 1991, 8.000,
03/01/98......................................................... 313,523 -- 313,523
3,000,000 Allegheny County Residential Financing Authority (Ladies Grand Army
of the Republic Health), 6.350%, 10/01/36........................ -- 2,863,920 2,863,920
2,000,000 Allegheny County Residential Finance Authority Single Family GNMA
Collateralized Alternative Minimum Tax, 0.000%, 5/01/27
(Alternative Minimum Tax)........................................ -- 227,240 227,240
2,000,000 Armstrong County Hospital Authority (Canterbury Place Project),
6.500%, 12/01/21................................................. -- 2,058,020 2,058,020
1,000,000 Bradford County, PA Industrial Development Authority--Solid Waste
Disposal Revenue--International Paper Company--Series 1995 B,
5.900, 12/01/19.................................................. 952,230 -- 952,230
1,000,000 Bucks County Community College Authority, Bucks County,
Pennsylvania, College Building Revenue and Refunding Bonds,
Series of 1992, 6.250%, 6/15/14.................................. -- 1,009,210 1,009,210
500,000 Bucks County, PA Redevelopment Authority Mortgage Revenue--
Westminster Heights--Series 1992 A, 6.875, 08/01/23.............. 513,705 -- 513,705
200,000 Butler County, PA Hospital Authority Revenue--North Hills Passavant
Hospital, 7.000, 06/01/22........................................ 216,466 -- 216,466
1,000,000 Butler County, PA Industrial Development Authority--Health Center
Revenue-- Sherwood Oaks Project--Series 1993, 5.750, 06/01/16.... 922,280 -- 922,280
2,000,000 Cambria County, PA Industrial Development Authority Pollution
Control Revenue--Pennsylvania Electric Company--Series 1995 A and
B, 5.800, 11/01/20............................................... 1,936,520 -- 1,936,520
1,650,000 Cambria County, PA Industrial Development Authority Resource
Recovery Revenue--Cambria CoGen Project, 7.750, 09/01/19......... 1,729,414 -- 1,729,414
750,000 Central Greene County, PA School District--General Obligation--
Series 1996, 5.250, 02/15/24..................................... 673,478 -- 673,478
500,000 Clarion County, PA Hospital Authority Revenue--Clarion Hospital,
8.100, 07/01/12.................................................. 516,260 -- 516,260
400,000 Columbia County, PA Industrial Development Authority--Orangeville
Nursing Center, 9.000, 12/01/12.................................. 398,980 -- 398,980
500,000 Dauphin County, PA Hospital Authority Revenue--Harrisburg Hospital,
8.250, 07/01/14.................................................. 529,000 -- 529,000
2,850,000 Deer Lakes School District (Allegheny County, Pennsylvania) General
Obligation Bonds, Series of 1995, 6.350%, 1/15/14................ -- 2,940,801 2,940,801
2,300,000 Doylestown, PA Hospital Authority Revenue--Series 1993 A, 5.000,
07/01/23......................................................... 1,980,162 -- 1,980,162
800,000 Greater Lebanon Refuse Authority Solid Waste, 7.000%, 11/15/04..... -- 840,960 840,960
230,000 Health Care Facilities Authority of Sayre (Pennsylvania), Series
1991A Revenue Bonds, Guthrie Healthcare System, 7.100%,
3/01/17.......................................................... -- 250,088 250,088
</TABLE>
P-19
<PAGE> 137
PRO FORMA FINANCIAL INFORMATION -- (CONTINUED)
<TABLE>
<CAPTION>
FLAGSHIP NUVEEN PRO FORMA
PRINCIPAL MARKET MARKET MARKET
AMOUNT DESCRIPTION VALUE VALUE VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 3,500,000 Indiana County Industrial Development Authority Pollution Control
(New York State Electric and Gas Corporation), 6.000%, 6/01/06... $ -- $ 3,698,030 $ 3,698,030
3,000,000 Indiana County Industrial Development Authority Pollution Control
(Pennsylvania Electric Company), 5.350%, 11/01/10................ -- 2,924,880 2,924,880
1,000,000 Lancaster County, PA Hospital Authority Revenue--Health Care Center
Masonic Homes--Series 1994, 5.000, 11/15/20...................... 864,530 -- 864,530
1,500,000 Lawrence County, PA Industrial Development Authority Pollution
Control Revenue--Pennsylvania Power Company, 7.150, 03/01/17..... 1,559,130 -- 1,559,130
1,200,000 Lehigh County, PA General Purpose Authority Hospital
Revenue--Lehigh Valley Hospital--Series 1995 B, 5.625,
07/01/25......................................................... 1,128,972 -- 1,128,972
550,000 Lehigh County, PA Industrial Development Authority Pollution
Control Revenue--Pennsylvania Power and Light Company--Series
1995 A, 6.150, 08/01/29.......................................... 554,362 -- 554,362
950,000 Luzerne County Industrial Development Authority (Pennsylvania Gas
and Water Company Project) Alternative Minimum Tax, 7.125%,
12/01/22 (Alternative Minimum Tax)............................... -- 988,817 988,817
1,500,000 Luzerne County Industrial Development Authority (Pennsylvania Gas
and Water Company Project) Alternative Minimum Tax, 7.000%,
12/01/17 (Alternative Minimum Tax)............................... -- 1,634,205 1,634,205
1,000,000 Monroeville, PA Hospital Authority Revenue--Forbes Health System--
Series 1995, 6.250, 10/01/15..................................... 959,860 -- 959,860
3,000,000 Montgomery County General Obligation, 6.100%, 10/15/25............. -- 3,040,410 3,040,410
500,000 Montgomery County, PA Higher Education and Health Authority
Revenue--
Holy Redeemer Hospital, 7.625, 02/01/20.......................... 539,260 -- 539,260
3,000,000 Montgomery County Higher Educational and Health Authority (Waverly
Heights), 6.375%, 1/01/26........................................ -- 2,840,040 2,840,040
1,000,000 Montgomery County, PA Industrial Development Authority Pollution
Control Revenue--Philadelphia Electric--Series A, 8.875,
06/01/16......................................................... 1,020,000 -- 1,020,000
2,195,000 Montour, Pa School District--General Obligation--Allegheny County--
Series 1993 B, 0.000, 01/01/14................................... 780,213 -- 780,213
1,800,000 Northampton County Higher Education Authority, University Revenue
(Lehigh University), 6.900%, 10/15/06............................ -- 1,963,241 1,963,241
1,000,000 Northampton County, PA Industrial Development Authority Pollution
Control Revenue--Metropolitan Edison--Series 1995 A, 6.100,
07/15/21......................................................... 1,001,520 -- 1,001,520
750,000 Northeastern Pennsylvania Hospital and Education Authority
Revenue--
Luzerne County Community College--Series 1994, 6.625, 08/15/15... 790,170 -- 790,170
1,000,000 Northumberland County Industrial Development Authority (Roaring
Creek Water Company) Alternative Minimum Tax, 6.375%, 10/15/23
(Alternative Minimum Tax)........................................ -- 919,090 919,090
2,000,000 Pennsylvania Economic Development Financing Authority Revenue--
MacMillan Bloedel Clarion--Series 1995, 7.600, 12/01/20.......... 2,181,880 -- 2,181,880
3,500,000 Pennsylvania Economic Development Financing Authority (Sun
Co -- R&M Project) Alternative Minimum Tax, 7.600%, 12/01/24
(Alternative Minimum Tax)........................................ 1,093,450 2,738,825 3,832,275
500,000 Pennsylvania State Higher Educational Facilities Authority
Revenue--
Lycoming College, 8.375, 10/01/18................................ 553,890 -- 553,890
700,000 Pennsylvania State Higher Educational Facilities Authority
Revenue--
Thomas Jefferson University, 8.000, 01/01/18..................... 756,259 -- 756,259
750,000 Pennsylvania Higher Educational Facilities Authority, Revenue Bonds
(Thomas Jefferson University -- Life Sciences Building Project),
1989 Series A, 6.000%, 7/01/19................................... -- 744,863 744,863
600,000 Pennsylvania Housing Finance Agency, Single Family Mortgage Revenue
Bonds, Series 1991-32, 7.150%, 4/01/15........................... -- 637,098 637,098
300,000 Pennsylvania Housing Finance Agency--Single Family--Series 1989 S,
7.600, 04/01/16.................................................. 322,584 -- 322,584
250,000 Pennsylvania Housing Finance Agency--Single Family--Series 1991-30,
7.300, 10/01/17.................................................. 268,870 -- 268,870
1,390,000 Pennsylvania Intergovernmental Cooperative Authority (City of
Philadelphia Funding Program), 7.000%, 6/15/05................... -- 1,566,975 1,566,975
1,500,000 Pennsylvania Intergovernmental Coop Auth Special Tax Revenue
Refunding Bonds City of Philadelphia Funding Series 1996, 5.500%,
6/15/20.......................................................... -- 1,407,855 1,407,855
1,500,000 Pennsylvania Intergovernmental Cooperation Authority--Special Tax
Revenue--Series 1994, 7.000, 06/15/14............................ 1,704,300 -- 1,704,300
</TABLE>
P-20
<PAGE> 138
PRO FORMA FINANCIAL INFORMATION -- (CONTINUED)
<TABLE>
<CAPTION>
FLAGSHIP NUVEEN PRO FORMA
PRINCIPAL MARKET MARKET MARKET
AMOUNT DESCRIPTION VALUE VALUE VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 1,000,000 Pennsylvania State General Obligation--Series 1996 (WI), 5.375,
05/15/16......................................................... $ 944,470 $ -- $ 944,470
2,300,000 Pennsylvania Turnpike Commission, Pennsylvania Turnpike Revenue
Bonds, Series O of 1992, 5.500%, 12/01/17........................ -- 2,163,426 2,163,426
2,000,000 Philadelphia Gas Works, 6.375%, 7/01/14............................ -- 2,072,340 2,072,340
1,400,000 Philadelphia, PA Gas Works Revenue--Fourteenth Series--Series 1993,
6.375, 07/01/26.................................................. 1,382,374 -- 1,382,374
750,000 Philadelphia, PA Gas Works Revenue--Fourteenth Series--Series 1993,
6.375, 07/01/26.................................................. 772,605 -- 772,605
650,000 Philadelphia, PA Gas Works Revenue--Twelfth Series, 7.000,
05/15/20......................................................... 751,108 -- 751,108
1,275,000 Philadelphia Hospital and Higher Educational Facilities Authority
(St. Agnes/Franciscan Health System), 5.250%, 7/01/10............ -- 1,201,050 1,201,050
2,000,000 Philadelphia, PA Hospitals and Higher Education Facilities
Revenue--
Temple University Hospital--Series 1993 A, 6.625, 11/15/23....... 1,996,140 -- 1,996,140
250,000 Philadelphia, PA Industrial Development Authority--National Board
of Medical Examiners--Series 1992, 6.750, 05/01/12............... 267,222 -- 267,222
2,000,000 Philadelphia Authority for Industrial Development (Pennsylvania),
Project Revenue Refunding Bonds (PGH Development Corporation),
Series of 1993, 5.250%, 7/01/17.................................. -- 1,805,860 1,805,860
150,000 Philadelphia, PA Municipal Authority Revenue, 7.800, 04/01/18...... 160,382 -- 160,382
1,450,000 Philadelphia, PA Municipal Authority Revenue, 7.800, 04/01/18...... 1,595,667 -- 1,595,667
1,000,000 Philadelphia, PA Water and Wastewater Revenue--Series 1993, 5.250,
06/15/23......................................................... 897,790 -- 897,790
1,100,000 Pittsburgh Urban Redevelopment Authority Alternative Minimum Tax,
6.625%, 4/01/22 (Alternative Minimum Tax)........................ -- 1,112,936 1,112,936
3,280,000 Pittsburgh Urban Redevelopment Authority Home Improvement Loan
Alternative Minimum Tax, 6.375%, 8/01/18 (Alternative Minimum
Tax)............................................................. -- 3,254,645 3,254,645
1,000,000 Pittsburgh, PA Urban Redevelopment Authority--Mortgage Revenue--
Series 1996 A, 6.000, 04/01/19................................... 960,330 -- 960,330
1,185,000 Pittsburgh, PA Water and Sewer Authority--Water and Sewer System
Revenue--Series 1995 B, 5.750, 09/01/25.......................... 1,142,684 -- 1,142,684
2,545,000 Reading, PA General Obligation--Parking Authority--Series 1993,
0.000, 11/15/15.................................................. 808,750 -- 808,750
500,000 Saint Mary Hospital Authority (Pennsylvania), Hospital Revenue
Bonds, Series 1992a (Franciscan Health System/Saint Mary Hospital
Of Langhorne, Inc.), 6.500%, 7/01/12............................. -- 523,123 523,123
920,000 South Wayne County, PA Water and Sewer Authority Revenue, 8.200,
04/15/13......................................................... 969,579 -- 969,579
Southeastern Pennsylvania Transportation Authority:
1,500,000 6.500%, 3/01/04.................................................... -- 1,636,410 1,636,410
1,000,000 6.500%, 3/01/05.................................................... -- 1,092,930 1,092,930
935,000 The Municipal Authority of the Borough of West View (Allegheny
County, Pennsylvania), Special Obligation Bonds, Series of 1985A,
9.500%, 11/15/14................................................. -- 1,269,945 1,269,945
1,865,000 Union County Higher Educational Facilities Financing Authority,
University Revenue Bonds, Series 1996 (Bucknell University),
5.500%, 4/01/16.................................................. 818,991 949,590 1,768,581
1,910,000 Valley View School District General Obligation, 5.750%, 11/15/20... -- 1,869,470 1,869,470
350,000 Washington County Hospital Authority (Monongahela Valley Hospital),
6.750%, 12/01/08................................................. -- 361,752 361,752
1,750,000 Westmoreland County, PA Industrial Development Authority
Revenue--Citizens General Hospital--Series 1987 A, 8.250,
07/01/13......................................................... 1,814,592 -- 1,814,592
</TABLE>
P-21
<PAGE> 139
PRO FORMA FINANCIAL INFORMATION -- (CONTINUED)
<TABLE>
<CAPTION>
FLAGSHIP NUVEEN PRO FORMA
PRINCIPAL MARKET MARKET MARKET
AMOUNT DESCRIPTION VALUE VALUE VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 600,000 Wilkes-Barre General Municipal Authority (College Misericordia)
Alternative Minimum Tax, 7.750%, 12/01/12........................ $ -- $ 635,351 $ 635,351
400,000 York County, PA Solid Waste and Refuse Authority Industrial
Development Revenue--Resource Recovery--Series C, 8.200,
12/01/14......................................................... 426,039 -- 426,039
750,000 Commonwealth of Puerto Rico Electric Power Authority--Series 1994
T, 6.375, 07/01/24............................................... 768,150 -- 768,150
2,100,000 Commonwealth of Puerto Rico Public Improvement--General
Obligation--
Series 1996 A, 5.400, 07/01/25................................... 1,893,003 -- 1,893,003
- -------------------------------------------------------------------------------------------------------------------------------
$112,561,000 Total Investments--(Cost $106,644,539)--97.4%...................... $48,130,638 $ 60,573,875 108,704,513
=========== ----------------------------------------------------------------------------------------------------------------
Temporary Investments in Short-Term Municipal Securities--3.4%
$ 250,000 Allegheny County Hospital Development Authority (Allegheny County,
Pennsylvania), Health Center Revenue Bonds, Series 1990A
(Presbyterian-University Health System, Inc.), Variable Rate
Demand Bonds, 3.750%, 3/01/20+................................... $ -- $ 250,000 250,000
3,500,000 Allegheny County Hospital Development Authority (Allegheny County,
Pennsylvania), Health Center Revenue Bonds, Series 1990B
(Presbyterian-University Health System, Inc.), Variable Rate
Demand Bonds, 3.750%, 3/01/20+................................... -- 3,500,000 3,500,000
- -------------------------------------------------------------------------------------------------------------------------------
$ 3,750,000 Total Temporary Investments--3.4%.................................. $ -- $ 3,750,000 3,750,000
=========== ----------------------------------------------------------------------------------------------------------------
Other Assets Less Liabilities---(0.8)%............................. (880,803)
----------------------------------------------------------------------------------------------------------------
Net Assets--100%................................................... $111,573,710
================================================================================================================
* Optional Call Provisions: Dates (month and year) and prices of the earliest optional call or
redemption. There may be other call provisions at varying prices at later dates.
** Ratings: Using the higher of Standard & Poor's or Moody's rating.
N/R--Investment is not rated.
(WI) Securities purchased or a "when-issued" basis.
+ The security has a maturity of more than one year, but has variable rate and demand features
which qualify it as a short-term security. The rate disclosed is that currently in effect.
This rate changes periodically based on market conditions or a specified market index.
</TABLE>
P-22
<PAGE> 140
PRO FORMA FINANCIAL INFORMATION
NEW VIRGINIA
PRO FORMA CAPITALIZATION AS OF MAY 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
FLAGSHIP NUVEEN
VIRGINIA VIRGINIA NEW VIRGINIA NEW VIRGINIA
(ACTUAL) (ACTUAL) (PRO FORMA) (AS ADJUSTED)(1)
------------ ----------- ------------ ----------------
<S> <C> <C> <C> <C>
Common shares, $.01 par value per share...................... $ -- $ 63,461 $ 33 $ 193,416 (2)
Paid-in surplus.............................................. 126,593,242 63,007,742 33,327 189,504,389 (3)
Balance of undistributed net investment income............... -- 23,985 -- -- (4)
Accumulated net realized gain (loss) from investment
transactions............................................... (1,051,577) (89,289) -- (1,140,866)(5)
Net unrealized appreciation of investments................... 3,113,668 1,745,764 -- 4,859,432
------------ ----------- -------- ------------
Net assets............................................... $128,655,333 $64,751,663 $ 33,360 $193,416,371
============ =========== ======== ============
</TABLE>
(1) The adjusted balances are presented as if the Reorganization was effective
as of May 31, 1996 for information purposes only. The actual Effective Time
of the Reorganization is expected to be January 31, 1997 at which time the
results would be reflective of the actual composition of shareholders'
equity at that date.
(2) Assumes the issuance of 11,767,721 and 723,156 class A shares, 1,097,812 and
88,830 class C shares and 5,660,782 class R shares of New Virginia in
exchange for the net assets of class A, C and R of Flagship Virginia and
Nuveen Virginia, respectively. These numbers are based on the net assets of
each class of Flagship Virginia and Nuveen Virginia, and the net asset
values of each respective class of New Virginia, as of May 31, 1996, after
adjustment for the distributions referred to in (4) below. The issuance of
such number of New Virginia shares would result in the distribution of
1.0395161 and 1.0202061 class A shares, 1.0389710 and 1.0173542 class C
shares and 1.0199618 class R shares for each share of each respective class
of Flagship Virginia and Nuveen Virginia, respectively, upon liquidation of
each respective class of Flagship Virginia and Nuveen Virginia.
(3) Includes the impact of $129,922 due to the effect of the exchange ratios on
the value of new shares issued in excess of the value of shares liquidated
and the effect of assigning a par value equal to .01 per share for each New
Virginia share issued in exchange for each Flagship Virginia share.
(4) Assumes Nuveen Virginia distributes all of its undistributed net investment
income to shareholders.
(5) Assumes Flagship Virginia and Nuveen Virginia carry forward their net
realized losses from investment transactions to New Virginia, as permitted
under applicable tax regulations.
PRO FORMA CONDENSED BALANCE SHEET AS OF MAY 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
FLAGSHIP NUVEEN
VIRGINIA VIRGINIA NEW VIRGINIA PRO FORMA NEW VIRGINIA
(ACTUAL) (ACTUAL) (PRO FORMA) ADJUSTMENTS (AS ADJUSTED)
------------ ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Investments in municipal securities, at market
value.......................................... $126,563,949 $63,578,895 $ -- $ -- $190,142,844
Cash............................................. 484,558 209,348 33,360 (23,985)(1) 703,281
Other assets less liabilities.................... 1,606,826 963,420 -- -- 2,570,246
------------- ------------ -------- --------- -------------
Net assets....................................... $128,655,333 $64,751,663 $ 33,360 $ (23,985) $193,416,371
============= ============ ======== ========= =============
Class A Shares:
Net assets....................................... $117,677,212 $ 7,234,237 $ 8,340 $ (2,680) $124,917,109
============= ============ ======== ========= =============
Shares outstanding............................... 11,320,384 708,833 834 461,660(2) 12,491,711
============= ============ ======== ========= =============
Net asset value and redemption price per share... $ 10.40 $ 10.21 $ 10.00 $ 10.00
============= ============ ======== =============
Offering price per share (net asset value per
share plus maximum sales charge of 4.20%,
4.50%, 4.20% and 4.20%, respectively, of
offering price)................................ $ 10.86 $ 10.69 $ 10.44 $ 10.44
============= ============ ======== =============
Class B Shares:
Net assets....................................... N/A N/A $ 8,340 $ 8,340
============= ============ ======== =============
Shares outstanding............................... N/A N/A 834 834
============= ============ ======== =============
Net asset value.................................. N/A N/A $ 10.00 $ 10.00
============= ============ ======== =============
Class C Shares:
Net assets....................................... $ 10,978,121 $ 888,632 $ 8,340 $ (329) $ 11,874,764
============= ============ ======== ========= =============
Shares outstanding............................... 1,056,634 87,315 834 42,693(2) 1,187,476
============= ============ ======== ========= =============
Net asset value, offering and redemption price
per share...................................... $ 10.39 $ 10.18 $ 10.00 $ 10.00
============= ============ ======== =============
Class R Shares:
Net assets....................................... N/A $56,628,794 $ 8,340 $ (20,976) $ 56,616,158
============= ============ ======== ========= =============
Shares outstanding............................... N/A 5,549,994 834 110,788(2) 5,661,616
============= ============ ======== ========= =============
Net asset value and redemption price per share... N/A $ 10.20 $ 10.00 $ 10.00
============= ============ ======== =============
</TABLE>
(1) See note (1) to Pro Forma Capitalization table above as to the Effective
Time of the Reorganization. Net effect on cash after distribution of all net
investment income of Nuveen Virginia.
(2) See note (1) to Pro Forma Capitalization table. Based on the issuance of
11,767,721 and 723,156 class A shares, 1,097,812 and 88,830 class C shares
and 5,660,782 class R shares of New Virginia and the cancellation of all
shares of each class of Flagship Virginia and Nuveen Virginia, respectively.
P-23
<PAGE> 141
PRO FORMA FINANCIAL INFORMATION
NEW VIRGINIA
PRO FORMA CONDENSED INCOME STATEMENT FOR THE TWELVE MONTHS ENDED MAY 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
FLAGSHIP NUVEEN
VIRGINIA VIRGINIA PRO FORMA NEW VIRGINIA
(ACTUAL) (ACTUAL) ADJUSTMENTS (AS ADJUSTED)
----------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
Investment Income:
Tax-exempt interest income..................................... $ 7,751,940 $3,786,499 $ -- $11,538,439
----------- ---------- --------- -----------
Expenses:
Management fees(1)........................................... 622,309 351,545 51,887 1,025,741
12b-1 fees(2)................................................ 540,231 19,856 (252,326) 307,761
Other expenses............................................... 225,958 239,595 (144,298)(3) 321,255
----------- ---------- --------- -----------
Total expenses............................................. 1,388,498 610,996 (344,737) 1,654,757
Expense waiver/reimbursement from investment adviser(4)...... (346,282) (111,761) 381,270 (76,773)
----------- ---------- --------- -----------
Net expenses............................................... 1,042,216 499,235 36,533 1,577,984
----------- ---------- --------- -----------
Net investment income.................................... 6,709,724 3,287,264 (36,533) 9,960,455
----------- ---------- --------- -----------
Realized and Unrealized Gain (Loss) from Investments:
Net realized gain (loss) from investment transactions, net of
taxes, if applicable......................................... 1,352,908 294,381 -- 1,647,289
Net change in unrealized appreciation or depreciation of
investments.................................................. (3,368,259) (944,960) -- (4,313,219)
----------- ---------- --------- -----------
Net gain (loss) from investments......................... (2,015,351) (650,579) -- (2,665,930)
----------- ---------- --------- -----------
Net increase (decrease) in net assets from operations............ $ 4,694,373 $2,636,685 $ (36,533) $ 7,294,525
=========== ========== ========= ===========
</TABLE>
(1) Reflects a management fee of .50% of net assets of Flagship Virginia and
.55% of net assets for the first $125 million of Nuveen Virginia. Also
reflects a management fee of .55% of net assets for the first $125 million
and .5375% of net assets over $125 million of New Virginia (as adjusted).
(2) Reflects a 12b-1 service fee of .20% of net assets for classes A and C of
Flagship Virginia and .25% of net assets for classes A and C of Nuveen
Virginia. New Virginia (as adjusted) reflects a 12b-1 service fee of .20%
of net assets for classes A and C. Also included is a 12b-1 distribution
fee of .20% and .75% of net assets of class A and C, respectively, of
Flagship Virginia. Class C of the Nuveen Virginia is subject to a 12b-1
distribution fee of .75% of net assets. New Virginia (as adjusted) reflects
a 12b-1 distribution fee of .55% of net assets for class C. Class R is not
subject to a 12b-1 service or distribution fee.
(3) Represents estimated reduction in operating expenses, including audit,
legal, custodian, transfer agency and report printing. New Virginia (as
adjusted) would have a much larger asset base than either Fund currently
has. Certain operating expenses would have been reduced had they been
applied to the larger asset base for one Fund, rather than to two smaller
separate Funds.
(4) Reflects an expense waiver/reimbursement of .28% of net assets of Flagship
Virginia and .18% of net assets of Nuveen Virginia. New Virginia Fund (as
adjusted) reflects an expense waiver/reimbursement of .04% of net assets.
P-24
<PAGE> 142
PRO FORMA FINANCIAL INFORMATION
NEW VIRGINIA
PRO FORMA PORTFOLIO OF INVESTMENTS
MAY 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
NUVEEN
PRINCIPAL FLAGSHIP MARKET PRO FORMA
AMOUNT DESCRIPTION MARKET VALUE VALUE MARKET VALUE
- --------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 1,000,000 Abingdon General Obligation, 6.250%, 8/01/12............................. $ -- $ 1,027,860 $ 1,027,860
1,125,000 Albemarle County, VA Industrial Development Authority Revenue--University
of Virginia Health Services Foundation--Series 1992, 6.500%,
10/01/22............................................................... 1,143,664 -- 1,143,664
715,000 Albemarle County, VA Industrial Development Authority--First Mortgage
Revenue, 8.900%, 07/15/26.............................................. 792,370 -- 792,370
1,000,000 Alexandria, VA Industrial Development Authority--Alexandria Community
Healthcare--Series 1993 B, 5.500%, 07/01/14............................ 948,390 -- 948,390
1,750,000 Alexandria, VA Redevelopment and Housing Authority--Arha Apartments,
8.600%, 07/20/29....................................................... 1,824,235 -- 1,824,235
2,300,000 Big Stone Gap, VA Redevelopment and Housing Authority--Correctional
Facility Lease Revenue--Wallens Ridge Development--Series 1995, 5.500%,
09/01/15............................................................... 2,172,028 -- 2,172,028
1,000,000 Blacksburg, VA Polytechnic Institute Sanitation Authority--Sewer System
Revenue--Series 1992, 6.250%, 11/01/12................................. 1,007,730 -- 1,007,730
1,185,000 Buena Vista, VA Industrial Development Authority--Stonewall Jackson
Hospital, 8.375%, 11/01/14............................................. 1,241,738 -- 1,241,738
750,000 Charlottesville-Albemarle Airport Authority, 6.125%, 12/01/13
(Alternative Minimum Tax).............................................. -- 716,715 716,715
2,500,000 Chesapeake Bay Bridge & Tunnel Commn, General Resolution Revenue Bonds,
Refunding Series 1991, 6.375%, 7/01/22 (Pre-refunded to 7/01/01)....... -- 2,717,875 2,717,875
3,005,000 City of Richmond, Virginia, General Obligation Public Improvement Bonds,
Series 1993B, 5.500%, 7/15/23.......................................... -- 2,833,475 2,833,475
2,260,000 City of Virginia Beach Development Authority (Virginia), Hospital Revenue
Bonds (Sentara Bayside Hospital), Series 1991, 6.300%, 11/01/21........ -- 2,247,095 2,247,095
2,425,000 Commonwealth of Virginia, Transportation Revenue Refunding Bonds, (U.S.
Route 58 Corridor Development Program) Series 1993A, 6.000%, 5/15/19... -- 2,411,469 2,411,469
1,700,000 County of Cumberland, Virginia, Certificates of Participation, Series
1994, 5.480%, 7/15/97.................................................. -- 1,702,159 1,702,159
1,000,000 Covington-Allegheny County Industrial Development Authority (Virginia),
Hospital Facility Revenue Bonds (Allegheny Regional Hospital), Series
1992, 6.625%, 4/01/12 (Pre-refunded to 4/01/02)........................ -- 1,102,400 1,102,400
2,000,000 Covington-Alleghany County, VA Industrial Development Authority
Revenue--Pollution Control Facilities--Westvaco Corporation--Series
1994, 6.650%, 09/01/18................................................. 2,095,100 -- 2,095,100
730,000 Danville, VA General Improvement Revenue, 6.500%, 05/01/12............... 764,901 -- 764,901
1,460,000 Fairfax County Industrial Development Authority (Inova Health System),
5.000%, 8/15/13........................................................ -- 1,339,010 1,339,010
2,000,000 Fairfax County, VA Industrial Development Authority--Health Care
Revenue-- Inova Health System Project--Series 1996, 6.000%, 08/15/26... 1,951,320 -- 1,951,320
1,435,000 Fairfax County, VA Redevelopment and Housing Authority Revenue--Office
Building--Series 1992 A, 7.500%, 06/15/18.............................. 1,483,101 -- 1,483,101
500,000 Fairfax County, VA Redevelopment and Housing Authority Revenue--Vinson
Pravalion--Series A, 7.500%, 11/01/19.................................. 555,070 -- 555,070
1,000,000 Fairfax County, VA Water Authority Revenue--Series 1992, 6.000%,
04/01/22............................................................... 990,830 -- 990,830
3,250,000 Fairfax County (Virginia), Water Authority Water Refunding Revenue Bonds,
Series 1992, 5.750%, 4/01/29........................................... -- 3,095,755 3,095,755
1,000,000 Frederick-Winchester Service Authority, VA Regional Sewer System
Revenue--Series 1993, 5.750%, 10/01/15................................. 972,640 -- 972,640
500,000 Front Royal & Warren County, VA Industrial Development Authority
Revenue-- Heritage Hall, 9.450%, 07/15/24.............................. 555,500 -- 555,500
1,500,000 Giles County Industrial Development Authority (Hoechst Celanese
Corporation), 6.625%, 12/01/22 (Alternative Minimum Tax)............... -- 1,544,925 1,544,925
2,110,000 Halifax County, VA Industrial Development Authority--Exempt Facilities
Revenue--Old Dominion Electric Cooperative--Series 1992, 6.500%,
12/01/12............................................................... 2,170,684 -- 2,170,684
500,000 Hampton Roads, VA Medical College Revenue--Series 1991A, 6.875%,
11/15/16............................................................... 531,830 -- 531,830
2,000,000 Hanover County, VA Industrial Development Authority Hospital Revenue--Bon
Secours Health System--Series 1995, 5.500%, 08/15/25................... 1,862,780 -- 1,862,780
2,000,000 Hanover County, VA Industrial Development Authority Hospital Revenue--
Memorial Regional Medical Center--Series 1995, 6.375%, 08/15/18........ 2,150,180 -- 2,150,180
</TABLE>
P-25
<PAGE> 143
PRO FORMA FINANCIAL INFORMATION
<TABLE>
<CAPTION>
NUVEEN
PRINCIPAL FLAGSHIP MARKET PRO FORMA
AMOUNT DESCRIPTION MARKET VALUE VALUE MARKET VALUE
- --------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 1,000,000 Harrisonburg, VA Industrial Development Authority Hospital Revenue--
Rockingham Memorial Hospital--Series 1993, 5.250%, 12/01/22............ $ 885,430 $ -- $ 885,430
2,475,000 Harrisonburg, VA Redevelopment and Housing Authority--Multifamily Housing
Revenue--United Dominion--Series 1992, 7.100%, 12/01/15................ 2,562,664 -- 2,562,664
1,750,000 Harrisonburg, VA Redevelopment and Housing Authority--Multifamily Housing
Revenue--United Dominion--Series 1992, 7.000%, 12/01/08................ 1,828,505 -- 1,828,505
1,195,000 Henrico County, VA Industrial Development Authority--Nursing Facility--
Cambridge Manor Nursing Home--Series 1993, 5.875%, 07/01/19............ 1,125,272 -- 1,125,272
2,000,000 Henrico County, VA Industrial Development Authority--Solid Waste Disposal
Revenue--Browning-Ferris Industries of South Atlantic,
Incorporated--Series 1996 A, 5.450%, 01/01/14.......................... 1,893,440 -- 1,893,440
2,000,000 Henrico County, VA Industrial Development Authority Revenue--Henrico
County Regional Jail--Series 1994, 7.000%, 08/01/13.................... 2,228,640 -- 2,228,640
2,500,000 Henrico County, Virginia, Water and Sewer System Refunding Revenue Bonds,
Series 1992, 6.250%, 5/01/13........................................... -- 2,528,725 2,528,725
750,000 Henry County, VA Public Service Authority Water and Sewer Revenue,
6.250%, 11/15/19....................................................... 763,095 -- 763,095
1,410,000 Industrial Development Authority of Albemarle County, Virginia, Hospital
Refunding Revenue Bonds (Martha Jefferson Hospital), Series 1993,
5.800%, 10/01/09....................................................... -- 1,388,046 1,388,046
500,000 Industrial Development Authority of the City of Hampton, Virginia,
Hospital Revenue and Refunding Bonds (Sentara Hampton General
Hospital), Series 1994A, 6.500%, 11/01/12.............................. -- 512,700 512,700
1,500,000 Industrial Development Authority of the City of Lynchburg, Virginia,
Educational Facilities Revenue Bonds, (Randolph-Macon Women's College),
Series 1993, 5.875%, 9/01/13........................................... -- 1,460,235 1,460,235
1,155,000 Industrial Development Authority of the City of Roanoke, Virginia,
Hospital Revenue Bonds (Roanoke Memorial Hospitals, Community Hospital
of Roanoke Valley and Franklin Memorial Hospital Project), Series 1990,
6.500%, 7/01/25 (Pre-refunded to 7/01/00).............................. -- 1,232,477 1,232,477
3,225,000 Industrial Development Authority of Loudoun County, Virginia, University
Facilities Revenue Refunding Bonds (The George Washington University),
Series of 1992, 6.250%, 5/15/22........................................ 1,234,102 2,017,980 3,252,082
Industrial Development Authority of Rockingham County, Virginia,
Educational Facilities Revenue Bonds (Bridgewater College), Series
1993:
400,000 5.600%, 10/01/06......................................................... -- 393,172 393,172
400,000 5.700%, 10/01/07......................................................... -- 392,932 392,932
1,000,000 Loudoun County Sanitation Authority (Virginia), Water and Sewer System
Revenue Bonds, Refunding Series 1992, 6.250%, 1/01/16.................. -- 1,025,610 1,025,610
750,000 Loudoun County, VA Certificates of Participation, 7.200%, 10/01/10....... 869,535 -- 869,535
3,000,000 Loudoun County, VA Industrial Development Authority--Air Cargo Facility
Revenue--Washington Dulles--Series 1992, 7.000%, 01/01/09.............. 3,038,310 -- 3,038,310
300,000 Loudoun County, VA Industrial Development Authority--Air Cargo Facility
Revenue--Washington Dulles--Series 1992, 6.625%, 01/01/00.............. 305,655 -- 305,655
500,000 Loudoun County, VA Industrial Development Authority--George Washington
University, 6.250%, 05/15/12........................................... 506,535 -- 506,535
2,000,000 Loudoun County, VA Industrial Development Authority Revenue--Loudoun
Hospital Center--Series 1995, 5.800%, 06/01/20......................... 1,946,980 -- 1,946,980
3,545,000 Isle of Wight County, VA Industrial Development Authority--Solid Waste
Disposal Facilities--Union Camp--Series 1994, 6.550%, 04/01/24......... 3,650,180 -- 3,650,180
250,000 Martinsville, VA Industrial Development Authority Hospital Facility
Revenue-- Memorial Hospital Martinsville and Henry, 7.000%, 01/01/11... 261,090 -- 261,090
2,500,000 Mecklenburg County, VA Industrial Development Authority
Revenue--Mecklenburg Cogeneration, 7.350%, 05/01/08.................... 2,645,600 -- 2,645,600
Metropolitan Washington Airports Authority, Airport System Revenue Bonds,
Series 1992A:
1,500,000 6.625%, 10/01/19 (Alternative Minimum Tax)............................... -- 1,566,105 1,566,105
1,500,000 6.250%, 10/01/21 (Alternative Minimum Tax)............................... -- 1,509,030 1,509,030
1,000,000 Metropolitan Washington DC Airports Authority, 5.750%, 10/01/20
(Alternative Minimum Tax).............................................. -- 956,430 956,430
2,000,000 Newport News, VA Redevelopment and Housing Authority--Mortgage
Revenue--Berkley West Apartments--Series 1992 A, 6.550%, 07/01/24...... 2,035,080 -- 2,035,080
1,150,000 Norfolk, VA Industrial Development Authority Revenue--Children's Hospital
of The King's Daughters--Series 1991, 6.500%, 06/01/21................. 1,187,110 -- 1,187,110
</TABLE>
P-26
<PAGE> 144
PRO FORMA FINANCIAL INFORMATION
<TABLE>
<CAPTION>
NUVEEN
PRINCIPAL FLAGSHIP MARKET PRO FORMA
AMOUNT DESCRIPTION MARKET VALUE VALUE MARKET VALUE
- --------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 3,500,000 Norfolk, VA Industrial Development Authority Revenue--James
Barry-Robinson Institute Project, 7.700%, 10/01/06..................... $ 3,623,375 $ -- $ 3,623,375
1,500,000 Peninsula Airport Commission--Virginia Airport Improvement
Revenue--Series 1991, 7.300%, 07/15/21................................. 1,627,680 -- 1,627,680
2,000,000 Peninsula Ports Authority Revenue--Virginia Hospital Facility--Mary
Immaculate Hospital--Series 1994, 7.000%, 08/01/17..................... 2,050,880 -- 2,050,880
2,080,000 Peninsula Ports Authority of Virginia, Health System Revenue and
Refunding Bonds (Riverside Health System Project), Series 1992-A,
6.625%, 7/01/18........................................................ -- 2,146,726 2,146,726
1,500,000 Portsmouth, VA Public Utility General Obligation--Series 1993, 5.500%,
08/01/19............................................................... 1,419,180 -- 1,419,180
2,500,000 Prince William County Park Authority (Virginia), Revenue Bonds, Series
1994, 6.875%, 10/15/16................................................. -- 2,653,575 2,653,575
1,000,000 Prince William County Service Authority (Virginia), Water and Sewer
System Revenue Bonds, Series 1991, 6.000%, 7/01/29..................... -- 1,000,150 1,000,150
2,000,000 Prince William County, VA Industrial Development Authority
Revenue--Hospital Facility--Potomac Hospital--Series 1995, 6.850%,
10/01/25............................................................... 2,096,180 -- 2,096,180
1,000,000 Richmond, VA General Obligation--Public Improvement Revenue--Series 1995
B, 5.000%, 01/15/21.................................................... 874,460 -- 874,460
400,000 Richmond, VA Industrial Development Authority Revenue--Richmond
Metropolitan Blood Service, 7.125%, 02/01/11........................... 418,004 -- 418,004
1,500,000 Richmond, VA Redevelopment and Housing Authority Revenue--Old
Manchester--Series 1994, 6.800%, 03/01/15.............................. 1,567,275 -- 1,567,275
2,000,000 Roanoke, VA Industrial Development Authority Hospital Revenue--Roanoke
Memorial Hospital--Community Hospital of Roanoke Valley Franklin
Memorial Hospital--Saint Albans Psychiatric Hospital--Series, 5.000%,
07/01/24............................................................... 1,725,100 -- 1,725,100
2,000,000 Roanoke, VA Valley Resource Authority--Solid Waste System Revenue--Series
1992, 5.750%, 09/01/12................................................. 1,932,240 -- 1,932,240
1,250,000 Rockingham County, VA Industrial Development Authority
Revenue--Bridgewater College--Series 1993, 6.000%, 10/01/23............ 1,143,738 -- 1,143,738
1,000,000 Russell County, VA Industrial Development Authority Pollution Control
Revenue--Appalachian Power Company, 7.700%, 11/01/07................... 1,087,260 -- 1,087,260
2,750,000 Southeastern Public Service Authority of Virginia, Senior Revenue Bonds,
Series 1993, (Regional Solid Waste System), 6.000%, 7/01/13
(Alternative Minimum Tax).............................................. -- 2,599,740 2,599,740
500,000 Strasburg, VA General Obligation, 7.875%, 03/01/19....................... 519,650 -- 519,650
2,000,000 University of Virginia--Rector and Visitors General Pledge--Series 1993
B, 5.375%, 06/01/20.................................................... 1,866,120 -- 1,866,120
4,000,000 Upper Occoquan Sewage Authority (Virginia), Regional Sewerage System
Revenue Refunding Bonds, Series of 1993, 5.000%, 7/01/21............... -- 3,500,840 3,500,840
2,215,000 Upper Occoquan, VA Sewage Authority Revenue--Regional Sewerage
System--Series 1995 A and B, 5.150%, 07/01/20.......................... 2,005,350 -- 2,005,350
Virginia College Building Authority, Educational Facilities Revenue Bonds
(The Washington and Lee University Project), Series of 1994:
1,250,000 5.750%, 1/01/14.......................................................... -- 1,222,225 1,222,225
1,000,000 5.800%, 1/01/24.......................................................... -- 965,950 965,950
1,000,000 Virginia College Building Authority Educational Facilities
Revenue--Hampton University--Series A, 7.750%, 04/01/14................ 1,100,840 -- 1,100,840
3,250,000 Virginia College Building Authority Educational Facilities
Revenue--Hampton University--Series 1993, 5.750%, 04/01/14............. 3,089,840 -- 3,089,840
2,000,000 Virginia College Building Authority Educational Facilities
Revenue--Roanoke College--Series 1992, 6.625%, 10/15/12................ 2,026,040 -- 2,026,040
750,000 Virginia College Building Authority Educational Facilities
Revenue--Washington and Lee University--Series 1992, 6.400%,
01/01/12............................................................... 779,108 -- 779,108
800,000 Virginia College Building Authority (Randolph-Macon College), 6.625%,
5/01/13................................................................ -- 828,800 828,800
4,000,000 Virginia Housing Development Authority, Commonwealth Mortgage Bonds, 1992
Series A, 7.150%, 1/01/33.............................................. -- 4,212,040 4,212,040
650,000 Virginia Housing Development Authority, 6.850%, 7/01/17.................. -- 670,566 670,566
800,000 Virginia Housing Development Authority, 6.800%, 11/01/09................. -- 841,872 841,872
1,000,000 Virginia Public School Authority--School Financing--Series 1994 A,
6.200%, 08/01/13....................................................... 1,034,180 -- 1,034,180
1,210,000 Virginia Public School Authority--School Financing--Series 1995 B,
5.625%, 08/01/16....................................................... 1,175,116 -- 1,175,116
1,000,000 Virginia Public School Authority--School Financing--Series 1995 B,
5.750%, 08/01/15....................................................... 986,210 -- 986,210
1,090,000 Virginia Public Building Authority, State Building Revenue Bonds, Series
1991A, 6.500%, 8/01/11................................................. -- 1,191,141 1,191,141
1,960,000 Virginia Resource Authority Solid Waste Disposal System Revenue Bonds
(Prince William County) Refunding 1995-A, 5.500%, 4/01/15.............. -- 1,863,921 1,863,921
</TABLE>
P-27
<PAGE> 145
PRO FORMA FINANCIAL INFORMATION
<TABLE>
<CAPTION>
NUVEEN
PRINCIPAL FLAGSHIP MARKET PRO FORMA
AMOUNT DESCRIPTION MARKET VALUE VALUE MARKET VALUE
- --------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 1,000,000 Virginia Resources Authority Sewer System Revenue Bonds, 6.000%, 10/01/25
(Alternative Minimum Tax).............................................. $ -- $ 941,590 $ 941,590
2,500,000 Virginia Resources Authority, Water and Sewer System Revenue Bonds, 1995
Series A (Sussex County Project), 5.600%, 10/01/25..................... 926,880 1,395,120 2,322,000
500,000 Virginia Resources Authority--Water and Sewer System Revenue--Lot 7,
7.125%, 10/01/16....................................................... 534,955 -- 534,955
105,000 Virginia Resources Authority--Water and Sewer System Revenue--Pooled Loan
Program--Series A, 8.125%, 11/01/16.................................... 112,955 -- 112,955
110,000 Virginia Resources Authority--Water and Sewer System Revenue--Pooled Loan
Program--Series A, 8.125%, 11/01/16.................................... 120,534 -- 120,534
120,000 Virginia Resources Authority--Water and Sewer System Revenue--Pooled Loan
Program--Series A, 8.125%, 11/01/16.................................... 133,307 -- 133,307
130,000 Virginia Resources Authority--Water and Sewer System Revenue--Pooled Loan
Program--Series A, 8.125%, 11/01/16.................................... 147,399 -- 147,399
140,000 Virginia Resources Authority--Water and Sewer System Revenue--Pooled Loan
Program--Series A, 8.125%, 11/01/16.................................... 161,748 -- 161,748
275,000 Virginia Resources Authority--Water and Sewer System Revenue--Pooled Loan
Program--Series 1986 A, 7.600%, 11/01/16............................... 296,994 -- 296,994
305,000 Virginia Resources Authority--Water and Sewer System Revenue--Pooled Loan
Program--Series 1986 A, 7.600%, 11/01/16............................... 329,394 -- 329,394
410,000 Virginia Resources Authority--Water and Sewer System Revenue--Pooled Loan
Program--Series 1986 A, 7.650%, 11/01/16............................... 454,665 -- 454,665
1,500,000 Virginia Resources Authority--Water and Sewer System Revenue--Series 1992
A, 6.125%, 04/01/19.................................................... 1,482,585 -- 1,482,585
900,000 Virginia Resource Authority Water System, 6.450%, 4/01/13................ -- 936,603 936,603
200,000 Virginia State Housing Development Authority--Commonwealth
Mortgage--Series 1989 D, 7.500%, 07/01/17.............................. 208,230 -- 208,230
3,000,000 Virginia State Housing Development Authority--Commonwealth
Mortgage--Series 1992 A, 7.100%, 01/01/17.............................. 3,161,160 -- 3,161,160
1,000,000 Virginia State Housing Development Authority--Commonwealth
Mortgage--Series 1992 A, 7.100%, 01/01/22.............................. 1,051,870 -- 1,051,870
700,000 Virginia State Housing Development Authority Revenue--Multifamily--Series
1991 F, 7.000%, 05/01/04............................................... 745,703 -- 745,703
3,000,000 Virginia State Public Building Authority Revenue--Series 1994 A, 6.250%,
08/01/15............................................................... 3,251,910 -- 3,251,910
1,000,000 Virginia State Resource Authority--Sewer System
Revenue--Harrisonburg--Rockingham--Series 1992 A, 6.000%, 05/01/22..... 965,570 -- 965,570
1,000,000 Virginia State Resource Authority Solid Waste Disposal System
Revenue--Series 1992 B, 6.750%, 11/01/12............................... 1,055,210 -- 1,055,210
1,500,000 Virginia State Resource Authority--Water and Sewer System Revenue--Lot
9--Frederick County Sanitation, 6.000%, 10/01/12....................... 1,473,840 -- 1,473,840
2,000,000 Virginia State Transportation Board--U.S. Route 58 Corridor Development
Program--Series 1993 B, 5.500%, 05/15/18............................... 1,892,760 -- 1,892,760
1,800,000 Winchester, VA Industrial Development Authority Educational Facilities
Revenue-- Shenandoah University--Series 1994, 6.700%, 10/01/14......... 1,894,373 -- 1,894,373
775,000 Winchester, VA Industrial Development Authority Educational Facilities
Revenue-- Shenandoah University--Series 1994, 6.750%, 10/01/19......... 819,198 -- 819,198
2,000,000 Commonwealth of Puerto Rico Aqueduct and Sewer Authority Revenue--Series
1995, 5.000%, 07/01/15................................................. 1,757,920 -- 1,757,920
2,000,000 Commonwealth of Puerto Rico Electric Power Authority Revenue--Series 1995
Z, 5.500%, 07/01/16.................................................... 1,864,200 -- 1,864,200
1,865,000 Commonwealth of Puerto Rico Electric Power Authority--Series O,
0.000%, 07/01/17....................................................... 525,072 -- 525,072
1,000,000 Commonwealth of Puerto Rico Electric Power Authority--Series 1992 R,
6.250%, 07/01/17....................................................... 1,007,490 -- 1,007,490
200,000 Commonwealth of Puerto Rico Electric Power Authority--Series K,
9.375%, 07/01/17....................................................... 215,806 -- 215,806
2,575,000 Commonwealth of Puerto Rico--General Obligation--Series 1994, 6.450%,
07/01/17............................................................... 2,651,735 -- 2,651,735
2,500,000 Commonwealth of Puerto Rico--General Obligation--Series 1994, 6.500%,
07/01/23............................................................... 2,583,825 -- 2,583,825
490,000 Commonwealth of Puerto Rico Housing Authority--Single Family--Series B,
7.650%, 10/15/22....................................................... 512,476 -- 512,476
100,000 Commonwealth of Puerto Rico Public Building Authority Guaranteed Public
Education and Health Facilities--Series G, 7.875%, 07/01/16............ 106,367 -- 106,367
4,250,000 Commonwealth of Puerto Rico Public Improvement--General
Obligation--Series 1996 A, 5.400%, 07/01/25............................ 3,831,078 -- 3,831,078
</TABLE>
P-28
<PAGE> 146
PRO FORMA FINANCIAL INFORMATION
<TABLE>
<CAPTION>
NUVEEN
PRINCIPAL FLAGSHIP MARKET PRO FORMA
AMOUNT DESCRIPTION MARKET VALUE VALUE MARKET VALUE
- --------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 800,000 Puerto Rico Highway Transportation Authority, 6.625%, 7/01/18
(Pre-refunded to 7/01/02).............................................. $ -- $ 885,856 $ 885,856
2,000,000 Puerto Rico Ports Authority--Special Facilities Revenue--American
Airlines, Incorporated Project--Series 1996 A, 6.250%, 06/01/26........ 1,957,600 -- 1,957,600
- --------------------------------------------------------------------------------------------------------------------------------
$191,160,000 Total Investments--(Cost $185,283,412)--98.3%............................ $126,563,949 $63,578,895 190,142,844
=========== -----------------------------------------------------------------------------------------------------------------
Other Assets Less Liabilities--1.7%...................................... 3,273,527
-----------------------------------------------------------------------------------------------------------------
Net Assets--100%......................................................... $193,416,371
=================================================================================================================
</TABLE>
* Optional Call Provisions: Dates (month and year) and prices of the earliest
optional call or redemption. There may be other call provisions at varying
prices at later dates.
** Ratings: Using the higher of Standard & Poor's or Moody's rating.
N/R--Investment is not rated.
P-29
<PAGE> 147
ANNEX A
RATINGS OF INVESTMENTS
STANDARD & POOR'S RATINGS GROUP -- A brief description of the applicable
Standard & Poor's Ratings Group rating symbols and their meanings (as published
by Standard & Poor's Corporation) follows:
A Standard & Poor's corporate or municipal debt rating is a current
assessment of the creditworthiness of an obligor with respect to a specific debt
obligation. This assessment may take into consideration obligors such as
guarantors, insurers, or lessees.
The rating is not a recommendation to purchase, sell or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished by the issuer and
obtained by Standard & Poor's from other sources it considers reliable. Standard
& Poor's 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 for other circumstances.
The ratings are based, in varying degrees, on the following considerations:
<TABLE>
<S> <C>
I. Likelihood of default -- capacity and willingness of the obligor as to the timely
payment of interest and repayment of principal in accordance with the terms of the
obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization or other arrangements under the laws of bankruptcy and
other laws affecting creditors' rights.
</TABLE>
1. Long-term municipal bonds
<TABLE>
<S> <C>
AAA Bonds rated AAA have the highest rating assigned by Standard & Poor's to a debt
obligation. Capacity to pay interest and repay principal is extremely strong.
AA Bonds rated AA have a very strong capacity to pay interest and repay principal and
differ from the highest rated issues only in small degree.
A Bonds rated A have a strong capacity to pay interest and repay principal although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in higher rated categories.
BBB Bonds rated BBB are regarded as having an adequate capacity to pay interest and
repay principal. Whereas they normally exhibit adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for bonds in this category
than for bonds in higher rated categories.
BB-D Debt rated "BB," "B," "CCC," "CC" and "C" is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
The "CT" is reserved for income bonds on which no interest is being paid. Debt
rated "D" is in default, and payment of interest and/or repayment of principal is
in arrears.
</TABLE>
Plus (+) or Minus (-): The ratings from "AA" to "BBB" may be modified by
the addition of a plus or a minus sign to show relative standing within the
major rating categories.
Provisional Ratings: The letter "P" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the bonds being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no comment on the
likelihood of, or the risk of default upon failure of, such completion. The
investor should exercise his own judgment with respect to such likelihood and
risk.
A-1
<PAGE> 148
2. Short-term tax exempt notes
Standard & Poor's tax exempt note rates are generally given to such notes
that mature in three years or less. The three rating categories are as follows:
<TABLE>
<S> <C>
SP-1 Strong capacity to pay principal and interest. Issues determined to possess very
strong characteristics will be 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.
</TABLE>
3. Tax-exempt commercial paper
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
165 days. Ratings are graded into four categories, ranging from "A" for the
highest quality obligations to "D" for the lowest. The four categories are as
follows:
<TABLE>
<S> <C>
A Issues assigned this highest rating are regarded as having the greatest capacity
for timely payment. Issues in this category are further refined with the
designation 1, 2, and 3 to indicate the relative degree of safety.
A-1 This designation indicates that the degree of safety regarding timely payment is
strong. Those issues determined to possess overwhelming safety characteristics are
denoted with a plus (+) sign designation.
A-2 Capacity for timely payment on issues with this designation is satisfactory.
However, the relative degree of safety is not as high as for issues designated
"A-1."
A-3 Issues carrying this designation have adequate capacity for timely payment. They
are, however, somewhat more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
B Issues rated "B" are regarded as having speculative capacity for timely payment.
C&D These ratings indicate that the issue is either in default or expected to be in
default upon maturity.
</TABLE>
MOODY'S INVESTORS SERVICE, INC. -- A brief description of the applicable
Moody's Investor Service, Inc. rating symbols and their meanings follow:
1. Long-term municipal bonds
Aaa -- Bonds which are rated Aaa are judged to be the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large, or by an exceptionally
stable, margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are more unlikely to
impair the fundamentally strong position of such issues. With the occasional
exception of oversupply in a few specific instances, the safety of obligations
of this class is so absolute that their market value is affected solely by money
market fluctuations.
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 fluctuations 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 the Aaa
securities. These Aa bonds are high grade, their market value is virtually
immune to all but money market influences, with the occasional exception of
oversupply in a few specific instances.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as higher medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to A-rated bonds may be influenced to
some degree by credit circumstances during a sustained period of depressed
business conditions. During periods of normalcy, bonds of this quality
frequently move in parallel with Aaa and Aa obligations, with the occasional
exception of oversupply in a few specific instances.
A-2
<PAGE> 149
Baa -- Bonds which are rated Baa are considered as lower medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments but certain protective elements may be lacking or may be
characteristically unreliable of over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well. The market value of Baa-rated bonds is more sensitive
to change in economic circumstances, and aside from occasional speculative
factors applying to some bonds of this class, Baa market valuations move in
parallel with Aaa, Aa, and A obligations during periods of economic normalcy,
except in instances of oversupply.
Ba-C -- 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. 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. 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. 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. 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.
Moody's bond rating symbols may contain numerical modifiers of a generic
rating classification. The modifier 1 indicates that the bond ranks at the high
end of its category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its generic rating
category.
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 operating experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit status upon completion or
construction elimination of basis of condition.
2. Short-term tax exempt notes
SHORT-TERM NOTES. The four ratings of Moody's for short-term notes are MIG
1, MIG 2, MIG 3, and MIG 4; MIG 1 denotes "best quality, enjoying strong
protection from established cash flows"; MIG 2 denotes "high quality" with
"ample margins of protection"; MIG 3 notes are of "favorable quality . . . but
lacking the undeniable strength of the preceding grades"; MIG 4 notes are of
"adequate quality, carrying specific risk but having protection . . . and not
distinctly or predominantly speculative."
3. Tax-exempt commercial paper
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:
Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
A-3
<PAGE> 150
FITCH INVESTORS SERVICE, INC. -- A brief description of the applicable
Fitch Investors Service, Inc. rating symbols and their meanings follows:
1. Long-term municipal bonds
<TABLE>
<S> <C>
AAA Bonds considered to be investment grade and of the highest credit quality. The
obligor has an exceptionally strong ability to pay interest and repay principal,
which is unlikely to be affected by reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high quality. The obligor's
ability to pay interest and repay principal is very strong, although not quite as
strong as bonds rated "AAA." Because bonds rated in the "AAA" and "AA" categories
are not significantly vulnerable to foreseeable future developments, short-term
debt of these issuers is generally rated "F-1+."
A Bonds considered to be investment grade and of high credit quality. The obligor's
ability to pay interest and repay principal is considered to be strong, but may be
more vulnerable to adverse changes in economic conditions and circumstances than
bonds with higher ratings.
BBB Bonds considered to be investment grade and of satisfactory credit quality. The
obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that the ratings of these bonds will fall below investment
grade is higher than for bonds with higher ratings.
PLUS (+) Plus and minus signs are used with a rating symbol to indicate the relative
MINUS (-) position of a credit within the rating category. Plus and minus signs, however,
are not used in the "AAA" category.
NR Indicates that Fitch does not rate the specific issue.
CONDITIONAL A conditional rating is premised on the successful completion of a project or the
occurrence of a specific event.
SUSPENDED A rating is suspended when Fitch deems the amount of information available from
the issuer to be inadequate for rating purposes.
WITHDRAWN A rating will be withdrawn when an issue matures or is called or refinanced, and,
at Fitch's discretion, when an issuer fails to furnish proper and timely
information.
FITCHALERT Ratings are placed on FitchAlert to notify investors of an occurrence that is
likely to result in a rating change and the likely direction of such change. These
are designated as "Positive," indicating a potential upgrade, "Negative," for
potential downgrade, or "Evolving," where ratings may be raised or lowered.
FitchAlert is relatively short-term, and should be resolved within 12 months.
CREDIT TREND Credit trend indicators show whether credit fundamentals are improving, stable,
declining, or uncertain, as follows:
Improving
Stable
Declining
Uncertain
Credit trend indicators are not predictions that any rating change will occur, and
have a longer-term time frame than issues placed on FitchAlert.
</TABLE>
A-4
<PAGE> 151
ANNEX B
May 31, 1996
NUVEEN MULTISTATE TAX-FREE TRUST
333 WEST WACKER DRIVE
CHICAGO, ILLINOIS 60606
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus. A prospectus
may be obtained from certain securities representatives, banks and other
financial institutions that have entered into sales agreements with John Nuveen
& Co. Incorporated, or from the Funds, c/o John Nuveen & Co. Incorporated, 333
West Wacker Drive, Chicago, Illinois 60606. This Statement of Additional
Information relates to, and should be read in conjunction with, the Prospectus,
dated May 31, 1996.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fundamental Policies and Investment Portfolio............................................. B-2
Management................................................................................ B-27
Investment Adviser and Investment Management Agreement.................................... B-32
Portfolio Transactions.................................................................... B-33
Net Asset Value........................................................................... B-34
Tax Matters............................................................................... B-34
Performance Information................................................................... B-42
Additional Information on the Purchase and Redemption of Fund Shares...................... B-48
Distribution and Service Plan............................................................. B-50
Independent Public Accountants and Custodian.............................................. B-51
</TABLE>
The audited financial statements for the fiscal year ended January 31, 1996
of Nuveen Arizona Tax-Free Value Fund, Nuveen Florida Tax-Free Value Fund,
Nuveen Pennsylvania Tax-Free Value Fund and Nuveen Virginia Tax-Free Value Fund,
appearing in the Annual Report of Nuveen Multistate Tax-Free Trust are
incorporated herein by reference. The audited financial statements for those
funds accompany this Statement of Additional Information.
B-1
<PAGE> 152
FUNDAMENTAL POLICIES AND INVESTMENT PORTFOLIO
FUNDAMENTAL POLICIES
The investment objective and certain fundamental investment policies of
each Fund are described in the Prospectus. Each of the Funds, as a fundamental
policy, may not, without the approval of the holders of a majority of the shares
of that Fund:
(1) Invest in securities other than Municipal Obligations and
temporary investments, as those terms are defined in the Prospectus;
(2) Invest more than 5% of its total assets in securities of any one
issuer, except that this limitation shall not apply to securities of the
United States government, its agencies and instrumentalities or to the
investment of 25% of such Fund's assets;
(3) Borrow money, except from banks for temporary or emergency
purposes and not for investment purposes and then only in an amount not
exceeding (a) 10% of the value of its total assets at the time of borrowing
or (b) one-third of the value of the Fund's total assets including the
amount borrowed, in order to meet redemption requests which might otherwise
require the untimely disposition of securities. While any such borrowings
exceed 5% of such Fund's total assets, no additional purchases of
investment securities will be made by such Fund. If due to market
fluctuations or other reasons, the value of the Fund's assets falls below
300% of its borrowings, the Fund will reduce its borrowings within 3
business days. To do this, the Fund may have to sell a portion of its
investments at a time when it may be disadvantageous to do so;
(4) Pledge, mortgage or hypothecate its assets, except that, to secure
borrowings permitted by subparagraph (3) above, it may pledge securities
having a market value at the time of pledge not exceeding 10% of the value
of the Fund's total assets;
(5) Issue senior securities as defined in the Investment Company Act
of 1940, except to the extent such issuance might be involved with respect
to borrowings described under item (3) above or with respect to
transactions involving futures contracts or the writing of options within
the limits described in the Prospectus and this Statement of Additional
Information;
(6) Underwrite any issue of securities, except to the extent that the
purchase of Municipal Obligations in accordance with its investment
objective, policies and limitations, may be deemed to be an underwriting;
(7) Purchase or sell real estate, but this shall not prevent any Fund
from investing in Municipal Obligations secured by real estate or interests
therein or foreclosing upon and selling such security;
(8) Purchase or sell commodities or commodities contracts or oil, gas
or other mineral exploration or development programs, except for
transactions involving futures contracts within the limits described in the
Prospectus and this Statement of Additional Information;
(9) Make loans, other than by entering into repurchase agreements and
through the purchase of Municipal Obligations or temporary investments in
accordance with its investment objective, policies and limitations;
(10) Make short sales of securities or purchase any securities on
margin, except for such short-term credits as are necessary for the
clearance of transactions;
(11) Write or purchase put or call options, except to the extent that
the purchase of a stand-by commitment may be considered the purchase of a
put, and except for transactions involving options within the limits
described in the Prospectus and this Statement of Additional Information;
(12) Invest more than 5% of its total assets in securities of
unseasoned issuers which, together with their predecessors, have been in
operation for less than three years;
(13) Invest more than 25% of its total assets in securities of issuers
in any one industry; provided, however, that such limitations shall not be
applicable to Municipal Obligations issued by governments or political
subdivisions of governments, and obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities;
(14) Invest more than 10% of its total assets in repurchase agreements
maturing in more than seven days, "illiquid" securities (such as
non-negotiable CDs) and securities without readily available market
quotations;
B-2
<PAGE> 153
(15) Purchase or retain the securities of any issuer other than the
securities of the Fund if, to the Fund's knowledge, those trustees of the
Trust, or those officers and directors of Nuveen Advisory Corp. ("Nuveen
Advisory"), who individually own beneficially more than 1/2 of 1% of the
outstanding securities of such issuer, together own beneficially more than
5% of such outstanding securities.
For the purpose of applying the limitations set forth in paragraphs (2) and
(12) 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 user, 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 user, then such non-governmental user would be deemed to
be the sole issuer. Where a security is also backed by the enforceable
obligation of a superior or unrelated governmental entity 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. Where a security is insured
by bond insurance, it shall not be considered a security issued or guaranteed by
the insurer; instead the issuer of such security will be determined in
accordance with the principles set forth above. The foregoing restrictions do
not limit the percentage of a Fund's assets that may be invested in securities
insured by any single insurer. It is a fundamental policy of each Fund, which
cannot be changed without the approval of the holders of a majority of shares of
such Fund, that a Fund will not hold securities of a single bank, including
securities backed by a letter of credit of such bank, if such holdings would
exceed 10% of the total assets of such Fund.
The foregoing restrictions and limitations, as well as the Funds' policies
as to ratings of portfolio investments, will apply only at the time of purchase
of securities, and the percentage limitations will not be considered violated
unless an excess or deficiency occurs or exists immediately after and as a
result of an acquisition of securities, unless otherwise indicated.
The foregoing fundamental investment policies, together with the investment
objective of each Fund, cannot be changed without approval by holders of a
"majority of the Fund's outstanding voting shares." As defined in the Investment
Company Act of 1940, this means the vote of (i) 67% or more of the Fund's shares
present at a meeting, if the holders of more than 50% of the Fund's shares are
present or represented by proxy, or (ii) more than 50% of the Fund's shares,
whichever is less.
Nuveen Multistate Tax-Free Trust (the "Trust") is an open-end diversified
management series company under SEC Rule 18f-2. Each Fund is a separate series
issuing its own shares. Certain matters under the Investment Company Act of 1940
which must be submitted to a vote of the holders of the outstanding voting
securities of a series company shall not be deemed to have been effectively
acted upon unless approved by the holders of a majority of the outstanding
voting securities of each series affected by such matter.
PORTFOLIO SECURITIES
As described in the Prospectus, each Fund invests primarily in a
diversified portfolio of Municipal Obligations that are issued within the Fund's
respective state. In general, Municipal Obligations include debt obligations
issued by states, cities and local authorities to obtain funds for various
public purposes, including construction of a wide range of public facilities
such as airports, bridges, highways, hospitals, housing, mass transportation,
schools, streets and water and sewer works. Industrial development bonds and
pollution control bonds that are issued by or on behalf of public authorities to
finance various privately-rated facilities are included within the term
Municipal Obligations if the interest paid thereon is exempt from federal income
tax. Municipal Obligations in which each Fund will primarily invest are issued
by that Fund's respective state and local authorities in that state, and bear
interest that, in the opinion of bond counsel to the issuer, is exempt from
federal income tax and from personal income tax imposed by the respective state.
The investment assets of each Fund will consist of (1) Municipal
Obligations which are rated at the time of purchase within the four highest
grades (Baa or BBB or better) by Moody's Investors Service, Inc. ("Moody's") or
Standard and Poor's Corporation ("S&P"), (2) unrated Municipal Obligations
which, in the opinion of Nuveen Advisory, have credit characteristics equivalent
to bonds rated within the four highest grades by Moody's or S&P, except that a
Fund may not invest more than 20% of its net assets in unrated bonds and (3)
temporary investments as described below, the income from which may be subject
to state income tax or to both federal and state income taxes.
B-3
<PAGE> 154
As described in the Prospectus, each Fund may invest in Municipal
Obligations that constitute participations in a lease obligation or installment
purchase contract obligation (hereafter collectively called "lease obligations")
of a municipal authority or entity. Although lease obligations do not constitute
general obligations of the municipality for which the municipality's taxing
power is pledged, a lease obligation is ordinarily backed by the municipality's
covenant to budget for, appropriate and make the payments due under the lease
obligation. However, certain 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. Although non-appropriation lease obligations are
secured by the leased property, disposition of the property in the event of
foreclosure might prove difficult. Each Fund will seek to minimize the special
risks associated with such securities by not investing more than 10% of its
assets in lease obligations that contain non-appropriation clauses, and by only
investing in those nonappropriation leases where (1) the nature of the leased
equipment or property is such that its ownership or use is essential to a
governmental function of the municipality, (2) the lease payments will commence
amortization of principal at an early date resulting in an average life of seven
years or less for the lease obligation, (3) appropriate covenants will be
obtained from the municipal obligor prohibiting the substitution or purchase of
similar equipment if lease payments are not appropriated, (4) the lease obligor
has maintained good market acceptability in the past, (5) the investment is of a
size that will be attractive to institutional investors, and (6) the underlying
leased equipment has elements of portability and/or use that enhance its
marketability in the event foreclosure on the underlying equipment were ever
required. Lease obligations provide a premium interest rate which along with
regular amortization of the principal may make them attractive for a portion of
the assets of the Funds.
Obligations of issuers of Municipal Obligations are subject to the
provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the Federal 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 and/or interest, 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 Obligations may be materially affected.
PORTFOLIO TRADING AND TURNOVER
Each Fund will make changes in its investment portfolio from time to time
in order to take advantage of opportunities in the municipal market and to limit
exposure to market risk. A Fund may also engage to a limited extent in
short-term trading consistent with its investment objective, but a Fund will not
trade securities solely to realize a profit. Securities may be sold in
anticipation of market decline or purchased in anticipation of market rise and
later sold, but a Fund will not engage in trading solely to recognize a gain. 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 disparity in the normal yield relationship between the two
securities. A Fund may make changes in its investment portfolio in order to
limit its exposure to changing market conditions. Changes in a Fund's
investments are known as "portfolio turnover." While it is impossible to predict
future portfolio turnover rates, each Fund's annual portfolio turnover rate is
generally not expected to exceed 50%. However, each Fund reserves the right to
make changes in its investments whenever it deems such action advisable, and
therefore, a Fund's annual portfolio turnover rate may exceed 50% in particular
years depending upon market conditions. The portfolio turnover rates for the
fiscal years ended January 31, 1996 and 1995, respectively, were 5% and 29% for
the Arizona Fund, 21% and 4% for the Florida Fund, 17% and 35% for the Maryland
Fund, 33% and 35% for the Michigan Fund, 39% and 32% for the New Jersey Fund,
52% and 74% for the Pennsylvania Fund and 42% and 40% for the Virginia Fund.
WHEN-ISSUED SECURITIES
As described in the Prospectus, each Fund may purchase and sell Municipal
Obligations on a when-issued or delayed delivery basis. When-issued and delayed
delivery transactions arise when securities are purchased or sold with payment
and delivery beyond the regular settlement date. (When-issued transactions
normally settle within 15-45 days.) On such transactions the payment obligation
and the interest rate are fixed at the time the buyer enters into the
commitment. The commitment to purchase securities on a when-issued or delayed
delivery basis may involve an element of risk because the value of the
securities is subject to market fluctuation, no interest accrues to the
purchaser prior to settlement of the transaction, and at the time of delivery
the market value may be less than cost. At the time a Fund makes the commitment
to purchase a Municipal Obligation on a when-issued or delayed delivery basis,
it will record the transaction and reflect the amount due and the value of the
security in determining
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its net asset value. Likewise, at the time a Fund makes the commitment to sell a
Municipal Obligation on a delayed delivery basis, it will record the transaction
and include the proceeds to be received in determining its net asset value;
accordingly, any fluctuations in the value of the Municipal Obligation sold
pursuant to a delayed delivery commitment are ignored in calculating net asset
value so long as the commitment remains in effect. The Fund will maintain
designated readily marketable assets at least equal in value to commitments to
purchase when-issued or delayed delivery securities, such assets to be
segregated by the Custodian specifically for the settlement of such commitments.
A Fund will only make commitments to purchase Municipal Obligations on a
when-issued or delayed delivery basis with the intention of actually acquiring
the securities, but each Fund reserves the right to sell these securities before
the settlement date if it is deemed advisable. If a when-issued security is sold
before delivery any gain or loss would not be tax-exempt. A Fund commonly
engages in when-issued transactions in order to purchase or sell newly-issued
Municipal Obligations, and may engage in delayed delivery transactions in order
to manage its operations more effectively.
SPECIAL CONSIDERATIONS RELATING TO MUNICIPAL OBLIGATIONS OF DESIGNATED STATES
As described in the Prospectus, except for investments in temporary
investments, each of the Funds will, at all times, invest all of its net assets
in its respective state's Municipal Obligations. Each Fund is therefore more
susceptible to political, economic or regulatory factors adversely affecting
issuers of Municipal Obligations in its state. Brief summaries of these factors
are contained in the Prospectus. Set forth below is additional information that
bears upon the risk of investing in Municipal Obligations issued by public
authorities in the states of currently offered Funds. This information was
obtained from official statements of issuers located in the respective states as
well as from other publicly available official documents and statements. The
Funds have not independently verified any of the information contained in such
statements and documents.
FACTORS PERTAINING TO ARIZONA
As described above, except to the extent the Arizona Fund invests in
temporary investments, the Arizona Fund will invest substantially all of its net
assets in Arizona Municipal Obligations. The Arizona Fund is therefore
susceptible to political, economic or regulatory factors affecting issuers of
Arizona Municipal Obligations. The information set forth below is derived from
official statements prepared in connection with the issuance of Arizona
Municipal Obligations and other sources that are generally available to
investors. The information is provided as general information intended to give a
recent historical description and is not intended to indicate future or
continuing trends in the financial or other positions of The State of Arizona
(the "State"). This information has not been independently verified.
There can be no assurance that future statewide or regional economic
difficulties, and the resulting impact on State or local governmental finances
generally, will not adversely affect the market value of Arizona Municipal
Obligations held in the portfolio of the Arizona Fund or the ability of
particular obligors to make timely payments of debt service on (or relating to)
those obligations.
General Economic Conditions. Arizona is the nation's sixth largest state in
terms of area. Arizona's main economic/employment sectors include services,
tourism and manufacturing. Mining and agriculture are also significant, although
they tend to be more capital than labor intensive. Services is the single
largest economic sector. Many of these jobs are directly related to tourism.
The unemployment rate in Arizona for 1995 was 5.1% and for 1994 was 6.3%
compared to a national rate of 5.6% in 1995 and 6.1% in 1994. Job growth may be
adversely affected by the closing of a major air force base near Phoenix.
Budgetary Process. Arizona operates on a fiscal year beginning July 1 and
ending June 30. Fiscal year 1996 refers to the year ending June 30, 1996.
Total General Fund revenues of $4.5 billion are expected during fiscal year
1996. Approximately 47% of this budgeted revenue comes from sales and use taxes,
35% from income taxes (both individual and corporate) and 4% from property
taxes. All taxes total approximately $4.1 billion, or 92% of the General Fund
revenues. Non-tax revenue includes items such as income from the state lottery,
licenses, fees and permits, and interest.
For fiscal year 1995, the budget called for expenditures of approximately
$4.7 billion. These expenditures fell into the following major categories:
education (52%), health and welfare (24%), protection and safety (4%), general
government (15%) and inspection and regulation, natural resources,
transportation and other (6%). The State's general fund expenditures for fiscal
year 1996 are budgeted at approximately $4.5 billion. Fiscal year 1996's
proposed expenditures fall into the following major categories: education (52%),
health and welfare (23%),
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protection and safety (4%), general government (15%) and inspection and
regulation, natural resources, transportation and other (6%). For fiscal year
1997, a general fund budget of $4.77 billion has been adopted.
Most or all of the Arizona Municipal Obligations are not obligations of the
State of Arizona and are not supported by the State's taxing powers. The
particular source of payment and security for each of the Arizona Municipal
Obligations is detailed in the instruments themselves and in related offering
materials. There can be no assurances with respect to whether the market value
or marketability of any of the Arizona Municipal Obligations issued by an entity
other than the State of Arizona will be affected by financial or other
conditions of the State or of any entity located within the State. In addition,
it should be noted that the State of Arizona, as well as counties,
municipalities, political subdivisions and other public authorities of the
State, are subject to limitations imposed by Arizona's Constitution with respect
to ad valorem taxation, bonded indebtedness and other matters. For example, the
State legislature cannot appropriate revenues in excess of 7% of the total
personal income of the State in any fiscal year. These limitations may affect
the ability of the issuers to generate revenues to satisfy their debt
obligations.
Local governments have experienced many of the same fiscal difficulties for
many of the same reasons and, in several cases, have been prevented by
Constitutional limitations on bonded indebtedness and declining assessed
property values from securing necessary funds to undertake street, utility and
other infrastructure expansions, improvements and renovations in order to meet
the need of rapidly increasing populations. Maricopa County, Arizona has
encountered financial difficulties related to declines in assessed property
values and budgetary deficits and its general obligation bonds have received
rating downgrades. Maricopa County, Arizona is analyzing various budget options
to deal with its existing deficit.
Although most of the Arizona Municipal Obligations are revenue obligations
of local governments or authorities in the State, there can be no assurance that
the fiscal and economic conditions referred to above will not affect the market
value or marketability of the Arizona Municipal Obligations or the ability of
the respective obligors to pay principal of and interest on the Arizona
Municipal Obligations when due.
On July 21, 1994, the Arizona Supreme Court rendered its opinion in
Roosevelt Elementary School District Number 66, et al v.c. Dianne Bishop, et al
(the "Roosevelt Opinion"). In this opinion, the Arizona Supreme Court held that
the present statutory financing scheme for public education in the State of
Arizona does not comply with the Arizona constitution. Subsequently, the Arizona
School Boards Association, with the approval of the appellants and the appellees
to the Roosevelt Opinion, and certain Arizona school districts, filed with the
Arizona Supreme Court motions for clarification of the Roosevelt Opinion,
specifically with respect to seeking prospective application of the Roosevelt
Opinion. On July 29, 1994, the Arizona Supreme Court clarified the Roosevelt
Opinion to hold that such opinion will have prospective effect only. The impact
of the Roosevelt Opinion on Arizona school finances or budgets cannot be
determined at this time.
Taxpayers within another school district, Creighton Elementary School
District No. 14 of Maricopa County, Arizona (the "Creighton District") have been
granted a summary judgment by the Superior Court of Maricopa County on February
15, 1996, against the Creighton District to the effect that the outstanding
principal amount of bonds theretofore issued by the Creighton District, together
with premium received in connection with the issuance of such bonds, be treated
as debt for constitutional and statutory debt limit purposes. A significant
number of other Arizona school district have issued bonds with premiums and did
not treat such premium as debt for purposes of applicable debt limitations. It
is not known if the judgment against the Creighton District, when final, will
result in similar applicability to other school districts or political
subdivisions or will cause all or part of any premium to be subject to
constitutional and statutory requirements other than debt limits, such as the
requirement for voter authorization. Such judgment could potentially adversely
impact the secondary market for Arizona school district bonds. Recent
legislation may affect the method of calculating outstanding debt and may affect
the bonding capacity of all Arizona cities, towns, school districts and other
political subdivisions.
Certain other circumstances are relevant to the market value, marketability
and payment of any hospital and health care revenue bonds in the Fund. The
Arizona Legislature has in the past sought to enact health care cost control
legislation. Certain other health care regulatory laws have expired. It is
expected that the Arizona Legislature will at future sessions continue to
attempt to adopt legislation concerning health care cost control and related
regulatory matters. The effect of any such legislation or of the continued
absence of any legislation restricting hospital bed increases and limiting new
hospital construction on the ability of Arizona hospitals and other health care
providers to pay debt service on their revenue bonds cannot be determined at
this time.
Arizona does not participate in the federally administered Medicaid
program. Instead, the State administers an alternative program, AHCCCS, which
provides health care to indigent persons meeting certain financial eligibility
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requirements through managed care programs. In fiscal year 1996, AHCCCS was
financed approximately 61% by Federal funds, 28% by State funds and 11% by
county funds.
Under State law, hospitals retain the authority to raise rates with
notification and review by, but not approval from, the Department of Health
Services. Hospitals in Arizona have experienced profitability problems along
with those in other states. At least two Phoenix based hospitals have defaulted
on or reported difficulties in meeting their bond obligations during the past
five years.
Insofar as tax-exempt Arizona investor-owned public utility pollution
control revenue bonds are concerned, the issuance of such bonds and the periodic
rate increases needed to cover operating costs and debt service are generally
subject to regulation by the Arizona Corporation Commission. On July 15, 1991,
several creditors of Tucson Electric Power Company ("Tucson Electric") filed
involuntary petitions under Chapter 11 of the U.S. Bankruptcy Code to force
Tucson Electric to reorganize under the supervision of the bankruptcy court. On
December 31, 1991, the Bankruptcy Court approved the utility's motion to dismiss
the July petition after five months of negotiations between Tucson Electric and
its creditors to restructure the utility's debt and other obligations. In
December 1992, Tucson Electric announced that it had completed financial
restructuring. In January 1993 Tucson Electric asked the Arizona Corporation
Commission for a 9.3% average rate increase. The Arizona Corporation Commission
approved a rate increase of 4.2%. Tucson Electric serves approximately 270,000
customers, primarily in the Tucson area. Inability of any regulated public
utility to secure necessary rate increases could adversely affect, to an
indeterminable extent, its ability to pay debt service on its pollution control
revenue bonds.
FACTORS PERTAINING TO FLORIDA
As described above, except to the extent the Florida Fund invests in
temporary investments, the Florida Fund will invest substantially all of its net
assets in Florida Municipal Obligations. The Florida Fund is therefore
susceptible to political, economic or regulatory factors affecting issuers of
Florida Municipal Obligations. The following information provides only a brief
summary of some of the complex factors affecting the financial situation in
Florida (the "State"). This information is derived from sources that are
generally available to investors and is believed to be accurate. It is based in
part on information obtained from various State and local agencies in Florida,
some of which information is related to periods prior to the onset of the recent
national recession, the effects of which are not necessarily reflected in the
information. No independent verification has been made of the accuracy or
completeness of the following information.
There can be no assurance that current or future statewide or regional
economic difficulties, and the resulting impact on State or local governmental
finances generally, will not adversely affect the market value of Florida
Municipal Obligations held in the portfolio of the Florida Fund or the ability
of particular obligors to make timely payments of debt service on (or relating
to) those obligations.
State Economy. Florida's economy tracked the national economy through the
recent national recession and subsequent recovery. While expected to decelerate
in the near-term, the State's economy is predicted to continue to outperform the
U.S. as a whole, driven by the service and trade sectors.
Since 1985, the State's job creation rate was well over twice the rate for
the nation as a whole. While the State's historically strong job growth rate
weakened somewhat in the 1980's, the non-farm growth rate is projected at 3.2%
in 1995-96, and 3.0% in 1996-97, reaching an average employment at the end of
1996-97 of 6.1 million. Trade and services account for more than half of total
non-farm employment. Trade-related employment is expected to expand 3.4% in
1995-96 and 3.0% in 1996-97, while service sector employment is expected to
increase 5.3% and 4.5% for the same periods. The State's unemployment rate is
currently projected to be 5.9% in both 1995-96, and 1996-97.
The State's economy has in the past been highly dependent on the
construction industry and construction-related manufacturing. While this
dependence has declined, construction remains an important sector. In 1995-96,
single and multi-family housing starts are projected to reach a combined level
of 117,500 units, but dropping to 108,900 in 1996-97.
The important tourism sector is expected to decline 4.7% in 1995-96
although various important tourist destinations report recent growth. 4.3%
growth is projected for 1996-97. In addition to lingering crime concerns,
analysts have pointed to "product maturity" of a Florida vacation package,
higher prices, and increasing competition from other resort areas to explain the
recent decline.
For 1994, the State's per capita personal income of $21,677 was slightly
below the national average of $21,809, but significantly ahead of that for the
southeastern United States, which was $19,649. Real personal income per
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capita is expected to increase 2.9% in 1995-1996 and 1.9% in 1996-97 while real
personal income is expected to grow 4.7% in 1995-96 and 3.8% in 1996-97.
State Budget. In fiscal year 1994-95, approximately 66% of the State's
total direct revenue to its operating funds was derived from State taxes, with
Federal grants and other special revenue accounting for the balance. State sales
and use tax, corporate income tax, intangible personal property tax and beverage
tax amounted to 67%, 7%, 4% and 4%, respectively, of total receipts by the
General Revenue Fund during fiscal 1994-95. In that same year, expenditures for
education, health and welfare and public safety amounted to 49%, 32% and 11%,
respectively, of total expenditures from the General Revenue Fund. At the end of
fiscal 1994, $6.1 billion in principal amount of debt secured by the full faith
and credit of the State was outstanding. As of March 22, 1996, Florida's
outstanding full faith and credit obligations totalled approximately $7.3
billion.
1995-96 fiscal year. Currently estimated available revenues (estimated
revenues, plus the balance forwarded from 1994-95, transfers from other accounts
and other miscellaneous amounts) are approximately $15.3 billion, an increase of
3.3% over comparable 1994-95 figures. Estimated (revised) revenues of
approximately $14.5 billion represent an increase of 6.5% over comparable
1994-95 figures. Total effective appropriations for 1995-96 are $14.8 billion,
an increase of 3.5% over comparable 1994-95 figures.
1996-97 fiscal year. Preliminary estimated available revenues are now set
at $16 billion, an increase of 4.5% over comparable 1995-96 figures. Governor
Chiles has proposed his fiscal 1997-98 budget at $39.6 billion, without new tax
revenue. This represents a 1.0% increase over 1995-96. A supplemental budget
recommendation from the Governor has withdrawn approximately $58 million in
increased business fees included in the earlier proposal.
Revenue Generating Measures. Florida's Constitution allows the issuance of
full faith and credit bonds generally only upon approval of the electorate and
in an aggregate amount not exceeding 50% of the State's total tax revenues for
the preceding two years. A number of exceptions to the election requirement have
been enacted, allowing the issuance of full faith and credit bonds in addition
to a primary pledge of a separately identifiable revenue source for certain uses
such as road and bridge projects, education and environmental facilities and
projects.
In 1987, the State Legislature passed a major revenue enhancement bill
resulting in the largest tax increase in State history. In order to balance the
budget, as required by the State's Constitution, a 5% sales tax was imposed on
nearly all services sold or used in the State. However, the tax was challenged
by numerous national groups and repealed, effective January 1, 1988. At the same
time the tax was replaced by a one cent ($.01) increase, from 5% to 6%, in the
general sales tax on goods and rentals. The one cent ($.01) increase became
effective February 1, 1988. The sales and use tax currently accounts for the
State's single largest source of tax receipts. For the fiscal year ended June
30, 1995, sales and use tax receipts (exclusive of the tax on gasoline and
special fuels) totalled approximately $10.7 billion, an increase of
approximately 6.0% from fiscal year 1993-94.
In 1992, Florida voters approved a new constitutional amendment that limits
homestead (residential) property tax increases to the lower of 3% per year or
the increase in the consumer price index, until the next transfer of ownership
of the property. The cap took effect January 1, 1994, and could have an adverse
effect on local revenues, which are largely dependent on the property tax for
operating funds. Whether this measure will have any adverse effect on municipal
obligations is not known at this time.
In 1994, Florida voters approved another amendment to the Florida
Constitution which will limit the rate of growth of general state revenues
beginning in 1995 to the growth rate of personal income in Florida. If more
revenue is collected than permitted by the limit, the excess will be placed in
the "Budget Stabilization Fund" unless, the Legislature decides otherwise by a
two-thirds vote of both houses. The revenue limit is determined by multiplying
the average annual growth rate in Florida personal income over the previous five
years by the maximum amount permitted under the cap of the previous year. The
amendment does not limit the imposition of any tax nor does it repeal any
existing tax levy. It also has no direct impact on local taxation, but it may
affect the sharing of state revenues with local governments.
Another 1994 Florida constitutional amendment limits the application of the
"single subject" requirement used by the courts to test citizen initiative
constitutional proposals. Under the amendment, citizens' initiatives seeking to
limit the ability of government to increase taxes or otherwise raise revenue are
exempt from the single-subject restriction of the Florida Constitution. This
amendment will probably encourage further efforts to limit and cap the
government's revenue generating power.
In 1988, the State began its own lottery. State law requires that lottery
revenues be distributed 50% to the public in prizes, 38% for use in enhancing
education, and the balance, 12%, to retailers as commission for their services
and for administration of the lottery. While Florida's lottery remains in the
top five state lotteries, annual
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ticket sales have flattened at slightly less than $2.2 billion; sales rose
slightly in 1994-95 to approximately $2.19 billion. Education has been receiving
in excess of $800 million per year from lottery sales.
Litigation. Currently under litigation are several issues relating to State
actions or State taxes that put at risk substantial amounts of General Revenue
Fund monies. Accordingly, there is no assurance that the resolution of any of
such matters, individually or in the aggregate, will not have a material adverse
effect on the State's financial position. This discussion omits any case for
which the State's estimate of exposure is less than $50 million.
The Florida Supreme Court recently declared unconstitutional the $295
"impact fee" on cars purchased out of state and registered in Florida. Void from
its inception in 1990, the total cost to the state is estimated to be in excess
of $180 million in real dollars being refunded plus losses of estimated revenue
collections through the next fiscal year.
The State recently settled virtually all pending lawsuits challenging
certain premium taxes imposed on certain motor vehicle service agreement
companies. The one remaining case is estimated to have a potential refund
exposure of approximately $150 million.
A challenge to the Florida intangible tax law, which currently raises over
$783 million per year, was recently resolved by a per curiam affirmance by the
United States Supreme Court of a Florida court decision upholding the tax. Other
challenges to that tax, involving refund claims in excess of $25 million for
later years, are now proceeding.
The State was challenged on its imposition of a gross receipts tax on
hospitals. The trial court denied the plaintiffs' refund request and upheld the
tax. An appeal is pending. The Florida Agency for Health Care Administration has
now calculated the cost to the State of an unfavorable result as approximately
$116 million.
The State has been involved in litigation relating to the implementation of
a Department of Health and Rehabilitative Services computer system. While the
trial court's dismissal of DHRS' motion to dismiss was pending appeal, the
parties jointly submitted the case to a Special Master, who recommended against
DHRS. If the appeal by DHRS is unsuccessful, the exposure to the State,
including accrued interest, is estimated at $50 million.
The constitutionality of the Public Medical Assistance Trust Fund's annual
assessment on revenue of certain out-patient facilities has been challenged. An
unfavorable outcome could expose the State to refund claims estimated at $70
million.
State Bond Rating. The State maintains a bond rating of Aa and AA from
Moody's and S&P, respectively, on the majority of its general obligation bonds,
although the rating of a particular series of revenue bonds relates primarily to
the project, facility or other revenue source from which such series derives
funds for repayment. See "Investment Objectives and Policies -- Municipal
Obligations." It should also be noted that the creditworthiness of obligations
issued by local Florida issuers may be unrelated to the creditworthiness of
obligations issued by the State of Florida, and that there is no obligation on
the part of the State to make payment on such local obligations in the event of
default. At least one analyst has predicted that various fiscal factors,
including over-reliance on tourism, aging population, high crime rate, and an
unrealistic tax system, will combine to cause a drop in these ratings to the A
level by the end of the decade.
Other Issuers of Florida 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.
FACTORS PERTAINING TO MARYLAND
As described above, except to the extent the Maryland Fund invests in
temporary investments, the Maryland Fund will invest substantially all of its
net assets in Maryland Municipal Obligations. The Maryland Fund is therefore
susceptible to political, economic or regulatory factors affecting issuers of
Maryland Municipal Obligations. The following information provides only a brief
summary of some of the complex factors affecting the financial situation in
Maryland (the "State") and is derived principally from official statements dated
on or before February 14, 1996, relating to issues of State obligations and does
not purport to be a complete description generally available to investors. No
independent verification has been made of the accuracy or completeness of any of
the following information.
There can be no assurance that current or future statewide or regional
economic difficulties, and the resulting impact on State or local governmental
finances generally, will not adversely affect the market value of Maryland
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Municipal Obligations held in the portfolio of the Maryland Fund or the ability
of particular obligors to make timely payments of debt service on (or relating
to) those obligations.
The State and Its Economy. Maryland encompasses a geographic land area of
9,837 square miles and ranks 42nd among the 50 states in size. According to the
Maryland Office of Planning, Maryland's population in 1994 was 5,006,265,
reflecting an increase of 4.7% from the 1990 Census. Maryland's population is
concentrated in urban areas; the eight counties and Baltimore City located in
the Baltimore and Washington Corridor contain 37.4% of the State's land area and
82.3% of its population.
After enjoying rapid economic growth in the 1980's, Maryland has
experienced declining rates of growth in the 1990's. Total personal income in
Maryland grew at annual rates between 6.2% and 10.9% in each of the years 1980
through 1990, but grew at a rate of 3.1% in 1991, 4.4% in 1992, 4.0% in 1993 and
4.9% in 1994. Similarly, per capita income, which had grown at rates no lower
than 4.7% for the period from 1980 to 1990, grew at a rate of 1.8% in 1991, 3.2%
in 1992, 3.0% in 1993 and 3.9% in 1994. Unemployment in Maryland peaked in 1982
at 8.5%, then decreased steadily to a low of 3.7% in 1989. By 1991, unemployment
had increased to 5.9%, and increased further to 6.6% in 1992 before falling to
6.2% in 1993 and further falling to 5.1% in 1994.
Retail sales in Maryland grew by 5.4% in 1990, decreased by 2.1% in 1991,
rebounded mildly by 0.3% in 1992 and further increased by 6.2% in 1993 and 9.6%
in 1994, versus nationwide growth of 4.9%, 0.6%, 5.2%, 6.3% and 7.8% in such
years, respectively.
Services (including mining), wholesale and retail trade, government, and
manufacturing (primarily printing and publishing, food and kindred products,
instruments and related products, industrial machinery, electronic equipment,
and chemical and allied products) are the leading areas of employment in the
State of Maryland. In contrast to the nation as a whole, more people in Maryland
are employed in government and services (50.8% in Maryland compared to 44.9%
nationwide) than in manufacturing (8.3% in Maryland compared to 16.1%
nationwide) (8.5% versus 19.9% in 1993). Between 1974 and 1994, total
manufacturing wages and salary employment in Maryland decreased 29.7%, while
total non-manufacturing wages and salary employment increased 58.6%.
The State's total expenditures for the fiscal years ending June 30, 1993,
June 30, 1994 and June 30, 1995 were approximately $11.8 billion, $12.3 billion
and $13.5 billion, respectively. As of February 14, 1996, it was estimated that
total expenditures for fiscal year 1996 would be approximately $14.6 billion.
The original appropriation for expenditures in fiscal year 1996 is approximately
$14.4 billion. The State's General Fund, representing approximately 55%-60% of
each year's total budget, had an unreserved surplus on a budgetary basis of
$10.5 million in fiscal year 1993, an unreserved surplus of $60 million in
fiscal year 1994 and an unreserved surplus of $132.5 million in fiscal year
1995. When the fiscal year 1996 budget was enacted, it was estimated that the
general fund unreserved surplus on a budgetary basis at June 30, 1996 would be
approximately $7.8 million; as of February 14, 1996 it was estimated that the
unreserved surplus in the general fund at June 30, 1996 will be $1 million. In
addition, on December 12, 1995 the Board of Revenue Estimates lowered the
estimate of fiscal year 1996 general fund revenues by $92 million. To address
this shortfall, the Governor has proposed to reduce fiscal year 1996
appropriations by $26 million and to simultaneously obtain additional moneys for
the general fund from other available sources. The State Constitution mandates a
balanced budget.
On January 17, 1996, the Governor submitted his proposed fiscal year 1997
budget to the General Assembly. The Budget includes $2.9 billion in aid to local
governments (reflecting a $121.5 million increase in funding over 1996 that
provides for substantial increases in education, health, and police aid), and
$77 million in general fund deficiency appropriations for fiscal year 1996.
Based on the proposed 1997 Executive Budget, it is estimated that the general
fund surplus on a budgetary basis at June 30, 1997 will be approximately $0.5
million. In addition, it is estimated that the balance in the Revenue
Stabilization Account of the State Reserve Fund at June 30, 1997 will be $538
million.
State-level Municipal Obligations. The State of Maryland and its various
political subdivisions issue a number of different kinds of Municipal
Obligations, including general obligation bonds supported by tax collections,
revenue bonds payable from certain identified tax levies or revenue streams,
conduit revenue bonds payable from the repayment of certain loans to authorized
entities such as hospitals and universities, and certificates of participation
in tax-exempt municipal leases.
The State of Maryland issues general obligation bonds, which are payable
from ad valorem property taxes. The State Constitution prohibits the contracting
of State debt unless the debt is authorized by a law levying an annual tax or
taxes sufficient to pay the debt service within 15 years and prohibiting the
repeal of the tax or taxes or their use for another purpose until the debt has
been paid. The State also enters into lease-purchase agreements,
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participation interests in which are often sold publicly as individual
securities. These obligations are subject to annual appropriation by the General
Assembly.
As of March of 1996, the State's general obligation bonds were rated Aaa by
Moody's, AAA by S&P, and AAA by Fitch Investors Service, Inc. ("Fitch"). There
can be no assurance that these ratings will continue.
The Maryland Department of Transportation issues Consolidated
Transportation Bonds, which are payable out of specific excise taxes, motor
vehicle taxes and corporate income taxes, and from the general revenues of the
Department. Issued to finance highway, port, transit, rail or aviation
facilities, as of March of 1996, these bonds were rated Aa by Moody's, AA by S&P
and AA by Fitch. The Maryland Transportation Authority, a unit of the
Department, issues its own revenue bonds for transportation facilities, which
are payable from certain highway, bridge and tunnel tolls. These bonds were
rated A1 by Moody's and A+ by S&P as of March of 1996. There can be no assurance
that these ratings will continue.
Other State agencies which issue Municipal Obligations include the Maryland
Stadium Authority, which has issued bonds payable from sports facility lease
revenues and certain lottery revenues, the Maryland Water Quality Financing
Administration, which issues bonds to provide loans to local governments for
wastewater control projects, the Community Development Administration of the
Department of Housing and Community Development, which issues mortgage revenue
bonds for housing, the Maryland Environmental Service, which issues bonds
secured by the revenues from its various water supply, wastewater treatment and
waste management projects, and the various public institutions of higher
education in Maryland (which include the University of Maryland System, Morgan
State University, Baltimore City Community College and St. Mary's College of
Maryland) which issue their own revenue bonds. None of these bonds constitute
debts or pledges of the full faith and credit of the State of Maryland. The
issuers of these obligations 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.
In addition, the Maryland Health and Higher Educational Facilities
Authority and the Maryland Industrial Development Financing Authority issue
conduit revenue bonds, the proceeds of which are lent to borrowers eligible
under relevant state and federal law. These bonds are payable solely from the
loan payments made by borrowers, and their credit quality varies with the
financial strengths of the respective borrowers.
Municipal Obligations of Maryland Local Governments. Maryland has 24
geographical subdivisions, comprised of 23 counties plus the independent City of
Baltimore, which functions much like a county. Some of the counties and the City
of Baltimore operate pursuant to the provisions of codes of their own adoption,
while others operate pursuant to State-approved charters and State statutes.
Maryland counties and the City of Baltimore receive most of their revenues from
ad valorem taxes on real and personal property, individual income taxes,
transfer taxes, miscellaneous taxes and aid from the State. Their expenditures
include public safety, public works, health, public welfare, court and
correctional services, education and general governmental costs.
The economic factors affecting the State, as discussed above, also have
affected the counties and the City of Baltimore. In addition, reductions in
State aid caused by State budget cuts have caused the local governments to trim
expenditures and, in some cases, raise taxes.
According to recent available ratings, general obligation bonds of
Montgomery County (abutting Washington, D.C.) are rated Aaa by Moody's and AAA
by S&P. Prince George's County, also in the Washington, D.C. suburbs, issues
general obligation bonds rated Aa by Moody's and AA- by S&P, while Baltimore
County, a separate political subdivision surrounding the City of Baltimore,
issues general obligation bonds rated Aaa by Moody's and AAA by S&P. The City of
Baltimore's general obligation bonds are rated A1 by Moody's and A by S&P. The
other counties in Maryland which are rated by Moody's all have general
obligation bond ratings of A or better from Moody's, except for Allegany County,
the bonds of which are rated Baa by Moody's. The Washington Suburban Sanitary
District, a bi-county agency providing water and sewerage services in Montgomery
and Prince George's Counties, issues general obligation bonds rated Aa1 by
Moody's and AA by S&P as of March of 1996. Additionally, some of the large
municipal corporations in Maryland (such as the cities of Rockville and
Annapolis) have issued general obligation bonds. There can be no assurance that
these ratings will continue.
Other Issuers of Maryland Municipal Obligations. Many of Maryland's
counties have established subsidiary agencies with bond issuing powers, such as
housing authorities, parking revenue authorities and industrial development
authorities. In addition, all Maryland municipalities have the authority under
State law to issue conduit revenue bonds 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.
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FACTORS PERTAINING TO MICHIGAN
As described above, except to the extent the Michigan Fund invests in
temporary investments, the Michigan Fund will invest substantially all of its
net assets in Michigan Municipal Obligations. The Michigan Fund is therefore
susceptible to political, economic or regulatory factors affecting issuers of
Michigan Municipal Obligations. The information set forth below is derived from
official statements prepared in connection with the issuance of Michigan
Municipal Obligations and other sources that are generally available to
investors. The information is provided as general information intended to give a
recent historical description and is not intended to indicate future or
continuing trends in the financial or other positions of The State of Michigan
(the "State"). This information has not been independently verified.
There can be no assurance that current or future statewide or regional
economic difficulties, and the resulting impact on state or local government
finances generally, will not adversely affect the market value of Michigan
Municipal Obligations held in the portfolio of the Michigan Fund or the ability
of particular obligors to make timely payments of debt service on (or relating
to) those obligations.
Economy. The principal sectors of the State's economy are manufacturing of
durable goods (including automobile and office equipment manufacturing), tourism
and agriculture. As reflected in historical employment figures, the State's
economy has lessened its dependence upon durable goods manufacturing. In 1960,
employment in such industry accounted for 33% of the State's workforce. This
figure fell to 17% by 1994. However, manufacturing (including auto-related
manufacturing) continues to be an important part of the State's economy. These
industries are highly cyclical. This factor could adversely affect the revenue
streams of the State and its political subdivisions because of its impact on tax
sources, particularly sales taxes, income taxes and single business taxes.
Historically, the average monthly unemployment rate in the State has been
higher than the average figures for the United States. For 1994, however, the
average monthly unemployment rate in the State was 5.9% as compared to a
national average of 6.1%, and for 1995, the average annual unemployment rate in
the State was 5.3% as compared to a national average of 5.6%.
Budget. The budget of the State is a complete financial plan and
encompasses the revenues and expenditures, both operating and capital outlay, of
the State's General Fund and special revenue funds. The budget is prepared on a
basis consistent with generally accepted accounting principles (GAAP). The
State's fiscal year begins on October 1 and ends September 30 of the following
year. Under State law, the executive budget recommendations for any fund may not
exceed the estimated revenue thereof, and an itemized statement of estimated
revenues in each operating fund must be contained in an appropriation bill as
passed by the State Legislature, the total of which may not be less than the
total of all appropriations made from the fund for that fiscal year. The State
Constitution provides that proposed expenditures from and revenues of any fund
must be in balance and that any prior year's surplus or deficit in any fund must
be included in the succeeding year's budget for that fund.
The State Constitution limits the amount of total State revenues that may
be raised from taxes and other sources. State revenues (excluding federal aid
and revenues used for payment of principal of and interest on general obligation
bonds) in any fiscal year are limited to a specified percentage of State
personal income in the prior calendar year or the average thereof in the prior
three calendar years, whichever is greater. The State may raise taxes in excess
of the limit in emergency situations.
The State finances its operations through the State's General Fund and
special revenue funds. The General Fund receives revenues of the State that are
not specifically required to be included in the special revenue funds.
Approximately 59% of General Fund revenues are obtained from the payment of
State taxes and approximately 41 percent are obtained from federal and non-tax
revenue sources. Tax revenues credited to the General Fund includes the State's
personal income tax, single business tax, use tax, and approximately 15% of
sales tax collections. In addition the State levies various other taxes.
Approximately one-half of total General Fund expenditures have been made by the
State's Department of Education and Department of Social Services. Other
significant expenditures from the General Fund provide funds for law
enforcement, general State government, debt service and capital outlays.
Despite modest surpluses in the three preceding fiscal years, the State
ended fiscal years 1989-90 and 1990-91 with negative balances of $310.3 million
and $169.4 million, respectively. This negative balance had been eliminated as
of the end of fiscal year 1991-92 which ended September 30, 1992. The State
ended fiscal year 1992-93 with a balance of $26 million after transfer of $282.6
million to the Counter-Cyclical Budget and Economic Stabilization Fund described
below. The State ended fiscal year 1993- 94 with a $460.2 million surplus which
was transferred to the Counter-Cyclical Budget and Economic Stabilization Fund
described below. The State's preliminary results for
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fiscal year 1994-95 indicate an $84.5 million surplus, $56.8 million of which
will be transferred to the Counter-Cyclical Budget and Economic Stabilization
Fund described below.
The State budget for the 1995-96 fiscal year, which began on October 1,
1995, was passed by the State Legislature in June 1995. This budget passed by
the State Legislature totaled $8,438.6 million from General Fund/general purpose
revenues. The Governor vetoed $45.7 million of these appropriations and the
Legislature has adopted supplemental appropriations of $30.8 million.
The State also maintains the Counter-Cyclical Budget and Economic
Stabilization Fund ("BSF") which accumulates balances during years of
significant economic growth and which may be utilized during periods of
budgetary shortfalls. The unreserved balance for the BSF for the 1990-91 fiscal
year end was $182.2 million, for the 1991-92 fiscal year end was $20.1 million,
for the 1992-93 fiscal year end was $303.4 million and for the 1993-94 fiscal
year end was $775.5 million. The accrued balance of the BSF as of September 30,
1995 is estimated to be $1,003.2 million.
Debt. The State Constitution limits State general obligation debt to (i)
short-term debt for State operating purposes which must be repaid in the same
fiscal year in which it is issued and which cannot exceed 15% of the undedicated
revenues received by the State during the preceding fiscal year, (ii) short and
long term debt unlimited in amount for the purpose of making loans to school
districts and (iii) long term debt for voter-approved purposes.
The State has issued and has outstanding general obligation full faith and
credit bonds for water resources, environmental protection program, recreation
program and school loan program purposes totalling, as of September 30, 1995,
approximately $706 million. In November 1988 the State's voters approved the
issuance of $800 million of general obligation bonds for environmental
protection and recreational purposes; of this amount approximately $275 million
remains to be issued. The State issued $900 million in general obligation notes
on February 20, 1996 which will mature on September 30, 1996.
Other Issuers of Michigan Municipal Obligations. There are a number of
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 obligations backed by the full faith
and credit of the State.
Ratings. Currently the State's general obligation bonds are rated Aa by
Moody's, AA by S&P and AA by Fitch Investors Service, Inc.
Litigation. The State is a party to various legal proceedings seeking
damages or injunctive or other relief. In addition to routine litigation,
certain of these proceedings could, if unfavorably resolved from the point of
view of the State, substantially affect State programs or finances. These
lawsuits involve programs generally in the areas of corrections, tax collection,
commerce and budgetary reductions to school districts and governmental units and
court funding. The ultimate disposition of these proceedings is not
determinable.
Property Tax and School Finance Reform. The State Constitution limits the
extent to which municipalities or political subdivisions may levy taxes upon
real and personal property through a process that regulates assessments.
On August 19, 1993, the Governor signed into law Act 145, Public Acts of
Michigan, 1993 ("Act 145"), a measure which would have significantly impacted
financing of primary and secondary school operations and which has resulted in
additional property tax and school finance reform legislation. Act 145 would
have exempted all property in the State of Michigan from millage levied for
local and intermediate school districts operating purposes, other than millage
levied for community colleges, effective July 1, 1994. In order to replace local
property tax revenues lost as a result of Act 145, the State Legislature, in
December 1993, enacted several statutes which address property tax and school
finance reform.
The property tax and school finance reform measures included a ballot
proposal which was approved by the voters on March 15, 1994. Effective May 1,
1994, the State sales and use tax was increased from 4% to 6%, the State income
tax was decreased from 4.6% to 4.4%, the cigarette tax was increased from $.25
to $.75 per pack and an additional tax of 16% of the wholesale price was imposed
on certain other tobacco products. A 0.75% real estate transfer tax became
effective January 1, 1995. Beginning in 1994, a state property tax of 6 mills
began to be imposed on all real and personal property currently subject to the
general property tax. The ability of school districts to levy property taxes for
school operating purposes has been partially restored. A local school board
will, with voter approval, be able to levy up to the lesser of 18 mills or the
number of mills levied in 1993 for school operating purposes, on non-homestead
property and nonqualified agricultural property. The adopted ballot proposal
contained additional provisions regarding the ability of local school districts
to levy taxes as well as a limit on assessment
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increases for each parcel of property, beginning in 1995 to the lesser of 5% or
the rate of inflation. When property is subsequently sold, its assessed value
will revert to the current assessment level of 50% of true cash value. Under the
adopted ballot proposal, much of the additional revenue generated by the new
taxes will be dedicated to the State School Aid Fund.
The adopted ballot proposal contained a system of financing local school
operating costs relying upon a foundation allowance amount which may vary by
district based upon historical spending levels. State funding will provide each
school district an amount generally equal to the difference between its
foundation allowance and the amount of revenues it could generate if it levied
certain local property taxes at the maximum rate authorized by state law. Local
school districts will also be entitled to levy supplemental property taxes to
generate additional revenues if their foundation allowance is less than their
historical per pupil expenditures. The adopted ballot proposal also contained
provisions which allow for the levy of a limited number of enhancement mills on
regional and local school district bases.
The adopted ballot proposal shifts significant portions of the cost of
local school operations from local school districts to the State and raises
additional State revenues to fund these additional State expenses. These
additional revenues will be included within the State's constitutional revenue
limitations and may impact the State's ability to raise additional revenues in
the future.
FACTORS PERTAINING TO NEW JERSEY
As described above, except to the extent the New Jersey Fund invests in
temporary investments, the New Jersey Fund will invest substantially all of its
net assets in New Jersey Municipal Obligations. The New Jersey Fund is therefore
susceptible to political, economic or regulatory factors affecting issuers of
New Jersey Municipal Obligations. The following information provides only a
brief summary of some of the complex factors affecting the financial situation
in New Jersey (the "State") and is derived from sources that are generally
available to investors and is believed to be accurate. It is based in part on
information obtained from various State and local agencies in New Jersey. No
independent verification has been made of the accuracy or completeness of any of
the following information.
There can be no assurance that current or future statewide or regional
economic difficulties, and the resulting impact on State or local governmental
finances generally, will not adversely affect the market value of New Jersey
Municipal Obligations held in the portfolio of the New Jersey Fund or the
ability of particular obligors to make timely payments of debt service on (or
relating to) those obligations.
The State and Its Economy. The State is the ninth largest state in
population and the fifth smallest in land area. With an average of 1,062 people
per square mile, it is the most densely populated of all the states. The State's
economic base is diversified, consisting of a variety of manufacturing,
construction and service industries, supplemented by rural areas with selective
commercial agriculture. Historically, New Jersey's average per capita income has
been well above the national average, and in 1994 the State ranked second among
the states in per capita personal income ($27,742).
The New Jersey Economic Policy Council, a statutory arm of the New Jersey
Department of Commerce and Economic Development, has reported in New Jersey
Economic Indicators, a monthly publication of the New Jersey Department of
Labor, Division of Labor Market and Demographic Research, that in 1988 and 1989
employment in New Jersey's manufacturing sector failed to benefit from the
export boom experienced by many Midwest states and the State's service sectors,
which had fueled the State's prosperity since 1982, lost momentum. In the
meantime, the prolonged fast growth in the State in the mid 1980s resulted in a
tight labor market situation, which has led to relatively high wages and housing
prices. This means that, while the incomes of New Jersey residents are
relatively high, the State's business sector has become more vulnerable to
competitive pressures.
The onset of the national recession (which officially began in July 1990
according to the National Bureau of Economic Research) caused an acceleration of
New Jersey's job losses in construction and manufacturing. In addition, the
national recession caused an employment downturn in such previously growing
sectors as wholesale trade, retail trade, finance, utilities and trucking and
warehousing. Reflecting the downturn, the rate of unemployment in the State rose
from a low of 3.6% during the first quarter of 1989 to an estimated 6.6% in
April 1996, which is greater than the national average of 5.4% in April 1996.
Because some sectors will lag due to continued excess capacity, employers
even in rebounding sectors can be expected to remain cautious about hiring until
they become convinced that improved business will be sustained, and certain
firms will continue to merge or downsize to increase profitability. Economic
recovery is likely to be slow and uneven in New Jersey, with unemployment
receding at a correspondingly slow pace.
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Debt Service. The primary method for State financing of capital projects is
through the sale of the general obligation bonds of the State. These bonds are
backed by the full faith and credit of the State tax revenues and certain other
fees are pledged to meet the principal and interest payments and if provided,
redemption premium payments, if any, required to repay the bonds. As of June 30,
1995, there was a total authorized bond indebtedness of approximately $9.48
billion, of which $3.65 billion was issued and outstanding, $4.0 billion was
retired (including bonds for which provision for payment has been made through
the sale and issuance of refunding bonds) and $1.83 billion was unissued. The
debt service obligation for such outstanding indebtedness is $466.3 million for
fiscal year 1996.
New Jersey's Budget and Appropriation System. The State operates on a
fiscal year beginning July 1 and ending June 30. At the end of fiscal year 1989,
there was a surplus in the State's general fund (the fund into which all State
revenues not otherwise restricted by statute are deposited and from which
appropriations are made) of $411.2 million. At the end of fiscal year 1990,
there was a surplus in the general fund of $1.0 million. At the end of fiscal
year 1991, there was a surplus in the general fund of $1.4 million. New Jersey
closed its fiscal year 1992 with a surplus in the general fund of $760.8
million, fiscal year 1993 with a surplus of $937.4 million, and fiscal year 1994
with a surplus of $926.0 million. It is estimated that New Jersey closed its
fiscal year 1995 with a surplus of $569 million.
In order to provide additional revenues to balance future budgets, to
redistribute school aid and to contain real property taxes, on June 27, 1990,
and July 12, 1990, Governor Florio signed into law legislation which was
estimated to raise approximately $2.8 billion in additional taxes (consisting of
$1.5 billion in sales and use taxes and $1.3 billion in income taxes), the
biggest tax hike in New Jersey history. There can be no assurance that receipts
and collections of such taxes will meet such estimates.
The first part of the tax hike took effect on July 1, 1990, with the
increase in the State's sales and use tax rate from 6.0% to 7.0% and the
elimination of exemptions for certain products and services not previously
subject to the tax, such as telephone calls, disposable paper products (which
has since been reinstated), soaps and detergents, janitorial services, alcoholic
beverages and cigarettes. At the time of enactment, it was projected that these
taxes would raise approximately $1.5 billion in additional revenue. Projections
and estimates of receipts from sales and use taxes, however, have been subject
to variance in recent fiscal years.
The second part of the tax hike took effect on January 1, 1991, in the form
of an increased state income tax on individuals. At the time of enactment, it
was projected that this increase would raise approximately $1.3 billion in
additional income taxes to fund a new school aid formula, a new homestead rebate
program and state assumption of welfare and social services costs. Projections
and estimates of receipts from income taxes, however, have also been subject to
variance in recent fiscal years. Under the legislation, income tax rates
increased from their previous range of 2.0% to 3.5% to a new range of 2.0% to
7.0%, with the higher rates applying to married couples with incomes exceeding
$70,000 who file joint returns, and to individuals filing single returns with
incomes of more than $35,000.
The Florio administration had contended that the income tax package would
help reduce local property tax increases by providing more state aid to
municipalities. Under the income tax legislation the State assumed approximately
$289.0 million in social services costs that previously were paid by counties
and municipalities and funded by property taxes. In addition, under the new
formula for funding school aid, an extra $1.1 billion was proposed to be sent by
the State to school districts beginning in 1991, thus reducing the need for
property tax increases to support education programs.
Effective July 1, 1992, the State's sales and use tax rate decreased from
7% to 6%. Effective January 1, 1994, an across-the-board 5% reduction in the
income tax rates was enacted and effective January 1, 1995, further reductions
ranging from 1% up to 10% in income tax rates took effect.
On June 30, 1995, Governor Whitman signed the New Jersey Legislature's
$16.0 billion budget for fiscal year 1996. The balanced budget, which includes
$541 million in surplus, is $300 million more than the 1995 budget. Whether the
State can achieve a balanced budget depends on its ability to enact and
implement expenditure reductions and to collect estimated tax revenues.
Litigation. The State is a party in numerous legal proceedings pertaining
to matters incidental to the performance of routine governmental operations.
Such litigation includes, but is not limited to, claims asserted against the
State arising from alleged torts, alleged breaches of contracts, condemnation
proceedings and other alleged violations of State and Federal laws. Included in
the State's outstanding litigation are cases challenging the following: the
funding of teachers' pension funds, the adequacy of Medicaid reimbursement for
hospital services, the hospital assessment authorized by the Health Care Reform
Act of 1992, various provisions, and the constitutionality, of the Fair
Automobile Insurance Reform Act of 1990, the State's role in a consent order
concerning the
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construction of a resource facility in Passaic County, actions taken by the
Bureau of Securities against an individual, the State's actions regarding
alleged chromium contamination of State-owned property in Hudson County, the
issuance of emergency redirection orders and a draft permit by the Department of
Environmental Protection and Energy, refusal of the State to share with Camden
County federal funding the State recently received for disproportionate share
hospital payments made to county psychiatric facilities, and the
constitutionality of annual A-901 hazardous and solid waste licensure renewal
fees collected by the Department of Environmental Protection and Energy. Adverse
judgments in these and other matters could have the potential for either a
significant loss of revenue or a significant unanticipated expenditure by the
State.
At any given time, there are various numbers of claims and cases pending
against the State, State agencies and employees seeking recovery of monetary
damages that are primarily paid out of the fund created pursuant to the New
Jersey Tort Claims Act. In addition, at any given time, there are various
numbers of contract claims against the State and State agencies seeking recovery
of monetary damages. The State is unable to estimate its exposure for these
claims.
Debt Ratings. For many years prior to 1991, both Moody's and S&P had rated
New Jersey general obligation bonds Aaa and AAA, respectively. On July 3, 1991,
however, S&P downgraded New Jersey general obligation bonds to AA+. On June 4,
1992, S&P placed New Jersey general obligation bonds on CreditWatch with
negative implications, citing as its principal reason for its caution the denial
by the federal government of New Jersey's request for $450 million in
retroactive Medicaid payments for psychiatric hospitals. These funds were
critical to closing a $1 billion gap in the State's $15 billion budget for
fiscal year 1992 which ended on June 30, 1992. Under New Jersey state law, the
gap in the budget must be closed before the new budget year began on July 1,
1992. S&P suggested the State could close fiscal year 1992's budget gap and help
fill fiscal year 1993's hole by a reversion of $700 million of pension
contributions to its general fund under a proposal to change the way the State
calculates its pension liability.
On July 6, 1992, S&P reaffirmed its AA+ rating for New Jersey general
obligation bonds and removed the debt from its CreditWatch list, although it
stated that New Jersey's long-term financial outlook was negative. S&P was
concerned that the State was entering fiscal year 1993 with only a $26 million
surplus and remained concerned about whether the State economy would recover
quickly enough to meet lawmakers' revenue projections. It also remained
concerned about the recent federal ruling leaving in doubt how much the State
was due in retroactive Medicaid reimbursements and a ruling by a federal judge,
now on appeal, of the State's method for paying for uninsured hospital patients.
However, on July 27, 1994, S&P announced that it was changing the State's
outlook from negative to stable due to a brightening of the State's prospects as
a result of Governor Whitman's effort to trim spending and cut taxes, coupled
with an improving economy. S&P reaffirmed its AA+ rating at the same time.
On August 24, 1992, Moody's downgraded New Jersey general obligation bonds
to Aa1, stating that the reduction reflected a developing pattern of reliance on
nonrecurring measures to achieve budgetary balance, four years of financial
operations marked by revenue shortfalls and operating deficits, and the
likelihood that serious financial pressures would persist. On August 5, 1994,
Moody's reaffirmed its Aa1 rating, citing on the positive side New Jersey's
broad-based economy, high income levels, history of maintaining a positive
financial position and moderate (albeit rising) debt ratios, and, on the
negative side, a continued reliance on one-time revenues and a dependence on
pension-related savings to achieve budgetary balance.
There can be no assurance that these ratings will continue.
Other Issuers of New Jersey 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.
FACTORS PERTAINING TO PENNSYLVANIA
As described above, except to the extent the Pennsylvania Fund invests in
temporary investments, the Pennsylvania Fund will invest substantially all of
its net assets in Pennsylvania Municipal Obligations. The Pennsylvania Fund is
therefore susceptible to political, economic or regulatory factors affecting
issuers of Pennsylvania Municipal Obligations. Without intending to be complete,
the following briefly summarizes some of these difficulties and the current
financial situation, as well as some of the complex factors affecting the
financial situation in the Commonwealth of Pennsylvania (the "Commonwealth" or
"Pennsylvania"). It is derived from sources that are generally available to
investors and is based in part on information obtained from various agencies in
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the Commonwealth. No independent verification has been made of the accuracy or
completeness of the following information.
Prospective investors should consider the financial difficulties and
pressures which the Commonwealth and certain of its municipal subdivisions have
undergone. Both the Commonwealth and the City of Philadelphia have historically
experienced significant revenue shortfalls. There can be no assurance that
current or future statewide or regional economic difficulties, and the resulting
impact on State or local governmental finances generally, will not adversely
affect the market value of Pennsylvania Municipal Obligations held in the
portfolio of the Pennsylvania Fund or the ability of particular obligors to make
timely payments of debt service on (or relating to) those obligations.
State Economy. Pennsylvania has been historically identified as a
heavy-industry state although that reputation has changed recently as the
industrial composition of the Commonwealth diversified when the coal, steel and
railroad industries began to decline. The major new sources of growth in
Pennsylvania are in the service sector, including trade, medical and the health
services, education and financial institutions. Pennsylvania's agricultural
industries are also an important component of the Commonwealth's economic
structure, accounting for more than $3.6 billion in crop and livestock products
annually while agribusiness and food related industries support $39 billion in
economic activity annually.
Employment within the Commonwealth increased steadily from 1984 to 1990.
From 1991 to 1994, employment in the Commonwealth declined 1.2%. The change in
employment experienced in the Commonwealth during such periods is comparable to
the change in employment in the Middle Atlantic region of the United States.
Non-manufacturing employment in the Commonwealth has increased steadily since
1980 to its 1994 level of 82.0% of total Commonwealth employment. Manufacturing,
which contributed 18.0% of 1994 non-agricultural employment, has fallen behind
both the services sector and the trade sector as the largest single source of
employment within the Commonwealth. In 1994, the services sector accounted for
29.9% of all non-agricultural employment in the Commonwealth while the trade
sector accounted for 22.9%.
The Commonwealth recently experienced a slowdown in its economy. Moreover,
economic strengths and weaknesses vary in different parts of the Commonwealth.
In general, heavy industry and manufacturing have been facing increasing
competition from foreign producers. During 1995, the annual average unemployment
rate in Pennsylvania was 5.9% compared to 5.6% for the United States. For
January 1996 the unadjusted unemployment rate was 6.7% in the Commonwealth and
6.3% in the United States, while the seasonally adjusted unemployment rate for
the Commonwealth was 6.1% and for the United States was 5.8%.
State Budget. The Commonwealth operates under an annual budget that is
formulated and submitted for legislative approval by the Governor each February.
The Pennsylvania Constitution requires that the Governor's budget proposal
consist of three parts: (i) a balanced operating budget setting forth proposed
expenditures and estimated revenues from all sources and, if estimated revenues
and available surplus are less than proposed expenditures, recommending specific
additional sources of revenue sufficient to pay the deficiency; (ii) a capital
budget setting forth proposed expenditures to be financed from the proceeds of
obligations of the Commonwealth or its agencies or from operating funds; and
(iii) a financial plan for not less than the succeeding five fiscal years,
including for each year projected operating expenditures and estimated revenues
and projected expenditures for capital projects. The General Assembly may add,
change or delete any items in the budget prepared by the Governor, but the
Governor retains veto power over the individual appropriations passed by the
legislature. The Commonwealth's fiscal year begins on July 1 and ends on June
30.
All funds received by the Commonwealth are subject to appropriation in
specific amounts by the General Assembly or by executive authorization by the
Governor. Total appropriations enacted by the General Assembly may not exceed
the ensuing year's estimated revenues, plus (less) the unappropriated fund
balance (deficit) of the preceding year, except for constitutionally authorized
debt service payments. Appropriations from the principal operating funds of the
Commonwealth (the General Fund, the Motor License Fund and the State Lottery
Fund) are generally made for one fiscal year and are returned to the
unappropriated surplus of the fund if not spent or encumbered by the end of the
fiscal year. The Constitution specifies that a surplus of operating funds at the
end of a fiscal year must be appropriated for the ensuing year.
Pennsylvania uses the "fund" method of accounting for receipts and
disbursements. In the Commonwealth, over 150 funds have been established by
legislative enactment or in certain cases by administrative action for the
purpose of recording the receipt and disbursement of monies received by the
Commonwealth. Annual budgets are adopted each fiscal year for the principal
operating funds of the Commonwealth and several other special revenue funds.
Expenditures and encumbrances against these funds may only be made pursuant to
appropriation measures
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enacted by the General Assembly and approved by the Governor. The General Fund,
the Commonwealth's largest fund, receives all tax revenues, non-tax revenues and
federal grants and entitlements that are not specified by law to be deposited
elsewhere. The majority of the Commonwealth's operating and administrative
expenses are payable from the General Fund. Debt service on all bond
indebtedness of the Commonwealth, except that issued for highway purposes or for
the benefit of other special revenue funds, is payable from the General Fund.
Financial information for the principal operating funds of the Commonwealth
are maintained on a budgetary basis of accounting, which is used for the purpose
of ensuring compliance with the enacted operating budget. The Commonwealth also
prepares annual financial statements in accordance with generally accepted
accounting principles ("GAAP"). Budgetary basis financial reports are based on a
modified cash basis of accounting as opposed to a modified accrual basis of
accounting prescribed by GAAP. Financial information is adjusted at fiscal
year-end to reflect appropriate accruals for financial reporting in conformity
with GAAP.
Recent Financial Results. From fiscal 1984, when the Commonwealth first
prepared its financial statements on a GAAP basis, through fiscal 1989, the
Commonwealth reported a positive unreserved-undesignated fund balance for its
governmental fund types at each fiscal year end. Slowing economic growth during
1990, leading to a national economic recession beginning in fiscal 1991, reduced
revenue growth and increased costs of certain governmental programs and
contributed to negative unreserved-undesignated fund balances at the end of the
1990 and 1991 fiscal years. The negative unreserved-undesignated fund balance
was due largely to operating deficits in the General Fund and the State Lottery
Fund during those fiscal years. Actions taken during fiscal 1992 to bring the
General Fund back into balance, including tax increases and expenditure
restraints, resulted in a $1.1 billion reduction to the unreserved-undesignated
fund deficit for combined governmental fund types and a return to a positive
fund balance. Financial performance continued to improve during the 1993 and
1994 fiscal years. The fund balance for the governmental fund types increased
from $1,692.8 million on June 30, 1993, as restated, to $1,982.0 million on June
30, 1994, an increase of $289.2 million. An unreserved-undesignated fund balance
of $334.7 million was recorded for fiscal 1994 year end.
The Commonwealth experienced a $454 million General Fund deficit as of the
end of its 1991 fiscal year. The deficit reflected higher than budgeted
expenditures, below-estimate economic activity and growth rates of economic
indicators and total tax revenue shortfalls below those assumed in the enacted
budget. Rising demands on state programs caused by the economic recession,
particularly for medical assistance and cash assistance programs, and the
increased costs of special education programs and correction facilities and
programs, contributed to increased expenditures in fiscal 1991, while tax
revenues for the 1991 fiscal year were severely affected by the economic
recession. Total corporation tax receipts and sales and use tax receipts during
fiscal 1991 were, respectively, 7.3 percent and 0.9 percent below amounts
collected during fiscal 1990. Personal income tax receipts also were affected by
the recession but not to the extent of the other major General Fund taxes,
increasing only 2.0 percent over fiscal 1990 collections. A number of actions
were taken throughout the fiscal year by the Commonwealth to mitigate the
effects of the recession on budget revenues and expenditures. The Commonwealth
initiated a number of cost-saving measures, including the firing of 2,000 state
employees, deferral of paychecks and reduction of funds to state universities,
which resulted in approximately $871 million cost savings.
Actions taken during fiscal 1992 to bring the General Fund budget back into
balance, including tax increases and expenditure restraints, resulted in a $1.1
billion reduction for the unreserved-undesignated fund deficit for combined
governmental fund types and a return to a positive fund balance. Total general
fund revenues for fiscal 1992 were $14,516.8 million which is approximately 22
percent higher than fiscal 1991 revenues of $11,877.3 million due in large part
to tax increases. The increased revenues funded substantial increases in
education, social services and corrections programs. As a result of the tax
increases and certain appropriation lapses, fiscal 1992 ended with an $8.8
million surplus after having started the year with an unappropriated balance
deficit of $454 million.
Fiscal 1993 closed with revenues higher than anticipated and expenditures
approximately as projected, resulting in an ending unappropriated balance
surplus of $242.3 million. A deduction in the personal income tax rate in July
1992 and the one-time receipt of revenues from retroactive corporate tax
increases in fiscal 1992 were responsible, in part, for the low growth in fiscal
1993.
Financial performance continued to improve during fiscal 1994. Commonwealth
revenues during the 1994 fiscal year totaled $15,210.7 million, $38.6 million
above the fiscal year estimate, and 3.9 percent over Commonwealth revenues
during the 1993 fiscal year. The sales tax was an important contributor to the
higher than estimated revenues. The strength of collections from the sales tax
offset the lower than budgeted performance of the personal income tax that ended
the 1994 fiscal year $74.4 million below estimate. The shortfall in the personal
income tax was largely due to shortfalls in income not subject to withholding
such as interest, dividends and other income. Expenditures, excluding pooled
financing expenditures and net of all fiscal 1994 appropriation lapses, totaled
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$14,934.4 million representing a 7.2 percent increase over fiscal 1993
expenditures. Medical assistance and prisons spending contributed to the rate of
spending growth for the 1994 fiscal year. The Commonwealth maintained an
operating balance on a budgetary basis for fiscal 1994 producing a fiscal year
ending unappropriated surplus of $335.8 million.
Commonwealth revenues for the 1995 fiscal year were above estimate and
exceeded fiscal year expenditures and encumbrances. Fiscal 1995 was the fourth
consecutive fiscal year the Commonwealth reported an increase in the fiscal
year-end unappropriated balance. Prior to reserves for transfer to the Tax
Stabilization Reserve Fund, the fiscal 1995 closing unappropriated surplus was
$540.0 million, an increase of $204.2 million over the fiscal 1994 closing
unappropriated surplus prior to transfers. Commonwealth revenues during the 1995
fiscal year were $459.4 million, 2.9 percent, above the estimate of revenues
used at the time the 1995 fiscal year budget was enacted. Corporation taxes
contributed $329.4 million of the additional receipts largely due to higher
receipts from the corporate net income tax. Fiscal 1995 revenues from the
corporate net income tax were 22.6 percent over collections in fiscal 1994 and
include the effects of the reduction of the tax rate from 12.25 percent to 11.99
percent that became effective with tax years beginning on and after January 1,
1994. The sales and use tax and miscellaneous revenues also showed strong
year-over-year growth that produced above-estimate revenue collections. Sales
and use tax revenues were $5,526.9 million, $128.8 million above the enacted
budget estimate and 7.9 percent over fiscal 1994 collections. Tax receipts from
both motor vehicle and non-motor vehicle sales contributed to the higher
collections. Miscellaneous revenue collections for fiscal 1995 were $183.5
million, $44.9 million above estimate and were largely due to additional
investment earnings, escheat revenues and other miscellaneous revenues.
Fiscal 1996 Budget. On June 30, 1995, the Governor signed a $16.2 billion
general fund budget, an increase of approximately 2.7 percent over the total
appropriations from Commonwealth revenues in the fiscal 1995 budget. The
appropriations increase for fiscal 1996 is one of the lowest rates in recent
years. Areas receiving the largest budgetary increases are medical assistance
and basic education. In addition, the budget accelerated corporate net income
tax rate reductions eliminated the inheritance tax paid by a surviving spouse on
jointly owned property, and made other business tax reductions.
Fiscal 1997 Budget. On February 6, 1996, the Governor submitted to the
General Assembly his fiscal 1997 budget that proposes $31.761 billion in total
spending including a $16.19 billion General Fund budget, a 0.2% decrease from
the fiscal 1996 budget. The proposed fiscal 1997 budget represents the first
time since 1970 that a Pennsylvania Governor has proposed a budget with less
spending than the prior year. The proposed fiscal 1997 budget contains modest
business tax reductions.
Debt Limits and Outstanding Debt. The Constitution of Pennsylvania permits
the issuance of the following types of debt: (i) debt to suppress insurrection
or rehabilitate areas affected by disaster; (ii) electorate approved debt; (iii)
debt for capital projects subject to an aggregate outstanding debt limit of 1.75
times the annual average tax revenues of the preceding five fiscal years; and
(iv) tax anticipation notes payable in the fiscal year of issuance.
Under the Pennsylvania Fiscal Code, the Auditor General is required
annually to certify to the Governor and the General Assembly certain information
regarding the Commonwealth's indebtedness. According to the February 29, 1996
Auditor General certificate, the average annual tax revenues deposited in all
funds in the five fiscal years ended June 30, 1995 was approximately $17.7
billion, and, therefore, the net debt limitation for the 1996 fiscal year is
$30.9 billion. Outstanding net debt totaled $3.9 billion at June 30, 1995,
approximately equal to the net debt at June 30, 1994. At February 29, 1996, the
amount of debt authorized to be issued, but not yet incurred was $16.5 billion.
Outstanding general obligation debt totaled $5,045.4 million at June 30,
1995, a decrease of $30.4 million from June 30, 1994. Over the ten-year period
ending June 30, 1995, total outstanding general obligation debt increased at an
annual rate of 1.1 percent. Within the most recent five-year period, outstanding
general obligation debt has grown at an annual rate of 1.7 percent.
Debt Ratings. All outstanding general obligation bonds of the Commonwealth
are rated AA- by S&P and A1 by Moody's.
City of Philadelphia. The City of Philadelphia is the largest city in the
Commonwealth with an estimated population of 1,585,577, according to the 1990
census. Philadelphia experienced a series of general fund deficits for fiscal
years 1988 through 1992 which have culminated in the City's present serious
financial difficulties. In its 1992 Comprehensive Annual Financial Report, the
City reported a cumulative general fund deficit of $71.4 million for fiscal year
1992.
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In June 1991, the Pennsylvania legislature established the Pennsylvania
Intergovernmental Cooperation Authority ("PICA"), a five-member board to assist
Philadelphia in remedying fiscal emergencies. PICA is designed to provide
assistance through the issuance of funding debt and to make factual findings and
recommendations to Philadelphia concerning its budgetary and fiscal affairs. The
legislation empowers PICA to issue notes and bonds on behalf of Philadelphia,
and also authorizes Philadelphia to levy a one-percent sales tax, the proceeds
of which would be used to pay off the bonds. In return for PICA's fiscal
assistance, Philadelphia is required, among other things, to establish five-year
financial plans that include balanced annual budgets. Under the legislation, if
Philadelphia does not comply with such requirements, PICA may withhold bond
revenues and certain state funding. At this time, the City is operating under a
five-year fiscal plan approved by PICA on April 17, 1995. Technical
modifications were made to that plan as of July 12, 1995 and the revised plan,
incorporating such technical modifications, was approved by PICA on July 18,
1995. As of November 15, 1995, PICA has issued approximately $1,418.7 million of
its Special Tax Revenue Bonds.
No further PICA bonds are to be issued by PICA for the purpose of financing
a capital project or deficit as the authority for such bond sales expired on
December 31, 1994. PICA's authority to issue debt for the purpose of financing a
cash flow deficit expires on December 31, 1996. Its ability to refund existing
outstanding debt is unrestricted.
In January 1993, Philadelphia anticipated a cumulative general fund budget
deficit of $57 million for the 1993 fiscal year. In response to the anticipated
deficit, the Mayor unveiled a financial plan eliminating the budget deficit for
the 1993 budget year through significant service cuts that included a plan to
privatize certain city-provided services. Due to an upsurge in tax receipts,
cost-cutting and additional PICA borrowings, Philadelphia completed the 1993
fiscal year with a balanced general fund budget. The audit findings for fiscal
year 1993 show a cumulative general fund surplus of approximately $3 million for
the fiscal year ended June 30, 1993.
In January 1994, the Mayor proposed a $2.3 billion city general fund budget
that included no tax increases, no significant service cuts and a series of
modest health and welfare program increases. At that time, the Mayor also
unveiled a $2.2 billion program (the "Philadelphia Economic Stimulus Program")
designed to stimulate Philadelphia's economy and stop the loss of 1,000 jobs a
month. In its 1994 Comprehensive Annual Financial Report, Philadelphia reported
a cumulative general fund surplus of approximately $15.4 million for the fiscal
year ended June 30, 1994, up from approximately $3 million as of June 30, 1993.
Philadelphia's preliminary unaudited General Fund financial statements at June
30, 1995 project a surplus approximating $59.6 million.
S&P's rating on Philadelphia's general obligation bonds is BBB-. Moody's
rating is currently Baa.
Litigation. The Commonwealth is a party to numerous lawsuits in which an
adverse final decision could materially affect the Commonwealth's governmental
operations and consequently its ability to pay debt service on its obligations.
The Commonwealth also faces tort claims made possible by the limited waiver of
sovereign immunity effected by Act 152, approved September 28, 1978, as amended.
Under Act 152, damages for any loss are limited to $250,000 per person and $1
million for each accident.
Other Issuers of Pennsylvania Municipal Obligations. There are a number of
state agencies, instrumentalities and political subdivisions of the Commonwealth
that issue Municipal Obligations, some of which may be conduit revenue
obligations payable from payments from private borrowers. These entities are
subject to various economic risks and uncertainties, and the credit quality of
the securities issued by them may vary considerably from the credit quality of
obligations backed by the full faith and credit of the Commonwealth.
FACTORS PERTAINING TO VIRGINIA
As described above, except to the extent the Virginia Fund invests in
temporary investments, the Virginia Fund will invest substantially all of its
net assets in Virginia Municipal Obligations. The Virginia Fund is therefore
susceptible to political, economic or regulatory factors affecting issuers of
Virginia Municipal Obligations. Without intending to be complete, the following
briefly summarizes some of these difficulties and the current financial
situation, as well as some of the complex factors affecting the financial
situation, in the Commonwealth of Virginia (the "Commonwealth" or "Virginia").
It is derived from sources that are generally available to investors and is
based in part on information obtained from various agencies in Virginia. No
independent verification has been made of the accuracy or completeness of the
following information.
There can be no assurance that current or future statewide or regional
economic difficulties, and the resulting impact on State or local governmental
finances generally, will not adversely affect the market value of Virginia
Municipal Obligations held in the portfolio of the Virginia Fund or the ability
of particular obligors to make timely payments of debt service on (or relating
to) those obligations.
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The Commonwealth's financial condition is supported by a broad-based
economy, including manufacturing, tourism, agriculture, ports, mining and
fisheries. Manufacturing continues to be a major source of employment, ranking
behind only services, wholesale and retail trade, and government (federal, state
and local). Defense activity is an important component of Virginia's economy.
The Commonwealth accounted for 9.6 percent of all military and civilian U.S.
Department of Defense (DOD) employees and ranked first in per capita defense
spending in federal fiscal year 1994, while ranking second in total defense
spending. Northern Virginia and the Hampton Roads area accounted for 91.5
percent of DOD employment in Virginia in 1994. However, for federal fiscal year
1994, total DOD employment in Virginia decreased 2.2 percent from the previous
year and can be expected to continue to decline as previously announced base
closures are implemented and the military downsizes.
Economic growth continued in fiscal year 1995, mimicking neither the boom
of the late 1980's nor the 1990-1991 recession. Personal income continued to
rise in real terms during the first three quarters of the fiscal year but at
only 1.1 percent in the first quarter of calendar year 1995. Employment
continued to give brighter news and unemployment dropped to 4.7 percent compared
to the national rate of 5.7 percent. While recent decisions by large private
firms to locate or expand in Virginia provide encouragement, additional company
downsizings and defense cutbacks have now been joined by the prospect of major
cuts in federal employment as threats to the Commonwealth's economic health.
Personal income figures for Virginia have generally followed national
trends. Changes in the Commonwealth personal income were generally higher than
the U.S. figures in the 1980's. Since then, the Commonwealth and the nation have
grown at similar rates. Virginia's per capita income of $22,501 for 1994 was 104
percent of the national figure, as in the previous two years. At 106 percent of
the South Atlantic region's per capita income for both 1993 and 1994, the ratio
remains lower than at any other time since 1980.
Virginia's nonagricultural employment has also reflected that of the
national economy. For fiscal year 1994 Virginia's nonagricultural employment
rose 2.3 percent, as did U.S. employment; however, the rate of growth was less
than the Commonwealth's 2.9 percent rate for the previous year. Total
nonagricultural employment for Virginia in June 1995 was a record high. During
the 1980's, the Commonwealth growth rate outpaced the nation, but since then it
has been close to the national average. The South Atlantic region continued to
outpace Virginia in growth of nonagricultural employment and seemed to be
widening the gap.
The unemployment picture brightened in Virginia in fiscal year 1995. For
the first 10 months of 1994, Virginia's unemployment rate of 5 percent was 21
percent below the national average of 6.3 percent. Virginia's unemployment rate
has typically been one of the lowest in the nation, largely as a result of the
balance found in Virginia's economy, and has remained consistently below the
national rate. Rates of unemployment in excess of 9 percent were found in
southwest Virginia where mining jobs have been lost and the lowest unemployment
rates were seen in the Northern Virginia, Charlottesville and Richmond areas at
under 4 percent.
Employment trends in Virginia have varied from sector to sector. The growth
patterns were similar to those in fiscal year 1994. Employment grew in seven of
ten sectors. This past fiscal year's growth was led by a 6.3 percent employment
jump in the construction sector and 5.4 percent in services. Federal civilian
employment slipped 2.3 percent, the result of continued defense cutbacks and an
effort to downsize. The drop in mining employment accelerated to 9.8 percent
from 7.7 percent in the previous year. Manufacturing has lost 25,100 jobs during
the five-year period beginning in 1991, emphasizing dramatic evidence of the
shift to a service economy from a goods-producing one. Employment trends also
varied among regions. All of the Commonwealth's metropolitan statistical areas
showed increased employment from fiscal year 1994 to fiscal year 1995, ranging
from .7 percent to 4.3 percent, with most employment increases being experienced
in metropolitan areas.
While Virginia has nearly completed an economic recovery from the 1990-91
recession, its period of eclipsing national and South Atlantic regional economic
outcomes may be over. In both measures of income and particularly of employment
the South Atlantic region seems to be gaining. Virginia continues to lead the
U.S. as a whole in per capita income but no longer exceeds the nation in
year-to-year changes in income and level of employment. The implementation of
announced defense cutbacks, the duration of the period of economic growth, and
the impact of potential cuts in federal spending are continuing sources of
concern. Dependence of Virginia's international trade upon tobacco exports is
worrisome for the long term. Growing interest in Virginia by major corporations
as a site for new facilities is the brightest hope for the future of the state
economy.
The Commonwealth of Virginia has historically operated on a fiscally
conservative basis and is required by its Constitution to have a balanced
biennial budget. At the end of the June 30, 1995 fiscal year, the General Fund
had an ending fund balance, computed on a budgetary cash basis, of $350.7
million, of which $151.6 million was in required reserves. $199.1 million of the
general fund balance was designated for expenditure during the next fiscal
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year, leaving no undesignated, unreserved fund balance. This is the first year
since fiscal year 1991 that there has not been an undesignated fund balance at
year end. Computed on a modified accrual basis in accordance with generally
accepted accounting principles, the General Fund balance at the end of the
fiscal year ended June 30, 1995, was negative $86.4 million, compared with a
General Fund balance of $185.3 million at the end of the fiscal year ended June
30, 1994. The fiscal year 1995 deficit in the General Fund is the result of a
settlement and subsequent ruling by the Virginia Supreme Court in the case of
Harper v. Department of Taxation relating to the tax treatment of federal
retirees' benefits.
As of June 30, 1995, total debt of the Commonwealth aggregated $9.3
billion. Of that amount, $2.7 billion was tax-supported. Outstanding general
obligation debt backed by the full faith and credit of the Commonwealth was $963
million at June 30, 1995. Of that amount, $524 million was also secured by
revenue producing capital projects.
The Virginia Constitution contains limits on the amount of general
obligation bonds which the Commonwealth can issue. These limits are
substantially in excess of current levels of outstanding bonds, and at June 30,
1995 would permit an additional total of approximately $6.0 billion of bonds
secured by revenue-producing projects and approximately $6.1 billion of
unsecured general obligation bonds for capital projects, with not more than
approximately $1.0 billion of the latter to be issued in any four-year period.
Bonds which are not secured by revenue-producing projects must be approved in a
state-wide election.
The Commonwealth of Virginia maintains a AAA bond rating from Standard &
Poor's Corporation, Moody's Investors Service and Fitch Investors Service on its
general obligation indebtedness, reflecting in part its sound fiscal management,
diversified economic base and low debt ratios. There can be no assurances that
these conditions will continue. Nor are these same conditions necessarily
applicable to securities which are not general obligations of the Commonwealth.
Securities issued by specific municipalities, governmental authorities or
similar issuers may be subject to economic risks or uncertainties peculiar to
the issuers of such securities or the sources from which they are to be paid,
and the credit quality of the securities issued by them may vary considerably
from the credit quality of obligations backed by the full faith and credit of
the Commonwealth.
CONSIDERATIONS RELATING TO FINANCIAL FUTURES AND OPTION CONTRACTS
As described in the Prospectus, each of the Funds may purchase and sell
financial futures contracts, options on financial futures or related options for
the purpose of hedging its portfolio securities against declines in the value of
such securities, and to hedge against increases in the cost of securities the
Fund intends to purchase. To accomplish such hedging, a Fund may take an
investment position in a futures contract or in an option which is expected to
move in the opposite direction from the position being hedged. Futures or
options utilized for hedging purposes would either be based on an index of
long-term Municipal Obligations (i.e., those with remaining maturities averaging
20-30 years) or relate to debt securities whose prices are anticipated by Nuveen
Advisory to correlate with the prices of the Municipal Obligations owned by a
Fund. The sale of financial futures or the purchase of put options on financial
futures or on debt securities or indexes is a means of hedging against the risk
that the value of securities owned by a Fund may decline on account of an
increase in interest rates, and the purchase of financial futures or of call
options on financial futures or on debt securities or indexes is a means of
hedging against increases in the cost of the securities a Fund intends to
purchase as a result of a decline in interest rates. Writing a call option on a
futures contract or on debt securities or indexes may serve as a hedge against a
modest decline in prices of Municipal Obligations held in a Fund's portfolio,
and writing a put option on a futures contract or on debt securities or indexes
may serve as a partial hedge against an increase in the value of Municipal
Obligations a Fund intends to acquire. The writing of such options provides a
hedge to the extent of the premium received in the writing transaction.
Regulations of the Commodity Futures Trading Commission ("CFTC") applicable to
the Funds require that transactions in futures and options on futures be engaged
in only for bona-fide hedging purposes, and that no such transactions may be
entered into by a Fund if the aggregate initial margin deposits and premiums
paid by that Fund exceeds 5% of the market value of the Fund's assets. A Fund
will not purchase futures unless it has segregated cash, government securities
or high grade liquid debt equal to the contract price of the futures less any
margin on deposit, or unless the long futures position is covered by the sale of
a put option. A Fund will not sell futures unless the Fund owns the instruments
underlying the futures or owns options on such instruments or owns a portfolio
whose market price may be expected to move in tandem with the market price of
the instruments or index underlying the futures. In addition, each Fund is
subject to the tax requirement that less than 30% of its gross income may be
derived from the sale or disposition of securities held for less than three
months. With respect to its engaging in transactions involving the purchase or
writing of put and call options on debt securities or indexes, a Fund will not
purchase such options if more than 5% of its assets would be invested in the
premiums for such options, and it will only write "covered" or "secured"
options, wherein the securities or cash required to be delivered upon exercise
are held by a
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Fund, with such cash being maintained in a segregated account. These
requirements and limitations may limit a Fund's ability to engage in hedging
transactions.
Description of Financial Futures and Options. A futures contract is a
contract between a seller and a buyer for the sale and purchase of specified
property at a specified future date for a specified price. An option is a
contract that gives the holder of the option the right, but not the obligation,
to buy (in the case of a call option) specified property from, or to sell (in
the case of a put option) specified property to, the writer of the option for a
specified price during a specified period prior to the option's expiration.
Financial futures contracts and options cover specified debt securities (such as
U.S. Treasury securities) or indexes designed to correlate with price movements
in certain categories of debt securities. At least one exchange trades futures
contracts on an index designed to correlate with the long-term municipal bond
market. Financial futures contracts and options on financial futures contracts
are traded on exchanges regulated by the CFTC. Options on certain financial
instruments and financial indexes are traded in securities markets regulated by
the Securities and Exchange Commission. Although futures contracts and options
on specified financial instruments call for settlement by delivery of the
financial instruments covered by the contracts, in most cases positions in these
contracts are closed out in cash by entering into offsetting, liquidating or
closing transactions. Index futures and options are designed for cash settlement
only.
Risks of Futures and Options Transactions. There are risks associated with
the use of futures contracts and options for hedging purposes. Investment in
futures contracts and options involves the risk of imperfect correlation between
movements in the price of the futures contract and options and the price of the
security being hedged. The hedge will not be fully effective where there is
imperfect correlation between the movements in the two financial instruments.
For example, if the price of the futures contract moves more than the price of
the hedged security, a Fund will experience either a loss or gain on the future
which is not completely offset by movements in the price of the hedged
securities. Further, even where perfect correlation between the price movements
does occur, a Fund will sustain a loss at least equal to the commissions on the
financial futures transaction. To compensate for imperfect corrections, the
Funds may purchase or sell futures contracts in a greater dollar amount than the
hedged securities if the volatility of the hedged securities is historically
greater than the volatility of the futures contracts. Conversely, the Funds may
purchase or sell fewer futures contracts if the volatility of the price of the
hedged securities is historically less than that of the futures contracts.
Because of low initial margin deposits made upon the opening of a futures
position, futures transactions involve substantial leverage. As a result,
relatively small movements in the price of the futures contract can result in
substantial unrealized gains or losses. Because the Funds will engage in the
purchase and sale of financial futures contracts solely for hedging purposes,
however, any losses incurred in connection therewith should, if the hedging
strategy is successful, be offset in whole or in part by increases in the value
of securities held by the Funds or decreases in the price of securities the
Funds intend to acquire.
The Funds expect to liquidate a majority of the financial futures contracts
they enter into through offsetting transactions on the applicable contract
market. There can be no assurance, however, that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be possible to close a futures position. In the event of adverse price
movements, the Funds would continue to be required to make daily cash payments
of variation margin. In such situations, if a Fund has sufficient cash, it may
be required to sell portfolio securities to meet daily variation margin
requirements at a time when it may be disadvantageous to do so. The inability to
close out futures positions also could have an adverse impact on a Fund's
ability to hedge its portfolio effectively and may expose the Fund to risk of
loss. The Funds will enter into a futures position only if, in the judgment of
Nuveen Advisory, there appears to be an actively traded secondary market for
such futures contracts.
The liquidity of a secondary market in a futures contract may be adversely
affected by "daily price fluctuation limits" established by commodity exchanges
which limit the amount of fluctuation in a futures contract price during a
single trading day. Once the daily limit has been reached in the contract, no
trades may be entered into at a price beyond the limit, thus preventing the
liquidation of open futures positions. Prices have in the past moved the daily
limit on a number of consecutive trading days.
The successful use of transactions in futures also depends on the ability
of Nuveen Advisory to forecast the direction and extent of interest rate
movements within a given time frame. To the extent these prices remain stable
during the period in which a futures contract is held by a Fund or moves in a
direction opposite to that anticipated, the Fund may realize a loss on the
hedging transaction which is not fully or partially offset by an increase in the
value of portfolio securities. As a result, the Fund's total return for such
period may be less than if it had not engaged in the hedging transaction.
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The ability of each of the Funds to engage in transactions in futures
contracts may be limited by the tax requirement that it have less than 30% of
its gross income derived from the sale or other disposition of stock or
securities held for less than three months. Gain from transactions in futures
contracts will be taxable to a Fund's shareholders partially as short-term and
partially as long-term capital gain.
TEMPORARY INVESTMENTS
The Prospectus discusses briefly the ability of each Fund to invest a
portion of its assets in federally tax-exempt or taxable "temporary
investments." Temporary investments will not exceed 20% of any Fund's assets
except when made for defensive purposes. The Funds will invest only in taxable
temporary investments that are either U.S. Government securities or are rated
within the highest grade by Moody's or S&P, and mature within one year from the
date of purchase or carry a variable or floating rate of interest.
The Funds may invest in the following federally tax-exempt temporary
investments:
Bond Anticipation Notes (BANs) are usually general obligations of state and
local governmental issuers which are sold to obtain interim financing for
projects that will eventually be funded through the sale of long-term debt
obligations or bonds. The ability of an issuer to meet its obligations on its
BANs is primarily dependent on the issuer's access to the long-term municipal
bond market and the likelihood that the proceeds of such bond sales will be used
to pay the principal and interest on the BANs.
Tax Anticipation Notes (TANs) are issued by state and local governments to
finance the current operations of such governments. Repayment is generally to be
derived from specific future tax revenues. Tax anticipation notes 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 as
those described above to commercial banks as evidence of borrowings. The
purposes for which the notes are issued are varied but they are frequently
issued to meet short-term working capital or capital-project needs. These notes
may have risks similar to the risks associated with TANs and RANs.
Tax-Exempt Commercial Paper (Municipal Paper) represents very short-term
unsecured, negotiable promissory notes, issued by states, municipalities and
their agencies. Payment of principal and interest on issues of municipal paper
may be made from various sources, to the extent the funds are available
therefrom. Maturities of municipal paper generally will be shorter than the
maturities of TANs, BANs or RANs. There is a limited secondary market for issues
of municipal paper.
While these various types of notes as a group represent the major portion
of the tax-exempt note market, other types of notes are occasionally available
in the marketplace and each Fund may invest in such other types of notes to the
extent permitted under its investment objective, policies and limitations. Such
notes may be issued for different purposes and may be secured differently from
those mentioned above.
The Funds may also invest in the following taxable temporary investments:
U.S. Government Direct Obligations are issued by the United States Treasury
and include bills, notes and bonds.
-- Treasury bills are issued with maturities of up to one year. They are
issued in bearer form, are sold on a discount basis and are payable at
par value at maturity.
-- Treasury notes are longer-term interest bearing obligations with
original maturities of one to seven years.
-- Treasury bonds are longer-term interest-bearing obligations with
original maturities from five to thirty years.
B-24
<PAGE> 175
U.S. Government Agencies Securities -- Certain federal agencies have been
established as instrumentalities of the United States Government to supervise
and finance certain types of activities. These agencies include, but are not
limited to, the Bank for Cooperatives, Federal Land Banks, Federal Intermediate
Credit Banks, Federal Home Loan Banks, Federal National Mortgage Association,
Government National Mortgage Association, Export-Import Bank of the United
States, and Tennessee Valley Authority. Issues of these agencies, while not
direct obligations of the United States Government, are either backed by the
full faith and credit of the United States or are guaranteed by the Treasury or
supported by the issuing agencies' right to borrow from the Treasury. There can
be no assurance that the United States Government itself will pay interest and
principal on securities as to which it is not legally so obligated.
Certificates of Deposit (CDs) -- A certificate of deposit is a negotiable
interest bearing instrument with a specific maturity. CDs are issued by banks in
exchange for the deposit of funds and normally can be traded in the secondary
market, prior to maturity. The Funds will only invest in U.S. dollar denominated
CDs issued by U.S. banks with assets of $1 billion or more.
Commercial Paper -- Commercial paper is the term used to designate
unsecured short-term promissory notes issued by corporations. Maturities on
these issues vary from a few days to nine months. Commercial paper may be
purchased from U.S. corporations.
Other Corporate Obligations -- The Funds may purchase notes, bonds and
debentures issued by corporations if at the time of purchase there is less than
one year remaining until maturity or if they carry a variable or floating rate
of interest.
Repurchase Agreements -- A repurchase agreement is a contractual agreement
whereby the seller of securities (U.S. Government or Municipal Obligations)
agrees to repurchase the same security at a specified price on a future date
agreed upon by the parties. The agreed upon repurchase price determines the
yield during a Fund's holding period. Repurchase agreements are considered to be
loans collateralized by the underlying security that is the subject of the
repurchase contract. The Funds will only enter into repurchase agreements with
dealers, domestic banks or recognized financial institutions that in the opinion
of Nuveen Advisory present minimal credit risk. The risk to the Funds 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 Funds 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 Funds may be delayed or limited. Nuveen Advisory will monitor
the value of 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 the value always equals or exceeds the agreed upon price. In the
event the value of the collateral declined below the repurchase price, Nuveen
Advisory will demand additional collateral from the issuer to increase the value
of the collateral to at least that of the repurchase price. A Fund will not
invest more than 10% of its assets in repurchase agreements maturing in more
than seven days.
RATINGS OF INVESTMENTS
The four highest ratings of Moody's for Municipal Obligations are Aaa, Aa,
A and Baa. Municipal Obligations rated Aaa are judged to be of the "best
quality." The rating of Aa is assigned to Municipal Obligations which are of
"high quality by all standards," but as to which margins of protection or other
elements make long-term risks appear somewhat larger than in Aaa rated Municipal
Obligations. The Aaa and Aa rated Municipal Obligations comprise what are
generally known as "high grade bonds." Municipal Obligations that are rated A by
Moody's possess many favorable investment attributes and are considered upper
medium grade obligations. Factors giving security to principal and interest of A
rated Municipal Obligations are considered adequate, but elements may be
present, which suggest a susceptibility to impairment sometime in the future.
Municipal Obligations rated Baa by Moody's are considered medium grade
obligations (i.e., they are neither highly protected nor poorly secured). Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well. Moody's bond rating symbols may contain numerical
modifiers of a generic rating classification. The modifier 1 indicates that the
bond ranks at the high end of its category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks in the lower end of
its general rating category.
The four highest ratings of S&P for Municipal Obligations are AAA, AA, A
and BBB. Municipal Obligations rated AAA have a strong capacity to pay principal
and interest. The rating of AA indicates that capacity to pay principal and
interest is very strong and such bonds differ from AAA issues only in small
degree. The category of A
B-25
<PAGE> 176
describes bonds which have a strong capacity to pay principal and interest,
although such bonds are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions. The BBB rating is the lowest
"investment grade" security rating by S&P. Municipal Obligations rated BBB are
regarded as having an adequate capacity to pay principal and interest. Whereas
such bonds normally exhibit adequate protection parameters, adverse economic
conditions are more likely to lead to a weakened capacity to pay principal and
interest for bonds in this category than for bonds in the A category.
The "Other Corporate Obligations" category of temporary investments are
corporate (as opposed to municipal) debt obligations rated AAA by S&P or Aaa by
Moody's. Corporate debt obligations rated AAA by S&P have an extremely strong
capacity to pay principal and interest. The Moody's corporate debt rating of Aaa
is comparable to that set forth above for Municipal Obligations.
Subsequent to its purchase by a Fund, an issue may cease to be rated or its
rating may be reduced below the minimum required for purchase by such Fund.
Neither event requires the elimination of such obligation from the Fund's
portfolio, but Nuveen Advisory will consider such an event in its determination
of whether the Fund should continue to hold such obligation.
B-26
<PAGE> 177
MANAGEMENT
The management of the Trust, including general supervision of the duties
performed for the Funds under the Investment Management Agreement, is the
responsibility of its Board of Trustees. The Trust currently has six trustees,
two of whom are "interested persons" (as the term "interested persons" is
defined in the Investment Company Act of 1940) and four of whom are
"disinterested persons." The names and business addresses of the trustees and
officers of the Trust 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 Trust indicated by an asterisk.
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND ADDRESS AGE OFFICES WITH TRUST DURING PAST FIVE YEARS
- ---------------------------- ------ ---------------------- --------------------------------------------------------------
<S> <C> <C> <C>
Richard J. Franke*.......... 64 Chairman of the Chairman of the Board, Director and formerly President of John
333 West Wacker Drive Board and Trustee Nuveen & Co. Incorporated; Chairman of the Board and Director,
Chicago, IL 60606 formerly President, of Nuveen Advisory Corp.; Chairman of the
Board and Director of Nuveen Institutional Advisory Corp.
(since April 1990); Certified Financial Planner.
Timothy R. Schwertfeger*.... 47 President and Trustee Executive Vice President and Director of The John Nuveen
333 West Wacker Drive Company (since March 1992) and John Nuveen & Co. Incorporated;
Chicago, IL 60606 Director of Nuveen Advisory Corp. (since 1992) and Nuveen
Institutional Advisory Corp. (since 1992).
Lawrence H. Brown........... 61 Trustee Retired (August 1989) as Senior Vice President of The Northern
201 Michigan Avenue Trust Company.
Highwood, IL 60040
Anne E. Impellizzeri........ 63 Trustee President and Chief Executive Officer of Blanton-Peale,
3 West 29th Street Institutes of Religion and Health (since December 1990); prior
New York, NY 10001 thereto, Vice President of New York City Partnership (from
1987 to 1990).
Margaret K. Rosenheim....... 69 Trustee Helen Ross Professor of Social Welfare Policy, School of
969 East 60th Street Social Science Administration, University of Chicago.
Chicago, IL 60637
Peter R. Sawers............. 63 Trustee Adjunct Professor of Business and Economics, University of
22 The Landmark Dubuque, Iowa; Adjunct Professor, Lake Forest Graduate School
Northfield, IL 60093 of Management, Lake Forest, Illinois (since January 1992);
prior thereto, Executive Director, Towers Perin Australia
(management consultant); Chartered Financial Analyst;
Certified Management Consultant.
William M. Fitzgerald....... 32 Vice President Vice President of Nuveen Advisory Corp. (since December 1995);
33 West Wacker Drive Assistant Vice President of Nuveen Advisory Corp. (from
Chicago, Illinois 60606 September 1992 to December 1995), prior thereto Assistant
Portfolio Manager of Nuveen Advisory Corp. (from June 1988 to
September 1992).
Kathleen M. Flanagan........ 49 Vice President Vice President of John Nuveen & Co. Incorporated.
333 West Wacker Drive
Chicago, IL 60606
J. Thomas Futrell........... 40 Vice President Vice President of Nuveen Advisory Corp.
333 West Wacker Drive
Chicago, IL 60606
Steven J. Krupa............. 38 Vice President Vice President of Nuveen Advisory Corp.
333 West Wacker Drive
Chicago, IL 60606
Anna R. Kucinskis........... 50 Vice President Vice President of John Nuveen & Co. Incorporated.
333 West Wacker Drive
Chicago, IL 60606
Larry W. Martin............. 44 Vice President and Vice President (since September 1992), Assistant Secretary and
333 West Wacker Drive Assistant Secretary Assistant General Counsel of John Nuveen & Co. Incorporated;
Chicago, IL 60606 Vice President (since May 1993) and Assistant Secretary of
Nuveen Advisory Corp.; Vice President (since May 1993) and
Assistant Secretary (since January 1992) of Nuveen
Institutional Advisory Corp.; Assistant Secretary of The John
Nuveen Company (since February 1993).
O. Walter Renfftlen......... 56 Vice President and Vice President and Controller of The John Nuveen Company
333 West Wacker Drive Controller (since March 1992), John Nuveen & Co. Incorporated, Nuveen
Chicago, IL 60606 Advisory Corp. and Nuveen Institutional Advisory Corp.
Thomas C. Spalding, Jr...... 44 Vice President Vice President of Nuveen Advisory Corp. and Nuveen
333 West Wacker Drive Institutional Advisory Corp.; Chartered Financial Analyst.
Chicago, IL 60606
H. William Stabenow......... 61 Vice President and Vice President and Treasurer of The John Nuveen Company (since
333 West Wacker Drive Treasurer March 1992), John Nuveen & Co. Incorporated, Nuveen Advisory
Chicago, IL 60606 Corp. and Nuveen Institutional Advisory Corp, (since January
1992).
James J. Wesolowski......... 45 Vice President and Vice President, General Counsel and Secretary of The John
333 West Wacker Drive Secretary Nuveen Company (since March 1992), John Nuveen & Co.
Chicago, IL 60606 Incorporated, Nuveen Advisory Corp. and Nuveen Institutional
Advisory Corp.
Gifford R. Zimmerman........ 39 Vice President and Vice President (since September 1992), Assistant Secretary and
333 West Wacker Drive Assistant Secretary Assistant General Counsel of John Nuveen & Co. Incorporated;
Chicago, IL 60606 Vice President (since May 1993) and Assistant Secretary of
Nuveen Advisory Corp.; Vice President (since May 1993) and
Assistant Secretary (since January 1992) of Nuveen
Institutional Advisory Corp.
</TABLE>
B-27
<PAGE> 178
Richard J. Franke, Timothy R. Schwertfeger and Margaret K. Rosenheim serve
as members of the Executive Committee of the Board of Trustees. The Executive
Committee, which meets between regular meetings of the Board of Trustees, is
authorized to exercise all of the powers of the Board of Trustees.
The trustees of the Trust are also directors or trustees, as the case may
be, of 14 other Nuveen open-end fund portfolios and 53 Nuveen closed-end funds.
The following table sets forth compensation paid by the Trust during the
fiscal year ended January 31, 1996 to each of the trustees of the Trust. The
Trust has no retirement or pension plans. The officers and trustees affiliated
with Nuveen serve without any compensation from the Trust.
<TABLE>
<CAPTION>
TOTAL COMPENSATION
AGGREGATE FROM TRUST
COMPENSATION AND FUND COMPLEX
NAME OF TRUSTEE FROM THE TRUST PAID TO TRUSTEES
------------------------------------------------------------ -------------- -------------------
<S> <C> <C>
Richard J. Franke........................................... $ 0 0
Timothy R. Schwertfeger..................................... 0 0
Lawrence H. Brown........................................... 1,873 55,500
Anne E. Impellizzeri........................................ 1,873 63,000
John E. O'Toole............................................. 1,695 47,000
Margaret K. Rosenheim....................................... 1,971 62,322(1)
Peter R. Sawers............................................. 1,873 55,500
</TABLE>
- ---------------
(1) Includes $1,572 in interest earned on deferred compensation from prior
years.
Each trustee who is not affiliated with Nuveen or Nuveen Advisory receives
a $45,000 annual retainer for serving as a director or trustee of all funds for
which Nuveen Advisory serves as investment adviser and a $1,000 fee per day plus
expenses for attendance at all meetings held on a day on which a regularly
scheduled Board meeting is held, a $1,000 fee per day plus expenses for
attendance in person or a $500 fee per day plus expenses for attendance by
telephone at a meeting held on a day on which no regular Board meeting is held,
and a $250 fee per day plus expenses for attendance in person or by telephone at
a meeting of the Executive Committee held solely to declare dividends. The
annual retainer, fees and expenses are allocated among the funds for which
Nuveen Advisory serves as investment adviser on the basis of relative net asset
sizes. The Trust requires no employees other than its officers, all of whom are
compensated by Nuveen.
On May 6, 1996, the officers and trustees of the Trust as a group owned
less than 1% of the outstanding shares of each Fund. The following table sets
forth the percentage ownership of each person who, as of May 6, 1996, owns of
record or is known by the Registrant to own of record or beneficially 5% or more
of any class of each Fund's shares of the Trust.
<TABLE>
<CAPTION>
NAME OF FUND AND CLASS NAME AND ADDRESS OF OWNER PERCENTAGE OF OWNERSHIP
- ------------------------------------------------ ------------------------------------------------ -----------------------
<S> <C> <C>
Arizona Fund
Class A Shares................................ Smith Barney, Inc. 5.51
00154505634
388 Greenwich Street
New York, NY 10013
Donaldson Lufkin Jenrette 13.95
Securities Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303-9998
Merrill Lynch Pierce Fenner & Smith Inc. 97E76 13.11
Attn: Book Entry Dept.
4800 Deer Lake Dr. E. Fl. 3
Jacksonville, FL 32246-6484
Arizona Fund
Class C Shares................................ Prudential Securities FBO 41.25
Janet Irving Itee
Janet Irving Trust
UA DTD 05/27/82
Sun City West, AZ 85375-5172
PaineWebber For The Benefit Of 13.88
Elisabeth A. Lang
Sole & Separate Property
1453 W. Orchid Lane
Chandler, AZ 85224-8658
</TABLE>
B-28
<PAGE> 179
<TABLE>
<CAPTION>
NAME OF FUND AND CLASS NAME AND ADDRESS OF OWNER PERCENTAGE OF OWNERSHIP
- ------------------------------------------------ ------------------------------------------------ -----------------------
<S> <C> <C>
Prudential Securities FBO 8.08
Mr. Evans Robert Woodhouse &
Mr. Elizabeth Biron Woodhouse
JT TEN
3138 N. 17th Dr
Phoenix, AZ 85015-5807
Leonidas K. Springer & 10.41
Beverly J. Springer
JT TEN WROS NOT TC
4720 W. Greenway Rd
Glendale, AZ 85306-3518
Erasno Ysasi TR 7.98
UA APR 07 95
FBO Erasmo Ysasi Trust
1754 E. Carson Rd.
Phoenix, AZ 85040-5747
Charles Schwab & Co Inc. 11.13
Special Custody Account For The Exclusive
Benefit Of Customers
Attn: Mutual Funds
101 Montgomery St
San Francisco, CA 94104-4122
Florida Fund
Class A Shares................................ Merrill Lynch Pierce Fenner & Smith Inc. 97E80 5.65
Attn: Book Entry Dept.
4800 Deer Lake Dr. E. Fl. 3
Jacksonville, FL 32246-6484
Florida Fund
Class C Shares................................ Roland C. White & 13.39
Arlene I. White
JT TEN WROS NOT TC
961 Tarrson Blvd.
Lady Lake, FL 32159-2363
PaineWebber For The Benefit Of 10.59
Ronald M. Goldberg &
Rita E. Goldberg JTWROS
90 Congress Street
Milford, MA 01757-2076
PaineWebber For The Benefit Of 12.47
Clarence W. Hebert
11 Hunthurst Circle
Worcester, MA 01602-2830
Norman Rudolph 13.51
1168 Lake Breeze Dr.
West Palm Beach, FL 33414-7945
PaineWebber For The Benefit Of 6.44
Mary Rogers and
Pamela Anne Rogers JT WROS
3070 Wedgewood Blvd.
DelRay Beach, FL 33445-5748
Monica Hart & 35.85
Melissa J. Hart TR
UA HAR 23 83
Robert J. Hart Trust
251 Algiers Ave.
Fort Lauderdale, FL 33308-4434
Olmedo E. Villavicencio & 6.14
Elsa V. Villavicencio
JT TEN WROS NOT TC
8903 Glade Hill Rd.
Fairfax VA 22031-3221
Maryland Fund
Class A Shares................................ NFSC FEBO #AIF-375349 15.20
Imelda J. Hall
4610 Col. Fenwick Place
Upper Marlboro, MD 20772
Merrill Lynch Pierce Fenner & 6.02
Smith Inc. 97E83
Attn: Book Entry Dept.
4800 Deer Lake Dr. E. Fl. 3
Jacksonville, FL 32246-6484
Maryland Fund
Class C Shares................................ NFSC FEBO # A1F-405744 47.31
Russell L. Jackson &
Carthelia L. Jackson
P.O. Box 256
Hughesville, MD 20637
</TABLE>
B-29
<PAGE> 180
<TABLE>
<CAPTION>
NAME OF FUND AND CLASS NAME AND ADDRESS OF OWNER PERCENTAGE OF OWNERSHIP
- ------------------------------------------------ ------------------------------------------------ -----------------------
<S> <C> <C>
Maryland Fund
Class R Shares................................ Merrill Lynch Pierce Fenner & 5.99
Smith Inc. 97905
Attn: Book Entry Dept.
4800 Deer Lake Dr. E. Fl. 3
Jacksonville, FL 32246-6484
Michigan Fund
Class A Shares................................ Donaldson Lufkin Jenrette 7.76
Securities Corporation Inc.
PO Box 2052
Jersey City, NJ 07303-9998
Diane E. Smith 5.56
2345 Heronwood Dr.
Bloomfield Hills, MI 48302-0835
The Ohio Company Cust 5.44
FBO E. E. Rucker
E. E. Rucker Living Trust
A/C 85-72878-1-7
155 E. Broad St.
Columbus, OH 43215-3609
Michigan Fund
Class C Shares................................ Donaldson Lufkin Jenrette 7.72
Securities Corporation Inc.
PO Box 2052
Jersey City, NJ 07303-9998
William J. Donahue & 9.73
Linda S. Donahue
1835 S Walmont Rd.
Jackson, MI 49203-5267
Mildred T. Barkalow 10.53
7171 Camino Del Ray
Rockford, MI 49341
Gerald D. Alvord & 10.99
Shirley M. Alvord
JT TEN WROS NOT TC
1444 Neece Dr.
Muskegon, MI 49441-5790
Nicholas & Melody Liscomb TR 8.47
UA JUN 13 91
Liscomb Family Living Trust
434 W. Westwood Dr.
Adrian, MI 49221-1349
Mary L. Evans & 7.97
Leamon Evans &
Noah Shumpert
JT TEN WROS NOT TC
1163 Peachtree Dr.
Mount Morris, MI 48458-2833
Jane E. Boyles-Visel TR 9.99
UA JAN 25 93
Jane E. Boyles-Visel Trust
5975 Leland Rd.
Ann Arbor, MI 48105-9309
PaineWebber For The Benefit Of 10.80
Frank Salucci &
Carol A. Salucci
JTWROS
4075 S. Pine Center
W. Bloomfield, MI 48323-3062
PaineWebber For The Benefit Of 5.55
Ardis L. Chester &
Albert S. Chester
JTWROS
416 Saddle Lane
Grosse Pte. Woods, WI 48236-2729
New Jersey Fund
Class A Shares................................ NFSC FEBO # AAR-452009 5.48
Olga Schadas
28 Madison Street
S. Bound Brook, NJ 08880
Nicholas A. Rao & 7.59
Catherine F. Rao
JT TEN WROS NOT TC
9 Harlin Ave W.
Edison, NJ 08820-3164
</TABLE>
B-30
<PAGE> 181
<TABLE>
<CAPTION>
NAME OF FUND AND CLASS NAME AND ADDRESS OF OWNER PERCENTAGE OF OWNERSHIP
- ------------------------------------------------ ------------------------------------------------ -----------------------
<S> <C> <C>
Merrill Lynch Pierce Fenner & 7.83
Smith Inc. 97E82
Attn: Book Entry Dept.
4800 Deer Lake Dr. E. Fl. 3
Jacksonville, FL 32246-6484
New Jersey Fund
Class C Shares................................ Donaldson Lufkin Jenrette 6.00
Securities Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303-9998
William G. Osborne 26.37
c/o Aurachem Corp.
South 3R & Somerset St.
PO Box 471
Harrison, NJ 07029-0471
Alvin H. Frankel Agent For 9.33
Louise I. Grill
U/POA DTD Jun 17 94
601 Haddon Ave.
Collingswood, NJ 08108-3703
Prudential Securities FBO 5.69
Alfred T. Mattera &
Joanna Mattera JT TEN
3204 Wesley Ave.
Ocean City, NJ 08226-2045
Catherine Small & 5.81
Robert N. Small
JT TEN WROS NOT TC
1039 Bay Front Ave.
North Beach, MD 20714-9751
Pennsylvania Fund
Class A Shares................................ Francis R. Gelnett 5.22
210 S. Market St.
Selinsgrove, PA 17870-1814
Pennsylvania Fund
Class C Shares................................ Hani J. Tuffaha & Eihan H. Tuffaha 5.61
JT TEN WROS NOT TC
25 Selkirk Rd.
Williamsport, PA 17701-1810
NFSC FEBO # OC8-421383 10.87
Ronald Piotrowski
103 South Brodhead Rd.
Aliquippa, PA 15001
George D. Hawthorne & 8.46
Barbara Ann Berline &
Virginia N. Hawthorne
JT TEN WROS NOT TC
2408 Linden Dr.
Allison Park, PA 15101-3454
Virginia Fund
Class A Shares................................ Merrill Lynch Pierce Fenner & 10.49
Smith Inc. 97E81
Attn: Book Entry Dept.
4800 Deer Lake Dr. E. Fl. 3
Jacksonville, FL 32246-6484
Virginia Fund
Class C Shares................................ NFSC FEBO # A1F-435902 25.82
Richard U. Cogswell
350 S. Vandorn St.
Alexandria, VA 22304
Muriel S. Fleming & 11.06
David M. Fleming II
14303 Branderhill Woods Trl.
Midlothian, VA 23112-4171
Donaldson Lufkin Jenrette 8.10
Securities Corporation Inc.
PO Box 2052
Jersey City, NJ 07303-9998
John T. E. Cribb, Jr. & 5.28
Kirsten Brandt Cribb
JT TEN WROS NOT TC
712 N. Oakland St.
Arlington, VA 22203-2223
</TABLE>
B-31
<PAGE> 182
<TABLE>
<CAPTION>
NAME OF FUND AND CLASS NAME AND ADDRESS OF OWNER PERCENTAGE OF OWNERSHIP
- ------------------------------------------------ ------------------------------------------------ -----------------------
<S> <C> <C>
Roberta K. Federici Tr. 6.06
UA APR 29 92
Roberta K. Federici
Revocable Trust
811 Bradford Ave.
Westfield, NJ 07090-3006
Virginia Fund
Class R Shares................................ Merrill Lynch Pierce Fenner & 6.64
Smith Inc. 979D8
Attn: Book Entry Dept.
4800 Deer Lake Dr. E. Fl. 3
Jacksonville, FL 32246-6484
</TABLE>
INVESTMENT ADVISER AND INVESTMENT MANAGEMENT AGREEMENT
Nuveen Advisory Corp. acts as investment adviser for and manages the
investment and reinvestment of the assets of each of the Funds. Nuveen Advisory
also administers the Trust's business affairs, provides office facilities and
equipment and certain clerical, bookkeeping and administrative services, and
permits any of its officers or employees to serve without compensation as
trustees or officers of the Trust if elected to such positions. See "Management
of the Funds" in the Prospectus.
Pursuant to an investment management agreement between Nuveen Advisory and
the Trust, each Fund has agreed to pay an annual management fee at the rates set
forth below:
<TABLE>
<CAPTION>
AVERAGE DAILY NET ASSET VALUE MANAGEMENT FEE
----------------------------- --------------
<S> <C>
For the first $125 million .5500 of 1%
For the next $125 million .5375 of 1%
For the next $250 million .5250 of 1%
For the next $500 million .5125 of 1%
For the next $1 billion .5000 of 1%
For net assets over $2 billion .4750 of 1%
</TABLE>
In order to prevent total operating expenses (including Nuveen Advisory's
fee, but excluding interest, taxes, fees incurred in acquiring and disposing of
portfolio securities, any asset-based distribution or service fees and, to the
extent permitted, extraordinary expenses) from exceeding .75 of 1% of the
average daily net asset value of any class of shares of each Fund for the fiscal
year ended January 31, 1996, Nuveen Advisory agreed to waive all or a portion of
its management fees or reimburse certain expenses of each Fund. For the last
three fiscal years, the Funds paid net management fees to Nuveen Advisory as
follows:
<TABLE>
<CAPTION>
MANAGEMENT FEES NET OF EXPENSE
REIMBURSEMENT PAID TO FEE WAIVERS AND
NUVEEN ADVISORY FOR EXPENSE REIMBURSEMENTS FOR
THE YEAR ENDED JANUARY 31, THE YEAR ENDED JANUARY 31,
---------------------------------- ------------------------------
1994 1995 1996 1994 1995 1996
-------- ---------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Arizona Fund................................................ $ 5,394 $ 37,557 $ 32,670 $ 60,783 $ 51,152 $ 78,929
Florida Fund................................................ 143,759 226,883 234,568 50,646 44,113 78,507
Maryland Fund............................................... 172,693 189,022 131,476 42,288 65,460 148,537
Michigan Fund............................................... 46,875 86,293 76,644 63,717 58,458 93,136
New Jersey Fund............................................. 85,065 156,717 152,929 61,303 54,105 115,121
Pennsylvania Fund........................................... 132,557 191,299 195,814 67,989 83,798 128,011
Virginia Fund............................................... 214,913 261,196 223,025 42,776 40,815 117,673
Total for all Funds......................................... 801,256 1,148,967 1,047,126 389,502 397,901 759,914
</TABLE>
Nuveen Advisory has agreed to continue its fee waivers and expense
reimbursements through July 31, 1996, and it is anticipated that Nuveen Advisory
will continue its fee waivers and expense reimbursements for some length of time
thereafter. As discussed in the Prospectus, in addition to the management fee of
Nuveen Advisory, each Fund pays all other costs and expenses of its operations
and a portion of the Trust's general administrative expenses allocated in
proportion to the net assets of each Fund.
Nuveen Advisory is a wholly owned subsidiary of John Nuveen & Co.
Incorporated ("Nuveen"), the Funds' principal underwriter. Founded in 1898,
Nuveen is the oldest and largest investment banking firm specializing in the
underwriting and distribution of tax-exempt securities and maintains the largest
research department in the investment banking community devoted exclusively to
the analysis of municipal securities. In 1961, Nuveen began sponsoring the
Nuveen Tax-Exempt Unit Trust and since that time has issued more than $36
billion in tax-exempt
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unit trusts, including over $12 billion in tax-exempt insured unit trusts. In
addition, Nuveen open-end and closed-end funds held approximately $31 billion in
tax-exempt securities under management as of the date of this Statement. Over
1,000,000 individuals have invested to date in Nuveen's tax-exempt funds and
trusts. Nuveen is a subsidiary of The John Nuveen Company which, in turn, is
approximately 75% owned by The St. Paul Companies, Inc. ("St. Paul"). St. Paul
is located in St. Paul, Minnesota and is principally engaged in providing
property-liability insurance through subsidiaries.
Nuveen Advisory's portfolio managers call upon the resources of Nuveen's
Research Department, the largest in the investment banking industry devoted
exclusively to tax-exempt securities. Nuveen's Research Department was selected
in 1994 by Research & Ratings Review, a municipal industry publication, as one
of the leading research teams in the municipal industry, based on an extensive
industry-wide poll of portfolio managers, department heads and bond buyers. The
Nuveen Research Department reviews more than $100 billion in tax-exempt bonds
every year.
The Funds, the other Nuveen funds, the Adviser, and other related entities
have adopted a code of ethics which essentially prohibits all Nuveen fund
management personnel, including Nuveen fund portfolio managers, from engaging in
personal investments which compete or interfere with, or attempt to take
advantage of, a Fund's anticipated or actual portfolio transactions, and is
designed to assure that the interests of Fund shareholders are placed before the
interests of Nuveen personnel in connection with personal investment
transactions.
PORTFOLIO TRANSACTIONS
Nuveen Advisory, in effecting purchases and sales of portfolio securities
for the account of each Fund, will place orders in such manner as, in the
opinion of management, will offer the best price and market for the execution of
each transaction. Portfolio securities will normally be purchased directly from
an underwriter or in the over-the-counter market from the principal dealers in
such securities, unless it appears that a better price or execution may be
obtained elsewhere. Portfolio securities will not be purchased from Nuveen or
its affiliates except in compliance with the Investment Company Act of 1940.
The Funds expect that all portfolio transactions will be effected on a
principal (as opposed to an agency) basis and, accordingly, do 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. Given the best price
and execution obtainable, it will be the practice of the Funds 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 Funds, 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.
Nuveen Advisory reserves the right to, and does, manage other investment
accounts and investment companies for other clients, which may have investment
objectives similar to the Funds. Subject to applicable laws and regulations,
Nuveen Advisory will attempt to allocate equitably portfolio transactions among
the Funds and the portfolios of its other clients purchasing or selling
securities whenever decisions are made to purchase or sell securities by a Fund
and one or more of such other clients simultaneously. In making such allocations
the main factors to be considered will be the respective investment objectives
of the Fund and such other clients, the relative size of portfolio holdings of
the same or comparable securities, the availability of cash for investment by
the Fund and such other clients, the size of investment commitments generally
held by the Fund and such other clients and opinions of the persons responsible
for recommending investments to the Fund and such other clients. While this
procedure could have a detrimental effect on the price or amount of the
securities available to a Fund from time to time, it is the opinion of the Board
of Trustees that the benefits available from Nuveen Advisory's organization will
outweigh any disadvantage that may arise from exposure to simultaneous
transactions.
Under the Investment Company Act of 1940, the Funds 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 Obligations purchased by a Fund, the amount of Municipal Obligations
which may be purchased in any one issue and the assets of a Fund which may be
invested in a particular issue. In addition, purchases of securities made
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pursuant to the terms of the Rule must be approved at least quarterly by the
Board of Trustees, including a majority of the trustees who are not interested
persons of the Trust.
NET ASSET VALUE
As stated in the Prospectus, the net asset value of the shares of each Fund
will be determined separately for each class of a Fund's shares by The Chase
Manhattan Bank, N.A., the Trust's custodian, as of 4:00 p.m. Eastern Time on
each day on which the New York Stock Exchange (the "Exchange") is normally open
for trading. The Exchange is not open for trading on New Year's Day,
Washington's Birthday, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. The net asset value per share of a class of
shares of a Fund will be computed by dividing the value of the Fund's assets
attributable to the class, less the liabilities attributable to the class, by
the number of shares of the class outstanding.
In determining net asset value for each of the Funds, the Trust's custodian
utilizes the valuations of portfolio securities furnished by a pricing service
approved by the trustees. The pricing service values portfolio securities at the
mean between the quoted bid and asked price or the yield equivalent when
quotations are readily available. Securities for which quotations are not
readily available (which constitute a majority of the securities held by these
Funds) are valued at fair value as determined by the pricing service using
methods which include consideration of the following: yields or prices of
municipal bonds of comparable quality, type of issue, coupon, maturity and
rating; indications as to value from dealers; and general market conditions. The
pricing service may employ electronic data processing techniques and/or a matrix
system to determine valuations. The procedures of the pricing service and its
valuations are reviewed by the officers of the Trust under the general
supervision of the Board of Trustees.
TAX MATTERS
FEDERAL INCOME TAX MATTERS
The following discussion of federal income tax matters is based upon the
advice of Fried, Frank, Harris, Shriver & Jacobson, Washington, D.C., counsel to
the Trust.
As described in the Prospectus, each Fund intends to qualify under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code") for
tax treatment as a regulated investment company. In order to qualify as a
regulated investment company, a Fund must satisfy certain requirements relating
to the source of its income, diversification of its assets, and distributions of
its income to shareholders. First, a Fund must derive at least 90% of its annual
gross income (including tax-exempt interest) from dividends, interest, payments
with respect to securities loans, gains from the sale or other disposition of
stock or securities, foreign currencies or other income (including but not
limited to gains from options and futures) derived with respect to its business
of investing in such stock or securities (the "90% gross income test"). Second,
a Fund must derive less than 30% of its annual gross income from the sale or
other disposition of any of the following which was held for less than three
months: (i) stock or securities and (ii) certain options, futures, or forward
contracts (the "short-short test"). Third, a Fund must diversify its holdings so
that, at the close of each quarter of its taxable year, (i) at least 50% of the
value of its total assets is comprised of cash, cash items, United States
Government securities, securities of other regulated investment companies and
other securities limited in respect of any one issuer to an amount not greater
in value than 5% of the value of a Fund's total assets and to not more than 10%
of the outstanding voting securities of such issuer, and (ii) not more than 25%
of the value of the total assets is invested in the securities of any one issuer
(other than United States Government securities and securities of other
regulated investment companies) or two or more issuers controlled by a Fund and
engaged in the same, similar or related trades or businesses.
As a regulated investment company, a Fund will not be subject to federal
income tax in any taxable year for which it distributes at least 90% of the sum
of (i) its "investment company taxable income" (which includes dividends,
taxable interest, taxable original issue discount and market discount income,
income from securities lending, net short-term capital gain in excess of
long-term capital loss, and any other taxable income other than "net capital
gain" (as defined below) and is reduced by deductible expenses) and (ii) its net
tax-exempt interest (the excess of its gross tax-exempt interest income over
certain disallowed deductions). A Fund may retain for investment its net capital
gain (which consists of the excess of its net long-term capital gain over its
short-term capital loss). However, if a Fund retains any net capital gain or any
investment company taxable income, it will be subject to tax at regular
corporate rates on the amount retained. If a Fund retains any capital gain, such
Fund 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
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long-term capital gain, their shares of such undistributed amount, and (ii) will
be entitled to credit their proportionate shares of the tax paid by such Fund
against their federal income tax liabilities if any, and to claim refunds to the
extent the credit exceeds such liabilities. For federal income tax purposes, the
tax basis of shares owned by a shareholder of the Fund will be increased by an
amount equal under current law to 65% of the amount of undistributed capital
gains included in the shareholder's gross income. Each 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, i.e., the excess of
net long-term capital gain over net short-term capital loss for any taxable
year, to elect (unless it has made a taxable year election for excise tax
purposes as discussed below) to treat all or part of any net capital loss, any
net long-term capital loss or any net foreign currency loss incurred after
October 31 as if they had been incurred in the succeeding year.
Each Fund also intends to satisfy conditions (including requirements as to
the proportion of its assets invested in Municipal Obligations) that will enable
it to designate distributions from the interest income generated by investments
in Municipal Obligations, which is exempt from regular federal income tax when
received by such Fund, as exempt-interest dividends. Shareholders receiving
exempt-interest dividends will not be subject to regular federal income tax on
the amount of such dividends. Insurance proceeds received by a Fund under any
insurance policies in respect of scheduled interest payments on defaulted
Municipal Obligations will be excludable from federal gross income under Section
103(a) of the Code. In the case of non-appropriation by a political subdivision,
however, there can be no assurance that payments made by the insurer
representing interest on "non-appropriation" lease obligations will be
excludable from gross income for federal income tax purposes. See "Fundamental
Policies and Investment Portfolio; Portfolio Securities."
Distributions by each Fund of net interest received from certain taxable
temporary investments (such as certificates of deposit, commercial paper and
obligations of the U.S. Government, its agencies and instrumentalities) and net
short-term capital gains realized by a Fund, if any, will be taxable to
shareholders as ordinary income whether received in cash or additional
shares.(1) If a Fund purchases a Municipal Obligation at a market discount, any
gain realized by the Fund upon sale or redemption of the Municipal Obligation
will be treated as taxable interest income to the extent such gain does not
exceed the market discount, and any gain realized in excess of the market
discount will be treated as capital gains. Any net long-term capital gains
realized by a Fund and distributed to shareholders in cash or additional shares,
will be taxable to shareholders as long-term capital gains regardless of the
length of time investors have owned shares of a Fund. Distributions by a Fund
that do not constitute ordinary income dividends, exempt-interest dividends, or
capital gain dividends will be treated as a return of capital to the extent of
(and in reduction of) the shareholder's tax basis in his or her shares. Any
excess will be treated as gain from the sale of his or her shares, as discussed
below.
If any of the Funds engages in hedging transactions involving financial
futures and options, these transactions will be subject to special tax rules,
the effect of which may be to accelerate income to a Fund, defer a Fund's
losses, cause adjustments in the holding periods of a Fund's securities, convert
long-term capital gains into short-term capital gains and convert short-term
capital losses into long-term capital losses. These rules could therefore affect
the amount, timing and character of distributions to shareholders.
Because the taxable portion of each Fund's investment income consists
primarily of interest, none of its dividends, whether or not treated as
exempt-interest dividends, is expected to qualify under the Internal Revenue
Code for the dividends received deductions for corporations.
Prior to purchasing shares in one of the Funds, the impact of dividends or
distributions which are expected to be or have been declared, but not paid,
should be carefully considered. 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.
- ---------------
(1) If a Fund has both tax-exempt and taxable income, it will use the "average
annual" method for determining the designated percentage that is taxable
income and designate the use of such method within 60 days after the end of
the Fund's taxable year. Under this method, one designated percentage is
applied uniformly to all distributions made during the Fund's taxable year.
The percentage of income designated as tax-exempt for any particular
distribution may be substantially different from the percentage of the
Fund's income that was tax-exempt during the period covered by the
distribution.
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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 each Fund (and received
by the shareholders) on December 31.
The redemption or exchange of the shares of a Fund normally will result in
capital gain or loss to the shareholders. Generally, a shareholder's gain or
loss will be long-term gain or loss if the shares have been held for more than
one year. Present law taxes both long- and short-term capital gains of
corporations at the rates applicable to ordinary income. For non-corporate
taxpayers, however, net capital gains (i.e., the excess of net long-term capital
gain over net short-term capital loss) will be taxed at a maximum marginal rate
of 28%, while short-term capital gains and other ordinary income will be taxed
at a maximum marginal rate of 39.6%. 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 load paid in purchasing shares of a Fund 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 a Fund or another fund are subsequently acquired without payment of a
sales load pursuant to the reinvestment or exchange privilege. Any disregarded
portion of such load will result in an increase in the shareholder's tax basis
in the shares subsequently acquired. Moreover, losses recognized by a
shareholder on the redemption or exchange of shares of a Fund held for six
months or less are disallowed to the extent of any distribution of
exempt-interest dividends received with respect to such shares and, if not
disallowed, such losses are treated as long-term capital losses to the extent of
any distributions of long-term capital gains made with respect to such shares.
In addition, no loss will be allowed on the redemption or exchange of shares of
a Fund if the shareholder purchases other shares of such Fund (whether through
reinvestment of distributions or otherwise) or the shareholder acquires or
enters into a contract or option to acquire securities that are substantially
identical to shares of a Fund within a period of 61 days beginning 30 days
before and ending 30 days after such redemption or exchange. If disallowed, the
loss will be reflected in an adjustment to the basis of the shares acquired.
It may not be advantageous from a tax perspective for shareholders to
redeem or exchange shares after tax-exempt income has accrued but before the
record date for the exempt-interest dividend representing the distribution of
such income. Because such accrued tax-exempt income is included in the net asset
value per share (which equals the redemption or exchange value), such a
redemption could result in treatment of the portion of the sales or redemption
proceeds equal to the accrued tax-exempt interest as taxable gain (to the extent
the redemption or exchange price exceeds the shareholder's tax basis in the
shares disposed of) rather than tax-exempt interest.
In order to avoid a 4% federal excise tax, each Fund must distribute or be
deemed to have distributed by December 31 of each calendar year at least 98% of
its taxable ordinary income for such year, at least 98% of the excess of its
realized capital gains over its realized capital losses (generally computed on
the basis of the one-year period ending on October 31 of such year) and 100% of
any taxable ordinary income and the excess of realized capital gains over
realized capital losses for the prior year that was not distributed during such
year and on which such 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 Funds intend to make timely distributions in
compliance with these requirements and consequently it is anticipated that they
generally will not be required to pay the excise tax.
If in any year a Fund should fail to qualify under Subchapter M for tax
treatment as a regulated investment company, the Fund would incur a regular
corporate federal income tax upon its income for that year (other than interest
income from Municipal Obligations), and distributions to its shareholders would
be taxable to shareholders as ordinary dividend income for federal income tax
purposes to the extent of the Fund's available earnings and profits.
Among the requirements that a Fund must meet in order to qualify under
Subchapter M in any year is that less than 30% of its gross income must be
derived from the sale or other disposition of securities and certain other
assets held for less than three months.
Because the Funds may invest in private activity bonds, the interest on
which is not federally tax-exempt to persons who are "substantial users" of the
facilities financed by such bonds or "related persons" of such "substantial
users," the Funds may not be an appropriate investment for shareholders who are
considered either a "substantial user" or a "related person" within the meaning
of the Code. For additional information, investors should consult their tax
advisers before investing in one of the Funds.
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Federal tax law imposes an alternative minimum tax with respect to both
corporations and individuals. Interest on certain Municipal Obligations, such as
bonds issued to make loans for housing purposes or to private entities (but not
for certain tax-exempt organizations such as universities and non-profit
hospitals), is included as an item of tax preference in determining the amount
of a taxpayer's alternative minimum taxable income. To the extent that a Fund
receives income from Municipal Obligations subject to the alternative minimum
tax, a portion of the dividends paid by it, although otherwise exempt from
federal income tax, will be taxable to shareholders to the extent that their tax
liability is determined under the alternative minimum tax regime. The Funds will
annually supply shareholders with a report indicating the percentage of Fund
income attributable to Municipal Obligations subject to the federal alternative
minimum tax.
In addition, the alternative minimum taxable income for corporations is
increased by 75% of the difference between an alternative measure of income
("adjusted current earnings") and the amount otherwise determined to be the
alternative minimum taxable income. Interest on all Municipal Obligations, and
therefore all distributions by the Funds that would otherwise be tax-exempt, is
included in calculating a corporation's adjusted current earnings.
Tax-exempt income, including exempt-interest dividends paid by the Fund,
will be added to the taxable income of individuals receiving social security or
railroad retirement benefits in determining whether a portion of that benefit
will be subject to federal income tax.
The Code provides that interest on indebtedness incurred or continued to
purchase or carry shares of any Fund is not deductible. Under rules used by the
IRS for determining when borrowed funds are considered used for the purpose of
purchasing or carrying particular assets, the purchase of shares of a Fund may
be considered to have been made with borrowed funds even though such funds are
not directly traceable to the purchase of shares.
The Funds are 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 Funds their correct taxpayer identification number (in
the case of individuals, their social security number) and certain
certifications, or who are otherwise subject to backup withholding.
The foregoing is a general and abbreviated summary of the provisions of the
Code and Treasury Regulations presently in effect as they directly govern the
taxation of the Funds and their 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. Shareholders are advised to consult their own tax advisers for
more detailed information concerning the federal taxation of the Funds and the
income tax consequences to their shareholders.
STATE TAX MATTERS
The following state tax information applicable to each Fund and its
shareholders is based upon the advice of each Fund's special state tax counsel,
and represents a summary of certain provisions of each state's tax laws
presently in effect. These provisions are subject to change by legislative or
administrative action, which may be applied retroactively to Fund transactions.
You should consult your own tax adviser for more detailed information concerning
state taxes to which you may be subject.
NUVEEN ARIZONA TAX-FREE VALUE FUND
The following is based upon the advice of Chapman and Cutler, special state
tax counsel to the Arizona Fund.
Assuming that the Arizona Fund qualifies as a "regulated investment
company" for federal income tax purposes under Subchapter M of the Code and that
amounts so designated by the Arizona Fund to its shareholders qualify as
"exempt-interest dividends" under Section 852(b)(5) of the Code, such
exempt-interest dividends attributable to Arizona Municipal Obligations will be
exempt from Arizona income tax when received by a shareholder of the Arizona
Fund to the same extent as interest on the Arizona Municipal Obligations would
be exempt from Arizona income tax if received directly by such shareholder.
Other dividends by the Arizona Fund, including capital gain distributions, if
any, or additional amounts includable in the gross income of the shareholders
for federal income tax purposes (including gains realized upon the redemption or
exchange of shares of the Fund) will be subject to Arizona income tax.
Assuming that the Arizona Fund will be classified as a "diversified
management company" under Section 5(b)(1) of the Investment Company Act of 1940
and registered as such thereunder, the Arizona Fund will be exempt from Arizona
income tax.
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Interest on indebtedness incurred or continued by a shareholder in
connection with the purchase or carrying of shares in the Arizona Fund will not
be deductible for Arizona income tax purposes. Neither the Arizona Municipal
Obligations purchased by the Arizona Fund nor the shares in the Arizona Fund
owned by a shareholder will be subject to Arizona property taxes, sales or use
taxes.
Chapman and Cutler has expressed no opinion with respect to taxation under
any other provision of Arizona law. Ownership of the Units may result in
collateral Arizona tax consequences to certain taxpayers. Prospective investors
should consult their tax advisors as to the applicability of any such collateral
consequences.
NUVEEN FLORIDA TAX-FREE VALUE FUND
The following is based upon the advice of Baker & McKenzie, special state
tax counsel to the Florida Fund.
Florida does not impose an income tax on individuals. All corporate
shareholders will be subject to Florida income taxation on (a) their apportioned
share of the income characterized as business income of such shareholders under
the Florida Income Tax Code ("Florida Code") realized by the Florida Fund and
distributed to them notwithstanding the tax exempt character of the interest
received from Florida Municipal Obligations under Section 103(a) of the Code or
any other federal law and (b) on gains realized from a redemption or exchange of
the Florida Fund shares to the extent characterized as business income. Only a
corporate shareholder that has its commercial domicile in Florida will be
taxable under the Florida Code on its respective share of the Florida Fund's
capital gains and interest income that constitute nonbusiness income of such
shareholder and that is distributed to it, and on gains realized from a
redemption or exchange of the Florida Fund shares that constitute nonbusiness
income. Certain trusts, excluding private and testamentary trusts, may be
subject to the Florida corporate income tax.
Neither the Florida Fund nor its shareholders will be subject to the
Florida intangible personal property tax on Florida Municipal Obligations or the
Shares of the Florida Fund, respectively, with respect to any calendar year so
long as at the close of the preceding calendar year and on January 1 of the then
current year, the Florida Fund's portfolio of assets consisted solely of Florida
Municipal Obligations or other assets exempt from the Florida intangible
personal property tax. If the Florida Fund holds any other types of assets on
that date, then the entire value of the Fund's shares (except for the portion of
the value of the shares attributable to U.S. Government Obligations) will be
subject to the intangible personal property tax.
Shares of the Florida Fund will be subject to Florida estate tax only if
owned by Florida residents, certain natural persons not residents of Florida, or
certain natural persons not residents of the United States. The Florida estate
tax is limited, however, to the amount of the credit allowable under the
applicable Federal Revenue Act (currently Section 2011 and in some cases Section
2102 of the Code) for state death taxes actually paid to the several states.
For Florida state income tax purposes, the Florida Fund should not be
liable for Florida corporate income tax imposed by the Florida Code so long as
the Florida Fund does not have taxable nexus with Florida. Assuming that the
Fund will not have an office or other place of business in Florida, nor any
employees or salespersons in Florida, nor any tangible property in Florida, nor
any private loans secured by a mortgage, deed of trust or other lien on real or
tangible personal property there should be no taxable nexus with Florida for
corporate income tax purposes. If there is taxable nexus with Florida, the
Florida Fund's "taxable income" will be its investment company taxable income,
increased by the excess of net long-term capital gains for the year over the
amount of capital gain dividends attributable to the year.
Shares of the Florida Fund will not be subject to the Florida ad valorem
property tax or Florida sales and use tax, assuming the Florida Fund owns no
Florida tangible property. The transfer of the Fund Shares will not be subject
to the Florida Documentary Stamp Tax.
NUVEEN MARYLAND TAX-FREE VALUE FUND
The following is based upon the advice of Venable, Baetjer and Howard, LLP,
special state tax counsel to the Maryland Fund.
As long as dividends paid by the Maryland Fund qualify as interest
excludable under Section 103 of the Code and the Maryland Fund qualifies as a
"regulated investment company" under the Code, the portion of exempt-interest
dividends that represents interest received by the Maryland Fund on obligations
(a) of Maryland or its political subdivisions and authorities, or (b) of the
United States or an authority, commission, instrumentality, possession or
territory of the United States, will be exempt from Maryland state and local
income taxes when allocated or distributed to a shareholder of the Maryland
Fund.
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Income earned on certain private activity bonds (which might be held by the
Maryland Fund) will constitute a Maryland tax preference for individual
shareholders.
Interest received by the Maryland Fund on obligations issued by states
other than Maryland, as well as any income earned on repurchase contracts, will
be subject to Maryland state and local income taxes.
Gain realized by the Maryland Fund from the sale or exchange of a bond
issued by Maryland or a political subdivision of Maryland, will not be subject
to Maryland state and local income taxes.
Maryland has no general exemption provisions for capital gain which would
be available to a shareholder of the Maryland Fund. Thus, capital gain dividends
paid by the Maryland Fund to a shareholder (except for gain on bonds issued by
Maryland or its political subdivisions), or gains realized by a shareholder from
a redemption or exchange of these shares, will be subject to Maryland state and
local income taxes.
Interest on indebtedness incurred or continued (directly or indirectly) by
a shareholder of the Maryland Fund to purchase or carry shares of the Maryland
Fund will not be deductible for Maryland state and local income tax purposes to
the extent such interest is allocable to exempt-interest dividends.
Any interest in the Fund owned by a Maryland resident upon death will be
subject to Maryland estate tax and Maryland inheritance tax, subject to any
available exemptions or credits allowed by law.
NUVEEN MICHIGAN TAX-FREE VALUE FUND
The following is based upon the advice of Dickinson, Wright, Moon, Van
Dusen & Freeman, special state tax counsel to the Michigan Fund. In rendering
such advice, counsel has assumed that the Fund will qualify under Subchapter M
of the Code as a regulated investment company and will satisfy the conditions
which will cause Fund distributions to qualify as exempt-interest dividends to
shareholders when distributed as intended.
The Michigan Fund is not subject to tax under the Michigan income tax act,
the Michigan single business tax act, the Michigan intangibles tax act, the
Michigan city income tax act (which authorizes the only income tax ordinance
that may be adopted by cities in Michigan), and under the law which authorizes a
"first class" school district to levy an excise tax upon income.
To the extent that an individual (and certain other Michigan Fund
shareholders) receives distributions with respect to Michigan Fund shares that
are derived from interest on Michigan Municipal Obligations, such distributions
will be exempt from Michigan state and local income taxes and excluded from the
taxable income base of the Michigan intangibles tax. Corporations and financial
institutions are not subject to Michigan income tax and business corporations
subject to the Michigan single business tax are not subject to the Michigan
intangibles tax.
For Michigan income tax purposes, the proportionate share of distributions
from the Michigan Fund's net investment income derived from other than Michigan
Municipal Obligations and from any short-term or long-term capital gains
(whether received in cash or additional shares), together with any gain or loss
realized when the shareholder redeems or exchanges shares of the Fund, will be
included in Michigan taxable income.
For Michigan intangibles tax purposes, the proportionate share of
distributions from the Michigan Fund's net investment income derived from other
than Michigan Municipal Obligations and from any short-term or long-term capital
gains, will be included in the taxable income base of the Michigan intangibles
tax, except that distributions from net investment income or capital gains
reinvested in Michigan Fund shares are exempt from such tax.
If the shareholder is subject to the Michigan single business tax (i.e., is
engaged in a "business activity" and receives distributions derived from
interest on Michigan Municipal Obligations) or the shareholder sells or
exchanges shares of the Michigan Fund, such event may affect the adjusted tax
base upon which the single business tax is computed. The taxation of business
activities subject to the Michigan single business tax is complex and
shareholders who receive distributions with respect to shares of the Michigan
Fund held in connection with such individual, corporate or partnership business
activities should consult with their tax advisors.
To the extent a shareholder receives distributions from the Michigan Fund
which are derived from interest on obligations of the United States or its
agencies, possessions, or instrumentalities that are exempt from state taxation
under federal law, such distributions will also be exempt from the Michigan
income tax, the Michigan intangibles tax, the Michigan single business tax, and
the Michigan city income tax act.
Shares of the Michigan Fund will be subject to the Michigan estate tax if
owned by a Michigan decedent at the date of death.
B-39
<PAGE> 190
The foregoing is a general, abbreviated summary of certain of the
provisions of the applicable Michigan tax law as presently in effect as it
directly governs the taxation of shareholders of the Michigan Fund. These
provisions are subject to change by legislative or administrative action, and
any such change may be retroactive with respect to Michigan Fund transactions.
Shareholders are advised to consult with their own tax advisers for more
detailed information concerning Michigan tax matters.
NUVEEN NEW JERSEY TAX-FREE VALUE FUND
The following is based upon the advice of Pitney, Hardin, Kipp & Szuch,
special state tax counsel to the New Jersey Fund.
The New Jersey Fund will qualify as a "qualified investment fund" if, for
any calendar year in which a distribution is paid: (1) the New Jersey Fund has
no investments, other than interest-bearing obligations, obligations issued at a
discount, and cash and cash items, including receivables, and financial options,
futures, forward contracts, or other similar financial instruments related to
interest-bearing obligations, obligations issued at a discount or bond indexes
related thereto; (2) at the close of each calendar quarter the New Jersey Fund
has not less than 80% of the aggregate principal amount of all of its
investments (excluding financial options, futures, forward contracts, or other
similar financial instruments related to interest-bearing obligations,
obligations issued at a discount or bond indexes related thereto to the extent
such instruments are authorized by Section 851(b) of the Code, cash and cash
items, which cash items shall include receivables) in New Jersey Municipal
Obligations, United States obligations, or any other obligations the interest or
gains on which is exempt from New Jersey Gross Income Tax pursuant to New Jersey
law or federal law; and (3) the New Jersey Fund satisfies the certification and
reporting requirements imposed by regulations promulgated by the New Jersey
Division of Taxation. The New Jersey Fund intends to so qualify.
Individual shareholders of the New Jersey Fund, including trusts and
estates, who are subject to the New Jersey Gross Income Tax, will not be
required to include in their New Jersey gross income distributions from the New
Jersey Fund which the New Jersey Fund clearly identifies as directly
attributable to interest or gains from New Jersey Municipal Obligations,
obligations of the United States or any other obligations the interest or gains
on which is exempt from New Jersey Gross Income Tax under New Jersey law or
federal law, provided that the New Jersey Fund qualifies as a "qualified
investment fund."
Distributions to individual shareholders, including trusts and estates, who
are subject to the New Jersey Gross Income Tax, attributable to interest or
gains on municipal obligations issued by states other than New Jersey, including
municipalities or authorities in such other states, or any other obligations the
interest on which is not exempt from New Jersey Gross Income Tax pursuant to New
Jersey law or federal law, will be included in the New Jersey Gross Income Tax
as New Jersey gross income.
Individual shareholders of the New Jersey Fund, including trusts and
estates, who are subject to the New Jersey Gross Income Tax, will not be
required to include in gross income net gains attributable to the redemption or
exchange of New Jersey Fund shares provided that the New Jersey Fund qualifies
as a "qualified investment fund." Any loss realized on such redemption or
exchange may not be utilized to offset gains realized by such shareholder on the
sale of assets the gain on which is subject to the New Jersey Gross Income Tax.
Shares of the New Jersey Fund may be taxable upon the death of a
shareholder who dies domiciled in New Jersey under the New Jersey Inheritance
Tax Law or the New Jersey Estate Tax Law.
If a shareholder is a corporation (including an S corporation) subject to
the New Jersey Corporation Business Tax or the New Jersey Corporation Income
Tax, distributions of interest or gains, or both, from the New Jersey Fund will
be includable in its entire net income for purposes of the New Jersey
Corporation Business Tax or New Jersey Corporation Income Tax, less any interest
expense incurred to carry such investment to the extent such interest expense
has not been deducted in computing federal taxable income. Net gains derived by
such corporation on the redemption or exchange of New Jersey Fund shares will be
included in its entire net income for purposes of the New Jersey Corporation
Business Tax or New Jersey Corporation Income Tax.
NUVEEN PENNSYLVANIA TAX-FREE VALUE FUND
The following is based upon the advice of Dechert Price & Rhoads, special
state tax counsel to the Pennsylvania Fund.
Shares of the Pennsylvania Fund are not subject to any of the personal
property taxes presently in effect in Pennsylvania to the extent of that
proportion of the Pennsylvania Fund represented by Pennsylvania Municipal
B-40
<PAGE> 191
Obligations. The taxes referred to above include the County Personal Property
Tax, the additional personal property taxes imposed on Pittsburgh residents by
the School District of Pittsburgh and by the City of Pittsburgh. Shares of the
Pennsylvania Fund may be taxable under the Pennsylvania inheritance and estate
taxes.
The proportion of interest income representing interest income from
Pennsylvania Municipal Obligations received by the Fund and distributed to
shareholders of the Pennsylvania Fund is not taxable under the Pennsylvania
Personal Income Tax or under the Corporate Net Income Tax, nor will such
interest be taxable under the Philadelphia School District Investment Income Tax
imposed on Philadelphia resident individuals.
The disposition by the Pennsylvania Fund of a Pennsylvania Municipal
Obligation (whether by sale, exchange, redemption or payment at maturity), as
well as the distribution of the proceeds of such disposition, will not
constitute a taxable event to a shareholder under the Pennsylvania Personal
Income Tax if the Pennsylvania Municipal Obligation was issued prior to February
1, 1994. Further, although there is no published authority on the subject,
special Pennsylvania counsel is of the opinion that (i) a shareholder of the
Pennsylvania Fund will not have a taxable event under the Pennsylvania state and
local income taxes referred to in the preceding paragraph (other than the
Corporate Net Income Tax) upon the redemption or exchange of his or her shares
to the extent that the Pennsylvania Fund is then composed of Pennsylvania
Municipal Obligations issued prior to February 1, 1994 and (ii) the dispositions
by the Pennsylvania Fund of a Pennsylvania Municipal Obligations (whether by
sale, exchange, redemption or payment at maturity), as well as the distribution
of the proceeds of such disposition, will not constitute a taxable event to a
shareholder under the Philadelphia School District Investment Income Tax if the
Pennsylvania Municipal Obligation was issued prior to February 1, 1994. (The
School District tax has no application to gain on the disposition of property
held by the taxpayer for more than six months.)
The Pennsylvania Fund is not subject to the Pennsylvania Corporate Net
Income Tax or Capital Stock-Franchise Tax.
If a shareholder is a corporation subject to the Pennsylvania Capital
Stock-Franchise Tax, the value of the Pennsylvania Fund shares owned by such
shareholder and income derived from their ownership may be taken into account in
determining the "capital stock value" of such shareholder.
NUVEEN VIRGINIA TAX-FREE VALUE FUND
The following is based upon the advice of Christian & Barton, L.L.P.,
special state tax counsel to the Virginia Fund. It assumes that the Virginia
Fund qualifies for treatment as a regulated investment company under Subchapter
M of the Code, that it will satisfy conditions that will enable it to avoid
liability for federal income taxation on its investment income, that it will
designate distributions from the income generated by the Virginia Municipal
Obligations as exempt-interest dividends and that amounts so designated qualify
as exempt-interest dividends under the Code.
Under existing Virginia law, as long as the Virginia Fund qualifies as a
regulated investment company under the Code, it will be exempt from Virginia
income taxation and dividends received from the Virginia Fund that are allocable
to interest received by the Virginia Fund on Virginia Municipal Obligations will
be exempt from Virginia income taxes.
In this regard, notwithstanding the fact that income on certain of the
obligations in the Virginia Fund may be subject to Federal income taxes,
interest on certain federal obligations is exempt from Virginia income taxation.
Distributions to shareholders that are attributable to interest on federal
obligations that are exempt from Virginia income taxation would be exempt from
Virginia income taxes. Further, to the extent distributions to shareholders are
attributable to interest on Municipal Obligations other than Virginia Municipal
Obligations, such distributions will be included in the shareholder's Virginia
taxable income.
As a general rule, to the extent that gain (whether as a result of the sale
of Virginia Municipal Obligations by the Virginia Fund or as a result of the
redemption or exchange of a share by the shareholder) is subject to federal
income tax, such gain will be included in the shareholder's Virginia taxable
income. Under the language of certain enabling legislation, however, such as the
Virginia Industrial Development and Revenue Bond Act, the Virginia Resources
Authority Act and the Virginia Housing Development Authority Act, gain made on
the sale of obligations issued thereunder is expressly exempt from Virginia
income taxation. Distributions to shareholders that are attributable to such
gain would be exempt from Virginia income taxes.
Although certain counties and cities in the Commonwealth are authorized to
levy a local income tax upon Virginia taxable income, to date, none has
undertaken to do so.
B-41
<PAGE> 192
The Commonwealth does not impose a gift tax. The Commonwealth imposes an
estate tax on the transfer of a resident's federal taxable estate and a
non-resident's federal taxable estate located in the Commonwealth.
PERFORMANCE INFORMATION
As explained in the Prospectus, the historical investment performance of
the Funds may be shown in the form of "yield," "taxable equivalent yield,"
"average annual total return," "cumulative total return" and "taxable equivalent
total return" figures, each of which will be calculated separately for each
class of shares.
In accordance with a standardized method prescribed by rules of the
Securities and Exchange Commission ("SEC"), yield is computed by dividing the
net investment income per share earned during the specified one month or 30-day
period by the maximum offering price per share on the last day of the period,
according to the following formula:
a-b 6
Yield = 2 [( ---- +1) - 1]
cd
In the above formula, a = dividends and interest earned during the period;
b = expenses accrued for the period (net of reimbursements); c = the average
daily number of shares outstanding during the period that were entitled to
receive dividends; and d = the maximum offering price per share on the last day
of the period. In the case of Class A shares, the maximum offering price
includes the current maximum sales charge of 4.50%.
In computing yield, the Funds follow certain standardized accounting
practices specified by SEC rules. These practices are not necessarily consistent
with those that the Funds use to prepare their annual and interim financial
statements in conformity with generally accepted accounting principles. Thus,
yield may not equal the income paid to shareholders or the income reported in a
Fund's financial statements. Yields for each class of shares of each Fund as of
January 31, 1996 are set forth below.
B-42
<PAGE> 193
Taxable equivalent yield is computed by dividing that portion of the yield
which is tax-exempt by the remainder of (1 minus the stated combined federal and
state income tax rate, taking into account the deductibility of state taxes for
federal income tax purposes) and adding the product to that portion, if any, of
the yield that is not tax exempt. The taxable equivalent yields quoted below are
based upon (1) the stated combined federal and state income tax rates and (2)
the yields for the 30-day period ended January 31, 1996 quoted in the left-hand
column.
<TABLE>
<CAPTION>
COMBINED
FEDERAL TAXABLE
AND STATE EQUIVALENT
AS OF JANUARY 31, 1996 YIELD TAX RATE* YIELD
- ---------------------------------------------------------------------------------------- ----- --------- ----------
<S> <C> <C> <C>
Arizona Fund
Class A Shares........................................................................ 4.09 % 43.0% 7.18%
Class C Shares........................................................................ 3.54 % 43.0% 6.21%
Class R Shares........................................................................ 4.54 % 43.0% 7.96%
Florida Fund
Class A Shares........................................................................ 4.11 % 39.6% 6.80%
Class C Shares........................................................................ 3.56 % 39.6% 5.89%
Class R Shares........................................................................ 4.55 % 39.6% 7.53%
Maryland Fund**
Class A Shares........................................................................ 4.00 % 44.5% 7.21%
Class C Shares........................................................................ 3.44 % 44.5% 6.20%
Class R Shares........................................................................ 4.44 % 44.5% 8.00%
Michigan Fund
Class A Shares........................................................................ 4.22 % 43.5% 7.47%
Class C Shares........................................................................ 3.66 % 43.5% 6.48%
Class R Shares........................................................................ 4.67 % 43.5% 8.27%
New Jersey Fund
Class A Shares........................................................................ 4.49 % 43.5% 7.95%
Class C Shares........................................................................ 3.95 % 43.5% 6.99%
Class R Shares........................................................................ 4.96 % 43.5% 8.78%
Pennsylvania Fund
Class A Shares........................................................................ 4.11 % 41.5% 7.03%
Class C Shares........................................................................ 3.56 % 41.5% 6.09%
Class R Shares........................................................................ 4.56 % 41.5% 7.79%
Virginia Fund
Class A Shares........................................................................ 4.31 % 43.0% 7.56%
Class C Shares........................................................................ 3.76 % 43.0% 6.60%
Class R Shares........................................................................ 4.76 % 43.0% 8.35%
</TABLE>
- ---------------
* The combined tax rates used in the table represent the highest or one of the
highest combined tax rates applicable to state taxpayers, rounded to the
nearest .5%; these rates do not reflect the current federal tax limitations
on itemized deductions and personal exemptions, which may raise the effective
tax rate and taxable equivalent yield for taxpayers above certain income
levels.
** Reflects a combined federal, state and local tax rate.
For additional information concerning taxable equivalent yields, see the
Taxable Equivalent Yield Tables in the Prospectus.
Each Fund may from time to time in its advertising and sales materials
report a quotation of the current distribution rate. The distribution rate
represents a measure of dividends distributed for a specified period.
Distribution rate is computed by taking the most recent monthly tax-free income
dividend per share, multiplying it by 12 to annualize it, and dividing by the
appropriate price per share (e.g., net asset value for purchases to be made
without a load such as reinvestments from Nuveen UITs, or the maximum public
offering price). The distribution rate differs from yield and total return and
therefore is not intended to be a complete measure of performance. Distribution
rate may sometimes be higher than yield because it may not include the effect of
amortization of bond
B-43
<PAGE> 194
premiums to the extent such premiums arise after the bonds were purchased. The
distribution rates as of January 31, 1996, based on the maximum public offering
price then in effect for the Funds were as follows:
<TABLE>
<CAPTION>
DISTRIBUTION RATES
------------------------------
CLASS A* CLASS C CLASS R
-------- ------- -------
<S> <C> <C> <C>
Arizona Fund............................................................................... 4.48% 3.94% 4.89%
Florida Fund............................................................................... 4.45% 3.94% 4.88%
Maryland Fund.............................................................................. 4.45% 3.92% 4.89%
Michigan Fund.............................................................................. 4.53% 3.97% 4.97%
New Jersey Fund............................................................................ 4.85% 4.34% 5.30%
Pennsylvania Fund.......................................................................... 4.43% 3.89% 4.88%
Virginia Fund.............................................................................. 4.65% 4.14% 5.09%
</TABLE>
- ---------------
* Assumes imposition of the maximum sales charge for Class A shares of 4.50%.
Average annual total return quotation is computed in accordance with a
standardized method prescribed by SEC rules. The average annual total return for
a specific period is found by taking a hypothetical, $1,000 investment ("initial
investment") in Fund shares on the first day of the period, reducing the amount
to reflect the maximum sales charge, and computing the "redeemable value" of
that investment at the end of the period. The redeemable value is then divided
by the initial investment, and this quotient is taken to the Nth root (N
representing the number of years in the period) and 1 is subtracted from the
result, which is then expressed as a percentage. The calculation assumes that
all income and capital gains distributions have been reinvested in Fund shares
at net asset value on the reinvestment dates during the period. The annual total
return figures, including the effect of the current maximum sales charge for
Class A shares, for the one-year period ended January 31, 1996 and for the
period from inception (on December 13, 1991 with respect to the Class R Shares
and on or after September 6, 1994 with respect to the Class A Shares and Class C
Shares) through January 31, 1996, respectively, were as follows:
<TABLE>
<CAPTION>
ANNUAL TOTAL RETURN
------------------------------------
FOR THE YEAR FROM INCEPTION
ENDED THROUGH
JANUARY 31, 1996 JANUARY 31, 1996
---------------- ----------------
<S> <C> <C>
Arizona Fund
Class A Shares...................................................................... 8.56% 6.97%
Class C Shares...................................................................... 12.90% 10.07%
Class R Shares...................................................................... 14.09% 8.51%
Florida Fund
Class A Shares...................................................................... 8.79% 6.59%
Class C Shares...................................................................... 12.54% 10.43%
Class R Shares...................................................................... 14.05% 7.97%
Maryland Fund
Class A Shares...................................................................... 8.94% 6.10%
Class C Shares...................................................................... 13.24% 9.55%
Class R Shares...................................................................... 14.33% 7.74%
Michigan Fund
Class A Shares...................................................................... 9.52% 6.72%
Class C Shares...................................................................... 13.96% 10.92%
Class R Shares...................................................................... 14.93% 8.74%
New Jersey Fund
Class A Shares...................................................................... 7.56% 5.35%
Class C Shares...................................................................... 11.80% 9.46%
Class R Shares...................................................................... 12.88% 8.08%
Pennsylvania Fund
Class A Shares...................................................................... 9.08% 6.76%
Class C Shares...................................................................... 13.27% 8.88%
Class R Shares...................................................................... 14.40% 8.14%
Virginia Fund
Class A Shares...................................................................... 9.35% 6.58%
Class C Shares...................................................................... 13.58% 9.63%
Class R Shares...................................................................... 14.65% 8.29%
</TABLE>
Calculation of cumulative total return is not subject to a prescribed
formula. Cumulative total return for a specific period is calculated by first
taking a hypothetical initial investment in Fund shares on the first day of the
period, deducting (in some cases) the maximum sales charge, and computing the
"redeemable value" of that investment at the end of the period. The cumulative
total return percentage is then determined by subtracting the initial investment
from the redeemable value and dividing the remainder by the initial investment
and expressing the result as a percentage. The calculation assumes that all
income and capital gains distributions by the Fund have been reinvested at net
asset value on the reinvestment dates during the period. Cumulative total return
may also be shown as the increased dollar value of the hypothetical investment
over the period. Cumulative total return calculations that do not include the
effect of the sales charge would be reduced if such charge were included. The
B-44
<PAGE> 195
cumulative total returns, including the effect of the maximum sales charge for
Class A Shares, for the one-year period ended January 31, 1996, and for the
period from inception (on December 13, 1991 with respect to the Class R Shares
and on or after September 6, 1994 with respect to the Class A Shares and Class C
Shares) through January 31, 1996, respectively, were as follows:
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN
------------------------------------
FOR THE YEAR FROM INCEPTION
ENDED THROUGH
JANUARY 31, 1996 JANUARY 31, 1996
---------------- ----------------
<S> <C> <C>
Arizona Fund
Class A Shares...................................................................... 8.56% 9.91%
Class C Shares...................................................................... 12.90% 14.31%
Class R Shares...................................................................... 14.09% 37.78%
Florida Fund
Class A Shares...................................................................... 8.79% 9.36%
Class C Shares...................................................................... 12.54% 14.61%
Class R Shares...................................................................... 14.05% 35.08%
Maryland Fund
Class A Shares...................................................................... 8.94% 8.65%
Class C Shares...................................................................... 13.24% 13.38%
Class R Shares...................................................................... 14.33% 33.99%
Michigan Fund
Class A Shares...................................................................... 9.52% 9.54%
Class C Shares...................................................................... 13.96% 15.30%
Class R Shares...................................................................... 14.93% 38.90%
New Jersey Fund
Class A Shares...................................................................... 7.56% 7.58%
Class C Shares...................................................................... 11.80% 13.09%
Class R Shares...................................................................... 12.88% 35.66%
Pennsylvania Fund
Class A Shares...................................................................... 9.08% 9.61%
Class C Shares...................................................................... 13.27% 12.67%
Class R Shares...................................................................... 14.40% 35.95%
Virginia Fund
Class A Shares...................................................................... 9.35% 9.35%
Class C Shares...................................................................... 13.58% 13.69%
Class R Shares...................................................................... 14.65% 36.70%
</TABLE>
Calculation of taxable equivalent total return is also not subject to a
prescribed formula. Taxable equivalent total return for a specific period is
calculated by first taking a hypothetical initial investment in Fund shares on
the first day of the period, computing the total return for each calendar year
in the period in the manner described above, and increasing the total return for
each such calendar year by the amount of additional income that a taxable fund
would need to have generated to equal the income on an after-tax basis, at a
specified income tax rate (usually the highest marginal federal tax rate),
calculated as described above under the discussion of "taxable equivalent
yield." The resulting amount for the calendar year is then divided by the
initial investment amount to arrive at a "taxable equivalent total return
factor" for the calendar year. The taxable equivalent total return factors for
all the calendar years are then multiplied together and the result is then
annualized by taking its Nth root (N representing the number of years in the
period) and subtracting 1, which provides a taxable equivalent total return
expressed as a percentage. Using the 39.6% maximum marginal federal tax rate for
1996, the annual taxable equivalent total returns for each Fund's Shares for the
one-year period ended January 31, 1996, and for the period from inception
B-45
<PAGE> 196
(on December 13, 1991 with respect to the Class R Shares and on or after
September 6, 1994 with respect to the Class A Shares and Class C Shares) through
January 31, 1996, respectively, were as follows:
<TABLE>
<CAPTION>
FROM INCEPTION
THROUGH JANUARY
ONE YEAR ENDED 31,
JANUARY 31, 1996 1996 ASSUMED
---------------- ---------------- COMBINED
WITH WITH FEDERAL
MAXIMUM MAXIMUM AND
4.50% AT NET 4.50% AT NET STATE
SALES ASSET SALES ASSET TAX
CHARGE VALUE CHARGE VALUE RATE*
------- ------ ------- ------ --------
<S> <C> <C> <C> <C> <C>
Arizona Fund
Class A Shares........................................................ 12.44% 17.74% 10.95% 14.66% 43.0%
Class C Shares........................................................ N/A 16.33% N/A 13.78% 43.0%
Class R Shares........................................................ N/A 18.33% N/A 12.50% 43.0%
Florida Fund
Class A Shares........................................................ 12.07% 17.35% 9.91% 13.58% 39.6%
Class C Shares........................................................ N/A 15.44% N/A 13.37% 39.6%
Class R Shares........................................................ N/A 17.64% N/A 11.36% 39.6%
Maryland Fund**
Class A Shares........................................................ 12.99% 18.31% 10.22% 13.90% 44.5%
Class C Shares........................................................ N/A 16.83% N/A 13.17% 44.5%
Class R Shares........................................................ N/A 18.78% N/A 11.92% 44.5%
Michigan Fund
Class A Shares........................................................ 13.48% 18.82% 10.72% 14.42% 43.5%
Class C Shares........................................................ N/A 17.47% N/A 14.48% 43.5%
Class R Shares........................................................ N/A 19.27% N/A 12.84% 43.5%
New Jersey Fund
Class A Shares........................................................ 11.69% 16.96% 9.48% 13.14% 43.5%
Class C Shares........................................................ N/A 15.49% N/A 13.19% 43.5%
Class R Shares........................................................ N/A 17.40% N/A 12.19% 43.5%
Pennsylvania Fund
Class A Shares........................................................ 12.70% 18.01% 10.46% 14.15% 41.5%
Class C Shares........................................................ N/A 16.50% N/A 12.30% 41.5%
Class R Shares........................................................ N/A 18.38% N/A 11.93% 41.5%
Virginia Fund
Class A Shares........................................................ 13.19% 18.53% 10.51% 14.20% 43.0%
Class C Shares........................................................ N/A 16.99% N/A 13.28% 43.0%
Class R Shares........................................................ N/A 18.87% N/A 12.29% 43.0%
</TABLE>
- ---------------
*The combined tax rates used in the table do not reflect the current federal
tax limitations on itemized deductions and personal exemptions, which may
raise the effective tax rate and taxable equivalent yield for taxpayers above
certain income levels.
**Reflects a combined federal, state and local tax rate.
From time to time, a Fund may compare its risk-adjusted performance with
other investments that may provide different levels of risk and return. For
example, a Fund may compare its risk level, as measured by the variability of
its periodic returns, or its risk-adjusted total return, with those of other
funds or groups of funds. Risk-adjusted total return would be calculated by
adjusting each investment's total return to account for the risk level of the
investment.
A Fund may also compare its tax-adjusted total return with that of other
funds or groups of funds. This measure would take into account the tax-exempt
nature of exempt-interest dividends and the payment of income taxes on a fund's
distributions of net realized capital gains and ordinary income.
The risk level for a class of shares of a Fund, and any of the other
investments used for comparison, would be evaluated by measuring the variability
of the investment's return, as indicated by the annualized standard deviation of
the investment's monthly returns over a specified measurement period (e.g.,
three years). An investment with a higher annualized standard deviation of
monthly returns would indicate that a fund had greater price variability, and
therefore greater risk, than an investment with a lower annualized standard
deviation. The annualized standard
B-46
<PAGE> 197
deviation of monthly returns for the three years ended January 31, 1996, for the
Class R Shares of each of the Funds, was as follows:
<TABLE>
<CAPTION>
ANNUALIZED
STANDARD
DEVIATION
OF RETURN
----------
<S> <C>
Arizona Fund......................................................................... 6.70%
Florida Fund......................................................................... 7.58%
Maryland Fund........................................................................ 6.13%
Michigan Fund........................................................................ 6.57%
New Jersey Fund...................................................................... 5.68%
Pennsylvania Fund.................................................................... 7.27%
Virginia Fund........................................................................ 6.96%
</TABLE>
The risk-adjusted total return for a class of shares of a Fund and for
other investments over a specified period would be evaluated by dividing (a) the
remainder of the investment's annualized three-year total return minus the
annualized total return of an investment in short-term tax-exempt securities
(essentially a risk-free return) over that period, by (b) the annualized
standard deviation of the investment's monthly returns for the period. This
ratio is sometimes referred to as the "Sharpe measure" of return. An investment
with a higher Sharpe measure would be regarded as producing a higher return for
the amount of risk assumed during the measurement period than an investment with
a lower Sharpe measure. The Sharpe measure, for the three-year period ended
January 31, 1996, for the Class R Shares of each of the Funds was as follows:
<TABLE>
<CAPTION>
SHARPE
MEASURE
-------
<S> <C>
Arizona Fund........................................................................... 0.663
Florida Fund........................................................................... 0.558
Maryland Fund.......................................................................... 0.659
Michigan Fund.......................................................................... 0.697
New Jersey Fund........................................................................ 0.763
Pennsylvania Fund...................................................................... 0.582
Virginia Fund.......................................................................... 0.614
</TABLE>
Class A Shares of the Funds are sold at net asset value plus a current
maximum sales charge of 4.50% of the offering price. This current maximum sales
charge will typically be used for purposes of calculating performance figures.
Yield, returns and net asset value of each class of shares of the Funds will
fluctuate. Factors affecting the performance of the Funds include general market
conditions, operating expenses and investment management. Any additional fees
charged by a securities representative or other financial services firm would
reduce returns described in this section. Shares of the Funds are redeemable at
net asset value, which may be more or less than original cost.
In reports or other communications to shareholders or in advertising and
sales literature, the Funds may also compare their performance with that of: (1)
the Consumer Price Index or various unmanaged bond indexes such as the Lehman
Brothers Municipal Bond Index and the Salomon Brothers High Grade Corporate Bond
Index and (2) other fixed income or municipal bond mutual funds or mutual fund
indexes as reported by Lipper Analytical Services, Inc. ("Lipper"), Morningstar,
Inc. ("Morningstar"), Wiesenberger Investment Companies Service ("Wiesenberger")
and CDA Investment Technologies, Inc. ("CDA") or similar independent services
which monitor the performance of mutual funds, or other industry or financial
publications such as Barron's, Changing Times, Forbes and Money Magazine.
Performance comparisons by these indexes, services or publications may rank
mutual funds over different periods of time by means of aggregate, average,
year-by-year, or other types of total return and performance figures. Any given
performance quotation or performance comparison should not be considered as
representative of the performance of the Funds for any future period.
There are differences and similarities between the investments which the
Funds may purchase and the investments measured by the indexes and reporting
services which are described herein. The Consumer Price Index is generally
considered to be a measure of inflation. The CDA Mutual Fund-Municipal Bond
Index is a weighted performance average of other mutual funds with a federally
tax-exempt income objective. The Salomon Brothers High Grade Corporate Bond
Index is an unmanaged index that generally represents the performance of high
grade long-term taxable bonds during various market conditions. The Lehman
Brothers Municipal Bond Index is an unmanaged index that generally represents
the performance of high grade intermediate and long-term municipal bonds during
various market conditions. Lipper, Morningstar, Wiesenberger and CDA are widely
recognized mutual fund reporting services whose performance calculations are
based upon changes in net asset value with all dividends reinvested and which do
not include the effect of any sales charges. The market prices and yields of
taxable and tax-
B-47
<PAGE> 198
exempt bonds will fluctuate. The Funds primarily invest in investment grade
Municipal Obligations in pursuing their objective of as high a level of current
interest income which is exempt from federal and state income tax as is
consistent, in the view of the Funds' management, with preservation of capital.
The Funds may also compare their taxable equivalent total return
performance to the total return performance of taxable income funds such as
treasury securities funds, corporate bond funds (either investment grade or high
yield), or Ginnie Mae funds. These types of funds, because of the character of
their underlying securities, differ from municipal bond funds in several
respects. The susceptibility of the price of treasury bonds to credit risk is
far less than that of municipal bonds, but the price of treasury bonds tends to
be slightly more susceptible to change resulting from changes in market interest
rates. The susceptibility of the price of investment grade corporate bonds and
municipal bonds to market interest rate changes and general credit changes is
similar. High yield bonds are subject to a greater degree of price volatility
than municipal bonds resulting from changes in market interest rates and are
particularly susceptible to volatility from credit changes. Ginnie Mae bonds are
generally subject to less price volatility than municipal bonds from credit
concerns, due primarily to the fact that the timely payment of monthly
installments of principal and interest are backed by the full faith and credit
of the U.S. Government, but Ginnie Mae bonds of equivalent coupon and maturity
are generally more susceptible to price volatility resulting from market
interest rate changes. In addition, the volatility of Ginnie Mae bonds due to
changes in market interest rates may differ from municipal bonds of comparable
coupon and maturity because bonds of the sensitivity of Ginnie Mae prepayment
experience to change in interest rates.
ADDITIONAL INFORMATION ON THE PURCHASE AND
REDEMPTION OF FUND SHARES
As described in the Prospectus, each Fund has adopted a Flexible Pricing
Program which provides you with alternative ways of purchasing Fund shares based
upon your individual investment needs and preferences. You may purchase Class A
Shares at a price equal to their net asset value plus an up-front sales charge.
For information regarding the up-front sales charge on Class A shares, see the
table under "How to Buy Fund Shares" of the Prospectus. Set forth is an example
of the method of computing the offering price of the Class A shares of each of
the Funds. The example assumes a purchase on January 31, 1996 of Class A shares
from the Arizona Fund aggregating less than $50,000 subject to the schedule of
sales charges set forth in the Prospectus at a price based upon the net asset
value of the Class A shares.
<TABLE>
<S> <C>
Net Asset Value per share............................................................... $ 10.74
Per Share Sales Charge -- 4.50% of public offering price (4.71% of net asset value per
share)................................................................................ $ 0.506
Per Share Offering Price to the Public.................................................. $11.246
</TABLE>
You may purchase Class C Shares without any up-front sales charge at a
price equal to their net asset value, but subject to an annual distribution fee
designed to compensate Authorized Dealers over time for the sale of Fund shares.
Class C Shares are subject to a contingent deferred sales charge for redemption
within 12 months of purchase. Class C Shares automatically convert to Class A
Shares six years after purchase. Both Class A Shares and Class C Shares are
subject to annual service fees, which are used to compensate Authorized Dealers
for providing you with ongoing account services.
Under the Flexible Pricing Program, all Fund shares outstanding as of
September 6, 1994, have been designated as Class R Shares. Class R Shares are
available for purchase at a price equal to their net asset value only under
certain limited circumstances, or by specified investors, as described herein.
Each class of shares of a Fund represents an interest in the same portfolio
of investments. Each class of shares is identical in all respects except that
each class bears its own class expenses, including distribution and
administration expenses, and each class has exclusive voting rights with respect
to any distribution or service plan applicable to its shares. In addition, the
Class C Shares are subject to a conversion feature, as described below. As a
result of the differences in the expenses borne by each class of shares, net
income per share, dividends per share and net asset value per share will vary
among a Fund's classes of shares.
Shareholders of each class will shares expenses proportionately for
services that are received equally by all shareholders. A particular class of
shares will bear only those expenses that are directly attributable to that
class, where the type or amount of services received by a class varies from one
class to another. For example, class-specific expenses generally will include
distribution and service fees.
Each Fund has special purchase programs under which certain persons may
purchase Class A Shares at reduced sales charges. One such program is available
to members of a "qualified group."
B-48
<PAGE> 199
An individual who is a member of a "qualified group" may purchase Class A
Shares of a Fund (or any other Nuveen Fund with respect to which a sales charge
is imposed), at the reduced sales charge applicable to the group taken as a
whole. A "qualified group" is one which (i) has been in existence for more than
six months; (ii) has a purpose other than investment; (iii) has five or more
participating members; (iv) has agreed to include sales literature and other
materials related to the Fund in publications and mailings to members; (v) has
agreed to have its group administrator submit a single bulk order and make
payment with a single remittance for all investments in the Fund during each
investment period by all participants who choose to invest in the Fund; and (vi)
has agreed to provide the Fund's transfer agent with appropriate backup data for
each participant of the group in a format fully compatible with the transfer
agent's processing system.
The "amount" of a share purchase by a participant in a group purchase
program for purposes of determining the applicable sales charge is (i) the
aggregate value of all shares of the Fund (and all other Nuveen Funds with
respect to which a sales charge is imposed) currently held by participants of
the group, plus (ii) the amount of shares currently being purchased.
Special Sales Charge Waivers. Class A Shares of the Funds may be purchased
at net asset value without a sales charge, and Class R Shares may be purchased,
by the following categories of investors:
- officers, trustees and retired trustees of the Trust;
- bona fide, full-time and retired employees of Nuveen, any parent company
of Nuveen, and subsidiaries thereof, or their immediate family members
(as defined below);
- any person who, for at least 90 days, has been an officer, director or
bona fide employee of any Authorized Dealer, or their immediate family
members;
- officers and directors of bank holding companies that make Fund shares
available directly or through subsidiaries or bank affiliates;
- bank or broker-affiliated trust departments investing funds over which
they exercise exclusive discretionary investment authority and that are
held in a fiduciary, agency, advisory, custodial or similar capacity;
- investors purchasing through a mutual fund purchase program sponsored by
a broker-dealer that offers a selected group of mutual funds either
without a transaction fee or with an asset-based fee or a fixed fee that
does not vary with the amount of the purchase. In order to qualify, such
purchase program must offer a full range of mutual fund related services
and shareholder account servicing capabilities, including establishment
and maintenance of shareholder accounts, addressing investor inquiries
regarding account activity and investment performances, processing of
trading and dividend activity and generation of monthly account
statements and year-end tax reporting; and
- registered investment advisers, certified financial planners and
registered broker-dealers who in each case either charge periodic fees to
their customers for financial planning, investment advisory or asset
management services, or provide such services in connection with the
establishment of an investment account for which a comprehensive "wrap
fee" charge is imposed.
The Funds may encourage registered representatives and their firms to help
apportion their assets among bonds, stocks and cash, and may seek to participate
in programs that recommend a portion of their assets be invested in tax-free,
fixed income securities.
To help advisers and investors better understand and most efficiently use
the Funds to reach their investment goals, the Funds may advertise and create
specific investment programs and systems. For example, this may include
information on how to use the Funds to accumulate assets for future education
needs or periodic payments such as insurance premiums. The Funds may produce
software or additional sales literature to promote the advantages of using the
Funds to meet these and other specific investor needs.
Exchanges of shares of a Fund for shares of a Nuveen money market fund may
be made on days when both funds calculate a net asset value and make shares
available for public purchase. Shares of the Nuveen money market funds may be
purchased on days on which the Federal Reserve Bank of Boston is normally open
for business. In addition to the holidays observed by the Fund, the Nuveen money
market funds observe and will not make fund shares available for purchase on the
following holidays: Martin Luther King's Birthday, Columbus Day and Veterans
Day.
For more information on the procedure for purchasing shares of the Funds
and on the special purchase programs available thereunder, see "How to Buy Fund
Shares" in the Prospectus.
B-49
<PAGE> 200
Nuveen serves as the principal underwriter of the shares of each of the
Funds pursuant to a "best efforts" arrangement as provided by a distribution
agreement with the Trust, dated December 12, 1991 and last renewed on July 27,
1995 ("Distribution Agreement"). Pursuant to the Distribution Agreement, the
Trust appointed Nuveen to be its agent for the distribution of the Funds' shares
on a continuous offering basis. Nuveen sells shares to or through brokers,
dealers, banks or other qualified financial intermediaries (collectively
referred to as "Dealers"), or others, in a manner consistent with the then
effective registration statement of the Trust. Pursuant to the Distribution
Agreement, Nuveen, at its own expense, finances certain activities incident to
the sale and distribution of the Funds' shares, including printing and
distributing of prospectuses and statements of additional information to other
than existing shareholders, the printing and distributing of sales literature,
advertising and payment of compensation and giving of concessions to Dealers.
Nuveen receives for its services the excess, if any, of the sales price of the
Funds' shares less the net asset value of those shares, and reallows a majority
or all of such amounts to the Dealers who sold the shares; Nuveen may act as
such a Dealer. Nuveen also receives compensation pursuant to a distribution plan
adopted by the Trust pursuant to Rule 12b-1 and described herein under
"Distribution and Service Plan." Nuveen receives any CDSCs imposed on
redemptions of Class C Shares redeemed within 12 months of purchase, but any
amounts as to which a reinstatement privilege is not exercised are set off
against and reduce amounts otherwise payable to Nuveen pursuant to the
distribution plan.
The following table sets forth the aggregate amount of underwriting
commissions with respect to the sale of Fund shares and the amount thereof
retained by Nuveen for each of the Funds for the last three fiscal years. All
figures are to the nearest thousand.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 31, 1996 JANUARY 31, 1995 JANUARY 31, 1994
------------------------ ------------------------ ------------------------
AMOUNT OF AMOUNT AMOUNT OF AMOUNT AMOUNT OF AMOUNT
UNDERWRITING RETAINED UNDERWRITING RETAINED UNDERWRITING RETAINED
FUND COMMISSIONS BY NUVEEN COMMISSIONS BY NUVEEN COMMISSIONS BY NUVEEN
- ----------------------------------------------- ------------ --------- ------------ --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Arizona Fund................................... $ 96,000 $13,000 $ 88,000 $20,000 $178,000 $29,000
Florida Fund................................... 106,000 25,000 178,000 32,000 462,000 84,000
Maryland Fund.................................. 160,000 26,000 216,000 38,000 474,000 61,000
Michigan Fund.................................. 89,000 26,000 127,000 30,000 260,000 35,000
New Jersey Fund................................ 241,000 16,000 255,000 35,000 527,000 76,000
Pennsylvania Fund.............................. 113,000 20,000 236,000 45,000 459,000 67,000
Virginia Fund.................................. 130,000 14,000 255,000 30,000 544,000 78,000
</TABLE>
DISTRIBUTION AND SERVICE PLAN
Each Fund has adopted a plan (the "Plan") pursuant to Rule 12b-1 under the
Investment Company Act of 1940, which provides that Class C Shares will be
subject to an annual distribution fee, and that both Class A Shares and Class C
Shares will be subject to an annual service fee. Class R Shares will not be
subject to either distribution or service fees.
The distribution fee applicable to Class C Shares under each Fund's Plan
will be payable to reimburse Nuveen for services and expenses incurred in
connection with the distribution of Class C Shares. These expenses include
payments to Authorized Dealers, including Nuveen, who are brokers of record with
respect to the Class C Shares, as well as, without limitation, expenses of
printing and distributing prospectuses to persons other than shareholders of the
Fund, expenses of preparing, printing and distributing advertising and sales
literature and reports to shareholders used in connection with the sale of Class
C Shares, certain other expenses associated with the distribution of Class C
Shares, and any distribution-related expenses that may be authorized from time
to time by the Board of Trustees.
The service fee applicable to Class A Shares and Class C Shares under each
Fund's Plan will be payable to Authorized Dealers in connection with the
provision of ongoing account services to shareholders.
These services may include establishing and maintaining shareholder
accounts, answering shareholder inquiries and providing other personal services
to shareholders.
Each Fund may spend up to .25 of 1% per year of the average daily net
assets of Class A Shares as a service fee under the Plan applicable to Class A
Shares. Each Fund may spend up to .75 of 1% per year of the average daily net
assets of Class C Shares as a distribution fee and up to .25 of 1% per year of
the average daily net assets of Class C Shares as a service fee under the Plan
applicable to Class C Shares. The .75 of 1% distribution fee will be reduced by
the amount of any CDSC imposed on the redemption of Class C Shares within 12
months of purchase as to which a reinstatement privilege has not been exercised.
For the fiscal year ended January 31, 1996, 100% of service
B-50
<PAGE> 201
fees and distribution fees were paid out as compensation to Authorized Dealers.
The amount of compensation paid to Authorized Dealers for the fiscal year ended
January 31, 1996 was $6,771 for the Arizona Fund, $9,232 for the Florida Fund,
$22,018 for the Maryland Fund, $7,144 for the Michigan Fund, $23,280 for the New
Jersey Fund, $16,190 for the Pennsylvania Fund and $15,510 for the Virginia
Fund.
Under each Fund's Plan, the Fund will report quarterly to the Board of
Trustees for its review all amounts expended per class of shares under the Plan.
The Plan may be terminated at any time with respect to any class of shares,
without the payment of any penalty, by a vote of a majority of the trustees who
are not "interested persons" and who have no direct or indirect financial
interest in the Plan or by vote of a majority of the outstanding voting
securities of such class. The Plan may be renewed from year to year if approved
by a vote of the Board of Trustees and a vote of the non-interested trustees who
have no direct or indirect financial interest in the Plan cast in person at a
meeting called for the purpose of voting on the Plan. The Plan may be continued
only if the trustees who vote to approve such continuance conclude, in the
exercise of reasonable business judgment and in light of their fiduciary duties
under applicable law, that there is a reasonable likelihood that the Plan will
benefit the Fund and its shareholders. The Plan may not be amended to increase
materially the cost which a class of shares may bear under the Plan without the
approval of the shareholders of the affected class, and any other material
amendments of the Plan must be approved by the non-interested trustees by a vote
cast in person at a meeting called for the purpose of considering such
amendments. During the continuance of the Plan, the selection and nomination of
the non-interested trustees of the Trust will be committed to the discretion of
the non-interested trustees then in office.
INDEPENDENT PUBLIC ACCOUNTANTS AND CUSTODIAN
Arthur Andersen LLP, independent public accountants, 33 W. Monroe Street,
Chicago, Illinois 60603 have been selected as auditors for the Trust. In
addition to audit services, Arthur Andersen LLP, will provide consultation and
assistance on accounting, internal control, tax and related matters. The
financial statements incorporated by reference elsewhere in this Statement of
Additional Information and the information set forth under "Financial
Highlights" in the Prospectus have been audited by Arthur Andersen LLP as
indicated in their report with respect thereto, and are included in reliance
upon the authority of said firm as experts in giving said report.
The custodian of the assets of the Funds is The Chase Manhattan Bank, N.A.,
770 Broadway, New York, NY 10003. The custodian performs custodial, fund
accounting and portfolio accounting services.
B-51
<PAGE> 202
NUVEEN TAX-FREE MUTUAL FUNDS
PORTFOLIO OF INVESTMENTS
ARIZONA
JANUARY 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL OPT. CALL MARKET
AMOUNT DESCRIPTION PROVISIONS* RATINGS** VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 250,000 Arizona Certificates of Participation, 6.250%, 9/01/10................... 9/02 at 102 Aaa $ 272,493
Arizona Education Loan Marketing Corporation, Alternative Minimum Tax:
200,000 7.000%, 3/01/05.......................................................... 3/02 at 101 A 210,860
100,000 6.375%, 9/01/05.......................................................... 9/02 at 101 Aa 105,202
300,000 Arizona Health Facilities Authority (Phoenix Baptist Hospital and Medical
Center), 6.250%, 9/01/11............................................... 9/03 at 100 Aaa 324,888
200,000 Arizona Municipal Financing Program, Certificates of Participation,
7.700%, 8/01/10........................................................ No Opt. Call Aaa 248,448
200,000 Arizona State Transportation Board, 6.500%, 7/01/11 (Pre-refunded to
7/01/02)............................................................... 7/02 at Aaa 228,050
101 1/2
700,000 Arizona State University Research Park, 5.000%, 7/01/21.................. 7/06 at 100 Aaa 673,190
Arizona State University:
500,000 5.750%, 7/01/12.......................................................... 7/02 at 101 AA 514,705
500,000 5.500%, 7/01/19.......................................................... 7/02 at 101 AA 500,730
500,000 Arizona Student Loan Acquisition Authority, Alternative Minimum Tax,
6.600%, 5/01/10........................................................ 5/04 at 102 Aa 518,205
Arizona Wastewater Management Authority:
175,000 5.950%, 7/01/12.......................................................... 7/02 at 102 Aaa 185,719
250,000 5.750%, 7/01/15.......................................................... 7/05 at 102 Aaa 261,385
700,000 Apache County Public Finance Corporation, Certificates of Participation,
5.500%, 5/01/10........................................................ 5/00 at 102 A 714,119
195,000 Central Arizona Water Conservation District, 6.500%, 11/01/11
(Pre-refunded to 5/01/01).............................................. 5/01 at 102 AA- 219,646
300,000 Cochise County Unified School District No. 68, General Obligation,
7.500%, 7/01/10........................................................ No Opt. Call Aaa 382,296
250,000 Coconino and Yavapai Counties, Joint Unified School District No. 9,
6.750%, 7/01/07........................................................ 7/01 at 101 A- 273,245
550,000 Douglas Municipal Property Corporation, 5.750%, 7/01/15.................. 7/05 at 101 Aaa 574,294
280,000 Eloy Municipal Property Corporation, 7.000%, 7/01/11..................... 7/02 at 101 BBB 301,034
375,000 Maricopa Rural Road Improvement District, 6.900%, 7/01/05................ 7/99 at 101 N/R 396,461
300,000 Maricopa County Hospital District No. 1, 6.250%, 6/01/10................. 6/04 at 101 Aaa 328,662
500,000 Maricopa County Industrial Development Authority (Samaritan Health
Services), 7.000%, 12/01/16............................................ No Opt. Call Aaa 622,100
600,000 Maricopa County Industrial Development Authority (Baptist Hospital),
5.500%, 9/01/16........................................................ 9/05 at 101 Aaa 603,804
Maricopa County School District No. 28, General Obligation:
265,000 6.000%, 7/01/12 (Pre-refunded to 7/01/02)................................ 7/02 at 100 Aaa 291,733
50,000 6.000%, 7/01/12.......................................................... 7/02 at 100 Aaa 52,784
200,000 Maricopa County Unified School District No. 41, 6.500%, 7/01/08
(Pre-refunded to 7/01/02).............................................. 7/02 at 100 Aaa 225,750
250,000 Maricopa County Unified School District No. 69 (Paradise Valley), 6.500%,
7/01/09 (Pre-refunded to 7/01/01)...................................... 7/01 at 100 Aaa 278,998
500,000 Mohave County Industrial Development Authority (Citizens Utilities
Company), Alternative Minimum Tax, 6.600%, 5/01/29..................... 11/03 at 101 AAA 528,845
Navajo County Pollution Control Corporation (Arizona Public Service
Company):
1,000,000 5.875%, 8/15/28.......................................................... 8/03 at 102 Baa1 993,510
750,000 5.500%, 8/15/28.......................................................... 8/03 at 102 Aaa 747,165
425,000 Peoria Improvement District (North Valley Power Center), 7.300%,
1/01/12................................................................ 1/03 at 101 BBB 461,835
200,000 Phoenix General Obligation, 6.500%, 7/01/11 (Pre-refunded to 7/01/99).... 7/99 at 102 AA+ 220,116
250,000 Phoenix Civic Improvement Corporation, Airport Terminal Excise Tax,
Alternative Minimum Tax, 7.800%, 7/01/11............................... 7/97 at 102 AA+ 266,505
295,000 Phoenix Housing Finance Corporation FHA-Insured, 6.500%, 7/01/24......... 7/02 at 101 Aaa 305,310
Phoenix Civic Improvement Corporation, Wastewater System:
1,000,000 5.000%, 7/01/18.......................................................... 7/04 at 102 A1 950,180
400,000 6.125%, 7/01/23 (Pre-refunded to 7/01/03)................................ 7/03 at 102 AAA 452,028
200,000 Phoenix Industrial Development Authority, FHA-Insured (Chris Ridge
Village Project), 6.750%, 11/01/12..................................... 11/02 at 101 AAA 212,054
300,000 Phoenix Junior Lien Street and Highway, 6.250%, 7/01/11.................. 7/02 at 102 A+ 320,919
500,000 Phoenix Industrial Development Authority, GNMA (Meadow Glen Apartments),
5.800%, 8/20/28........................................................ 2/03 at 102 Aaa 498,530
485,000 Phoenix Industrial Development Authority, Single Family Mortgage,
Alternative Minimum Tax, 6.150%, 12/01/08.............................. 6/05 at 102 AAA 489,641
</TABLE>
B-52
<PAGE> 203
<TABLE>
<CAPTION>
PRINCIPAL OPT. CALL MARKET
AMOUNT DESCRIPTION PROVISIONS* RATINGS** VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 500,000 Phoenix Industrial Development Authority (John C. Lincoln Hospital and
Health Center):
6.000%, 12/01/10......................................................... 12/03 at 102 BBB+ $ 517,530
500,000 6.000%, 12/01/14......................................................... 12/03 at 102 BBB+ 497,495
290,000 Pima County Industrial Development Authority (Tucson Electric), 7.250%,
7/15/10................................................................ 1/02 at 103 Aaa 328,999
300,000 Pima County Unified School District No. 1, General Obligation, 6.100%,
7/01/12................................................................ 7/02 at 102 Aaa 321,852
500,000 Pima County, Single Family Mortgage, 6.500%, 2/01/17..................... 8/05 at 102 A 515,525
Pinal County, Certificates of Participation:
300,000 6.375%, 6/01/06.......................................................... 6/02 at 100 AA 329,895
200,000 6.500%, 6/01/09.......................................................... 6/02 at 100 AA 215,810
Salt River Project Agricultural Improvement and Power District:
300,000 5.750%, 1/01/19.......................................................... 1/02 at 100 Aa 302,748
280,000 5.750%, 1/01/20.......................................................... 3/96 at 100 Aa 279,997
225,000 Tempe General Obligation, 6.000%, 7/01/08................................ 7/02 at 101 AA+ 242,118
500,000 Tempe Industrial Development Authority, Multi-Family Housing, FHA-Insured
(Quadrangles Village Apartments), 6.250%, 6/01/26...................... 6/03 at 102 AAA 513,815
600,000 Tempe Union High School District No. 213, General Obligation, 6.000%,
7/01/12................................................................ 7/04 at 101 Aaa 643,674
500,000 Tucson General Obligation, 6.250%, 7/01/18............................... 7/04 at 101 Aaa 544,885
575,000 Tucson Airport Authority, 5.700%, 6/01/13................................ 6/03 at 102 Aaa 591,376
250,000 Tucson Local Business Development Finance Corporation, 6.250%, 7/01/12... 7/02 at 102 Aaa 272,115
300,000 University of Arizona, 6.250%, 6/01/11................................... 6/02 at 102 AA 323,064
335,000 Yavapai County Community College, 6.000%, 7/01/12........................ 7/03 at 101 A- 349,076
675,000 Yuma County Union High School District No. 70, General Obligation,
5.700%, 7/01/06........................................................ 7/02 at 101 Aaa 720,285
- -----------
$22,125,000 Total Investments--(Cost $21,884,694)--97.9%............................. 23,265,698
=========== -----------------------------------------------------------------------------------------------------------------
Other Assets Less Liabilities--2.1%...................................... 490,183
-----------------------------------------------------------------------------------------------------------------
Net Assets--100%......................................................... $23,755,881
=================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET MARKET
STANDARD & POOR'S MOODY'S OF ISSUES VALUE PERCENT
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SUMMARY OF RATINGS** AAA Aaa 31 $12,725,168 55%
PORTFOLIO OF INVESTMENTS: AA+, AA, AA- Aa1, Aa, Aa2, Aa3 13 4,038,741 17
A+ A1 2 1,271,099 5
A, A- A, A2, A3 5 2,062,825 9
BBB+, BBB, BBB- Baa1, Baa, Baa2, Baa3 5 2,771,404 12
Non-rated Non-rated 1 396,461 2
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL 57 $23,265,698 100%
=================================================================================================================================
</TABLE>
* Optional call provisions (not covered by the report of independent public
accountants): Dates (month and year) and prices of the earliest optional call
or redemption. There may be other call provisions at varying prices at later
dates.
** Ratings (not covered by the report of independent public accountants): Using
the higher of Standard & Poor's or Moody's rating.
N/R--Investment is not rated.
See accompanying notes to financial statements.
B-53
<PAGE> 204
NUVEEN TAX-FREE MUTUAL FUNDS
PORTFOLIO OF INVESTMENTS
FLORIDA
JANUARY 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL OPT. CALL MARKET
AMOUNT DESCRIPTION PROVISIONS* RATINGS** VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 300,000 Florida Department of General Services, General Obligation, 6.600%,
7/01/17................................................................ 7/02 at 101 Aa $ 332,154
2,500,000 Florida Housing Finance Agency, Alternative Minimum Tax, 6.875%,
8/01/26................................................................ 2/05 at 102 Aaa 2,672,225
750,000 Florida Housing Finance Agency, 6.400%, 6/01/24.......................... 6/02 at 103 AAA 776,003
30,000 Florida Housing Finance Agency, Home Ownership (GNMA), Alternative
Minimum Tax, 8.595%, 11/01/18.......................................... No Opt. Call AAA 31,802
Florida Municipal Power Agency:
1,000,000 6.250%, 10/01/21 (Pre-refunded to 10/01/02).............................. 10/02 at 102 Aaa 1,135,100
1,145,000 6.000%, 10/01/27 (Pre-refunded to 10/01/02).............................. 10/02 at 102 Aaa 1,283,179
1,000,000 Florida Municipal Power Agency, St. Lucie Project, 5.500%, 10/01/12...... 10/02 at 102 Aaa 1,022,390
Florida State Board of Education:
1,160,000 7.100%, 6/01/07.......................................................... No Opt. Call Aaa 1,276,766
2,250,000 5.875%, 6/01/20.......................................................... 6/05 at 101 Aa 2,338,110
460,000 7.250%, 6/01/23 (Pre-refunded to 6/01/00)................................ 6/00 at 102 Aaa 527,450
2,680,000 7.250%, 6/01/23.......................................................... 6/00 at 102 Aa 3,007,255
1,650,000 Florida Turnpike Authority, 6.350%, 7/01/22 (Pre-refunded to 7/01/02).... 7/02 at 101 Aaa 1,863,279
300,000 Brevard County Educational Facilities Authority (Florida Institute of
Technology), 6.875%, 11/01/22.......................................... 11/02 at 102 BBB 308,484
600,000 Broward County Housing Finance Authority (Lakeside Apartments), 7.000%,
2/01/25................................................................ 2/05 at 102 AAA 647,310
190,000 Cape Coral Health Facilities Authority (Cape Coral Medical Center),
8.125%, 11/01/08....................................................... No Opt. Call Aaa 212,589
1,000,000 Dade County (Miami International Airport), Alternative Minimum Tax,
6.550%, 10/01/13....................................................... 10/02 at 102 Aaa 1,096,780
115,000 Dade County Housing Finance Authority, Single Family Mortgage,
Alternative Minimum Tax, 7.250%, 9/01/23............................... 3/01 at 102 Aaa 121,089
2,480,000 Dade County (Jackson Memorial Hospital), 4.875%, 6/01/15................. 6/03 at 102 Aaa 2,348,982
470,000 Dade County Special Housing (City of Miami Developments), 12.000%
7/01/12................................................................ 3/96 at 102 A 482,220
255,000 Dade County (Courthouse Center), 6.300%, 4/01/14......................... 4/04 at 102 A 274,717
250,000 Dade County Health Facilities Authority (South Miami Hospital), 7.000%,
10/01/18 (Pre-refunded to 10/01/99).................................... 10/99 at 102 Aaa 281,388
300,000 Dade County Health Facilities Authority (North Shore Medical Center),
6.500%, 8/15/15........................................................ 8/02 at 102 Aaa 326,976
1,000,000 Davie Water and Sewer System, 6.250%, 10/01/17........................... 10/02 at 102 Aaa 1,073,510
600,000 Daytona Beach Water and Sewer System, 6.000%, 11/15/14................... 11/02 at 102 Aaa 636,288
1,600,000 Dunedin (Mease Health Care), 5.375%, 11/15/13............................ 11/03 at 101 Aaa 1,615,632
Escambia County Housing Finance Authority,
Single Family Mortgage,
Alternative Minimum Tax:
325,000 6.900%, 4/01/20.......................................................... 10/02 at 102 Aaa 340,727
2,000,000 6.950%, 10/01/27......................................................... 4/05 at 102 Aaa 2,098,140
500,000 Escambia County School Board, Certificates of Participation, 6.375%,
2/01/12................................................................ 2/02 at 100 Aaa 536,735
500,000 Gainesville Utility System, 6.500%, 10/01/22............................. 10/02 at 102 Aa 549,080
1,200,000 Hillsborough County Industrial Development Authority, Pollution Control
(Tampa Electric), 8.000%, 5/01/22...................................... 5/02 at 103 Aa2 1,439,112
250,000 Hillsborough County, Capital Improvement (Museum of Science and
Industry), 6.400%, 1/01/12 (Pre-refunded to 1/01/00)................... 1/00 at 102 A 275,633
250,000 Hollywood Water and Sewer System, 6.875%, 10/01/21 (Pre-refunded to
10/01/01).............................................................. 10/01 at 102 Aaa 288,305
Jacksonville Electric Authority:
470,000 7.500%, 10/01/02......................................................... 10/97 at Aa1 503,224
101 1/2
500,000 5.500%, 10/01/14......................................................... 10/02 at 101 Aa1 501,975
790,000 5.250%, 10/01/21......................................................... 10/02 at 101 Aa1 766,648
1,000,000 5.250%, 10/01/28......................................................... 10/02 at 101 Aa1 967,340
250,000 Jacksonville Excise Taxes, 6.500%, 10/01/13.............................. 10/02 at 102 Aaa 276,795
605,000 Jacksonville Health Facilities Authority (Daughters of Charity Health
System--
St. Vincent), 7.500%, 11/01/15 (Pre-refunded to 11/01/00).............. 11/00 at 102 Aaa 706,900
375,000 Jacksonville Water and Sewer (Jacksonville Suburban Utilities
Corporation), Alternative Minimum Tax, 6.750%, 6/01/22................. 6/02 at 102 A2 409,174
250,000 Jupiter Water System, 6.250%, 10/01/18................................... 10/01 at 102 Aaa 266,320
1,300,000 Kissimmee Utility Authority, Electric System, 5.375%, 10/01/12........... 10/03 at 102 Aaa 1,322,451
1,000,000 Manatee County Housing Finance Authority, Single Family Mortgage,
Alternative Minimum Tax, 7.600%, 11/01/26.............................. 11/05 at 105 Aaa 1,104,650
</TABLE>
B-54
<PAGE> 205
<TABLE>
<CAPTION>
PRINCIPAL OPT. CALL MARKET
AMOUNT DESCRIPTION PROVISIONS* RATINGS** VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 2,550,000 Miami Beach Water and Sewer System, 5.375%, 9/01/15...................... 9/05 at 102 Aaa $ 2,549,873
250,000 North Broward Hospital District, 6.250%, 1/01/12......................... 1/02 at 102 Aaa 268,555
Orange County Sales Tax:
145,000 6.125%, 1/01/19.......................................................... No Opt. Call Aaa 158,768
1,500,000 5.375%, 1/01/24.......................................................... 1/03 at 102 Aaa 1,489,200
500,000 Orange County Water Utilities System, 6.250%, 10/01/17................... 4/02 at 102 Aaa 535,045
1,000,000 Orange County Housing Finance Authority (Ashley Point Apartments),
Alternative Minimum Tax, 7.100%, 10/01/24.............................. 10/01 at 101 BBB+ 1,037,930
Orlando Utilities Commission:
1,250,000 6.000%, 10/01/20......................................................... 10/02 at 102 Aa 1,291,213
1,000,000 5.500%, 10/01/20......................................................... 10/99 at 100 Aa 999,250
Orlando and Orange County Expressway Authority:
1,000,000 5.500%, 7/01/18.......................................................... 7/03 at 102 Aaa 1,007,620
1,000,000 5.125%, 7/01/20.......................................................... 7/03 at 102 Aaa 968,820
Palm Beach County Criminal Justice Facilities:
1,000,000 5.300%, 6/01/05.......................................................... No Opt. Call Aaa 1,063,100
1,000,000 5.375%, 6/01/10.......................................................... No Opt. Call Aaa 1,045,810
2,000,000 Pensacola Health Facilities Authority (Daughters of Charity--Sacred
Heart), 5.250%, 1/01/11................................................ 1/03 at 102 Aa 1,966,420
2,000,000 Pinellas County Health Facilities Authority (Morton Plant Health System),
5.500%, 11/15/18....................................................... 11/03 at 102 Aaa 2,005,080
565,000 St. Lucie County Solid Waste System, 6.000%, 9/01/15 (Pre-refunded to
9/01/99)............................................................... 9/99 at 100 Aaa 606,059
500,000 St. Petersburg Health Facilities Authority (St. Joseph's Hospital Inc.),
7.000%, 12/01/15....................................................... 12/01 at 102 Aaa 567,450
1,000,000 Sarasota Water and Sewer System, 7.625%, 10/01/08 (Pre-refunded to
10/01/96).............................................................. 10/96 at 102 Aaa 1,045,910
500,000 Tampa Water and Sewer System, 6.000%, 10/01/17 (Pre-refunded to
10/01/02).............................................................. 10/02 at 101 Aaa 554,690
1,000,000 Turtle Run Community Development District, 6.400%, 5/01/11............... 5/03 at 100 A1 1,061,390
2,000,000 West Palm Beach Utility System, 5.400%, 10/01/23......................... 10/02 at 101 Aaa 1,978,580
- -----------
$57,410,000 Total Investments--(Cost $56,821,593)--98.3%............................. 60,245,650
=========== -----------------------------------------------------------------------------------------------------------------
Other Assets Less Liabilities--1.7%...................................... 1,062,980
-----------------------------------------------------------------------------------------------------------------
Net Assets--100%......................................................... $61,308,630
=================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET MARKET
STANDARD & POOR'S MOODY'S OF ISSUES VALUE PERCENT
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SUMMARY OF RATINGS** AAA Aaa 43 $41,734,321 69%
PORTFOLIO OF INVESTMENTS: AA+, AA, AA- Aa1, Aa, Aa2, Aa3 12 14,661,781 24
A+ A1 1 1,061,390 2
A, A- A, A2, A3 4 1,441,744 3
BBB+, BBB, BBB- Baa1, Baa, Baa2, Baa3 2 1,346,414 2
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL 62 $60,245,650 100%
=================================================================================================================================
</TABLE>
* Optional Call Provisions (not covered by the report of independent public
accountants): Dates (month and year) and prices of the earliest optional call
or redemption. There may be other call provisions at varying prices at later
dates.
** Ratings (not covered by the report of independent public accountants): Using
the higher of Standard & Poor's or Moody's rating.
See accompanying notes to financial statements.
B-55
<PAGE> 206
NUVEEN TAX-FREE MUTUAL FUNDS
PORTFOLIO OF INVESTMENTS
PENNSYLVANIA
JANUARY 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL OPT. CALL MARKET
AMOUNT DESCRIPTION PROVISIONS* RATINGS** VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 2,500,000 Pennsylvania Economic Development Financing Authority (Sun Co--R&M
Project), Alternative Minimum Tax, 7.600%, 12/01/24.................... 12/04 at 102 Baa1 $ 2,822,650
Pennsylvania General Obligation:
2,000,000 6.400%, 1/01/99.......................................................... No Opt. Call AA- 2,136,220
1,290,000 5.000%, 5/01/03.......................................................... No Opt. Call AA- 1,338,736
2,000,000 5.300%, 5/01/05.......................................................... No Opt. Call AA 2,106,680
2,500,000 Pennsylvania Higher Education Assistance Agency, Student Loan, 4.625%,
12/01/00............................................................... No Opt. Call AAA 2,508,975
750,000 Pennsylvania Higher Educational Facilities Authority (Thomas Jefferson
University), 6.000%, 7/01/19........................................... 7/99 at 102 Aa 768,555
600,000 Pennsylvania Housing Finance Agency, Single Family Mortgage, 7.150%,
4/01/15................................................................ 10/01 at 102 Aa 646,956
1,795,000 Pennsylvania Industrial Development Authority, 7.000%, 1/01/06........... No Opt. Call Aaa 2,127,775
1,390,000 Pennsylvania Intergovernmental Cooperative Authority (City of
Philadelphia Funding Program), 7.000%, 6/15/05......................... No Opt. Call Aaa 1,640,992
2,300,000 Pennsylvania Turnpike Commission, 5.500%, 12/01/17....................... 12/02 at 102 Aaa 2,305,382
1,000,000 Allegheny County (Greater Pittsburgh International Airport), Alternative
Minimum Tax, 7.000%, 1/01/18........................................... 1/00 at 102 Aaa 1,061,710
1,375,000 Allegheny County Hospital Development Authority (Allegheny Valley
Hospital), 7.000%, 8/01/15............................................. No Opt. Call A 1,597,709
1,500,000 Allegheny County Hospital Development Authority (Rehabilitation Institute
of Pittsburgh), 7.000%, 6/01/22........................................ 6/02 at 102 BBB 1,548,465
3,000,000 Allegheny County Residential Financing Authority (Ladies Grand Army of
the Republic Health), 6.350%, 10/01/36................................. 10/05 at 100 AAA 3,052,770
2,000,000 Allegheny County Residential Finance Authority, Single Family Mortgage,
(GNMA), Alternative Minimum Tax, 0.000%, 5/01/27....................... No Opt. Call Aaa 232,940
2,000,000 Armstrong County Hospital Authority (Canterbury Place Project), 6.500%,
12/01/21............................................................... 12/01 at 100 Aaa 2,140,100
1,000,000 Bucks County Community College Authority, 6.250%, 6/15/14................ 6/02 at 100 Aa 1,045,510
2,850,000 Deer Lakes School District, General Obligation, 6.350%, 1/15/14.......... 1/04 at 100 Aaa 3,067,968
800,000 Greater Lebanon Refuse Authority, Solid Waste, 7.000%, 11/15/04.......... 11/02 at 100 A- 860,104
3,500,000 Indiana County Industrial Development Authority, Pollution Control (New
York State Electric and Gas Corporation), 6.000%, 6/01/06.............. No Opt. Call Aaa 3,873,345
3,000,000 Indiana County Industrial Development Authority, Pollution Control
(Pennsylvania Electric Company), 5.350%, 11/01/10...................... No Opt. Call Aaa 3,121,440
Luzerne County Industrial Development Authority (Pennsylvania Gas and
Water Company), Alternative Minimum Tax:
1,500,000 7.000%, 12/01/17......................................................... 12/04 at 102 Aaa 1,706,490
950,000 7.125%, 12/01/22......................................................... 12/02 at 102 Baa1 1,018,315
3,000,000 Montgomery County Higher Educational and Health Authority (Waverly
Heights), 6.375%, 1/01/26 (DD)......................................... 1/06 at 101 BBB 2,999,790
1,800,000 Northampton County Higher Education Authority (Lehigh University),
6.900%, 10/15/06....................................................... 10/01 at 102 Aaa 2,041,560
1,000,000 Northumberland County Industrial Development Authority (Roaring Creek
Water Company), Alternative Minimum Tax, 6.375%, 10/15/23.............. 10/03 at 102 N/R 965,270
2,000,000 Philadelphia Gas Works, 6.375%, 7/01/14.................................. 7/03 at 102 Aaa 2,177,420
1,000,000 Philadelphia Municipal Authority, 5.625%, 11/15/14....................... 11/03 at 102 Aaa 1,005,890
Pittsburgh Urban Redevelopment Authority, Alternative Minimum Tax:
3,280,000 6.375%, 8/01/18.......................................................... 8/05 at 102 A 3,318,638
1,100,000 6.625%, 4/01/22.......................................................... 4/04 at 102 A1 1,132,241
500,000 St. Mary's Hospital Authority (Franciscan Health System/St. Mary of
Langhorne), 6.500%, 7/01/12............................................ 7/02 at 102 Aaa 543,820
230,000 Sayre Health Care Facilities Authority (Guthrie Healthcare System),
7.100%, 3/01/17........................................................ 3/01 at 102 Aaa 258,713
Southeastern Pennsylvania Transportation Authority:
1,500,000 6.500%, 3/01/04.......................................................... No Opt. Call Aaa 1,702,980
1,000,000 6.500%, 3/01/05.......................................................... No Opt. Call Aaa 1,140,920
2,250,000 University of Pittsburgh, 6.125%, 6/01/21................................ 6/02 at 102 Aaa 2,375,865
</TABLE>
B-56
<PAGE> 207
<TABLE>
<CAPTION>
PRINCIPAL OPT. CALL MARKET
AMOUNT DESCRIPTION PROVISIONS* RATINGS** VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 350,000 Washington County Hospital Authority (Monongahela Valley Hospital),
6.750%, 12/01/08....................................................... 4/02 at 102 A $ 370,832
935,000 West View Municipal Authority, 9.500%, 11/15/14.......................... No Opt. Call Aaa 1,324,718
600,000 Wilkes-Barre General Municipal Authority (College Misericordia),
Alternative Minimum Tax, 7.750%, 12/01/12.............................. 12/00 at 100 N/R 661,650
- -------------------------------------------------------------------------------------------------------------------------------
$62,145,000 Total Investments--(cost $60,924,413)--100.8%............................ $64,750,094
=========== -----------------------------------------------------------------------------------------------------------------
TEMPORARY INVESTMENTS IN SHORT-TERM MUNICIPAL SECURITIES--3.1%
$ 2,000,000 Geisinger Authority (Montaur Co.), Variable Rate Demand Bonds, 3.600%,
7/01/22+............................................................... A-1+ $ 2,000,000
-----------------------------------------------------------------------------------------------------------------
Other Assets Less Liabilities--(3.9)%.................................... (2,487,424)
-----------------------------------------------------------------------------------------------------------------
Net Assets--100%......................................................... $64,262,670
=================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET MARKET
STANDARD & POOR'S MOODY'S OF ISSUES VALUE PERCENT
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SUMMARY OF RATINGS** AAA Aaa 21 $39,411,773 61%
PORTFOLIO OF INVESTMENTS AA+, AA, AA- Aa1, Aa, Aa2, Aa3 6 8,042,657 12
(EXCLUDING TEMPORARY A+ A1 1 1,132,241 2
INVESTMENTS): A, A- A, A2, A3 4 6,147,283 9
BBB+, BBB, BBB- Baa1, Baa, Baa2, Baa3 4 8,389,220 13
Non-rated Non-rated 2 1,626,920 3
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL 38 $64,750,094 100%
=================================================================================================================================
</TABLE>
* Optional call provisions (not covered by the report of independent public
accountants): Dates (month and year) and prices of the earliest optional call
or redemption. There may be other call provisions at varying prices at later
dates.
** Ratings (not covered by the report of independent public accountants): Using
the higher of Standard & Poor's or Moody's rating.
N/R--Investment is not rated.
(DD) Security purchased on a delayed delivery basis (note 1).
+ The security has a maturity of more than one year, but has variable rate and
demand features which qualify it as a short-term security. The rate disclosed
is that currently in effect. This rate changes periodically based on market
conditions or a specified market index.
See accompanying notes to financial statements.
B-57
<PAGE> 208
NUVEEN TAX-FREE MUTUAL FUNDS
PORTFOLIO OF INVESTMENTS
VIRGINIA
JANUARY 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL OPT. CALL MARKET
AMOUNT DESCRIPTION PROVISIONS* RATINGS** VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 800,000 Virginia College Building Authority (Randolph-Macon College), 6.625%,
5/01/13................................................................ 5/02 at 102 A- $ 856,392
Virginia College Building Authority
(The Washington and Lee University):
1,250,000 5.750% 1/01/14........................................................... 1/04 at 102 Aa 1,287,538
1,000,000 5.800%, 1/01/24.......................................................... 1/04 at 102 Aa 1,027,640
Virginia Housing Development Authority:
800,000 6.800%, 11/01/09......................................................... 5/02 at 102 AA+ 854,472
650,000 6.850%, 7/01/17.......................................................... 1/00 at 102 AA+ 675,168
4,000,000 7.150%, 1/01/33.......................................................... 1/02 at 102 AA+ 4,242,320
Virginia Public Building Authority:
1,090,000 6.500%, 8/01/11.......................................................... 8/01 at 102 Aa 1,229,040
750,000 6.250%, 8/01/14.......................................................... 8/04 at 101 Aa 814,050
800,000 Virginia Resource Authority, Water System,
6.450%, 4/01/13.......................................................... 4/02 at 102 AA 853,448
1,000,000 Virginia Resource Authority, Sewer System, Alternative Minimum Tax,
6.000%, 10/01/25....................................................... 10/05 at 102 AA 1,033,400
4,425,000 Virginia Transportation Board, 6.000%, 5/15/19........................... 5/98 at 102 Aa 4,542,041
1,000,000 Abingdon General Obligation, 6.250%, 8/01/12............................. 8/02 at 102 A 1,071,050
1,410,000 Albemarle County Industrial Development Authority (Martha Jefferson
Hospital), 5.800%, 10/01/09............................................ 10/03 at 102 A 1,449,790
1,500,000 Capital Region Airport Commission (Richmond International Airport),
5.625%, 7/01/20........................................................ 7/05 at 102 Aaa 1,518,840
750,000 Charlottesville-Albemarle Airport Authority, Alternative Minimum Tax,
6.125%, 12/01/13....................................................... 12/05 at 102 BBB 765,285
2,500,000 Chesapeake Bay Bridge and Tunnel Commission, 6.375%, 7/01/22............. 7/01 at 102 Aaa 2,671,800
1,000,000 Covington-Alleghany County Industrial Development Authority (Alleghany
Regional Hospital), 6.625%, 4/01/12 (Pre-refunded to 4/01/02).......... 4/02 at 102 A- 1,138,330
1,700,000 Cumberland County Certificate of Participation, 5.480%, 7/15/97.......... No Opt. Call N/R 1,700,000
2,500,000 Fairfax County Economic Development Authority (Ogden Martin Systems
Project), Alternative Minimum Tax, 7.750%, 2/01/11..................... 2/99 at 103 A1 2,747,375
1,460,000 Fairfax County Industrial Development Authority (Inova Health System)
5.000%, 8/15/13........................................................ No Opt. Call Aaa 1,439,020
1,500,000 Giles County Industrial Development Authority (Hoechst Celanese
Corporation), Alternative Minimum Tax, 6.625%, 12/01/22................ 12/02 at 102 AA- 1,571,775
500,000 Hampton Industrial Development Authority (Sentara Hampton General
Hospital), 6.500%, 11/01/12............................................ 11/04 at 102 A 533,215
2,500,000 Henrico County Water and Sewer System, 6.250%, 5/01/13................... 5/02 at 100 A1 2,615,925
1,000,000 Loudoun County Sanitation Authority, Water and Sewer System, 6.250%,
1/01/16................................................................ 1/03 at 102 Aaa 1,073,740
2,000,000 Loudoun County Industrial Development Authority (The George Washington
University), 6.250%, 5/15/22........................................... 5/02 at 102 A1 2,104,700
1,500,000 Lynchburg Industrial Development Authority (Randolph-Macon Women's
College), 5.875%, 9/01/13.............................................. 9/03 at 102 A 1,531,860
750,000 Nelson County Service Authority, Water and Sewer System, 5.500%,
7/01/18................................................................ 7/03 at 102 Aaa 748,523
1,580,000 Peninsula Ports Authority of Virginia (Riverside Health System), 6.625%,
7/01/18................................................................ 7/02 at 102 Aa 1,697,678
2,500,000 Prince William County Park Authority, 6.875%, 10/15/16................... 10/04 at 102 A- 2,767,100
1,000,000 Prince William County Service Authority, Water and Sewer System, 6.000%,
7/01/29................................................................ 7/01 at 100 Aaa 1,033,250
3,005,000 Richmond General Obligation, 5.500%, 7/15/23............................. 7/03 at 102 AA 3,012,603
1,155,000 Roanoke Industrial Development Authority (Roanoke Memorial Hospitals),
6.500%, 7/01/25 (Pre-refunded to 7/01/00).............................. 7/00 at 100 Aaa 1,269,818
Rockingham County Industrial Development Authority (Bridgewater College):
400,000 5.600%, 10/01/06......................................................... 10/03 at 102 Baa1 433,244
400,000 5.700%, 10/01/07......................................................... 10/03 at 102 Baa1 425,168
2,750,000 Southeastern Public Service Authority (Regional Solid Waste System),
Alternative Minimum Tax, 6.000%, 7/01/13............................... 7/03 at 102 A- 2,782,368
4,000,000 Upper Occoquan Sewer Authority, 5.000%, 7/01/21.......................... 1/04 at 102 Aaa 3,836,000
2,260,000 Virginia Beach Development Authority (Sentara Bayside Hospital), 6.300%,
11/01/21............................................................... 11/01 at 102 Aa 2,368,977
</TABLE>
B-58
<PAGE> 209
<TABLE>
<CAPTION>
PRINCIPAL OPT. CALL MARKET
AMOUNT DESCRIPTION PROVISIONS* RATINGS** VALUE
- --------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 1,000,000 Metropolitan Washington D. C. Airports Authority, Alternative Minimum
Tax:
5.750%, 10/1/20.......................................................... 10/04 at 102 AAA $ 1,017,060
1,500,000 6.250%, 10/1/21.......................................................... 10/02 at 102 AAA 1,587,720
800,000 Puerto Rico Highway Transportation Authority, 6.625%, 7/01/18............ 7/02 at A 863,064
101 1/2
$62,485,000 Total Investments--(cost $61,036,092)--98.7%............................. 65,190,787
=========== ------------------------------------------------------------------------------------------------------------------
Other Assets Less Liabilities--1.3%...................................... 877,240
------------------------------------------------------------------------------------------------------------------
Net Assets--100%......................................................... $66,068,027
==================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET MARKET
STANDARD & POOR'S MOODY'S OF ISSUES VALUE PERCENT
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SUMMARY OF RATINGS** AAA Aaa 10 $16,195,771 25%
PORTFOLIO INVESTMENTS: AA+, AA, AA- Aa1, Aa, Aa2, Aa3 14 25,210,150 39
A+ A1 3 7,468,000 11
A, A- A, A2, A3 9 12,993,169 20
BBB+, BBB, BBB- Baa1, Baa, Baa2, Baa3 3 1,623,697 2
Non-rated Non-rated 1 1,700,000 3
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL 40 $65,190,787 100%
=================================================================================================================================
</TABLE>
* Optional call provisions (not covered by the report of independent public
accountants): Dates (month and year) and prices of the earliest optional call
or redemption. There may be other call provisions at varying prices at later
dates.
** Ratings (not covered by the report of independent public accountants): Using
the higher of Standard & Poor's or Moody's rating.
N/R--Investment is not rated.
See accompanying notes to financial statements.
B-59
<PAGE> 210
NUVEEN TAX-FREE MUTUAL FUNDS
STATEMENT OF NET ASSETS
JANUARY 31, 1996
<TABLE>
<CAPTION>
AZ FL PA VA
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Investments in municipal securities, at
market value (note 1)...................... $23,265,698 $60,245,650 $64,750,094 $65,190,787
Temporary investments in short-term municipal
securities, at amortized cost (note 1)..... 2,000,000
Cash......................................... 242,662 280,875 270,963
Receivables:
Interest................................ 262,440 935,255 761,603 837,425
Shares sold............................. 86,335 51,425 28,669 --
Investments sold........................ -- 5,000 --
Deferred organization costs (note 1)......... 6,998 6,998 7,984 5,824
Other assets................................. 501 4,519 35,893 13,090
----------- ----------- ----------- -----------
Total assets....................... 23,864,634 61,529,722 67,584,243 66,318,089
----------- ----------- ----------- -----------
LIABILITIES
Payables:
Investments purchased...................... 3,015,938
Shares reacquired.......................... -- 13,223 55,248 --
Cash overdraft............................... 1,615
Accrued expenses:
Management fees (note 7)................ 10,895 28,402 29,831 30,744
Other................................... 46,078 47,287 54,749 54,585
Dividends payable............................ 51,780 132,180 164,192 164,733
----------- ----------- ----------- -----------
Total liabilities.................. 108,753 221,092 3,321,573 250,062
----------- ----------- ----------- -----------
Net assets (note 8).......................... $23,755,881 $61,308,630 $64,262,670 $66,068,027
========== ========== ========== ==========
Class A Shares (note 1)
Net assets................................... $ 3,894,689 $ 5,823,021 $ 5,816,905 $ 5,874,288
========== ========== ========== ==========
Shares outstanding........................... 362,624 551,681 548,766 554,008
========== ========== ========== ==========
Net asset value and redemption price per
share...................................... $ 10.74 $ 10.56 $ 10.60 $ 10.60
========== ========== ========== ==========
Offering price per share (net asset value per
share plus maximum sales charge of 4.50% of
offering price)............................ $ 11.25 $ 11.06 $ 11.10 $ 11.10
========== ========== ========== ==========
Class C Shares (note 1)
Net assets................................... $ 327,826 $ 167,925 $ 1,101,179 $ 788,903
========== ========== ========== ==========
Shares outstanding........................... 30,775 15,971 105,115 74,618
========== ========== ========== ==========
Net asset value, offering and redemption
price per share............................ $ 10.65 $ 10.51 $ 10.48 $ 10.57
========== ========== ========== ==========
Class R Shares (note 1)
Net assets................................... $19,533,366 $55,317,684 $57,344,586 $59,404,836
========== ========== ========== ==========
Shares outstanding........................... 1,830,754 5,235,606 5,424,007 5,603,960
========== ========== ========== ==========
Net asset value and redemption price per
share...................................... $ 10.67 $ 10.57 $ 10.57 $ 10.60
========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
B-60
<PAGE> 211
NUVEEN TAX-FREE MUTUAL FUNDS
STATEMENT OF OPERATIONS
YEAR ENDED JANUARY 31, 1996
<TABLE>
<CAPTION>
AZ FL PA VA
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Tax-exempt interest income (note 1)................. $1,189,234 $3,304,797 $3,464,924 $3,701,411
---------- ---------- ---------- ----------
Expenses (note 2):
Management fees (note 7)....................... 111,599 313,075 323,825 340,698
12b-1 distribution and service fees (note 1)... 6,771 9,232 16,190 15,510
Shareholders' servicing agent fees and
expenses..................................... 22,979 47,824 82,103 78,664
Custodian's fees and expenses.................. 40,994 50,179 45,385 51,430
Trustees' fees and expenses (note 7)........... 506 617 1,268 1,628
Professional fees.............................. 20,251 23,172 21,640 19,516
Shareholders' reports -- printing and mailing
expenses..................................... 21,551 51,528 73,091 72,151
Federal and state registration fees............ 3,910 5,074 7,801 3,614
Amortization of deferred organization costs
(note 1)..................................... 6,785 7,610 7,391 7,375
Other expenses................................. 2,534 6,349 7,087 7,190
---------- ---------- ---------- ----------
Total expenses before expense
reimbursement........................... 237,880 514,660 585,781 597,776
Expense reimbursement from investment adviser
(note 7)..................................... (78,929) (78,507) (128,011) (117,673)
---------- ---------- ---------- ----------
Net expenses.............................. 158,951 436,153 457,770 480,103
---------- ---------- ---------- ----------
Net investment income................ 1,030,283 2,868,644 3,007,154 3,221,308
---------- ---------- ---------- ----------
REALIZED AND UNREALIZED GAIN (LOSS) FROM INVESTMENTS
Net realized gain (loss) from investment
transactions, net of taxes, if applicable(notes 1
and 5)............................................ (27,336) (140,189) (36,684) 334,528
Net change in unrealized appreciation or
depreciation of investments....................... 1,629,699 4,780,693 4,855,692 4,882,314
---------- ---------- ---------- ----------
Net gain from investments................. 1,602,363 4,640,504 4,819,008 5,216,842
---------- ---------- ---------- ----------
Net increase in net assets from operations.......... $2,632,646 $7,509,148 $7,826,162 $8,438,150
========= ========= ========= =========
</TABLE>
See accompanying notes to financial statements.
B-61
<PAGE> 212
NUVEEN TAX-FREE MUTUAL FUNDS
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
AZ FL
-------------------------- ---------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
1/31/96 1/31/95 1/31/96 1/31/95
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
OPERATIONS
Net investment income......................... $ 1,030,283 $ 874,402 $ 2,868,644 $ 2,567,258
Net realized gain (loss) from investment
transactions, net of taxes, if applicable... (27,336) (127,639) (140,189) (88,470)
Net change in unrealized appreciation or
depreciation of investments................. 1,629,699 (1,415,009) 4,780,693 (4,454,622)
----------- ----------- ------------ -----------
Net increase (decrease) in net
assets from operations............ 2,632,646 (668,246) 7,509,148 (1,975,834)
----------- ----------- ------------ -----------
DISTRIBUTIONS TO SHAREHOLDERS (note 1)
From undistributed net investment income:
Class A.................................. (101,157) (11,579) (148,024) (12,861)
Class C.................................. (6,237) (786) (5,956) (807)
Class R.................................. (937,616) (863,461) (2,730,462) (2,538,376)
From accumulated net realized gains from
investment transactions:
Class A.................................. -- -- -- (11)
Class C.................................. -- -- -- --
Class R.................................. -- -- -- (13,228)
----------- ----------- ------------ -----------
Decrease in net assets from
distributions to shareholders..... (1,045,010) (875,826) (2,884,442) (2,565,283)
----------- ----------- ------------ -----------
FUND SHARE TRANSACTIONS (note 3)
Net proceeds from sale of shares:
Class A.................................. 2,882,755 1,124,442 4,315,210 1,665,651
Class C.................................. 273,019 51,694 77,334 73,100
Class R.................................. 2,473,853 4,004,198 8,465,473 13,751,923
Net asset value of shares issued to
shareholders due to reinvestment of
distributions from net investment income and
from net realized gains from investment
transactions:
Class A.................................. 38,250 2,269 52,678 4,072
Class C.................................. 5,264 509 3,575 230
Class R.................................. 529,462 464,469 1,500,287 1,376,114
----------- ----------- ------------ -----------
6,202,603 5,647,581 14,414,557 16,871,090
----------- ----------- ------------ -----------
Cost of shares redeemed:
Class A.................................. (303,388) (30,002) (173,983) (314,814)
Class C.................................. (3,168) (9,346) -- --
Class R.................................. (1,449,215) (2,482,522) (11,564,633) (6,261,459)
----------- ----------- ------------ -----------
(1,755,771) (2,521,870) (11,738,616) (6,576,273)
----------- ----------- ------------ -----------
Net increase in net assets derived from
Fund shares transactions............... 4,446,832 3,125,711 2,675,941 10,294,817
----------- ----------- ------------ -----------
Net increase (decrease) in net
assets............................ 6,034,468 1,581,639 7,300,647 5,753,700
Net assets at the beginning of year........... 17,721,413 16,139,774 54,007,983 48,254,283
----------- ----------- ------------ -----------
Net assets at the end of year................. $23,755,881 $17,721,413 $ 61,308,630 $54,007,983
=========== =========== ============ ===========
Balance of undistributed net investment income
at end of year.............................. $ 1,809 $ 16,536 $ 20,796 $ 36,594
=========== =========== ============ ===========
</TABLE>
See accompanying notes to financial statements.
B-62
<PAGE> 213
NUVEEN TAX-FREE MUTUAL FUNDS
STATEMENT OF CHANGES IN NET ASSETS -- (CONTINUED)
<TABLE>
<CAPTION>
PA VA
-------------------------- --------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
1/31/96 1/31/95 1/31/96 1/31/95
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
OPERATIONS
Net investment income.......................... $ 3,007,154 $ 2,714,124 $ 3,221,308 $ 2,965,312
Net realized gain (loss) from investment
transactions, net of taxes, if applicable.... (36,684) (835,288) 334,528 (110,113)
Net change in unrealized appreciation or
depreciation of investments.................. 4,855,692 (4,232,526) 4,882,314 (5,022,831)
----------- ----------- ----------- -----------
Net increase (decrease) in net assets from
operations.............................. 7,826,162 (2,353,690) 8,438,150 (2,167,632)
----------- ----------- ----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS (note 1)
From undistributed net investment income:
Class A...................................... (173,805) (17,517) (191,806) (20,902)
Class C...................................... (28,974) (5,177) (23,926) (4,516)
Class R...................................... (2,830,558) (2,690,297) (2,997,681) (2,960,225)
From accumulated net realized gains from
investment transactions:
Class A...................................... -- -- (15,706) --
Class C...................................... -- -- (2,511) --
Class R...................................... -- -- (193,671) --
----------- ----------- ----------- -----------
Decrease in net assets from
distributions to shareholders...... (3,033,337) (2,712,991) (3,425,301) (2,985,643)
----------- ----------- ----------- -----------
FUND SHARE TRANSACTIONS (note 3)
Net proceeds from sale of shares:
Class A...................................... 4,222,635 1,465,445 3,799,529 2,169,078
Class C...................................... 633,225 480,657 402,084 359,962
Class R...................................... 6,005,478 12,882,787 3,456,619 9,464,055
Net asset value of shares issued to
shareholders due to reinvestment of
distributions from net investment income and
from net realized gains from investment
transactions:
Class A...................................... 126,885 9,834 109,800 6,496
Class C...................................... 24,758 3,155 21,313 2,776
Class R...................................... 1,786,453 1,624,542 1,928,344 1,626,894
----------- ----------- ----------- -----------
12,799,434 16,466,420 9,717,689 13,629,261
----------- ----------- ----------- -----------
Cost of shares redeemed:
Class A...................................... (281,318) (27,047) (543,599) (10,247)
Class C...................................... (105,804) -- (54,845) --
Class R...................................... (6,418,284) (6,616,545) (5,446,943) (6,855,537)
----------- ----------- ----------- -----------
(6,805,406) (6,643,592) (6,045,387) (6,865,784)
----------- ----------- ----------- -----------
Net increase in net assets derived from Fund
share transactions........................ 5,994,028 9,822,828 3,672,302 6,763,477
----------- ----------- ----------- -----------
Net increase (decrease) in net
assets............................. 10,786,853 4,756,147 8,685,151 1,610,202
Net assets at the beginning of year............ 53,475,817 48,719,670 57,382,876 55,772,674
----------- ----------- ----------- -----------
Net assets at the end of year.................. $64,262,670 $53,475,817 $66,068,027 $57,382,876
=========== =========== =========== ===========
Balance of undistributed net investment income
at end of year............................... $ 5,651 $ 31,834 $ 29,706 $ 21,811
=========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
B-63
<PAGE> 214
NUVEEN TAX-FREE MUTUAL FUNDS
NOTES TO FINANCIAL STATEMENTS
1. GENERAL INFORMATION AND SIGNIFICANT ACCOUNTING POLICIES
The Nuveen Multistate Tax-Free Trust (the "Trust") is an open-end
diversified management series investment company registered under the Investment
Company Act of 1940. The Trust comprises seven single-state tax-free mutual
funds (the Nuveen Tax-Free Value Funds -- the "Funds"). Each Fund constitutes a
separate series of the Trust and is itself an open-end diversified management
investment company, commonly referred to as a mutual fund. The Trust was
organized as a Massachusetts Business Trust on July 26, 1991.
The Trust currently has seven authorized state tax-free Funds: the Nuveen
Arizona Tax-Free Value Fund, the Nuveen Florida Tax-Free Value Fund, the Nuveen
Maryland Tax-Free Value Fund, the Nuveen Michigan Tax-Free Value Fund, the
Nuveen New Jersey Tax-Free Value Fund, the Nuveen Pennsylvania Tax-Free Value
Fund and the Nuveen Virginia Tax-Free Value Fund. Additional state Funds may be
established in the future. Sale of Fund shares first commenced on February 28,
1992. Each Fund invests primarily in municipal obligations issued within its
respective state.
The following is a summary of significant accounting policies followed by
the Funds in the preparation of their financial statements in accordance with
generally accepted accounting principles.
Securities Valuation
Portfolio securities for which market quotations are readily available are
valued at the mean between the quoted bid and asked prices or the yield
equivalent. Portfolio securities for which market quotations are not readily
available are valued at fair value by consistent application of methods
determined in good faith by the Board of Trustees. Temporary investments in
securities that have variable rate and demand features qualifying them as short-
term securities are traded and valued at amortized cost.
Securities Transactions
Securities transactions are recorded on a trade date basis. Realized gains
and losses from such transactions are determined on the specific identification
method. Securities purchased or sold on a when-issued or delayed delivery basis
may be settled a month or more after the transaction date. Any securities so
purchased are subject to market fluctuation during this period. The Trust has
instructed the custodian to segregate assets in a separate account with a
current value at least equal to the amount of its purchase commitments. At
January 31, 1996 there were no such purchase commitments in any of the Funds,
except for the Nuveen Pennsylvania Tax-Free Value Fund's purchase commitments of
$3,015,938.
Interest Income
Interest income is determined on the basis of interest accrued, adjusted
for amortization of premiums and accretion of discounts on long-term debt
securities when required for federal income tax purposes.
Dividends and Distributions to Shareholders
Net investment income is declared as a dividend monthly and payment is made
or reinvestment is credited to shareholder accounts after month-end. Net
realized gains from securities transactions are distributed to shareholders not
less frequently than annually only to the extent they exceed available capital
loss carryovers.
Distributions to shareholders of net investment income and net realized
gains from investment transactions are recorded on the ex-dividend date. The
amount and timing of such distributions are determined in accordance with
federal income tax regulations, which may differ from generally accepted
accounting principles. Accordingly, temporary over-distributions as a result of
these differences may result and will be classified as either distributions in
excess of net investment income or distributions in excess of net realized gains
from investment transactions, if applicable.
Income Taxes
Each Fund is a separate taxpayer for federal income tax purposes and
intends to comply with the requirements of the Internal Revenue Code applicable
to regulated investment companies by distributing all of its net investment
income, in addition to any significant amounts of net realized gains from
investments, to shareholders. The Funds
B-64
<PAGE> 215
NUVEEN TAX-FREE MUTUAL FUNDS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
currently consider significant net realized gains as amounts in excess of $.001
per share. Furthermore, each Fund intends to satisfy conditions which will
enable interest from municipal securities, which is exempt from regular federal
and designated state income taxes, to retain such tax-exempt status when
distributed to the shareholders of the respective Funds. All income dividends
paid during the year ended January 31, 1996, have been designated Exempt
Interest Dividends.
Deferred Organization Costs
Costs incurred by the Trust in connection with its organization and initial
registration of shares were deferred and are being amortized over a 60-month
period beginning February 28, 1992. If any of the initial shares of each Fund
are redeemed during this period, the proceeds of the redemption will be reduced
by the pro-rata share of the unamortized organization costs as of the date of
redemption.
Flexible Sales Charge Program
Effective September 6, 1994, each Fund commenced offering Class "A" Shares
and Class "C" Shares. Class "A" Shares incur a front-end sales charge and an
annual 12b-1 service fee. Class "C" Shares are sold without a sales charge but
incur annual 12b-1 distribution and service fees. Effective June 13, 1995, an
investor purchasing Class "C" Shares agrees to pay a contingent deferred sales
charge ("CDSC") of 1% if Class "C" Shares are redeemed within 12 months of
purchase.
Prior to the offering of Class "A" and Class "C" shares, the shares
outstanding were renamed Class "R" and are not subject to any 12b-1 distribution
or service fees. Effective with the offering of the new classes, Class "R"
Shares are generally available only for reinvestment of dividends by current "R"
shareholders and for already established Nuveen Unit Investment Trust
reinvestment accounts.
Derivative Financial Instruments
In October 1994, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 119 Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments which prescribes
disclosure requirements for transactions in certain derivative financial
instruments including future, forward, swap, and option contracts, and other
financial instruments with similar characteristics. Although the Funds are
authorized to invest in such financial instruments, and may do so in the future,
they did not make any such investments during the year ended January 31, 1996.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of increases and
decreases in net assets from operations during the reporting period.
B-65
<PAGE> 216
NUVEEN TAX-FREE MUTUAL FUNDS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. EXPENSE ALLOCATION
Expenses of the Funds that are not directly attributable to any class of
shares are prorated among the classes based on the relative net assets of each
class. Expenses directly attributable to a class of shares are recorded to the
specific class. Effective August 1, 1995, the Funds adopted a multiple class
plan pursuant to Rule 18f-3 under the Investment Company Act of 1940 and now
designate class specific expenses to include Rule 12b-1 distribution and service
fees, and other expenses incurred for services received by a class that differ
in either amount or kind. A breakdown of the class specific expenses is as
follows:
<TABLE>
<CAPTION>
AZ FL PA VA
------- ------- ------- -------
<S> <C> <C> <C> <C>
12b-1 distribution and service fees (for the year
ended January 31, 1996):
Class A.......................................... $ 5,232 $ 7,876 $ 9,108 $ 9,870
Class C.......................................... 1,539 1,356 7,082 5,640
Shareholders' servicing agent fees and expenses
(for the six month period ended July 31, 1995):
Class A.......................................... 1,219 2,388 2,563 2,427
Class C.......................................... 103 57 360 265
Class R.......................................... 9,209 17,836 32,785 36,716
Shareholders' reports -- printing and mailing
expenses (for the six month period ended July 31,
1995):
Class A.......................................... 574 1,437 1,336 1,588
Class C.......................................... 88 57 76 220
Class R.......................................... 17,565 32,346 31,233 40,281
Federal and state registration fees (for the six
month period ended July 31, 1995):
Class A.......................................... 237 786 1,858 744
Class C.......................................... 9 379 1,378 40
Class R.......................................... 1,870 715 1,519 1,185
</TABLE>
B-66
<PAGE> 217
NUVEEN TAX-FREE MUTUAL FUNDS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. FUND SHARES
Transactions in shares were as follows:
<TABLE>
<CAPTION>
AZ FL PA VA
------------------- ---------------------- --------------------- --------------------
YEAR YEAR YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
1/31/96 1/31/95 1/31/96 1/31/95 1/31/96 1/31/95 1/31/96 1/31/95
-------- -------- ---------- --------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shares sold:
Class A........... 274,843 116,098 420,409 175,913 411,858 153,866 369,049 227,287
Class C........... 26,227 5,260 7,638 7,959 62,079 50,810 39,142 38,465
Class R........... 239,176 401,984 824,725 1,397,272 585,804 1,297,150 336,826 931,986
Shares issued to
shareholders due
to reinvestment of
distributions from
net investment
income and from
net realized gains
from investment
transactions:
Class A........... 3,655 237 5,125 435 12,297 1,047 10,624 690
Class C........... 505 54 350 24 2,439 329 2,074 296
Class R........... 51,292 48,864 147,052 139,011 174,784 165,879 186,098 165,173
--------- --------- ----------- ---------- --------- --------- --------- ----------
595,698 572,497 1,405,299 1,720,614 1,249,261 1,669,081 943,813 1,363,897
--------- --------- ----------- ---------- --------- --------- --------- ----------
Shares redeemed:
Class A........... (29,122) (3,087) (16,925) (33,276) (27,436) (2,866) (52,547) (1,095)
Class C........... (313) (958) -- -- (10,542) -- (5,359) --
Class R........... (139,521) (254,213) (1,126,197) (639,360) (628,872) (676,175) (529,723) (680,380)
--------- --------- ----------- ---------- --------- --------- --------- ----------
(168,956) (258,258) (1,143,122) (672,636) (666,850) (679,041) (587,629) (681,475)
--------- --------- ----------- ---------- --------- --------- --------- ----------
Net increase....... 426,742 314,239 262,177 1,047,978 582,411 990,040 356,184 682,422
========= ========= =========== ========== ========= ========= ========= ==========
</TABLE>
4. DISTRIBUTIONS TO SHAREHOLDERS
On February 9, 1996, the Funds declared dividend distributions from their
ordinary income which were paid on March 1, 1996, to shareholders of record on
February 9, 1996, as follows:
<TABLE>
<CAPTION>
AZ FL PA VA
------ ------ ------ ------
<S> <C> <C> <C> <C>
Dividend per share:
Class A.............................................. $.0420 $.0410 $.0410 $.0430
Class C.............................................. .0350 .0345 .0340 .0365
Class R.............................................. .0435 .0430 .0430 .0450
====== ====== ====== ======
</TABLE>
B-67
<PAGE> 218
NUVEEN TAX-FREE MUTUAL FUNDS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. SECURITIES TRANSACTIONS
Purchases and sales (including maturities) of investments in municipal
securities and temporary municipal investments for the year ended January 31,
1996, were as follows:
<TABLE>
<CAPTION>
AZ FL PA VA
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
PURCHASES
Investments in municipal
securities.......................... $5,373,232 $14,977,473 $41,972,985 $29,255,837
Temporary municipal investments....... 7,000,000 11,900,000 20,880,000 13,000,000
SALES
Investments in municipal
securities.......................... 938,787 11,397,779 29,645,304 25,325,007
Temporary municipal investments....... 7,200,000 11,900,000 19,880,000 14,300,000
========== =========== =========== ===========
</TABLE>
At January 31, 1996, the identified cost of investments owned for federal
income tax purposes was the same as the cost for financial reporting purposes
for each Fund.
At January 31, 1996, the following Funds had unused capital loss
carryforwards available for federal income tax purposes to be applied against
future capital gains, if any. If not applied, the carryovers will expire as
follows:
<TABLE>
<CAPTION>
AZ FL PA
-------- -------- --------
<S> <C> <C> <C>
Expiration year:
2003.................................................... $127,444 $ 87,166 $377,256
2004.................................................... 17,690 141,494 468,676
-------- -------- --------
Total........................................... $145,134 $228,660 $845,932
======== ======== ========
</TABLE>
6. UNREALIZED APPRECIATION (DEPRECIATION)
Gross unrealized appreciation and gross unrealized depreciation of
investments at January 31, 1996, were as follows:
<TABLE>
<CAPTION>
AZ FL PA VA
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Gross unrealized:
Appreciation........................... $1,382,474 $3,438,260 $3,860,621 $4,243,525
Depreciation........................... (1,470) (14,203) (34,940) (88,830)
---------- ---------- ---------- ----------
Net unrealized appreciation.............. $1,381,004 $3,424,057 $3,825,681 $4,154,695
========== ========== ========== ==========
</TABLE>
7. MANAGEMENT FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Under the Trust's investment management agreement with Nuveen Advisory
Corp. (the "Adviser"), a wholly owned subsidiary of The John Nuveen Company,
each Fund pays to the Adviser an annual management fee, payable monthly, at the
rates set forth below which are based upon the average daily net asset value of
each Fund:
<TABLE>
<CAPTION>
AVERAGE DAILY NET ASSET VALUE MANAGEMENT FEE
-----------------------------------------------------------------------------------
<S> <C>
For the first $125,000,000......................................... .55 of 1%
For the next $125,000,000.......................................... .5375 of 1
For the next $250,000,000.......................................... .525 of 1
For the next $500,000,000.......................................... .5125 of 1
For the next $1,000,000,000........................................ .5 of 1
For net assets over $2,000,000,000................................. .475 of 1
</TABLE>
From inception of the Trusts on December 13, 1991 through January 31, 1996,
the Adviser waived part of its management fees or reimbursed certain expenses of
each Fund in order to limit total expenses to .75 of 1% of the
B-68
<PAGE> 219
NUVEEN TAX-FREE MUTUAL FUNDS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
average daily net asset value of each Fund, excluding any 12b-1 fees applicable
to Class A and Class C. The Adviser has currently agreed to continue its fee
waivers and expense reimbursements through July 31, 1996.
The management fee compensates the Adviser for overall investment advisory
and administrative services, and general office facilities. The Trust pays no
compensation directly to its Trustees who are affiliated with the Adviser or to
its officers, all of whom receive remuneration for their services to the Trust
from the Adviser.
8. COMPOSITION OF NET ASSETS
At January 31, 1996, there were an unlimited number of $.01 par value
shares authorized. Net assets consisted of:
<TABLE>
<CAPTION>
AZ FL PA VA
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Capital paid-in...................... $22,527,848 $58,092,437 $61,303,237 $61,873,371
Balance of undistributed net
investment income.................. 1,809 20,796 5,651 29,706
Accumulated net realized gain (loss)
from investment transactions....... (154,780) (228,660) (871,899) 10,255
Net unrealized appreciation of
investments........................ 1,381,004 3,424,057 3,825,681 4,154,695
----------- ----------- ----------- -----------
Net assets................. $23,755,881 $61,308,630 $64,262,670 $66,068,027
=========== =========== =========== ===========
</TABLE>
9. INVESTMENT COMPOSITION
Each Fund invests in municipal securities which include general obligation,
escrowed and revenue bonds. At January 31, 1996, the revenue sources by
municipal purpose for these investments, expressed as a percent of total
investments, were as follows:
<TABLE>
<CAPTION>
AZ FL PA VA
--- --- --- ---
<S> <C> <C> <C> <C>
Revenue Bonds:
Pollution Control......................................... 11% 2% 24% --%
Housing Facilities........................................ 11 16 8 9
Health Care Facilities.................................... 11 15 17 11
Water/Sewer Facilities.................................... 6 9 -- 17
Electric Utilities........................................ 2 16 3 --
Educational Facilities.................................... 14 1 13 12
Transportation............................................ 3 5 5 12
Lease Rental Facilities................................... 8 1 2 6
Other..................................................... 8 9 11 23
General Obligation Bonds.................................... 17 9 15 6
Escrowed Bonds.............................................. 9 17 2 4
--- --- --- ---
100% 100% 100% 100%
=== === === ===
</TABLE>
Certain long-term and intermediate-term investments owned by the Funds are
covered by insurance issued by several private insurers or are backed by an
escrow or trust containing U.S. Government or U.S. Government agency securities,
either of which ensure the timely payment of principal and interest in the event
of default (51% for Arizona, 61% for Florida and 24% for Virginia). Such
insurance or escrow, however, does not guarantee the market value of the
municipal securities or the value of the Funds' shares.
All of the temporary investments in short-term municipal securities have
credit enhancements (letters of credit, guarantees or insurance) issued by third
party domestic or foreign banks or other institutions.
For additional information regarding each investment security, refer to the
Portfolio of Investments of each Fund.
B-69
<PAGE> 220
NUVEEN TAX-FREE MUTUAL FUNDS
FINANCIAL HIGHLIGHTS
Selected data for a Common share outstanding throughout each period is as
follows:
<TABLE>
<CAPTION>
INCOME FROM INVESTMENT
OPERATIONS
---------------------------
NET REALIZED LESS DISTRIBUTIONS
AND ---------------------------
NET ASSET UNREALIZED DIVIDENDS TOTAL
VALUE NET GAIN (LOSS) FROM NET DISTRIBUTIONS NET ASSET RETURN ON
BEGINNING INVESTMENT FROM INVESTMENT FROM CAPITAL VALUE END NET ASSET
OF PERIOD INCOME++ INVESTMENTS** INCOME GAINS OF PERIOD VALUE+
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ARIZONA
- ----------------------------------------------------------------------------------------------------------------------------
CLASS A
Year ended 1/31,
1996 $ 9.930 $ .503 $ .829 $(.522) $ -- $10.740 13.68%
9/6/94 to 1/31/95 10.030 .203 (.086) (.217) -- 9.930 1.24
CLASS C
Year ended 1/31,
1996 9.840 .419 .830 (.439) -- 10.650 12.90
9/9/94 to 1/31/95 9.940 .169 (.052) (.217) -- 9.840 1.25
CLASS R
Year ended 1/31,
1996 9.850 .529 .831 (.540) -- 10.670 14.09
1995 10.880 .536 (1.026) (.540) -- 9.850 (4.39)
1994 10.050 .531 .853 (.522) (.032) 10.880 14.07
1993 9.525 .438 .563 (.435) (.041) 10.050 10.71
12/13/91 to 1/31/92 9.525 -- -- -- -- 9.525 --
- ----------------------------------------------------------------------------------------------------------------------------
FLORIDA
- ----------------------------------------------------------------------------------------------------------------------------
CLASS A
Year ended 1/31,
1996 9.730 .488 .840 (.498) -- 10.560 13.92
9/6/94 to 1/31/95 9.890 .193 (.148) (.202) (.003) 9.730 .52
CLASS C
Year ended 1/31,
1996 9.730 .413 .789 (.422) -- 10.510 12.54
9/16/94 to 1/31/95 9.720 .152 .021 (.163) -- 9.730 1.84
CLASS R
Year ended 1/31,
1996 9.750 .518 .824 (.522) -- 10.570 14.05
1995 10.740 .508 (.985) (.510) (.003) 9.750 (4.33)
1994 9.960 .511 .779 (.510) -- 10.740 13.22
1993 9.525 .440 .431 (.436) -- 9.960 9.33
12/13/91 to 1/31/92 9.525 -- -- -- -- 9.525 --
- ----------------------------------------------------------------------------------------------------------------------------
PENNSYLVANIA
- ----------------------------------------------------------------------------------------------------------------------------
CLASS A
Year ended 1/31,
1996 9.750 .498 .862 (.510) -- 10.600 14.22
9/6/94 to 1/31/95 9.920 .206 (.164) (.212) -- 9.750 .49
CLASS C
Year ended 1/31,
1996 9.650 .417 .843 (.430) -- 10.480 13.27
9/6/94 to 1/31/95 9.920 .176 (.235) (.211) -- 9.650 (.53)
CLASS R
Year ended 1/31,
1996 9.730 .527 .846 (.533) -- 10.570 14.40
1995 10.810 .531 (1.077) (.534) -- 9.730 (4.94)
1994 10.010 .533 .807 (.534) (.006) 10.810 13.67
1993 9.525 .451 .481 (.443) (.004) 10.010 9.97
12/13/91 to 1/31/92 9.525 -- -- -- -- 9.525 --
- ----------------------------------------------------------------------------------------------------------------------------
VIRGINIA
- ----------------------------------------------------------------------------------------------------------------------------
CLASS A
Year ended 1/31,
1996 $ 9.760 $ .509 $ .878 $(.509) $ (.038) $10.600 14.50%
9/6/94 to 1/31/95 9.980 .201 (.207) (.214) -- 9.760 .01
CLASS C
Year ended 1/31,
1996 9.740 .432 .868 (.432) (.038) 10.570 13.58
9/8/94 to 1/31/95 9.950 .171 (.167) (.214) -- 9.740 .10
CLASS R
Year ended 1/31,
1996 9.770 .537 .864 (.533) (.038) 10.600 14.65
1995 10.740 .531 (.964) (.537) -- 9.770 (3.92)
1994 10.030 .529 .726 (.527) (.018) 10.740 12.78
1993 9.525 .439 .499 (.433) -- 10.030 10.04
12/13/91 to 1/31/92 9.525 -- -- -- -- 9.525 --
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
---------------------------------------------------------------------------------------------------
RATIO OF NET RATIO OF NET
RATIO OF INVESTMENT RATIO OF INVESTMENT
NET ASSETS EXPENSES TO INCOME TO EXPENSES TO INCOME TO
END OF AVERAGE NET AVERAGE NET AVERAGE NET AVERAGE NET PORTFOLIO
PERIOD (IN ASSETS BEFORE ASSETS BEFORE ASSETS AFTER ASSETS AFTER TURNOVER
THOUSANDS) REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT++ REIMBURSEMENT++ RATE
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
ARIZONA
- ------------------------------------------------------------------------------------------------------------------------------
CLASS A
Year ended 1/31,
1996 $3,895 1.31% 4.49% 1.00% 4.80% 5%
9/6/94 to 1/31/95 1,124 1.60* 4.68* 1.00* 5.28* 29
CLASS C
Year ended 1/31,
1996 328 2.11 3.66 1.75 4.02 5
9/9/94 to 1/31/95 43 3.51* 2.79* 1.75* 4.55* 29
CLASS R
Year ended 1/31,
1996 19,533 1.15 4.72 .75 5.12 5
1995 16,554 1.06 5.12 .75 5.43 29
1994 16,140 1.25 4.48 .75 4.98 11
1993 8,026 1.75* 3.94* .75* 4.94* 43
12/13/91 to 1/31/92 15 -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
FLORIDA
- ------------------------------------------------------------------------------------------------------------------------------
CLASS A
Year ended 1/31,
1996 5,823 1.21 4.53 1.00 4.74 21
9/6/94 to 1/31/95 1,392 1.56* 4.52* 1.00* 5.08* 4
CLASS C
Year ended 1/31,
1996 168 2.16 3.62 1.75 4.03 21
9/16/94 to 1/31/95 78 2.84* 3.26* 1.75* 4.35* 4
CLASS R
Year ended 1/31,
1996 55,318 .88 4.93 .75 5.06 21
1995 52,538 .84 5.12 .75 5.21 4
1994 48,254 .89 4.69 .75 4.83 3
1993 23,727 1.24* 4.35* .75* 4.84* 1
12/13/91 to 1/31/92 15 -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
PENNSYLVANIA
- -------------------------------------------------------------------------------------------------------------------------------
CLASS A
Year ended 1/31,
1996 5,817 1.30 4.52 1.00 4.82 52
9/6/94 to 1/31/95 1,483 1.87* 4.56* 1.00* 5.43* 74
CLASS C
Year ended 1/31,
1996 1,101 2.14 3.70 1.75 4.09 52
9/6/94 to 1/31/95 494 2.52* 3.90* 1.75* 4.67* 74
CLASS R
Year ended 1/31,
1996 57,345 .96 4.93 .75 5.14 52
1995 51,499 .91 5.27 .75 5.43 74
1994 48,720 .94 4.82 .75 5.01 5
1993 23,680 1.25* 4.53* .75* 5.03* 15
12/13/91 to 1/31/92 15 -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
VIRGINIA
- -------------------------------------------------------------------------------------------------------------------------------
CLASS A
Year ended 1/31,
1996 $5,874 1.20% 4.73% 1.00% 4.93% 42%
9/6/94 to 1/31/95 2,215 1.57* 4.70* 1.00* 5.27* 40
CLASS C
Year ended 1/31,
1996 789 1.92 4.04 1.75 4.21 42
9/8/94 to 1/31/95 378 2.20* 4.12* 1.75* 4.57* 40
CLASS R
Year ended 1/31,
1996 59,405 .94 5.04 .75 5.23 42
1995 54,791 .82 5.33 .75 5.40 40
1994 55,773 .84 4.94 .75 5.03 7
1993 37,196 .96* 4.71* .75* 4.92* 12
12/13/91 to 1/31/92 15 -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(footnotes on following page)
B-70
<PAGE> 221
NUVEEN TAX-FREE MUTUAL FUNDS
FINANCIAL HIGHLIGHTS -- (CONTINUED)
* Annualized. For the year ended 1/31/93, the information is based on the
period beginning 2/28/92, commencement of operations.
** Net of taxes, if applicable (note 1).
+ Total Return on Net Asset Value is the combination of reinvested dividend
income, reinvested capital gains distributions, if any, and changes in stock
price per share.
++ Reflects the waiver of certain management fees and reimbursement of certain
other expenses by the Adviser (note 7).
B-71
<PAGE> 222
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Trustees and Shareholders of
Nuveen Multistate Tax-Free Trust:
We have audited the accompanying statements of net assets of Nuveen
Multistate Tax-Free Trust (a Massachusetts business trust comprising the
Arizona, Florida, Pennsylvania and Virginia Nuveen Tax-Free Value Funds),
including the portfolios of investments, as of January 31, 1996, and the related
statements of operations for the year then ended, the statements of changes in
net assets for each of the two years in the period then ended and the financial
highlights for the periods indicated thereon. These financial statements and
financial highlights are the responsibility of the Funds' management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
January 31, 1996, by correspondence with the custodian and brokers. 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 audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the net assets of the Nuveen
Arizona, Florida, Pennsylvania and Virginia Tax-Free Value Funds as of January
31, 1996, the results of their operations for the year then ended, the changes
in their net assets for each of the two years in the period then ended, and the
financial highlights for the periods indicated thereon in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
March 1, 1996
B-72
<PAGE> 223
FLAGSHIP TAX EXEMPT FUNDS TRUST
STATEMENT OF ADDITIONAL INFORMATION
DATED SEPTEMBER 26, 1996
ONE DAYTON CENTRE, ONE SOUTH MAIN STREET; DAYTON, OHIO 45402-2030
Flagship Tax Exempt Funds Trust (the "Fund") is a registered open-end,
management investment company organized in series. The Fund is divided into
separate series each of which is designed for individuals and taxable entities
that desire to invest in an actively managed portfolio of securities the
interest on which is exempt from Federal income taxes as well as income taxes of
the particular state indicated by the name of such series. There are two classes
of shares authorized for each series (Class A Shares and Class C Shares),
although they may not be available for all series. The current state series are:
Flagship Alabama Double Tax Exempt Fund
Flagship Arizona Double Tax Exempt Fund -- Class A Shares
Flagship Arizona Double Tax Exempt Fund -- Class C Shares
Flagship California Double Tax Exempt Fund
Flagship California Intermediate Tax Exempt Fund
Flagship Colorado Double Tax Exempt Fund
Flagship Connecticut Double Tax Exempt Fund -- Class A Shares
Flagship Connecticut Double Tax Exempt Fund -- Class C Shares
Flagship Florida Double Tax Exempt Fund -- Class A Shares
Flagship Florida Double Tax Exempt Fund -- Class C Shares
Flagship Florida Intermediate Tax Exempt Fund -- Class A Shares
Flagship Florida Intermediate Tax Exempt Fund -- Class C Shares
Flagship Florida Limited Term Tax Exempt Fund
Flagship Georgia Double Tax Exempt Fund -- Class A Shares
Flagship Georgia Double Tax Exempt Fund -- Class C Shares
Flagship Kansas Triple Tax Exempt Fund
Flagship Kentucky Limited Term Municipal Bond Fund -- Class A Shares
Flagship Kentucky Limited Term Municipal Bond Fund -- Class C Shares
Flagship Kentucky Triple Tax Exempt Fund -- Class A Shares
Flagship Kentucky Triple Tax Exempt Fund -- Class C Shares
Flagship Louisiana Double Tax Exempt Fund -- Class A Shares
Flagship Louisiana Double Tax Exempt Fund -- Class C Shares
Flagship Michigan Triple Tax Exempt Fund -- Class A Shares
Flagship Michigan Triple Tax Exempt Fund -- Class C Shares
Flagship Michigan Intermediate Tax Exempt Fund
Flagship Michigan Limited Term Tax Exempt Fund
Flagship Missouri Double Tax Exempt Fund -- Class A Shares
Flagship Missouri Double Tax Exempt Fund -- Class C Shares
Flagship New Jersey Double Tax Exempt Fund
Flagship New Jersey Intermediate Tax Exempt Fund
Flagship New Jersey Limited Term Tax Exempt Fund
Flagship New Mexico Double Tax Exempt Fund
Flagship New York Tax Exempt Fund -- Class A Shares
Flagship New York Tax Exempt Fund -- Class C Shares
Flagship New York Intermediate Tax Exempt Fund
Flagship New York Limited Term Tax Exempt Fund
Flagship North Carolina Double Tax Exempt Fund -- Class A Shares
Flagship North Carolina Double Tax Exempt Fund -- Class C Shares
Flagship Ohio Double Tax Exempt Fund -- Class A Shares
Flagship Ohio Double Tax Exempt Fund -- Class C Shares
Flagship Ohio Intermediate Tax Exempt Fund
Flagship Ohio Limited Term Tax Exempt Fund
Flagship Pennsylvania Triple Tax Exempt Fund -- Class A Shares
Flagship Pennsylvania Triple Tax Exempt Fund -- Class C Shares
C-1
<PAGE> 224
Flagship South Carolina Double Tax Exempt Fund
Flagship Tennessee Double Tax Exempt Fund -- Class A Shares
Flagship Tennessee Double Tax Exempt Fund -- Class C Shares
Flagship Virginia Double Tax Exempt Fund -- Class A Shares
Flagship Virginia Double Tax Exempt Fund -- Class C Shares
Flagship Wisconsin Double Tax Exempt Fund
NATIONAL SERIES:
Flagship All-American Tax Exempt Fund -- Class A Shares
Flagship All-American Tax Exempt Fund -- Class C Shares
Flagship High Yield Municipal Bond Fund
Flagship Intermediate Tax Exempt Fund -- Class A Shares
Flagship Intermediate Tax Exempt Fund -- Class C Shares
Flagship Limited Term Tax Exempt Fund -- Class A Shares
Flagship Limited Term Tax Exempt Fund -- Class C Shares
Flagship Short Term Tax Exempt Fund
Flagship U.S. Territories Tax Exempt Fund
INSURED SERIES:
Flagship Insured Limited Term Tax Exempt Fund
Flagship Insured Intermediate Tax Exempt Fund
Flagship Insured Tax Exempt Fund
The diversified series of the Fund are All-American, Arizona, Colorado,
Connecticut, Florida, Georgia, High Yield, Insured, Insured Intermediate,
Insured Limited Term, Intermediate, Kentucky, Limited Term, Louisiana, Michigan,
Missouri, New York, North Carolina, Ohio, Pennsylvania, Short Term, Tennessee
and Virginia. All other series are non-diversified. The initial offering to the
public of any series is determined at the discretion of the Board of Trustees.
Each series seeks high current after tax income consistent with liquidity and
preservation of capital primarily through investment in investment grade tax
exempt obligations.
This Statement of Additional Information provides certain detailed
information concerning the Fund. It is not a Prospectus and should be read in
conjunction with the current Prospectus (the "Prospectus") relating to the Fund.
A copy of the Prospectus may be obtained without charge by telephone or written
request to: Flagship Funds Inc., at One Dayton Centre, One South Main Street;
Dayton, Ohio 45402-2030; or by telephone (toll free) at 800-414-7447, or for TDD
call 800-360-4521.
This Statement of Additional Information relates to the Prospectus of the
Fund dated September 26, 1996.
C-2
<PAGE> 225
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Investment Objectives and Policies........................................................ C-4
Shares of the Fund........................................................................ C-6
Officers and Trustees..................................................................... C-8
Investment Advisory Services.............................................................. C-9
Distributor............................................................................... C-13
Custodian and Transfer Agent.............................................................. C-17
Auditors.................................................................................. C-17
Portfolio Transactions.................................................................... C-17
Yield and Total Return Calculation........................................................ C-18
Dividend Payment Options.................................................................. C-20
Purchase, Redemption and Pricing of Shares................................................ C-20
Taxes..................................................................................... C-23
Exchange and Reinvestment Privilege....................................................... C-24
Systematic Withdrawal Plan................................................................ C-24
Servicemarks and Trademarks............................................................... C-25
Other Information......................................................................... C-25
Index to Financial Statements............................................................. F-1
Appendix I -- Description of Municipal Securities Ratings................................. I-1
Appendix II -- Description of Hedging Techniques.......................................... II-1
</TABLE>
C-3
<PAGE> 226
INVESTMENT OBJECTIVES AND POLICIES
The Fund has adopted the following investment restrictions (which
supplement the matters described under "The Funds and Their Objectives" in the
Prospectus), none of which may be changed with respect to any series of the Fund
designated on the date hereof without the approval of the holders of a majority
of such series' outstanding shares. No existing series of the Fund may:
(1) Purchase the securities of any one issuer, other than the U.S.
Government or any of its instrumentalities, if immediately after such
purchase more than 5% of the value of its total assets would be invested in
such issuer, or if all series of the Fund would own in the aggregate more
than 10% of the outstanding voting securities of such issuer, except that
up to 25% of the value of the Fund's total assets may be invested without
regard to such 5% and 10% limitations.
(2) Make loans, except to the extent the purchase of the debt
obligations (including repurchase agreements) in accordance with the
series' investment objectives and policies are considered loans.
(3) Issue securities senior to the shares or borrow money, except from
banks for extraordinary or emergency purposes (and not for leveraging) or
in order to meet unexpectedly heavy redemption requests in an amount not
exceeding 10% of the value of the series' assets, or purchase any
securities at any time when the total outstanding borrowings from banks
attributable to such series exceeds 5% of the series' net assets.
(4) Mortgage, pledge or hypothecate any assets except as required by
law or agreement to secure borrowings permitted by clause (3) above.
(5) Purchase or sell real estate, real estate mortgage loans, real
estate investment trust securities, commodities, commodity contracts or oil
and gas interests, except to the extent that the tax-exempt and U.S.
government securities the series may invest in would be considered to be
such loans, securities, contracts or interests and except to the extent the
various hedging instruments the series may invest in would be considered to
be commodities or commodities contracts.
(6) Acquire securities of other investment companies (other than in
connection with the acquisition of such companies), except that a series
may from time to time invest up to 10% of its assets in tax-exempt funds,
including money market funds.
(7) Act as an underwriter of securities except to the extent that in
connection with disposition of portfolio securities it may be deemed to be
an underwriter.
(8) Purchase securities on margin, make short sales of securities or
maintain a net short position except to the extent the various hedging
instruments the series may invest in or the options the series may write
would be considered to involve short sales or a net short position.
(9) Invest more than 25% of its assets in a single industry. However,
as described in the Prospectus, particular series may from time to time
invest more than 25% of their assets in one or more particular segments of
the tax exempt obligations market.
In order to permit the sale of shares in certain states, the Fund may make
commitments more restrictive than the operating restrictions described above.
Should the Fund determine that any such commitment is no longer in the best
interests of the Fund and its stockholders, it will revoke the commitment by
terminating sales of its shares in the state involved. Specifically, in
addition, each series has made a commitment, although not a fundamental policy,
to not purchase warrants.
Portfolio Turnover. Although the Fund anticipates that the portfolio
turnover of each series will be less than 100% in any fiscal year, each series
will adjust its turnover as necessary or appropriate to seek to attain its
investment objective.
By purchasing obligations in larger denominations and with greater
variation in maturity and interest payment dates than investors may be able to
achieve on their own, the Fund, through each of its series, offers investors
economies of scale and greater diversification. In addition, an investment in
any series of the Fund gives investors a convenient and affordable method of
avoiding administrative burdens and transaction costs normally involved in
direct purchases of tax exempt obligations. For instance, investors do not have
to keep track of detailed maturity schedules, formulate specific reinvestment
plans, arrange for safekeeping of the obligations, obtain price and delivery
terms from numerous dealers, or maintain separate principal, income and capital
gain and loss records.
Municipal Leases and Participations Therein. These are obligations in the
form of a lease or installment purchase which is issued by state and local
governments to acquire equipment and facilities. Income from such
C-4
<PAGE> 227
obligations is exempt from local and state taxes in the state of issuance.
"Participations" in such leases are undivided interests in a portion of the
total obligation. Municipal Leases frequently have special risks not normally
associated with general obligation or revenue bonds. The constitutions and
statutes of all states contain requirements that the state or a municipality
must meet to incur debt. These often include voter referenda, interest rate
limits and public sale requirements. Leases and installment purchase or
conditional sale contracts (which normally provide for title to the leased asset
to pass eventually to the governmental issuer) have evolved as a means for
governmental issuers to acquire property and equipment without meeting the
constitutional and statutory requirements for the issuance of debt. The
debt-issuance limitations are deemed to be inapplicable because of the inclusion
in many leases or contracts of "non-appropriation" clauses that provide that the
governmental issuer has no obligation to make future payments under the lease or
contract unless money is appropriated for such purpose by the appropriate
legislative body on a yearly or other periodic basis.
In addition to the "non-appropriation" risk, Municipal Leases have
additional risk aspects because they represent a relatively new type of
financing that has not yet developed in many cases the depth of marketability
and liquidity associated with conventional bonds; moreover, although the
obligations will be secured by the leased equipment, the disposition of the
equipment in the event of non-appropriation or foreclosure might, in some cases,
prove difficult. In addition, in certain instances the tax-exempt status of the
obligations will not be subject to the legal opinion of a nationally recognized
"bond counsel," as is customarily required in larger issues of municipal
obligations. However, in all cases the Fund will require that a Municipal Lease
purchased by the Fund be covered by a legal opinion (typically from the issuer's
counsel) to the effect that, as of the effective date of such Lease, the Lease
is the valid and binding obligation of the governmental issuer.
Municipal Leases and participations will be purchased pursuant to analysis
and review procedures which the Manager believes will minimize risks to
shareholders. It is possible that more than 5% of a series' net assets will be
invested in Municipal Leases which, pursuant to guidelines established by the
Securities and Exchange Commission ("SEC"), have been determined by the Board of
Trustees to be liquid securities. When evaluating the liquidity of a Municipal
Lease, the Board, or the investment adviser pursuant to procedures established
by the Board, considers all relevant factors including frequency of trading,
availability of quotations, the number of dealers and their willingness to make
markets, the nature of trading activity and the assurance that liquidity will be
maintained. With respect to unrated Municipal Leases, credit quality is also
evaluated.
Hedging and Other Defensive Actions. Each series of 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. The Trustees and investment adviser of
the Fund believe that it is desirable and possible in various market
environments to partially hedge the portfolio against fluctuations in market
value due to interest rate fluctuations by investment in financial futures and
index futures as well as related put and call options on such instruments. Both
parties entering into an index or financial futures contract are required to
post an initial deposit of 1% to 5% of the total contract price. Typically,
option holders enter into offsetting closing transactions to enable settlement
in cash rather than take delivery of the position in the future of the
underlying security. The Fund will only sell covered futures contracts, which
means that the Fund segregates assets equal to the amount of the obligations.
These transactions present certain risks. In particular, the imperfect
correlation between price movements in the futures contract and price movements
in the securities being hedged creates the possibility that losses on the hedge
by a series of the Fund may be greater than gains in the value of the securities
in such series' portfolio. In addition, futures and options markets may not be
liquid in all circumstances. As a result, in volatile markets, a series of the
Fund may not be able to close out the transaction without incurring losses
substantially greater than the initial deposit. Finally, the potential daily
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.
No series of the Fund will 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 such series' net assets. Each series
will invest in these instruments only in markets believed by the investment
adviser to be active and sufficiently liquid. For further information regarding
these investment strategies and risks presented thereby, see Appendix II to this
Statement of Additional Information.
C-5
<PAGE> 228
Each series of the Fund reserves the right, if necessary in the judgment of
the Trustees and the investment adviser for liquidity or defensive purposes
(such as thinness in the market for municipal securities or an expected
substantial decline in value of long-term obligations), to temporarily invest up
to 20% of its assets in obligations issued or guaranteed by the U.S. Government
and its agencies or instrumentalities, including up to 5% in adequately
collateralized repurchase agreements relating thereto. Interest on each
instruments is taxable for Federal income tax purposes and would reduce the
amount of tax-free interest payable to shareholders.
SHARES OF THE FUND
Four classes of shares, Class A Shares, Class B Shares, Class C Shares, and
Class R Shares, are authorized for all series with Class A Shares currently
offered by all series and Class C Shares currently offered by some series. Other
classes of shares in other series may be offered in the future. Each series of
the Fund is authorized to offer up to four classes of shares which may be
purchased at a price equal to their net asset value per share, plus (for certain
classes) a sales charge (discussed below) which, at the election of the
purchaser, may be imposed either (i) at the time of purchase (the "Class A
Shares") or (ii) on a contingent deferred basis (the "Class B Shares" or the
"Class C Shares"). See "How to Buy Shares" in the Prospectus. The four classes
of shares each represent an interest in the same portfolio of investments of the
Fund and have the same rights, except (i) Class B and Class C Shares bear the
expenses of the deferred sales arrangement and any expenses (including a higher
distribution services fee) resulting from such sales arrangement, (ii) each
class that is subject to a distribution fee has exclusive voting rights with
respect to those provisions of the Fund's Rule 12b-1 distribution plan which
relate only to such class and (iii) the classes have different exchange
privileges. Additionally, Class B Shares will automatically convert into Class A
Shares after a specified period of years (as discussed below.) The net income
attributable to Class B and Class C Shares and the dividends payable on Class B
and Class C Shares will be reduced by the amount of the higher distribution
services fee and certain other incremental expenses associated with the deferred
sales charge arrangement. The net asset value per share of Class A Shares, Class
B Shares, Class C Shares and Class R Shares is expected to be substantially the
same, but it may differ from time to time. Class B, Class C and Class R Shares
are authorized for all series, but may not be available for all series. Prior to
implementing the multiple class distribution for any series, the Trustees will
re-denominate all outstanding shares in such series as Class A Shares.
Class A Shares. The public offering price of Class A Shares is equal to net
asset value plus an initial sales charge that is a variable percentage of the
offering price depending on the amount of the sale. Net asset value will be
determined as described in the Prospectus under "How Fund Shares are Priced".
The net assets attributable to Class A Shares are subject to an ongoing
distribution services fee (see "Distributor" below). Purchasers of Class A
Shares may be entitled to reduced sales charges through a combination of
investments, rights of accumulation or a Letter of Intent even if their current
investment would not normally qualify for a quantity discount (see "Purchase,
Redemption and Pricing of Shares" below). Class A Shares also qualify for
certain exchange and reinvestment privileges as described in "Exchange And
Reinvestment Privilege" below. The investor or the investor's broker or dealer
is responsible for promptly forwarding payment to the Fund for shares purchased.
Class A Shares may be subject to a CDSC as explained in the Prospectus.
Class B Shares. Class B Shares are sold at net asset value without a sales
charge at the time of purchase. Instead, the sales charge is imposed on a
contingent deferred basis. The net assets attributable to Class B Shares are
subject to an ongoing distribution fee (see "Distributor" below). The amount of
the contingent deferred sales charge, if any, will vary depending on the number
of years from the time of payment of the purchase of Class B Shares until the
time such shares are redeemed. Solely for purposes of determining the number of
years from the time of any payment of the purchase of Class B Shares, all
payments during any month will be aggregated and deemed to have been made on the
last day of the month.
Class B Shares automatically convert into Class A Shares after 8 years (5
years intermediate and limited term) after the end of the month in which a
shareholder's order to purchase Class B Shares was accepted. As a result, the
shares that converted will no longer be subject to a sales charge upon
redemption and will enjoy the lower Class A distribution services fee.
For purposes of conversion of Class A Shares, Class B Shares purchased
through the reinvestment of dividends and distributions paid in respect of Class
B Shares in a shareholder's account will be considered to be held in a separate
sub-account. Each time any Class B Shares in the shareholder's account (other
than those in the sub-account) convert to Class A Shares, an equal pro rata
portion of the Class B Shares in the sub-account also will convert to Class A
Shares. The conversion of Class B Shares to Class A Shares is subject to the
continuing availability of an opinion of counsel to the effect that (i) the
assessment of the higher distribution services fee and transfer agency cost with
respect to Class B Shares does not result in the Fund's dividends or
distributions
C-6
<PAGE> 229
constituting "preferential dividends" under the Internal Revenue Code of 1986,
as amended (the "Code"), and (ii) that the conversion of Class B Shares does not
constitute a taxable event under federal income tax law. The conversion of Class
B Shares to Class A Shares may be suspended if such an opinion is no longer
available. In that event, no further conversions of Class B Shares would occur,
and Class B Shares might continue to be subject to the higher distribution
services fee for an indefinite period, which period may extend beyond the
conversion period after the end of the month in which the shares were issued.
The Class B Shares are otherwise the same as Class C Shares and are subject
to the same conditions, except that they can only be exchanged for other Class B
Shares without imposition of sales charges.
Class C Shares. Class C Shares are sold at net asset value (see "How Fund
Shares are Priced" in the Prospectus) without a sales charge at the time of
purchase. Instead, Class C Shares are subject to a 1% contingent deferred sales
charge ("CDSC") if they are redeemed within one year after purchase. Their net
assets are subject to an ongoing distribution services fee of (a) 0.95% for any
fund with other than a short term or limited term maturity, of which 0.75% is an
asset based sales charge and 0.20% is a service fee or (b) for any fund with a
short term or limited term maturity, an ongoing distribution services fee of
0.70%, of which 0.50% is an asset based sales charge and 0.20%, is a service fee
(see "Distributor" below). The Class C Shares have no conversion rights.
The CDSC will not be imposed on amounts representing increases in net asset
value above the initial purchase price. Additionally, no charge will be assessed
on Class B or Class C Shares derived from reinvestment of dividends or capital
gains distributions. The CDSC will be waived (i) on redemption of shares
following the death of a shareholder, (ii) for redemptions following the
disability (as determined in writing by the Social Security Administration) or
death of the shareholder, and (iii) when Class B or Class C Shares are exchanged
for Class B or Class C Shares of other Flagship Funds distributed by the
Distributor (see "Exchange And Reinvestment Privilege" below). In the case of an
exchange, the length of time that the investor held the original Class B or
Class C Shares is counted towards satisfaction of the period during which a
deferred sales charge is imposed on the Class B or Class C Shares for which the
exchange was made.
Class R Shares. You may purchase Class R Shares with monies representing
dividends and capital gain distributions on Class R Shares of the Fund. Also,
you may purchase Class R Shares if you are within the following specified
categories of investors who are also eligible to purchase Class A Shares at net
asset value without an up-front sales charge: officers, current and former
trustees of the Fund, bona fide, full-time and retired employees of Flagship,
and subsidiaries thereof, or their immediate family members; any person who, for
at least 90 days, has been an officer, director or bona fide employee of any
Authorized Dealer, or their immediate family members; officers and directors of
bank holding companies that make Fund shares available directly or through
subsidiaries or bank affiliates; and bank or broker-affiliated trust
departments; persons investing $1 million or more in Class R Shares; and clients
of investment advisers, financial planners or other financial intermediaries
that charge periodic or asset-based "wrap" fees for their services.
If you are eligible to purchase either Class R Shares or Class A Shares
without a sales charge at net asset value, you should be aware of the
differences between these two classes of shares. Class A Shares are subject to
an annual distribution fee to compensate Flagship Funds Inc. (the "Distributor")
for distribution costs associated with the Fund and to an annual service fee to
compensate Authorized Dealers for providing you with ongoing account services.
Class R Shares are not subject to a distribution or service fee and,
consequently, holders of Class R Shares may not receive the same types or levels
of services from Authorized Dealers. In choosing between Class A Shares and
Class R Shares, you should weigh the benefits of the services to be provided by
Authorized Dealers against the annual service fee imposed upon the Class A
Shares.
C-7
<PAGE> 230
OFFICERS AND TRUSTEES
The Trustees and executive officers of the Fund are listed below. Each of
them holds the same positions with each series of the Fund and with Flagship
Admiral Funds Inc. Except as indicated, each individual has held the office
shown or other offices in the same company for the last five years and has a
business address at One Dayton Centre, One South Main Street, Dayton, Ohio
45402-2030, which is also the address of the Fund.
The "interested" trustees of the Fund as defined in the Investment Company
Act of 1940 (the "1940 Act") are indicated by an asterisk (*).
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND ADDRESS POSITION WITH THE FUND DURING PAST FIVE YEARS
- ---------------------------- ----------------------- -------------------------------------
<S> <C> <C>
Bruce Paul Bedford* Trustee Chairman and Chief Executive Officer
of Flagship Resources Inc.
("Flagship"), Flagship Financial Inc.
(the "Manager"), and Flagship Funds
Inc. (the "Distributor").
Richard P. Davis* Trustee and President President and Chief Operating Officer
of Flagship, the Manager, and the
Distributor.
Robert P. Bremner Trustee Private Investor and Management
3725 Huntington Street, NW Consultant.
Washington, DC 20015
Joseph F. Castellano Trustee Professor and former Dean, College of
4249 Honeybrook Avenue Business and Administration, Wright
Dayton, Ohio 45415 State University.
Paul F. Nezi Trustee Executive Vice President and Chief
227 E. Dixon Avenue Marketing Officer, ChoiceCare; prior
Dayton, Ohio 45419 to March 1993, Vice President and
General Manager, Advanced Imaging
Products, a division of AM
International; prior to March 1991,
Partner, Hooper & Nezi, a marketing
and communications firm.
William J. Schneider Trustee Senior Partner, Miller-Valentine
4000 Miller-Valentine Ct. Partners; Vice President,
P.O. Box 744 Miller-Valentine Realty, Inc.
Dayton, OH 45401
M. Patricia Madden Vice President Vice President, Operations of the
Distributor
Michael D. Kalbfleisch Treasurer and Secretary Vice President and Chief Financial
Officer of Flagship, the Manager and
the Distributor
LeeAnne G. Sparling Controller Director of Portfolio Operations of
the Manager
</TABLE>
COMPENSATION: TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
TOTAL COMPENSATION
FROM REGISTRANT AND
AGGREGATE FUND COMPLEX
NAME OF PERSON COMPENSATION PAID TO TRUSTEES
POSITION FROM REGISTRANT (NUMBER OF OTHER FUNDS)
----------------------------------------------- --------------- -----------------------
<S> <C> <C>
Robert P. Bremner.............................. $20,500 $25,500(4)
Trustee
Joseph F. Castellano........................... $21,500 $26,500(4)
Trustee
William J. Schneider........................... $21,500 $26,500(4)
Trustee
Paul F. Nezi................................... $21,500 $26,500(4)
Trustee
</TABLE>
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<PAGE> 231
As of August 8, 1996, to the knowledge of management, each of the following
persons beneficially owned the percentage noted of the fund listed beside their
name:
<TABLE>
<S> <C> <C>
Alabama Fund Farley L. Berman 10.39%
1234 Champaign Ave.
Anniston, AL 36207
Prudential Securities Inc. 7.32%
FBO Jerry F. Wilson
P.O. Box 300
Addison, AL 35540
Kansas Fund PaineWebber 8.62%
FBO Sonya & Leonard Ropfogel, Trustees
155 N. Market, Suite 1000
Wichita, KS 67202
South Carolina Fund Janece Marsha Garrison 10.33%
1017 Stevens Creek Road
Augusta, GA 30907
J.C. Bradford & Co. Cust. FBO 6.38%
Ruth K. Keever
330 Commerce St.
Nashville, TN 37201
Joseph Christopher Garrison 10.33%
1017 Stevens Creek Road
Augusta, GA 30907
James G. McMillan 8.96%
6 Rock Ledge Ct.
Banner Elk, NC 28604
</TABLE>
As of such date, no person beneficially owned 5% or more of the outstanding
shares of the following sub-trusts of the Trust: All-American Fund, Arizona
Fund, Colorado Fund, Connecticut Fund, Florida Fund, Florida Intermediate Fund,
Georgia Fund, Intermediate Fund, Kentucky Fund, Kentucky Limited Term Fund,
Limited Term Fund, Louisiana Fund, Michigan Fund, Missouri Fund, New Jersey
Fund, New Jersey Intermediate Fund, New Mexico Fund, New York Fund, North
Carolina Fund, Ohio Fund, Pennsylvania Fund, Tennessee Fund, Virginia Fund and
Wisconsin Fund.
All trustees and officers as a group own less than 1% of the outstanding
shares of the Trust.
Prior to the sale of shares of any series of the Fund to the public, all of
the shares of such series of the Fund will be owned by the Manager.
INVESTMENT ADVISORY SERVICES
As stated in the Prospectus, Flagship Financial Inc. acts as investment
adviser (the "Manager") to the Fund and each series pursuant to separate
Investment Advisory Agreements (the "Advisory Agreements") with each series. See
"How the Funds are Managed" in the Prospectus for a description of the Manager's
duties as investment adviser. The Manager's administrative obligations include:
(i) assisting in supervising all aspects of the Fund's operations; (ii)
providing the Fund, at the Manager's expense, with the services of persons
competent to perform such administrative and clerical functions as are necessary
in order to provide effective corporate administration; and (iii) providing the
Fund, at the Manager's expense, with adequate office space and related services.
The Fund's accounting records are maintained, at the Fund's expense, by its
Custodian, Boston Financial.
As compensation for the services rendered by the Manager under the Advisory
Agreements dated March 8, 1985, with respect to the All American, Michigan and
Ohio series; November 21, 1985, with respect to the Georgia, North Carolina and
Virginia series; July 25, 1986, with respect to the Arizona series; February 2,
1987, with respect to the Colorado, Connecticut, Kentucky and Missouri series;
July 20, 1987 with respect to the New York, Florida, Louisiana, New Jersey, and
Tennessee series; June 15, 1990, with respect to the Kansas series; May 15,
1992, with respect to the Intermediate, New Jersey, New Jersey Intermediate,
Pennsylvania and New Mexico series; June 15, 1992, with respect to the Alabama,
Florida Intermediate and South Carolina series; and February 4, 1994 with
respect to the Wisconsin series; the Manager is paid a fee, computed daily and
payable monthly with respect to each series on a separate basis, at an annual
rate of .50% of the average daily net assets of such series. As compensation for
the services rendered by the Manager under the Advisory Agreement dated July 20,
1987, with respect to the Limited Term series, and April 21, 1995, with respect
to the Kentucky Limited Term Municipal Bond Fund, the
C-9
<PAGE> 232
Manager is paid a fee, computed daily and payable monthly at an annual rate of
.30% of the average daily net assets up to $500 million plus .25% of the average
daily net assets in excess of $500 million.
For the most recent fiscal periods ended May 31, 1994, 1995, and 1996, with
respect to each series, the amounts paid to the Manager by such series of the
Fund were as follows:
<TABLE>
<CAPTION>
STATE SERIES 1994 1995 1996
------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Alabama.................................... $ -- $ -- $ --
Arizona.................................... 43,162 122,032 140,063
Colorado................................... -- -- --
Connecticut................................ 255,441 396,094 421,811
Florida.................................... 314,749 633,336 980,751
Florida Intermediate....................... -- -- --
Georgia.................................... 165,095 287,399 235,562
Kansas..................................... -- -- 38,552
Kentucky................................... 294,356 559,150 799,646
Kentucky Limited........................... 2,496
Louisiana.................................. 24,821 96,442 148,090
Michigan................................... 645,194 729,008 873,242
Missouri................................... 107,595 244,965 494,006
New Jersey................................. -- -- --
New Jersey Intermediate.................... -- -- --
New Mexico................................. -- 17,972 32,291
New York................................... -- -- 6,359
North Carolina............................. 676,431 675,473 674,110
Ohio....................................... 1,901,128 1,926,295 1,899,111
Pennsylvania............................... 104,513 58,095 76,802
South Carolina............................. -- -- --
Tennessee.................................. 548,942 776,025 921,400
Virginia................................... 133,981 211,367 310,198
Wisconsin.................................. -- -- --
NATIONAL SERIES
All-American............................... 267,846 420,954 644,844
Intermediate............................... -- -- --
Limited Term............................... 1,313,071 1,369,218 1,259,810
---------- ---------- ----------
TOTAL............................ $6,796,325 $8,523,825 $9,959,144
========== ========== ==========
</TABLE>
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<PAGE> 233
The tables set forth above do not include portions of the Manager's fee
which were permanently waived by the Manager. The amounts of compensation waived
by the Manager for such period were:
<TABLE>
<CAPTION>
STATE SERIES 1994 1995 1996
------------------------------------------ ------------ ----------- -----------
<S> <C> <C> <C>
Alabama................................... $ 107 $ 4,854 $ 12,670
Arizona................................... 377,569 277,079 279,976
Colorado.................................. 162,901 169,048 173,105
Connecticut............................... 768,360 615,631 636,447
Florida................................... 1,676,047 1,093,473 685,218
Florida Int............................... 2,503 19,498 38,041
Georgia................................... 421,674 321,940 366,193
Kansas.................................... 425,046 404,085 429,494
Kentucky.................................. 1,521,748 1,357,696 1,328,971
Kentucky Limited.......................... -- -- 10,100
Louisiana................................. 290,721 240,777 222,310
Michigan.................................. 653,131 626,290 586,307
Missouri.................................. 779,519 726,130 598,909
New Jersey................................ 18,392 31,524 48,257
New Jersey Intermediate................... 40,542 45,333 45,699
New Mexico................................ 225,840 226,715 226,537
New York.................................. 215,688 236,428 244,412
North Carolina............................ 290,321 289,460 318,954
Ohio...................................... 404,687 375,587 522,006
Pennsylvania.............................. 111,454 164,423 156,472
South Carolina............................ 23,928 37,587 46,785
Tennessee................................. 597,902 442,963 389,150
Virginia.................................. 404,880 351,513 312,111
Wisconsin................................. -- 22,083 55,421
NATIONAL SERIES
------------------------------------------
All-American.............................. 753,169 632,023 588,351
Intermediate.............................. 146,230 187,583 228,684
Limited Term.............................. 657,881 458,100 332,579
----------- ---------- ----------
TOTAL.............................. $ 10,970,240 $ 9,357,823 $ 8,883,159
=========== ========== ==========
</TABLE>
Also, under separate agreements with the following Funds, for the period
ended May 31, 1996, Manager agreed to subsidize certain expenses, excluding
advisory and distribution fees, as set forth below. The Manager is not obligated
to subsidize such expenses and may not do so in the future.
C-11
<PAGE> 234
<TABLE>
<CAPTION>
AMOUNT
SUBSIDIZED
STATE SERIES 5/31/96
----------------------------------------------- ----------
<S> <C>
Alabama........................................ $ 57,787
Arizona........................................ 57,950
Colorado....................................... 84,532
Florida Intermediate........................... 37,757
Kansas......................................... 66,694
Kentucky Limited............................... 40,302
New Jersey..................................... 67,802
New Jersey Intermediate........................ 56,297
New York....................................... 26,209
Pennsylvania................................... 11,285
South Carolina................................. 40,103
Wisconsin...................................... 47,172
NATIONAL SERIES
-----------------------------------------------
Intermediate................................... 41,246
--------
TOTAL................................... $ 635,136
========
</TABLE>
Each Advisory Agreement will terminate automatically upon its assignment
and its continuance must be approved annually by the Fund's trustees or a
majority of the particular series' outstanding voting shares and in either case,
by a majority of the Fund's disinterested trustees. Each Advisory Agreement is
terminable at any time without penalty by the trustees or by a vote of a
majority of the particular series' outstanding voting shares on 60 days' written
notice to the Manager, or by the Manager on 60 days' written notice to the Fund.
The Manager has advanced all organization expenses of the Fund and each
series, which include printing of documents, fees and disbursements of the
Fund's counsel and accountants, registration fees under the Securities Act of
1933, the 1940 Act, and state securities laws, as well as the initial fees of
the Fund's custodian and transfer agent. Such fees aggregated approximately
$83,600 for the Colorado series, $69,000 for the Limited Term series, $83,600
for the Missouri series, $72,000 for the Louisiana series, $284,600 for the
Florida series, $257,000 for the New York series, $42,800 for the Kansas series,
$58,900 for the New Jersey series, $32,200 for the New Jersey Intermediate
series, $51,700 for the New Mexico series, $35,700 for the Intermediate series,
$35,400 for the South Carolina series, $27,400 for the Florida Intermediate
series, $60,800 for the Alabama series, $98,000 for the Wisconsin series and
$29,400 for the Kentucky Limited Term series. The Manager advanced $63,000 for
reorganizational expenses for the Pennsylvania Series.
The expenses are being reimbursed to the Manager by uniform pro rata
deductions from the net asset value of each series of the Fund accrued daily and
paid monthly over the five-year period which commenced June 1, 1991, with
respect to the Louisiana, and Missouri series; June 1, 1992, with respect to the
New York series; June 1, 1993, with respect to the Colorado, Kansas and New
Mexico series, and January 1, 1996 with respect to the Pennsylvania Series. For
the Alabama, Florida, Intermediate, Kentucky Limited Term, New Jersey
Intermediate, South Carolina and Wisconsin Series, reimbursement commenced on
June 1, 1996 and will be paid pro rata over a three-year period.
The Manager has agreed that in the event the operating expenses of the
series (including fees paid to the Manager and payments to the Distributor but
excluding taxes, interest, brokerage and extraordinary expenses) for any fiscal
year ending on a date on which the related Advisory Agreement is in effect,
exceed the expense limitations imposed by applicable state securities laws or
any regulations thereunder, it will, up to the amount of its fee, reduce its fee
or reimburse the Fund in the amount of such excess.
A series may advertise its actual expenses expressed as a percentage of its
net assets and may also quote the average expense percentage of funds of the
same type as calculated by Lipper Analytical Services.
Securities held by any series may also be held by, or be appropriate
investments for, other series or other investment advisory clients of the
Manager. Because of different objectives or other factors, a particular security
may be bought for one or more clients when one or more clients are selling the
same security.
If purchases or sales of securities for any series of the Fund or other
advisory clients arise for consideration at or about the same time, transactions
in such securities will be made, insofar as feasible, for the affected series
and such
C-12
<PAGE> 235
other clients in a manner deemed equitable to all. To the extent that
transactions on behalf of more than one client of the Manager during the same
period may increase the demand for securities being purchased or the supply of
securities being sold, there may be an adverse effect on price.
DISTRIBUTOR
As stated in the Prospectus, Flagship Funds Inc. acts as the Distributor
(the "Distributor") of shares of each series in accordance with the terms of
separate Distribution Agreements with each series. The Distributor may conduct
an initial subscription period offering respecting each series of the Fund and
may thereafter make a continuous offering of such series' shares and will be
responsible for all sales and promotion efforts. The Distribution Agreements
must be approved in the same manner as the Advisory Agreements discussed under
"How the Funds are Managed" in the Prospectus and will terminate automatically
if assigned by either party thereto and are terminable at any time without
penalty by the Board of Trustees of the Fund or by vote of a majority of the
pertinent series' outstanding shares on 60 days' written notice to the
Distributor and by the Distributor on 60 days' written notice to the Fund.
Pursuant to Rule 12b-1 under the 1940 Act, the Fund has adopted a plan (the
"Plan") with respect to Class A Shares, Class B Shares and Class C Shares which
permits the Fund to pay for certain distribution and promotion expenses related
to marketing the Fund's shares.
The Plan authorizes each Fund to expend its monies in an amount equal to
the aggregate for all such expenditures to such percentage of each Fund's daily
net asset values attributable to each class of shares as may be determined from
time to time by vote cast in person at a meeting called for such purpose, by a
majority of the Funds' disinterested trustees. The scope of the foregoing shall
be interpreted by the trustees, whose decision shall be conclusive except to the
extent it contravenes established legal authority. Without in any way limiting
the discretion of the trustees, the following activities are hereby declared to
be primarily intended to result in the sale of shares of the Fund: advertising
the Fund or the Fund's investment adviser's mutual fund activities; compensating
underwriters, dealers, brokers, banks and other selling entities and sales and
marketing personnel of any of them for sales of shares of the Fund, whether in a
lump sum or on a continuous, periodic, contingent, deferred or other basis;
compensating underwriters, dealers, brokers, banks and other servicing entities
and servicing personnel (including the Fund's investment adviser and its
personnel of any of them for providing services to shareholders of the Fund
relating to their investment in the Fund, including assistance in connection
with inquiries relating to shareholder accounts; the production and
dissemination of prospectuses including statements of additional information) of
the Fund and the preparation, production and dissemination of sales, marketing
and shareholder servicing materials; and the ordinary or capital expenses, such
as equipment, rent, fixtures, salaries, bonuses, reporting and record-keeping
and third party consultancy or similar expenses relating to any activity for
which payment is authorized by the trustees; and the financing of any activity
for which payment is authorized by the trustees. Pursuant to the Plan, each
series itself through authorized officers may make similar payments for
marketing services to non-broker-dealers who enter into service agreements with
such series. Distribution costs in the early years of any series of the Fund are
likely to be higher than the distribution fee paid to the Distributor by such
series of the Fund. For example, in the first year of operations distribution
expenses might amount to $500,000 and the fee paid by the Fund might be capped
at only $100,000 in view of the Fund's relatively small size, whereas in later
years distribution expenses might be $1 million but the distribution fee could
be even greater than $1 million in view of the growth of the Fund.
The maximum amount payable annually by any series of the Fund under the
Plan and related agreements with respect to the Class A Shares is .40% of such
series' average daily net assets for the year attributable to such Class A
Shares. For Class B Shares, the maximum amount payable annually is .95% of such
series' average daily net assets attributable to such Class B Shares. For Class
C Shares, the maximum amount payable annually is .95% of such series' average
daily net assets attributable to such Class C Shares. In the case of
broker-dealers who have selling agreements with the Distributor and others, such
as banks, who have service agreements with any series of the Fund, the maximum
amount payable to any recipient is .001096% per day (.40% on an annualized
basis) of the proportion of average daily net assets of such series attributable
to Class A Shares represented by such person's customers. The maximum amount
payable to any such recipient with respect to Class B Shares is .00260% per day
(.95% on an annualized basis) of the proportion of average daily net assets of
such series attributable to Class B Shares represented by such person's
customers. The maximum amount payable to any such recipient with respect to
Class C Shares is .00260% per day (.95% on an annualized basis) of the
proportion of average daily net assets of such series attributable to Class C
Shares represented by such person's customers. The Board of Trustees may reduce
these amounts at any time. All distribution expenses incurred by the Distributor
and others, such as broker-
C-13
<PAGE> 236
dealers, in excess of the amount paid by the Fund will be borne by such persons
without any reimbursement from the Fund or any series.
During the period ended May 31, 1996, the amounts paid to the Distributor
by each series of the Fund pursuant to the Plan were as follows:
<TABLE>
<CAPTION>
BROKER SALARIES INCENTIVE MATERIALS AND SELLING
STATE SERIES CLASS PAYMENTS AND BENEFITS COMPENSATION FULFILLMENT ACTIVITIES TOTAL
- --------------------------- ----- -------- ------------ ------------ ------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Alabama.................... 5,193 1,278 1,922 846 846 10,085
Arizona.................... A 172,738 40,769 33,210 26,367 55,007 328,091
C 11,759 896 1,396 2,191 465 16,707
Colorado................... 74,330 17,123 13,096 6,992 26,572 138,113
Connecticut................ A 413,718 101,546 74,020 31,198 197,518 818,000
C 52,470 3,289 3,976 2,000 407 62,142
Florida.................... A 662,408 164,117 120,873 54,748 325,924 1,328,070
C 2,748 421 -- -- -- 3,169
Florida Int................ A 10,143 2,586 3,116 4,574 -- 20,419
C 19,302 1,157 2,180 836 -- 23,475
</TABLE>
<TABLE>
<CAPTION>
COMPENSATION UPFRONT ADVERTISING AND SALARIES AND
STATE SERIES CLASS TO BROKERS COMMISSIONS PROMOTIONS BENEFITS OTHER TOTAL
- ------------------------ ----- ------------ ----------- --------------- ------------ -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Georgia................. A 221,898 55,538 42,053 20,987 108,015 448,491
C 67,291 3,736 4,019 -- -- 75,046
Kansas.................. 216,586 46,501 53,076 53,704 3,247 373,114
Kentucky................ A 821,365 201,713 153,206 77,786 367,244 1,621,314
C 158,023 9,602 12,342 1,807 -- 181,774
Kentucky Limited........ A 8,450 -- -- -- -- 8,450
C 3,532 -- -- -- -- 3,532
Louisiana............... A 143,051 34,484 29,834 25,110 44,783 277,262
C 35,638 2,306 3,754 1,381 -- 43,079
Michigan................ A 506,976 124,353 92,905 48,156 230,567 1,002,957
C 337,687 20,181 19,123 6,253 -- 383,244
Missouri................ A 465,343 105,958 86,346 55,801 138,003 851,451
C 41,343 2,578 4,381 -- -- 48,302
New Jersey.............. 20,430 4,797 5,920 7,297 -- 38,444
New Jersey
Intermediate.......... 18,192 4,604 3,756 2,523 7,395 36,470
New Mexico.............. 102,945 25,626 19,125 10,090 48,715 206,501
New York................ A 99,416 24,886 21,298 16,886 37,656 200,142
C 533 -- -- -- -- 533
N. Carolina............. A 378,621 94,866 67,823 32,435 191,517 765,262
C 55,544 3,402 4,142 1,565 -- 64,653
Ohio.................... A 924,924 223,595 165,812 76,854 411,049 1,802,234
C 270,416 16,259 20,206 441 -- 307,322
Pennsylvania............ A 101,147 21,299 18,416 15,672 14,438 170,972
C 29,841 1,923 2,397 1,742 -- 35,903
South Carolina.......... 18,382 4,656 4,770 5,467 4,029 37,304
Tennessee............... A 546,564 123,001 101,192 68,622 149,370 988,749
C 115,085 7,114 9,196 3,055 -- 134,450
Virginia................ A 227,640 57,827 45,610 28,110 105,191 464,378
C 72,478 3,375 -- -- -- 75,853
Wisconsin............... 21,996 5,622 8,478 8,068 -- 44,164
</TABLE>
C-14
<PAGE> 237
<TABLE>
<CAPTION>
COMPENSATION UPFRONT ADVERTISING AND SALARIES AND
NATIONAL SERIES CLASS TO BROKERS COMMISSIONS PROMOTIONS BENEFITS OTHER TOTAL
- ------------------------ ----- ------------ ----------- --------------- ------------ -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
All-American............ A 460,073 99,403 85,217 69,713 86,005 800,411
C 373,587 22,918 24,007 15,918 -- 436,430
Intermediate............ A 93,973 22,576 24,346 27,048 12,960 180,903
C 3,450 -- -- -- -- 3,450
Limited Term............ A 1,133,290 259,839 211,727 138,760 365,561 2,109,177
C 28,351 -- -- -- -- 28,351
</TABLE>
The Plan, the Distribution Agreements, the Selling Agreements and the
Service Agreements have been approved by the Fund's trustees, including a
majority of the trustees who are not "interested persons" of the Fund and who
have no direct or indirect financial interest in the Plan or any related
agreement, by vote cast in person at a meeting called for the purpose of voting
on the Plan and such agreements. Continuation of the Plan and the related
agreements must be approved annually in the same manner, and the Plan or any
related agreement may be terminated at any time without penalty by a majority of
such disinterested trustees or by a majority of the Fund's outstanding shares.
Any amendment increasing the maximum percentage payable under the Plan for any
class of shares must be approved by a majority of each series' outstanding
shares of such class, and all other material amendments to the Plan or any
related agreement must be approved by a majority of each series' outstanding
shares. Any amendment increasing the maximum must be approved by a majority of
such disinterested trustees.
In order for the Plan to remain effective, the selection and nomination of
trustees who are not "interested persons" of the Fund must be done by the
trustees who are not "interested persons" and the persons authorized to make
payments under the Plan must provide written reports at least quarterly to the
trustees for their review.
Also, in its capacity as national wholesale underwriter for shares of the
Funds, the Distributor received commissions on sales of the Funds' Class A
Shares and, if applicable, contingent deferred sales load on Class C Shares
offered on a continuous basis for the years ended May 31, 1994; 1995; and 1996
as follows (there is no historical data for Class B or R Shares)
C-15
<PAGE> 238
CLASS A SHARES
<TABLE>
<CAPTION>
1994 1995 1996
------------------------ ------------------------ -----------------------
AGGREGATE RETAINED AGGREGATE RETAINED AGGREGATE RETAINED
STATE SERIES AMOUNT BY DIST. AMOUNT BY DIST. AMOUNT BY DIST.
- ---------------------------- ----------- ---------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Alabama..................... $ 14,500 $ -- $ 40,800 $ 5,600 $ 36,800 $ 4,500
Arizona..................... 743,600 84,700 226,600 31,400 193,700 26,200
Colorado.................... 326,900 43,800 95,400 13,300 98,000 12,900
Connecticut................. 1,033,000 137,900 446,500 59,500 349,000 47,400
Florida..................... 2,135,700 296,700 882,000 111,900 608,800 83,000
Florida Intermediate........ 24,400 -- 23,300 3,200 22,700 4,200
Georgia..................... 945,300 127,200 347,400 46,900 292,900 38,600
Kansas...................... 1,400,000 185,200 384,000 51,100 251,000 35,000
Kentucky.................... 3,192,800 423,600 1,304,200 174,100 1,057,100 144,700
Kentucky Limited............ 23,400 4,200
Louisiana................... 575,400 71,400 246,500 31,500 254,300 32,900
Michigan.................... 1,222,500 139,300 593,700 80,600 552,600 75,500
Missouri.................... 2,103,300 278,200 892,200 119,700 631,600 86,900
New Jersey.................. 112,100 10,800 115,700 14,700 105,700 13,400
New Jersey Intermediate..... 117,500 20,400 30,800 5,600 19,100 3,600
New Mexico.................. 646,900 85,500 191,100 28,400 131,800 17,500
New York.................... 596,817 69,217 242,700 31,800 202,800 26,900
N. Carolina................. 1,076,400 146,300 438,500 46,900 358,200 49,300
Ohio........................ 2,337,100 274,500 1,065,900 141,100 931,000 124,400
Pennsylvania................ 173,900 20,000 118,700 15,300 107,100 14,200
S. Carolina................. 111,100 6,100 44,300 5,700 47,900 7,800
Tennessee................... 2,123,600 284,800 845,900 113,400 639,000 88,400
Virginia.................... 677,600 88,700 381,200 49,800 311,100 25,900
Wisconsin................... 272,200 23,800 169,600 21,300
NATIONAL SERIES
- ----------------------------
All-American................ 1,188,000 161,798 763,400 104,100 556,900 73,800
Intermediate................ 460,600 89,100 171,100 34,400 136,700 27,900
Limited Term................ 4,055,400 818,100 797,200 160,100 543,300 108,400
----------- ---------- ----------- ---------- ---------- ----------
TOTAL............. $27,394,417 $3,863,315 $10,961,300 $1,503,900 $8,632,100 $1,198,800
=========== ========== =========== ========== ========== ==========
</TABLE>
C-16
<PAGE> 239
CLASS C SHARES
<TABLE>
<CAPTION>
1994 1995 1996
------------------- ------------------- -------------------
CONTINGENT DEFERRED CONTINGENT DEFERRED CONTINGENT DEFERRED
STATE SERIES SALES CHARGE SALES CHARGE SALES CHARGE
-------------------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C>
Arizona......................... $ -- $ 4,000 $ 1,900
Connecticut..................... 800 5,900 400
Florida......................... 200
Florida Intermediate............ 400 1,200 3,600
Georgia......................... 600 7,300 2,000
Kentucky........................ 5,900 6,900 7,300
Kentucky Limited................ 200
Louisiana....................... 200 1,300 1,000
Michigan........................ 10,500 20,400 7,800
Missouri........................ 100 2,700 1,300
New York........................ --
North Carolina.................. 400 4,500 1,600
Ohio............................ 11,600 7,800 12,300
Pennsylvania.................... 100 800 900
Tennessee....................... 3,900 16,300 18,400
Virginia........................ 1,200 9,600 1,700
NATIONAL SERIES
--------------------------------
All-American.................... 26,000 31,500 13,400
Intermediate.................... --
Limited Term.................... 1,800
------- -------- -------
TOTAL................. $61,700 $ 120,200 $75,800
======= ======== =======
</TABLE>
CUSTODIAN AND TRANSFER AGENT
Boston Financial, 225 Franklin, Boston, MA 02106, is the custodian,
transfer agent and dividend disbursing agent for each series. It also maintains
the accounting records, determines the net asset value and performs other
shareholder services for the Fund and each series.
AUDITORS
Deloitte & Touche LLP, 1700 Courthouse Plaza N.E., Dayton, OH 45402, are
the independent auditors for the Fund and each series.
PORTFOLIO TRANSACTIONS
The obligations in which the various series invest are traded primarily in
the over-the-counter market. Portfolio securities normally are purchased
directly from dealers who make a market in the securities involved or directly
from the issuer. Such dealers are usually acting as principals for their own
account. Because such obligations are usually bought and sold on a net basis
without any brokerage commissions, the cost of portfolio transactions to the
Fund will primarily consist of dealer spreads.
Subject to policy established by the Fund's trustees, the Manager is
primarily responsible for each series' portfolio decisions and the placing of
portfolio transactions. In placing orders, it is the policy of the Fund that the
Manager obtain the best net results taking into account such factors as price
(including the dealer spread, where applicable); the size, type and difficulty
of the transaction involved; the firm's general execution and operational
facilities; and the firm's risk in the positioning of the securities involved.
While the Manager seeks reasonably competitive prices or commissions, the Fund
will not necessarily always be paying the lowest price or commission available.
The Manager does not expect to use any one particular dealer, but, subject to
obtaining the best price and execution, dealers who provide supplemental
investment research to the Fund or the Manager may receive orders for
transactions by the Fund. Information so received will be in addition to and not
in lieu of the services required to be performed by the Manager under the
Advisory Agreements and the expenses of the Manager or any of its
C-17
<PAGE> 240
affiliates, acting either as principal or as paid broker. No brokerage
commissions were paid by any series of the Fund from its respective date of
commencement through the period ended May 31, 1996.
YIELD AND TOTAL RETURN CALCULATION
Each series of the Fund may include its current yield or total return in
advertisements of information furnished to stockholders or potential investors.
The yield of each series is calculated in accordance with the Securities and
Exchange Commission's standardized yield formula and, in the case of series
offering both Class A and Class C Shares, is so calculated separately for Class
A and Class C Shares. Under this formula, interest income over a 30-day
measurement period (including appropriate adjustments for accretion of original
issue discounts and amortization of market premiums) is reduced by period
expenses and divided by the number of days within the measurement period to
arrive at a daily income rate. This daily income rate is then expressed as a
semiannually compounded yield based on the maximum offering price of a share
assuming a standardized 360-day year. The corresponding tax equivalent yield
reflects the rate an investor would have to earn on a taxable security in order
to equal the same after-tax return. As appropriate, the tax equivalent yield may
reflect exemption from federal and/or state income taxes, as well as property
and/or intangible taxes.
A series may also advertise total return for each class of shares which is
calculated differently from "average annual total return" (a "nonstandardized
quotation"). A nonstandardized quotation of total return measures the percentage
change in the value of an account between the beginning and end of a period,
assuming no activity in the account other than reinvestment of dividends and
capital gains distributions. This computation does not include the effect of the
applicable sales charges which, if included, would reduce total return. A
nonstandardized quotation of total return will always be accompanied by the
series' or class's "average annual total return." A series' average annual total
return for any time period is calculated (separately for each class of shares)
by assuming an investment at the beginning of the measurement period at the
maximum offering price. Dividends from the net investable amount are then
reinvested in additional shares each month at the net asset value. At the end of
the measurement period, the total number of shares owned are redeemed at net
asset value (less any applicable contingent deferred sales charge). The change
in total value at the end of the investment period is then expressed as an
average annual total rate of return. Each class of each series may also quote
its current yield and total return on a tax equivalent basis assuming specified
applicable Federal, state and local tax rates and may also quote rankings,
yields or returns as published by recognized statistical services or publishers
wherein a series' performance is categorized or compared with other national or
state tax-exempt bond funds with similar investment objectives, such as Lipper
Analytical Service's Fixed Income Performance Analysis for Municipal Bond Funds
under "Short (1-5 Yr.) Municipal Bond Funds," "Intermediate (5-10 Yr.) Municipal
Bond Funds," or "Single State Municipal Bond Funds," or this same data as quoted
by Barrons, Business Week, Forbes, Fortune, Micropal, Money, Mutual Fund,
Personal Investing, Worth, Value Line Mutual Fund Survey, or others;
Weisenberger Investment Companies Service's annual Investment Companies under
"Mutual Fund Tax Exempt Bond Funds"; or Morningstar, Inc.'s Mutual Fund Values
under "Municipal Bond General Overview."
A series may also quote from articles or commentary published by these same
statistical services or publishers. In addition, a series may show, in narrative
or chart form, such series' credit rating analysis, sector analysis,
composition, portfolio holdings, coupon range, as well as information contained
in such series' audited financial report.
From time to time the tax equivalent yield and average annual total return
of any national or state tax exempt funds, may be compared to the yield of a
three-month, six-month or five-year Certificate of Deposit (a "CD"). Such
comparisons will, of course, indicate that while the principal value and yield
of the series may fluctuate, the principal value of a CD is FDIC insured, and
both its principal value and yield are fixed and stable.
Current yield and total return of each class of each series will vary from
time to time depending on market conditions, the composition of the portfolio of
the particular series, operating expenses and other factors. These factors and
possible differences in method of calculating performance figures should be
considered when comparing the performance figures of any series of the Fund with
those of other investment vehicles.
C-18
<PAGE> 241
Yield and Total Return Calculation as of May 31, 1996 (there is no
historical data for Class B or R Shares):
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL
CURRENT YIELD RETURN
PRIOR ---------------------------
STATE FUNDS CLASS 30 DAYS 1 YEAR 5 YEAR 10 YEAR INCEPTION DATE
- ----------------------------------- ----- ------------- ------ ------ ------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Alabama............................ 5.18% (.64%) 4.33%* April 11, 1994
Arizona............................ A 5.16% (.16%) 6.95% 7.18%* October 29, 1986
C 4.83% 2.75% 3.18%* February 7, 1994
Colorado........................... 5.78% (.24%) 6.59% 6.44%* May 4, 1987
Connecticut........................ A 5.12% (.19%) 6.09% 6.70%* July 13, 1987
C 4.80% 2.72% 2.49%* October 4, 1993
Florida............................ A 4.93% (1.19%) 6.30% 6.86%* June 15, 1990
C 4.58% (.05%)* September 14, 1995
Florida Intermediate............... A 4.46% .34% 3.92%* February 1, 1994
C 4.05% 1.90% 4.74%* February 2, 1994
Georgia............................ A 5.32% (1.28%) 5.60% 6.92% March 27, 1986
C 5.01% 1.51% 2.24%* January 4, 1994
Kansas............................. 5.82% (.72%) 5.35%* January 9, 1992
Kentucky........................... A 4.94% (.33%) 6.46% 7.53%* May 4, 1987
C 4.60% 2.40% 2.99%* October 4, 1993
Kentucky Limited................... A 5.22% 1.29%* September 14, 1995
C 5.05% 2.64%* September 14, 1995
Louisiana.......................... A 5.11% .37% 6.84% 7.49%* September 12, 1989
C 4.79% 3.12% 2.83%* February 2, 1994
Michigan........................... A 4.87% (.74%) 6.22% 7.37% June 27, 1985
C 4.55% 1.98% 3.73%* June 22, 1993
Missouri........................... A 4.83% (.84%) 6.28% 7.14%* August 3, 1987
C 4.50% 1.86% 1.82% February 2, 1994
New Jersey......................... 5.35% (.39%) 5.65%* September 16, 1992
New Jersey Intermediate............ 4.27% .77% 5.45%* September 16, 1992
New Mexico......................... 4.99% (1.16%) 4.85%* September 16, 1992
New York........................... A 5.11% (.23%) 7.53% 7.58%* January 16, 1991
C 4.77% (3.88%)* March 4, 1996
North Carolina..................... A 4.66% (.69%) 5.70% 6.85% March 27, 1986
C 4.32% 2.02% 2.09%* October 4, 1993
Ohio............................... A 4.48% (.77%) 5.98% 7.20% June 27, 1985
C 4.12% 2.05% 3.62%* August 3, 1993
Pennsylvania....................... A 5.31% (.53%) 6.18% 6.57%* October 29, 1986
C 4.99% 2.19% 2.47%* February 2, 1994
South Carolina..................... 4.93% (.82%) 2.62%* July 6, 1993
Tennessee.......................... A 4.69% (.58%) 5.94% 7.31%* November 2, 1987
C 4.35% 2.24% 2.39%* October 4, 1993
Virginia........................... A 5.01% (.34%) 6.31% 7.40% March 27, 1986
C 4.69% 2.38% 2.67%* October 4, 1993
Wisconsin.......................... 5.03% (.99%) 3.09%* June 1, 1994
NATIONAL FUNDS
- -----------------------------------
All-American....................... A 5.33% .25% 7.36% 7.96%* October 3, 1988
C 5.02% 3.08% 4.53%* June 2, 1993
Intermediate....................... A 5.37% 1.70% 5.90%* September 15, 1992
C 4.98% (1.86%)* December 1, 1995
Limited Term....................... A 3.84% 1.43% 5.84% 6.45%* October 19, 1987
C 3.64% (.75%)* December 1, 1995
</TABLE>
- ---------------
* Inception to date
C-19
<PAGE> 242
DIVIDEND PAYMENT OPTIONS
Several dividend payment options are available to shareholders. The
activation of these options varies with the nature of a shareholder's
administrative relationship with the Fund. If the shareholder receives periodic
statements regarding the Fund from their broker/dealer, then all dividends are
automatically paid in cash unless the shareholder instructs their broker/dealer
to implement a different option. If the shareholder receives a periodic
statement directly from the Fund, then all dividends are automatically
reinvested unless the shareholder instructs the Fund to implement a different
option.
The dividend payment options are to:
1. Automatically reinvest all interest and capital gains distributions.
2. Pay interest dividends in cash, and reinvest capital gains
distributions.
3. Pay both interest and capital gains distributions in cash.
4. Direct all dividends to another Flagship tax exempt or utility fund
account which has an identical registration and tax identification
number (the $3,000 minimum initial investment applies).
5. Have dividends deposited electronically via automated clearing house
into a bank account. The Fund's Prospectus contains complete
information.
If a shareholder's dividend or capital gains distribution check is returned
by the postal or other delivery service, such shareholder's check may be
reinvested in their account. The shareholder's distribution options may also be
converted to having all dividends and other distributions reinvested in
additional shares.
All reinvested or directed dividends will be at net asset value without any
sales charge. Your broker, or Flagship customer service representative can help
you change your option from your initial account opening instructions.
PURCHASE, REDEMPTION AND PRICING OF SHARES
The ways in which the shares of the series of the Fund are offered to the
public is described in the Fund's Prospectus.
PURCHASE
The Distributor offers several reduced sales charge programs as described
below.
1. Cumulative Purchase Discount (Class A Shares Only). Whenever an
individual shareholder purchases Class A Shares of any series of the Fund, such
individual shareholder may aggregate his holdings of all Class A Shares in any
other open-end mutual fund subject to a front-end sales charge distributed by
the Distributor and any current purchases of Class A Shares to determine the
applicable sales charge. A reduced sales charge will be imposed if the aggregate
amount qualifies under the rate schedule. An individual shareholder may also
aggregate the holdings of a spouse, any of their children and parents in the
same fashion when making a particular purchase. Finally, for purposes of
determining the applicable sales charge, trusts and other fiduciaries may
aggregate the holdings of each trust estate or other fiduciary account in the
same fashion even if the beneficiaries are unrelated. Any shareholder may also
combine his holdings of Class A Shares subject to a front-end sales charge and
current purchases of Class A Shares in all such funds distributed by the
Distributor in order to qualify for a reduced sales charge on any particular
purchase.
2. Letter of Intent (Class A Shares Only). A shareholder may also qualify
for reduced sales charges by sending to the Fund (within 90 days after the first
purchase desired to be included in the purchase program) a signed, nonbinding
letter of intent to purchase, during a 13-month period, an amount sufficient to
qualify for a reduced sales charge. A single letter may be used for spouses,
their children and parents or any single trust estate or other fiduciary
account. All investments in Class A Shares of the Fund or in Class A Shares of
any other open-end mutual fund subject to a front-end sales charge distributed
by the Distributor count toward the indicated goal. Once the Distributor
receives the required letter of intent, it will apply to qualifying purchases
within the 13-month period the sales charge that would be applicable to a single
purchase of the total amount indicated in the letter. During the period covered
by the letter of intent, 5% of the shares purchased will be restricted until the
stated goal is reached. If the intended purchase program is not completed within
the 13-month period, the sales charge will be adjusted upward as appropriate and
a sufficient number of restricted shares will be redeemed by the Fund if the
shareholder does not pay the increased sales charge.
C-20
<PAGE> 243
3. Broker-dealer and Flagship Employees. In view of the reduction of
distribution expenses associated with sales of the Fund's shares to registered
representatives and full-time employees of broker/dealers who have signed
Selling agreements with the Distributor, such individuals are permitted to
purchase shares of the Fund at net asset value for their personal accounts. The
purchaser must certify to the Fund that certain qualifications have been met and
agree to certain restrictions (such as an investment letter) in order to take
advantage of this program. For similar reasons, shares of the Fund may be
purchased at net asset value and in amounts less than the minimum purchase price
by officers, trustees and full-time employees of the Fund, the Distributor and
the Manager. For this purpose, the terms "registered representatives of
broker/dealers who have signed Dealer Agreements with the Distributor,"
"officers," "trustees" and "employees" include such persons' spouses, children
and parents, as well as the trustee or custodian of any trust, qualified pension
or profit sharing plan or IRA established by or for the benefit of such officer,
trustee, employee, spouse, child or parent.
4. Group Purchasers (Class A Shares Only). Members of a qualified group may
purchase shares of the Fund at a reduced sales charge applicable to the group as
a whole, if such purchases are made in an amount and manner acceptable to the
Fund. The sales charge, if any, is based on the aggregate dollar value of shares
purchased and still owned by the group, plus the current purchase amount.
Members of a qualified group may purchase shares at net asset value (without
sales charge) where the amount invested is documented to the Fund to be proceeds
from distributions of a unit investment trust. Shares of the Fund may be
purchased at net asset value (without sales charge) by tax-qualified employee
benefit plans and by trust companies and bank trust departments for funds over
which they exercise exclusive discretionary investment authority for which they
charge customary fees and which are held in a fiduciary, agency, advisory,
custodial or similar capacity.
A "qualified group" is one which (i) has previously been in existence, (ii)
has a primary purpose other than acquiring Fund shares at a discount and (iii)
satisfies investment criteria described in the Prospectus which enables the
Distributor to realize economies of scale in its costs of distributing shares. A
qualified group must have more than 10 members and must agree to comply with
certain administrative requirements relating to its group purchases. Under such
purchase plans, subsequent investments will continue until such time as the
investor notifies his group to discontinue further investments. There may be a
delay between the time a member's funds are received by the group and the time
the money reaches the Fund because of a qualified group's remittance procedures.
Unless otherwise noted above, the investment in the Fund will be made at the
public offering price based on net asset value determined on the day that the
funds are received in proper form by the Fund.
5. Redemptions from Unrelated Funds. Shares of the Fund may be purchased at
net asset value where the amount invested is documented to the Fund to be
proceeds from (i) the redemption (within one year of the purchase of Fund
shares) of shares of unrelated investment companies on which the investor has
paid initial or contingent deferred sales charges or is no longer subject to a
CDSC, (ii) the redemption of related or unrelated investment companies with a
Class "R" Share or a share class similar in all material respects to Flagship's
Class R Shares or (iii) a Unit Investment Trust.
6. Wrap Fee Accounts (Class A or Class R Shares Only). Shares of the Fund
may be purchased at net asset value by broker/dealers on behalf of wrap fee
client accounts for which the broker/dealer charges a fee and performs advisory,
custodial, record keeping or other services.
7. Waiver of CDSC. For purchases of Class A Shares in amounts over
$1,000,000, the contingent deferred sales charge may be waived for purchases
through a broker-dealer that waives its commission.
EXCHANGES
Any Class A Shares which have been registered in a shareholder's name for
at least 15 calendar days, except shares of money market funds may be exchanged
on the basis of relative net asset value per share without a sales charge for
Class A Shares of any other tax exempt, cash management, utility fund, stock
fund or series thereof distributed by the Distributor in any state where such
exchange may legally be made.
An exchange between funds pursuant to the exchange privilege is treated as
a sale for federal income tax purposes and, depending upon the circumstances, a
capital gain or loss may be realized. However, shareholders who exchange between
funds within 90 days of the initial purchase date may not take as a loss the
amount of the sales charge paid, if a sales charge was assessed on the exchanged
shares. Also, if a shareholder receives tax-exempt dividends and shares have not
been held for more than six months, any loss on the sale or exchange of such
holdings shall be disallowed to the extent of the tax-exempt dividends.
C-21
<PAGE> 244
REDEMPTION
To redeem shares, your dealer is responsible for transmitting the
redemption request to Boston Financial, the Fund's custodian, by the close of
trading on the New York Stock Exchange on a particular day in order for you to
receive the redemption price based upon the net asset value per share determined
that day. If the dealer fails to do so, you will receive the redemption price
next calculated after your request and any other materials are received and your
entitlement to any prior day's redemption price must be settled between you and
your dealer. Your dealer may charge a service fee for handling your redemption
request.
If you meet the requirements stated below, you may redeem shares by
telephone toll free at 800-225-8530.
If you request payment by wire, proceeds will be sent by wire to a
previously designated bank or trust company account normally on the next
business day Boston Financial is open for business. The minimum amount to be
wired is $5,000. Payment by mail may also be requested by telephone, in which
case the Fund will make the redemption as of the close of business on the date
on which such request is received and will normally send a check on the next
business day in the appropriate amount to the shareholder of record at the
address listed in the most recent Application Form received for such
shareholder.
In order to use the telephone redemption procedure, an Application Form
with the expedited payment section properly completed must be on file with
Boston Financial before an expedited redemption request is submitted. This form
requires you to designate the bank or trust company account to which your
redemption proceeds should be sent. Any change in the account designated to
receive the proceeds must be submitted in proper form on a new Application Form
with signature guaranteed (see "Ordinary Redemption" for guaranty requirements).
Neither the Fund nor Boston Financial will be responsible for the
authenticity of any redemption instructions received by telephone or for the
accuracy or authenticity of anything contained in the most recent Application
Form received from you.
For all redemptions other than through your dealer or by telephone, your
redemption request must be submitted in writing to:
Flagship Funds
c/o Boston Financial
P.O. Box 8509
Boston, MA 02266-8509
Such redemptions will be made immediately after the next determination of
net asset value, and the Fund will make payment by sending a check to you at the
address on your most recent Application Form. Checks will normally be sent out
within one business day, but in no event more than the required settlement
period as set by regulation following receipt of the redemption request in
proper form. Proceeds of redemptions of recently purchased shares may be delayed
for 15 days or more, pending collection of funds for the initial purchase. For
redemption requests over $50,000, or if the address on your account has been
changed within the past 60 days, or if the redemption proceeds are to go to an
address other than the address of record, your signature on the redemption
request must be guaranteed by a commercial bank, trust company, savings bank or
savings and loan association that is a member of the FDIC or FSLIC, or by a
member firm of a domestic national securities exchange. In certain instances,
Boston Financial may request additional documentation which it believes
necessary to insure proper authorization.
The Fund reserves the right to suspend the right of redemption and to
postpone the date of payment upon redemption for any period during which the New
York Stock Exchange is closed, other than weekend and holiday closings, or
trading on the New York Stock Exchange is restricted or during which (as
determined by the Commission by rule or regulation) and emergency exists as a
result of which disposal or evaluation of a series' portfolio securities is not
reasonably practicable, or for such other periods as the Commission by order
permits.
The Fund will use its best efforts to pay in cash for all shares redeemed,
but under abnormal conditions which make payment in cash impractical or unwise,
the Fund may make payment wholly or partly in portfolio securities at their then
market value equal, when added to any cash payment, to the redemption price. In
such cases an investor may incur brokerage costs in converting such securities
to cash.
Due to the relatively high cost of handling small investments, the Fund
reserves the right to involuntarily redeem, at net asset value, the shares in a
series of any shareholder whose redemptions cause the value of its holdings in
such series to have a value of less than $1,000. Before the Fund redeems such
shares and sends the proceeds to the shareholder, the shareholder will be given
written notice that the value of the shares of such series in
C-22
<PAGE> 245
the account is less than the minimum amount and will be allowed 30 days to make
an additional investment in an amount which will increase the value of his
holdings in such series to at least $1,000. Accounts with balances of less than
$25 will be redeemed without written notice. No CDSC will be imposed on
involuntary redemptions.
Shares purchased other than by Federal Funds wire or bank wire may not be
redeemed by telephone until 15 calendar days after the purchase of such shares
but may be redeemed pursuant to the ordinary redemption procedure during such
period.
PRICE
The public offering price is based on net asset value and includes the
applicable sales charge. Because the Fund determines net asset value for each
series daily as of the close of trading (normally 4:00 p.m. New York time) on
the New York Stock Exchange on each day that the Exchange is open for trading,
your dealer must transmit your order to the Fund prior to such time in order for
your order to be executed at the public offering price based on the net asset
value to be determined that day. Any change in price due to the failure of the
Fund to receive an order prior to the close of the Exchange must be settled
between you and your dealer. Similarly, if your dealer fails to provide timely
payment (normally five business days after the order is received), the
Distributor may sell the shares to other investors at the then current offering
price. If the Distributor does so, the dealer will be responsible to the
Distributor for any loss which the Distributor incurs in connection with the
transaction, and you must settle with your dealer your rights to shares at the
price on the day you ordered them.
All funds will be fully invested in full and fractional shares. The
issuance of shares is recorded on the books of the Fund, and, to avoid
additional operating costs and for investor convenience, share certificates will
not be issued, except by special arrangement. Boston Financial will send to each
shareholder of record a confirmation of each purchase and redemption transaction
(including the aggregate number of shares owned after such transaction) by such
shareholder and a quarterly statement summarizing purchases, redemptions and
dividend accruals and distributions in the account during the prior month.
TAXES
Each series of the Fund intends to qualify and elect to be treated as a
"regulated investment company" under Sections 851-855 of the Internal Revenue
Code of 1986, as amended (the "Code"). To so qualify, each series must, among
other things, (i) derive at least 90% of its gross income in each taxable year
from dividends, interest, payments with respect to securities loans, gains from
the sale or other disposition of stock or securities or foreign currency, or
certain other income (including but not limited to gains from options, futures
and forward contracts) derived with respect to its business of investing in
stock, securities or currencies; (ii) derive less than 30% of its gross income
in each taxable year from the sale or other disposition of the following assets
held for less than three months: (a) stock or securities, (b) options, futures
or forward contracts on stock or securities, or (c) foreign currencies (or
foreign currency options, futures or forward contracts) not directly related to
its principal business of investing in stock or securities; and (iii) diversify
its holdings so that, at the end of each quarter of its taxable year, the
following two conditions are met: (a) at least 50% of the value of the Fund's
total assets is represented by cash, U.S. Government securities, securities of
other regulated investment companies and other securities (for this purpose,
such other securities will qualify only if the Fund's investment is limited, in
respect of any issuer, to an amount not greater than 5% of the Fund's assets and
10% of the outstanding voting securities of such issuer) and (b) not more than
25% of the value of the Fund's assets is invested in securities of any one
issuer (other than U.S. Government securities or securities of other regulated
investment companies). Because each series of the Fund generally invests in the
obligations of a single state and its political subdivisions, it may be more
difficult for a series to comply with the above-mentioned diversification
requirements than would be the case if such series invested in a broader
category of obligations.
Corporate shareholders may also be taxed on exempt interest dividends not
otherwise considered to be a preference item since the computation of a
corporation's alternative minimum tax liability includes an adjustment generally
based on the difference between adjusted current earnings (an alternative
measure of income that includes interest on tax-exempt obligations) and the
amount otherwise determined to be alternative minimum taxable income.
Each series intends to declare and pay dividends and capital gains
distributions so as to avoid imposition of a four percent Federal excise tax. To
do so, each series expects to distribute during the calendar year at least an
amount equal to (i) 98% of its calendar year ordinary income, (ii) 98% of its
capital gain net income (the excess of short and long-term capital gain over
short and long-term capital loss) for each one-year period ending October 31,
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and (iii) 100% of any undistributed ordinary or capital gain net income from the
prior calendar year which has not been taxed to such series. Dividends declared
in October, November or December made payable to shareholders of record in such
a month, and paid in the following January would be deemed to have been paid by
the Fund and received by shareholders as of December 31st of the year declared.
Dividends paid by any series will not qualify for the 70 percent
dividends-received deduction generally available to corporate shareholders
because none of any series' gross income will consist of dividends from domestic
corporations. Shareholders will be subject to federal and state taxes on
distributions attributable to interest earned on certificates issued by U.S.
agencies (e.g., GNMA, FNMA, and FHLMC).
A series may engage in various defensive hedging transactions. Under
various Code provisions, such transactions may change the character of
recognized gains and losses, accelerate the recognition of certain gains and
losses, and defer the recognition of certain losses. If a shareholder receives
an exempt-interest dividend with respect to any share of a series and such share
is held by such shareholder for less than six months, any loss on the sale or
exchange of such share shall be disallowed to the extent of such exempt-interest
dividend. Also, if a capital gain dividend is paid with respect to any shares of
a series which are sold at a loss after being held for less than six months, any
loss realized upon the sale of such shares will be treated as a long-term
capital loss to the extent of such capital gain dividend. There are special
rules for determining holding periods for purposes of these rules.
EXCHANGE AND REINVESTMENT PRIVILEGE
Any Class of Shares which have been registered in a shareholder's name for
at least 15 calendar days, may be exchanged, on the basis of relative net asset
value per share, for shares of any other tax exempt, cash management, stock, or
utility mutual fund or series thereof distributed by Flagship Funds Inc.
("Substitute Fund"). Class A Shares may only be exchanged for other shares which
are sold subject to an initial sales charge in any state where such exchange may
legally be made. Any Class B and Class C Shares may be exchanged without the
payment of any contingent deferred sales charge otherwise due upon redemption of
Class B and Class C Shares for shares of any other Substitute Fund which are
sold pursuant to a deferred sales charge arrangement in any state where such
exchange may legally be made. Any Class R Shares may be exchanged for any other
series of Class R Shares. Shares must be on deposit at the transfer agent before
the exchange can be made. Before effecting an exchange, a shareholder should
obtain and read a current prospectus of the Substitute Fund.
An exchange between funds pursuant to the exchange privilege is treated as
a sale for Federal income tax purposes and, depending upon the circumstances, a
short or long-term capital gain or loss may be realized. However, shareholders
who exchange between funds within 90 days of the initial purchase date may not
take as a loss the amount of the sales charge paid, if a sales charge was
assessed on the exchanged shares.
The exchange privilege may be modified or terminated at any time. The Fund
reserves the right to limit the number of times an investor may exercise the
exchange privilege. To exercise the exchange privilege, you must either contact
your dealer or broker, who will advise the Fund of the exchange, or complete the
Exchange Application available from the Fund's Transfer Agent and submit it to
the Transfer Agent. If you have certificates for any shares being exchanged, you
must surrender such certificates.
A shareholder who has redeemed Class A Shares may repurchase shares (or
shares of any other fund distributed by the Distributor or series thereof which
are sold subject to a sales charge) at net asset value without incurring the
applicable sales charge. Such a purchase must, however, be in an amount between
the stated minimum investment of such fund and the amount of the proceeds of
redemption. The reinvestment request must be received by the Transfer Agent
within one year of the redemption, and this feature may be exercised by a
shareholder only twice per calendar year. Exercising the reinvestment privilege
will not affect the character of any gain or loss realized on the redemption for
federal income tax purposes, except that if the redemption resulted in a loss,
the reinvestment may result in the loss being disallowed under the "wash sale"
rules.
For further details on exchanges and reinvestments, please contact your
dealer or call the Fund toll free at 1-800-414-7447, or for TDD call
800-360-4521.
SYSTEMATIC WITHDRAWAL PLAN
Shareholders of any series of the Fund whose account is valued at $10,000
or more may establish a Systematic Withdrawal Plan ("SWP") and receive monthly
or quarterly checks for $50 or any specified greater amount. Shareholders who
establish a SWP must receive their distributions of the Fund's investment income
in the form of additional full and fractional shares at net asset value without
any sales charge. Such distributions and other shares
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in the shareholder's account will be redeemed to the extent necessary at net
asset value on the day of the month that monthly dividends are paid in order to
pay the specified amount to be withdrawn that month pursuant to the
shareholder's SWP. Depending upon the size of withdrawal payments specified, the
size of the shareholder's account and fluctuations in net asset value, such
redemptions may reduce or exhaust the shareholder's account.
Generally, it will be disadvantageous for a shareholder to purchase shares
(except through reinvestment of distributions) while the shareholder is
participating in a SWP because the shareholder will be paying a sales charge to
purchase shares at the same time that the shareholder is redeeming shares upon
which the shareholder may already have paid a sales charge. Therefore, the Fund
will not knowingly permit a shareholder to make additional investments of less
than $5,000 if such shareholder is at the same time making systematic
withdrawals at a rate greater than the dividends being paid on his shares. The
Fund reserves the right to amend or terminate the systematic withdrawal program
on thirty days' notice. Shareholders may withdraw from the program at any time
or change the payee or the specified amount of payments.
If you are interested in establishing a SWP, please contact Flagship toll
free at 1-800-225-8530, or for TDD call 800-360-4521.
SERVICEMARKS AND TRADEMARKS
Flagship Financial has obtained federal registration of combination
servicemarks for each of the state and national series described in this
prospectus. The servicemarks consist of both the full name of each fund and an
accompanying logo. In the case of the state funds, the logo is presented as
white stars on a blue field, along with red and white stripes covering an
outline of the specific state, and in the case of the national funds, a similar
design covering an outline of the United States. These servicemarks are filed
for federal registration. In addition, Flagship Financial was granted a federal
registered trademark for its use of "Plain Vanilla(R)" in the investment and
mutual fund area.
OTHER INFORMATION
The Prospectus and the Statement of Additional Information do not contain
all the information included in the Registration Statement filed with the SEC
under the Securities Act of 1933 and the 1940 Act with respect to the securities
offered by the Prospectus, certain portions of which have been omitted pursuant
to the rules and regulations of the SEC. The Registration Statement including
the exhibits filed therewith may be examined at the office of the SEC in
Washington, D.C.
Statements contained in the Prospectus or in the Additional Statement as to
the contents of any contract of other documents referred to are not 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 of which the
Prospectus and the Statement of Additional Information form a part, each such
statement being qualified in all respects by such reference.
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APPENDIX I
DESCRIPTION OF MUNICIPAL SECURITIES RATINGS
Standard & Poor's Ratings Group -- A brief description of the applicable
Standard & Poor's Ratings Group rating symbols and their meanings (as published
by Standard & Poor's Corporation) follows:
A Standard & Poor's corporate or municipal debt rating is a current
assessment of the creditworthiness of an obligor with respect to a specific debt
obligation. This assessment may take into consideration obligors such as
guarantors, insurers, or lessees.
The rating is not a recommendation to purchase, sell or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished by the issuer and
obtained by Standard & Poor's from other sources it considers reliable. Standard
& Poor's 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 for other circumstances.
The ratings are based, in varying degrees, on the following considerations:
<TABLE>
<S> <C>
I. Likelihood of default -- capacity and willingness of the obligor as to the timely
payment of interest and repayment of principal in accordance with the terms of the
obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization or other arrangements under the laws of bankruptcy and
other laws affecting creditors' rights.
</TABLE>
1. Long-term municipal bonds
<TABLE>
<S> <C>
AAA Bonds rated AAA have the highest rating assigned by Standard & Poor's to a debt
obligation. Capacity to pay interest and repay principal is extremely strong.
AA Bonds rated AA have a very strong capacity to pay interest and repay principal and
differ from the highest rated issues only in small degree.
A Bonds rated A have a strong capacity to pay interest and repay principal although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in higher rated categories.
BBB Bonds rated BBB are regarded as having an adequate capacity to pay interest and
repay principal. Whereas they normally exhibit adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for bonds in this category
than for bonds in higher rated categories.
BB-D Debt rated "BB", "B", "CCC", "CC" and "C" is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
The "CI" is reserved for income bonds on which no interest is being paid. Debt
rated "D" is in default, and payment of interest and/or repayment of principal is
in arrears.
</TABLE>
Plus (+) or Minus (B): The ratings from "AA" to "BBB" may be modified by
the addition of a plus or a minus sign to show relative standing within the
major rating categories.
Provisional Ratings: The letter "P" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the bonds being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no comment on the
likelihood of, or the risk of default upon failure of, such completion. The
investor should exercise his own judgment with respect to such likelihood and
risk.
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2. Short-term tax exempt notes
Standard & Poor's tax exempt note ratings are generally given to such notes
that mature in three years or less. The three rating categories are as follows:
<TABLE>
<S> <C>
SP-1 Strong capacity to pay principal and interest. Issues determined to possess very
strong characteristics will be 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.
</TABLE>
3. Tax-exempt commercial paper
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
165 days. Ratings are graded into four categories, ranging from "A" for the
highest quality obligations to "D" for the lowest. The four categories are as
follows:
<TABLE>
<S> <C>
A Issues assigned this highest rating are regarded as having the greatest capacity
for timely payment. Issues in this category are further refined with the
designation 1, 2, and 3 to indicate the relative degree of safety.
A-1 This designation indicates that the degree of safety regarding timely payment is
strong. Those issues determined to possess overwhelming safety characteristics are
denoted with a plus (+) sign designation.
A-2 Capacity for timely payment on issues with this designation is satisfactory.
However, the relative degree of safety is not as high as for issues designated
"A-1".
A-3 Issues carrying this designation have adequate capacity for timely payment. They
are, however, somewhat more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
B Issues rated "B" are regarded as having speculative capacity for timely payment.
C&D These ratings indicate that the issue is either in default or expected to be in
default upon maturity.
</TABLE>
MOODY'S INVESTORS SERVICE, INC. -- A brief description of the applicable
Moody's Investors Service, Inc. rating symbols and their meanings follow:
1. Long-term municipal bonds
Aaa -- Bonds which are rated Aaa are judged to be the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge". Interest payments are protected by a large, or by an exceptionally
stable, margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are more unlikely to
impair the fundamentally strong position of such issues. With the occasional
exception of oversupply in a few specific instances, the safety of obligations
of this class is so absolute that their market value is affected solely by money
market fluctuations.
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 fluctuations 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 the Aaa
Securities. These Aa bonds are high grade, their market value virtually immune
to all but money market influences, with the occasional exception of oversupply
in a few specific instances.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as higher medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to A-rated bonds may be influenced to
some degree by credit circumstances during a sustained period of depressed
business conditions. During periods of normalcy, bonds of this quality
frequently move in parallel with Aaa and Aa obligations, with the occasional
exception of oversupply in a few specific instances.
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Baa -- Bonds which are rated Baa are considered as lower medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments but certain protective elements may be lacking or may be
characteristically unreliable of over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well. The market value of Baa-rated bonds is more sensitive
to change in economic circumstances, and aside from occasional speculative
factors applying to some bonds of this class, Baa market valuations move in
parallel with Aaa, Aa, and A obligations during periods of economic normalcy,
except in instances of oversupply.
Ba-C -- 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. 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. 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. 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. 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.
Moody's bond rating symbols may contain numerical modifiers of a generic
rating classification. The modifier 1 indicates that the bond ranks at the high
end of its category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its generic rating
category.
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 operating experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit status upon completion of
construction or elimination of basis of condition.
2. Short-term tax exempt notes
SHORT-TERM NOTES. The four ratings of Moody's for short-term notes are MIG
1, MIG 2, MIG 3, and MIG 4; MIG 1 denotes "best quality, enjoying strong
protection from established cash flows"; MIG 2 denotes "high quality" with
"ample margins of protection"; MIG 3 notes are of "favorable quality...but
lacking the undeniable strength of the preceding grades"; MIG 4 notes are of
"adequate quality, carrying specific risk but having protection...and not
distinctly or predominantly speculative".
3. Tax-exempt commercial paper
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:
Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
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FITCH INVESTORS SERVICE, INC. -- A brief description of the applicable
Fitch Investors Service, Inc. rating symbols and their meanings follows:
1. Long-term municipal bonds
<TABLE>
<S> <C>
AAA Bonds considered to be investment grade and the of highest credit quality. The
obligor has an exceptionally strong ability to pay interest and repay principal,
which is unlikely to be affected by reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although not
quite as strong as bonds rated "AAA". Because bonds rated in the "AAA" and "AA"
categories are not significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated "F-1+".
A Bonds considered to be investment grade and of high credit quality. The obligor's
ability to pay interest and repay principal is considered to be strong, but may be
more vulnerable to adverse changes in economic conditions and circumstances than
bonds with higher ratings.
BBB Bonds considered to be investment grade and of satisfactory credit quality. The
obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that the ratings of these bonds will fall below investment
grade is higher than for bonds with higher ratings.
PLUS (+) MINUS Plus and minus signs are used with a rating symbol to indicate the relative
(B) position of a credit within the rating category. Plus and minus signs, however,
are not used in the 'AAA' category.
NR Indicates that Fitch does not rate the specific issue.
CONDITIONAL A conditional rating is premised on the successful completion of a project or the
occurrence of a specific event.
SUSPENDED A rating is suspended when Fitch deems the amount of information available from
the issuer to be inadequate for rating purposes.
WITHDRAWN A rating will be withdrawn when an issue matures or is called or refinanced, and,
at Fitch's discretion, when an issuer fails to furnish proper and timely
information.
FITCHALERT Ratings are placed on FitchAlert to notify investors of an occurrence that is
likely to result in a rating change and the likely direction of such change. These
are designated as "'Positive," indicating a potential upgrade, "Negative," for
potential downgrade, or "Evolving," where ratings may be raised or lowered.
FitchAlert is relatively short-term, and should be resolved within 12 months.
CREDIT TREND Credit trend indicators show whether credit fundamentals are improving, stable,
declining, or uncertain, as follows:
Improving
Stable
Declining
Uncertain
Credit trend indicators are not predictions that any rating change will occur, and
have a longer-term time frame than issues placed on FitchAlert
</TABLE>
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APPENDIX II
DESCRIPTION OF HEDGING TECHNIQUES
Set forth below is additional information regarding the various series'
defensive hedging techniques and use of repurchase agreements.
FUTURES AND INDEX TRANSACTIONS
Financial Futures. A financial future is an agreement between two parties
to buy and sell a security for a set price on a future date. They have been
designed by boards of trade which have been designated "contracts markets" by
the Commodity Futures Trading Commission ("CFTC").
The purchase of financial futures is for the purpose of hedging a series'
existing or anticipated holdings of long-term debt securities. When a series
purchases a financial future, it deposits in cash or securities an "initial
margin" of between 1% and 5% of the contract amount. Thereafter, the series'
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 series must make
additional payments to cover debits to its account and has the right to withdraw
credits in excess of the liquidity, the series 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 series to settle the final determination and the series
realizes a loss or gain depending on whether on a net basis it made or received
such payments.
The sale of financial futures is for the purpose of hedging a series'
existing or anticipated holdings of long-term debt securities. For example, if a
series 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 series' portfolio would decline, but the value of the
series' financial futures would be expected to increase at approximately the
same rate thereby keeping the net asset value of the series from declining as
much as it otherwise would have.
Among the risks associated with the use of financial futures by the Fund's
series 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 series 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 series may enter into fewer financial futures if the
historical volatility of the price of the securities being hedged is less than
the historical volatility of the financial futures.
The market prices of financial futures may also be affected by factors
other than interest rates. One of these factors is the possibility that rapid
changes in the volume of closing transactions, whether due to volatile markets
or movements by speculators, would temporarily distort the normal relationship
between the markets in the financial future and the chosen debt securities. In
these circumstances as well as in periods of rapid and large price movements.
The series might find it difficult or impossible to close out a particular
transaction.
Options on Financial Futures. The Fund's series may also purchase put or
call options on financial futures which are traded on a U.S. Exchange or board
of trade and enter into closing transactions with respect to such options to
terminate an existing position. Currently, options can be purchased with respect
to financial futures on U.S. Treasury Bonds on The Chicago Board of Trade. The
purchase of put options on financial futures is analogous to the purchase of put
options by a series on its portfolio securities to hedge against the risk of
rising interest rates. As with options on debt securities, the holder of an
option may terminate his position by selling an option of the same series. 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.
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Index Options. The Fund's series 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 Manager's opinion, the market for such
instruments has developed sufficiently.
REPURCHASE AGREEMENTS
A series may invest temporarily up to 5% of its assets in repurchase
agreements, which are agreements pursuant to which securities are acquired by
the series from a third party with the understanding that they will be
repurchased by the seller at a fixed price on an agreed date. These agreements
may be made with respect to any of the portfolio securities in which the series
is authorized to invest. Repurchase agreements may be characterized as loans
secured by the underlying securities. The series may enter into repurchase
agreements with (i) member banks of the Federal Reserve System having total
assets in excess of $500 million and (ii) securities dealers, provided that such
banks or dealers meet the creditworthiness standards established by the Fund's
board of trustees ("Qualified Institutions"). The Manager will monitor the
continued creditworthiness of Qualified Institutions, subject to the oversight
of the series board of trustees.
The use of repurchase agreements involves certain risks. For example, if
the seller of securities under a repurchase agreement defaults on its obligation
to repurchase the underlying securities, as a result of its bankruptcy or
otherwise, the series will seek to dispose of such securities, which action
could involve costs or delays. If the seller becomes insolvent and subject to
liquidation or reorganization under applicable bankruptcy or other laws, the
series' ability to dispose of the underlying securities may be restricted.
Finally, it is possible that the series may not be able to substantiate its
interest in the underlying securities. To minimize this risk, the securities
underlying the repurchase agreement will be held by the custodian at all times
in an amount at least equal to the repurchase price, including accrued interest.
If the seller fails to repurchase the securities, the series may suffer a loss
to the extent proceeds from the sale of the underlying securities are less than
the repurchase price.
The resale price reflects the purchase price plus an agreed upon market
rate of interest which is unrelated to the coupon rate or date of maturity of
the purchased security. The collateral is marked to market daily. Such
agreements permit the Series to keep all its assets earning interest while
retaining "overnight" flexibility in pursuit of investments of a longer-term
nature.
C-29
<PAGE> 254
FLAGSHIP ARIZONA
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS
MUNICIPAL BONDS
MAY 31, 1996
<TABLE>
<CAPTION>
FACE
AMOUNT FACE MARKET
(000) DESCRIPTION RATE MATURITY VALUE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
EDUCATION
$1,370 University of Arizona Foundation Lease Revenue................................ 7.750% 07/01/07 $ 1,442,898
HEALTH CARE
1,670 Cochise County, AZ Industrial Development Authority Revenue--Sierra Vista Care
Center--Series 1994 A....................................................... 6.750 11/20/19 1,753,483
HOSPITALS
1,250 Arizona Health Facilities Authority Revenue--Arizona Voluntary Hospital
Federation Pooled Loan Program--Series 1985 B............................... 7.250 10/01/13 1,345,062
2,275 Maricopa County, AZ Industrial Development Authority Hospital Facility
Revenue--Samaritan Health Services--Series 1990 A........................... 7.000 12/01/16 2,657,359
750 Maricopa County, AZ Industrial Development Authority Hospital Facility
Revenue--John C. Lincoln Hospital........................................... 7.500 12/01/13 828,420
500 Pima County, AZ Industrial Development Authority Revenue--Carondelet Health
Care Corporation--Series 1993............................................... 5.250 07/01/12 475,980
1,000 Scottsdale, AZ Industrial Development Authority Hospital Revenue--Scottsdale
Memorial Hospital--1987 A................................................... 8.500 09/01/17 1,066,770
1,500 Scottsdale, AZ Industrial Development Authority Hospital Revenue--Scottsdale
Memorial Hospital--Series 1993.............................................. 5.500 09/01/12 1,473,015
HOUSING/MULTIFAMILY
425 Phoenix, AZ Industrial Development Authority Revenue--Chris Ridge Village--
Series 1992................................................................. 6.800 11/01/25 437,572
HOUSING/SINGLE FAMILY
255 Maricopa County, AZ Industrial Development Authority--Single Family Mortgage
Revenue--Series 1991 A...................................................... 7.500 08/01/12 266,279
INDUSTRIAL DEVELOPMENT AND POLLUTION CONTROL
250 Casa Grande, AZ Industrial Development Authority Revenue--Frito-Lay/PepsiCo
Pollution Control Project--Series 1984 A.................................... 6.650 12/01/14 263,118
1,000 Mesa, AZ Industrial Development Authority--TRW Vehicle Safety
Systems, Inc................................................................ 7.250 10/15/04 1,026,330
500 Mohave County, AZ Industrial Development Authority Revenue--Citizens Utility
Company Project............................................................. 7.150 02/01/26 528,770
195 Navajo County, AZ Pollution Control Revenue--Arizona Public Service Company--
Series 1993................................................................. 5.875 08/15/28 181,535
MUNICIPAL APPROPRIATION OBLIGATIONS
225 Arizona State Municipal Financing Program--Certificates of
Participation--Series 11.................................................... 8.000 08/01/17 292,784
850 Tucson, AZ Certificates of Participation--Series 1994......................... 6.375 07/01/09 900,804
MUNICIPAL REVENUE/OTHER
375 Salt River Pima--Maricopa Indian Community--Arizona Special Obligation
Revenue--Phoenix Cement Company............................................. 7.750 02/15/97 383,749
MUNICIPAL REVENUE/TRANSPORTATION
500 Phoenix, AZ Airport Revenue--Series 1994 D.................................... 6.400 07/01/12 517,610
500 Tucson, AZ Airport Authority Revenue--Series B................................ 7.125 06/01/15 537,245
MUNICIPAL REVENUE/UTILITY
500 Central Arizona Water Conservation District Revenue--Central Arizona Project--
Contract Revenue--Series 1993A.............................................. 5.500 11/01/10 497,515
5 Central Arizona Water Conservation District Revenue--Series 1991 B............ 6.500 11/01/11 5,334
500 Salt River Project--Arizona Agricultural Improvement and Power
District--Electric System Refunding Revenue--Series 1993 A.................. 5.750 01/01/10 508,470
MUNICIPAL REVENUE/WATER & SEWER
1,750 Chandler, AZ Water and Sewer Revenue.......................................... 6.750 07/01/06 1,875,895
500 Cottonwood, AZ Sewer Revenue--Series 1992..................................... 6.900 07/01/03 541,495
100 Cottonwood, AZ Sewer Revenue--Series 1992..................................... 7.000 07/01/06 107,255
100 Cottonwood, AZ Sewer Revenue--Series 1992..................................... 7.000 07/01/07 106,671
540 Pima County, AZ Sewer Revenue--Series 1991.................................... 6.750 07/01/15 572,659
800 Sedona, AZ Sewer Revenue--Series 1992......................................... 7.000 07/01/12 838,280
500 Tucson, AZ Water System Revenue--Series 1991.................................. 6.700 07/01/12 538,240
1,000 Tucson, AZ Water System Revenue--Series 1993.................................. 5.500 07/01/10 991,250
</TABLE>
C-31
<PAGE> 255
FLAGSHIP ARIZONA
<TABLE>
<CAPTION>
FACE
AMOUNT FACE MARKET
(000) DESCRIPTION RATE MATURITY VALUE
- -----------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
NON-STATE GENERAL OBLIGATIONS
$ 800 Chandler, AZ General Obligation............................................... 7.000% 07/01/12 $ 868,968
250 Cochise County, AZ Sierra Unified School District Number 68--General
Obligation--Series 1992..................................................... 7.500 07/01/09 297,225
250 Coconino and Yavapai Counties, AZ Unified School District Number
9--Sedona--Oak Creek--Series 1992 A......................................... 6.700 07/01/06 266,975
750 Maricopa County, AZ School District Number 11--Peoria--Series 1992............ 6.400 07/01/10 783,532
675 Maricopa County, AZ School District Number 11--Peoria--Series 1992............ 0.000 07/01/06 389,806
4,000 Maricopa County, AZ School District Number 28--Kyrene Elementary--Series 1993
C........................................................................... 0.000 07/01/07 2,161,760
2,460 Maricopa County, AZ School District Number 28--Kyrene Elementary--Series 1993
C........................................................................... 0.000 07/01/08 1,242,989
1,870 Maricopa County, AZ School District Number 28--Kyrene Elementary--Series 1993
C........................................................................... 0.000 01/01/09 918,563
3,805 Maricopa County, AZ School District Number 28--Kyrene Elementary--Series 1993
C........................................................................... 0.000 01/01/10 1,743,223
6,000 Maricopa County, AZ School District Number 28--Kyrene Elementary--Series 1993
C........................................................................... 0.000 01/01/11 2,558,820
500 Maricopa County, AZ Glendale Elementary School District Number 40--School
Improvement--Series 1995.................................................... 6.200 07/01/09 505,560
3,000 Maricopa County, AZ Glendale Elementary School District Number 40--School
Improvement--Series 1995.................................................... 6.250 07/01/10 3,035,670
1,750 Maricopa County, AZ Glendale Elementary School District Number 40--School
Improvement--Series 1995.................................................... 6.300 07/01/11 1,770,755
2,000 Maricopa County, AZ Unified School District Number 41--Gilbert--Series 1994... 0.000 01/01/06 1,197,980
500 Maricopa County, AZ Unified School District Number 41--Gilbert--Series 1995
D............................................................................. 6.250 07/01/15 491,770
515 Maricopa County, AZ School District Number 68--Alhambra Elementary--Series
1994 A...................................................................... 6.750 07/01/14 557,189
2,000 Maricopa County, AZ Paradise Valley Unified School District Number 69--Series
1995........................................................................ 7.000 07/01/12 2,287,280
500 Maricopa County, AZ School District Number 80--Chandler--Series 1994.......... 6.250 07/01/11 535,415
1,275 Maricopa County, AZ School District Number 98--Fountain Hills--Series 1992.... 0.000 07/01/06 736,300
125 Navajo County, AZ Unified School District Number 2--Joseph City--Series 1992
A........................................................................... 6.800 07/01/01 132,910
375 Navajo County, AZ Unified School District Number 2--Joseph City--Series 1992
A........................................................................... 6.800 07/01/02 398,302
1,000 Pima County, AZ Unified School District Number 1--Tucson--Series 1992......... 7.500 07/01/10 1,190,930
500 Pima County, AZ Unified School District Number 13--Tanque Verde--Series
1994........................................................................ 6.700 07/01/10 543,440
1,100 Santa Cruz, AZ Nogales Unified School District Number 1--General Obligation--
Series 1995................................................................. 0.000 01/01/09 540,331
315 Scottsdale, AZ Mountain Community Facilities District--General Obligation--
Series 1993A................................................................ 6.200 07/01/17 319,561
1,925 Tatum Ranch, AZ Community Facilities District--Phoenix, Arizona--
General Obligation--Series 1991 A........................................... 6.875 07/01/16 2,072,282
PRE-REFUNDED OR ESCROWED
500 Arizona State Transportation Board--Highway Revenue--Series 1990.............. 7.000 07/01/09 546,580
300 Arizona State University Revenues............................................. 7.000 07/01/15 335,685
1,995 Central Arizona Water Conservation District Revenue--Series 1991 B............ 6.500 11/01/11 2,171,637
35 Glendale, AZ Municipal Property Corporation................................... 8.850 07/01/08 35,847
395 Maricopa County, AZ Hospital Revenue--St. Luke's Hospital Medical Center...... 8.750 02/01/10 464,619
135 Maricopa County, AZ Industrial Development Authority Hospital Facility
Revenue-- Samaritan Health Services......................................... 12.000 01/01/08 144,987
1,250 Maricopa County, AZ Industrial Development Authority--Mercy Health System
Revenue..................................................................... 7.150 07/01/12 1,365,875
10,800 Maricopa County, AZ Industrial Development Authority--Single Family Mortgage
Revenue..................................................................... 0.000 02/01/16 3,262,680
13,040 Maricopa County, AZ Industrial Development Authority--Single Family Mortgage
Revenue--Series 1983........................................................ 0.000 12/31/14 4,209,442
575 Maricopa County, AZ School District Number 214--Tolleson Union High........... 6.500 07/01/09 617,774
300 Maricopa County, AZ School District Number 214--Tolleson Union High........... 6.500 07/01/10 322,317
1,250 Northern Arizona University Revenue........................................... 7.500 06/01/08 1,355,238
700 Peoria, AZ Municipal Development Authority Facilities Revenue................. 7.000 07/01/10 761,817
500 Phoenix, AZ Street and Highway User Revenue--Series 1992...................... 6.250 07/01/11 521,770
650 Pima County, AZ Unified School District Number 1--Tucson...................... 7.200 07/01/09 713,810
460 Pima County, AZ Sewer Revenue--Series 1991.................................... 6.750 07/01/15 504,063
1,500 Price-Elliott Research Park, Incorporated--Arizona State University Research
Park Development--Series 1991............................................... 7.000 07/01/21 1,671,510
300 Salt River Project--Arizona Agricultural Improvement and Power
District--Electric System Revenue--Series A................................. 7.500 01/01/27 312,432
100 Salt River Project--Arizona Agricultural Improvement and Power
District--Electric System Revenue--Series E................................. 8.250 01/01/28 106,537
100 Salt River Project--Arizona Agricultural Improvement and Power
District--Electric System Revenue--Series E................................. 8.250 01/01/13 106,537
450 Scottsdale, AZ Certificates of Participation--Scottsdale Municipal Property
Corporation................................................................. 7.875 11/01/14 466,659
</TABLE>
C-32
<PAGE> 256
FLAGSHIP ARIZONA
<TABLE>
<CAPTION>
FACE
AMOUNT FACE MARKET
(000) DESCRIPTION RATE MATURITY VALUE
- -----------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 850 Tucson, AZ Water System Revenue............................................... 7.700% 07/01/15 $ 869,762
10,320 Tucson and Pima County, AZ Industrial Development Authority--Single Family
Mortgage Revenue--Series 1983 A............................................. 0.000 12/01/14 3,348,943
1,085 University of Arizona Medical Center Corporation--Tucson, Arizona--Hospital
Revenue--Series 1986........................................................ 8.100 07/01/16 1,151,673
1,000 University of Arizona Medical Center Corporation--Tucson, Arizona--Hospital
Revenue--Series 1987........................................................ 8.100 07/01/16 1,064,101
SPECIAL TAX REVENUE
965 Bullhead City, AZ Parkway Improvement District................................ 6.100 01/01/13 948,170
760 Flagstaff, AZ Junior Lien and Highway User Revenue--Series 1992............... 5.900 07/01/10 788,584
350 Nogales, AZ Street and Highway Users Revenue--Series 1993..................... 5.500 07/01/11 326,522
365 Nogales, AZ Street and Highway Users Revenue--Series 1993..................... 5.500 07/01/12 337,804
460 Peoria, AZ Improvement District Number 8801--North Valley Power Center........ 7.300 01/01/13 493,787
STATE/TERRITORIAL GENERAL OBLIGATIONS
1,000 Commonwealth of Puerto Rico Public Building Authority Guaranteed Public
Education and Health Facilities--Series M................................... 3.750 07/01/16 894,760
STUDENT LOAN REVENUE BONDS
370 Arizona Educational Loan Revenue--Series B.................................... 7.000 03/01/05 391,279
1,000 Arizona Student Loan Acquisition Authority Revenue--Series 1994 B............. 6.600 05/01/10 1,040,500
------------------------------------------------------------------------------------------------------------------
Total Investments in Securities--Municipal Bonds (cost $78,251,477)--100.1%... 82,163,084
------------------------------------------------------------------------------------------------------------------
Excess of Liabilities over Other Assets--(0.1)%............................... (98,674)
------------------------------------------------------------------------------------------------------------------
Total Net Assets--100.0%...................................................... $82,064,410
==================================================================================================================
</TABLE>
See notes to financial statements.
C-33
<PAGE> 257
FLAGSHIP ARIZONA
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 1996
<TABLE>
<S> <C>
ASSETS
Investments, at market value (cost $78,251,477)..................................... $82,163,084
Receivable for Fund shares sold..................................................... 233,221
Interest receivable................................................................. 1,421,524
Other............................................................................... 5,550
-----------
Total assets.............................................................. 83,823,379
-----------
LIABILITIES
Bank borrowings (note F)............................................................ 830,576
Payable for investments purchased................................................... 245,558
Payable for Fund shares reacquired.................................................. 264,547
Distributions payable............................................................... 357,574
Accrued expenses.................................................................... 60,714
-----------
Total liabilities......................................................... 1,758,969
-----------
NET ASSETS.......................................................................... $82,064,410
===========
Class A:
Applicable to 7,463,231 shares of beneficial interest issued and outstanding........ $80,094,252
===========
Net asset value per share........................................................... $ 10.73
===========
Class C:
Applicable to 183,587 shares of beneficial interest issued and outstanding.......... $ 1,970,158
===========
Net asset value per share........................................................... $ 10.73
===========
</TABLE>
C-34
<PAGE> 258
FLAGSHIP ARIZONA
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MAY 31, 1996
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest............................................................................ $ 4,932,741
-----------
Expenses:
Distribution fees--Class A (note E)............................................ 328,091
Distribution fees--Class C (note E)............................................ 16,707
Investment advisory fees (note E).............................................. 420,039
Custody and accounting fees.................................................... 61,467
Transfer agent's fees.......................................................... 57,035
Registration fees.............................................................. 9,890
Legal fees..................................................................... 2,923
Audit fees..................................................................... 14,762
Trustees' fees................................................................. 2,164
Shareholder services fees (note E)............................................. 8,047
Other.......................................................................... 2,746
Advisory fees waived (note E).................................................. (279,976)
Expense subsidy (note E)....................................................... (57,950)
-----------
Total expenses before credits............................................. 585,945
Custodian fee credit (note B).................................................. (15,992)
-----------
Net expenses.............................................................. 569,953
-----------
Net investment income................................................ 4,362,788
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on security transactions................................... 317,259
Change in unrealized appreciation (depreciation) of investments..................... (1,200,471)
-----------
Net loss on investments.............................................. (883,212)
-----------
Net increase in net assets resulting from operations................................ $ 3,479,576
===========
</TABLE>
See notes to financial statements.
C-35
<PAGE> 259
FLAGSHIP ARIZONA
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
MAY 31, 1996 MAY 31, 1995
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income................................................. $ 4,362,788 $ 4,453,941
Net realized gain (loss) on security transactions..................... 317,259 155,116
Change in unrealized appreciation (depreciation) of investments....... (1,200,471) 2,669,143
------------ ------------
Net increase in net assets resulting from operations........ 3,479,576 7,278,200
------------ ------------
DISTRIBUTIONS TO CLASS A SHAREHOLDERS
From net investment income............................................ (4,301,398) (4,420,414)
DISTRIBUTIONS TO CLASS C SHAREHOLDERS
From net investment income............................................ (82,198) (72,191)
------------ ------------
Net decrease in net assets from distributions to
shareholders.............................................. (4,383,596) (4,492,605)
------------ ------------
FUND SHARE TRANSACTIONS (note C)
Proceeds from shares sold............................................. 11,832,617 9,819,607
Net asset value of shares issued in reinvestment of distributions..... 1,939,151 1,866,427
Cost of shares reacquired............................................. (12,829,723) (16,243,843)
------------ ------------
Net increase (decrease) in net assets from Fund share
transactions.............................................. 942,045 (4,557,809)
------------ ------------
Total increase (decrease) in net assets..................... 38,025 (1,772,214)
NET ASSETS
Beginning of year..................................................... 82,026,385 83,798,599
------------ ------------
End of year........................................................... $ 82,064,410 $ 82,026,385
============ ============
NET ASSETS CONSIST OF
Paid-in surplus....................................................... $ 78,032,113 $ 77,110,876
Accumulated net realized gain (loss) on security transactions......... 120,690 (196,569)
Unrealized appreciation (depreciation) of investments................. 3,911,607 5,112,078
------------ ------------
$ 82,064,410 $ 82,026,385
============ ============
</TABLE>
See notes to financial statements.
C-36
<PAGE> 260
FLAGSHIP ARIZONA
NOTES TO FINANCIAL STATEMENTS
A. DESCRIPTION OF BUSINESS
The Flagship Arizona Double Tax Exempt Fund (Fund) is a sub-trust of the
Flagship Tax Exempt Funds Trust (Trust), a Massachusetts business trust
organized on March 8, 1985. The Fund is an open-end diversified management
investment company registered under the Investment Company Act of 1940, as
amended. The Fund commenced investment operations on October 29, 1986. On
February 7, 1994, the Fund began to offer Class C shares to the investing
public. Class A shares are sold with a front-end sales charge. Class C shares
are sold with no front-end sales charge but are assessed a contingent deferred
sales charge if redeemed within one year from the time of purchase. Both classes
of shares have identical rights and privileges except with respect to the effect
of sales charges, the distribution and/or service fees borne by each class,
expenses specific to each class, voting rights on matters affecting a single
class and the exchange privilege of each class. Shares of beneficial interest in
the Fund, which are registered under the Securities Act of 1933, as amended, are
offered to the public on a continuous basis.
B. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund.
ESTIMATES: The preparation of financial statements and daily calculation of
net asset value in conformity with generally accepted accounting principles
requires management to fairly value, at market, investment securities and make
estimates and assumptions regarding the reported amounts of assets and
liabilities at the date of the financial statements and the reported amount of
revenues and expenses during the reporting period. The financial statements
reflect these inherent valuations, estimates and assumptions, and actual results
could differ.
SECURITY VALUATIONS: Portfolio securities for which market quotations are
readily available are valued on the basis of prices provided by a pricing
service which uses information with respect to transactions in bonds, quotations
from bond dealers, market transactions in comparable securities and various
relationships between securities in determining the values. If market quotations
are not readily available from such pricing service, securities are valued at
fair value as determined under procedures established by the Trustees.
Short-term securities are stated at amortized cost, which is equivalent to fair
value.
The Fund must maintain a diversified investment portfolio as a registered
investment company, however, the Fund's investments are primarily in the
securities of its state. Such concentration subjects the Fund to the effects of
economic changes occurring within that state.
FEDERAL INCOME TAXES: It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute to its shareholders all of its tax exempt net
investment income and net realized gains on security transactions. Therefore, no
federal income tax provision is required.
Distributions from net realized capital gains may differ for financial
statement and tax purposes primarily due to the treatment of wash sales and
post-October capital losses. The effect on dividend distributions of certain
book-to-tax timing differences is presented as excess distributions in the
statement of changes in net assets.
SECURITY TRANSACTIONS: Security transactions are accounted for on the date
the securities are purchased or sold (trade date). Realized gains and losses on
security transactions are determined on the identified cost basis. Interest
income is recorded on the accrual basis. The Fund amortizes original issue
discounts and premiums paid on purchases of portfolio securities on the same
basis for both financial reporting and tax purposes. Market discounts, if
applicable, are recognized as ordinary income upon disposition or maturity.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS: Interest income and
estimated expenses are accrued daily. Daily dividends are declared from net
investment income and paid monthly. Net realized gains from security
transactions, to the extent they exceed available capital loss carryforwards,
are distributed to shareholders at least annually.
EXPENSE ALLOCATION: Shared expenses incurred by the Trust are allocated
among the sub-trusts based on each sub-trust's ratio of net assets to the
combined net assets. Specifically identified direct expenses are charged to each
sub-trust as incurred. Fund expenses not specific to any class of shares are
prorated among the classes based upon the eligible net assets of each class.
Specifically identified direct expenses of each class are charged to that class
as incurred.
C-37
<PAGE> 261
FLAGSHIP ARIZONA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Fund has entered into an agreement with the custodian, whereby it earns
custodian fee credits for temporary cash balances. These credits, which offset
custodian fees that may be charged to the Fund, are based on 80% of the daily
effective federal funds rate.
SECURITIES PURCHASED ON A "WHEN-ISSUED" BASIS: The Fund may, upon adequate
segregation of securities as collateral, purchase and sell portfolio securities
on a "when-issued" basis. These securities are registered by a municipality or
government agency, but have not been issued to the public. Delivery and payment
take place after the date of the transaction and such securities are subject to
market fluctuations during this period. The current market value of these
securities is determined in the same manner as other portfolio securities. There
were no "when-issued" purchase commitments included in the statement of
investments at May 31, 1996.
C. FUND SHARES
At May 31, 1996, there were an indefinite number of shares of beneficial
interest with no par value authorized for each class. Transactions in shares
were as follows:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31, 1996 YEAR ENDED MAY 31, 1995
-------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
CLASS A:
Shares sold.................................... 987,074 $ 10,720,918 868,576 $ 9,000,803
Shares issued on reinvestment.................. 174,172 1,897,941 178,972 1,839,048
Shares reacquired.............................. (1,111,337) (12,066,428) (1,563,719) (15,834,858)
---------- ------------ ---------- ------------
Net increase (decrease)........................ 49,909 $ 552,431 (516,171) $ (4,995,007)
========= =========== ========= ===========
CLASS C:
Shares sold.................................... 101,591 $ 1,111,699 78,796 $ 818,804
Shares issued on reinvestment.................. 3,779 41,210 2,677 27,379
Shares reacquired.............................. (71,245) (763,295) (39,624) (408,985)
---------- ------------ ---------- ------------
Net increase................................... 34,125 $ 389,614 41,849 $ 437,198
========= =========== ========= ===========
</TABLE>
D. PURCHASES AND SALES OF MUNICIPAL BONDS
Purchases and sales of municipal bonds for the year ended May 31, 1996,
aggregated $33,285,040 and $31,763,502, respectively. At May 31, 1996, cost for
federal income tax purposes is $78,251,477 and net unrealized appreciation
aggregated $3,911,607, of which $4,166,528 related to appreciated securities and
$254,921 related to depreciated securities.
E. TRANSACTIONS WITH INVESTMENT ADVISOR AND DISTRIBUTOR
Flagship Financial Inc. (Advisor), under the terms of an agreement which
provides for furnishing of investment advice, office space and facilities to the
Fund, receives fees computed monthly on the average daily net assets of the Fund
at an annualized rate of 1/2 of 1%. During the year ended May 31, 1996, the
Advisor, at its discretion, permanently waived $279,976 of its advisory fees.
Also, under an agreement with the Fund, the Advisor may subsidize certain
expenses excluding advisory and distribution fees.
The Fund has a Distribution Agreement with Flagship Funds Inc.
(Distributor). The Distributor serves as the exclusive selling agent and
distributor of the Fund's Class A and Class C shares and in that capacity is
responsible for all sales and promotional efforts including printing of
prospectuses and reports used for sales purposes. Pursuant to Rule 12b-1 under
the Investment Company Act of 1940, the Fund has adopted a plan to reimburse the
Distributor for its actual expenses incurred in the distribution and promotion
of all classes of the Fund's shares. The maximum amount payable for these
expenses on an annual basis is .40% and .95% of the Fund's average daily net
assets for Class A and Class C shares, respectively. Included in accrued
expenses at May 31, 1996 are accrued distribution fees of $27,298 and $1,587 for
Class A and Class C shares, respectively. Certain non-promotional expenses
directly attributable to current shareholders are aggregated by the Distributor
and passed through to the Fund as shareholder services fees.
C-38
<PAGE> 262
FLAGSHIP ARIZONA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In its capacity as national wholesale underwriter for the shares of the
Fund, the Distributor received commissions on sales of the Fund's Class A shares
of approximately $193,700 for the year ended May 31, 1996, of which
approximately $167,500 was paid to other dealers. For the year ended May 31,
1996, the Distributor received approximately $1,900 of contingent deferred sales
charges on redemptions of shares. Certain officers and trustees of the Trust are
also officers and/or directors of the Distributor and/or Advisor.
F. LINE OF CREDIT
The Trust participates in a line of credit in which a maximum amount of $30
million is provided by State Street Bank & Trust Co. The Fund may temporarily
borrow up to $4 million under the line of credit. Borrowings are collateralized
with pledged securities and are due on demand with interest at 1% above the
federal funds rate. The average daily amount of borrowings under the line of
credit during the year ended May 31, 1996 was approximately $296,300, at a
weighted average annualized interest rate of 6.96%. At May 31, 1996, the Fund
had $830,576 outstanding under the line of credit.
C-39
<PAGE> 263
FLAGSHIP ARIZONA
FINANCIAL HIGHLIGHTS
Selected data for each share of beneficial interest outstanding throughout
the year.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MAY 31, 1996 MAY 31, 1995 MAY 31, 1994 MAY 31, 1993 MAY 31, 1992
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
CLASS A
Net asset value, beginning of year... $ 10.85 $ 10.43 $ 10.81 $ 10.13 $ 9.81
-------- -------- -------- -------- --------
Income from investment operations
Net investment income.............. 0.57 0.58 0.60 0.63 0.65
Net realized and unrealized gain
(loss) on securities............ (0.12) 0.42 (0.38) 0.69 0.32
-------- -------- -------- -------- --------
Total from investment operations..... 0.45 1.00 0.22 1.32 0.97
-------- -------- -------- -------- --------
Less distributions
From net investment income......... (0.57) (0.58) (0.60) (0.64) (0.65)
-------- -------- -------- -------- --------
Total distributions.................. (0.57) (0.58) (0.60) (0.64) (0.65)
-------- -------- -------- -------- --------
Net asset value, end of year......... $ 10.73 $ 10.85 $ 10.43 $ 10.81 $ 10.13
======== ======== ======== ======== ========
Total return(a)...................... 4.21% 10.03% 1.92% 13.37% 10.25%
Ratios to average net assets
Actual net of waivers and
reimbursements:
Expenses(b)..................... 0.69% 0.82% 0.64% 0.44% 0.44%
Net investment income........... 5.20% 5.59% 5.48% 6.03% 6.55%
Assuming credits and no waivers or
reimbursements
Expenses........................ 1.07% 1.20% 1.09% 1.11% 1.20%
Net investment income........... 4.82% 5.21% 5.03% 5.36% 5.79%
Net assets at end of year (000's).... $ 80,094 $ 80,406 $ 82,676 $ 72,778 $ 51,123
Portfolio turnover rate.............. 38.15% 26.79% 21.08% 20.04% 33.75%
</TABLE>
(a) The total returns shown do not include the effect of applicable front-end
sales charge.
(b) During the year ended May 31, 1996, the Fund has earned credits from the
custodian which reduce service fees incurred. If included, the ratio of
expenses to average net assets would be 0.67%; prior year numbers have not
been restated to reflect these credits.
C-40
<PAGE> 264
FLAGSHIP ARIZONA
FINANCIAL HIGHLIGHTS
Selected data for each share of beneficial interest outstanding throughout
the period.
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED YEAR ENDED FEBRUARY 7, 1994 TO
MAY 31, 1996 MAY 31, 1995 MAY 31, 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CLASS C
Net asset value, beginning of period..................... $10.84 $10.43 $ 11.22
------ ------ ------
Income from investment operations:
Net investment income.................................. 0.51 0.52 0.14
Net realized and unrealized gain (loss) on
securities.......................................... (0.11) 0.41 (0.79)
------ ------ ------
Total from investment operations......................... 0.40 0.93 (0.65)
------ ------ ------
Less distributions:
From net investment income............................. (0.51) (0.52) (0.14)
------ ------ ------
Total distributions...................................... (0.51) (0.52) (0.14)
------ ------ ------
Net asset value, end of period........................... $10.73 $10.84 $ 10.43
====== ====== ======
Total return(a).......................................... 3.75% 9.32% (16.61)%
Ratios to average net assets:
(annualized where appropriate)
Actual net of waivers and reimbursements:
Expenses(b)......................................... 1.23% 1.36% 1.20%
Net investment income............................... 4.64% 5.01% 4.36%
Assuming credits and no waivers or reimbursements:
Expenses............................................ 1.63% 1.75% 1.62%
Net investment income............................... 4.24% 4.62% 3.94%
Net assets at end of period (000's)...................... $1,970 $1,621 $ 1,122
Portfolio turnover rate.................................. 38.15% 26.79% 21.08%
</TABLE>
(a) The total returns shown do not include the effect of applicable contingent
deferred sales charge and are annualized where appropriate.
(b) During the year ended May 31, 1996, the Fund has earned credits from the
custodian which reduce service fees incurred. If included, the ratio of
expenses to average net assets would be 1.21%; prior period numbers have not
been restated to reflect these credits.
C-41
<PAGE> 265
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS AND TRUSTEES
FLAGSHIP ARIZONA
DOUBLE TAX EXEMPT FUND
We have audited the accompanying statement of assets and liabilities,
including the statement of investments in securities and net assets, of the
Flagship Arizona Double Tax Exempt Fund as of May 31, 1996, the related
statement of operations for the year then ended, and the statements of changes
in net assets and the financial highlights for each of the periods presented.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 1996, by correspondence with the Fund's custodian and brokers. 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 audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of the Flagship Arizona
Double Tax Exempt Fund at May 31, 1996, the results of its operations, the
changes in its net assets and the financial highlights for the respective stated
periods, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dayton, Ohio
July 3, 1996
C-42
<PAGE> 266
FLAGSHIP FLORIDA
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS
MUNICIPAL BONDS--FLORIDA DOUBLE TAX EXEMPT
MAY 31, 1996
<TABLE>
<CAPTION>
FACE
AMOUNT FACE MARKET
(000) DESCRIPTION RATE MATURITY VALUE
- -----------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
HEALTH CARE
$5,500 Cape Coral, FL Health Facilities Authority--First Mortgage Revenue--Gulf Care,
Incorporated--Series 1995 A................................................... 6.000% 10/01/25 $ 5,373,390
540 Sarasota County, FL Health Facilities Authority Revenue--Sunnyside Properties
Project-- Series 1995......................................................... 5.500 05/15/02 525,053
570 Sarasota County, FL Health Facilities Authority Revenue--Sunnyside Properties
Project-- Series 1995......................................................... 5.500 05/15/03 548,021
855 Sarasota County, FL Health Facilities Authority Revenue--Sunnyside Properties
Project-- Series 1995......................................................... 5.500 05/15/01 840,456
600 Sarasota County, FL Health Facilities Authority Revenue--Sunnyside Properties
Project-- Series 1995......................................................... 5.500 05/15/04 569,946
1,000 Sarasota County, FL Health Facilities Authority Revenue--Sunnyside Properties
Project-- Series 1995......................................................... 6.000 05/15/10 930,280
170 Sarasota County, FL Health Facilities Authority Revenue--Sunnyside Properties
Project-- Series 1995......................................................... 5.500 05/15/05 159,576
HOSPITALS
2,735 Dade County, FL Health Facilities Authority Revenue--Catholic Health and
Rehabilitation Inc. .......................................................... 7.125 08/15/09 2,901,507
3,000 Jacksonville, FL Health Facilities Authority Hospital Revenue--St. Luke's
Hospital...................................................................... 7.125 11/15/20 3,236,220
6,000 Lakeland, FL Hospital Revenue--Lakeland Regional Medical Center Project--Series
1996.......................................................................... 5.250 11/15/25 5,427,120
2,320 Martin County, FL Health Facilities Authority Hospital Revenue--Martin Memorial
Hospital--Series A............................................................ 7.125 11/15/04 2,545,063
1,000 Martin County, FL Health Facilities Authority Hospital Revenue--Martin Memorial
Hospital--Series B............................................................ 7.100 11/15/20 1,086,830
1,330 North Miami, FL Health Facilities Authority Revenue--Bon Secours Health System--
Villa Maria Nursing Center.................................................... 7.500 09/01/12 1,442,186
2,500 Orange County, FL Health Facilities Authority Revenue--Adventist
Health/Sunbelt-- Series 1991.................................................. 6.875 11/15/15 2,692,325
2,500 Orange County, FL Health Facilities Authority Revenue--Adventist
Health/Sunbelt-- Series 1991.................................................. 6.750 11/15/21 2,665,600
8,895 Orange County, FL Health Facilities Authority Revenue--Adventist Health
System/Sunbelt--Series 1995................................................... 5.250 11/15/20 8,023,735
1,000 Orange County, FL Health Facilities Authority Revenue--Adventist Health
System/Sunbelt--Series 1995................................................... 5.750 11/15/25 964,270
1,550 Osceola County, FL Industrial Development Authority Revenue--Evangelical
Lutheran Society Project...................................................... 6.750 05/01/16 1,653,354
1,650 Polk County, FL Industrial Development Authority Revenue--Winter Haven
Hospital-- Series 1985-2...................................................... 6.250 09/01/15 1,688,164
1,000 Saint Johns County, FL Industrial Development Authority--Hospital
Revenue--Flagler Hospital--Series 1992........................................ 6.000 08/01/22 929,120
2,000 St. Petersburg, FL Health Facilities Authority Revenue--Allegheny Health
System-- St. Anthony's Health Care Center..................................... 6.750 12/01/21 2,137,120
1,610 St. Petersburg, FL Health Facilities Authority Revenue--Allegheny Health
System-- St. Mary's Hospital.................................................. 7.000 12/01/21 1,757,621
1,000 Tampa, FL Allegany Health System Revenue--St. Joseph's Hospital, Incorporated--
Series 1991................................................................... 6.750 12/01/17 1,071,510
2,000 Tampa, FL Allegany Health System Revenue--St. Joseph's Hospital--Series 1994.... 6.500 12/01/23 2,084,980
HOUSING/MULTIFAMILY
2,700 Duval County, FL Housing Finance Authority--Multifamily Housing
Revenue--Greentree Place--Series 1995......................................... 6.750 04/01/25 2,725,056
1,000 Florida Housing Finance Agency--Multifamily Housing Revenue--Antigua Club
Apartments--Series 1995 A1.................................................... 6.750 08/01/14 1,053,520
1,115 Florida Housing Finance Agency--Multifamily Housing Revenue--Brittany of
Rosemont Apartments--Series 1995 C1........................................... 6.875 08/01/26 1,176,537
1,260 Florida Housing Finance Agency Revenue--Vinyards Project--Series 1995 H......... 6.400 11/01/15 1,246,127
1,660 Florida Housing Finance Agency Revenue--Vinyards Project--Series 1995 H......... 6.500 11/01/25 1,649,110
</TABLE>
C-43
<PAGE> 267
FLAGSHIP FLORIDA
<TABLE>
<CAPTION>
FACE
AMOUNT FACE MARKET
(000) DESCRIPTION RATE MATURITY VALUE
- -----------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
HOUSING/SINGLE FAMILY
$5,425 Broward County, FL Housing Finance Authority Revenue--Single Family--Series
1985.......................................................................... 0.000% 04/01/16 $ 686,371
1,995 Broward County, FL Housing Finance Authority Revenue--Single Family--Series 1990
A............................................................................. 7.900 03/01/23 2,100,675
2,500 Clay County, FL Housing Finance Authority Revenue--Single Family Mortgage--
Series 1995................................................................... 6.550 03/01/28 2,520,775
290 Dade County, FL Housing Finance Authority--Single Family--Series B.............. 7.750 03/01/17 305,298
630 Dade County, FL Housing Finance Authority--Single Family--Series B.............. 7.250 09/01/23 651,578
1,355 Dade County, FL Housing Finance Authority--Single Family--Series D.............. 6.950 12/15/12 1,422,059
40 Dade County, FL Housing Finance Authority--Single Family--Series E.............. 7.000 03/01/24 41,537
1,000 Dade County, FL Housing Finance Authority--Single Family Mortgage Revenue--
Series 1995................................................................... 6.700 04/01/28 1,007,460
425 Duval County, FL Housing Finance Authority--Single Family--Series B............. 7.500 06/01/15 448,447
215 Duval County, FL Housing Finance Authority--Single Family--Series A............. 7.850 12/01/22 226,468
520 Duval County, FL Housing Finance Authority--Single Family--Series C............. 7.650 09/01/10 549,453
735 Duval County, FL Housing Finance Authority Revenue--Single Family--Series
1994.......................................................................... 6.550 10/01/15 743,048
1,690 Escambia County, FL Housing Finance Authority--Single Family.................... 7.400 10/01/23 1,761,301
1,425 Florida Housing Finance Agency--Single Family Revenue--Series 1994.............. 6.250 07/01/11 1,443,183
715 Florida Housing Finance Agency--Single Family Mortgage Revenue--Series 1995 A... 6.550 07/01/14 724,910
715 Florida Housing Finance Agency--Single Family Mortgage Revenue--Series 1995 A... 6.650 01/01/24 723,609
1,000 Florida Housing Finance Agency--Homeowner Mortgage Revenue--Series 1995 2B...... 5.950 07/01/14 998,840
435 Leon County, FL Housing Finance Authority Revenue--Single Family................ 7.300 04/01/21 450,751
3,000 Leon County, FL Housing Finance Authority Revenue--Single Family--Series 1995... 7.300 01/01/28 3,229,890
1,330 Orange County, FL Housing Finance Authority Revenue--Series B................... 8.100 11/01/21 1,408,124
280 Orange County, FL Housing Finance Authority Revenue--Series A................... 7.600 01/01/24 295,778
1,055 Palm Beach County, FL Housing Finance Authority--Single Family Mortgage
Revenue....................................................................... 7.600 03/01/23 1,111,759
2,000 Pinellas County, FL Housing Finance Authority Revenue--Single Family--Series
1995 A........................................................................ 6.650 08/01/21 2,019,840
1,160 Polk County, FL Housing Finance Authority--Single Family Revenue--Series A...... 7.150 09/01/23 1,208,210
INDUSTRIAL DEVELOPMENT AND POLLUTION CONTROL
3,000 Alliance Airport Authority, Incorporated, TX--Special Facilities
Revenue--Federal Express Corporation Project--Series 1996..................... 6.375 04/01/21 2,911,380
6,000 Citrus County, FL Pollution Control Revenue-- Florida Power Corporation--Crystal
River Power Plant--Series 1992A............................................... 6.625 01/01/27 6,255,060
750 Clay County, FL Industrial Development Authority Revenue--Cargill Project--
Series 1992................................................................... 6.400 03/01/11 780,038
5,500 Escambia County, FL Pollution Control Revenue--Champion International
Corporation--Series 1994...................................................... 6.900 08/01/22 5,704,655
2,500 Hillsborough County, FL Industrial Development Authority Pollution Control
Revenue--Tampa Electric Company............................................... 7.875 08/01/21 2,871,400
600 Jacksonville, FL Industrial Development Revenue--Cargill Project--Series 1992... 6.400 03/01/11 623,592
2,000 Martin County, FL Pollution Control Revenue--Florida Power and Light Company--
Series 1990................................................................... 7.300 07/01/20 2,197,460
1,500 Nassau County, FL Pollution Control Revenue--ITT Rayonier Project--Series
1993.......................................................................... 6.200 07/01/15 1,457,475
4,000 Pinellas County, FL Pollution Control Revenue--Florida Power Corporation--
Anclote and Bartow Power Plants............................................... 7.200 12/01/14 4,269,240
3,000 St. Lucie County, FL Solid Waste Disposal Revenue--Florida Power and Light
Company....................................................................... 7.150 02/01/23 3,235,740
2,000 St. Lucie County, FL Solid Waste Disposal Revenue--Florida Power and Light
Company--Series 1992.......................................................... 6.700 05/01/27 2,090,920
3,400 Tulsa, OK Municipal Airport Trustees Trust Revenue--AMR Corporation--
Series 1995................................................................... 6.250 06/01/20 3,320,780
MUNICIPAL APPROPRIATION OBLIGATIONS
500 Brevard County, FL School Board--Certificates of Participation--
Series 1996 A and B........................................................... 5.400 07/01/11 489,085
500 Brevard County, FL School Board--Certificates of Participation--
Series 1996 A and B........................................................... 5.400 07/01/12 486,055
1,100 Brevard County, FL School Board--Certificates of Participation--
Series 1996 A and B........................................................... 5.500 07/01/21 1,034,495
3,500 Florida State Department of Correctional Privatization Commission--Certificates
of Participation--350 Bed Youth--Series 1995.................................. 5.000 08/01/17 3,106,285
1,500 Florida State Department of Corrections--Certificates of Participation--Series
1994.......................................................................... 6.000 03/01/14 1,514,160
1,000 Palm Beach County, FL School Board--Certificates of Participation--
Series 1994 A................................................................. 6.375 08/01/15 1,033,880
5,050 Palm Beach County, FL School Board--Certificates of Participation--
Series 1995 A................................................................. 5.375 08/01/15 4,742,102
</TABLE>
C-44
<PAGE> 268
FLAGSHIP FLORIDA
<TABLE>
<CAPTION>
FACE
AMOUNT FACE MARKET
(000) DESCRIPTION RATE MATURITY VALUE
- -----------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL REVENUE/OTHER
$3,105 Gulf Breeze, FL Local Government Loan Program Floating Rate Demand Revenue--
Series 1985 A through E....................................................... 7.750% 12/01/15 $ 3,439,967
1,000 Gulf Breeze, FL Local Government Loan Program Floating Rate Demand Revenue--
Series 1985 B................................................................. 5.900 12/01/11 1,017,310
5,000 Hernando County, FL Revenue Criminal Justice Complex............................ 7.650 07/01/16 6,143,150
85 Orange County, FL Capital Improvement Revenue--Series A......................... 7.700 10/01/18 92,189
MUNICIPAL REVENUE/TRANSPORTATION
1,000 Dade County, FL Seaport General Obligation--Series 1996......................... 5.125 10/01/26 878,350
7,585 Dade County, FL Aviation Revenue--Series 1996 A and B........................... 5,600 10/01/26 7,182,995
4,000 Dade County, FL Aviation Revenue--Series 1995 A, B and C........................ 5.750 10/01/25 3,873,080
530 Florida State Department of Transportation--Turnpike Revenue--Series 1992 A..... 6.350 07/01/22 543,303
4,000 * Jacksonville, FL Port Authority--Port Facilities Revenue--Series 1996........... 5.625 11/01/18 3,770,160
2,475 Palm Beach County, FL Airport System Revenue.................................... 7.500 10/01/00 2,729,356
3,000 Sanford Airport Authority, Florida--Industrial Development Revenue Bonds--
(Central Florida Terminals, Inc. Project)--Series 1995 A and B................ 7.500 05/01/15 2,765,940
3,270 Sanford Airport Authority, Florida--Industrial Development Revenue Bonds--
(Central Florida Terminals, Inc. Project)--Series 1995 A and B................ 7.750 05/01/21 2,993,848
MUNICIPAL REVENUE/UTILITY
2,000 Escambia County, FL Utilities Authority--System Revenue--Series 1992 B.......... 0.000 01/01/15 666,680
3,000 Jacksonville, FL Electric Authority--St. Johns River Power System Revenue--
Issue 2--Series 11............................................................ 5.250 10/01/20 2,671,620
2,000 Key West, FL Utility Board Electric System Revenue--Series 1991................. 0.000 10/01/14 676,600
2,500 Key West, FL Utility Board Electric System Revenue--Series 1991................. 0.000 10/01/17 707,425
1,850 Manatee County, FL Public Utilities Revenue--Series 1991 C...................... 0.000 10/01/08 935,027
2,800 Manatee County, FL Public Utilities Revenue--Series 1991 C...................... 0.000 10/01/09 1,320,032
1,000 Orlando, FL Utilities Commission--Water and Electric Revenue--Series 1989 D..... 6.750 10/01/17 1,116,630
375 Orlando, FL Utilities Commission--Water and Electric Revenue--Series 1989 D..... 5.000 10/01/23 317,801
6,500 Southern Minnesota Municipal Power Agency--Power Supply System Revenue--
Series 1994 A................................................................. 0.000 01/01/21 1,477,840
2,570 Sunrise, FL Utility System Revenue--Capital Appreciation--Series 1992 B......... 0.000 10/01/13 930,186
MUNICIPAL REVENUE/WATER & SEWER
3,750 Auburndale, FL Water and Sewer Revenue--Series 1995............................. 5.250 12/01/25 3,396,675
2,500 Dade County, FL Water and Sewer System Revenue--Series 1995..................... 5.500 10/01/25 2,341,275
2,250 Hillsborough County, FL Utility Revenue--Series A............................... 6.500 08/01/16 2,334,398
3,500 Hillsborough County, FL Utility Revenue--Series B............................... 6.500 08/01/16 3,631,285
500 Jacksonville, FL District Water and Sewer Revenue--Series 1996.................. 5.000 10/01/20 436,400
3,500 Miami Beach, FL Water and Sewer Revenue--Series 1995............................ 5.375 09/01/15 3,297,560
2,000 Florida Village Center Community Development District--Water and Sewer Utility
Revenue--Series 1993.......................................................... 5.000 11/01/13 1,785,620
NON-STATE GENERAL OBLIGATIONS
2,990 Hillsborough County, FL Environmentally Sensitive Lands Acquisition and
Protection Program--Series 1992............................................... 6.250 07/01/08 3,085,381
3,000 Mobile, AL General Obligation Warrants--Series 1996 5.000 02/15/16 2,700,540
5,500 New York City, NY General Obligation--Series 1996 F and G....................... 5.750 02/01/19 4,941,750
3,000 New York City, NY General Obligation--Series 1996 H and I....................... 5.875 03/15/18 2,743,710
5,000 Sunrise Lakes, FL Phase 4 Recreation District--General Obligation and
Revenue--Series 1995 A and B.................................................. 6.750 08/01/24 5,202,300
PRE-REFUNDED OR ESCROWED
1,925 Boynton Beach, FL Water and Sewer System Utility Revenue--Series 1990........... 7.400 11/01/15 2,167,627
1,500 Broward County, FL School Board--Certificates of Participation.................. 7.125 07/01/10 1,662,600
15,000 Colquitt County, GA Development Authority Revenue--Southern Care
Corporation--Series 1991 A.................................................... 0.000 12/01/21 2,476,350
1,500 Dade County, FL Health Facilities Authority Revenue--Baptist Hospital of
Miami Project................................................................. 5.750 05/01/21 1,494,990
2,600 Dade County, FL Health Facilities Authority Revenue--South Miami Hospital--
Series 1991 A................................................................. 6.750 10/01/20 2,886,624
550 Florida State Jacksonville Transportation Authority--Senior Lien--General
Obligation Unlimited Tax--Series 1990......................................... 7.375 07/01/20 614,790
335 Florida State Board of Education Capital Outlay................................. 9.125 06/01/14 458,380
5,000 Florida State Board of Education Capital Outlay--Series 1991 B.................. 6.700 06/01/22 5,475,050
3,000 Florida State Board of Education Capital Outlay--Series 1992 C.................. 6.625 06/01/17 3,305,070
2,500 Florida State Department of Transportation--Turnpike Revenue--Series 1989 A..... 7.500 07/01/19 2,757,900
</TABLE>
C-45
<PAGE> 269
FLAGSHIP FLORIDA
<TABLE>
<CAPTION>
FACE
AMOUNT FACE MARKET
(000) DESCRIPTION RATE MATURITY VALUE
- -----------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 55 Greater Orlando Aviation Authority--Airport Facilities Revenue--
City of Orlando, FL........................................................... 8.000% 10/01/18 $ 60,488
1,000 Hillsborough County, FL Port District Revenue--Tampa Port Authority--
Series 1990................................................................... 8.250 06/01/09 1,151,670
1,020 Hillsborough County, FL Capital Improvement Program Revenue--Series 1994........ 6.400 08/01/09 1,121,510
1,635 Hillsborough County, FL Utility Revenue--Series A............................... 7.000 08/01/14 1,812,986
1,810 Jacksonville, FL Electric Authority--Bulk Power Supply System Revenue--
Scherer 4 Project--Series 1991 A.............................................. 7.000 10/01/12 1,995,036
1,500 Lady Lake, FL Industrial Development Revenue--Sunbelt Utilities................. 9.625 07/01/15 1,791,585
1,050 Naples, FL Hospital Revenue--Naples Community Hospital.......................... 7.200 10/01/19 1,171,989
3,400 North Springs, FL Improvement District Water and Sewer Revenue--
Broward County--Series 1991................................................... 8.000 10/01/16 3,971,336
15 Orange County, FL Capital Improvement Revenue--Series A......................... 7.700 10/01/18 16,439
1,750 Orange County, FL Tourist Development Tax Revenue............................... 7.250 10/01/10 1,956,710
420 Orlando-Orange County, FL Expressway Authority Revenue--Series 1990............. 6.500 10/01/20 455,574
1,750 Palm Beach County, FL Criminal Justice Facilities Revenue....................... 7.250 06/01/11 1,944,828
1,900 Commonwealth of Puerto Rico Electric Power Authority--Series P.................. 7.000 07/01/21 2,125,473
1,000 Sarasota County, FL Utility System Revenue--Series 1994......................... 6.500 10/01/22 1,114,380
2,500 Seminole County, FL School Board--Certificates of Participation--Series 1994
B............................................................................. 6.750 07/01/14 2,808,175
RESOURCE RECOVERY
4,565 Broward County, FL Resource Recovery Revenue--SES Broward Company, L.P. South
Project--Series 1984.......................................................... 7.950 12/01/08 5,026,887
2,125 Lee County, FL Solid Waste System Revenue--Series A............................. 7.000 10/01/11 2,294,022
2,700 Palm Beach County, FL Solid Waste Industrial Development Revenue--Okeelanta
Power--Series 1993 A.......................................................... 6.375 02/15/07 2,671,056
2,000 Palm Beach County, FL Solid Waste Industrial Development Revenue--Okeelanta
Power--Series 1993 A.......................................................... 6.700 02/15/15 1,960,100
7,500 Palm Beach County, FL Solid Waste Industrial Development Revenue--Okeelanta
Power--Series 1993 A.......................................................... 6.850 02/15/21 7,358,925
2,000 Sarasota County, FL Solid Waste System Revenue--Series 1996..................... 5.500 10/01/21 1,887,800
SPECIAL TAX REVENUE
7,600 Dade County, FL Professional Sports Franchise Facilities Tax
Revenue--Series 1995.......................................................... 0.000 10/01/27 1,178,152
6,730 Dade County, FL Professional Sports Franchise Facilities Tax
Revenue--Series 1995.......................................................... 5.250 10/01/30 6,052,424
700 Detroit, MI Downtown Development Authority--Tax Increment Development Area
Number 1 Projects--Series 1996 B, C-1, C-2 and D.............................. 6.250 07/01/25 683,466
500 Jacksonville, FL Excise Taxes Revenue--Series 1996 A............................ 5.000 10/01/16 447,070
1,010 Martin County, FL Tropical Farms Water and Sewer Special Assessment District--
Series 1995................................................................... 5.900 11/01/11 1,023,039
1,000 Metropolitan Atlanta Rapid Transit Authority--Georgia Sales Tax Revenue--Series
1992 P........................................................................ 6.250 07/01/20 1,049,930
1,000 Palm Beach Gardens, FL Special Obligation Revenue............................... 7.250 07/01/15 1,083,960
4,580 Pembroke Pines, FL Special Assessment Number 94-1--Series 1995.................. 5.750 11/01/05 4,517,666
10,500 Puerto Rico Highway and Transportation Authority Revenue--Series 1996 Y and Z... 5.500 07/01/36 9,530,640
1,000 Puerto Rico Highway and Transportation Authority Revenue--Series 1996 Y and Z... 5.000 07/01/36 833,270
400 Wisconsin Center District--Junior Dedicated Tax Revenue--Series 1996 B.......... 5.700 12/15/20 386,320
STATE/TERRITORIAL GENERAL OBLIGATIONS
4,000 Florida State Broward County Expressway Authority--Series 1984.................. 9.875 07/01/09 5,612,280
1,000 Florida State Broward County Expressway Authority--Series 1984.................. 10.000 07/01/14 1,465,060
2,165 Florida State Board of Education Capital Outlay--Series 1985.................... 9.125 06/01/14 2,959,663
-------------------------------------------------------------------------------------------------------------------
Total Investments in Securities--Municipal Bonds (cost $307,972,351)--100.2%.... 320,272,636
-------------------------------------------------------------------------------------------------------------------
Excess of Liabilities over Other Assets--(0.2)%................................. (641,592)
-------------------------------------------------------------------------------------------------------------------
Total Net Assets--100.0%........................................................ $319,631,044
===================================================================================================================
* Securities purchased on a "when-issued" basis.
</TABLE>
See notes to financial statements.
C-46
<PAGE> 270
FLAGSHIP FLORIDA
FLORIDA DOUBLE TAX EXEMPT
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 1996
<TABLE>
<S> <C>
ASSETS
Investments, at market value (cost $307,972,351)................................... $320,272,636
Cash............................................................................... 97,112
Receivable for investments sold.................................................... 145,000
Receivable for Fund shares sold.................................................... 177,243
Interest receivable................................................................ 5,534,307
Other.............................................................................. 21,231
------------
Total assets............................................................. 326,247,529
------------
LIABILITIES
Payable for investments purchased.................................................. 4,431,235
Payable for Fund shares reacquired................................................. 450,685
Distributions payable.............................................................. 1,475,578
Accrued expenses................................................................... 258,987
------------
Total liabilities........................................................ 6,616,485
------------
NET ASSETS......................................................................... 319,631,044
============
Class A:
Applicable to 30,652,271 shares of beneficial interest issued and outstanding...... $318,456,444
============
Net asset value per share.......................................................... $ 10.39
============
Class C:
Applicable to 113,035 shares of beneficial interest issued and outstanding......... $ 1,174,600
============
Net asset value per share.......................................................... $ 10.39
============
</TABLE>
C-47
<PAGE> 271
FLAGSHIP FLORIDA
FLORIDA DOUBLE TAX EXEMPT
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MAY 31, 1996
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest........................................................................... $ 20,541,373
-------------
Expenses:
Distribution fees--Class A (note E)........................................... 1,328,070
Distribution fees--Class C (note E)........................................... 3,169
Investment advisory fees (note E)............................................. 1,665,969
Custody and accounting fees................................................... 169,744
Transfer agent's fees......................................................... 144,895
Registration fees............................................................. 12,994
Legal fees.................................................................... 637
Audit fees.................................................................... 20,862
Reimbursement of organizational expenses (note F)............................. 56,723
Trustees' fees................................................................ 8,817
Shareholder services fees (note E)............................................ 21,560
Other......................................................................... 10,642
Advisory fees waived (note E)................................................. (685,218)
-------------
Total expenses before credits............................................ 2,758,864
Custodian fee credit (note B)................................................. (48,694)
-------------
Net expenses............................................................. 2,710,170
-------------
Net investment income............................................... 17,831,203
-------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on security transactions.................................. 4,828,780
Change in unrealized appreciation (depreciation) of investments.................... (12,275,838)
-------------
Net loss on investments............................................. (7,447,058)
-------------
Net increase in net assets resulting from operations............................... $ 10,384,145
=============
</TABLE>
See notes to financial statements.
C-48
<PAGE> 272
FLAGSHIP FLORIDA
FLORIDA DOUBLE TAX EXEMPT
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
MAY 31, 1996 MAY 31, 1995
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income................................................. $ 17,831,203 $ 19,719,394
Net realized gain (loss) on security transactions..................... 4,828,780 (2,273,532)
Change in unrealized appreciation (depreciation) of investments....... (12,275,838) 8,667,382
------------ ------------
Net increase in net assets resulting from operations........ 10,384,145 26,113,244
------------ ------------
DISTRIBUTIONS TO CLASS A SHAREHOLDERS
From net investment income............................................ (17,864,777) (19,846,500)
DISTRIBUTIONS TO CLASS C SHAREHOLDERS
From net investment income............................................ (15,706) --
------------ ------------
Net decrease in net assets from distributions to
shareholders.............................................. (17,880,483) (19,846,500)
------------ ------------
FUND SHARE TRANSACTIONS (note C)
Proceeds from shares sold............................................. 36,866,299 45,355,080
Net asset value of shares issued in reinvestment of distributions..... 6,774,286 7,682,266
Cost of shares reacquired............................................. (57,887,168) (90,012,143)
------------ ------------
Net decrease in net assets from Fund share transactions..... (14,246,583) (36,974,797)
------------ ------------
Total decrease in net assets................................ (21,742,921) (30,708,053)
NET ASSETS
Beginning of year..................................................... 341,373,965 372,082,018
------------ ------------
End of year........................................................... $319,631,044 $341,373,965
============ ============
NET ASSETS CONSIST OF
Paid-in surplus....................................................... $308,648,791 $322,944,654
Accumulated net realized gain (loss) on security transactions......... (1,318,032) (6,146,812)
Unrealized appreciation (depreciation) of investments................. 12,300,285 24,576,123
------------ ------------
$319,631,044 $341,373,965
============ ============
</TABLE>
See notes to financial statements.
C-49
<PAGE> 273
FLAGSHIP FLORIDA
NOTES TO FINANCIAL STATEMENTS
A. DESCRIPTION OF BUSINESS
Flagship's Florida Double Tax Exempt Fund (Florida Double Tax Exempt) is a
sub-trust of the Flagship Tax Exempt Funds Trust (Trust), a Massachusetts
business trust organized on March 8, 1985. The diversified Florida Double Tax
Exempt Fund is an open-end management investment company registered under the
Investment Company Act of 1940, as amended. The Fund commenced investment
operations on June 15, 1990. The Fund began to offer Class C shares to the
investing public on September 14, 1995. Class A shares are sold with a front-end
sales charge. Class C shares are sold with no front-end sales charge but are
assessed a contingent deferred sales charge if redeemed within one year from the
time of purchase. Both classes of shares have identical rights and privileges
except with respect to the effect of sales charges, the distribution and/or
service fees borne by each class, expenses specific to each class, voting rights
on matters affecting a single class and the exchange privilege of each class.
Shares of beneficial interest in the Fund, which are registered under the
Securities Act of 1933, as amended, are offered to the public on a continuous
basis.
B. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund.
ESTIMATES: The preparation of financial statements and daily calculation of
net asset value in conformity with generally accepted accounting principles
requires management to fairly value, at market, investment securities and make
estimates and assumptions regarding the reported amounts of assets and
liabilities at the date of the financial statements and the reported amount of
revenues and expenses during the reporting period. The financial statements
reflect these inherent valuations, estimates and assumptions, and actual results
could differ.
SECURITY VALUATIONS: Portfolio securities for which market quotations are
readily available are valued on the basis of prices provided by a pricing
service which uses information with respect to transactions in bonds, quotations
from bond dealers, market transactions in comparable securities and various
relationships between securities in determining the values. If market quotations
are not readily available from such pricing service, securities are valued at
fair value as determined under procedures established by the Trustees.
Short-term securities are stated at amortized cost, which is equivalent to fair
value.
The Fund must maintain a diversified investment portfolio as a registered
investment company, however, the Fund's investments are primarily in the
securities of their state. Such concentration subjects the Fund to the effects
of economic changes occurring within that state.
FEDERAL INCOME TAXES: It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute to its shareholders all of its tax exempt net
investment income and net realized gains on security transactions. Therefore, no
federal income tax provision is required.
Distributions from net realized capital gains may differ for financial
statement and tax purposes primarily due to the treatment of wash sales and
post-October capital losses. The effect on dividend distributions of certain
book-to-tax timing differences is presented as excess distributions in the
statement of changes in net assets.
SECURITY TRANSACTIONS: Security transactions are accounted for on the date
the securities are purchased or sold (trade date). Realized gains and losses on
security transactions are determined on the identified cost basis. Interest
income is recorded on the accrual basis. The Fund amortizes original issue
discounts and premiums paid on purchases of portfolio securities on the same
basis for both financial reporting and tax purposes. Market discounts, if
applicable, are recognized as ordinary income upon disposition or maturity.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS: Interest income and
estimated expenses are accrued daily. Daily dividends are declared from net
investment income and paid monthly. Net realized gains from security
transactions, to the extent they exceed available capital loss carryforwards,
are distributed to shareholders at least annually.
EXPENSE ALLOCATION: Shared expenses incurred by the Trust are allocated
among the sub-trusts based on each sub-trust's ratio of net assets to the
combined net assets. Specifically identified direct expenses are charged to each
sub-trust as incurred. Fund expenses not specific to any class of shares are
prorated among the classes based upon the eligible net assets of each class.
Specifically identified direct expenses of each class are charged to that class
as incurred.
C-50
<PAGE> 274
FLAGSHIP FLORIDA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Fund has entered into an agreement with the custodian, whereby it earns
custodian fee credits for temporary cash balances. These credits, which offset
custodian fees that may be charged to the Fund, are based on 80% of the daily
effective federal funds rate.
SECURITIES PURCHASED ON A "WHEN-ISSUED" BASIS: The Fund may, upon adequate
segregation of securities as collateral, purchase and sell portfolio securities
on a "when-issued" basis. These securities are registered by a municipality or
government agency, but have not been issued to the public. Delivery and payment
take place after the date of the transaction and such securities are subject to
market fluctuations during this period. The current market value of these
securities is determined in the same manner as other portfolio securities. At
May 31, 1996, there were $3,730,000 of "when-issued" purchase commitments
included in the Florida Double Tax Exempt Funds' statements of investments.
C. FUND SHARES
At May 31, 1996, there were an indefinite number of shares of beneficial
interest with no par value authorized for each class. Transactions in shares
were as follows:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31, 1996 YEAR ENDED MAY 31, 1995
-------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
FLORIDA DOUBLE TAX EXEMPT
CLASS A:
Shares sold.................................... 3,341,801 $ 35,642,289 4,468,523 $ 45,355,080
Shares issued on reinvestment.................. 635,529 6,768,677 753,914 7,682,266
Shares reacquired.............................. (5,453,566) (57,862,882) (8,942,409) (90,012,143)
---------- ------------ ---------- ------------
Net decrease................................... (1,476,236) $(15,451,916) (3,719,972) $(36,974,797)
========== ============ ========== ============
</TABLE>
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 14, 1995
TO MAY 31, 1996
--------------------------
SHARES AMOUNT
---------- ------------
<S> <C> <C>
CLASS C:
Shares sold............................................................. 114,811 $1,224,010
Shares issued on reinvestment........................................... 526 5,609
Shares reacquired....................................................... (2,302) (24,286)
-------- ----------
Net increase............................................................ 113,035 $1,205,333
======== ==========
</TABLE>
D. PURCHASES AND SALES OF MUNICIPAL BONDS
Purchases and sales of municipal bonds for the year ended May 31, 1996,
aggregated:
<TABLE>
<CAPTION>
PURCHASES SALES
------------ ------------
<S> <C> <C>
FUND
Florida Double Tax Exempt............................................. $312,473,071 $311,159,076
</TABLE>
At May 31, 1996, cost for federal income tax purposes is $308,060,449 for
the Florida Double Tax Exempt Fund, and net unrealized appreciation aggregated
$12,212,187, which includes:
<TABLE>
<CAPTION>
UNREALIZED APPRECIATION UNREALIZED DEPRECIATION
----------------------- -----------------------
<S> <C> <C>
FUND
Florida Double Tax Exempt.................................. $14,230,200 $ 2,018,013
</TABLE>
At May 31, 1996, Florida Double Tax Exempt has available a capital loss
carryforward of approximately $1,130,500 to offset future net capital gains
through May 31, 2003.
C-51
<PAGE> 275
FLAGSHIP FLORIDA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
E. TRANSACTIONS WITH INVESTMENT ADVISOR AND DISTRIBUTOR
Flagship Financial Inc. (Advisor), under the terms of agreements which
provide for furnishing of investment advice, office space and facilities to the
Fund, receives fees computed monthly on the daily net assets of the Fund at an
annualized rate of 1/2 of 1%. During the year ended May 31, 1996, the Advisor,
at its discretion, permanently waived advisory fees for the Florida Double Tax
Exempt Funds amounting to $685,218. Included in accrued expenses at May 31, 1996
are accrued advisory fees of $92,745 for Florida Double Tax Exempt. Also, under
an agreement with the Fund, the Advisor may subsidize certain expenses excluding
advisory and distribution fees.
The Fund has Distribution Agreements with Flagship Funds Inc.
(Distributor). The Distributor serves as the exclusive selling agent and
distributor of the Fund's Class A and Class C shares and in that capacity is
responsible for all sales and promotional efforts including printing of
prospectuses and reports used for sales purposes. Pursuant to Rule 12b-1 under
the Investment Company Act of 1940, the Fund has adopted a plan to reimburse the
Distributor for its actual expenses incurred in the distribution and promotion
of all classes of the Fund's shares. The maximum amount payable for these
expenses on an annual basis is .40% and .95% of the Fund's average daily net
assets for Class A and Class C shares, respectively. Included in accrued
expenses at May 31, 1996 are accrued distribution fees of $108,740 and $882 for
Florida Double Tax Exempt Class A shares and Class C shares. Certain
non-promotional expenses directly attributable to current shareholders are
aggregated by the Distributor and passed through to the Fund as shareholder
services fees.
In its capacity as national wholesale underwriter for the shares of the
Fund, the Distributor received commissions on sales of the Fund's shares for the
year ended May 31, 1996, are approximately as follows:
<TABLE>
<CAPTION>
GROSS COMMISSIONS PAID TO OTHER DEALERS
----------------- ---------------------
<S> <C> <C>
FUND
Florida Double Tax Exempt...................................... $ 608,800 $ 525,800
</TABLE>
For the year ended May 31, 1996, the Distributor received approximately
$200 of contingent deferred sales charges on redemptions of shares in Florida
Double Tax Exempt. Certain officers and trustees of the Trust are also officers
and/or directors of the Distributor and/or Advisor.
F. ORGANIZATIONAL EXPENSES
The organizational expenses incurred on behalf of the Florida Double Tax
Exempt Fund (approximately $284,600) have been reimbursed to the Advisor as of
May 31, 1996.
G. LINE OF CREDIT
The Trust participates in a line of credit in which a maximum amount of $30
million is provided by State Street Bank & Trust Co. Florida Double Tax Exempt
may temporarily borrow up to $17 million under the line of credit. Borrowings
are collateralized with pledged securities and are due on demand with interest
at 1% above the federal funds rate. The average daily amount of borrowings under
the line of credit during the year ended May 31, 1996 was approximately
$906,300, at a weighted average annualized interest rate of 6.63%. At May 31,
1996, the Fund had no borrowings outstanding under the line of credit.
C-52
<PAGE> 276
FLAGSHIP FLORIDA
FLORIDA DOUBLE TAX EXEMPT
FINANCIAL HIGHLIGHTS
Selected data for each share of beneficial interest outstanding throughout
the year.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MAY 31, 1996 MAY 31, 1995 MAY 31, 1994 MAY 31, 1993 MAY 31, 1992
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CLASS A
Net asset value, beginning of year... $ 10.63 $ 10.38 $ 10.76 $ 10.18 $ 9.87
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income.............. 0.57 0.58 0.60 0.63 0.66
Net realized and unrealized gain
(loss) on securities............ (0.24) 0.26 (0.38) 0.61 0.33
-------- -------- -------- -------- --------
Total from investment operations..... 0.33 0.84 0.22 1.24 0.99
-------- -------- -------- -------- --------
Less distributions:
From net investment income......... (0.57) (0.59) (0.60) (0.64) (0.67)
From net realized capital gains.... -- -- -- (0.02) (0.01)
-------- -------- -------- -------- --------
Total distributions.................. (0.57) (0.59) (0.60) (0.66) (0.68)
-------- -------- -------- -------- --------
Net asset value, end of year......... $ 10.39 $ 10.63 $ 10.38 $ 10.76 $ 10.18
======== ======== ======== ======== ========
Total return(a)...................... 3.14% 8.43% 2.00% 12.49% 10.32%
Ratios to average net assets:
Actual net of waivers and
reimbursements:
Expenses(b)..................... 0.83% 0.73% 0.58% 0.45% 0.26%
Net investment income........... 5.36% 5.71% 5.51% 6.01% 6.59%
Assuming credits and no waivers or
reimbursements:
Expenses........................ 1.02% 1.04% 1.00% 0.99% 1.03%
Net investment income........... 5.17% 5.40% 5.09% 5.47% 5.82%
Net assets at end of year (000's).... $318,456 $341,374 $372,082 $369,123 $276,811
Portfolio turnover rate.............. 93.93% 52.67% 31.92% 22.60% 49.72%
</TABLE>
(a) The total returns shown do not include the effect of applicable front-end
sales charge.
(b) During the year ended May 31, 1996, the Fund has earned credits from the
custodian which reduce service fees incurred. If included, the ratio of
expenses to average net assets would be 0.82%; prior year numbers have not
been restated to reflect these credits.
C-53
<PAGE> 277
FLAGSHIP FLORIDA
FLORIDA DOUBLE TAX EXEMPT
FINANCIAL HIGHLIGHTS
Selected data for each share of beneficial interest outstanding throughout
the period.
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 14, 1995 TO
MAY 31, 1996
- -------------------------------------------------------------------------------------------------------
<S> <C>
CLASS C
Net asset value, beginning of period........................................... $ 10.65
-------
Income from investment operations:
Net investment income........................................................ 0.35
Net realized and unrealized gain (loss) on securities........................ (0.26)
-------
Total from investment operations............................................... 0.09
-------
Less distributions:
From net investment income................................................... (0.35)
-------
Total distributions............................................................ (0.35)
-------
Net asset value, end of period................................................. $ 10.39
=======
Total return(a)................................................................ 1.30%
Ratios to average net asset
(annualized where appropriate):
Actual net of waivers and reimbursements:
Expenses(b)............................................................... 1.38%
Net investment income..................................................... 4.59%
Assuming credits and no waivers or reimbursements:
Expenses.................................................................. 1.55%
Net investment income..................................................... 4.42%
Net assets at end of period (000's)............................................ $ 1,175
Portfolio turnover rate........................................................ 93.93%
</TABLE>
(a) The total return shown does not include the effect of applicable contingent
deferred sales charge and is annualized.
(b) During the year ended May 31, 1996, the Fund has earned credits from the
custodian which reduce service fees incurred. If included, the ratio of
expenses to average net assets would be 1.37%.
C-54
<PAGE> 278
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS AND TRUSTEES
FLAGSHIP FLORIDA
TAX EXEMPT FUNDS
We have audited the accompanying statements of assets and liabilities,
including the statements of investments in securities and net assets, of the
Flagship Florida Intermediate Tax Exempt Fund and the Flagship Florida Double
Tax Exempt Fund as of May 31, 1996, the related statements of operations for the
year then ended, and the statements of changes in net assets and the financial
highlights for each of the periods presented. These financial statements and
financial highlights are the responsibility of the Funds' management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 1996, by correspondence with the Funds' custodian and brokers. 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 audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of the Flagship Florida
Intermediate Tax Exempt Fund and the Flagship Florida Double Tax Exempt Fund at
May 31, 1996, the results of their operations, the changes in their net assets
and the financial highlights for the respective stated periods, in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dayton, Ohio
July 3, 1996
C-55
<PAGE> 279
FLAGSHIP PENNSYLVANIA
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS
MUNICIPAL BONDS
MAY 31, 1996
<TABLE>
<CAPTION>
FACE
AMOUNT FACE MARKET
(000) DESCRIPTION RATE MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
EDUCATION
$3,000 Allegheny County, PA Higher Education Building Authority Revenue--
Robert Morris College--Series 1996 A........................................... 6.250% 02/15/26 $ 2,793,870
750 Northeastern Pennsylvania Hospital and Education Authority Revenue--
Luzerne County Community College--Series 1994.................................. 6.625 08/15/15 790,170
865 Union County, PA Higher Educational Facilities Financing Authority
Revenue--Bucknell University--Series 1996...................................... 5.500 04/01/16 818,991
HEALTH CARE
1,000 Butler County, PA Industrial Development Authority--Health Center Revenue--
Sherwood Oaks Project--Series 1993............................................. 5.750 06/01/16 922,280
400 Columbia County, PA Industrial Development Authority--Orangeville Nursing
Center......................................................................... 9.000 12/01/12 398,980
HOSPITALS
200 Allegheny County, PA Hospital Development Authority--St. Margaret Memorial
Hospital--Series 1991A......................................................... 7.125 10/01/21 205,624
200 Butler County, PA Hospital Authority Revenue--North Hills Passavant Hospital..... 7.000 06/01/22 216,466
500 Clarion County, PA Hospital Authority Revenue--Clarion Hospital.................. 8.100 07/01/12 516,260
500 Dauphin County, PA Hospital Authority Revenue--Harrisburg Hospital............... 8.250 07/01/14 529,000
2,300 Doylestown, PA Hospital Authority Revenue--Series 1993 A......................... 5.000 07/01/23 1,980,162
1,000 Lancaster County, PA Hospital Authority Revenue--Health Care Center
Masonic Homes--Series 1994..................................................... 5.000 11/15/20 864,530
1,200 Lehigh County, PA General Purpose Authority Hospital Revenue--Lehigh Valley
Hospital--Series 1995 B........................................................ 5.625 07/01/25 1,128,972
1,000 Monroeville, PA Hospital Authority Revenue--Forbes Health System--
Series 1995.................................................................... 6.250 10/01/15 959,860
500 Montgomery County, PA Higher Education and Health Authority Revenue--
Holy Redeemer Hospital......................................................... 7.625 02/01/20 539,260
2,000 Philadelphia, PA Hospitals and Higher Education Facilities Revenue--
Temple University Hospital--Series 1993 A...................................... 6.625 11/15/23 1,996,140
1,750 Westmoreland County, PA Industrial Development Authority Revenue--
Citizens General Hospital--Series 1987 A....................................... 8.250 07/01/13 1,814,592
HOUSING/MULTIFAMILY
500 Bucks County, PA Redevelopment Authority Mortgage Revenue--
Westminster Heights--Series 1992 A............................................. 6.875 08/01/23 513,705
HOUSING/SINGLE FAMILY
300 Pennsylvania Housing Finance Agency--Single Family--Series 1989 S................ 7.600 04/01/16 322,584
250 Pennsylvania Housing Finance Agency--Single Family--Series 1991-30............... 7.300 10/01/17 268,870
1,000 Pittsburgh, PA Urban Redevelopment Authority--Mortgage Revenue--
Series 1996 A.................................................................. 6.000 04/01/19 960,330
INDUSTRIAL DEVELOPMENT AND POLLUTION CONTROL
296 Allegheny County, PA Industrial Development Authority - Solid Waste Disposal--
Conversion Systems, Inc.--Series 1991.......................................... 8.000 03/01/98 313,523
1,000 Bradford County, PA Industrial Development Authority--Solid Waste Disposal
Revenue--International Paper Company - Series 1995 B........................... 5.900 12/01/19 952,230
2,000 Cambria County, PA Industrial Development Authority Pollution Control Revenue--
Pennsylvania Electric Company--Series 1995 A and B............................. 5.800 11/01/20 1,936,520
1,500 Lawrence County, PA Industrial Development Authority Pollution Control
Revenue--Pennsylvania Power Company............................................ 7.150 03/01/17 1,559,130
550 Lehigh County, PA Industrial Development Authority Pollution Control Revenue--
Pennsylvania Power and Light Company--Series 1995 A............................ 6.150 08/01/29 554,362
1,000 Northampton County, PA Industrial Development Authority Pollution Control
Revenue--Metropolitan Edison--Series 1995 A.................................... 6.100 07/15/21 1,001,520
2,000 Pennsylvania Economic Development Financing Authority Revenue--
MacMillan Bloedel Clarion--Series 1995......................................... 7.600 12/01/20 2,181,880
1,000 Pennsylvania Economic Development Finance Authority Revenue--
Wastewater Treatment--Sun Company, Incorporated R & M--Series 1994 A........... 7.600 12/01/24 1,093,450
250 Philadelphia, PA Industrial Development Authority--National Board of Medical
Examiners--Series 1992......................................................... 6.750 05/01/12 267,222
</TABLE>
C-56
<PAGE> 280
FLAGSHIP PENNSYLVANIA
<TABLE>
<CAPTION>
FACE
AMOUNT FACE MARKET
(000) DESCRIPTION RATE MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL REVENUE/OTHER
$2,545 Reading, PA General Obligation--Parking Authority--Series 1993................... 0.000% 11/15/15 $ 808,750
MUNICIPAL REVENUE/UTILITY
1,400 Philadelphia, PA Gas Works Revenue--Fourteenth Series--Series 1993............... 6.375 07/01/26 1,382,374
750 Philadelphia, PA Gas Works Revenue--Fourteenth Series--Series 1993............... 6.375 07/01/26 772,605
750 Commonwealth of Puerto Rico Electric Power Authority--Series 1994 T.............. 6.375 07/01/24 768,150
650 Philadelphia, PA Gas Works Revenue--Twelfth Series............................... 7.000 05/15/20 751,108
MUNICIPAL REVENUE/WATER & SEWER
1,000 Philadelphia, PA Water and Wastewater Revenue--Series 1993....................... 5.250 06/15/23 897,790
1,185 Pittsburgh, PA Water and Sewer Authority--Water and Sewer System Revenue--
Series 1995 B.................................................................. 5.750 09/01/25 1,142,684
920 South Wayne County, PA Water and Sewer Authority Revenue......................... 8.200 04/15/13 969,579
NON-STATE GENERAL OBLIGATIONS
750 Central Greene County, PA School District--General Obligation--
Series 1996.................................................................... 5.250 02/15/24 673,478
2,195 Montour, Pa School District--General Obligation--Allegheny County--
Series 1993 B.................................................................. 0.000 01/01/14 780,213
PRE-REFUNDED OR ESCROWED
1,000 Montgomery County, PA Industrial Development Authority Pollution Control
Revenue--Philadelphia Electric--Series A....................................... 8.875 06/01/16 1,020,000
500 Pennsylvania State Higher Educational Facilities Authority Revenue--
Lycoming College............................................................... 8.375 10/01/18 553,890
700 Pennsylvania State Higher Educational Facilities Authority Revenue--
Thomas Jefferson University.................................................... 8.000 01/01/18 756,259
150 Philadelphia, PA Municipal Authority Revenue..................................... 7.800 04/01/18 160,382
1,450 Philadelphia, PA Municipal Authority Revenue..................................... 7.800 04/01/18 1,595,667
RESOURCE RECOVERY
1,650 Cambria County, PA Industrial Development Authority Resource
Recovery Revenue--Cambria CoGen Project........................................ 7.750 09/01/19 1,729,414
400 York County, PA Solid Waste and Refuse Authority Industrial Development
Revenue--Resource Recovery--Series C........................................... 8.200 12/01/14 426,039
SPECIAL TAX REVENUE
1,500 Pennsylvania Intergovernmental Cooperation Authority--Special Tax Revenue--
Series 1994.................................................................... 7.000 06/15/14 1,704,300
STATE/TERRITORIAL GENERAL OBLIGATIONS
1,000* Pennsylvania State General Obligation--Series 1996............................... 5.375 05/15/16 944,470
2,100 Commonwealth of Puerto Rico Public Improvement--General Obligation--
Series 1996 A.................................................................. 5.400 07/01/25 1,893,003
-------------------------------------------------------------------------------------------------------------------
Total Investments in Securities--Municipal Bonds (cost $47,130,386)--98.6%....... 48,130,638
-------------------------------------------------------------------------------------------------------------------
Excess of Other Assets over Liabilities--1.4%.................................... 702,992
-------------------------------------------------------------------------------------------------------------------
Total Net Assets--100.0%......................................................... $48,833,630
===================================================================================================================
* Securities purchased on a "when-issued" basis.
</TABLE>
See notes to financial statements.
C-57
<PAGE> 281
FLAGSHIP PENNSYLVANIA
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 1996
<TABLE>
<S> <C>
ASSETS
Investments, at market value (cost $47,130,386)..................................... $48,130,638
Receivable for investments sold..................................................... 2,292,793
Receivable for Fund shares sold..................................................... 128,413
Interest receivable................................................................. 976,009
Other............................................................................... 3,314
-----------
Total assets.............................................................. 51,531,167
-----------
LIABILITIES
Bank borrowings (note G)............................................................ 526,230
Payable for investments purchased................................................... 1,886,776
Payable for Fund shares reacquired.................................................. 476
Distributions payable............................................................... 236,454
Accrued expenses.................................................................... 47,601
-----------
Total liabilities......................................................... 2,697,537
-----------
NET ASSETS.......................................................................... $48,833,630
===========
Class A:
Applicable to 4,441,276 shares of beneficial interest issued and outstanding........ $44,392,043
===========
Net asset value per share........................................................... $ 10.00
===========
Class C:
Applicable to 444,517 shares of beneficial interest issued and outstanding.......... $ 4,441,587
===========
Net asset value per share........................................................... $ 9.99
===========
</TABLE>
C-58
<PAGE> 282
FLAGSHIP PENNSYLVANIA
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MAY 31, 1996
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest............................................................................ $ 3,049,939
-----------
Expenses:
Distribution fees--Class A (note E)............................................ 170,972
Distribution fees--Class C (note E)............................................ 35,903
Investment advisory fees (note E).............................................. 233,274
Custody and accounting fees.................................................... 50,937
Transfer agent's fees.......................................................... 40,720
Registration fees.............................................................. 1,098
Legal fees..................................................................... 61
Audit fees..................................................................... 14,640
Reimbursement of organizational expenses (note F).............................. 5,244
Trustees' fees................................................................. 1,316
Shareholder services fees (note E)............................................. 3,566
Other.......................................................................... 1,685
Advisory fees waived (note E).................................................. (156,472)
Expense subsidy (note E)....................................................... (11,285)
-----------
Total expenses before credits............................................. 391,659
Custodian fee credit (note B).................................................. (11,012)
-----------
Net expenses.............................................................. 380,647
-----------
Net investment income................................................ 2,669,292
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on security transactions................................... 714,271
Change in unrealized appreciation (depreciation) of investments..................... (1,775,459)
-----------
Net loss on investments.............................................. (1,061,188)
-----------
Net increase in net assets resulting from operations................................ $ 1,608,104
===========
</TABLE>
See notes to financial statements.
C-59
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FLAGSHIP PENNSYLVANIA
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
MAY 31, 1996 MAY 31, 1995
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income................................................... $ 2,669,292 $ 2,691,538
Net realized gain (loss) on security transactions....................... 714,271 (78,262)
Change in unrealized appreciation (depreciation) of investments......... (1,775,459) 623,383
------------ ------------
Net increase in net assets resulting from operations.......... 1,608,104 3,236,659
------------ ------------
DISTRIBUTIONS TO CLASS A SHAREHOLDERS:
From net investment income.............................................. (2,497,316) (2,597,708)
DISTRIBUTIONS TO CLASS C SHAREHOLDERS:
From net investment income.............................................. (199,438) (121,479)
------------ ------------
Net decrease in net assets from distributions to
shareholders................................................. (2,696,754) (2,719,187)
------------ ------------
FUND SHARE TRANSACTIONS (note C)
Proceeds from shares sold............................................... 8,804,404 10,848,092
Net asset value of shares issued in reinvestment of distributions....... 1,323,945 1,278,709
Cost of shares reacquired............................................... (5,923,636) (10,849,240)
------------ ------------
Net increase in net assets from Fund share transactions....... 4,204,713 1,277,561
------------ ------------
Total increase in net assets.................................. 3,116,063 1,795,033
NET ASSETS
Beginning of year....................................................... 45,717,567 43,922,534
------------ ------------
End of year............................................................. $ 48,833,630 $ 45,717,567
============ ============
NET ASSETS CONSIST OF
Paid-in surplus......................................................... $ 47,936,238 $ 43,754,125
Undistributed net investment income..................................... 4,862
Accumulated net realized gain (loss) on security transactions........... (102,860) (817,131)
Unrealized appreciation (depreciation) of investments................... 1,000,252 2,775,711
------------ ------------
$ 48,833,630 $ 45,717,567
============ ============
</TABLE>
See notes to financial statements.
C-60
<PAGE> 284
FLAGSHIP PENNSYLVANIA
NOTES TO FINANCIAL STATEMENTS
A. DESCRIPTION OF BUSINESS
The Flagship Pennsylvania Triple Tax Exempt Fund (Fund), is a sub-trust of
the Flagship Tax Exempt Funds Trust (Trust), a Massachusetts business trust
organized on March 8, 1985. The Fund is registered under the Investment Company
Act of 1940, as amended, as a diversified, open-end management investment
company. The Fund commenced investment operations on October 29, 1986. On
February 2, 1994, the Fund began to offer Class C shares to the investing
public. Class A shares are sold with a front-end sales charge. Class C shares
are sold with no front-end sales charge but are assessed a contingent deferred
sales charge if redeemed within one year from the time of purchase. Both classes
of shares have identical rights and privileges except with respect to the effect
of sales charges, the distribution and/or service fees borne by each class,
expenses specific to each class, voting rights on matters affecting a single
class and the exchange privilege of each class. Shares of beneficial interest in
the Fund, which are registered under the Securities Act of 1933, as amended, are
offered to the public on a continuous basis.
B. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund.
ESTIMATES: The preparation of financial statements and daily calculation of
net asset value in conformity with generally accepted accounting principles
requires management to fairly value, at market, investment securities and make
estimates and assumptions regarding the reported amounts of assets and
liabilities at the date of the financial statements and the reported amount of
revenues and expenses during the reporting period. The financial statements
reflect these inherent valuations, estimates and assumptions, and actual results
could differ.
SECURITY VALUATIONS: Portfolio securities for which market quotations are
readily available are valued on the basis of prices provided by a pricing
service which uses information with respect to transactions in bonds, quotations
from bond dealers, market transactions in comparable securities and various
relationships between securities in determining the values. If market quotations
are not readily available from such pricing service, securities are valued at
fair value as determined under procedures established by the Trustees.
Short-term securities are stated at amortized cost, which is equivalent to fair
value.
The Fund must maintain a diversified investment portfolio as a registered
investment company, however, the Fund's investments are primarily in the
securities of its state. Such concentration subjects the Fund to the effects of
economic changes occurring within that state.
FEDERAL INCOME TAXES: It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute to its shareholders all of its tax exempt net
investment income and net realized gains on security transactions. Therefore, no
federal income tax provision is required.
Distributions from net realized capital gains may differ for financial
statement and tax purposes primarily due to the treatment of wash sales and
post-October capital losses. The effect on dividend distributions of certain
book-to-tax timing differences is presented as excess distributions in the
statement of changes in net assets.
SECURITY TRANSACTIONS: Security transactions are accounted for on the date
the securities are purchased or sold (trade date). Realized gains and losses on
security transactions are determined on the identified cost basis. Interest
income is recorded on the accrual basis. The Fund amortizes original issue
discounts and premiums paid on purchases of portfolio securities on the same
basis for both financial reporting and tax purposes. Market discounts, if
applicable, are recognized as ordinary income upon disposition or maturity.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS: Interest income and
estimated expenses are accrued daily. Daily dividends are declared from net
investment income and paid monthly. Net realized gains from security
transactions, to the extent they exceed available capital loss carryforwards,
are distributed to shareholders at least annually.
EXPENSE ALLOCATION: Shared expenses incurred by the Trust are allocated
among the sub-trusts based on each sub-trust's ratio of net assets to the
combined net assets. Specifically identified direct expenses are charged to each
sub-trust as incurred. Fund expenses not specific to any class of shares are
prorated among the classes based upon the eligible net assets of each class.
Specifically identified direct expenses of each class are charged to that class
as incurred.
C-61
<PAGE> 285
FLAGSHIP PENNSYLVANIA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Fund has entered into an agreement with the custodian, whereby it earns
custodian fee credits for temporary cash balances. These credits, which offset
custodian fees that may be charged to the Fund, are based on 80% of the daily
effective federal funds rate.
SECURITIES PURCHASED ON A "WHEN-ISSUED" BASIS: The Fund may, upon adequate
segregation of securities as collateral, purchase and sell portfolio securities
on a "when-issued" basis. These securities are registered by a municipality or
government agency, but have not been issued to the public. Delivery and payment
take place after the date of the transaction and such securities are subject to
market fluctuations during this period. The current market value of these
securities is determined in the same manner as other portfolio securities. There
were $950,110 "when-issued" purchase commitments included in the statement of
investments at May 31, 1996.
C. FUND SHARES
At May 31, 1996, there were an indefinite number of shares of beneficial
interest with no par value authorized for each class. Transactions in shares
were as follows:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31, 1996 YEAR ENDED MAY 31, 1995
----------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
-------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
CLASS A:
Shares sold...................................... 715,960 $ 7,326,760 948,108 $ 9,405,651
Shares issued on reinvestment.................... 117,434 1,199,201 120,686 1,191,490
Shares reacquired................................ (562,674) (5,744,061) (1,093,815) (10,689,804)
-------- ----------- ---------- ------------
Net increase (decrease).......................... 270,720 $ 2,781,900 (25,021) $ (92,663)
======== ========== ========= ===========
CLASS C:
Shares sold...................................... 144,791 $ 1,477,644 144,307 $ 1,442,441
Shares issued on reinvestment.................... 12,212 124,744 8,840 87,219
Shares reacquired................................ (17,822) (179,575) (16,468) (159,436)
-------- ----------- ---------- ------------
Net increase..................................... 139,181 $ 1,422,813 136,679 $ 1,370,224
======== ========== ========= ===========
</TABLE>
D. PURCHASES AND SALES OF MUNICIPAL BONDS
Purchases and sales of municipal bonds for the year ended May 31, 1996,
aggregated $33,868,512 and $29,642,173, respectively. At May 31, 1996, cost for
federal income tax purposes is $47,081,602 and net unrealized appreciation
aggregated $1,049,036, of which $1,645,841 related to appreciated securities and
$596,805 related to depreciated securities.
At May 31, 1996, the Fund has available capital loss carryforwards of
approximately $102,100 to offset future net capital gains in the amounts of
$12,400 through May 31,1999, $60,900 through May 31, 2002, and $28,800 through
May 31, 2003.
E. TRANSACTIONS WITH INVESTMENT ADVISOR AND DISTRIBUTOR
Flagship Financial Inc. (Advisor), under the terms of an agreement which
provides for furnishing of investment advice, office space and facilities to the
Fund, receives fees computed monthly on the average daily net assets of the Fund
at an annualized rate of 1/2 of 1%. During the year ended May 31, 1996, the
Advisor, at its discretion, permanently waived $156,472 of its advisory fees.
Also, under an agreement with the Fund, the Advisor may subsidize certain
expenses excluding advisory and distribution fees.
The Fund has a Distribution Agreement with Flagship Funds Inc.
(Distributor). The Distributor serves as the exclusive selling agent and
distributor of the Fund's Class A and Class C shares and in that capacity is
responsible for all sales and promotional efforts including printing of
prospectuses and reports used for sales purposes. Pursuant to Rule 12b-1 under
the Investment Company Act of 1940, the Fund has adopted a plan to reimburse the
Distributor for its actual expenses incurred in the distribution and promotion
of all classes of the Fund's shares. The maximum amount payable for these
expenses on an annual basis is .40% and .95% of the Fund's average daily net
assets for Class A and Class C shares, respectively. Included in accrued
expenses at May 31, 1996 are accrued distribution fees of $15,105 and $3,492 for
Class A and Class C shares, respectively. Certain non-promotional
C-62
<PAGE> 286
FLAGSHIP PENNSYLVANIA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
expenses directly attributable to current shareholders are aggregated by the
Distributor and passed through to the Fund as shareholder services fees.
In its capacity as national wholesale underwriter for the shares of the
Fund, the Distributor received commissions on sales of the Fund's Class A shares
of approximately $107,100 for the year ended May 31, 1996, of which
approximately $92,900 was paid to other dealers. For the year ended May 31,
1996, the Distributor received approximately $900 of contingent deferred sales
charges on redemptions of shares. Certain officers and trustees of the Trust are
also officers and/or directors of the Distributor and/or Advisor.
F. ORGANIZATIONAL EXPENSES
The organizational expenses incurred on behalf of the reorganization
(approximately $63,000) are being reimbursed to the Advisor on a straight-line
basis over a period of five years. As of May 31, 1996, $5,244 has been
reimbursed. In the event that the Advisor's current investment in the Trust
falls below $100,000 prior to the full reimbursement of the organizational
expenses, then it will forego any further reimbursement.
G. LINE OF CREDIT
The Trust participates in a line of credit in which a maximum amount of $30
million is provided by State Street Bank & Trust Co. The Fund may temporarily
borrow up to $2 million under the line of credit. Borrowings are collateralized
with pledged securities and are due on demand with interest at 1% above the
federal funds rate. The average daily amount of borrowings under the line of
credit during the year ended May 31, 1996 was approximately $61,700, at a
weighted average annualized interest rate of 6.75%. At May 31, 1996, the Fund
had $526,230 outstanding under the line of credit.
C-63
<PAGE> 287
FLAGSHIP PENNSYLVANIA
FINANCIAL HIGHLIGHTS
Selected data for each share of beneficial interest outstanding throughout
the year.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MAY 31, 1996 MAY 31, 1995 MAY 31, 1994 MAY 31, 1993 MAY 31, 1992
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CLASS A
Net asset value, beginning of year... $ 10.21 $ 10.06 $ 10.38 $ 9.90 $ 9.60
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income.............. 0.59 0.60 0.61 0.62 0.63
Net realized and unrealized gain
(loss) on securities............ (0.20) 0.16 (0.32) 0.47 0.30
-------- -------- -------- -------- --------
Total from investment operations..... 0.39 0.76 0.29 1.09 0.93
-------- -------- -------- -------- --------
Less distributions:
From net investment income......... (0.60) (0.61) (0.61) (0.61) (0.63)
-------- -------- -------- -------- --------
Total distributions.................. (0.60) (0.61) (0.61) (0.61) (0.63)
-------- -------- -------- -------- --------
Net asset value, end of year......... $ 10.00 $ 10.21 $ 10.06 $ 10.38 $ 9.90
======== ======== ======== ======== ========
Total return(a)...................... 3.83% 7.90% 2.70% 11.34% 9.98%
Ratios to average net assets:
Actual net of waivers and
reimbursements:
Expenses(b)..................... 0.79% 0.89% 0.91% 0.92% 0.83%
Net investment income........... 5.76% 6.08% 5.80% 6.07% 6.47%
Assuming credits and no waivers or
reimbursements:
Expenses........................ 1.13% 1.29% 1.17% 1.32% 1.31%
Net investment income........... 5.42% 5.68% 5.55% 5.67% 5.99%
Net assets at end of year (000's).... $ 44,392 $ 42,600 $ 42,226 $ 40,705 $ 36,917
Portfolio turnover rate.............. 64.54% 49.86% 20.70% 22.69% 41.33%
</TABLE>
(a) The total returns shown do not include the effect of applicable front-end
sales charge.
(b) During the year ended May 31, 1996, the Fund has earned credits from the
custodian which reduce service fees incurred. If included, the ratio of
expenses to average net assets would be 0.77%; prior year numbers have not
been restated to reflect these credits.
C-64
<PAGE> 288
FLAGSHIP PENNSYLVANIA
FINANCIAL HIGHLIGHTS
Selected data for each share of beneficial interest outstanding throughout
the period.
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 2,
YEAR ENDED YEAR ENDED 1994 TO
MAY 31, 1996 MAY 31, 1995 MAY 31, 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CLASS C
Net asset value, beginning of period................... $10.21 $ 10.06 $10.71
------- ------- -------
Income from investment operations:
Net investment income................................ 0.53 0.54 0.16
Net realized and unrealized gain (loss) on
securities........................................ (0.21) 0.16 (0.64)
------- ------- -------
Total from investment operations....................... 0.32 0.70 (0.48)
------- ------- -------
Less distributions:
From net investment income........................... (0.54) (0.55) (0.17)
------- ------- -------
Total distributions.................................... (0.54) (0.55) (0.17)
------- ------- -------
Net asset value, end of period......................... $ 9.99 $ 10.21 $10.06
======= ======= =======
Total return(a)........................................ 3.16% 7.31% (13.46)%
Ratios to average net assets:
(annualized where appropriate)
Actual net of waivers and reimbursements:
Expenses(b)....................................... 1.34% 1.39% 1.41%
Net investment income............................. 5.19% 5.50% 4.91%
Assuming credits and no waivers or reimbursements:
Expenses.......................................... 1.68% 1.84% 1.68%
Net investment income............................. 4.85% 5.05% 4.64%
Net assets at end of period (000's).................... $4,442 $ 3,118 $1,697
Portfolio turnover rate................................ 64.54% 49.86% 20.70%
</TABLE>
(a) The total returns shown do not include the effect of applicable contingent
deferred sales charge and are annualized where appropriate.
(b) During the year ended May 31, 1996, the Fund has earned credits from the
custodian which reduce service fees incurred. If included, the ratio of
expenses to average net assets would be 1.32%; prior period numbers have not
been restated to reflect these credits.
C-65
<PAGE> 289
FLAGSHIP PENNSYLVANIA
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS AND TRUSTEES
FLAGSHIP PENNSYLVANIA
TRIPLE TAX EXEMPT FUND
We have audited the accompanying statement of assets and liabilities,
including the statement of investments in securities and net assets, of the
Flagship Pennsylvania Triple Tax Exempt Fund as of May 31, 1996, the related
statement of operations for the year then ended, and the statements of changes
in net assets and the financial highlights for each of the periods presented.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 1996, by correspondence with the Fund's custodian and brokers. 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 audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of the Flagship
Pennsylvania Triple Tax Exempt Fund at May 31, 1996, the results of its
operations, the changes in its net assets and the financial highlights for the
respective stated periods, in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Dayton, Ohio
July 3, 1996
C-66
<PAGE> 290
FLAGSHIP VIRGINIA
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS
MUNICIPAL BONDS
MAY 31, 1996
<TABLE>
<CAPTION>
FACE
AMOUNT FACE MARKET
(000) DESCRIPTION RATE MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
EDUCATION
$ 500 Hampton Roads, VA Medical College Revenue--Series 1991A....................... 6.875% 11/15/16 $ 531,830
500 Loudoun County, VA Industrial Development Authority--George Washington
University.................................................................. 6.250 05/15/12 506,535
1,225 Loudoun County, VA Industrial Development Authority--George Washington
University.................................................................. 6.250 05/15/22 1,234,102
1,250 Rockingham County, VA Industrial Development Authority Revenue--Bridgewater
College--Series 1993........................................................ 6.000 10/01/23 1,143,738
2,000 University of Virginia--Rector and Visitors General
Pledge--Series 1993 B....................................................... 5.375 06/01/20 1,866,120
750 Virginia College Building Authority Educational Facilities Revenue--Washington
and Lee University--Series 1992............................................. 6.400 01/01/12 779,108
2,000 Virginia College Building Authority Educational Facilities Revenue--Roanoke
College--Series 1992........................................................ 6.625 10/15/12 2,026,040
3,250 Virginia College Building Authority Educational Facilities Revenue--Hampton
University--Series 1993..................................................... 5.750 04/01/14 3,089,840
775 Winchester, VA Industrial Development Authority Educational Facilities
Revenue--Shenandoah University--Series 1994................................. 6.750 10/01/19 819,198
1,800 Winchester, VA Industrial Development Authority Educational Facilities
Revenue--Shenandoah University--Series 1994................................. 6.700 10/01/14 1,894,373
HEALTH CARE
715 Albemarle County, VA Industrial Development Authority--First Mortgage
Revenue..................................................................... 8.900 07/15/26 792,370
500 Front Royal & Warren County, VA Industrial Development Authority
Revenue--Heritage Hall...................................................... 9.450 07/15/24 555,500
1,195 Henrico County, VA Industrial Development Authority--Nursing
Facility--Cambridge Manor Nursing Home--Series 1993......................... 5.875 07/01/19 1,125,272
3,500 Norfolk, VA Industrial Development Authority Revenue--James Barry-Robinson
Institute Project........................................................... 7.700 10/01/06 3,623,375
400 Richmond, VA Industrial Development Authority Revenue--Richmond Metropolitan
Blood Service............................................................... 7.125 02/01/11 418,004
HOSPITALS
1,125 Albemarle County, VA Industrial Development Authority Revenue--University of
Virginia Health Services Foundation--Series 1992............................ 6.500 10/01/22 1,143,664
1,000 Alexandria, VA Industrial Development Authority--Alexandria Community
Healthcare--Series 1993 B................................................... 5.500 07/01/14 948,390
1,185 Buena Vista, VA Industrial Development Authority--Stonewall Jackson
Hospital.................................................................... 8.375 11/01/14 1,241,738
2,000 Fairfax County, VA Industrial Development Authority--Health Care
Revenue--Inova Health System Project--Series 1996........................... 6.000 08/15/26 1,951,320
2,000 Hanover County, VA Industrial Development Authority Hospital Revenue--Memorial
Regional Medical Center--Series 1995........................................ 6.375 08/15/18 2,150,180
2,000 Hanover County, VA Industrial Development Authority Hospital Revenue--Bon
Secours Health System--Series 1995.......................................... 5.500 08/15/25 1,862,780
1,000 Harrisonburg, VA Industrial Development Authority Hospital Revenue--Rockingham
Memorial Hospital--Series 1993.............................................. 5.250 12/01/22 885,430
2,000 Loudoun County, VA Industrial Development Authority Revenue--Loudoun Hospital
Center--Series 1995......................................................... 5.800 06/01/20 1,946,980
250 Martinsville, VA Industrial Development Authority Hospital Facility
Revenue--Memorial Hospital Martinsville and Henry........................... 7.000 01/01/11 261,090
1,150 Norfolk, VA Industrial Development Authority Revenue--Children's Hospital of
The King's Daughters--Series 1991........................................... 6.500 06/01/21 1,187,110
2,000 Peninsula Ports Authority Revenue--Virginia Hospital Facility--Mary Immaculate
Hospital--Series 1994....................................................... 7.000 08/01/17 2,050,880
2,000 Prince William County, VA Industrial Development Authority Revenue--Hospital
Facility--Potomac Hospital--Series 1995..................................... 6.850 10/01/25 2,096,180
2,000 Roanoke, VA Industrial Development Authority Hospital Revenue--Roanoke
Memorial Hospital--Community Hospital of Roanoke Valley Franklin Memorial
Hospital--Saint Albans Psychiatric Hospital--Series......................... 5.000 07/01/24 1,725,100
</TABLE>
C-67
<PAGE> 291
FLAGSHIP VIRGINIA
<TABLE>
<CAPTION>
FACE
AMOUNT FACE MARKET
(000) DESCRIPTION RATE MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
HOUSING/MULTIFAMILY
$1,750 Alexandria, VA Redevelopment and Housing Authority--Arha Apartments........... 8.600% 07/20/29 $ 1,824,235
2,475 Harrisonburg, VA Redevelopment and Housing Authority--Multifamily Housing
Revenue--United Dominion--Series 1992....................................... 7.100 12/01/15 2,562,664
1,750 Harrisonburg, VA Redevelopment and Housing Authority--Multifamily Housing
Revenue--United Dominion--Series 1992....................................... 7.000 12/01/08 1,828,505
2,000 Newport News, VA Redevelopment and Housing Authority--Mortgage
Revenue--Berkley West Apartments--Series 1992 A............................. 6.550 07/01/24 2,035,080
1,500 Richmond, VA Redevelopment and Housing Authority Revenue--Old
Manchester--Series 1994..................................................... 6.800 03/01/15 1,567,275
700 Virginia State Housing Development Authority Revenue--Multifamily--Series
1991 F........................................................................ 7.000 05/01/04 745,703
HOUSING/SINGLE FAMILY
490 Commonwealth of Puerto Rico Housing Authority--Single Family--Series B........ 7.650 10/15/22 512,476
200 Virginia State Housing Development Authority--Commonwealth Mortgage--Series
1989 D...................................................................... 7.500 07/01/17 208,230
1,000 Virginia State Housing Development Authority--Commonwealth Mortgage--Series
1992 A...................................................................... 7.100 01/01/22 1,051,870
3,000 Virginia State Housing Development Authority--Commonwealth Mortgage--Series
1992 A...................................................................... 7.100 01/01/17 3,161,160
INDUSTRIAL DEVELOPMENT AND POLLUTION CONTROL
2,000 Covington-Alleghany County, VA Industrial Development Authority
Revenue--Pollution Control Facilities--Westvaco Corporation--Series 1994.... 6.650 09/01/18 2,095,100
2,000 Henrico County, VA Industrial Development Authority--Solid Waste Disposal
Revenue--Browning-Ferris Industries of South Atlantic, Incorporated--Series
1996 A...................................................................... 5.450 01/01/14 1,893,440
3,545 Isle of Wight County, VA Industrial Development Authority--Solid Waste
Disposal Facilities--Union Camp--Series 1994................................ 6.550 04/01/24 3,650,180
300 Loudoun County, VA Industrial Development Authority--Air Cargo Facility
Revenue--Washington Dulles--Series 1992..................................... 6.625 01/01/00 305,655
3,000 Loudoun County, VA Industrial Development Authority--Air Cargo Facility
Revenue--Washington Dulles--Series 1992..................................... 7.000 01/01/09 3,038,310
2,500 Mecklenburg County, VA Industrial Development Authority Revenue--Mecklenburg
Cogeneration................................................................ 7.350 05/01/08 2,645,600
2,000 Puerto Rico Ports Authority--Special Facilities Revenue--American Airlines,
Incorporated Project--Series 1996 A......................................... 6.250 06/01/26 1,957,600
1,000 Russell County, VA Industrial Development Authority Pollution Control
Revenue--Appalachian Power Company.......................................... 7.700 11/01/07 1,087,260
MUNICIPAL APPROPRIATION OBLIGATIONS
2,300 Big Stone Gap, VA Redevelopment and Housing Authority--Correctional Facility
Lease Revenue--Wallens Ridge Development--Series 1995....................... 5.500 09/01/15 2,172,028
1,435 Fairfax County, VA Redevelopment and Housing Authority Revenue--Office
Building--Series 1992 A..................................................... 7.500 06/15/18 1,483,101
2,000 Henrico County, VA Industrial Development Authority Revenue--Henrico County
Regional Jail--Series 1994.................................................. 7.000 08/01/13 2,228,640
750 Loudoun County, VA Certificates of Participation.............................. 7.200 10/01/10 869,535
2,000 Virginia State Transportation Board--U.S. Route 58 Corridor Development
Program--Series 1993 B...................................................... 5.500 05/15/18 1,892,760
MUNICIPAL REVENUE/TRANSPORTATION
1,500 Peninsula Airport Commission--Virginia Airport Improvement Revenue--Series
1991........................................................................ 7.300 07/15/21 1,627,680
MUNICIPAL REVENUE/UTILITY
2,110 Halifax County, VA Industrial Development Authority--Exempt Facilities
Revenue--Old Dominion Electric Cooperative--Series 1992..................... 6.500 12/01/12 2,170,684
1,865 Commonwealth of Puerto Rico Electric Power Authority--Series O................ 0.000 07/01/17 525,072
1,000 Commonwealth of Puerto Rico Electric Power Authority--Series 1992 R........... 6.250 07/01/17 1,007,490
2,000 Commonwealth of Puerto Rico Electric Power Authority Revenue--
Series 1995 Z............................................................... 5.500 07/01/16 1,864,200
MUNICIPAL REVENUE/WATER & SEWER
1,000 Blacksburg, VA Polytechnic Institute Sanitation Authority--Sewer System
Revenue--Series 1992........................................................ 6.250 11/01/12 1,007,730
1,000 Fairfax County, VA Water Authority Revenue--Series 1992....................... 6.000 04/01/22 990,830
1,000 Frederick-Winchester Service Authority, VA Regional Sewer System
Revenue--Series 1993........................................................ 5.750 10/01/15 972,640
750 Henry County, VA Public Service Authority Water and Sewer Revenue............. 6.250 11/15/19 763,095
</TABLE>
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<PAGE> 292
FLAGSHIP VIRGINIA
<TABLE>
<CAPTION>
FACE
AMOUNT FACE MARKET
(000) DESCRIPTION RATE MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$2,215 Upper Occoquan, VA Sewage Authority Revenue--Regional Sewerage System--Series
1995 A and B................................................................ 5.150% 07/01/20 $ 2,005,350
1,000 Virginia State Resource Authority--Sewer System
Revenue--Harrisonburg--Rockingham--Series 1992 A............................ 6.000 05/01/22 965,570
1,000 Virginia Resources Authority--Water and Sewer System Revenue--Sussex County
Project--Series 1995 A...................................................... 5.600 10/01/25 926,880
500 Virginia Resources Authority--Water and Sewer System Revenue--Lot 7........... 7.125 10/01/16 534,955
1,500 Virginia State Resource Authority--Water and Sewer System Revenue--
Lot 9--Frederick County Sanitation.......................................... 6.000 10/01/12 1,473,840
1,500 Virginia Resources Authority--Water and Sewer System Revenue--
Series 1992 A............................................................... 6.125 04/01/19 1,482,585
NON-STATE GENERAL OBLIGATIONS
730 Danville, VA General Improvement Revenue...................................... 6.500 05/01/12 764,901
1,500 Portsmouth, VA Public Utility General Obligation--Series 1993................. 5.500 08/01/19 1,419,180
1,000 Richmond, VA General Obligation--Public Improvement Revenue--
Series 1995 B............................................................... 5.000 01/15/21 874,460
1,000 Virginia Public School Authority--School Financing--Series 1994 A............. 6.200 08/01/13 1,034,180
1,000 Virginia Public School Authority--School Financing--Series 1995 B............. 5.750 08/01/15 986,210
1,210 Virginia Public School Authority--School Financing--Series 1995 B............. 5.625 08/01/16 1,175,116
PRE-REFUNDED OR ESCROWED
500 Fairfax County, VA Redevelopment and Housing Authority Revenue--Vinson
Pravalion--Series A......................................................... 7.500 11/01/19 555,070
100 Commonwealth of Puerto Rico Public Building Authority Guaranteed Public
Education and Health Facilities--Series G................................... 7.875 07/01/16 106,367
200 Commonwealth of Puerto Rico Electric Power Authority--Series K................ 9.375 07/01/17 215,806
500 Strasburg, VA General Obligation.............................................. 7.875 03/01/19 519,650
1,000 Virginia College Building Authority Educational Facilities Revenue--Hampton
University--Series A........................................................ 7.750 04/01/14 1,100,840
3,000 Virginia State Public Building Authority Revenue--Series 1994 A............... 6.250 08/01/15 3,251,910
105 Virginia Resources Authority--Water and Sewer System Revenue--Pooled Loan
Program--Series A........................................................... 8.125 11/01/16 112,955
110 Virginia Resources Authority--Water and Sewer System Revenue--Pooled Loan
Program--Series A........................................................... 8.125 11/01/16 120,534
120 Virginia Resources Authority--Water and Sewer System Revenue--Pooled Loan
Program--Series A........................................................... 8.125 11/01/16 133,307
130 Virginia Resources Authority--Water and Sewer System Revenue--Pooled Loan
Program--Series A........................................................... 8.125 11/01/16 147,399
140 Virginia Resources Authority--Water and Sewer System Revenue--Pooled Loan
Program--Series A........................................................... 8.125 11/01/16 161,748
275 Virginia Resources Authority--Water and Sewer System Revenue--Pooled Loan
Program--Series 1986 A...................................................... 7.600 11/01/16 296,994
305 Virginia Resources Authority--Water and Sewer System Revenue--Pooled Loan
Program--Series 1986 A...................................................... 7.600 11/01/16 329,394
410 Virginia Resources Authority--Water and Sewer System Revenue--Pooled Loan
Program--Series 1986 A...................................................... 7.650 11/01/16 454,665
RESOURCE RECOVERY
2,000 Roanoke, VA Valley Resource Authority--Solid Waste System Revenue--Series
1992........................................................................ 5.750 09/01/12 1,932,240
1,000 Virginia State Resource Authority Solid Waste Disposal System Revenue--Series
1992 B...................................................................... 6.750 11/01/12 1,055,210
STATE/TERRITORIAL GENERAL OBLIGATIONS
4,250 Commonwealth of Puerto Rico Public Improvement--General Obligation--Series
1996 A...................................................................... 5.400 07/01/25 3,831,078
2,575 Commonwealth of Puerto Rico--General Obligation--Series 1994.................. 6.450 07/01/17 2,651,735
2,500 Commonwealth of Puerto Rico--General Obligation--Series 1994.................. 6.500 07/01/23 2,583,825
2,000 Commonwealth of Puerto Rico Aqueduct and Sewer Authority Revenue--Series
1995........................................................................ 5.000 07/01/15 1,757,920
------------------------------------------------------------------------------------------------------------------
Total Investments in Securities--Municipal Bonds (cost $123,450,281)--98.4%... 126,563,949
------------------------------------------------------------------------------------------------------------------
Excess of Other Assets over Liabilities--1.6%................................. 2,091,384
------------------------------------------------------------------------------------------------------------------
Total Net Assets--100.0%...................................................... $128,655,333
==================================================================================================================
</TABLE>
See notes to financial statements.
C-69
<PAGE> 293
FLAGSHIP VIRGINIA
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 1996
<TABLE>
<S> <C>
ASSETS
Investments, at market value (cost $123,450,281)................................... $126,563,949
Cash............................................................................... 484,558
Receivable for Fund shares sold.................................................... 329,136
Interest receivable................................................................ 2,338,380
Other.............................................................................. 7,259
-----------
Total assets............................................................. 129,723,282
-----------
LIABILITIES
Payable for Fund shares reacquired................................................. 354,710
Distributions payable.............................................................. 590,897
Accrued expenses................................................................... 122,342
-----------
Total liabilities........................................................ 1,067,949
-----------
NET ASSETS......................................................................... $128,655,333
===========
Class A:
Applicable to 11,320,384 shares of beneficial interest issued and outstanding...... $117,677,212
===========
Net asset value per share.......................................................... $ 10.40
===========
Class C:
Applicable to 1,056,634 shares of beneficial interest issued and outstanding....... $ 10,978,121
===========
Net asset value per share.......................................................... $ 10.39
===========
</TABLE>
C-70
<PAGE> 294
FLAGSHIP VIRGINIA
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MAY 31, 1996
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest............................................................................ $ 7,751,940
-----------
Expenses:
Distribution fees--Class A (note E)............................................ 464,378
Distribution fees--Class C (note E)............................................ 75,853
Investment advisory fees (note E).............................................. 622,309
Custody and accounting fees.................................................... 99,226
Transfer agent's fees.......................................................... 83,650
Registration fees.............................................................. 4,628
Legal fees..................................................................... 3,313
Audit fees..................................................................... 15,738
Trustees' fees................................................................. 3,415
Shareholder services fees (note E)............................................. 12,078
Other.......................................................................... 3,910
Advisory fees waived (note E).................................................. (312,111)
-----------
Total expenses before credits............................................. 1,076,387
Custodian fee credit (note B).................................................. (34,171)
-----------
Net expenses.............................................................. 1,042,216
-----------
Net investment income................................................ 6,709,724
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on security transactions................................... 1,352,908
Change in unrealized appreciation (depreciation) of investments..................... (3,368,259)
-----------
Net loss on investments.............................................. (2,015,351)
-----------
Net increase in net assets resulting from operations................................ $ 4,694,373
===========
</TABLE>
See notes to financial statements.
C-71
<PAGE> 295
FLAGSHIP VIRGINIA
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
MAY 31, 1996 MAY 31, 1995
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income................................................. $ 6,709,724 $ 6,511,077
Net realized gain (loss) on security transactions..................... 1,352,908 (2,300,229)
Change in unrealized appreciation (depreciation) of investments....... (3,368,259) 4,479,267
------------ ------------
Net increase in net assets resulting from operations........ 4,694,373 8,690,115
------------ ------------
DISTRIBUTIONS TO CLASS A SHAREHOLDERS:
From net investment income............................................ (6,371,930) (6,193,219)
DISTRIBUTIONS TO CLASS C SHAREHOLDERS:
From net investment income............................................ (393,250) (290,174)
------------ ------------
Net decrease in net assets from distributions to
shareholders.............................................. (6,765,180) (6,483,393)
------------ ------------
FUND SHARE TRANSACTIONS (note C)
Proceeds from shares sold............................................. 19,415,807 15,736,060
Net asset value of shares issued in reinvestment of distributions..... 3,681,025 3,679,719
Cost of shares reacquired............................................. (11,550,452) (14,703,916)
------------ ------------
Net increase in net assets from Fund share transactions..... 11,546,380 4,711,863
------------ ------------
Total increase in net assets................................ 9,475,573 6,918,585
NET ASSETS:
Beginning of year..................................................... 119,179,760 112,261,175
------------ ------------
End of year........................................................... $128,655,333 $119,179,760
============ ============
NET ASSETS CONSIST OF:
Paid-in surplus....................................................... $126,593,242 $115,074,634
Undistributed net investment income................................... 27,684
Accumulated net realized gain (loss) on security transactions......... (1,051,577) (2,404,485)
Unrealized appreciation (depreciation) of investments................. 3,113,668 6,481,927
------------ ------------
$128,655,333 $119,179,760
============ ============
</TABLE>
See notes to financial statements.
C-72
<PAGE> 296
FLAGSHIP VIRGINIA
NOTES TO FINANCIAL STATEMENTS
A. DESCRIPTION OF BUSINESS
The Flagship Virginia Double Tax Exempt Fund (Fund) is a sub-trust of the
Flagship Tax Exempt Funds Trust (Trust), a Massachusetts business trust
organized on March 8, 1985. The Fund is an open-end diversified management
investment company registered under the Investment Company Act of 1940, as
amended. The Fund commenced investment operations on March 27, 1986. On October
4, 1993, the Fund began to offer Class C shares to the investing public. Class A
shares are sold with a front-end sales charge. Class C shares are sold with no
front-end sales charge but are assessed a contingent deferred sales charge if
redeemed within one year from the time of purchase. Both classes of shares have
identical rights and privileges except with respect to the effect of sales
charges, the distribution and/or service fees borne by each class, expenses
specific to each class, voting rights on matters affecting a single class and
the exchange privilege of each class. Shares of beneficial interest in the Fund,
which are registered under the Securities Act of 1933, as amended, are offered
to the public on a continuous basis.
B. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund.
ESTIMATES: The preparation of financial statements and daily calculation of
net asset value in conformity with generally accepted accounting principles
requires management to fairly value, at market, investment securities and make
estimates and assumptions regarding the reported amounts of assets and
liabilities at the date of the financial statements and the reported amount of
revenues and expenses during the reporting period. The financial statements
reflect these inherent valuations, estimates and assumptions, and actual results
could differ.
SECURITY VALUATIONS: Portfolio securities for which market quotations are
readily available are valued on the basis of prices provided by a pricing
service which uses information with respect to transactions in bonds, quotations
from bond dealers, market transactions in comparable securities and various
relationships between securities in determining the values. If market quotations
are not readily available from such pricing service, securities are valued at
fair value as determined under procedures established by the Trustees.
Short-term securities are stated at amortized cost, which is equivalent to fair
value.
The Fund must maintain a diversified investment portfolio as a registered
investment company, however, the Fund's investments are primarily in the
securities of its state. Such concentration subjects the Fund to the effects of
economic changes occurring within that state.
FEDERAL INCOME TAXES: It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute to its shareholders all of its tax exempt net
investment income and net realized gains on security transactions. Therefore, no
federal income tax provision is required.
Distributions from net realized capital gains may differ for financial
statement and tax purposes primarily due to the treatment of wash sales and
post-October capital losses. The effect on dividend distributions of certain
book-to-tax timing differences is presented as excess distributions in the
statement of changes in net assets.
SECURITY TRANSACTIONS: Security transactions are accounted for on the date
the securities are purchased or sold (trade date). Realized gains and losses on
security transactions are determined on the identified cost basis. Interest
income is recorded on the accrual basis. The Fund amortizes original issue
discounts and premiums paid on purchases of portfolio securities on the same
basis for both financial reporting and tax purposes. Market discounts, if
applicable, are recognized as ordinary income upon disposition or maturity.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS: Interest income and
estimated expenses are accrued daily. Daily dividends are declared from net
investment income and paid monthly. Net realized gains from security
transactions, to the extent they exceed available capital loss carryforwards,
are distributed to shareholders at least annually.
EXPENSE ALLOCATION: Shared expenses incurred by the Trust are allocated
among the sub-trusts based on each sub-trust's ratio of net assets to the
combined net assets. Specifically identified direct expenses are charged to each
sub-trust as incurred. Fund expenses not specific to any class of shares are
prorated among the classes based upon the eligible net assets of each class.
Specifically identified direct expenses of each class are charged to that class
as incurred.
C-73
<PAGE> 297
FLAGSHIP VIRGINIA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Fund has entered into an agreement with the custodian, whereby it earns
custodian fee credits for temporary cash balances. These credits, which offset
custodian fees that may be charged to the Fund, are based on 80% of the daily
effective federal funds rate.
SECURITIES PURCHASED ON A "WHEN-ISSUED" BASIS: The Fund may, upon adequate
segregation of securities as collateral, purchase and sell portfolio securities
on a "when-issued" basis. These securities are registered by a municipality or
government agency, but have not been issued to the public. Delivery and payment
take place after the date of the transaction and such securities are subject to
market fluctuations during this period. The current market value of these
securities is determined in the same manner as other portfolio securities. There
were no "when-issued" purchase commitments included in the statement of
investments at May 31, 1996.
C. FUND SHARES
At May 31, 1996, there were an indefinite number of shares of beneficial
interest with no par value authorized for each class. Transactions in shares
were as follows:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31, 1996 YEAR ENDED MAY 31, 1995
------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
--------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
CLASS A:
Shares sold..................................... 1,315,390 $ 13,890,308 1,189,750 $ 12,128,107
Shares issued on reinvestment................... 328,665 3,474,566 344,907 3,497,701
Shares reacquired............................... (989,759) (10,468,801) (1,243,117) (12,549,022)
--------- ------------ --------- ------------
Net increase.................................... 654,296 $ 6,896,073 291,540 $ 3,076,786
========= =========== ========= ============
CLASS C:
Shares sold..................................... 521,385 $ 5,525,499 355,128 $ 3,607,953
Shares issued on reinvestment................... 19,541 206,459 17,948 182,018
Shares reacquired............................... (103,572) (1,081,651) (213,209) (2,154,894)
--------- ------------ --------- ------------
Net increase.................................... 437,354 $ 4,650,307 159,867 $ 1,635,077
========= =========== ========= ============
</TABLE>
D. PURCHASES AND SALES OF MUNICIPAL BONDS
Purchases and sales of municipal bonds for the year ended May 31, 1996,
aggregated $33,221,244 and $21,355,355, respectively. At May 31, 1996, cost for
federal income tax purposes is $123,506,356 and net unrealized appreciation
aggregated $3,057,593, of which $4,252,146 related to appreciated securities and
$1,194,553 related to depreciated securities.
At May 31, 1996, the Fund has available a capital loss carryforward of
approximately $995,600 to offset future net capital gains expiring on May 31,
2003.
E. TRANSACTIONS WITH INVESTMENT ADVISOR AND DISTRIBUTOR
Flagship Financial Inc. (Advisor), under the terms of an agreement which
provides for furnishing of investment advice, office space and facilities to the
Fund, receives fees computed monthly on the average daily net assets of the Fund
at an annualized rate of 1/2 of 1%. During the year ended May 31, 1996, the
Advisor, at its discretion, permanently waived $312,111 of its advisory fees.
Included in accrued expenses at May 31, 1996 are accrued advisory fees of
$27,204. Also, under an agreement with the Fund, the Advisor may subsidize
certain expenses excluding advisory and distribution fees.
The Fund has a Distribution Agreement with Flagship Funds Inc.
(Distributor). The Distributor serves as the exclusive selling agent and
distributor of the Fund's Class A and Class C shares and in that capacity is
responsible for all sales and promotional efforts including printing of
prospectuses and reports used for sales purposes. Pursuant to Rule 12b-1 under
the Investment Company Act of 1940, the Fund has adopted a plan to reimburse the
Distributor for its actual expenses incurred in the distribution and promotion
of all classes of the Fund's shares. The maximum amount payable for these
expenses on an annual basis is .40% and .95% of the Fund's average daily net
assets for Class A and Class C shares, respectively. Included in accrued
expenses at May 31, 1996 are accrued distribution fees of $39,897 and $8,620 for
Class A and Class C shares, respectively. Certain non-promotional
C-74
<PAGE> 298
FLAGSHIP VIRGINIA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
expenses directly attributable to current shareholders are aggregated by the
Distributor and passed through to the Fund as shareholder services fees.
In its capacity as national wholesale underwriter for the shares of the
Fund, the Distributor received commissions on sales of the Fund's Class A shares
of approximately $311,100 for the year ended May 31, 1996, of which
approximately $285,200 was paid to other dealers. For the year ended May 31,
1996, the Distributor received approximately $1,700 of contingent deferred sales
charges on redemptions of shares. Certain officers and trustees of the Trust are
also officers and/or directors of the Distributor and/or Advisor.
F. LINE OF CREDIT
The Trust participates in a line of credit in which a maximum amount of $30
million is provided by State Street Bank & Trust Co. The Fund may temporarily
borrow up to $6 million under the line of credit. Borrowings are collateralized
with pledged securities and are due on demand with interest at 1% above the
federal funds rate. The average daily amount of borrowings under the line of
credit during the year ended May 31, 1996 was approximately $98,900, at a
weighted average annualized interest rate of 6.65%. At May 31, 1996, the Fund
had no borrowings outstanding under the line of credit.
C-75
<PAGE> 299
FLAGSHIP VIRGINIA
FINANCIAL HIGHLIGHTS
Selected data for each share of beneficial interest outstanding throughout
the year.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MAY 31, 1996 MAY 31, 1995 MAY 31, 1994 MAY 31, 1993 MAY 31, 1992
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CLASS A
- --------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year... $ 10.56 $ 10.36 $ 10.82 $ 10.24 $ 9.97
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income.............. 0.57 0.59 0.60 0.62 0.63
Net realized and unrealized gain
(loss) on securities............ (0.15) 0.20 (0.31) 0.62 0.27
-------- -------- -------- -------- --------
Total from investment operations..... 0.42 0.79 0.29 1.24 0.90
-------- -------- -------- -------- --------
Less distributions:
From net investment income......... (0.58) (0.59) (0.60) (0.62) (0.63)
From net realized capital gains.... -- -- (0.11) (0.04) --
In excess of net realized capital
gains........................... -- -- (0.04) -- --
-------- -------- -------- -------- --------
Total distributions.................. (0.58) (0.59) (0.75) (0.66) (0.63)
-------- -------- -------- -------- --------
Net asset value, end of year......... $ 10.40 $ 10.56 $ 10.36 $ 10.82 $ 10.24
======== ======== ======== ======== ========
Total return(a)...................... 4.03% 7.99% 2.62% 12.41% 9.37%
Ratios to average net assets:
Actual net of waivers and
reimbursements:
Expenses(b)..................... 0.83% 0.79% 0.64% 0.68% 0.75%
Net investment income........... 5.41% 5.81% 5.53% 5.82% 6.28%
Assuming credits and no waivers or
reimbursements:
Expenses........................ 1.06% 1.10% 1.06% 1.07% 1.14%
Net investment income........... 5.18% 5.50% 5.11% 5.43% 5.89%
Net assets at end of year (000's).... $117,677 $112,643 $107,502 $ 96,105 $ 64,628
Portfolio turnover rate.............. 17.47% 50.17% 17.37% 30.33% 26.59%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The total returns shown do not include the effect of applicable front-end
sales charge.
(b) During the year ended May 31, 1996, the Fund has earned credits from the
custodian which reduce service fees incurred. If included, the ratio of
expenses to average net assets would be 0.80%; prior year numbers have not
been restated to reflect these credits.
C-76
<PAGE> 300
FLAGSHIP VIRGINIA
FINANCIAL HIGHLIGHTS
Selected data for each share of beneficial interest outstanding throughout
the period.
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED YEAR ENDED OCTOBER 4, 1993 TO
MAY 31, 1996 MAY 31, 1995 MAY 31, 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CLASS C
- ---------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period...................... $ 10.56 $10.36 $11.24
------ ------ ------
Income from investment operations:
Net investment income................................... 0.51 0.53 0.34
Net realized and unrealized gain (loss) on securities... (0.16) 0.20 (0.78)
------ ------ ------
Total from investment operations.......................... 0.35 0.73 (0.44)
------ ------ ------
Less distributions:
From net investment income.............................. (0.52) (0.53) (0.34)
From net realized capital gains......................... -- -- (0.07)
In excess of net realized capital gains................. -- -- (0.03)
------ ------ ------
Total distributions....................................... (0.52) (0.53) (0.44)
------ ------ ------
Net asset value, end of period............................ $ 10.39 $10.56 $10.36
====== ====== ======
Total return(a)........................................... 3.37% 7.40% (7.13)%
Ratios to average net assets:
(annualized where appropriate):
Actual net of waivers and reimbursements:
Expenses(b).......................................... 1.38% 1.34% 1.14%
Net investment income................................ 4.84% 5.24% 4.85%
Assuming credits and no waivers or reimbursements:
Expenses............................................. 1.60% 1.65% 1.79%
Net investment income................................ 4.62% 4.93% 4.20%
Net assets at end of period (000's)....................... $ 10,978 $6,537 $4,759
Portfolio turnover rate................................... 17.47% 50.17% 17.37%
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The total returns shown do not include the effect of applicable contingent
deferred sales charge and are annualized where appropriate.
(b) During the year ended May 31, 1996, the Fund has earned credits from the
custodian which reduce service fees incurred. If included, the ratio of
expenses to average net assets would be 1.35%; prior period numbers have not
been restated to reflect these credits.
C-77
<PAGE> 301
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS AND TRUSTEES
FLAGSHIP VIRGINIA
DOUBLE TAX EXEMPT FUND
We have audited the accompanying statement of assets and liabilities,
including the statement of investments in securities and net assets, of the
Flagship Virginia Double Tax Exempt Fund as of May 31, 1996, the related
statement of operations for the year then ended, and the statements of changes
in net assets and the financial highlights for each of the periods presented.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 1996, by correspondence with the Fund's custodian and brokers. 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 audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of the Flagship
Virginia Double Tax Exempt Fund at May 31, 1996, the results of its operations,
the changes in its net assets and the financial highlights for the respective
stated periods, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dayton, Ohio
July 3, 1996
C-78
<PAGE> 302
PART C -- OTHER INFORMATION
ITEM 15. INDEMNIFICATION
Section 4 of Article XII of Registrant's Declaration of Trust provides as
follows:
Subject to the exceptions and limitations contained in this Section 4,
every person who is, or has been, a Trustee, officer, employee or agent of the
Trust, including persons who serve at the request of the Trust as directors,
trustees, officers, employees or agents of another organization in which the
Trust has an interest as a shareholder, creditor or otherwise (hereinafter
referred to as a "Covered Person"), shall be indemnified by the Trust to the
fullest extent permitted by law against liability and against all expenses
reasonably incurred or paid by him in connection with any claim, action, suit or
proceeding in which he becomes involved as a party or otherwise by virtue of his
being or having been such a Trustee, director, officer, employee or agent and
against amounts paid or incurred by him in settlement thereof.
No indemnification shall be provided hereunder to a Covered Person:
(a) against any liability to the Trust or its Shareholders by reason
of a final adjudication by the court or other body before which the
proceeding was brought that he engaged in willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the
conduct of his office;
(b) with respect to any matter as to which he shall have been finally
adjudicated not to have acted in good faith in the reasonable belief that
his action was in the best interests of the Trust; or
(c) in the event of a settlement or other disposition not involving a
final adjudication (as provided in paragraph (a) or (b)) and resulting in a
payment by a Covered Person, unless there has been either a determination
that such Covered Person did not engage in willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the
conduct of his office by the court or other body approving the settlement
or other disposition or a reasonable determination, based on a review of
readily available facts (as opposed to a full trial-type inquiry), that he
did not engage in such conduct:
(i) by a vote of a majority of the Disinterested Trustees acting on
the matter (provided that a majority of the Disinterested Trustees then
in office act on the matter); or
(ii) by written opinion of independent legal counsel.
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 advance; or
(b) a majority of the Disinterested Trustees acting on the matter
(provided that a majority of the Disinterested Trustees then in office act
on the matter) or independent legal counsel in a written opinion shall
determine, based upon a review of the readily available facts (as opposed
to a full trial-type inquiry), that there is reason to believe that the
recipient ultimately will be found entitled to indemnification.
As used in this Section 4, a "Disinterested Trustee" is one (x) who is not
an Interested Person of the Trust (including, as such Disinterested Trustee,
anyone who has been exempted from being an Interested Person by any rule,
regulation or order of the Commission), and (y) against whom none of such
actions, suits or other proceedings or another action, suit or other proceeding
on the same or similar grounds is then or has been pending.
As used in this Section 4, the words "claim," "action," "suit" or
"proceeding" shall apply to all claims, actions, suits, proceedings (civil,
criminal, administrative or other, including appeals), actual or threatened; and
the word "liability" and "expenses" shall include without limitation, attorneys'
fees, costs, judgments, amounts paid in settlement, fines, penalties and other
liabilities.
1
<PAGE> 303
The trustees and officers of the Registrant are covered by an Investment
Trust Errors and Omission policy in the aggregate amount of $40,000,000 (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 involved 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 shall have had reasonable cause to believe this conduct was
unlawful).
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to the officers, trustees or controlling persons of the
Registrant pursuant to the Declaration of Trust of the Registrant 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 Act 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 an officer or trustee or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such officer, trustee 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 of whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
ITEM 16. EXHIBITS
The exhibits to this Registration Statement are set forth on the Index to
Exhibits attached hereto.
ITEM 17. UNDERTAKINGS
(1) The undersigned registrant agrees that, prior to any public reoffering
of the securities registered through the use of a prospectus which is a part of
this registration statement by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c) of the Securities Act, the
reoffering prospectus will contain the information called for by the applicable
registration form for reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other items of the applicable
form.
(2) The undersigned registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as part of an amendment to the
registration statement and will not be used until the amendment is effective,
and that, in determining any liability under the 1933 Act, each post-effective
amendment shall be deemed to be a new registration statement for the securities
affected therein, and the offering of the securities at that time shall be
deemed to be the initial bona fide offering of them.
2
<PAGE> 304
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 THE CITY OF CHICAGO, AND STATE OF ILLINOIS, ON THE 17TH DAY OF
OCTOBER, 1996.
NUVEEN FLAGSHIP MULTISTATE TRUST I
/s/ GIFFORD R. ZIMMERMAN
-----------------------------------------
Gifford R. Zimmerman, Vice President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATE INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------- --------------------------- ---------------------------------
<S> <C> <C>
/s/ O. WALTER RENFFTLEN Vice President and October 17, 1996
- ----------------------------------- Controller
O. Walter Renfftlen (Principal Financial and
Accounting Officer)
Lawrence H. Brown Trustee
Anthony T. Dean President and Trustee By /s/ Gifford R. Zimmerman
Anne E. Impellizzeri Trustee ----------------------------
Margaret K. Rosenheim Trustee Gifford R. Zimmerman
Peter R. Sawers Trustee Attorney-in-Fact
Timothy R. Schwertfeger Chairman and Trustee October 17, 1996
(Principal Executive
Officer)
</TABLE>
<PAGE> 305
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
<S> <C>
- ---------------------------------------------------------------------------------------------------
99.1 (a) Declaration of Trust of Registrant*....................................................
99.1 (b) Certificates for the Establishment and Designation of Series and Classes*..............
99.1 (c) Amended and Restated Certificate for the Establishment and Designation of Series.......
99.2 By-Laws of Registrant*.................................................................
99.3 Not applicable.........................................................................
99.4 Form of Agreement and Plan of Reorganization (incorporated by reference to
Annex B to the Joint Proxy Statement-Prospectus).......................................
99.5 Form of Specimen certificates..........................................................
99.6 Form of Management Agreement between Registrant and Nuveen Advisory Corp...............
99.7 Form of Distribution Agreement between Registrant and John Nuveen & Co. Incorporated...
99.8 Not applicable.........................................................................
99.9 Form of Custodian Agreement............................................................
99.10(a) Plan of Distribution and Service Pursuant to Rule 12b-1 for the Class A Shares,
Class B Shares and Class C Shares......................................................
99.10(b) Multi-Class Plan.......................................................................
99.11(a) Opinion and consent of Vedder, Price, Kaufman & Kammholz...............................
99.11(b) Opinion and consent of Bingham, Dana & Gould LLP.......................................
99.11(c) Consent of Skadden, Arps, Slate, Meagher & Flom........................................
99.12 Tax opinion and consent of Vedder, Price, Kaufman & Kammholz...........................
99.13 Form of Transfer Agency Agreement among Registrant, Nuveen Advisory Corp.
and State Street Bank and Trust Company................................................
99.14(a) Consent of Arthur Andersen LLP.........................................................
99.14(b) Consent of Deloitte & Touche LLP.......................................................
99.14(c) Consent of Chapman & Cutler............................................................
99.14(d) Consent of Baker & McKenzie............................................................
99.14(e) Consent of Christian & Barton, L.L.P...................................................
99.14(f) Consent of Dechert Price & Rhodes......................................................
99.15 Not Applicable.........................................................................
99.16(a) Power of Attorney of Lawrence H. Brown*................................................
99.16(b) Power of Attorney of Anthony T. Dean*..................................................
99.16(c) Power of Attorney of Anne E. Impellizzeri*.............................................
99.16(d) Power of Attorney of Margaret K. Rosenheim*............................................
99.16(e) Power of Attorney of Peter R. Sawers*..................................................
99.16(f) Power of Attorney of Timothy R. Schwertfeger*..........................................
99.17(a) Form of Proxy for Nuveen Funds.........................................................
99.17(b) Form of Proxy for Flagship Funds.......................................................
- ---------------------------------------------------------------------------------------------------
</TABLE>
* Incorporated by reference to Registrant's Registration Statement on Form N-14,
which was filed on August 2, 1996.
<PAGE> 1
EXHIBIT 99.1(c)
NUVEEN FLAGSHIP MULTISTATE TRUST I
AMENDED AND RESTATED ESTABLISHMENT AND DESIGNATION
OF SERIES OF SHARES OF BENEFICIAL INTEREST
WHEREAS, pursuant to Section 2 of Article IV of the Declaration of Trust
dated July 1, 1996 (the "Declaration"), of Nuveen Flagship Multistate Trust I,
a Massachusetts business trust (the "Trust"), the Trustees of the Trust, on
July 10, 1996, established and designated certain series of Shares (as defined
in the Declaration) of the Trust by the execution of an instrument establishing
and designating such series and setting forth the special and relative rights
of such series;
WHEREAS, the Trustees of the Trust now desire to amend and restate such
instrument in order to establish and designate additional series of Shares and
redesignate certain of the series previously designated;
NOW THEREFORE, the Trustees of the Trust, this 9th day of October, 1996,
hereby establish and designate nine series of Shares (each a "Fund") to have
the special and relative rights described below.
1. The following nine Funds are established and designated:
Nuveen Flagship Arizona Municipal Bond Fund
Nuveen Flagship Colorado Municipal Bond Fund
Nuveen Flagship Florida Municipal Bond Fund
Nuveen Flagship Florida Intermediate Municipal Bond Fund
Nuveen Maryland Municipal Bond Fund
Nuveen Flagship New Mexico Municipal Bond Fund
Nuveen Oklahoma Municipal Bond Fund
Nuveen Flagship Pennsylvania Municipal Bond Fund
Nuveen Flagship Virginia Municipal Bond Fund
2. Each Fund shall be authorized to hold cash, invest in securities,
instruments and other property and use investment techniques
<PAGE> 2
-2-
as from time to time described in the Trust's then currently effective
registration statement under the Securities Act of 1933 to the extent
pertaining to the offering of Shares of such Fund. Each Share of each Fund
shall be redeemable, shall be entitled to one vote (or fraction thereof in
respect of a fractional share) on matters on which Shareholders of that Fund
may vote in accordance with the Declaration, shall represent a pro rata
beneficial interest in the assets allocated or belonging to such Fund, and
shall be entitled to receive its pro rata share of the net assets of such Fund
upon liquidation of such Fund, all as provided in Article IV, Sections 2 and 5
of the Declaration. The proceeds of the sale of Shares of each Fund, together
with any income and gain thereon, less any diminution or expenses thereof,
shall irrevocably belong to such Fund, unless otherwise required by law.
3. Shareholders of each Fund shall vote separately as a class on any
matter to the extent required by, and any matter shall be deemed to have been
effectively acted upon with respect to such Fund as provided in, Rule 18f-2, as
from time to time in effect, under the Investment Company Act of 1940, as
amended, or any successor rules, and by the Declaration.
4. The assets and liabilities of the Trust shall be allocated among each
Fund as set forth in Article IV, Section 5 of the Declaration.
5. The designation of the nine Funds hereby shall not impair the power of
the Trustees from time to time to designate additional series of Shares of the
Trust.
6. Subject to the applicable provisions of the 1940 Act and the provisions
of Article IV, Sections 2 and 5 of the Declaration, the Trustees shall have the
right at any time and from time to time to reallocate assets and expenses or to
change the designation of each Fund now or hereafter created, or to otherwise
change the special relative rights of each Fund designated hereby without any
action or consent of the Shareholders.
IN WITNESS WHEREOF, the undersigned, being all of the Trustees of the
Trust, have executed this instrument as of this 9th day of October, 1996.
<PAGE> 3
-3-
----------------------- ----------------------------
Anthony T. Dean, Timothy R. Schwertfeger,
as Trustee as Trustee
333 West Wacker Drive 333 West Wacker Drive
Chicago, Illinois 60606 Chicago, Illinois 60606
----------------------- ------------------------
Lawrence H. Brown, Anne E. Impellizerri,
as Trustee as Trustee
333 West Wacker Drive 333 West Wacker Drive
Chicago, Illinois 60606 Chicago, Illinois 60606
------------------------- ------------------------
Margaret K. Rosenheim, Peter R. Sawers,
as Trustee as Trustee
333 West Wacker Drive 333 West Wacker Drive
Chicago, Illinois 60606 Chicago, Illinois 60606
STATE OF ILLINOIS )
) SS.
COUNTY OF COOK )
Then personally appeared the above-named person(s) who are known to me to
be Trustee(s) of the Trust whose name(s) and signature(s) are affixed to the
foregoing Designation of Series and who acknowledged the same to be his/her
free act and deed, before me this ____ day of _____________, 1996.
_________________________________
Notary Public
My Commission Expires: ____________
<PAGE> 1
EXHIBIT 99.5
Number Class [ ] Shares
Nuveen Flagship Multistate Trust I
[Name of Series]
Organized Under the Laws of the Commonwealth of Massachusetts
This is to certify See Reverse for
is the owner of Certain Definitions
CUSIP [ ]
Fully Paid and Non-Assessable Class [ ] Shares
- -----------------------------------------------------------------------
of beneficial interest, with the par value of one-cent ($.01) each, of the
[Name of Series] series of the Nuveen Flagship Multistate Trust I (herein
called the "Trust") transferable on the books of the Trust by the holder
hereof in person or by duly authorized attorney upon surrender of this
certificate properly endorsed. The shares represented by this certificate are
issued and held subject to all of the provisions of the Declaration of Trust
establishing the Trust as a Massachusetts business trust and any amendments
thereto and any designation of classes, and the By-Laws of the Trust, and any
amendments thereto, copies of which are on file with the Transfer Agent, to
all of which the holder by acceptance hereof expressly assents. This
certificate is executed on behalf of the Trust by the officers as officers
and not individually and the obligations hereof are not binding upon any of
the Trustees, officers or shareholders individually but are binding only upon
the assets and property of the Trust. This certificate is not valid unless
countersigned by the Transfer Agent.
WITNESS THE FACsimile signature of its duly authorized officers.
Dated:
Nuveen Flagship Multistate Trust I
Secretary, Nuveen Flagship Chairman of the Board,
Multistate Trust I Nuveen Flagship Multistate Trust I
<PAGE> 2
<PAGE>
Nuveen Flagship Multistate Trust I
[Name of Series]
Nuveen Flagship Multistate Trust I (the "Trust") will furnish to any
shareholder, upon request and without charge, a full statement of the
designations, preferences, limitations as to dividends, qualifications and
terms and conditions of redemption and relative rights and preferences of the
shares of each class or series of the Trust authorized to be issued, so far as
they have been determined, and the authority of the Board of Trustees to
determine the relative rights and preferences of subsequent classes or series.
Any such request should be addressed to the Secretary of the Trust.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of survivorship and not as tenants
in common
UNIF GIFT MIN ACT - _____________ Custodian _____________ under Uniform gifts
(Cust) (Minor)
to Minors Act ___________________
(State)
Additional abbreviations may also be used though not in the above list.
_______________________________________________________________________
For value received, ______________ hereby sell, assign and transfer unto
_______________________________________________________________________
Please insert social security or other identifying number of assignee
_______________________________________________________________________
(Please print or typewrite name and address, including zip code, of
assignee)
_______________________________________________________________________
______________________________________________________________ Shares of
the beneficial interest represented by the within certificate, and do
hereby irrevocably constitute and appoint _____________________________
____________________________________________________________ Attorney to
<PAGE> 3
<PAGE>
transfer the said shares on the books of the within-named Trust with full power
of substitution in the premises.
Dated, _______________________ NOTICE: The signature to this assignment must
correspond with the name as written upon the
face of the certificate in every particular,
without alternation or enlargement or any
change whatever.
Owner ________________________ The signature(s) must be guaranteed by one
of the following entities: U.S. bank, trust
company, credit union, savings association,
or foreign bank having a U.S. correspondent
bank: a U.S. registered securities dealer or
broker, municipal securities dealer or
broker, or government securities dealer or
broker; or a national securities exchange,
registered securities association or clearing
agency.
Signature of Co-Owner, if any
_______________________________
Signature(s) guaranteed by:
________________________________________________________________________________
PLEASE NOTE: This document contains a watermark when viewed at an angle. It is
invalid without this watermark: NUVEEN
________________________________________________________________________________
This Space Must Not Be Covered In Any Way
<PAGE> 1
EXHIBIT 99.6
INVESTMENT MANAGEMENT AGREEMENT
AGREEMENT made this day ___ of ___, l996, by and between NUVEEN FLAGSHIP
MULTISTATE TRUST I, 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 each of the
Fund's series ("Portfolios") as may exist from time to time in accordance with
the Fund's investment objective and policies and limitations relating to such
portfolio, 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 assets of each
Portfolio shall be subject to the Fund's policies, restrictions and limitations
with respect to securities investments as set forth in the Fund's registration
statement on Form N-1A under the Securities Act of 1933 and the Investment
Company Act of 1940 covering the Fund's Portfolios' shares of beneficial
interest, including the Prospectus and Statement of Additional Information
forming a part thereof, all as filed with the Securities and Exchange
Commission and as from time to time amended, and all applicable laws and the
regulations of the Securities and Exchange Commission relating to the
management of registered open-end management investment companies.
<PAGE> 2
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 (other than such services, if any,
provided by the Fund's custodian, transfer agent and shareholder service agent,
and the like) 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 1, the Fund will pay to
the Adviser, at the end of each calendar month, an investment management fee
related to each of the Fund's Portfolios. For each Portfolio, calculated
separately, the fees shall be computed at the rate of:
<TABLE>
<S> <C>
RATE NET ASSETS
------ ----------
.5500% For the first $125 million
.5375% For the next $125 million
.5250% For the next $250 million
.5125% For the next $500 million
.5000% For the next $1 billion
.4750% For assets over $2 billion
</TABLE>
For the month and year in which this Agreement becomes effective, or
terminates, and for any month and year in which a Portfolio is added or
eliminated from the Fund, there shall be an appropriate proration on the basis
of the number of days that the Agreement shall have been in
2
<PAGE> 3
effect, or the Portfolio shall have existed, 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.
Regardless of any of the above provisions, the Adviser guarantees that the
total expenses of each Portfolio in any fiscal year, exclusive of taxes,
interest, brokerage commissions, and extraordinary expenses such as litigation
costs, shall not exceed, and the Adviser undertakes to pay or refund to the
Portfolio any amount up to but not greater than the aggregate fees received by
the Adviser under this Agreement for such fiscal year, the limitation imposed
by any jurisdiction in which the Fund continues to offer and sell shares of the
Portfolio after exceeding such limitation.
The net asset value of each Portfolio shall be calculated as provided in the
Declaration of Trust of the Fund. On each day when net asset value is not
calculated, the net asset value of a share of beneficial interest of a
Portfolio shall be deemed to be the net asset value of such share as of the
close of business on the last day on which such calculation was made for the
purpose of the foregoing computations.
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
<PAGE> 4
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 a Portfolio of the Fund may also be appropriate for other
Portfolios or 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 Fund's
Portfolios and the portfolios of its
4
<PAGE> 5
other investment accounts and funds purchasing securities whenever decisions
are made to purchase or sell securities by a Portfolio and another fund's
portfolio or one or more of such 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 Portfolio or Portfolios
purchasing such securities 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 Portfolios and such other accounts and funds,
the size of investment commitments generally held by the Fund Portfolios 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 ___, 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, with
respect to any Fund Portfolio, by vote of a majority of the outstanding voting
securities of that Portfolio, accompanied by appropriate notice.
5
<PAGE> 6
This Agreement may be terminated, at any time, without the payment of any
penalty, by the Board of Trustees of the Fund, or, with respect to any Fund
Portfolio, by vote of a majority of the outstanding voting securities of that
Portfolio, 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 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. The Adviser and its affiliates reserve the right to grant, at any time, the
use of the name "Nuveen" or the name "Flagship", or any approximation or
abbreviation thereof, to any other investment company or business enterprise.
Upon termination of this Agreement by either party, or by its terms, the Fund
shall thereafter refrain from using any name of the Fund which includes
"Nuveen" or "Flagship" or any approximation or abbreviation thereof, or is
sufficiently similar to such name as to be likely to cause confusion with such
name, and shall not allude in any public statement or advertisement to the
former association.
6
<PAGE> 7
10. 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.
11. 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.
7
<PAGE> 8
IN WITNESS WHEREOF, the Fund and the Adviser have caused this Agreement to
be executed on the day and year above written.
<TABLE>
<S> <C>
NUVEEN FLAGSHIP MULTISTATE TRUST I
by:
---------------------
Vice President
Attest:
- ------------------------
Assistant Secretary
NUVEEN ADVISORY CORP.
by:
---------------------
Vice President
</TABLE>
Attest:
- ------------------------
Assistant Secretary
8
<PAGE> 1
EXHIBIT 99.7
DISTRIBUTION AGREEMENT
AGREEMENT made as of this ______ day of __________, l996 between NUVEEN
FLAGSHIP MULTISTATE TRUST I, a business trust organized under the laws of the
Commonwealth of Massachusetts (the "Fund"), and JOHN NUVEEN & CO. INCORPORATED,
a Delaware corporation (the "Underwriter").
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 appoints the Underwriter its agent for the
distribution of shares of beneficial interest, par value $.0l per share,
including such series or classes of shares as may now or hereafter be
authorized (the "Shares"), in jurisdictions wherein Shares may legally be
offered for sale; provided, however, that the Fund, in its absolute discretion,
may: (a) issue or sell Shares directly to holders of Shares of the Fund upon
such terms and conditions and for such consideration, if any, as it may
determine, whether in connection with the distribution of subscription or
purchase rights, the payment or reinvestment of dividends or distributions, or
otherwise; and (b) issue or sell Shares at net asset value in connection with
merger or consolidation with, or acquisition of the assets of, other investment
companies or similar companies.
2. The Underwriter hereby accepts appointment as agent for the distribution of
the Shares and agrees that it will use its best efforts to sell such part of
the authorized Shares remaining unissued as from time to time shall be
effectively registered under the Securities Act of l933 ("Securities Act"), at
prices determined as hereinafter provided and on terms hereinafter set forth,
all subject to applicable Federal and State laws and regulations and to the
Declaration of Trust of the Fund.
3. The Fund agrees that it will use its best efforts to keep effectively
registered under the Securities Act for sale, as herein contemplated, such
Shares as the Underwriter shall reasonably request and as the Securities and
Exchange Commission shall permit to be so registered.
4. Notwithstanding any other provision hereof, the Fund may terminate,
suspend, or withdraw the offering of the Shares, or Shares of any series or
class, whenever, in its sole discretion, it deems such action to be desirable.
5. The Underwriter shall sell Shares to, or through, brokers, dealers, banks
or other qualified financial intermediaries (hereinafter referred to as
"dealers"), or others, in such manner not inconsistent with the provisions
hereof and the then effective Registration Statement of the Fund under the
Securities Act (and related Prospectus and Statement of Additional Information)
as the Underwriter may determine from time to time, provided that no dealer, or
other person, shall be appointed nor authorized to act as agent of the Fund
without the prior consent of the Fund. The Underwriter shall have the right to
enter into agreements with brokers, dealers and banks (referred to herein as
"dealers") of its choice for the sale of Shares and fix therein the portion of
<PAGE> 2
the sales charge which may be allocated to such dealers; provided that the Fund
shall approve the form of such agreements and shall evidence such approval by
filing said form and any amendments thereto as attachments to this Agreement,
which shall be filed as an exhibit to the Fund's currently effective
registration statement under the Securities Act. Shares sold to dealers shall
be for resale by such dealers only at the public offering price(s) set forth in
the Fund's then current Prospectus. The current forms of such agreements are
attached hereto as Exhibits 1, 2 and 3.
6. Shares offered for sale, or sold by the Underwriter, shall be so offered or
sold at a price per Share determined in accordance with the then current
Prospectus relating to the sale of Shares except as departure from such prices
shall be permitted by the rules and regulations of the Securities and Exchange
Commission. Any public offering price shall be the net asset value per Share
plus a sales charge of not more than 4.75% of such public offering price.
Shares may be sold at net asset value without a sales charge to such class or
classes of investors or in such class or classes of transactions as may be
permitted under applicable rules of the Securities and Exchange Commission and
as described in the then current Prospectus of the Fund. The net asset value
per Share of each series or class shall be calculated in accordance with the
Declaration of Trust of the Fund and shall be determined in the manner, and at
the time, set forth in the then current Prospectus of the Fund relating to such
Shares.
7. The price the Fund shall receive for all Shares purchased from the Fund
shall be the net asset value used in determining the public offering price
applicable to the sale of such Shares. The excess, if any, of the sales price
over the net asset value of Shares sold by the Underwriter as agent shall be
retained by the Underwriter as a commission for its services hereunder. Out of
such commission, the Underwriter may allow commissions or concessions to
dealers in such amounts as the Underwriter shall determine from time to time.
Except as may be otherwise determined by the Underwriter and the Fund from time
to time, such commissions or concessions shall be uniform to all dealers.
8. The Underwriter shall issue and deliver, or cause to be issued and
delivered, on behalf of the Fund such confirmations of sales made by it as
agent, pursuant to this Agreement, as may be required. At, or prior to, the
time of issuance of Shares, the Underwriter will pay, or cause to be paid, to
the Fund the amount due the Fund for the sale of such Shares. Certificates
shall be issued, or Shares registered on the transfer books of the Fund, in
such names and denominations as the Underwriter may specify.
9. The Fund will execute any and all documents, and furnish any and all
information, which may be reasonably necessary in connection with the
qualification of the Shares for sale (including the qualification of the Fund
as a dealer, where necessary or advisable) in such states as the Underwriter
may reasonably request (it being understood that the Fund shall not be
required, without its consent, to comply with any requirement which, in its
opinion, is unduly burdensome).
l0. The Fund will furnish to the Underwriter, from time to time, such
information with respect to the Fund and the Shares as the Underwriter may
reasonably request for use in connection with
<PAGE> 3
the sale of Shares. The Underwriter agrees that it will not use or distribute,
nor will it authorize dealers or others to use, distribute or disseminate, in
connection with the sale of such Shares, any statements other than those
contained in the Fund's current Prospectus and Statement of Additional
Information, except such supplemental literature or advertising as shall be
lawful under Federal and State securities laws and regulations, and that it
will furnish the Fund with copies of all such material.
ll. The Underwriter shall order Shares from the Fund only to the extent that it
shall have received purchase orders therefor. The Underwriter will not make,
nor authorize any dealers or others, to make: (a) any short sale of Shares; or
(b) any sale of Shares to any officer or trustee of the Fund, nor to any
officer or trustee of the Underwriter, or of any corporation or association
furnishing investment advisory, managerial, or supervisory services to the
Fund, nor to any such corporation or association, unless such sales are made in
accordance with the then current Prospectus relating to the sale of such
Shares.
l2. In selling Shares for the account of the Fund, the Underwriter will in all
respects conform to the requirements of all Federal and State laws and the
Rules of Fair Practice of the National Association of Securities Dealers, Inc.
relating to such sales, and will indemnify and save harmless the Fund from any
damage or expense on account of any wrongful act by the Underwriter or any
employee, representative, or agent of the Underwriter. The Underwriter will
observe and be bound by all the provisions of the Declaration of Trust of the
Fund (and of any fundamental policies adopted by the Fund pursuant to the
Investment Company Act of l940, notice of which shall have been given by the
Fund to the Underwriter) which at the time in any way require, limit, restrict,
prohibit or otherwise regulate any action on the part of the Underwriter.
l3. The Underwriter will require each dealer to conform to the provisions
hereof and of the Registration Statement (and related Prospectus) at the time
in effect under the Securities Act with respect to the public offering price of
the Shares, and neither the Underwriter nor any such dealer shall withhold the
placing of purchase orders so as to make a profit thereby.
l4. The Fund will pay, or cause to be paid, expenses (including the fees and
disbursements of its own counsel) of any registration of Shares under the
Securities Act, expenses of qualifying or continuing the qualification of the
Shares for sale and, in connection therewith, of qualifying or continuing the
qualification of the Fund as a dealer or broker under the laws of such states
as may be designated by the Underwriter under the conditions herein specified,
and expenses incident to the issuance of the Shares such as the cost of Share
certificates, issue taxes, and fees of the transfer and shareholder service
agent. The Underwriter will pay, or cause to be paid, all expenses (other than
expenses which any dealer may bear pursuant to any agreement with the
Underwriter) incident to the sale and distribution of the Shares issued or sold
hereunder, including, without limiting the generality of the foregoing, all:
(a) expenses of printing and distributing any Prospectus and Statement of
Additional Information and of preparing, printing and distributing or
disseminating any other literature, advertising and selling aids in connection
with such offering of the Shares for sale (except that such expenses need not
include expenses incurred by the Fund in connection with the preparation,
printing and distribution of any report
<PAGE> 4
or other communication to holders of Shares in their capacity as such), and (b)
expenses of advertising in connection with such offering. No transfer taxes,
if any, which may be payable in connection with the issue or delivery of Shares
sold as herein contemplated, or of the certificates for such Shares, shall be
borne by the Fund, and the Underwriter will indemnify and hold harmless the
Fund against liability for all such transfer taxes.
l5. This agreement shall continue in effect until _________, unless and until
terminated by either party as hereinafter provided, and will continue from
year to year thereafter, but only so long as such continuance is specifically
approved, at least annually, in the manner required by the Investment Company
Act of l940. Either party hereto may terminate this agreement on any date by
giving the other party at least six months' prior written notice of such
termination, specifying the date fixed therefor. Without prejudice to any
other remedies of the Fund in any such event, the Fund may terminate this
agreement at any time immediately upon any failure of fulfillment of any of the
obligations of the Underwriter hereunder.
Without prejudice to any other remedies of the Fund in any such event, the Fund
may terminate this Agreement at any time immediately upon any failure of
fulfillment of any of the obligations of the Underwriter hereunder.
l6. This agreement shall automatically terminate in the event of its
assignment.
l7. Any notice under this agreement shall be in writing, addressed, and
delivered or mailed, postage pre-paid, to the other party at such address as
such other party may designate for the receipt of such notice.
18. The Declaration of Trust of the Fund on file with the Secretary of State of
the Commonwealth of Massachusetts was executed on behalf of the Fund by the
initial trustees of the Fund and not individually, and any obligation of the
Fund shall be binding only upon the assets of the Fund (or applicable series
thereof) and shall not be binding upon any trustee, officer or shareholder of
the Fund. Neither the authorization of any action by the trustees or
shareholders of the Fund nor the execution of this agreement on behalf of the
Fund shall impose any liability upon any Trustee, officer or shareholder of the
Fund.
<PAGE> 5
IN WITNESS WHEREOF, the Fund and the Underwriter have each caused this
agreement to be executed on its behalf as of the day and year first above
written.
NUVEEN FLAGSHIP MULTISTATE TRUST I
By
----------------
Vice President
Attest:
- --------------------------
Assistant Secretary
JOHN NUVEEN & CO. INCORPORATED
By
----------------
Vice President
Attest:
- --------------------------
Assistant Secretary
<PAGE> 6
EXHIBIT A
[NUVEEN LOGO & LETTERHEAD]
NUVEEN TAX-EXEMPT MUTUAL FUNDS
DEALER DISTRIBUTION AND SHAREHOLDER SERVICING AGREEMENT
As principal underwriter of shares of the various Nuveen non-money market
open-end mutual funds, and of the shares of any future such funds
(collectively, the "Funds"), we invite you to join a selling group for the
distribution of shares of common stock of the Funds (the "Shares"). As
exclusive agent of the Funds, we offer to sell you Shares on the following
terms:
1. In all sales of Shares to the public you shall act as dealer for your
own account, and in no transaction shall you have any authority to act as
agent for any Fund, for us or for any other member of the Selling Group.
2. Orders received from you shall be accepted by us only at the public
offering price applicable to each order, as established by the then
current Prospectus of the appropriate Fund, subject to the discounts
provided in such Prospectus. Upon receipt from you of any order to
purchase Shares we shall confirm to you in writing or by wire to be
followed by a confirmation in writing. Additional instructions may be
forwarded to you from time to time. All orders are subject to acceptance
or rejection by us in our sole discretion.
3. You may offer and sell Shares to your customers only at the public
offering price determined in the manner described in the current
Prospectus of the appropriate Fund. Shares will be offered at a public
offering price based upon the net asset value of such Shares plus, with
respect to certain class(es) of Shares, a sales charge from which you
shall receive a discount equal to a percentage of the applicable offering
price as provided in the Prospectus. You may receive a distribution fee
and/or a service fee with respect to certain class(es) of Shares for which
such fees are applicable, as provided in the applicable Prospectus, which
distribution fee and/or service fee shall be payable for such periods and
at such intervals as are from time to time specified by us. Your placement
of an order for Shares after the date of any notice of such amendment
shall conclusively evidence your agreement to be bound thereby.
Reduced sales charges may also be available as a result of a cumulative
discount or pursuant to a letter of intent. Further information as to
such reduced sales charges, if any, is set forth in the appropriate Fund
Prospectus. You agree to advise us promptly as to the amounts of any sales
made by you to the public qualifying for reduced sales charges.
4. By accepting this Agreement, you agree:
(a) That you will purchase Shares only from us;
(b) That you will purchase Shares from us only to cover purchase
orders already received from your customers, or for your own
bona fide investment; and
(c) That you will not withhold placing with us orders received from
your customers so as to profit yourself as a result of such
withholding.
(d) That, with respect to the sale of Shares of Funds that offer
multiple classes of Shares, you will comply with the terms of
the Policies and Procedures with Respect to Sales of Multiple
Classes of Shares, attached hereto as Exhibit A.
5. We will not accept from you any conditional orders for Shares.
6. Payment for Shares ordered from us shall be in New York clearing house
funds and must be received by the Funds' agent, Shareholder Services,
Inc., P. O. Box 5330, Denver, Colorado 80217-5330, within three business
days after our acceptance of your order. If such payment is not received,
we reserve the right, without notice, forthwith to cancel the sale or, at
our option, to cause the Fund to redeem the Shares ordered, in which case
we may hold you responsible for any loss, including loss of profit,
suffered by us as result of your failure to make such payment. If any
Shares confirmed to you under the terms of this agreement are repurchased
by the issuing Fund or by us as agent for the Fund, or are tendered for
repurchase, within seven business days after the date of our confirmation
of the original purchase order, you shall promptly refund to us the full
discount, commission, or other concession, if any, allowed or paid to you
on such Shares.
7. Shares sold hereunder shall be available in book-entry form on the
books of Shareholder Services, Inc. unless other instructions have been
given.
8. No person is authorized to make any representations concerning Shares
or any Fund except those contained in the applicable current Prospectus
and printed information subsequently issued by the appropriate Fund or by
us as information supplemental to such Prospectus. You agree that you
will not offer or sell any Shares except under circumstances that will
result in compliance with the applicable Federal and state securities laws
and that in connection with sales and offers to sell Shares you will
furnish to each person to whom any such sale or offer is made a copy of
the then current Prospectus for the appropriate Fund (as the amended or
supplemented) and will not furnish to any persons any information relating
to Shares which is inconsistent in any respect with the information
contained in the then current Prospectus or cause any advertisement to be
published in any newspaper or posted in any public place without our
consent and the consent of the appropriate Fund. You shall be responsible
for any required filing of such advertising.
<PAGE> 7
9. All sales will be made subject to our receipt of Shares from the
appropriate Fund. We reserve the right, in our discretion, without
notice, to modify, suspend or withdraw entirely the offering of any
Shares, and upon notice to change the price, sales charge, or dealer
discount or to modify, cancel or change the terms of this agreement.
10. Your acceptance of this agreement constitutes a representation that you
are a registered securities dealer and a member in good standing of the
National Association of Securities Dealers, Inc. and agree to comply with
all applicable state and Federal laws, rules and regulations applicable to
transactions hereunder and to the Rules of Fair Practice of the National
Association of Securities Dealers, Inc., including specifically Section
26, Article III thereof. You likewise agree that you will not offer to
sell Shares in any state or other jurisdiction in which they may not
lawfully be offered for sale.
11. You shall provide such office space and equipment, telephone
facilities, personnel and literature distribution as is necessary or
appropriate for providing information and services to your customers.
Such services and assistance may include, but not be limited to,
establishment and maintenance of shareholder accounts and records,
processing purchase and redemption transactions, answering routine
inquiries regarding the Funds, and such other services as may be agreed
upon from time to time and as may be permitted by applicable statute,
rule, or regulation. You shall perform these services in good faith and
with reasonable care. You shall immediately inform the Funds or us of all
written complaints received by you from Fund shareholders relating to the
maintenance of their accounts and shall promptly answer all such
complaints.
12. All communications to us should be sent to 333 W. Wacker Drive,
Chicago, Illinois 60606. Any notice to you shall be duly given if mailed
or telegraphed to you at the address specified by you below.
13. This Agreement shall be construed in accordance with the laws of the
State of Illinois. This Agreement is subject to the Prospectuses of the
Funds from time to time in effect, and, in the event of a conflict, the
terms of the Prospectuses shall control. References herein to the
"Prospectus" of a Fund shall mean the prospectus and statement of
additional information of such Fund as from time to time in effect. Any
changes, modifications or additions reflected in any such Prospectus shall
be effective on the date of such Prospectus (or supplement thereto) unless
specified otherwise. This Agreement shall supersede any prior dealer
distribution agreement with respect to the Funds.
JOHN NUVEEN & CO. INCORPORATED
By:
- --------------------------------------------------------------------------------
We have read the foregoing agreement and accept and agree to the terms and
conditions therein.
Firm Name
- --------------------------------------------------------------------------------
By: Authorized Signature
- --------------------------------------------------------------------------------
Printed name of person signing
- --------------------------------------------------------------------------------
Address
- --------------------------------------------------------------------------------
City State Zip
- --------------------------------------------------------------------------------
Date
- --------------------------------------------------------------------------------
Firm Tax Identification No.
- --------------------------------------------------------------------------------
The above agreement should be executed in duplicate and both copies returned to
us for signature. We will return a fully executed copy to you for your files.
6/6/95
<PAGE> 8
Exhibit A to Nuveen Mutual Funds
DEALER DISTRIBUTION AND
SHAREHOLDER SERVICING AGREEMENT
Policies and Procedures With Respect to
Sales of Multiple Classes of Funds
The Nuveen non-money market open-end mutual funds (the "Funds") have one or
more of the following classes of shares generally available to the public:
Class A Shares, which are normally subject to an up-front sales charge and a
service fee; Class B Shares, which are subject to an asset-based sales charge,
a service fee, and a declining contingent deferred sales charge ("CDSC"); and
Class C Shares, which are subject to an asset-based sales charge, a service
fee, and a 12-month CDSC, it is important for an investor to choose the method
of purchasing shares which best suits his or her particular circumstances. To
assist investors in these decisions, John Nuveen & Co. Incorporated,
underwriter for the Nuveen Mutual Funds, has instituted the following policies
with respect to orders for Fund shares. These policies apply to each
Authorized Dealer which distributes Fund shares.
1. Purchase orders for a single purchaser equal to or exceeding
$1,000,000 should be placed only for Class A shares, unless such
purchase for Class B or Class C Shares has been reviewed and
approved by the Authorized Dealer's appropriate supervisor.
2. Any purchase order for less than $1,000,000 may be for Class A,
Class B or Class C Shares in light of the relevant facts and
circumstances, including:
a) the specific purchase order dollar amount;
b) the length of time the investor expects to hold his or her
Shares;
c) whether the investor expects to reinvest dividends; and
d) any other relevant circumstances such as the availability of
purchases under a letter of intent, a combined discount or a
cumulative discount, as described in the Prospectus for the
Fund, and any anticipated changes in the funds net asset value
per share.
There are instances when one method of purchasing Shares may be more
appropriate than the other. For example, investors who would qualify for a
significant discount from the maximum sales load on Class A Shares might
determine that payment of such a reduced up-front sales charge is preferable to
the payment of a higher ongoing distribution fee on Class B or Class C Shares.
On the other hand, investors who prefer not to pay an up-front sales charge may
wish to defer the sales charge by purchasing Class B or Class C Shares. Those
who plan to redeem their shares within 5 years might consider Class C Shares,
particularly if they do not expect to reinvest dividends in additional shares.
Note that, if an investor anticipates redeeming Class B Shares within a short
period of time such as one year, that investor may bear higher distribution
expenses than if Class A Shares had been purchased. In addition, investors who
intend to hold their shares for a significantly long time may not wish to bear
the higher ongoing-asset-based sales charges of Class B or Class C Shares,
irrespective of the fact that the CDSC that would apply to a redemption of
Class B Shares is reduced over time and is ultimately eliminated, and that the
CDSC that would apply to a redemption of Class C Shares is relatively short in
duration and small in amount.
Appropriate supervisory personnel within your organization must ensure that all
employees receiving investor inquiries about the purchase of shares of the
Funds advise the investor of the available pricing structures offered by the
Funds and the impact of choosing one method over another, including breakpoints
and the availability of letters of intent, combined purchases and cumulative
discounts. In some instances it may be appropriate for a supervisory person to
discuss a purchase with the investor.
These policies are effective immediately with respect to any order for the
purchase of shares of the Funds.
<PAGE> 9
Exhibit A (Page 2)
- ------------------------------------------------------------
NUVEEN TAX-FREE MUTUAL FUNDS
<TABLE>
<CAPTION>
--------------------------
CUSIP QUOTRON
NUMBER SYMBOL
- ------------------------------------------------------------------
<S> <C> <C>
NUVEEN TAX-FREE MONEY MARKET FUNDS
Nuveen Tax-Exempt
Money Market Fund, Inc. 670634104 NUVXX
Nuveen Tax-Free Reserves, Inc. 670639103 NRFXX
Nuveen CA Tax-Free Money Market Fund-
SERVICE PORTFOLIO 67062D303 NCTXX
DISTRIBUTION PORTFOLIO 67062D402 NCTXX
INSTITUTIONAL PORTFOLIO 67062D501 NCTXX
Nuveen MA Tax-Free Money Market Fund-
SERVICE PORTFOLIO 670637107 NMAXX
DISTRIBUTION PORTFOLIO 670637206 NMAXX
INSTITUTIONAL PORTFOLIO 670637305 NMAXX
Nuveen NY Tax-Free Money Market Fund-
SERVICE PORTFOLIO 670637404 NTFXX
DISTRIBUTION PORTFOLIO 670637503 NTFXX
INSTITUTIONAL PORTFOLIO 670637602 NTFXX
- ------------------------------------------------------------------
R SHARE A SHARE B SHARE C SHARE
---------------------------------------------------------------------------------------
CUSIP QUOTRON CUSIP QUOTRON CUSIP QUOTRON CUSIP QUOTRON
NUMBER SYMBOL NUMBER SYMBOL NUMBER SYMBOL NUMBER SYMBOL
- ------------------------------------------------------------------------------------------------------------------------------------
NUVEEN TAX-FREE MUTUAL FUNDS
Nuveen Municipal Bond Fund
Nuveen Flagship All-American
Municipal Bond Fund
Nuveen Flagship Limited Term
Municipal Bond Fund Not Available
Nuveen Flagship Intermediate
Municipal Bond Fund Not Available
Nuveen Flagship AL Municipal Bond Fund
Nuveen Flagship AZ Municipal Bond Fund
Nuveen CA Municipal Bond Fund
Nuveen Flagship CO Municipal Bond Fund
Nuveen Flagship CT Municipal Bond Fund
Nuveen Flagship FL Municipal Bond Fund
Nuveen Flagship FL Intermediate
Municipal Bond Fund Not Available
Nuveen Flagship GA Municipal Bond Fund
Nuveen Flagship KA Municipal Bond Fund
Nuveen Flagship KY Municipal Bond Fund
Nuveen Flagship KY Limited Term
Municipal Bond Fund Not Available
Nuveen Flagship LA Municipal Bond Fund
Nuveen MD Municipal Bond Fund
Nuveen MA Municipal Bond Fund
Nuveen Flagship MI Municipal Bond Fund
Nuveen Flagship MO Municipal Bond Fund
Nuveen Flagship NJ Municipal Bond Fund
Nuveen Flagship NJ Intermediate
Municipal Bond Fund Not Available
Nuveen Flagship NM Municipal Bond Fund
Nuveen Flagship NY Municipal Bond Fund
Nuveen Flagship NC Municipal Bond Fund
Nuveen Flagship OH Municipal Bond Fund
Nuveen Flagship PA Municipal Bond Fund
Nuveen Flagship SC Municipal Bond Fund
Nuveen Flagship TN Municipal Bond Fund
Nuveen Flagship VA Municipal Bond Fund
Nuveen Flagship WI Municipal Bond Fund
- ------------------------------------------------------------------------------------------------------------------------------------
NUVEEN INSURED TAX-FREE MUTUAL FUNDS
Nuveen Insured Municipal Bond Fund 67062G108 NITNX 67062G405 NMBIX 67062G504 #
Nuveen CA Insured Municipal Bond Fund 67062D204 NCIBX 67062D808 # 67062D881 #
Nuveen NY Insured Municipal Bond Fund 67062G306 NINYX 67062G801 NNYIX* 67062G884 #
Nuveen MA Insured Municipal Bond Fund 67062G207 NIMAX 67062G603 # 67062G702 #
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 10
Exhibit A (Page 3)
- -------------------------------------------------------------------------------
NUVEEN EQUITY AND BALANCED MUTUAL FUNDS
<TABLE>
<CAPTION>
R SHARE A SHARE B SHARE C SHARE
-------------------------------------------------------------------------------------------
CUSIP QUOTRON CUSIP QUOTRON CUSIP QUOTRON CUSIP QUOTRON
NUMBER SYMBOL NUMBER SYMBOL NUMBER SYMBOL NUMBER SYMBOL
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GROWTH AND INCOME FUNDS (WILL BECOME AVAILABLE FOR PUBLIC SALE AT SOME LATER DATE.)
Nuveen Growth and Income Stock Fund 67064Y800 # 67064Y503 # 67064Y602 # 67064Y701 #
- --------------------------------------------------------------------------------------------------------------------------------
BALANCED FUNDS (WILL BECOME AVAILABLE FOR PUBLIC SALE AT SOME LATER DATE.)
Nuveen Balanced Stock and Bond Fund 67064Y404 # 67064Y107 # 67064Y206 # 67064Y305 #
Nuveen Balanced Municipal
and Stock Fund 67064Y859 # 67064Y883 # 67064Y875 # 67064Y867 #
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
# Will receive a supplemental listing when the number of class shareholder
accounts is 300 or when the class asset base reaches $1 million.
NOTE: A Quotron Symbol requires 1,000 shareholder accounts or $25 million in
assets.
*Denotes supplemental listing only
<PAGE> 11
EXHIBIT B
[Nuveen logo + letterhead]
<TABLE>
<S> <C>
NUVEEN TAX-EXEMPT MUTUAL FUNDS
DISTRIBUTION AND SHAREHOLDER SERVICING AGREEMENT (Bank Version)
</TABLE>
As principal underwriter of shares of common stock (the "Shares") of the
various Nuveen non-money market open-end mutual funds and any future such funds
(collectively, the "Funds"), we offer to make available Shares for purchase by
your customers on the following terms:
1. In all sales of Shares to the public you shall act as agent for your
customers, and in no transaction shall you have any authority to act as
agent for any Fund or for us. The customers in question are for all purposes
your customers and not customers of John Nuveen & Co. Incorporated. We
shall execute transactions for each of your customers only upon your
authorization, it being understood in all cases that (a) you are acting as
agent for the customer; (b) the transactions are without recourse against
you by the customer; (c) as between you and the customer, the customer will
have full beneficial ownership of the securities; (d) each transaction is
initiated solely upon the order of the customer; and (e) each transaction is
for the account of the customer and not for your account.
2. Orders received from you shall be accepted by us only at the public
offering price applicable to each order, as established by the then current
Prospectus of the appropriate Fund, subject to the discounts provided in
such Prospectus. Upon receipt from you of any order to purchase Shares we
shall confirm to you in writing or by wire to be followed by a confirmation
in writing, and we shall concurrently send to your customer a letter
confirming such order, together with a copy of the appropriate Fund's
current Prospectus. Additional instructions may be forwarded to you from
time to time. All orders are subject to acceptance or rejection by us in
our sole discretion.
3. Members of the general public, including your customers, may
purchase Shares only at the public offering price determined in the manner
described in the current Prospectus of the appropriate Fund. Shares will be
offered at a public offering price based upon the net asset value of such
Shares plus, with respect to certain class(es) of Shares, a sales charge
which, together with the amount of that sales charge to be retained by banks
acting as agent for their customers, is set forth in the Prospectus. You
may receive a distribution fee and/or a service fee with respect to certain
class(es) of Shares for which such fees are applicable, as provided in the
applicable Prospectus, which distribution fee and/or service fee shall be
payable for such periods and at such intervals as are from time to time
specified by us. Your placement of an order for Shares after the date of any
notice of such amendment shall conclusively evidence your agreement to be
bound thereby. Reduced sales charges may also be available as a result of
a cumulative discount or pursuant to a letter of intent. Further
information as to such reduced sales charges, if any, is set forth in the
appropriate Fund Prospectus. You agree to advise us promptly as to the
amounts of any sales made by or though you to the public qualifying for
reduced sales charges.
4. By accepting this Agreement, you agree:
(a) That you will purchase Shares only from us, and only to cover
purchase orders already received from your customers;
(b) That you will not withhold placing with us orders received from
your customers so as to profit yourself as a result of such
withholding; and
(c) That, with respect to the sale of Shares of Funds that offer
multiple classes of Shares, you will comply with the terms of the
Policies and Procedures with Respect to Sales of Multiple Classes of
Shares, attached hereto as Exibit A.
5. We will not accept from you any conditional orders for Shares.
6. Payment for Shares ordered from us shall be in New York clearing
house funds and must be received by the Funds' agent, Shareholder Services,
Inc., P. O. Box 5330, Denver, Colorado 80217-5330, within three business
days after our acceptance of your order. If such payment is not received,
we reserve the right, without notice, forthwith to cancel the sale or, at
our option, to cause the Fund to redeem the Shares ordered, in which case we
may hold you responsible for any loss, including loss of profit, suffered by
us as result of your or your customer's failure to make such payment. If
any Shares confirmed to you or your customer under the terms of this
agreement are repurchased by the issuing Fund or by us as agent for the
Fund, or are tendered for repurchase, within seven business days after the
date of our confirmation of the original purchase order, you shall promptly
refund to us the full discount, commission, or other concession, if any,
allowed or paid to you on such Shares.
7. Shares sold hereunder shall be available in book-entry form on the books of
Shareholder Services, Inc. unless other instructions have been given.
8. No person is authorized to make any representations concerning
Shares or any Fund except those contained in the applicable current
Prospectus and printed information issued by the appropriate Fund or by us
as information supplemental to such Prospectus. You agree that you will not
offer or sell any Shares except under circumstances that will result in
compliance with the applicable Federal and state securities laws and that in
connection with sales and offers to sell Shares you will furnish to each
person to whom any such sale or offer is made a copy of the then current
Prospectus for the appropriate Fund (as amended or supplemented) and will
not furnish to any persons any information relating to Shares which is
inconsistent in any respect with the information contained in the then
current Prospectus or cause any
<PAGE> 12
advertisement to be published in any newspaper or posted in any public
place without our consent and the consent of the appropriate Fund. You
shall be responsible for any required filing of such advertising.
9. All sales will be made subject to our receipt of Shares from the
appropriate Fund. We reserve the right, in our discretion, without notice,
to modify, suspend or withdraw entirely the offering of any Shares, and
upon notice to change the price, sales charge, or dealer discount or to
modify, cancel or change the terms of this agreement.
10. Your acceptance of this agreement constitutes a representation that
you are a bank as defined in Section 3(a)(6) of the Securities Exchange Act
of 1934, as amended, and are duly authorized to engage in the transactions
to be performed hereunder. You hereby agree to comply with all applicable
state and Federal laws, rules and regulations applicable to transactions
hereunder. You likewise agree that you will not make Shares available in
any state or other jurisdiction in which they may not lawfully be offered
for sale.
11. You shall provide such office space and equipment, telephone
facilities, personnel and literature distribution as is necessary or
appropriate for providing information and services to your customers. Such
services and assistance may include, but not be limited to, establishment
and maintenance of shareholder accounts and records, processing purchase
and redemption transactions, answering routine inquiries regarding the
Funds, and such other services as may be agreed upon from time to time and
as may be permitted by applicable statute, rule, or regulation. You shall
perform these services in good faith and with reasonable care. You shall
immediately inform the Funds or us of all written complaints received by
you from Fund shareholders relating to the maintenance of their accounts
and shall promptly answer all such complaints.
12. All communications to us should be sent to 333 W. Wacker Drive,
Chicago, Illinois 60606. Any notice to you shall be duly given if mailed
or telegraphed to you at the address specified by you below.
13. This Agreement shall be construed in accordance with the laws of
the State of Illinois. This Agreement is subject to the Prospectuses of
the Funds from time to time in effect, and, in the event of a conflict, the
terms of the Prospectuses shall control. References herein to the
"Prospectus" of a Fund shall mean the prospectus and statement of
additional information of such Fund as from time to time in effect. Any
changes, modifications or additions reflected in any such Prospectus shall
be effective on the date of such Prospectus (or supplement thereto) unless
specified otherwise. This Agreement shall supersede any prior dealer
distribution agreement with respect to the Funds.
JOHN NUVEEN & CO. INCORPORATED
By:
- -------------------------------------------------------------------------------
We have read the foregoing agreement and accept and agree to the terms and
conditions therein.
Firm Name
- -------------------------------------------------------------------------------
By: Authorized Signature
- -------------------------------------------------------------------------------
Printed name of person signing
- -------------------------------------------------------------------------------
Address
- -------------------------------------------------------------------------------
City State Zip
- -------------------------------------------------------------------------------
Date
- -------------------------------------------------------------------------------
Firm Tax Identification No.
- -------------------------------------------------------------------------------
The above agreement should be executed in duplicate and both copies returned to
us for signature. We will return a fully executed copy to you for your files.
6/6/95
<PAGE> 13
Exhibit A to Nuveen Mutual Funds
DEALER DISTRIBUTION AND
SHAREHOLDER SERVICING AGREEMENT
Policies and Procedures With Respect to
Sales of Multiple Classes of Funds
The Nuveen non-money market open-end mutual funds (the "Funds") have one or
more of the following classes of shares generally available to the public:
Class A Shares, which are normally subject to an up-front sales charge and a
service fee; Class B Shares, which are subject to an asset-based sales charge,
a service fee, and a declining contingent deferred sales charge ("CDSC"); and
Class C Shares, which are subject to an asset-based sales charge, a service
fee, and a 12-month CDSC, it is important for an investor to choose the method
of purchasing shares which best suits his or her particular circumstances. To
assist investors in these decisions, John Nuveen & Co. Incorporated,
underwriter for the Nuveen Mutual Funds, has instituted the following policies
with respect to orders for Fund shares. These policies apply to each
Authorized Dealer which distributes Fund shares.
1. Purchase orders for a single purchaser equal to or exceeding
$1,000,000 should be placed only for Class A shares, unless such
purchase for Class B or Class C Shares has been reviewed and
approved by the Authorized Dealer's appropriate supervisor.
2. Any purchase order for less than $1,000,000 may be for Class A,
Class B or Class C Shares in light of the relevant facts and
circumstances, including:
a) the specific purchase order dollar amount;
b) the length of time the investor expects to hold his or her
Shares;
c) whether the investor expects to reinvest dividends; and
d) any other relevant circumstances such as the availability of
purchases under a letter of intent, a combined discount or a
cumulative discount, as described in the Prospectus for the
Fund, and any anticipated changes in the funds net asset value
per share.
There are instances when one method of purchasing Shares may be more
appropriate than the other. For example, investors who would qualify for a
significant discount from the maximum sales load on Class A Shares might
determine that payment of such a reduced up-front sales charge is preferable to
the payment of a higher ongoing distribution fee on Class B or Class C Shares.
On the other hand, investors who prefer not to pay an up-front sales charge may
wish to defer the sales charge by purchasing Class B or Class C Shares. Those
who plan to redeem their shares within 5 years might consider Class C Shares,
particularly if they do not expect to reinvest dividends in additional shares.
Note that, if an investor anticipates redeeming Class B Shares within a short
period of time such as one year, that investor may bear higher distribution
expenses than if Class A Shares had been purchased. In addition, investors who
intend to hold their shares for a significantly long time may not wish to bear
the higher ongoing-asset-based sales charges of Class B or Class C Shares,
irrespective of the fact that the CDSC that would apply to a redemption of
Class B Shares is reduced over time and is ultimately eliminated, and that the
CDSC that would apply to a redemption of Class C Shares is relatively short in
duration and small in amount.
Appropriate supervisory personnel within your organization must ensure that all
employees receiving investor inquiries about the purchase of shares of the
Funds advise the investor of the available pricing structures offered by the
Funds and the impact of choosing one method over another, including breakpoints
and the availability of letters of intent, combined purchases and cumulative
discounts. In some instances it may be appropriate for a supervisory person to
discuss a purchase with the investor.
These policies are effective immediately with respect to any order for the
purchase of shares of the Funds.
<PAGE> 14
Exhibit A (Page 2)
- ----------------------------------------------
NUVEEN TAX-FREE MUTUAL FUNDS
<TABLE>
<CAPTION>
<S> <C> <C>
--------------------------
CUSIP QUOTRON
NUMBER SYMBOL
- ------------------------------------------------------------------
NUVEEN TAX-FREE MONEY MARKET FUNDS
Nuveen Tax-Exempt
Money Market Fund, Inc. 670634104 NUVXX
Nuveen Tax-Free Reserves, Inc. 670639103 NRFXX
Nuveen CA Tax-Free Money Market Fund-
SERVICE PORTFOLIO 67062D303 NCTXX
DISTRIBUTION PORTFOLIO 67062D402 NCTXX
INSTITUTIONAL PORTFOLIO 67062D501 NCTXX
Nuveen MA Tax-Free Money Market Fund-
SERVICE PORTFOLIO 670637107 NMAXX
DISTRIBUTION PORTFOLIO 670637206 NMAXX
INSTITUTIONAL PORTFOLIO 670637305 NMAXX
Nuveen NY Tax-Free Money Market Fund-
SERVICE PORTFOLIO 670637404 NTFXX
DISTRIBUTION PORTFOLIO 670637503 NTFXX
INSTITUTIONAL PORTFOLIO 670637602 NTFXX
- ------------------------------------------------------------------
R SHARE A SHARE B SHARE C SHARE
--------------------------------------------------------------------------------------
CUSIP QUOTRON CUSIP QUOTRON CUSIP QUOTRON CUSIP QUOTRON
NUMBER SYMBOL NUMBER SYMBOL NUMBER SYMBOL NUMBER SYMBOL
- -----------------------------------------------------------------------------------------------------------------------------------
NUVEEN TAX-FREE MUTUAL FUNDS
Nuveen Municipal Bond Fund
Nuveen Flagship All-American
Municipal Bond Fund
Nuveen Flagship Limited Term
Municipal Bond Fund Not Available
Nuveen Flagship Intermediate
Municipal Bond Fund Not Available
Nuveen Flagship AL Municipal Bond Fund
Nuveen Flagship AZ Municipal Bond Fund
Nuveen CA Municipal Bond Fund
Nuveen Flagship CO Municipal Bond Fund
Nuveen Flagship CT Municipal Bond Fund
Nuveen Flagship FL Municipal Bond Fund
Nuveen Flagship FL Intermediate
Municipal Bond Fund Not Available
Nuveen Flagship GA Municipal Bond Fund
Nuveen Flagship KA Municipal Bond Fund
Nuveen Flagship KY Municipal Bond Fund
Nuveen Flagship KY Limited Term
Municipal Bond Fund Not Available
Nuveen Flagship LA Municipal Bond Fund
Nuveen MD Municipal Bond Fund
Nuveen MA Municipal Bond Fund
Nuveen Flagship MI Municipal Bond Fund
Nuveen Flagship MO Municipal Bond Fund
Nuveen Flagship NJ Municipal Bond Fund
Nuveen Flagship NJ Intermediate
Municipal Bond Fund Not Available
Nuveen Flagship NM Municipal Bond Fund
Nuveen Flagship NY Municipal Bond Fund
Nuveen Flagship NC Municipal Bond Fund
Nuveen Flagship OH Municipal Bond Fund
Nuveen Flagship PA Municipal Bond Fund
Nuveen Flagship SC Municipal Bond Fund
Nuveen Flagship TN Municipal Bond Fund
Nuveen Flagship VA Municipal Bond Fund
Nuveen Flagship WI Municipal Bond Fund
- -----------------------------------------------------------------------------------------------------------------------------------
NUVEEN INSURED TAX-FREE MUTUAL FUNDS
Nuveen Insured Municipal Bond Fund 67062G108 NITNX 67062G405 NMBIX 67062G504 #
Nuveen CA Insured Municipal Bond Fund 67062D204 NCIBX 67062D808 # 67062D881 #
Nuveen NY Insured Municipal Bond Fund 67062G306 NINYX 67062G801 NNYIX* 67062G884 #
Nuveen MA Insured Municipal Bond Fund 67062G207 NIMAX 67062G603 # 67062G702 #
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 15
Exhibit A (Page 3)
- --------------------------------------------------------------------------------
NUVEEN EQUITY AND BALANCED MUTUAL FUNDS
<TABLE>
<CAPTION>
R SHARE A SHARE B SHARE C SHARE
-------------------------------------------------------------------------------------------
CUSIP QUOTRON CUSIP QUOTRON CUSIP QUOTRON CUSIP QUOTRON
NUMBER SYMBOL NUMBER SYMBOL NUMBER SYMBOL NUMBER SYMBOL
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GROWTH AND INCOME FUNDS (WILL BECOME AVAILABLE FOR PUBLIC SALE AT SOME LATER DATE.)
Nuveen Growth and Income Stock Fund 67064Y800 # 67064Y503 # 67064Y602 # 67064Y701 #
- --------------------------------------------------------------------------------------------------------------------------------
BALANCED FUNDS (WILL BECOME AVAILABLE FOR PUBLIC SALE AT SOME LATER DATE.)
Nuveen Balanced Stock and Bond Fund 67064Y404 # 67064Y107 # 67064Y206 # 67064Y305 #
Nuveen Balanced Municipal
and Stock Fund 67064Y859 # 67064Y883 # 67064Y875 # 67064Y867 #
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
# Will receive a supplemental listing when the number of class shareholder
accounts is 300 or when the class asset base reaches $1 million.
NOTE: A Quotron Symbol requires 1,000 shareholder accounts or $25 million in
assets.
*Denotes supplemental listing only
<PAGE> 16
EXHIBIT C
[NUVEEN LOGO & LETTERHEAD]
NUVEEN TAX-EXEMPT MUTUAL FUNDS
DISTRIBUTION AND SHAREHOLDER SERVICING AGREEMENT (Version for Bank-Affiliated
Broker-Dealers)
As principal underwriter of shares of common stock (the "Shares") of the
various Nuveen non-money market open-end mutual funds and any future such funds
(collectively, the "Funds"), we offer to make available Shares for purchase by
your customers on the following terms:
1. In all sales of Shares to the public you shall act as agent for your
customers, and in no transaction shall you have any authority to act as
agent for any Fund or for us. The customers in question are for all
purposes your customers and not customers of John Nuveen & Co.
Incorporated. We shall execute transactions for each of your customers
only upon your authorization, it being understood in all cases that (a)
you are acting as agent for the customer; (b) the transactions are without
recourse against you by the customer; (c) as between you and the customer,
the customer will have full beneficial ownership of the securities; (d)
each transaction is initiated solely upon the order of the customer; and
(e) each transaction is for the account of the customer and not for your
account.
2. Orders received from you shall be accepted by us only at the public
offering price applicable to each order, as established by the then
current Prospectus of the appropriate Fund, subject to the discounts
provided in such Prospectus. Upon receipt from you of any order to
purchase Shares we shall confirm to you in writing or by wire to be
followed by a confirmation in writing, and we shall concurrently send to
your customer a letter confirming such order, together with a copy of the
appropriate Fund's current Prospectus. Additional instructions may be
forwarded to you from time to time. All orders are subject to acceptance
or rejection by us in our sole discretion.
3. Members of the general public, including your customers, may purchase
Shares only at the public offering price determined in the manner
described in the current Prospectus of the appropriate Fund. Shares will
be offered at a public offering price based upon the net asset value of
such Shares plus, with respect to certain class(es) of Shares, a sales
charge which, together with the amount of that sales charge to be retained
by banks or bank-affiliated broker-dealers acting as agent for their
customers, is set forth in the Prospectus. You may receive a distribution
fee and/or a service fee with respect to certain class(es) of Shares for
which such fees are applicable, as provided in the applicable Prospectus,
which distribution fee and/or service fee shall be payable for such
periods and at such intervals as are from time to time specified by us.
Your placement of an order for Shares after the date of any notice of such
amendment shall conclusively evidence your agreement to be bound thereby.
Reduced sales charges may also be available as a result of a cumulative
discount or pursuant to a letter of intent. Further information as to
such reduced sales charges, if any, is set forth in the appropriate Fund
Prospectus. You agree to advise us promptly as to the amounts of any
sales made by or though you to the public qualifying for reduced sales
charges.
4. By accepting this Agreement, you agree:
(a) That you will purchase Shares only from us, and only to cover
purchase orders already received from your customers;
(b) That you will not withhold placing with us orders received from
your customers so as to profit yourself as a result of such withholding;
and
(c) That, with respect to the sale of Shares of Funds that offer
multiple classes of Shares, you will comply with the terms of the
Policies and Procedures with Respect to Sales of Multiple Classes of
Shares, attached hereto as Exhibit A.
5. We will not accept from you any conditional orders for Shares.
6. Payment for Shares ordered from us shall be in New York clearing house
funds and must be received by the Funds' agent, Shareholder Services, Inc.,
P. O. Box 5330, Denver, Colorado 80217-5330, within three business days
after our acceptance of your order. If such payment is not received, we
reserve the right, without notice, forthwith to cancel the sale or, at our
option, to cause the Fund to redeem the Shares ordered, in which case we
may hold you responsible for any loss, including loss of profit, suffered
by us as result of your or your customer's failure to make such payment.
If any Shares confirmed to you or your customer under the terms of this
agreement are repurchased by the issuing Fund or by us as agent for the
Fund, or are tendered for repurchase, within seven business days after the
date of our confirmation of the original purchase order, you shall promptly
refund to us the full discount, commission, or other concession, if any,
allowed or paid to you on such Shares.
7. Shares sold hereunder shall be available in book-entry form on the books
of Shareholder Services, Inc. unless other instructions have been given.
8. No person is authorized to make any representations concerning Shares or
any Fund except those contained in the applicable current Prospectus and
printed information issued by the appropriate Fund or by us as information
supplemental to such Prospectus. You agree that you will not offer or sell
any Shares except under circumstances that will result in compliance with
the applicable Federal and state securities laws and that in connection
with sales and offers to sell Shares you will furnish to each person to
whom any such sale or offer is made a copy of the then current Prospectus
for the appropriate Fund (as amended or supplemented) and will not furnish
to any persons any information relating to Shares
<PAGE> 17
which is inconsistent in any respect with the information contained in
the then current Prospectus or cause any advertisement to be published in
any newspaper or posted in any public place without our consent and the
consent of the appropriate Fund. You shall be responsible for any
required filing of such advertising.
9. All sales will be made subject to our receipt of Shares from the
appropriate Fund. We reserve the right, in our discretion, without
notice, to modify, suspend or withdraw entirely the offering of any
Shares, and upon notice to change the price, sales charge, or dealer
discount or to modify, cancel or change the terms of this agreement.
10. Your acceptance of this agreement constitutes a representation that you
are a registered securities brokers-dealer and a member in good standing
of the National Association of Securities Dealers, Inc. and agree to
comply with all state and Federal laws, rules and regulations applicable
to transactions hereunder and with the Rules of Fair Practice of the NASD,
including specifically Section 26 of Article III thereof. You likewise
agree that you will not offer to sell Shares in any state or other
jurisdiction in which they may not lawfully be offered for sale. We agree
to advise you currently of the identity of those states and jurisdictions
in which the Shares may lawfully be offered for sale.
11. You shall provide such office space and equipment, telephone
facilities, personnel and literature distribution as is necessary or
appropriate for providing information and services to your customers.
Such services and assistance may include, but not be limited to,
establishment and maintenance of shareholder accounts and records,
processing purchase and redemption transactions, answering routine
inquiries regarding the Funds, and such other services as may be agreed
upon from time to time and as may be permitted by applicable statute,
rule, or regulation. You shall perform these services in good faith and
with reasonable care. You shall immediately inform the Funds or us of all
written complaints received by you from Fund shareholders relating to the
maintenance of their accounts and shall promptly answer all such
complaints.
12. All communications to us should be sent to 333 W. Wacker Drive,
Chicago, Illinois 60606. Any notice to you shall be duly given if mailed
or telegraphed to you at the address specified by you below.
13. This Agreement shall be construed in accordance with the laws of the
State of Illinois. This Agreement is subject to the Prospectuses of the
Funds from time to time in effect, and, in the event of a conflict, the
terms of the Prospectuses shall control. References herein to the
"Prospectus" of a Fund shall mean the prospectus and statement of
additional information of such Fund as from time to time in effect. Any
changes, modifications or additions reflected in any such Prospectus shall
be effective on the date of such Prospectus (or supplement thereto) unless
specified otherwise. This Agreement shall supersede any prior dealer
distribution agreement with respect to the Funds.
JOHN NUVEEN & CO. INCORPORATED
By:
- --------------------------------------------------------------------------------
We have read the foregoing agreement and accept and agree to the terms and
conditions therein.
Firm Name
- --------------------------------------------------------------------------------
By: Authorized Signature
- --------------------------------------------------------------------------------
Printed name of person signing
- --------------------------------------------------------------------------------
Address
- --------------------------------------------------------------------------------
City State Zip
- --------------------------------------------------------------------------------
Date
- --------------------------------------------------------------------------------
Firm Tax Identification No.
The above agreement should be executed in duplicate and both copies returned to
us for signature. We will return a fully executed copy to you for your files.
<PAGE> 18
Exhibit A to Nuveen Mutual Funds
DEALER DISTRIBUTION AND
SHAREHOLDER SERVICING AGREEMENT
Policies and Procedures With Respect to
Sales of Multiple Classes of Funds
The Nuveen non-money market open-end mutual funds (the "Funds") have one or
more of the following classes of shares generally available to the public:
Class A Shares, which are normally subject to an up-front sales charge and a
service fee; Class B Shares, which are subject to an asset-based sales charge,
a service fee, and a declining contingent deferred sales charge ("CDSC"); and
Class C Shares, which are subject to an asset-based sales charge, a service
fee, and a 12-month CDSC, it is important for an investor to choose the method
of purchasing shares which best suits his or her particular circumstances. To
assist investors in these decisions, John Nuveen & Co. Incorporated,
underwriter for the Nuveen Mutual Funds, has instituted the following policies
with respect to orders for Fund shares. These policies apply to each
Authorized Dealer which distributes Fund shares.
1. Purchase orders for a single purchaser equal to or exceeding
$1,000,000 should be placed only for Class A shares, unless such
purchase for Class B or Class C Shares has been reviewed and
approved by the Authorized Dealer's appropriate supervisor.
2. Any purchase order for less than $1,000,000 may be for Class A,
Class B or Class C Shares in light of the relevant facts and
circumstances, including:
a) the specific purchase order dollar amount;
b) the length of time the investor expects to hold his or her
Shares;
c) whether the investor expects to reinvest dividends; and
d) any other relevant circumstances such as the availability of
purchases under a letter of intent, a combined discount or a
cumulative discount, as described in the Prospectus for the
Fund, and any anticipated changes in the funds net asset value
per share.
There are instances when one method of purchasing Shares may be more
appropriate than the other. For example, investors who would qualify for a
significant discount from the maximum sales load on Class A Shares might
determine that payment of such a reduced up-front sales charge is preferable to
the payment of a higher ongoing distribution fee on Class B or Class C Shares.
On the other hand, investors who prefer not to pay an up-front sales charge may
wish to defer the sales charge by purchasing Class B or Class C Shares. Those
who plan to redeem their shares within 5 years might consider Class C Shares,
particularly if they do not expect to reinvest dividends in additional shares.
Note that, if an investor anticipates redeeming Class B Shares within a short
period of time such as one year, that investor may bear higher distribution
expenses than if Class A Shares had been purchased. In addition, investors who
intend to hold their shares for a significantly long time may not wish to bear
the higher ongoing-asset-based sales charges of Class B or Class C Shares,
irrespective of the fact that the CDSC that would apply to a redemption of
Class B Shares is reduced over time and is ultimately eliminated, and that the
CDSC that would apply to a redemption of Class C Shares is relatively short in
duration and small in amount.
Appropriate supervisory personnel within your organization must ensure that all
employees receiving investor inquiries about the purchase of shares of the
Funds advise the investor of the available pricing structures offered by the
Funds and the impact of choosing one method over another, including breakpoints
and the availability of letters of intent, combined purchases and cumulative
discounts. In some instances it may be appropriate for a supervisory person to
discuss a purchase with the investor.
These policies are effective immediately with respect to any order for the
purchase of shares of the Funds.
<PAGE> 19
Exhibit A (Page 2)
- ----------------------------
NUVEEN TAX-FREE MUTUAL FUNDS
<TABLE>
<CAPTION>
<S> <C> <C>
--------------------------
CUSIP QUOTRON
NUMBER SYMBOL
- ------------------------------------------------------------------
NUVEEN TAX-FREE MONEY MARKET FUNDS
Nuveen Tax-Exempt
Money Market Fund, Inc. 670634104 NUVXX
Nuveen Tax-Free Reserves, Inc. 670639103 NRFXX
Nuveen CA Tax-Free Money Market Fund-
SERVICE PORTFOLIO 67062D303 NCTXX
DISTRIBUTION PORTFOLIO 67062D402 NCTXX
INSTITUTIONAL PORTFOLIO 67062D501 NCTXX
Nuveen MA Tax-Free Money Market Fund-
SERVICE PORTFOLIO 670637107 NMAXX
DISTRIBUTION PORTFOLIO 670637206 NMAXX
INSTITUTIONAL PORTFOLIO 670637305 NMAXX
Nuveen NY Tax-Free Money Market Fund-
SERVICE PORTFOLIO 670637404 NTFXX
DISTRIBUTION PORTFOLIO 670637503 NTFXX
INSTITUTIONAL PORTFOLIO 670637602 NTFXX
- ------------------------------------------------------------------
R SHARE A SHARE B SHARE C SHARE
-------------------------------------------------------------------------------------
CUSIP QUOTRON CUSIP QUOTRON CUSIP QUOTRON CUSIP QUOTRON
NUMBER SYMBOL NUMBER SYMBOL NUMBER SYMBOL NUMBER SYMBOL
- ----------------------------------------------------------------------------------------------------------------------------------
NUVEEN TAX-FREE MUTUAL FUNDS
Nuveen Municipal Bond Fund
Nuveen Flagship All-American
Municipal Bond Fund
Nuveen Flagship Limited Term
Municipal Bond Fund Not Available
Nuveen Flagship Intermediate
Municipal Bond Fund Not Available
Nuveen Flagship AL Municipal Bond Fund
Nuveen Flagship AZ Municipal Bond Fund
Nuveen CA Municipal Bond Fund
Nuveen Flagship CO Municipal Bond Fund
Nuveen Flagship CT Municipal Bond Fund
Nuveen Flagship FL Municipal Bond Fund
Nuveen Flagship FL Intermediate
Municipal Bond Fund Not Available
Nuveen Flagship GA Municipal Bond Fund
Nuveen Flagship KA Municipal Bond Fund
Nuveen Flagship KY Municipal Bond Fund
Nuveen Flagship KY Limited Term
Municipal Bond Fund Not Available
Nuveen Flagship LA Municipal Bond Fund
Nuveen MD Municipal Bond Fund
Nuveen MA Municipal Bond Fund
Nuveen Flagship MI Municipal Bond Fund
Nuveen Flagship MO Municipal Bond Fund
Nuveen Flagship NJ Municipal Bond Fund
Nuveen Flagship NJ Intermediate
Municipal Bond Fund Not Available
Nuveen Flagship NM Municipal Bond Fund
Nuveen Flagship NY Municipal Bond Fund
Nuveen Flagship NC Municipal Bond Fund
Nuveen Flagship OH Municipal Bond Fund
Nuveen Flagship PA Municipal Bond Fund
Nuveen Flagship SC Municipal Bond Fund
Nuveen Flagship TN Municipal Bond Fund
Nuveen Flagship VA Municipal Bond Fund
Nuveen Flagship WI Municipal Bond Fund
- ----------------------------------------------------------------------------------------------------------------------------------
NUVEEN INSURED TAX-FREE MUTUAL FUNDS
Nuveen Insured Municipal Bond Fund 67062G108 NITNX 67062G405 NMBIX 67062G504 #
Nuveen CA Insured Municipal Bond Fund 67062D204 NCIBX 67062D808 # 67062D881 #
Nuveen NY Insured Municipal Bond Fund 67062G306 NINYX 67062G801 NNYIX* 67062G884 #
Nuveen MA Insured Municipal Bond Fund 67062G207 NIMAX 67062G603 # 67062G702 #
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 20
Exhibit A (Page 3)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nuveen Equity and Balanced Mutual Funds
R SHARE A SHARE B SHARE C SHARE
-------------------------------------------------------------------------------------------
CUSIP QUOTRON CUSIP QUOTRON CUSIP QUOTRON CUSIP QUOTRON
NUMBER SYMBOL NUMBER SYMBOL NUMBER SYMBOL NUMBER SYMBOL
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GROWTH AND INCOME FUNDS (WILL BECOME AVAILABLE FOR PUBLIC SALE AT SOME LATER DATE.)
Nuveen Growth and Income Stock Fund 67064Y800 # 67064Y503 # 67064Y602 # 67064Y701 #
- --------------------------------------------------------------------------------------------------------------------------------
BALANCED FUNDS (WILL BECOME AVAILABLE FOR PUBLIC SALE AT SOME LATER DATE.)
Nuveen Balanced Stock and Bond Fund 67064Y404 # 67064Y107 # 67064Y206 # 67064Y305 #
Nuveen Balanced Municipal
and Stock Fund 67064Y859 # 67064Y883 # 67064Y875 # 67064Y867 #
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
# Will receive a supplemental listing when the number of class shareholder
accounts is 300 or when the class asset base reaches $1 million.
NOTE: A Quotron Symbol requires 1,000 shareholder accounts or $25 million in
assets.
*Denotes supplemental listing only
<PAGE> 1
EXHIBIT 99.9
CUSTODIAN CONTRACT
This Contract between__________________________, a business trust
organized and existing under the laws of Massachusetts, having its principal
place of business at ______________ hereinafter called the "Trust", and State
Street Bank and Trust Company, a Massachusetts trust company, having its
principal place of business at 225 Franklin Street, Boston, Massachusetts,
02110, hereinafter called the "Custodian",
WITNESSETH:
WHEREAS, the Trust is authorized to issue shares in ________ separate
series, with each such series representing interests in a separate
portfolio of securities and other assets; and
WHEREAS, the Trust intends to initially offer shares in series, the
_____________________ (such series, together with all other series
subsequently established by the Trust and made subject to this Contract
in accordance with paragraph 13, being herein referred to as the "Trust(s)";
NOW THEREFORE, in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It
The Trust hereby employs the Custodian as the custodian of its assets
pursuant to the provisions of the Declaration of Trust. The Trust agrees to
deliver to the Custodian all securities and cash owned by it, and all payments
of income, payments of principal or capital distributions received by it with
respect to all securities owned by the Trust from time to time, and the cash
consideration received by it for such new or treasury shares of capital stock,
$ par value, ("Shares") of the Trust as may be issued or sold from time
to time. The Custodian shall not be responsible for any property of the Trust
held or received by the Trust and not delivered to the Custodian. Upon receipt
of "Proper Instructions" (within the meaning of Section 2.16), the Custodian
shall from time to time employ one or more sub-custodians, but only in
accordance with an applicable vote by the Board of Trustees of the Trust, and
provided that the Custodian shall have no more or less responsibility or
liability to the Trust on account of any actions or omissions of any
sub-custodian so employed than any such sub-custodian has to the Custodian.
2. Duties of the Custodian with Respect to Property of the Trust Held By
the Custodian
2.1 Holding Securities. The Custodian shall hold and physically segregate
for the account of the Trust all non-cash property, including all
securities owned by the Trust, other than securities which are maintained
pursuant to Section 2.12 in a clearing agency which acts as a securities
depository or in a book-entry system authorized by the U.S. Department of
the Treasury, collectively referred to herein as "Securities System".
<PAGE> 2
2.2 Delivery of Securities. The Custodian shall release and deliver
securities owned by the Trust held by the Custodian or in a Securities
System account of the Custodian only upon receipt of Proper Instructions,
which may be continuing instructions when deemed appropriate by the
parties, and only in the following cases:
1) Upon sale of such securities for the account of the Trust and
receipt of payment therefore;
2) Upon the receipt of payment in connection with any
repurchase agreement related to such securities entered into by the
Trust;
3) In the case of a sale effected through a Securities System,
in accordance with the provisions of Section 2.12 hereof;
4) To the depository agent in connection with tender or other
similar offers for portfolio securities of the Trust;
5) To the issuer thereof or its agent when such securities are
called, redeemed, retired or otherwise become payable; provided
that, in any such case, the cash or other consideration is
to be delivered to the Custodian;
6) To the issuer thereof, or its agent, for transfer into the
name of the Trust or into the name of any nominee or nominees of
the Custodian or into the name or nominee name of any agent
appointed pursuant to Section 2.11 or into the name or nominee name
of any sub-custodian appointed pursuant to Article t; or for
exchange for a different number of bonds, certificates or other
evidence representing the same aggregate face amount or number of
units; provided that, in any such case, the new securities are to
be delivered to the Custodian;
7) To the broker selling the same for examination in accordance
with the "street delivery" custom;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment of
the securities of the issuer of such securities, or pursuant to
provisions for conversion contained in such securities, or
pursuant to any deposit agreement; provided that, in any such case,
the new securities and cash, if any, are to be delivered to the
Custodian;
9) In the case of warrants, rights or similar securities, the
surrender thereof in the exercise of such warrants, rights or
similar securities or the surrender of interim receipts or
temporary securities for definitive securities; provided that, in
any such case, the new securities and cash, if any, are to be
delivered to the Custodian;
10) For delivery in connection with any loans of securities made
by the Trust, but only against receipt of adequate collateral as
agreed upon from time to time by the Custodian and the Trust, which
may be in the form of cash or obligations issued by the United
States government, its agencies or instrumentalities, except that
in connection with any loans for which collateral is to be
credited to the Custodian's account in the book-entry system
authorized by the U.S. Department of the Treasury, the Custodian
will not be held liable or responsible for the delivery of
securities owned by the Trust prior to the receipt of such
collateral;
<PAGE> 3
11) For delivery as security in connection with any borrowings
by the Trust requiring a pledge of assets by the Trust, but only
against receipt of amounts borrowed;
12) For delivery in accordance with the provisions of any
agreement among the Trust, the Custodian 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 Trust;
13) For delivery in accordance with the provisions of any
agreement among the Trust, the Custodian, 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 Trust;
14) Upon receipt of instructions from the transfer agent
("Transfer Agent") for the Trust, for delivery to such Transfer
Agent or to the holders of shares in connection with distributions
in kind, as may be described from time to time in the Trust's
currently effective prospectus and statement of additional
information ("prospectus"), in satisfaction of requests by holders
of Shares for repurchase or redemption; and
15) Upon receipt of proper instructions, to release securities
to designated brokers under covered call options; provided however,
that such securities shall be released only upon payment to State
Street of monies for the premium due and a receipt for the
securities which are to be held in escrow. Upon exercise of the
option, or at expiration, to receive from brokers the securities
previously deposited. State Street will act strictly in accordance
with proper instructions in the delivery of securities to be held
in escrow and will have no responsibility or liability for any such
securities which are not returned promptly when due other than to
make proper request for such return.
16) For 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 Trust 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 purposes to be proper corporate
purposes, and naming the person or persons to whom delivery of such
securities shall be made.
2.3 Registration of Securities. Securities held by the Custodian (other than
bearer securities) shall be registered in the name of the Trust or in the
name of any nominee of the Trust or of any nominee of the Custodian
which nominee shall be assigned exclusively to the Trust, unless the
Trust has authorized in writing the appointment of a nominee to be used
in common with other registered investment companies having the same
investment adviser as the Trust, or in the name or nominee name of any
agent appointed pursuant to Section 2.11 or in the
<PAGE> 4
name or nominee name of any sub-custodian appointed pursuant to Article
1. All securities accepted by the Custodian on behalf of the Trust under
the terms of this Contract shall be in "street name" or other good
delivery form.
2.4 Bank Accounts. The Custodian shall open and maintain a separate bank
account or accounts in the name of the Trust, subject only to draft or
order by the Custodian acting pursuant to the terms of this Contract, and
shall hold in such account or accounts, subject to the provisions
hereof, all cash received by it from or for the account of the Trust,
other than cash maintained by the Trust in a bank account established and
used in accordance with Rule 17f-3 under the Investment Company Act of
1940. Funds held by the Custodian for the Trust may be deposited by it to
its credit as Custodian in the Banking Department of the Custodian or in
such other banks or trust companies as it 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 Investment
Company Act of 1940 and that each such bank or trust company and the
funds to be deposited with each such bank or trust company shall be
approved by vote of a majority of the Board of Trustees of the Trust.
Such funds shall be deposited by the Custodian in its capacity as
Custodian and shall be withdrawable by the Custodian only in that
capacity.
2.5 Payments for Shares. (a) The Custodian shall receive from the
distributor for the Trust's Shares or from the Transfer Agent of the
Trust and deposit into the Trust's account such payments as are received
for Shares of the Trust issued or sold from time to time by the Trust.
The Custodian will provide timely notification to the Trust and the
Transfer Agent of any receipt by it of payments for Shares of the Trust.
(b) Upon receipt of proper instructions the Custodian will receive and
accept securities being tendered in exchange for Fund shares, providing
such securities are in negotiable form and have been identified as
acceptable securities by the Fund's Investment Manager.
2.6 Investment and Availability of Federal Funds. Upon mutual agreement
between the Trust and the Custodian, the Custodian shall, upon the
receipt of Proper Instructions,
1) invest in such instruments as may be set forth in such
instructions on the same day as received all federal funds received
after a time agreed upon between the Custodian and the Trust; and
2) make federal funds available to the Trust as of specified times
agreed upon from time to time by the Trust and the Custodian
in the amount of checks received in payment for Shares of the
Trust which are deposited into the Trust's account.
2.7 Collection of Income. The Custodian shall collect on a timely basis all
income and other payments with respect to registered securities held
hereunder to which the Trust 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 hearer securities if,
on the date of payment by the issuer, such securities are held by the
Custodian or agent thereof and shall credit such income, as collected,
to the Trust's custodian account. Without limiting the generality of the
foregoing, the Custodian shall detach and present for payment all coupons
<PAGE> 5
and other income items requiring presentation as and when they become due
and shall collect interest when due on securities held hereunder. Income
due the Trust on securities loaned pursuant to the provisions of Section
2.2 (10) shall be the responsibility of the Trust. The Custodian will
have no duty or responsibility in connection therewith, other than to
provide the Trust with such information or data as may be necessary to
assist the Trust in arranging for the timely delivery to the Custodian of
the income to which the Trust is properly entitled.
2.8 Payment of Trust Moneys. Upon receipt of Proper Instructions, which may
be continuing instructions when deemed appropriate by the parties, the
Custodian shall pay out moneys of the Trust in the following cases only:
1) Upon the purchase of securities, futures contracts or
options on futures contracts for the account of the Trust but only
(a) against the delivery of such securities, or evidence of title
to futures contracts or options on futures contracts, to the
Custodian (or any bank, banking firm or trust company doing
business in the United States or abroad which is qualified under
the Investment Company Act of 1940, as amended, to act as a
custodian and has been designated by the Custodian as its agent
for this purpose) registered in the name of the Trust or in the
name of a nominee of the Custodian referred to in Section 2.3
hereof or in proper form for transfer; (b) in the case of a
purchase effected through a Securities System, in accordance with
the conditions set forth in Section 2.12 hereof or (c) in the case
of repurchase agreements entered into between the Trust and the
Custodian, or another bank, or a broker-dealer which is a member of
NASD against delivery of the securities either in certificate
form or through an entry crediting the Custodian's account at the
Federal Reserve Bank with such securities or (ii) against delivery
of the receipt evidencing purchase by the Trust of securities
owned by the Custodian along with written evidence of the agreement
by the Custodian to repurchase such securities from the Trust;
2) In connection with conversion, exchange or surrender of
securities owned by the Trust as set forth in Section 2.2 hereof;
3) For the redemption or repurchase of Shares issued by the
Trust as set forth in Section 2.10 hereof;
4) For the payment of any expense or liability incurred by the
Trust, including but not limited to the following payments for the
account of the Trust: interest, taxes, management, accounting,
transfer agent and legal fees, and operating expenses of the Trust
whether or not such expenses are to be in whole or part capitalized
or treated as deferred expenses;
5) For the payment of any dividends declared pursuant to the
governing documents of the Trust;
6) For payment of the amount of dividends received in respect
of securities sold short;
7) For any other proper 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 of the Trust
signed by an officer of the Trust and certified by
<PAGE> 6
its Secretary or an Assistant Secretary, specifying the amount of
such payment, setting forth the purpose for which such payment is
to be made, declaring such purpose to be a proper purpose, and
naming the person or persons to whom such payment is to be made.
2.9 Liability for Payment in Advance of Receipt of Securities Purchased. In
any and every case where payment for purchase of securities for the
account of the Trust is made by the Custodian in advance of receipt of
the securities purchased in the absence of specific written instructions
from the Trust to so pay in advance, the Custodian shall be absolutely
liable to the Trust for such securities to the same extent as if the
securities had been received by the Custodian, except that in the case
of repurchase agreements entered into by the Trust with a bank which is a
member of the Federal Reserve System, the Custodian may transfer funds to
the account of such bank prior to the receipt of written evidence that
the securities subject to such repurchase agreement have been
transferred by book-entry into a segregated non-proprietary account of
the Custodian maintained with the Federal Reserve Bank of Boston or of
the safe-keeping receipt, provided that such securities have in fact been
so transferred by book-entry.
2.10 Payments for Repurchases or Redemptions of Shares of the Trust. From
such funds as may be available for the purpose but subject to the
limitations of the Declaration of Trust and any applicable votes of the
Directors of the Trust pursuant thereto, the Custodian shall, upon
receipt of instructions from the Transfer Agent, make funds available
for payment to holders of Shares who have delivered to the Transfer Agent
a request for redemption or repurchase of their Shares. In connection
with the redemption or repurchase of Shares of the Trust, the Custodian
is authorized upon receipt of instructions from the Transfer Agent to
wire funds to or through a commercial bank designated by the redeeming
shareholders. In connection with the redemption or repurchase of Shares
of the Trust, the Custodian shall honor checks drawn on the Custodian by
a holder of Shares, which checks have been furnished by the Trust to the
holder of Shares, when presented to the Custodian in accordance with such
procedures and controls as are mutually agreed upon from time to time
between the Trust and the Custodian.
2.11 Appointment of Agents. The Custodian may at any time or times in its
discretion appoint (and may at any time remove) any other bank or trust
company which is itself qualified under the Investment Company Act of
1940, as amended, to act as a custodian, as its agent to carry out such
of the provisions of this Article 2 as the Custodian may from time to
time direct; provided, however, that the appointment of any agent shall
not relieve the Custodian of its responsibilities or liabilities
hereunder.
2.12 Deposit of Trust Assets in Securities Systems. The Custodian may deposit
and/or maintain securities owned by the Trust in a clearing agency
registered with the Securities and Exchange Commission under Section 17A
of the Securities Exchange Act of 1934, which acts as a securities
depository, or in the book-entry system authorized by the U.S. Department
of the Treasury and certain federal agencies, collectively referred to
herein as 'Securities System" in accordance with applicable Federal
Reserve Board and Securities and
<PAGE> 7
Exchange Commission rules and regulations, if any, and subject to the
following provisions:
1) The Custodian may keep securities of the Trust in a
Securities System provided that such securities are represented in
an account ("Account") of the Custodian in the Securities System
which shall not include any assets of the Custodian other than
assets held as a fiduciary, custodian or otherwise for customers;
2) The records of the Custodian with respect to securities of
the Trust which are maintained in a Securities System shall
identify by book-entry those securities belonging to the Trust;
3) The Custodian shall pay for securities purchased for the
account of the Trust upon (i) receipt of advice from the Securities
System that such securities have been transferred to the Account,
and (ii) the making of an entry on the records of the Custodian to
reflect such payment and transfer for the account of the Trust. The
Custodian shall transfer securities sold for the account of the
Trust upon (i) receipt of advice from the Securities System that
payment for such securities has been transferred to the Account, and
(ii) the making of an entry on the records of the Custodian to
reflect such transfer and payment for the account of the Trust.
Copies of all advices from the Securities System of transfers of
securities for the account of the Trust shall identify the Trust,
be maintained for the Trust by the Custodian and be provided to
the Trust at its request. Upon request, the Custodian shall furnish
the Trust confirmation of each transfer to or from the account of
the Trust in the form of a written advice or notice and shall
furnish to the Trust copies of daily transaction sheets reflecting
each day's transactions in the Securities System for the account of
the Trust.
4) The Custodian shall provide the Trust with any report
obtained by the Custodian on the Securities System's accounting
system, internal accounting control and procedures for
safeguarding securities deposited in the Securities System;
5) The Custodian shall have received the initial or annual
certificate, as the case may be, required by Article 9 hereof;
6) Anything to the contrary in this Contract notwithstanding,
the Custodian shall be liable to the Trust for any loss or damage
to the Trust resulting from use of the Securities System by reason
of any negligence, misfeasance or misconduct of the Custodian or
any of its agents or of any of its or their employees or from
failure of the Custodian or any such agent to enforce effectively
such rights as it may have against the Securities System; at the
election of the Trust, it shall be entitled to be subrogated to the
rights of the Custodian with respect to any claim against the
Securities System or any other person which the Custodian may have
as a consequence of any such loss or damage if and to the extent
that the Trust has not been made whole for any such loss or damage.
2.13 Segregated Account; The Custodian shall upon receipt of Proper
Instructions establish and maintain a segregated account or accounts for
and on behalf of the Trust, into which account or accounts may be
transferred cash and/or securities, including securities maintained in an
account by the Custodian pursuant to Section 2.12 hereof, (i) in
accordance with the
<PAGE> 8
provisions of any agreement among the Trust, the Custodian and a
broker-dealer registered under the Exchange Act 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
Trust, (ii) for purposes of segregating cash or government securities in
connection with options purchased, sold or written by the Trust or
commodity futures contracts or options thereon purchased or sold by the
Trust, (iii) for the purposes of compliance by the Trust with the
procedures required by Investment Company Act Release No. 10666, or any
subsequent release or releases of the Securities and Exchange Commission
relating to the maintenance of segregated accounts by registered
investment companies and (iv) for other proper corporate purposes, but
only, in the case of clause (iv), 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 Trust
and certified by the Secretary or an Assistant Secretary, setting forth
the purpose or purposes of such segregated account and declaring such
purposes to be proper corporate purposes.
2.14 Ownership Certificates for Tax Purposes. The Custodian 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 Trust held by it and in connection with
transfers of securities.
2.15 Proxies. The Custodian shall, with respect to the securities held
hereunder, cause to be promptly executed by the registered holder of such
securities, if the securities are registered otherwise than in the name
of the Trust or a nominee of the Trust, all proxies, without indication
of the manner in which such proxies are to be voted, and shall promptly
deliver to the Trust such proxies, all prosy soliciting materials and all
notices relating to such securities.
2.16 Communications Relating to Trust Portfolio Securities. The Custodian
shall transmit promptly to the Trust all written information (including,
without limitation, tendency of calls and maturities of securities and
expirations of rights in connection therewith and notices of exercise of
call and put options written by the Trust and the maturity of futures
contracts purchased or sold by the Trust) received by the Custodian from
issuers of the securities being held for the Trust. With respect to
tender or exchange offers, the Custodian shall transmit promptly to the
Trust all written information received by the Custodian 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 Trust desires to
take action with respect to any tender offer, exchange offer or any other
similar transaction, the Trust shall notify the Custodian at least three
business days prior to the date on which the Custodian is to take such
action.
2.17 Proper Instructions. Proper Instructions as used throughout this Article
2 means a writing signed or initialed by one or more person or persons as
the Board of Directors shall have
<PAGE> 9
from time to time authorized. Each such writing shall set forth the
specific transactions action 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 the
Custodian reasonably believes them to have been given by a person
authorized to give such instructions with respect to the transaction
involved. The Trust shall cause all 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 Trust
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 the Custodian are satisfied that
such procedures afford adequate safeguards for the Trust's assets.
2.18 Actions Permitted without Express Authority. The Custodian may in its
discretion, without express authority from the Trust:
1) make payments to itself or others for minor expenses
of handling securities or other similar items relating to its
duties under this Contract, provided that all such payments shall
be accounted for to the Trust;
2) surrender securities in temporary form for securities in
definitive form;
3) endorse for collection, in the name of the Trust, checks,
drafts and other negotiable instruments; and
4) in general, attend to all non-discretionary details in
connection with the sale, exchange, substitution, purchase,
transfer and other dealings with the securities and property of
the Trust except as otherwise directed by the Board of Trustees of
the Trust.
2.19 Evidence of Authority. The Custodian shall be protected in acting upon
any instructions, notice, request, consent, certificate or other
instrument or paper believed by it to be genuine and to have been
properly executed by or on behalf of the Trust. The Custodian may
receive and accept a certified copy of a vote of the Board of Trustees of
the Trust as conclusive evidence (a) of the authority of any person to act
in accordance with such vote or (b) of any determination or of any action
by the Board of Trustees pursuant to the Declaration of Trust as described
in such vote, and such vote may be considered as in full force and effect
until receipt by the Custodian of written notice to the contrary.
3 Duties of Custodian with Respect to the Books of Account
and Calculation of Net Asset Value and Net Income.
The Custodian shall cooperate with and supply necessary information to
the entity or entitles appointed by the Board of Directors of the Trust to
keep the books of account of the Trust and/or compute the net asset value per
share of the outstanding shares of the Trust or, if directed in writing to do
so by the Trust, shall itself keep such books of account and/or compute such
net asset value per share. If so directed, the Custodian shall also calculate
dally the net income of the Trust as described in the Trust's currently
effective prospectus and shall advise the Trust and the Transfer Agent daily
of the total amounts of such net income and, if instructed in writing by an
officer of the Trust to do so, shall advise the Transfer Agent periodically of
the division of such net income among
<PAGE> 10
its various components. The calculations of the net asset value per share and
the daily income of the Trust shall be made at the time or times described
from time to time in the Trust's currently effective prospectus.
4. Records
The Custodian shall create and maintain all records relating to its
activities and obligations under this Contract in such manner as will meet the
obligations of the Trust under the Investment Company Act of 1940, with
particular attention to Section 31 thereof and Rules 31a-1 and 31a-2
thereunder, applicable federal and state tax laws and any other law or
administrative rules or procedures which may be applicable to the Trust. All
such records shall be the property of the Trust and shall at all times during
the regular business hours of the Custodian be open for inspection by duly
authorized officers, employees or agents of the Trust and employees and agents
of the Securities and Exchange Commission. The Custodian shall, at the
Trust's request, supply the Trust with a tabulation of securities owned by the
Trust and held by the Custodian and shall, when requested to do so by the
Trust and for such compensation as shall be agreed upon between the Trust and
the Custodian, include certificate numbers in such tabulations.
5. Opinion of Trust's Independent Accountant
The Custodian shall take all reasonable action, as the Trust may from
time to time request, to obtain from year to year favorable opinions from the
Trust's independent accountants with respect to its activities hereunder in
connection with the preparation of the Trust's Form N-lA, and Form N-SAR or
other annual reports to the Securities and Exchange Commission and with
respect to any other requirements of such Commission.
6. Reports to Trust by Independent Public Accountants
The Custodian shall provide the Trust, at such times as the Trust 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 System, relating to
the services provided by the Custodian under this Contract; such reports,
which shall be of sufficient scope and in sufficient detail, as may reasonably
be required by the Trust, to provide reasonable assurance that any material
inadequacies would be disclosed by such examination, and, if there are no such
inadequacies, shall so state.
7. Compensation of Custodian
The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian, as agreed upon from time to time between
the Trust and the Custodian.
8. Fidelity Insurance
<PAGE> 11
The Custodian will maintain fidelity insurance in the form of a standard
Bankers Blanket Bond.
9. Responsibility of Custodian
So long as and to the extent that it is in the exercise of reasonable
care, the Custodian shall not be responsible for the title, validity or
genuineness of any property or evidence of title thereto received by it or
delivered by it pursuant to this Contract and shall be held harmless in acting
upon any notice, request, consent, certificate or other instrument reasonably
believed by it to be genuine and to be signed by the proper party or parties.
The Custodian shall be held to the exercise of reasonable care in carrying out
the provisions of this Contract, but shall be kept indemnified by and shall be
without liability to the Trust for any action taken or omitted by it in good
faith without negligence. It shall be entitled to rely on and may act upon
advice of counsel (who may be counsel for the Trust) on all matters, and shall
be without liability for any action reasonably taken or omitted pursuant to
such advice. Notwithstanding the foregoing, the responsibility of the
Custodian with respect to redemptions effected by check shall be in accordance
with a separate Agreement entered into between the Custodian and the Trust.
If the Trust requires the Custodian to take any action with respect to
securities, which action involves the payment of money or which action may, in
the opinion of the Custodian, result in the Custodian or its nominee assigned
to the Trust being liable for the payment of money or incurring liability of
some other form, the Trust, as a prerequisite to requiring the Custodian to
take such action, shall provide indemnity to the Custodian in an amount and
form satisfactory to it. If the Trust requires the Custodian to advance cash
or securities for any purpose or in the event that the Custodian or its
nominee shall incur or be assessed any taxes, charges, expenses, assessments,
claims or liabilities in connection with the performance of this Contract,
except such as may arise from its or its nominee's own negligent action,
negligent failure to act or willful misconduct, any property at any time held
for the account of the Trust shall be security therefor and should the Trust
fail to repay the Custodian promptly, the Custodian shall be entitled to
utilize available cash and to dispose of Trust assets to the extent necessary
to obtain reimbursement.
10. Effective Period, Termination and Amendment
This Contract 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;
provided, however that the Custodian shall not act under Section 2.12 hereof
in the absence of receipt of an initial certificate of the Secretary or an
Assistant Secretary that the Board of Trustees of the Trust have approved the
initial use of a particular Securities System and the receipt of an annual
certificate of the Secretary or an Assistant Secretary that the Board of
Trustees have reviewed the use by the Trust of such Securities System, as
required in each case by Rule 17f-4 under the Investment Company Act of 1940,
as amended; provided further, however, that the Trust shall not amend or
terminate this Contract in contravention of any applicable federal or state
regulations, or any provision of the Declaration of Trust, and further
provided, that the Trust may at any time by action of its Board of Trustees
(i) substitute another bank
<PAGE> 12
or trust company for the Custodian by giving notice as described above to the
Custodian, or (11) immediately terminate this Contract in the event of the
appointment of a conservator or receiver for the Custodian by the Comptroller
of the Currency or upon the happening of a like event at the direction of an
appropriate regulatory agency or court of competent jurisdiction. Upon
termination of the Contract, the Trust shall pay to the Custodian such
compensation as may be due as of the date of such termination and shall
likewise reimburse the Custodian for its costs, expenses and disbursements.
11. Successor Custodian
If a successor custodian shall be appointed by the Board of Directors of
the Trust, the Custodian 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 Trust's securities held in a
Securities System. If no such successor custodian shall be appointed, the
Custodian shall, in like manner, upon receipt of a certified copy of a vote of
the Board of Trustees of the Trust, 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 Directors shall have been delivered
to the Custodian on or before the date when such termination shall become
effective, then the Custodian shall have the right to deliver to a bank or
trust company, which is a "bank" as defined in the Investment Company Act of
1940, doing business in Boston, Massachusetts, 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 the Custodian and all instruments held by the
Custodian relative thereto and all other property held by it under this
Contract and to transfer to an account of such successor custodian all of the
Trust's securities held in any Securities System. Thereafter, such bank or
trust company shall be the successor of the Custodian under this Contract. In
the event that securities, funds and other properties remain in the possession
of the Custodian after the date of termination hereof owing to failure of the
Trust to procure the certified copy of vote referred to or of the Board of
Trustees to appoint a successor custodian, the Custodian shall be entitled to
fair compensation for its services during such period as the Custodian retains
possession of such securities, funds and other properties and the provisions
of this Contract relating to the duties and obligations of the Custodian shall
remain in full force and effect.
12. Interpretive and Additional Provisions
In connection with the operation of this Contract, the Custodian and the
Trust may from time to time agree on such provisions interpretive of or in
addition to the provisions of this Contract as may in their joint opinion be
consistent with the general tenor of this Contract. Any such interpretive or
additional provisions shall be in a writing signed by both parties and shall
be annexed hereto, provided that no such interpretive or additional provisions
shall contravene any applicable federal or state regulations or any provision
of the Declaration of Trust of the Trust. No interpretive or additional
provisions made as provided in the preceding sentence shall be deemed to be an
amendment of this Contract.
<PAGE> 13
13. Additional Trusts
In the event that the Trust establishes one or more series of Shares in
addition to __________________________________________________ with respect
to which it desires to have the Custodian render services as custodian under
the terms hereof, it shall so notify the Custodian in writing, and if the
Custodian agrees in writing to provide such services, such series of Shares
shall become a Trust hereunder.
14. No Liability of Shareholders, Trustees, Officers, etc.
The Trustees have authorized the execution of this contract in their
capacity as Trustees and not individually and the Custodian acknowledges and
agrees that neither the shareholders, trustees, officers, employees and other
agents of the trust and the Funds shall personally be bound by or be liable
hereunder, nor shall any resort to their personal property be had for the
satisfaction of any obligation or claim hereunder.
15. Massachusetts Law to Apply
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with laws of The Commonwealth of Massachusetts.
16. Prior Contracts
This Contract supersedes and terminates, as of the date hereof, all prior
contracts between the Trust and the Custodian relating to the custody of the
Trust's assets.
<PAGE> 14
IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of the ______ day of _________ , ________.
ATTEST
By:
- --------------------------- -----------------------------------
ATTEST STATE STREET BANK AND TRUST COMPANY
By:
- --------------------------- -----------------------------------
<PAGE> 1
EXHIBIT 99.10(a)
NUVEEN FLAGSHIP MUNICIPAL TRUST
NUVEEN FLAGSHIP MULTISTATE TRUST I
NUVEEN FLAGSHIP MULTISTATE TRUST II
NUVEEN FLAGSHIP MULTISTATE TRUST III
NUVEEN FLAGSHIP MULTISTATE TRUST IV
PLAN OF DISTRIBUTION AND SERVICE
PURSUANT TO RULE 12b-1
October __, 1996
WHEREAS, Nuveen Flagship Municipal Trust, Nuveen Flagship Multistate Trust
I, Nuveen Flagship Multistate Trust II, Nuveen Flagship Multistate Trust III
and Nuveen Flagship Multistate Trust IV, each a Massachusetts business trust
(each, a "Fund"), engages in business as an open-end management investment
company and is registered under the Investment Company Act of 1940, as amended
(the "Act");
WHEREAS, each Fund is authorized to and may or does issue shares of
beneficial interest in separate series, with the shares of each such series
representing the interests in a separate portfolio of securities and other
assets (each Fund's series together with all other such series subsequently
established by a Fund being referred to herein individually as a "Series" and
collectively as the "Series");
WHEREAS, the Nuveen Flagship Municipal Trust currently has five Series with
shares outstanding: Nuveen Municipal Bond Fund, Nuveen Insured Municipal Bond
Fund, Nuveen Flagship All-American Municipal Bond Fund, Nuveen Flagship Limited
Term Municipal Bond Fund, Nuveen Flagship Intermediate Municipal Bond Fund;
WHEREAS, Nuveen Flagship Multistate Trust I currently has eight Series
with shares outstanding: Nuveen Flagship Arizona Municipal Bond Fund, Nuveen
Flagship Colorado Municipal Bond Fund, Nuveen Flagship Florida Municipal Bond
Fund, Nuveen Flagship Florida Intermediate Municipal Bond Fund, Nuveen Maryland
Municipal Bond Fund, Nuveen Flagship New Mexico Municipal Bond Fund, Nuveen
Flagship Pennsylvania Municipal Bond Fund, Nuveen Flagship Virginia Municipal
Bond Fund;
WHEREAS, Nuveen Flagship Multistate Trust II currently has nine Series
with shares outstanding: Nuveen California Municipal Bond Fund, Nuveen
California Insured Municipal Bond Fund, Nuveen Flagship Connecticut Municipal
Bond Fund, Nuveen Massachusetts Municipal Bond Fund, Nuveen Massachusetts
Insured Municipal Bond Fund, Nuveen Flagship New Jersey Municipal Bond Fund,
Nuveen Flagship New Jersey Intermediate Municipal Bond
<PAGE> 2
Fund, Nuveen Flagship New York Municipal Bond Fund, Nuveen New York Insured
Municipal Bond Fund;
WHEREAS, Nuveen Flagship Multistate Trust III currently has six Series
with shares outstanding: Nuveen Flagship Alabama Municipal Bond Fund, Nuveen
Flagship Georgia Municipal Bond Fund, Nuveen Flagship Louisiana Municipal Bond
Fund, Nuveen Flagship North Carolina Municipal Bond Fund, Nuveen Flagship South
Carolina Municipal Bond Fund, Nuveen Flagship Tennessee Municipal Bond Fund;
WHEREAS, Nuveen Flagship Multistate Trust IV currently has seven Series
with shares outstanding: Nuveen Flagship Kansas Municipal Bond Fun, Nuveen
Flagship Kentucky Municipal Bond Fund, Nuveen Flagship Kentucky Limited Term
Municipal Bond Fund, Nuveen Flagship Michigan Municipal Bond Fund, Nuveen
Flagship Missouri Municipal Bond Fund, Nuveen Flagship Ohio Municipal Bond
Fund, Nuveen Flagship Wisconsin Municipal Bond Fund;
WHEREAS, each Fund, on behalf of each Series, employs John Nuveen & Co.
Incorporated (the "Distributor") as distributor of the shares of each Series of
each Fund (the "Shares") pursuant to a Distribution Agreement dated as of______,
199_;
WHEREAS, each Fund is authorized to issue Shares in four different classes
("Classes"): Class A, Class B, Class C and Class R.
WHEREAS, each Fund, on behalf of its Series, desires to adopt a Plan of
Distribution and Service pursuant to Rule 12b-1 under the Act ("Rule 12b-1"),
and the Board of Trustees of each Fund has determined that there is a
reasonable likelihood that adoption of this Plan of Distribution and Service
will benefit the Fund and its shareholders;
WHEREAS, each Fund, on behalf of its Series, has adopted a Multiple Class
Plan Pursuant to Rule 18f-3 (the "Rule 18f-3 Plan") to enable the various
Classes of Shares to be granted different rights and privileges and to bear
different expenses, and has an effective registration statement on file with
the SEC containing a Prospectus describing such Classes of Shares;
WHEREAS, as described in the Rule 18f-3 Plan, the purchase of Class A
Shares is generally subject to an up-front sales charge, as set forth in the
Fund's Prospectus and Statement of Additional Information, and the purchase of
Class B and Class C Shares will not be subject to an up-front sales charge, but
in lieu thereof the Class B Shares will be subject to an asset-based
distribution fee (and a declining contingent deferred sales charge) and Class C
Shares will be subject to an asset-based distribution fee (and a one-year
contingent deferred sales charge), as described in the Prospectus for the
Shares; and
-2-
<PAGE> 3
WHEREAS, Shares representing an investment in Class B will automatically
convert to Class A Shares 8 years after the investment, as described in the
Prospectus for the Shares;
NOW, THEREFORE, each Fund, on behalf of its Series, hereby adopts, and the
Distributor hereby agrees to the terms of, this Plan of Distribution and
Service (the "Plan") in accordance with Rule 12b-1, on the following terms and
conditions:
1. (a) Each Fund, on behalf of its Series, is authorized to compensate the
Distributor for services performed and expenses incurred by the
Distributor in connection with the distribution of Shares of Class A,
Class B and Class C of the Fund and the servicing of accounts holding
such Shares.
(b) The amount of such compensation paid during any one year shall consist
of:
(i) with respect to Class A Shares, a Service Fee not
to exceed .20 % of average daily net assets of the Class A
Shares of the Fund;
(ii) with respect to Class B Shares, a Service Fee not
to exceed .20% of average daily net assets of the Class B
Shares of the Fund, plus a Distribution Fee not to exceed .75%
of average daily net assets of the Class B Shares of the Fund;
and
(iii) (A) with respect to Class C Shares of Long-Term and
Intermediate series, a Service Fee not to exceed .20% of
average daily net assets of the Class C Shares of the Fund,
plus a Distribution Fee not to exceed .55% of average daily
net assets of the Class C Shares of the Fund; and
(B) with respect to Class C Shares of Limited-Term series, a
Service Fee not to exceed .20% of average daily net assets of
the Class C Shares of the Fund, plus a Distribution Fee not
to exceed .35% of average daily net assets of the Class C
Shares of the Fund.
Such compensation shall be calculated and accrued daily and paid
monthly or at such other intervals as the Board of Trustees may
determine.
(c) With respect to Class A Shares, the Distributor shall pay
any Service Fees it receives under the Plan for which a particular
underwriter, dealer, broker, bank or selling entity having a Dealer
Agreement in effect ("Authorized Dealer", which may include the
Distributor) is the dealer of record to such Authorized Dealers to
compensate such organizations for providing services to
shareholders
-3-
<PAGE> 4
relating to their investment. The Distributor may retain any
Service Fees not so paid.
(d) With respect to the Class B Shares, the Distributor:
(i) shall retain the Distribution Fee to compensate it for costs
associated with the distribution of the Class B Shares,
including the payment of broker commissions to Authorized
Dealers (which may include the Distributor) who were the
dealer of record with respect to the purchase of those shares;
and
(ii) shall pay any Service Fees it receives under the Plan for
which a particular Authorized Dealer is the dealer of record
(which may include the Distributor) to such Authorized Dealers
to compensate such organizations for providing services to
shareholders relating to their investment; provided, however,
that the Distributor shall be entitled to retain, for the
first year after purchase of the Class B Shares, the Service
Fee to the extent that it may have pre-paid the Service Fee
for that period to the Authorized Dealer of record.
The Distributor may retain any Distribution or Service Fees not
so paid.
(e) With respect to the Class C Shares, the Distributor:
(i) shall pay the Distribution Fee it receives under the Plan
with respect to Class C Shares for which a particular
Authorized Dealer is the dealer of record (which may include
the Distributor) to such Authorized Dealers to compensate such
organizations in connection with such share sales; provided,
however, that the Distributor shall be entitled to retain, for
the first year after purchase of the Class C Shares, the
Distribution Fee to the extent that it may have pre-paid the
Distribution Fee for that period to the Authorized Dealer of
record; and
(ii) shall pay any Service Fees it receives under the Plan for
which a particular Authorized Dealer is the dealer of record
(which may include the Distributor) to such Authorized Dealers
to compensate such organizations for providing services to
shareholders relating to their investment; provided, however,
that the Distributor shall be entitled to retain, for the
first year after purchase of the Class C Shares, the Service
Fee to the
-4-
<PAGE> 5
extent that it may have pre-paid the Service Fee for that
period to the Authorized Dealer of record.
The Distributor may retain any Distribution or Service Fees not so
paid.
(f) Services for which such Authorized Dealers may receive Service Fee
payments include any or all of the following: maintaining account
records for shareholders who beneficially own Shares; answering
inquiries relating to the shareholders' accounts, the policies of the
Fund and the performance of their investment; providing assistance
and handling transmission of funds in connection with purchase,
redemption and exchange orders for Shares; providing assistance in
connection with changing account setups and enrolling in various
optional fund services; producing and disseminating shareholder
communications or servicing materials; the ordinary or capital
expenses, such as equipment, rent, fixtures, salaries, bonuses,
reporting and recordkeeping and third party consultancy or similar
expenses, relating to any activity for which payment is authorized by
the Board; and the financing of any other activity for which payment
is authorized by the Board.
(g) Payments of Distribution or Service Fees to any organization as of any
month-end (or other period-end, as appropriate) will not exceed the
appropriate amount based on the annual percentages set forth in
subparagraphs (c), (d) and (e) above, based on average net assets of
accounts for which such organization appeared on the records of the
Fund and/or its transfer agent as the organization of record during
the preceding month (period).
2. This Plan shall not take effect until the Plan, together with any
related agreement(s), has been approved by votes of a majority of both
(a) the Board of Trustees of the Fund, and (b) those Trustees of the
Fund who are not "interested persons" of the Fund (as defined in the
Act) and who have no direct or indirect financial interest in the
operation of the Plan or any agreements related to it (the "Rule 12b-1
Trustees") cast in person at a meeting (or meetings) called for the
purpose of voting on the Plan and such related Agreement(s).
3. This Plan shall remain in effect until August 1, 1997, and shall
continue in effect thereafter so long as such continuance is
specifically approved at least annually in the manner provided for
approval of this Plan in paragraph 2.
4. The Distributor shall provide to the Board of Trustees of the Fund and
the Board shall review, at least quarterly, a written report
of distribution- and service-related activities, Distribution Fees,
Service Fees, and the purposes for which such activities were
performed and expenses incurred.
-5-
<PAGE> 6
5. This Plan may be terminated at any time by vote of a majority of the
Rule 12b-1 Trustees or by vote of a majority (as defined in the Act)
of the outstanding voting Shares of a Series of the Fund.
6. This Plan may not be amended to increase materially the amount of
compensation payable by a Series with respect to Class A, Class B
or Class C Shares under paragraph 1 hereof unless such amendment is
approved by a vote of at least a majority (as defined in the Act) of
the outstanding voting Shares of that Class of Shares of the Series.
No material amendment to the Plan shall be made unless approved in the
manner provided in paragraph 2 hereof.
7. While this Plan is in effect, the selection and nomination of the
Trustees who are not interested persons (as defined in the Act) of the
Fund shall be committed to the discretion of the Trustees who are not
such interested persons.
8. The Fund shall preserve copies of this Plan and any related agreements
and all reports made pursuant to paragraph 4 hereof, for a period of
not less than six years from the date of the Plan, any such agreement
or any such report, as the case may be, the first two years in an
easily accessible place.
-6-
<PAGE> 1
EXHIBIT 99.10(b)
NUVEEN FLAGSHIP MUNICIPAL TRUST
NUVEEN FLAGSHIP MULTISTATE TRUST I
NUVEEN FLAGSHIP MULTISTATE TRUST II
NUVEEN FLAGSHIP MULTISTATE TRUST III
NUVEEN FLAGSHIP MULTISTATE TRUST IV
MULTIPLE CLASS PLAN
ADOPTED PURSUANT TO RULE 18f-3
WHEREAS, Nuveen Municipal Trust, Nuveen Multistate Trust I, Nuveen
Multistate Trust II, Nuveen Flagship Municipal Trust, Nuveen Flagship
Multistate Trust I, Nuveen Flagship Multistate Trusts II, Nuveen Flagship
Multistate Trust III and Nuveen Flagship Multistate Trust IV, each a
Massachusetts business trust (each a "Fund" and collectively, the "Funds"),
each engage in business as an open-end management investment company and are
each registered as such under the Investment Company Act of 1940, as amended
(the "Act");
WHEREAS, each Fund is authorized to and may or does issue shares of
beneficial interest in separate series, with the shares of each such series
representing the interests in a separate portfolio of securities and other
assets (each Fund's series together with all other such series subsequently
established by a Fund being referred to herein individually as a "Series" and
collectively as the "Series");
WHEREAS, each Fund is authorized to and has divided the shares of each
Series into four classes, designated as Class A Shares, Class B Shares, Class C
Shares and Class R Shares, and may offer all or less than all of these classes
for public sale at any time; and
WHEREAS, the Board of each Fund as a whole, and the Trustees who are not
interested persons of each such Fund (as defined in the Act) (the
"Non-Interested Members"), after having been furnished and having evaluated
information reasonably necessary to evaluate this Multiple Class Plan (the
"Plan"), have determined in the exercise of their reasonable business judgment
that the Plan is in the best interests of each class of each Series
individually, and each Series and each Fund as a whole.
NOW, THEREFORE, each Fund hereby adopts this Plan, effective the date
hereof, in accordance with Rule 18f-3 under the Act:
<PAGE> 2
Section 1. Class Differences. Each class of shares of a Series shall
represent interests in the same portfolio of investments of that Series and,
except as otherwise set forth in this Plan, shall differ solely with respect
to: (i) distribution, service and other charges and expenses as provided for
in Sections 2 and 3 of this Plan; (ii) the exclusive right of each class of
shares to vote on matters submitted to shareholders that relate solely to that
class or for which the interests of one class differ from the interests of
another class or classes; (iii) such differences relating to eligible investors
as may be set forth in the prospectus and statement of additional information
of each Series, as the same may be amended or supplemented from time to time
(each a "Prospectus" and "SAI" and collectively, the "Prospectus" and "SAI");
(iv) the designation of each class of shares; and (v) conversion features.
Section 2. Distribution and Service Arrangements; Conversion Features.
Class A Shares, Class B Shares, Class C Shares and Class R Shares of each Fund
shall differ in the manner in which such shares are distributed and in the
services provided to shareholders of each such class as follows:
(a) Class A Shares:
(i) Class A Shares shall be sold at net asset value subject to
a front-end sales charge set forth in the Prospectus and SAI;
(ii) Class A Shares shall be subject to an annual service fee
("Service Fee") pursuant to a Plan of Distribution and Service
Pursuant to Rule 12b-1 (the "12b-1 Plan") not to exceed 0.20 of 1%
of the average daily net assets of the Series allocable to Class A
Shares, which, as set forth in the Prospectus, SAI and the 12b-1
Plan, may be used to compensate certain authorized dealers for
providing ongoing account services to shareholders; and
(iii) Class A Shares shall not be subject to a Distribution
Fee (as hereinafter defined); and
(iv) As described in the Prospectus and SAI, certain Class A
shares purchased at net asset value without imposition of a
front-end sales charge that are redeemed within 18 months of
purchase shall be subject to a contingent deferred sales charge
("CDSC") of 1% of the lower of (a) the net asset value of Class A
Shares at the time of purchase or (b) the net asset value of Class
A Shares at the time of redemption, as set forth in the Prospectus
and SAI.
-2-
<PAGE> 3
(b) Class B Shares:
(i) Class B Shares shall be sold at net asset value without a
front-end sales charge;
(ii) Class B Shares shall be subject to a Service Fee pursuant
to the 12b-1 Plan not to exceed 0.20 of 1% of average daily net
assets of the Series allocable to Class B Shares, which, as set
forth in the Prospectus, SAI and the 12b-1 Plan, may be used to
compensate certain authorized dealers for providing ongoing account
services to shareholders;
(iii) Class B Shares shall be subject to an annual
distribution fee ("Distribution Fee") pursuant to the 12b-1 Plan
not to exceed 0.75 of 1% of average daily net assets of the Series
allocable to Class B Shares, which, as set forth in the Prospectus,
SAI and the 12b-1 Plan, will be used to reimburse John Nuveen & Co.
Incorporated, the Funds' distributor, for certain expenses and for
providing compensation to certain authorized dealers;
(iv) Class B Shares redeemed within 6 years of purchase shall
be subject to a CDSC described below of the lower of (a) the net
asset value of Class B Shares at the time of purchase or (b) the
net asset value of Class B Shares at the time of redemption, as set
forth in the Prospectus and SAI; and
<TABLE>
<CAPTION>
YEARS SINCE PURCHASE
OF CLASS B SHARES CDSC
<S> <C>
0-1 5%
1-2 4%
2-3 4%
3-4 3%
4-5 2%
5-6 1%
</TABLE>
(v) Class B Shares will automatically convert to Class A
Shares eight years after purchase, as set forth in the Prospectus
and SAI.
-3-
<PAGE> 4
(c) Class C Shares*:
(i) Class C Shares shall be sold at net asset value without a
front-end sales charge;
(ii) Class C Shares shall be subject to a Service Fee pursuant
to the 12b-1 Plan not to exceed 0.20 of 1% of average daily net
assets of the Series allocable to Class C Shares, which, as set
forth in the Prospectus, SAI and the 12b-1 Plan, may be used to
compensate certain authorized dealers for providing ongoing account
services to shareholders;
(iii) Class C Shares shall be subject to a Distribution Fee
pursuant to the 12b-1 Plan not to exceed 0.55 of 1% of average
daily net assets of the Series allocable to Class C Shares, except
that only Limited-Term or Short-Term Series (the "Limited-Term
Series") shall be subject to a Distribution Fee pursuant to the
12b-1 Plan not to exceed 0.35 of 1% of average daily net assets of
the Limited-Term Series allocable to Class C Shares; which, as set
forth in the Prospectus, SAI and the 12b-1 Plan, will be used to
reimburse John Nuveen & Co. Incorporated, the Funds' distributor,
for certain expenses and for providing compensation to certain
authorized dealers; and
(iv) Class C Shares redeemed within 12 months of purchase
shall be subject to a CDSC of 1% of the lower of (a) the net asset
value of Class C Shares at the time of purchase or (b) the net
asset value of Class C Shares at the time of redemption, as set
forth in the Prospectus and SAI.
(d) Class R Shares:
(i) Class R Shares shall be sold at net asset value without a
front-end sales charge to a limited group of investors as
described in the Prospectus and SAI;
(ii) Class R Shares shall not be subject to a Service Fee; and
(iii) Class R Shares shall not be subject to a Distribution Fee.
- --------
*Class C shareholders who acquired their shares from a Nuveen Fund on or prior
to the reorganization of the Fund (scheduled for January 31, 1997) will retain
the option to convert their sharaes to Class A shares of the same Fund at the
end of their six-year holding period, as described in the prospectus and SAI
for the Nuveen Fund in effect prior to the date of that reorganization.
-4-
<PAGE> 5
Section 3. Allocation of Income, Expenses, Gains and Losses.
(a) Investment Income, and Realized and Unrealized Gains and Losses. The
daily investment income, and realized and unrealized gains and losses, of a
Series will be allocated to each class of shares based on each class' relative
percentage of the total value of shares outstanding of the Series at the
beginning of the day, after such net assets are adjusted for the prior day's
capital share transactions.
(b) Series Level Expenses. Expenses that are attributable to a Series,
but not a particular class thereof ("Series level expenses"), will be allocated
to each class of shares based on each class' relative percentage of the total
value of shares outstanding of the Series at the beginning of the day, after
such net assets are adjusted for the prior day's capital share transactions.
Series level expenses include fees for services that are received equally by
the classes under the same fee arrangement. All expenses attributable to a
Series that are not "class level expenses" (as defined below) shall be Series
level expenses, including but not limited to transfer agency fees and expenses,
share registration expenses, and shareholder reporting expenses.
(c) Class Level Expenses. Expenses that are directly attributable to a
particular class of shares, including the expenses relating to the distribution
of a class' shares, or to services provided to the shareholders of a class, as
set forth in Section 2 of this Plan, will be incurred by that class of shares.
Class level expenses include expenses for services that are unique to a class
of shares in either form or amount. "Class level expenses" shall include, but
not be limited to, 12b-1 Service Fees, 12b-1 Distribution Fees, expenses
associated with the addition of share classes to a Fund (to the extent that the
expenses were not fully accrued prior to the issuance of the new classes of
shares), expenses of administrative personnel and services required to support
the shareholders of a specific class, litigation or other legal expenses
relating to a specific class of shares, directors' fees or expenses incurred as
a result of issues relating to a specific class of shares, and accounting
expenses relating to a specific class of shares.
(d) Fee Waivers and Expense Reimbursements. On a daily basis, if the
Series level expenses and the class level expenses (not including 12b-1 plan
payments) exceed the daily expense cap for the Series, an appropriate
waiver/reimbursement will be made to the Series. The amount of such
reimbursement to each class will be in an amount such that the expenses of the
class with the highest expense ratio (excluding Service Fees and Distribution
Fees) will be equal to the daily expense cap after reimbursement. The expense
reimbursement will be allocated to each class of shares based on each class'
relative percentage of the total value of shares outstanding of the Series at
the beginning of the day, after such net assets are adjusted for the prior
day's capital share transactions.
-5-
<PAGE> 6
Section 4. Exchange Privilege. Shares of a class of a Series may be
exchanged only for shares of the same class of another Series, except as
otherwise set forth in the Prospectus and SAI.
Section 5. Term and Termination.
(a) The Series. This Plan shall become effective with respect to each
Series on the date hereof, and shall continue in effect with respect to such
Class A, Class B, Class C and Class R Shares of each such Series until
terminated in accordance with the provisions of Section 5(c) hereof.
(b) Additional Series or Classes. This Plan shall become effective with
respect to any class of shares of a Series other than Class A, Class B, Class C
or Class R and with respect to each additional Series or class thereof
established by a Fund after the date hereof and made subject to this Plan upon
commencement of the initial public offering thereof (provided that the Plan has
previously been approved with respect to such additional Series or class by
votes of a majority of both (i) the members of the Board of a Fund, as a whole,
and (ii) the Non-Interested Members, cast at a meeting held before the initial
public offering of such additional Series or classes thereof), and shall
continue in effect with respect to each such additional Series or class until
terminated in accordance with provisions of Section 5(c) hereof. An addendum
setting forth such specific and different terms of such additional series or
classes shall be attached to or made part of this Plan.
(c) Termination. This Plan may be terminated at any time with respect to
any Fund or any Series or class thereof, as the case may be, by vote of a
majority of both the members of the Board of a Fund, as a whole, and the
Non-Interested Members. The Plan may remain in effect with respect to a
particular Fund or any Series or class thereof even if it has been terminated
in accordance with this Section 5(c) with respect to any other Fund or Series
or class thereof.
Section 6. Subsequent Funds. The parties hereto intend that any open-end
investment company established subsequent to the date set forth below for which
Nuveen Institutional Advisory Corp. acts as investment adviser (each a "Future
Fund"), will be covered by the terms and conditions of this Plan, provided that
the Board of such Future Fund as a whole, and the Non-Interested Members of
such Future Fund, after having been furnished and having evaluated information
reasonably necessary to evaluate the Plan, have determined in the exercise of
their reasonable business judgment that the Plan is in the best interests of
each class of each Series of such Future Fund individually, and each Series of
such Future Fund and such Future Fund as a whole.
-6-
<PAGE> 7
Section 7. Amendments.
(a) General. Except as set forth below, any material amendment to this
Plan affecting a Fund or Series or class thereof shall require the affirmative
vote of a majority of both the members of the Board of that Fund, as a whole,
and the Non-Interested Members that the amendment is in the best interests of
each class of each Series individually and each Series as a whole.
(b) Future Funds. Any amendment to the Plan solely for the purpose of
adding a Future Fund as a party hereto in accordance with Section 6, will not
require any action by the Boards of the Funds.
Dated: October __, 1996
-7-
<PAGE> 1
EXHIBIT 99.11(a)
Vedder, Price, Kaufman & Kammholz
222 North LaSalle Street
Chicago, Illinois 60601
(312) 609-7500
October 17, 1996
Nuveen Flagship Multistate Trust I
333 West Wacker Drive
Chicago, Illinois 60606
RE: NUVEEN FLAGSHIP MULTISTATE TRUST I
REGISTRATION STATEMENT ON FORM N-14
(REGISTRATION NO. 333-09521 AND 811-07747)
- NUVEEN FLAGSHIP ARIZONA MUNICIPAL BOND FUND
Ladies and Gentlemen:
We are acting as counsel for Nuveen Flagship Multistate Trust I, a
Massachusetts business trust (the "Trust"), in connection with the Trust's
filing of a registration statement on Form N-14 (the "Registration Statement")
with the Securities and Exchange Commission covering the registration of shares
of beneficial interest, $.01 par value per share, (the "Shares") of the Trust
designated Nuveen Flagship Arizona Municipal Bond Fund, pursuant to the
proposed reorganization by and between the Nuveen Multistate Tax-Free Trust (an
"Acquired Trust"), a Massachusetts business trust, on behalf of its series of
shares designated Nuveen Arizona Tax-Free Value Fund, the Flagship Tax Exempt
Funds Trust (an "Acquired Trust"), a Massachusetts business trust, on behalf of
its series of shares designated Flagship Arizona Double Tax Exempt Fund, and
the Trust, as described in the Registration Statement and pursuant to that
certain Agreement and Plan of Reorganization and Liquidation entered into
between the Trust and the Acquired Trusts as of October 15, 1996 (the
"Agreement").
In that capacity, we have examined such business trust records,
certificates and other documents, and have made such other factual and legal
investigations as we have deemed necessary and appropriate for the purposes of
this opinion. In such examination, we have assumed the genuineness of all
signatures, the authenticity of all documents submitted to us as originals, the
conformity to originals of all documents submitted to us as certified copies or
photocopies and the authenticity of the originals of such latter documents.
Insofar as this opinion pertains to matters governed by the laws of the
Commonwealth of Massachusetts, we are relying, with your consent, upon the
opinion of Bingham, Dana & Gould, LLP dated October 17, 1996, which opinion is
satisfactory in substance and form to us.
<PAGE> 2
VEDDER PRICE
Nuveen Flagship Multistate Trust I
October 17, 1996
Page 2
Based upon the foregoing, it is our opinion that:
(1) The Trust is a Massachusetts business trust duly organized and existing
under the laws of the Commonwealth of Massachusetts.
(2) The Shares, when issued and sold in accordance with the Trust's
Declaration of Trust, all amendments thereto, and By-Laws and for the
consideration described in the Agreement, will be legally issued, fully
paid and non-assessable, except that, as set forth in the Registration
Statement, shareholders of the Trust may under certain circumstances be
held personally liable for its obligations.
We hereby consent to the filing of this opinion as Exhibit 11(a) to the
Registration Statement and to the references to us under the caption
"Legal Opinions" in the Joint Proxy Statement - Prospectus contained in
the Registration Statement.
Respectfully submitted,
VEDDER, PRICE, KAUFMAN & KAMMHOLZ
<PAGE> 3
Vedder, Price, Kaufman & Kammholz
222 North LaSalle Street
Chicago, Illinois 60601
(312) 609-7500
October 17, 1996
Nuveen Flagship Multistate Trust I
333 West Wacker Drive
Chicago, Illinois 60606
RE: NUVEEN FLAGSHIP MULTISTATE TRUST I
REGISTRATION STATEMENT ON FORM N-14
(REGISTRATION NO. 333-09521 AND 811-07747)
- NUVEEN FLAGSHIP FLORIDA MUNICIPAL BOND FUND
Ladies and Gentlemen:
We are acting as counsel for Nuveen Flagship Multistate Trust I, a
Massachusetts business trust (the "Trust"), in connection with the Trust's
filing of a registration statement on Form N-14 (the "Registration Statement")
with the Securities and Exchange Commission covering the registration of shares
of beneficial interest, $.01 par value per share, (the "Shares") of the Trust
designated Nuveen Flagship Florida Municipal Bond Fund, pursuant to the
proposed reorganization by and between the Nuveen Multistate Tax-Free Trust (an
"Acquired Trust"), a Massachusetts business trust, on behalf of its series of
shares designated Nuveen Florida Tax-Free Value Fund, the Flagship Tax Exempt
Funds Trust (an "Acquired Trust"), a Massachusetts business trust, on behalf of
its series of shares designated Flagship Florida Double Tax Exempt Fund, and
the Trust, as described in the Registration Statement and pursuant to that
certain Agreement and Plan of Reorganization and Liquidation entered into
between the Trust and the Acquired Trusts as of October 15, 1996 (the
"Agreement").
In that capacity, we have examined such business trust records,
certificates and other documents, and have made such other factual and legal
investigations as we have deemed necessary and appropriate for the purposes of
this opinion. In such examination, we have assumed the genuineness of all
signatures, the authenticity of all documents submitted to us as originals, the
conformity to originals of all documents submitted to us as certified copies or
photocopies and the authenticity of the originals of such latter documents.
Insofar as this opinion pertains to matters governed by the laws of the
Commonwealth of Massachusetts, we are relying, with your consent, upon the
opinion of Bingham, Dana & Gould, LLP dated October 17, 1996, which opinion is
satisfactory in substance and form to us.
<PAGE> 4
VEDDER PRICE
Nuveen Flagship Multistate Trust I
October 17, 1996
Page 2
Based upon the foregoing, it is our opinion that:
(1) The Trust is a Massachusetts business trust duly organized and existing
under the laws of the Commonwealth of Massachusetts.
(2) The Shares, when issued and sold in accordance with the Trust's
Declaration of Trust, all amendments thereto, and By-Laws and for the
consideration described in the Agreement, will be legally issued, fully
paid and non-assessable, except that, as set forth in the Registration
Statement, shareholders of the Trust may under certain circumstances be
held personally liable for its obligations.
We hereby consent to the filing of this opinion as Exhibit 11(a) to the
Registration Statement and to the references to us under the caption
"Legal Opinions" in the Joint Proxy Statement - Prospectus contained in
the Registration Statement.
Respectfully submitted,
VEDDER, PRICE, KAUFMAN & KAMMHOLZ
<PAGE> 5
Vedder, Price, Kaufman & Kammholz
222 North LaSalle Street
Chicago, Illinois 60601
(312) 609-7500
October 17, 1996
Nuveen Flagship Multistate Trust I
333 West Wacker Drive
Chicago, Illinois 60606
RE: NUVEEN FLAGSHIP MULTISTATE TRUST I
REGISTRATION STATEMENT ON FORM N-14
(REGISTRATION NO. 333-09521 AND 811-07747)
- NUVEEN FLAGSHIP PENNSYLVANIA MUNICIPAL BOND FUND
Ladies and Gentlemen:
We are acting as counsel for Nuveen Flagship Multistate Trust I, a
Massachusetts business trust (the "Trust"), in connection with the Trust's
filing of a registration statement on Form N-14 (the "Registration Statement")
with the Securities and Exchange Commission covering the registration of shares
of beneficial interest, $.01 par value per share, (the "Shares") of the Trust
designated Nuveen Flagship Pennsylvania Municipal Bond Fund, pursuant to the
proposed reorganization by and between the Nuveen Multistate Tax-Free Trust (an
"Acquired Trust"), a Massachusetts business trust, on behalf of its series of
shares designated Nuveen Pennsylvania Tax-Free Value Fund, the Flagship Tax
Exempt Funds Trust (an "Acquired Trust"), a Massachusetts business trust, on
behalf of its series of shares designated Flagship Pennsylvania Triple Tax
Exempt Fund, and the Trust, as described in the Registration Statement and
pursuant to that certain Agreement and Plan of Reorganization and Liquidation
entered into between the Trust and the Acquired Trusts as of October 15, 1996
(the "Agreement").
In that capacity, we have examined such business trust records,
certificates and other documents, and have made such other factual and legal
investigations as we have deemed necessary and appropriate for the purposes of
this opinion. In such examination, we have assumed the genuineness of all
signatures, the authenticity of all documents submitted to us as originals, the
conformity to originals of all documents submitted to us as certified copies or
photocopies and the authenticity of the originals of such latter documents.
Insofar as this opinion pertains to matters governed by the laws of the
Commonwealth of Massachusetts, we are relying, with your consent, upon the
opinion of Bingham, Dana & Gould, LLP dated October 17, 1996, which opinion is
satisfactory in substance and form to us.
<PAGE> 6
VEDDER PRICE
Nuveen Flagship Multistate Trust I
October 17, 1996
Page 2
Based upon the foregoing, it is our opinion that:
(1) The Trust is a Massachusetts business trust duly organized and existing
under the laws of the Commonwealth of Massachusetts.
(2) The Shares, when issued and sold in accordance with the Trust's
Declaration of Trust, all amendments thereto, and By-Laws and for the
consideration described in the Agreement, will be legally issued, fully
paid and non-assessable, except that, as set forth in the Registration
Statement, shareholders of the Trust may under certain circumstances be
held personally liable for its obligations.
We hereby consent to the filing of this opinion as Exhibit 11(a) to the
Registration Statement and to the references to us under the caption
"Legal Opinions" in the Joint Proxy Statement - Prospectus contained in
the Registration Statement.
Respectfully submitted,
VEDDER, PRICE, KAUFMAN & KAMMHOLZ
<PAGE> 7
Vedder, Price, Kaufman & Kammholz
222 North LaSalle Street
Chicago, Illinois 60601
(312) 609-7500
October 17, 1996
Nuveen Flagship Multistate Trust I
333 West Wacker Drive
Chicago, Illinois 60606
RE: NUVEEN FLAGSHIP MULTISTATE TRUST I
REGISTRATION STATEMENT ON FORM N-14
(REGISTRATION NO. 333-09521 AND 811-07747)
- NUVEEN FLAGSHIP VIRGINIA MUNICIPAL BOND FUND
Ladies and Gentlemen:
We are acting as counsel for Nuveen Flagship Multistate Trust I, a
Massachusetts business trust (the "Trust"), in connection with the Trust's
filing of a registration statement on Form N-14 (the "Registration Statement")
with the Securities and Exchange Commission covering the registration of shares
of beneficial interest, $.01 par value per share, (the "Shares") of the Trust
designated Nuveen Flagship Virginia Municipal Bond Fund, pursuant to the
proposed reorganization by and between the Nuveen Multistate Tax-Free Trust (an
"Acquired Trust"), a Massachusetts business trust, on behalf of its series of
shares designated Nuveen Virginia Tax-Free Value Fund, the Flagship Tax Exempt
Funds Trust (an "Acquired Trust"), a Massachusetts business trust, on behalf of
its series of shares designated Flagship Virginia Double Tax Exempt Fund, and
the Trust, as described in the Registration Statement and pursuant to that
certain Agreement and Plan of Reorganization and Liquidation entered into
between the Trust and the Acquired Trusts as of October 15, 1996 (the
"Agreement").
In that capacity, we have examined such business trust records,
certificates and other documents, and have made such other factual and legal
investigations as we have deemed necessary and appropriate for the purposes of
this opinion. In such examination, we have assumed the genuineness of all
signatures, the authenticity of all documents submitted to us as originals, the
conformity to originals of all documents submitted to us as certified copies or
photocopies and the authenticity of the originals of such latter documents.
Insofar as this opinion pertains to matters governed by the laws of the
Commonwealth of Massachusetts, we are relying, with your consent, upon the
opinion of Bingham, Dana & Gould, LLP dated October 17, 1996, which opinion is
satisfactory in substance and form to us.
<PAGE> 8
VEDDER PRICE
Nuveen Flagship Multistate Trust I
October 17, 1996
Page 2
Based upon the foregoing, it is our opinion that:
(1) The Trust is a Massachusetts business trust duly organized and existing
under the laws of the Commonwealth of Massachusetts.
(2) The Shares, when issued and sold in accordance with the Trust's
Declaration of Trust, all amendments thereto, and By-Laws and for the
consideration described in the Agreement, will be legally issued, fully
paid and non-assessable, except that, as set forth in the Registration
Statement, shareholders of the Trust may under certain circumstances be
held personally liable for its obligations.
We hereby consent to the filing of this opinion as Exhibit 11(a) to the
Registration Statement and to the references to us under the caption "Legal
Opinions" in the Joint Proxy Statement - Prospectus contained in the
Registration Statement.
Respectfully submitted,
VEDDER, PRICE, KAUFMAN & KAMMHOLZ
<PAGE> 1
EXHIBIT 99.11(b)
[Bingham, Dana & Gould LLP Letterhead]
ARIZONA
October 17, 1996
Vedder, Price, Kaufman & Kammholz
222 North La Salle Street
Chicago, IL 60601-1003
Re: Nuveen Flagship Multitstate Trust I/Nuveen Flagship Arizona
Municipal Bond Fund
Ladies and Gentlemen:
We have acted as special Massachusetts counsel to Nuveen Flagship
Multistate Trust I, a Massachusetts business trust (the "Trust"), in
connection with the Trust's Registration Statement on Form N-14 filed with
the Securities and Exchange Commission on August 2, 1996 (the "Original
Filing"), as such Registration Statement is proposed to be amended by
Pre-Effective Amendment No. 1 filed with the Securities and Exchange
Commission on or about October 17, 1996 ("Amendment No. 1") (as proposed to
be amended, the "Registration Statement"), with respect to the shares of
beneficial interest, par value $.01 per share (the "Shares") of its series
Nuveen Flagship Arizona Municipal Bond Fund (the "Acquiring Fund") to be
issued in exchange for substantially all of the assets of Nuveen Arizona
Tax-Free Value Fund, a series of Nuveen Multistate Tax-Free Trust, a
Massachusetts business trust (an "Acquired Fund") and Flagship Arizona
Double Tax Exempt Fund, a series of Flagship Tax Exempt Funds Trust, a
Massachusetts business trust (an "Acquired Fund"), as described in the
Registration Statement. You have requested that we deliver this opinion to
you, as special counsel to the Trust, for use by you in connection with your
opinion to the Trust with respect to the Shares.
In connection with the furnishing of this opinion, we have examined the
following documents:
(a) a certificate of the Secretary of State of the Commonwealth
of Massachusetts as to the existence of the Trust;
<PAGE> 2
ARIZONA
Vedder, Price, Kaufman & Kammholz
October 17, 1996
Page 2
(b) a copy, certified by the Secretary of State of the
Commonwealth of Massachusetts, of the Trust's Declaration of Trust and
of all amendments thereto on file in the office of the Secretary of
State (the "Declaration");
(c) a copy of the Trust's Amended and Restated Establishment and
Designation of Series dated October 9, 1996 (the "Designation of
Series");
(d) a copy of the Trust's Establishment and Designation of
Classes dated July 10, 1996 (the "Designation of Classes");
(e) a certificate executed by an appropriate officer of the
Trust, certifying as to, and attaching copies of, the Trust's
Declaration, Designation of Series, Designation of Classes, By-Laws,
and certain resolutions adopted by the Trustees of the Trust;
(f) a conformed copy of the Original Filing;
(g) a printer's proof dated October 11, 1996 of Amendment No. 1; and
(h) a copy of the Agreement and Plan of Reorganization and
Liquidation entered into by the Trust, on behalf of the Acquiring
Fund, providing for (a) the acquisition by the Acquiring Fund of
substantially all of the assets of each of the Acquired Funds in
exchange for the Shares and the Acquiring Fund's assumption of
substantially all of the liabilities of each of the Acquired Funds and
(b) the pro rata distribution of the Shares to the holders of the
shares of the Acquired Funds in liquidation of the Acquired Funds, in
the form included in the printer's proof referred to in paragraph (g)
above (the "Agreement and Plan of Reorganization").
In such examination, we have assumed the genuineness of all signatures,
the conformity to the originals of all of the documents reviewed by us as
copies, including conformed copies, the authenticity and completeness of all
original documents reviewed by us in original or copy form and the legal
competence of each individual executing any document. We have assumed that
Amendment No. 1 to the Registration Statement as filed with the Securities
and Exchange Commission will be in substantially the form of the printer's
proof referred to in paragraph (g) above, and that the Agreement and Plan of
Reorganization has been duly completed, executed and delivered by the
parties thereto in substantially the form of the copy referred to in
paragraph (h) above.
<PAGE> 3
ARIZONA
Vedder, Price, Kaufman & Kammholz
October 17, 1996
Page 3
This opinion is based entirely on our review of the documents listed
above and such investigation of law as we have deemed necessary or
appropriate. We have made no other review or investigation of any kind
whatsoever, and we have assumed, without independent inquiry, the accuracy
of the information set forth in such documents.
This opinion is limited solely to the internal substantive laws of the
Commonwealth of Massachusetts as applied by courts located in such
Commonwealth, to the extent that same may apply to or govern the
transactions covered by this opinion, except that we express no opinion as
to any Massachusetts securities law.
We understand that all of the foregoing assumptions and limitations are
acceptable to you.
Based upon and subject to the foregoing, please be advised that it is
our opinion that:
1. The Trust is duly organized and existing under the Trust's
Declaration of Trust and the laws of the Commonwealth of Massachusetts as a
voluntary association with transferable shares of beneficial interest
commonly referred to as a "Massachusetts business trust."
2. The Shares, when issued and sold in accordance with the Trust's
Declaration and By-Laws and for the consideration described in the Agreement
and Plan of Reorganization, will be legally issued, fully paid and
non-assessable, except that, as set forth in the Registration Statement,
shareholders of the Acquiring Fund may under certain circumstances be held
personally liable for its obligations.
We hereby consent to your reliance on this opinion in connection with
your opinion to the Trust with respect to the Shares, to the reference to
our name in the Registration Statement under the heading "Legal Opinions"
and to the filing of this opinion as an exhibit to the Registration
Statement.
Very truly yours,
BINGHAM, DANA & GOULD LLP
<PAGE> 4
[Bingham, Dana & Gould LLP Letterhead]
FLORIDA
October 17, 1996
Vedder, Price, Kaufman & Kammholz
222 North La Salle Street
Chicago, IL 60601-1003
Re: Nuveen Flagship Multistate Trust I/Nuveen Flagship Florida
Municipal Bond Fund
Ladies and Gentlemen:
We have acted as special Massachusetts counsel to Nuveen Flagship
Multistate Trust I, a Massachusetts business trust (the "Trust"), in
connection with the Trust's Registration Statement on Form N-14 filed with
the Securities and Exchange Commission on August 2, 1996 (the "Original
Filing"), as such Registration Statement is proposed to be amended by
Pre-Effective Amendment No. 1 filed with the Securities and Exchange
Commission on or about October 17, 1996 ("Amendment No. 1") (as proposed to
be amended, the "Registration Statement"), with respect to the shares of
beneficial interest, par value $.01 per share (the "Shares") of its series
Nuveen Flagship Florida Municipal Bond Fund (the "Acquiring Fund") to be
issued in exchange for substantially all of the assets of Nuveen Florida
Tax-Free Value Fund, a series of Nuveen Multistate Tax-Free Trust, a
Massachusetts business trust (an "Acquired Fund") and Flagship Florida
Double Tax Exempt Fund, a series of Flagship Tax Exempt Funds Trust, a
Massachusetts business trust (an "Acquired Fund"), as described in the
Registration Statement. You have requested that we deliver this opinion to
you, as special counsel to the Trust, for use by you in connection with your
opinion to the Trust with respect to the Shares.
In connection with the furnishing of this opinion, we have examined the
following documents:
(a) a certificate of the Secretary of State of the Commonwealth
of Massachusetts as to the existence of the Trust;
<PAGE> 5
FLORIDA
Vedder, Price, Kaufman & Kammholz
October 17, 1996
Page 2
(b) a copy, certified by the Secretary of State of the
Commonwealth of Massachusetts, of the Trust's Declaration of Trust and
of all amendments thereto on file in the office of the Secretary of
State (the "Declaration");
(c) a copy of the Trust's Amended and Restated Establishment and
Designation of Series dated October 9, 1996 (the "Designation of
Series");
(d) a copy of the Trust's Establishment and Designation of
Classes dated July 10, 1996 (the "Designation of Classes");
(e) a certificate executed by an appropriate officer of the
Trust, certifying as to, and attaching copies of, the Trust's
Declaration, Designation of Series, Designation of Classes, By-Laws,
and certain resolutions adopted by the Trustees of the Trust;
(f) a conformed copy of the Original Filing;
(g) a printer's proof dated October 11, 1996 of Amendment No. 1; and
(h) a copy of the Agreement and Plan of Reorganization and
Liquidation entered into by the Trust, on behalf of the Acquiring
Fund, providing for (a) the acquisition by the Acquiring Fund of
substantially all of the assets of each of the Acquired Funds in
exchange for the Shares and the Acquiring Fund's assumption of
substantially all of the liabilities of each of the Acquired Funds and
(b) the pro rata distribution of the Shares to the holders of the
shares of the Acquired Funds in liquidation of the Acquired Funds, in
the form included in the printer's proof referred to in paragraph (g)
above (the "Agreement and Plan of Reorganization").
In such examination, we have assumed the genuineness of all signatures,
the conformity to the originals of all of the documents reviewed by us as
copies, including conformed copies, the authenticity and completeness of all
original documents reviewed by us in original or copy form and the legal
competence of each individual executing any document. We have assumed that
Amendment No. 1 to the Registration Statement as filed with the Securities
and Exchange Commission will be in substantially the form of the printer's
proof referred to in paragraph (g) above, and that the Agreement and Plan of
Reorganization has been duly completed, executed and delivered by the
parties thereto in substantially the form of the copy referred to in
paragraph (h) above.
<PAGE> 6
FLORIDA
Vedder, Price, Kaufman & Kammholz
October 17, 1996
Page 3
This opinion is based entirely on our review of the documents listed
above and such investigation of law as we have deemed necessary or
appropriate. We have made no other review or investigation of any kind
whatsoever, and we have assumed, without independent inquiry, the accuracy
of the information set forth in such documents.
This opinion is limited solely to the internal substantive laws of the
Commonwealth of Massachusetts as applied by courts located in such
Commonwealth, to the extent that same may apply to or govern the
transactions covered by this opinion, except that we express no opinion as
to any Massachusetts securities law.
We understand that all of the foregoing assumptions and limitations are
acceptable to you.
Based upon and subject to the foregoing, please be advised that it is
our opinion that:
1. The Trust is duly organized and existing under the Trust's
Declaration of Trust and the laws of the Commonwealth of Massachusetts as a
voluntary association with transferable shares of beneficial interest
commonly referred to as a "Massachusetts business trust."
2. The Shares, when issued and sold in accordance with the Trust's
Declaration and By-Laws and for the consideration described in the Agreement
and Plan of Reorganization, will be legally issued, fully paid and
non-assessable, except that, as set forth in the Registration Statement,
shareholders of the Acquiring Fund may under certain circumstances be held
personally liable for its obligations.
We hereby consent to your reliance on this opinion in connection with
your opinion to the Trust with respect to the Shares, to the reference to
our name in the Registration Statement under the heading "Legal Opinions"
and to the filing of this opinion as an exhibit to the Registration
Statement.
Very truly yours,
BINGHAM, DANA & GOULD LLP
<PAGE> 7
[Bingham, Dana & Gould LLP Letterhead]
PENNSYLVANIA
October 17, 1996
Vedder, Price, Kaufman & Kammholz
222 North La Salle Street
Chicago, IL 60601-1003
Re: Nuveen Flagship Multistate Trust I/Nuveen Flagship Pennsylvania
Municipal Bond Fund
Ladies and Gentlemen:
We have acted as special Massachusetts counsel to Nuveen Flagship
Multistate Trust I, a Massachusetts business trust (the "Trust"), in
connection with the Trust's Registration Statement on Form N-14 filed with
the Securities and Exchange Commission on August 2, 1996 (the "Original
Filing"), as such Registration Statement is proposed to be amended by
Pre-Effective Amendment No. 1 filed with the Securities and Exchange
Commission on or about October 17, 1996 ("Amendment No. 1") (as proposed to
be amended, the "Registration Statement"), with respect to the shares of
beneficial interest, par value $.01 per share (the "Shares") of its series
Nuveen Flagship Pennsylvania Municipal Bond Fund (the "Acquiring Fund") to
be issued in exchange for substantially all of the assets of Nuveen
Pennsylvania Tax-Free Value Fund, a series of Nuveen Multistate Tax-Free
Trust, a Massachusetts business trust (an "Acquired Fund") and Flagship
Pennsylvania Triple Tax Exempt Fund, a series of Flagship Tax Exempt Funds
Trust, a Massachusetts business trust (an "Acquired Fund"), as described in
the Registration Statement. You have requested that we deliver this opinion
to you, as special counsel to the Trust, for use by you in connection with
your opinion to the Trust with respect to the Shares.
In connection with the furnishing of this opinion, we have examined the
following documents:
(a) a certificate of the Secretary of State of the Commonwealth
of Massachusetts as to the existence of the Trust;
<PAGE> 8
PENNSYLVANIA
Vedder, Price, Kaufman & Kammholz
October 17, 1996
Page 2
(b) a copy, certified by the Secretary of State of the
Commonwealth of Massachusetts, of the Trust's Declaration of Trust and
of all amendments thereto on file in the office of the Secretary of
State (the "Declaration");
(c) a copy of the Trust's Amended and Restated Establishment and
Designation of Series dated October 9, 1996 (the "Designation of
Series");
(d) a copy of the Trust's Establishment and Designation of
Classes dated July 10, 1996 (the "Designation of Classes");
(e) a certificate executed by an appropriate officer of the
Trust, certifying as to, and attaching copies of, the Trust's
Declaration, Designation of Series, Designation of Classes, By-Laws,
and certain resolutions adopted by the Trustees of the Trust;
(f) a conformed copy of the Original Filing;
(g) a printer's proof dated October 11, 1996 of Amendment No. 1; and
(h) a copy of the Agreement and Plan of Reorganization and
Liquidation entered into by the Trust, on behalf of the Acquiring
Fund, providing for (a) the acquisition by the Acquiring Fund of
substantially all of the assets of each of the Acquired Funds in
exchange for the Shares and the Acquiring Fund's assumption of
substantially all of the liabilities of each of the Acquired Funds and
(b) the pro rata distribution of the Shares to the holders of the
shares of the Acquired Funds in liquidation of the Acquired Funds, in
the form included in the printer's proof referred to in paragraph (g)
above (the "Agreement and Plan of Reorganization").
In such examination, we have assumed the genuineness of all signatures,
the conformity to the originals of all of the documents reviewed by us as
copies, including conformed copies, the authenticity and completeness of all
original documents reviewed by us in original or copy form and the legal
competence of each individual executing any document. We have assumed that
Amendment No. 1 to the Registration Statement as filed with the Securities
and Exchange Commission will be in substantially the form of the printer's
proof referred to in paragraph (g) above, and that the Agreement and Plan of
<PAGE> 9
PENNSYLVANIA
Vedder, Price, Kaufman & Kammholz
October 17, 1996
Page 3
Reorganization has been duly completed, executed and delivered by the
parties thereto in substantially the form of the copy referred to in
paragraph (h) above.
This opinion is based entirely on our review of the documents listed
above and such investigation of law as we have deemed necessary or
appropriate. We have made no other review or investigation of any kind
whatsoever, and we have assumed, without independent inquiry, the accuracy
of the information set forth in such documents.
This opinion is limited solely to the internal substantive laws of the
Commonwealth of Massachusetts as applied by courts located in such
Commonwealth, to the extent that same may apply to or govern the
transactions covered by this opinion, except that we express no opinion as
to any Massachusetts securities law.
We understand that all of the foregoing assumptions and limitations are
acceptable to you.
Based upon and subject to the foregoing, please be advised that it is
our opinion that:
1. The Trust is duly organized and existing under the Trust's
Declaration of Trust and the laws of the Commonwealth of Massachusetts as a
voluntary association with transferable shares of beneficial interest
commonly referred to as a "Massachusetts business trust."
2. The Shares, when issued and sold in accordance with the Trust's
Declaration and By-Laws and for the consideration described in the Agreement
and Plan of Reorganization, will be legally issued, fully paid and
non-assessable, except that, as set forth in the Registration Statement,
shareholders of the Acquiring Fund may under certain circumstances be held
personally liable for its obligations.
<PAGE> 10
PENNSYLVANIA
Vedder, Price, Kaufman & Kammholz
October 17, 1996
Page 4
We hereby consent to your reliance on this opinion in connection with
your opinion to the Trust with respect to the Shares, to the reference to
our name in the Registration Statement under the heading "Legal Opinions"
and to the filing of this opinion as an exhibit to the Registration
Statement.
Very truly yours,
BINGHAM, DANA & GOULD LLP
<PAGE> 11
[Bingham, Dana & Gould LLP Letterhead]
VIRGINIA
October 17, 1996
Vedder, Price, Kaufman & Kammholz
222 North La Salle Street
Chicago, IL 60601-1003
Re: Nuveen Flagship Multistate Trust I/Nuveen Flagship Virginia
Municipal Bond Fund
Ladies and Gentlemen:
We have acted as special Massachusetts counsel to Nuveen Flagship
Multistate Trust I, a Massachusetts business trust (the "Trust"), in
connection with the Trust's Registration Statement on Form N-14 filed with
the Securities and Exchange Commission on August 2, 1996 (the "Original
Filing"), as such Registration Statement is proposed to be amended by
Pre-Effective Amendment No. 1 filed with the Securities and Exchange
Commission on or about October 17, 1996 ("Amendment No. 1") (as proposed to
be amended, the "Registration Statement"), with respect to the shares of
beneficial interest, par value $.01 per share (the "Shares") of its series
Nuveen Flagship Virginia Municipal Bond Fund (the "Acquiring Fund") to be
issued in exchange for substantially all of the assets of Nuveen Virginia
Tax-Free Value Fund, a series of Nuveen Multistate Tax-Free Trust, a
Massachusetts business trust (an "Acquired Fund") and Flagship Virginia
Double Tax Exempt Fund, a series of Flagship Tax Exempt Funds Trust, a
Massachusetts business trust (an "Acquired Fund"), as described in the
Registration Statement. You have requested that we deliver this opinion to
you, as special counsel to the Trust, for use by you in connection with your
opinion to the Trust with respect to the Shares.
In connection with the furnishing of this opinion, we have examined the
following documents:
(a) a certificate of the Secretary of State of the Commonwealth
of Massachusetts as to the existence of the Trust;
<PAGE> 12
VIRGINIA
Vedder, Price, Kaufman & Kammholz
October 17, 1996
Page 2
(b) a copy, certified by the Secretary of State of the
Commonwealth of Massachusetts, of the Trust's Declaration of Trust and
of all amendments thereto on file in the office of the Secretary of
State (the "Declaration");
(c) a copy of the Trust's Amended and Restated Establishment and
Designation of Series dated October 9, 1996 (the "Designation of
Series");
(d) a copy of the Trust's Establishment and Designation of
Classes dated July 10, 1996 (the "Designation of Classes");
(e) a certificate executed by an appropriate officer of the
Trust, certifying as to, and attaching copies of, the Trust's
Declaration, Designation of Series, Designation of Classes, By-Laws,
and certain resolutions adopted by the Trustees of the Trust;
(f) a conformed copy of the Original Filing;
(g) a printer's proof dated October 11, 1996 of Amendment No. 1; and
(h) a copy of the Agreement and Plan of Reorganization and
Liquidation entered into by the Trust, on behalf of the Acquiring
Fund, providing for (a) the acquisition by the Acquiring Fund of
substantially all of the assets of each of the Acquired Funds in
exchange for the Shares and the Acquiring Fund's assumption of
substantially all of the liabilities of each of the Acquired Funds and
(b) the pro rata distribution of the Shares to the holders of the
shares of the Acquired Funds in liquidation of the Acquired Funds, in
the form included in the printer's proof referred to in paragraph (g)
above (the "Agreement and Plan of Reorganization").
In such examination, we have assumed the genuineness of all signatures,
the conformity to the originals of all of the documents reviewed by us as
copies, including conformed copies, the authenticity and completeness of all
original documents reviewed by us in original or copy form and the legal
competence of each individual executing any document. We have assumed that
Amendment No. 1 to the Registration Statement as filed with the Securities
and Exchange Commission will be in substantially the form of the printer's
proof referred to in paragraph (g) above, and that the Agreement and Plan of
<PAGE> 13
VIRGINIA
Vedder, Price, Kaufman & Kammholz
October 17, 1996
Page 3
Reorganization has been duly completed, executed and delivered by the
parties thereto in substantially the form of the copy referred to in
paragraph (h) above.
This opinion is based entirely on our review of the documents listed
above and such investigation of law as we have deemed necessary or
appropriate. We have made no other review or investigation of any kind
whatsoever, and we have assumed, without independent inquiry, the accuracy
of the information set forth in such documents.
This opinion is limited solely to the internal substantive laws of the
Commonwealth of Massachusetts as applied by courts located in such
Commonwealth, to the extent that same may apply to or govern the
transactions covered by this opinion, except that we express no opinion as
to any Massachusetts securities law.
We understand that all of the foregoing assumptions and limitations are
acceptable to you.
Based upon and subject to the foregoing, please be advised that it is
our opinion that:
1. The Trust is duly organized and existing under the Trust's
Declaration of Trust and the laws of the Commonwealth of Massachusetts as a
voluntary association with transferable shares of beneficial interest
commonly referred to as a "Massachusetts business trust."
2. The Shares, when issued and sold in accordance with the Trust's
Declaration and By-Laws and for the consideration described in the Agreement
and Plan of Reorganization, will be legally issued, fully paid and
non-assessable, except that, as set forth in the Registration Statement,
shareholders of the Acquiring Fund may under certain circumstances be held
personally liable for its obligations.
<PAGE> 14
VIRGINIA
Vedder, Price, Kaufman & Kammholz
October 17, 1996
Page 4
We hereby consent to your reliance on this opinion in connection with
your opinion to the Trust with respect to the Shares, to the reference to
our name in the Registration Statement under the heading "Legal Opinions"
and to the filing of this opinion as an exhibit to the Registration
Statement.
Very truly yours,
BINGHAM, DANA & GOULD LLP
<PAGE> 1
Exhibit 99.11(c)
[SKADDEN, ARPS, SLATE, MEAGHER & FLOM LETTERHEAD]
September 27, 1996
Nuveen Flagship Multistate Trust I
333 West Wacker Drive
Chicago, Illinois, 60606
Re: Consent of Skadden, Arps, Slate,
Meagher & Flom
Ladies and Gentlemen:
We have acted as counsel to Flagship Tax Exempt Funds Trust.
We hereby consent to the use of our name in the Registration
Statements on Form N-14 and certain proxy statements to be filed with the
Securities and Exchange Commission (the "Commission"). In giving our consent,
we do not thereby admit that we are in the category of persons whose consent is
required under Section 7 of the Securities Act of 1933, as amended, and the
rules and regulations of the Commission thereunder.
Very truly yours,
/s/ Skadden, Arps, Slate, Meagher & Flom
<PAGE> 1
Exhibit 99.12
[VEDDER PRICE LETTERHEAD]
October 17, 1996
Flagship Arizona Double Tax Exempt Fund Nuveen Flagship Arizona Municipal
One Dayton Centre Bond Fund
One South Main Street 333 West Wacker Drive
Dayton, Ohio 45402 Chicago, Illinois 60606
Nuveen Arizona Tax-Free Value Fund
333 West Wacker Drive
Chicago, Illinois 60606
Gentlemen:
You have requested our opinion regarding certain federal income tax
consequences of the proposed reorganizations (each a "Reorganization") of
Flagship Arizona Double Tax Exempt Fund ("Flagship Fund"), a separate portfolio
of Flagship Tax Exempt Funds Trust, a Massachusetts business trust ("Flagship
Trust"), and Nuveen Arizona Tax-Free Value Fund ("Nuveen Fund"), a separate
portfolio of Nuveen Multistate Tax-Free Trust, a Massachusetts business trust
("Nuveen Trust"), (the Flagship Fund and the Nuveen Fund are also each referred
to as an "Acquired Fund" and collectively as the "Acquired Funds"), into Nuveen
Flagship Arizona Municipal Bond Fund ("Acquiring Fund"), a separate portfolio
of Nuveen Flagship Multistate Trust I, a Massachusetts business trust ("New
Trust"). The Reorganizations contemplate the acquisition by the Acquiring Fund
of substantially all the assets of the Acquired Funds in exchange for voting
shares of beneficial interest ("shares") of the Acquiring Fund and the
assumption of the Acquired Funds' liabilities. Thereafter, the shares of the
Acquiring Fund will be distributed to the shareholders of the Acquired Funds
and each Acquired Fund will be completely liquidated and terminated. The
foregoing will be accomplished pursuant to an Agreement and Plan of
Reorganization and Liquidation, dated as of October 15, 1996 (the "Plan"),
entered into by the Flagship Trust and the Nuveen Trust, on behalf of the
Acquired Funds, and the New Trust on behalf of the Acquiring Fund.
In rendering this opinion, we have reviewed and relied upon statements
made to us by certain of your officers. We have also examined certificates of
such officers and such other agreements, documents, and corporate records that
have been made available to us and such
<PAGE> 2
VEDDER PRICE
Flagship Arizona Double Tax Exempt Fund
Nuveen Arizona Tax-Free Value Fund
Nuveen Flagship Arizona Municipal Bond Fund
October 17, 1996
Page 2
other matters as we have deemed relevant for purposes of this opinion. In such
examination, we have assumed the genuineness of all signatures, the
authenticity of all documents submitted to us as originals, the conformity to
originals of all documents submitted to us as copies and the authenticity of
the originals of such latter documents.
Our opinion is based, in part, on the assumption that the proposed
Reorganizations described herein will occur in accordance with the agreements
and the facts and representations set forth or referred to in this opinion
letter, and that such facts and representations are accurate as of the date
hereof and will be accurate on the effective date of such Reorganizations (the
"Effective Time"). As more fully discussed below, we have also assumed in
issuing our opinion that the shareholders of the Acquired Funds do not have any
plan or intention to dispose of a certain number of the Acquiring Fund shares
received by them in the Reorganizations. We have undertaken no independent
investigation of the accuracy of the facts, representations and assumptions set
forth or referred to herein.
For the purposes indicated above, and based upon the facts,
assumptions and conditions as set forth herein, and the representations made to
us by duly authorized officers of the Acquired Funds and the Acquiring Fund in
a letter dated October 17, 1996, it is our opinion that:
1. The acquisitions by the Acquiring Fund of
substantially all the assets of the Acquired Funds in exchange solely
for Acquiring Fund voting shares and the assumption by the Acquiring
Fund of the Acquired Funds' liabilities, if any, followed by the
distribution by the Acquired Funds of the Acquiring Fund shares to the
shareholders of the Acquired Funds in exchange for their Acquired
Funds shares in complete liquidation of the Acquired Funds, will each
constitute a "reorganization" within the meaning of Section 368(a)(1)
of the Internal Revenue Code of 1986, as amended (the "Code"), and the
Acquiring Fund and, with respect to its respective Reorganization,
each Acquired Fund will be "a party to a reorganization" within the
meaning of Section 368(b) of the Code;
2. The Acquired Funds' shareholders will recognize no
gain or loss upon the exchange of all of their Acquired Fund shares
for Acquiring Fund shares in complete liquidation of an Acquired Fund
(Code Section 354(a)(1));
3. No gain or loss will be recognized by an Acquired
Fund upon the transfer of substantially all its assets to the
Acquiring Fund in exchange solely for Acquiring Fund shares and the
assumption by the Acquiring Fund of such Acquired Fund's
<PAGE> 3
VEDDER PRICE
Flagship Arizona Double Tax Exempt Fund
Nuveen Arizona Tax-Free Value Fund
Nuveen Flagship Arizona Municipal Bond Fund
October 17, 1996
Page 3
liabilities, if any, and with respect to the subsequent distribution
of those Acquiring Fund shares to the Acquired Fund's shareholders in
complete liquidation of such Acquired Fund (Code Section 361);
4. No gain or loss will be recognized by the Acquiring
Fund upon the acquisition of substantially all the Acquired Funds'
assets in exchange solely for Acquiring Fund shares and the assumption
of the Acquired Funds' liabilities, if any (Code Section 1032(a));
5. The basis of the assets acquired by the Acquiring
Fund will be, in each instance, the same as the basis of those assets
immediately before the transfer when such assets were held by an
Acquired Fund, and the holding period of such assets acquired by the
Acquiring Fund will include the holding period thereof when such
assets were held by an Acquired Fund (Code Sections 362(b) and
1223(2));
6. The basis of the Acquiring Fund shares to be received
by the Acquired Funds' shareholders upon liquidation of the Acquired
Funds will be, in each instance, the same as the basis of the Acquired
Fund shares surrendered in exchange therefor, decreased by any cash
received and increased by the amount of gain recognized on the
exchange (Code Section 358(a)(1)); and
7. The holding period of the Acquiring Fund shares to be
received by the Acquired Funds' shareholders will include the period
during which the Acquired Fund shares to be surrendered in exchange
therefor were held, provided such Acquired Fund shares were held as
capital assets by those shareholders on the date of the exchange (Code
Section 1223(1)).
FACTS
Our opinion is based upon the above referenced representations and the
following facts and assumptions, any alteration of which could adversely affect
our conclusions.
The Acquired Funds have been registered and operated since they
commenced operations as series of open-end, management investment companies
under the Investment Company Act of 1940, 15 U.S.C. Section 80a, et seq. (the
"1940 Act"). Each Acquired Fund has qualified and will qualify as a regulated
investment company under Section 851 of the Code for each of its taxable
<PAGE> 4
VEDDER PRICE
Flagship Arizona Double Tax Exempt Fund
Nuveen Arizona Tax-Free Value Fund
Nuveen Flagship Arizona Municipal Bond Fund
October 17, 1996
Page 4
years, and has distributed and will distribute all or substantially all its
income so that it and its shareholders have been and will be taxed in
accordance with Section 852 of the Code.
The Acquiring Fund is registered, and will operate once it commences
operations, as a series of an open-end, management investment company under the
1940 Act. It will qualify as a regulated investment company under Section 851
of the Code for its current taxable year, which is its first year of existence,
and anticipates so qualifying for all future years, and has distributed and
will distribute all or substantially all its income so that it and its
shareholders will be taxed in accordance with Section 852 of the Code.
Upon satisfaction of certain terms and conditions set forth in the
Plan on or before the Effective Time, the following will occur: (a) the
Acquiring Fund will acquire substantially all the assets of the Acquired Funds
in exchange for the Acquiring Fund's assumption of substantially all the
liabilities of the Acquired Funds and the issuance of Acquiring Fund shares to
such Acquired Funds; (b) the Acquiring Fund shares will be distributed to the
shareholders of the Acquired Funds in exchange for their Acquired Fund shares;
and (c) the Acquired Funds will be dissolved and liquidated. The assets of the
Acquired Funds to be acquired by the Acquiring Fund consist primarily of bonds
whose interest is exempt from federal income taxation, cash and other
securities held in the Acquired Funds' portfolios.
As soon as practicable after the Effective Time, each Acquired Fund
will be liquidated and will distribute the newly issued Acquiring Fund shares
it receives pro rata to its shareholders of record in exchange for such
shareholders' interests in such Acquired Fund. Such liquidation and
distribution will be accomplished by opening accounts on the books of the
Acquiring Fund in the names of the shareholders of each Acquired Fund (on a
class by class basis) and transferring to those shareholder accounts the pro
rata number of Acquiring Fund shares of each respective class as was previously
credited to the Acquired Fund on such books.
As a result of the Reorganization, every shareholder of each Acquired
Fund will own Acquiring Fund shares that would have an aggregate per share net
asset value immediately after the Effective Time equal to the aggregate per
share net asset value of that shareholder's Acquired Fund shares immediately
prior to the Effective Time. Since the Acquiring Fund shares issued to the
shareholders of the Acquired Funds will be issued at net asset value in
exchange for the net assets of such Acquired Funds having a value equal to the
aggregate per share net asset value of those Acquiring Fund shares so issued,
the net asset value of the Acquiring Fund shares should remain virtually
unchanged by the Reorganization.
<PAGE> 5
VEDDER PRICE
Flagship Arizona Double Tax Exempt Fund
Nuveen Arizona Tax-Free Value Fund
Nuveen Flagship Arizona Municipal Bond Fund
October 17, 1996
Page 5
The investment objectives of the Acquiring Fund will be substantially
similar or identical to those of the Acquired Funds and the Acquiring Fund will
continue the historic business of each Acquired Fund or use a significant
portion of each Acquired Fund's historic assets in its business.
The management of each Acquired Fund has represented to us that, to
the best of their knowledge, there is no plan or intention on the part of any
Acquired Fund shareholders to sell, exchange, or otherwise dispose of a number
of Acquiring Fund shares received in the Reorganization that would reduce the
ownership by shareholders of such Acquired Fund to a number of shares of
Acquiring Fund having a value, as of the Effective Time, of less than 50
percent of all the formerly outstanding shares of such Acquired Fund as of the
same time. In issuing our opinion, we have assumed that there is, in fact, no
such plan or intention. If such assumption were inaccurate, it would adversely
affect the opinions contained herein.
In approving the Reorganization, the Boards of Trustees of the Nuveen
Trust and the Flagship Trust each identified certain benefits that are likely
to result from combining the funds, including administrative and operating
efficiencies, potential for asset growth, additional investment options for
purchase of shares, and an expanded selection of investment products for their
shareholders. Each Board also considered the possible risks and costs of
combining the funds and determined that the Reorganization is likely to provide
benefits to the shareholders of each fund that outweigh the costs incurred.
CONCLUSION
Based on the foregoing, it is our opinion that the acquisition by the
Acquiring Fund, pursuant to the Plan, of substantially all the assets and
liabilities of the Nuveen Fund in exchange for voting shares of the Acquiring
Fund will qualify as a reorganization under Code Section 368(a)(1)(C) and the
acquisition by the Acquiring Fund, pursuant to the Plan, of substantially all
the assets and liabilities of the Flagship Fund in exchange for voting shares
of the Acquiring Fund will qualify as a reorganization under Code Section
368(a)(1)(D).
Our opinions set forth above with respect to (1) the nonrecognition of
gain or loss to the Acquired Funds and the Acquiring Fund, (2) the basis and
holding period of the assets received by the Acquiring Fund, (3) the
nonrecognition of gain or loss to the Acquired Funds' shareholders upon the
receipt of the Acquiring Fund shares, and (4) the basis and holding period of
the Acquiring Fund shares received by the Acquired Funds' shareholders, follow
as a matter
<PAGE> 6
VEDDER PRICE
Flagship Arizona Double Tax Exempt Fund
Nuveen Arizona Tax-Free Value Fund
Nuveen Flagship Arizona Municipal Bond Fund
October 17, 1996
Page 6
of law from the opinion that the acquisitions under the Plan will qualify as
reorganizations under Code Section 368(a)(1)(C) or Code Section 368(a)(1)(D).
The opinions expressed in this letter are based on the Code, the
Income Tax Regulations promulgated by the Treasury Department thereunder and
judicial authority reported as of the date hereof. We have also considered the
position of the Internal Revenue Service (the "Service") reflected in published
and private rulings. Although we are not aware of any pending changes to these
authorities that would alter our opinions, there can be no assurances that
future legislative or administrative changes, court decisions or Service
interpretations will not significantly modify the statements or opinions
expressed herein.
Our opinions are limited to those federal income tax issues
specifically considered herein and are addressed to and are only for the
benefit of the Acquired Funds and Acquiring Fund. We do not express any
opinion as to any other federal income tax issues, or any state or local law
issues, arising from the transactions contemplated by the Plan. Although the
discussion herein is based upon our best interpretation of existing sources of
law and expresses what we believe a court would properly conclude if presented
with these issues, no assurance can be given that such interpretations would be
followed if they were to become the subject of judicial or administrative
proceedings.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to the use of our name under the captions "Proposal
No. 4 - The Reorganizations - Tax Consequences of the Reorganizations" and
"Legal Opinions" in the Joint Proxy Statement - Prospectus contained in such
Registration Statement. In giving such consent, we do not thereby concede that
we are within the category of persons whose consent is required under Section 7
of the Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission thereunder.
Very truly yours,
VEDDER, PRICE, KAUFMAN & KAMMHOLZ
<PAGE> 7
[VEDDER PRICE LETTERHEAD]
October 17, 1996
Flagship Florida Double Tax Exempt Fund Nuveen Flagship Florida Municipal
One Dayton Centre Bond Fund
One South Main Street 333 West Wacker Drive
Dayton, Ohio 45402 Chicago, Illinois 60606
Nuveen Florida Tax-Free Value Fund
333 West Wacker Drive
Chicago, Illinois 60606
Gentlemen:
You have requested our opinion regarding certain federal income tax
consequences of the proposed reorganizations (each a "Reorganization") of
Flagship Florida Double Tax Exempt Fund ("Flagship Fund"), a separate portfolio
of Flagship Tax Exempt Funds Trust, a Massachusetts business trust ("Flagship
Trust"), and Nuveen Florida Tax-Free Value Fund ("Nuveen Fund"), a separate
portfolio of Nuveen Multistate Tax-Free Trust, a Massachusetts business trust
("Nuveen Trust"), (the Flagship Fund and the Nuveen Fund are also each referred
to as an "Acquired Fund" and collectively as the "Acquired Funds"), into Nuveen
Flagship Florida Municipal Bond Fund ("Acquiring Fund"), a separate portfolio
of Nuveen Flagship Multistate Trust I, a Massachusetts business trust ("New
Trust"). The Reorganizations contemplate the acquisition by the Acquiring Fund
of substantially all the assets of the Acquired Funds in exchange for voting
shares of beneficial interest ("shares") of the Acquiring Fund and the
assumption of the Acquired Funds' liabilities. Thereafter, the shares of the
Acquiring Fund will be distributed to the shareholders of the Acquired Funds
and each Acquired Fund will be completely liquidated and terminated. The
foregoing will be accomplished pursuant to an Agreement and Plan of
Reorganization and Liquidation, dated as of October 15, 1996 (the "Plan"),
entered into by the Flagship Trust and the Nuveen Trust, on behalf of the
Acquired Funds, and the New Trust on behalf of the Acquiring Fund.
In rendering this opinion, we have reviewed and relied upon statements
made to us by certain of your officers. We have also examined certificates of
such officers and such other agreements, documents, and corporate records that
have been made available to us and such
<PAGE> 8
VEDDER PRICE
Flagship Florida Double Tax Exempt Fund
Nuveen Florida Tax-Free Value Fund
Nuveen Flagship Florida Municipal Bond Fund
October 17, 1996
Page 2
other matters as we have deemed relevant for purposes of this opinion. In such
examination, we have assumed the genuineness of all signatures, the
authenticity of all documents submitted to us as originals, the conformity to
originals of all documents submitted to us as copies and the authenticity of
the originals of such latter documents.
Our opinion is based, in part, on the assumption that the proposed
Reorganizations described herein will occur in accordance with the agreements
and the facts and representations set forth or referred to in this opinion
letter, and that such facts and representations are accurate as of the date
hereof and will be accurate on the effective date of such Reorganizations (the
"Effective Time"). As more fully discussed below, we have also assumed in
issuing our opinion that the shareholders of the Acquired Funds do not have any
plan or intention to dispose of a certain number of the Acquiring Fund shares
received by them in the Reorganizations. We have undertaken no independent
investigation of the accuracy of the facts, representations and assumptions set
forth or referred to herein.
For the purposes indicated above, and based upon the facts,
assumptions and conditions as set forth herein, and the representations made to
us by duly authorized officers of the Acquired Funds and the Acquiring Fund in
a letter dated October 17, 1996, it is our opinion that:
1. The acquisitions by the Acquiring Fund of
substantially all the assets of the Acquired Funds in exchange solely
for Acquiring Fund voting shares and the assumption by the Acquiring
Fund of the Acquired Funds' liabilities, if any, followed by the
distribution by the Acquired Funds of the Acquiring Fund shares to the
shareholders of the Acquired Funds in exchange for their Acquired
Funds shares in complete liquidation of the Acquired Funds, will each
constitute a "reorganization" within the meaning of Section 368(a)(1)
of the Internal Revenue Code of 1986, as amended (the "Code"), and the
Acquiring Fund and, with respect to its respective Reorganization,
each Acquired Fund will be "a party to a reorganization" within the
meaning of Section 368(b) of the Code;
2. The Acquired Funds' shareholders will recognize no
gain or loss upon the exchange of all of their Acquired Fund shares
for Acquiring Fund shares in complete liquidation of an Acquired Fund
(Code Section 354(a)(1));
3. No gain or loss will be recognized by an Acquired
Fund upon the transfer of substantially all its assets to the
Acquiring Fund in exchange solely for Acquiring Fund shares and the
assumption by the Acquiring Fund of such Acquired Fund's
<PAGE> 9
VEDDER PRICE
Flagship Florida Double Tax Exempt Fund
Nuveen Florida Tax-Free Value Fund
Nuveen Flagship Florida Municipal Bond Fund
October 17, 1996
Page 3
liabilities, if any, and with respect to the subsequent distribution
of those Acquiring Fund shares to the Acquired Fund's shareholders in
complete liquidation of such Acquired Fund (Code Section 361);
4. No gain or loss will be recognized by the Acquiring
Fund upon the acquisition of substantially all the Acquired Funds'
assets in exchange solely for Acquiring Fund shares and the assumption
of the Acquired Funds' liabilities, if any (Code Section 1032(a));
5. The basis of the assets acquired by the Acquiring
Fund will be, in each instance, the same as the basis of those assets
immediately before the transfer when such assets were held by an
Acquired Fund, and the holding period of such assets acquired by the
Acquiring Fund will include the holding period thereof when such
assets were held by an Acquired Fund (Code Sections 362(b) and
1223(2));
6. The basis of the Acquiring Fund shares to be received
by the Acquired Funds' shareholders upon liquidation of the Acquired
Funds will be, in each instance, the same as the basis of the Acquired
Fund shares surrendered in exchange therefor, decreased by any cash
received and increased by the amount of gain recognized on the
exchange (Code Section 358(a)(1)); and
7. The holding period of the Acquiring Fund shares to be
received by the Acquired Funds' shareholders will include the period
during which the Acquired Fund shares to be surrendered in exchange
therefor were held, provided such Acquired Fund shares were held as
capital assets by those shareholders on the date of the exchange (Code
Section 1223(1)).
FACTS
Our opinion is based upon the above referenced representations and the
following facts and assumptions, any alteration of which could adversely affect
our conclusions.
The Acquired Funds have been registered and operated since they
commenced operations as series of open-end, management investment companies
under the Investment Company Act of 1940, 15 U.S.C. Section 80a, et seq. (the
"1940 Act"). Each Acquired Fund has qualified and will qualify as a regulated
investment company under Section 851 of the Code for each of its taxable
<PAGE> 10
VEDDER PRICE
Flagship Florida Double Tax Exempt Fund
Nuveen Florida Tax-Free Value Fund
Nuveen Flagship Florida Municipal Bond Fund
October 17, 1996
Page 4
years, and has distributed and will distribute all or substantially all its
income so that it and its shareholders have been and will be taxed in
accordance with Section 852 of the Code.
The Acquiring Fund is registered, and will operate once it commences
operations, as a series of an open-end, management investment company under the
1940 Act. It will qualify as a regulated investment company under Section 851
of the Code for its current taxable year, which is its first year of existence,
and anticipates so qualifying for all future years, and has distributed and
will distribute all or substantially all its income so that it and its
shareholders will be taxed in accordance with Section 852 of the Code.
Upon satisfaction of certain terms and conditions set forth in the
Plan on or before the Effective Time, the following will occur: (a) the
Acquiring Fund will acquire substantially all the assets of the Acquired Funds
in exchange for the Acquiring Fund's assumption of substantially all the
liabilities of the Acquired Funds and the issuance of Acquiring Fund shares to
such Acquired Funds; (b) the Acquiring Fund shares will be distributed to the
shareholders of the Acquired Funds in exchange for their Acquired Fund shares;
and (c) the Acquired Funds will be dissolved and liquidated. The assets of the
Acquired Funds to be acquired by the Acquiring Fund consist primarily of bonds
whose interest is exempt from federal income taxation, cash and other
securities held in the Acquired Funds' portfolios.
As soon as practicable after the Effective Time, each Acquired Fund
will be liquidated and will distribute the newly issued Acquiring Fund shares
it receives pro rata to its shareholders of record in exchange for such
shareholders' interests in such Acquired Fund. Such liquidation and
distribution will be accomplished by opening accounts on the books of the
Acquiring Fund in the names of the shareholders of each Acquired Fund (on a
class by class basis) and transferring to those shareholder accounts the pro
rata number of Acquiring Fund shares of each respective class as was previously
credited to the Acquired Fund on such books.
As a result of the Reorganization, every shareholder of each Acquired
Fund will own Acquiring Fund shares that would have an aggregate per share net
asset value immediately after the Effective Time equal to the aggregate per
share net asset value of that shareholder's Acquired Fund shares immediately
prior to the Effective Time. Since the Acquiring Fund shares issued to the
shareholders of the Acquired Funds will be issued at net asset value in
exchange for the net assets of such Acquired Funds having a value equal to the
aggregate per share net asset value of those Acquiring Fund shares so issued,
the net asset value of the Acquiring Fund shares should remain virtually
unchanged by the Reorganization.
<PAGE> 11
VEDDER PRICE
Flagship Florida Double Tax Exempt Fund
Nuveen Florida Tax-Free Value Fund
Nuveen Flagship Florida Municipal Bond Fund
October 17, 1996
Page 5
The investment objectives of the Acquiring Fund will be substantially
similar or identical to those of the Acquired Funds and the Acquiring Fund will
continue the historic business of each Acquired Fund or use a significant
portion of each Acquired Fund's historic assets in its business.
The management of each Acquired Fund has represented to us that, to
the best of their knowledge, there is no plan or intention on the part of any
Acquired Fund shareholders to sell, exchange, or otherwise dispose of a number
of Acquiring Fund shares received in the Reorganization that would reduce the
ownership by shareholders of such Acquired Fund to a number of shares of
Acquiring Fund having a value, as of the Effective Time, of less than 50
percent of all the formerly outstanding shares of such Acquired Fund as of the
same time. In issuing our opinion, we have assumed that there is, in fact, no
such plan or intention. If such assumption were inaccurate, it would adversely
affect the opinions contained herein.
In approving the Reorganization, the Boards of Trustees of the Nuveen
Trust and the Flagship Trust each identified certain benefits that are likely
to result from combining the funds, including administrative and operating
efficiencies, potential for asset growth, additional investment options for
purchase of shares, and an expanded selection of investment products for their
shareholders. Each Board also considered the possible risks and costs of
combining the funds and determined that the Reorganization is likely to provide
benefits to the shareholders of each fund that outweigh the costs incurred.
CONCLUSION
Based on the foregoing, it is our opinion that the acquisition by the
Acquiring Fund, pursuant to the Plan, of substantially all the assets and
liabilities of the Nuveen Fund in exchange for voting shares of the Acquiring
Fund will qualify as a reorganization under Code Section 368(a)(1)(C) and the
acquisition by the Acquiring Fund, pursuant to the Plan, of substantially all
the assets and liabilities of the Flagship Fund in exchange for voting shares
of the Acquiring Fund will qualify as a reorganization under Code Section
368(a)(1)(D).
Our opinions set forth above with respect to (1) the nonrecognition of
gain or loss to the Acquired Funds and the Acquiring Fund, (2) the basis and
holding period of the assets received by the Acquiring Fund, (3) the
nonrecognition of gain or loss to the Acquired Funds' shareholders upon the
receipt of the Acquiring Fund shares, and (4) the basis and holding period of
the Acquiring Fund shares received by the Acquired Funds' shareholders, follow
as a matter
<PAGE> 12
VEDDER PRICE
Flagship Florida Double Tax Exempt Fund
Nuveen Florida Tax-Free Value Fund
Nuveen Flagship Florida Municipal Bond Fund
October 17, 1996
Page 6
of law from the opinion that the acquisitions under the Plan will qualify as
reorganizations under Code Section 368(a)(1)(C) or Code Section 368(a)(1)(D).
The opinions expressed in this letter are based on the Code, the
Income Tax Regulations promulgated by the Treasury Department thereunder and
judicial authority reported as of the date hereof. We have also considered the
position of the Internal Revenue Service (the "Service") reflected in published
and private rulings. Although we are not aware of any pending changes to these
authorities that would alter our opinions, there can be no assurances that
future legislative or administrative changes, court decisions or Service
interpretations will not significantly modify the statements or opinions
expressed herein.
Our opinions are limited to those federal income tax issues
specifically considered herein and are addressed to and are only for the
benefit of the Acquired Funds and Acquiring Fund. We do not express any
opinion as to any other federal income tax issues, or any state or local law
issues, arising from the transactions contemplated by the Plan. Although the
discussion herein is based upon our best interpretation of existing sources of
law and expresses what we believe a court would properly conclude if presented
with these issues, no assurance can be given that such interpretations would be
followed if they were to become the subject of judicial or administrative
proceedings.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to the use of our name under the captions "Proposal
No. 4 - The Reorganizations - Tax Consequences of the Reorganizations" and
"Legal Opinions" in the Joint Proxy Statement - Prospectus contained in such
Registration Statement. In giving such consent, we do not thereby concede that
we are within the category of persons whose consent is required under Section 7
of the Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission thereunder.
Very truly yours,
VEDDER, PRICE, KAUFMAN & KAMMHOLZ
<PAGE> 13
[VEDDER PRICE LETTERHEAD]
October 17, 1996
Flagship Pennsylvania Triple Tax Nuveen Flagship Pennsylvania Municipal
Exempt Fund Bond Fund
One Dayton Centre 333 West Wacker Drive
One South Main Street Chicago, Illinois 60606
Dayton, Ohio 45402
Nuveen Pennsylvania Tax-Free Value Fund
333 West Wacker Drive
Chicago, Illinois 60606
Gentlemen:
You have requested our opinion regarding certain federal income tax
consequences of the proposed reorganizations (each a "Reorganization") of
Flagship Pennsylvania Triple Tax Exempt Fund ("Flagship Fund"), a separate
portfolio of Flagship Tax Exempt Funds Trust, a Massachusetts business trust
("Flagship Trust"), and Nuveen Pennsylvania Tax-Free Value Fund ("Nuveen
Fund"), a separate portfolio of Nuveen Multistate Tax-Free Trust, a
Massachusetts business trust ("Nuveen Trust"), (the Flagship Fund and the
Nuveen Fund are also each referred to as an "Acquired Fund" and collectively as
the "Acquired Funds"), into Nuveen Flagship Pennsylvania Municipal Bond Fund
("Acquiring Fund"), a separate portfolio of Nuveen Flagship Multistate Trust I,
a Massachusetts business trust ("New Trust"). The Reorganizations contemplate
the acquisition by the Acquiring Fund of substantially all the assets of the
Acquired Funds in exchange for voting shares of beneficial interest ("shares")
of the Acquiring Fund and the assumption of the Acquired Funds' liabilities.
Thereafter, the shares of the Acquiring Fund will be distributed to the
shareholders of the Acquired Funds and each Acquired Fund will be completely
liquidated and terminated. The foregoing will be accomplished pursuant to an
Agreement and Plan of Reorganization and Liquidation, dated as of October 15,
1996 (the "Plan"), entered into by the Flagship Trust and the Nuveen Trust, on
behalf of the Acquired Funds, and the New Trust on behalf of the Acquiring
Fund.
In rendering this opinion, we have reviewed and relied upon statements
made to us by certain of your officers. We have also examined certificates of
such officers and such other
<PAGE> 14
VEDDER PRICE
Flagship Pennsylvania Triple Tax Exempt Fund
Nuveen Pennsylvania Tax-Free Value Fund
Nuveen Flagship Pennsylvania Municipal Bond Fund
October 17, 1996
Page 2
agreements, documents, and corporate records that have been made available to
us and such other matters as we have deemed relevant for purposes of this
opinion. In such examination, we have assumed the genuineness of all
signatures, the authenticity of all documents submitted to us as originals, the
conformity to originals of all documents submitted to us as copies and the
authenticity of the originals of such latter documents.
Our opinion is based, in part, on the assumption that the proposed
Reorganizations described herein will occur in accordance with the agreements
and the facts and representations set forth or referred to in this opinion
letter, and that such facts and representations are accurate as of the date
hereof and will be accurate on the effective date of such Reorganizations (the
"Effective Time"). As more fully discussed below, we have also assumed in
issuing our opinion that the shareholders of the Acquired Funds do not have any
plan or intention to dispose of a certain number of the Acquiring Fund shares
received by them in the Reorganizations. We have undertaken no independent
investigation of the accuracy of the facts, representations and assumptions set
forth or referred to herein.
For the purposes indicated above, and based upon the facts,
assumptions and conditions as set forth herein, and the representations made to
us by duly authorized officers of the Acquired Funds and the Acquiring Fund in
a letter dated October 17, 1996, it is our opinion that:
1. The acquisitions by the Acquiring Fund of
substantially all the assets of the Acquired Funds in exchange solely
for Acquiring Fund voting shares and the assumption by the Acquiring
Fund of the Acquired Funds' liabilities, if any, followed by the
distribution by the Acquired Funds of the Acquiring Fund shares to the
shareholders of the Acquired Funds in exchange for their Acquired
Funds shares in complete liquidation of the Acquired Funds, will each
constitute a "reorganization" within the meaning of Section 368(a)(1)
of the Internal Revenue Code of 1986, as amended (the "Code"), and the
Acquiring Fund and, with respect to its respective Reorganization,
each Acquired Fund will be "a party to a reorganization" within the
meaning of Section 368(b) of the Code;
2. The Acquired Funds' shareholders will recognize no
gain or loss upon the exchange of all of their Acquired Fund shares
for Acquiring Fund shares in complete liquidation of an Acquired Fund
(Code Section 354(a)(1));
3. No gain or loss will be recognized by an Acquired
Fund upon the transfer of substantially all its assets to the
Acquiring Fund in exchange solely for Acquiring
<PAGE> 15
VEDDER PRICE
Flagship Pennsylvania Triple Tax Exempt Fund
Nuveen Pennsylvania Tax-Free Value Fund
Nuveen Flagship Pennsylvania Municipal Bond Fund
October 17, 1996
Page 3
Fund shares and the assumption by the Acquiring Fund of such Acquired
Fund's liabilities, if any, and with respect to the subsequent
distribution of those Acquiring Fund shares to the Acquired Fund's
shareholders in complete liquidation of such Acquired Fund (Code
Section 361);
4. No gain or loss will be recognized by the Acquiring
Fund upon the acquisition of substantially all the Acquired Funds'
assets in exchange solely for Acquiring Fund shares and the assumption
of the Acquired Funds' liabilities, if any (Code Section 1032(a));
5. The basis of the assets acquired by the Acquiring
Fund will be, in each instance, the same as the basis of those assets
immediately before the transfer when such assets were held by an
Acquired Fund, and the holding period of such assets acquired by the
Acquiring Fund will include the holding period thereof when such
assets were held by an Acquired Fund (Code Sections 362(b) and
1223(2));
6. The basis of the Acquiring Fund shares to be received
by the Acquired Funds' shareholders upon liquidation of the Acquired
Funds will be, in each instance, the same as the basis of the Acquired
Fund shares surrendered in exchange therefor, decreased by any cash
received and increased by the amount of gain recognized on the
exchange (Code Section 358(a)(1)); and
7. The holding period of the Acquiring Fund shares to be
received by the Acquired Funds' shareholders will include the period
during which the Acquired Fund shares to be surrendered in exchange
therefor were held, provided such Acquired Fund shares were held as
capital assets by those shareholders on the date of the exchange (Code
Section 1223(1)).
FACTS
Our opinion is based upon the above referenced representations and the
following facts and assumptions, any alteration of which could adversely affect
our conclusions.
The Acquired Funds have been registered and operated since they
commenced operations as series of open-end, management investment companies
under the Investment Company Act of 1940, 15 U.S.C. Section 80a, et seq. (the
"1940 Act"). Each Acquired Fund has qualified and will qualify as a regulated
investment company under Section 851 of the Code for each of its taxable
<PAGE> 16
VEDDER PRICE
Flagship Pennsylvania Triple Tax Exempt Fund
Nuveen Pennsylvania Tax-Free Value Fund
Nuveen Flagship Pennsylvania Municipal Bond Fund
October 17, 1996
Page 4
years, and has distributed and will distribute all or substantially all its
income so that it and its shareholders have been and will be taxed in
accordance with Section 852 of the Code.
The Acquiring Fund is registered, and will operate once it commences
operations, as a series of an open-end, management investment company under the
1940 Act. It will qualify as a regulated investment company under Section 851
of the Code for its current taxable year, which is its first year of existence,
and anticipates so qualifying for all future years, and has distributed and
will distribute all or substantially all its income so that it and its
shareholders will be taxed in accordance with Section 852 of the Code.
Upon satisfaction of certain terms and conditions set forth in the
Plan on or before the Effective Time, the following will occur: (a) the
Acquiring Fund will acquire substantially all the assets of the Acquired Funds
in exchange for the Acquiring Fund's assumption of substantially all the
liabilities of the Acquired Funds and the issuance of Acquiring Fund shares to
such Acquired Funds; (b) the Acquiring Fund shares will be distributed to the
shareholders of the Acquired Funds in exchange for their Acquired Fund shares;
and (c) the Acquired Funds will be dissolved and liquidated. The assets of the
Acquired Funds to be acquired by the Acquiring Fund consist primarily of bonds
whose interest is exempt from federal income taxation, cash and other
securities held in the Acquired Funds' portfolios.
As soon as practicable after the Effective Time, each Acquired Fund
will be liquidated and will distribute the newly issued Acquiring Fund shares
it receives pro rata to its shareholders of record in exchange for such
shareholders' interests in such Acquired Fund. Such liquidation and
distribution will be accomplished by opening accounts on the books of the
Acquiring Fund in the names of the shareholders of each Acquired Fund (on a
class by class basis) and transferring to those shareholder accounts the pro
rata number of Acquiring Fund shares of each respective class as was previously
credited to the Acquired Fund on such books.
As a result of the Reorganization, every shareholder of each Acquired
Fund will own Acquiring Fund shares that would have an aggregate per share net
asset value immediately after the Effective Time equal to the aggregate per
share net asset value of that shareholder's Acquired Fund shares immediately
prior to the Effective Time. Since the Acquiring Fund shares issued to the
shareholders of the Acquired Funds will be issued at net asset value in
exchange for the net assets of such Acquired Funds having a value equal to the
aggregate per share net asset value of those Acquiring Fund shares so issued,
the net asset value of the Acquiring Fund shares should remain virtually
unchanged by the Reorganization.
<PAGE> 17
VEDDER PRICE
Flagship Pennsylvania Triple Tax Exempt Fund
Nuveen Pennsylvania Tax-Free Value Fund
Nuveen Flagship Pennsylvania Municipal Bond Fund
October 17, 1996
Page 5
The investment objectives of the Acquiring Fund will be substantially
similar or identical to those of the Acquired Funds and the Acquiring Fund will
continue the historic business of each Acquired Fund or use a significant
portion of each Acquired Fund's historic assets in its business.
The management of each Acquired Fund has represented to us that, to
the best of their knowledge, there is no plan or intention on the part of any
Acquired Fund shareholders to sell, exchange, or otherwise dispose of a number
of Acquiring Fund shares received in the Reorganization that would reduce the
ownership by shareholders of such Acquired Fund to a number of shares of
Acquiring Fund having a value, as of the Effective Time, of less than 50
percent of all the formerly outstanding shares of such Acquired Fund as of the
same time. In issuing our opinion, we have assumed that there is, in fact, no
such plan or intention. If such assumption were inaccurate, it would adversely
affect the opinions contained herein.
In approving the Reorganization, the Boards of Trustees of the Nuveen
Trust and the Flagship Trust each identified certain benefits that are likely
to result from combining the funds, including administrative and operating
efficiencies, potential for asset growth, additional investment options for
purchase of shares, and an expanded selection of investment products for their
shareholders. Each Board also considered the possible risks and costs of
combining the funds and determined that the Reorganization is likely to provide
benefits to the shareholders of each fund that outweigh the costs incurred.
CONCLUSION
Based on the foregoing, it is our opinion that the acquisition by the
Acquiring Fund, pursuant to the Plan, of substantially all the assets and
liabilities of the Flagship Fund in exchange for voting shares of the Acquiring
Fund will qualify as a reorganization under Code Section 368(a)(1)(C) and the
acquisition by the Acquiring Fund, pursuant to the Plan, of substantially all
the assets and liabilities of the Nuveen Fund in exchange for voting shares of
the Acquiring Fund will qualify as a reorganization under Code Section
368(a)(1)(D).
Our opinions set forth above with respect to (1) the nonrecognition of
gain or loss to the Acquired Funds and the Acquiring Fund, (2) the basis and
holding period of the assets received by the Acquiring Fund, (3) the
nonrecognition of gain or loss to the Acquired Funds' shareholders upon the
receipt of the Acquiring Fund shares, and (4) the basis and holding period of
the Acquiring Fund shares received by the Acquired Funds' shareholders, follow
as a matter
<PAGE> 18
VEDDER PRICE
Flagship Pennsylvania Triple Tax Exempt Fund
Nuveen Pennsylvania Tax-Free Value Fund
Nuveen Flagship Pennsylvania Municipal Bond Fund
October 17, 1996
Page 6
of law from the opinion that the acquisitions under the Plan will qualify as
reorganizations under Code Section 368(a)(1)(C) or Code Section 368(a)(1)(D).
The opinions expressed in this letter are based on the Code, the
Income Tax Regulations promulgated by the Treasury Department thereunder and
judicial authority reported as of the date hereof. We have also considered the
position of the Internal Revenue Service (the "Service") reflected in published
and private rulings. Although we are not aware of any pending changes to these
authorities that would alter our opinions, there can be no assurances that
future legislative or administrative changes, court decisions or Service
interpretations will not significantly modify the statements or opinions
expressed herein.
Our opinions are limited to those federal income tax issues
specifically considered herein and are addressed to and are only for the
benefit of the Acquired Funds and Acquiring Fund. We do not express any
opinion as to any other federal income tax issues, or any state or local law
issues, arising from the transactions contemplated by the Plan. Although the
discussion herein is based upon our best interpretation of existing sources of
law and expresses what we believe a court would properly conclude if presented
with these issues, no assurance can be given that such interpretations would be
followed if they were to become the subject of judicial or administrative
proceedings.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to the use of our name under the captions "Proposal
No. 4 - The Reorganizations - Tax Consequences of the Reorganizations" and
"Legal Opinions" in the Joint Proxy Statement - Prospectus contained in such
Registration Statement. In giving such consent, we do not thereby concede that
we are within the category of persons whose consent is required under Section 7
of the Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission thereunder.
Very truly yours,
VEDDER, PRICE, KAUFMAN & KAMMHOLZ
<PAGE> 19
[VEDDER PRICE LETTERHEAD]
October 17, 1996
Flagship Virginia Double Tax Exempt Fund Nuveen Flagship Virginia Municipal
One Dayton Centre Bond Fund
One South Main Street 333 West Wacker Drive
Dayton, Ohio 45402 Chicago, Illinois 60606
Nuveen Virginia Tax-Free Value Fund
333 West Wacker Drive
Chicago, Illinois 60606
Gentlemen:
You have requested our opinion regarding certain federal income tax
consequences of the proposed reorganizations (each a "Reorganization") of
Flagship Virginia Double Tax Exempt Fund ("Flagship Fund"), a separate
portfolio of Flagship Tax Exempt Funds Trust, a Massachusetts business trust
("Flagship Trust"), and Nuveen Virginia Tax-Free Value Fund ("Nuveen Fund"), a
separate portfolio of Nuveen Multistate Tax-Free Trust, a Massachusetts
business trust ("Nuveen Trust"), (the Flagship Fund and the Nuveen Fund are
also each referred to as an "Acquired Fund" and collectively as the "Acquired
Funds"), into Nuveen Flagship Virginia Municipal Bond Fund ("Acquiring Fund"),
a separate portfolio of Nuveen Flagship Multistate Trust I, a Massachusetts
business trust ("New Trust"). The Reorganizations contemplate the acquisition
by the Acquiring Fund of substantially all the assets of the Acquired Funds in
exchange for voting shares of beneficial interest ("shares") of the Acquiring
Fund and the assumption of the Acquired Funds' liabilities. Thereafter, the
shares of the Acquiring Fund will be distributed to the shareholders of the
Acquired Funds and each Acquired Fund will be completely liquidated and
terminated. The foregoing will be accomplished pursuant to an Agreement and
Plan of Reorganization and Liquidation, dated as of October 15, 1996 (the
"Plan"), entered into by the Flagship Trust and the Nuveen Trust, on behalf of
the Acquired Funds, and the New Trust on behalf of the Acquiring Fund.
In rendering this opinion, we have reviewed and relied upon statements
made to us by certain of your officers. We have also examined certificates of
such officers and such other agreements, documents, and corporate records that
have been made available to us and such
<PAGE> 20
VEDDER PRICE
Flagship Virginia Double Tax Exempt Fund
Nuveen Virginia Tax-Free Value Fund
Nuveen Flagship Virginia Municipal Bond Fund
October 17, 1996
Page 2
other matters as we have deemed relevant for purposes of this opinion. In such
examination, we have assumed the genuineness of all signatures, the
authenticity of all documents submitted to us as originals, the conformity to
originals of all documents submitted to us as copies and the authenticity of
the originals of such latter documents.
Our opinion is based, in part, on the assumption that the proposed
Reorganizations described herein will occur in accordance with the agreements
and the facts and representations set forth or referred to in this opinion
letter, and that such facts and representations are accurate as of the date
hereof and will be accurate on the effective date of such Reorganizations (the
"Effective Time"). As more fully discussed below, we have also assumed in
issuing our opinion that the shareholders of the Acquired Funds do not have any
plan or intention to dispose of a certain number of the Acquiring Fund shares
received by them in the Reorganizations. We have undertaken no independent
investigation of the accuracy of the facts, representations and assumptions set
forth or referred to herein.
For the purposes indicated above, and based upon the facts,
assumptions and conditions as set forth herein, and the representations made to
us by duly authorized officers of the Acquired Funds and the Acquiring Fund in
a letter dated October 17, 1996, it is our opinion that:
1. The acquisitions by the Acquiring Fund of
substantially all the assets of the Acquired Funds in exchange solely
for Acquiring Fund voting shares and the assumption by the Acquiring
Fund of the Acquired Funds' liabilities, if any, followed by the
distribution by the Acquired Funds of the Acquiring Fund shares to the
shareholders of the Acquired Funds in exchange for their Acquired
Funds shares in complete liquidation of the Acquired Funds, will each
constitute a "reorganization" within the meaning of Section 368(a)(1)
of the Internal Revenue Code of 1986, as amended (the "Code"), and the
Acquiring Fund and, with respect to its respective Reorganization,
each Acquired Fund will be "a party to a reorganization" within the
meaning of Section 368(b) of the Code;
2. The Acquired Funds' shareholders will recognize no
gain or loss upon the exchange of all of their Acquired Fund shares
for Acquiring Fund shares in complete liquidation of an Acquired Fund
(Code Section 354(a)(1));
3. No gain or loss will be recognized by an Acquired
Fund upon the transfer of substantially all its assets to the
Acquiring Fund in exchange solely for Acquiring Fund shares and the
assumption by the Acquiring Fund of such Acquired Fund's
<PAGE> 21
VEDDER PRICE
Flagship Virginia Double Tax Exempt Fund
Nuveen Virginia Tax-Free Value Fund
Nuveen Flagship Virginia Municipal Bond Fund
October 17, 1996
Page 3
liabilities, if any, and with respect to the subsequent distribution
of those Acquiring Fund shares to the Acquired Fund's shareholders in
complete liquidation of such Acquired Fund (Code Section 361);
4. No gain or loss will be recognized by the Acquiring
Fund upon the acquisition of substantially all the Acquired Funds'
assets in exchange solely for Acquiring Fund shares and the assumption
of the Acquired Funds' liabilities, if any (Code Section 1032(a));
5. The basis of the assets acquired by the Acquiring
Fund will be, in each instance, the same as the basis of those assets
immediately before the transfer when such assets were held by an
Acquired Fund, and the holding period of such assets acquired by the
Acquiring Fund will include the holding period thereof when such
assets were held by an Acquired Fund (Code Sections 362(b) and
1223(2));
6. The basis of the Acquiring Fund shares to be received
by the Acquired Funds' shareholders upon liquidation of the Acquired
Funds will be, in each instance, the same as the basis of the Acquired
Fund shares surrendered in exchange therefor, decreased by any cash
received and increased by the amount of gain recognized on the
exchange (Code Section 358(a)(1)); and
7. The holding period of the Acquiring Fund shares to be
received by the Acquired Funds' shareholders will include the period
during which the Acquired Fund shares to be surrendered in exchange
therefor were held, provided such Acquired Fund shares were held as
capital assets by those shareholders on the date of the exchange (Code
Section 1223(1)).
FACTS
Our opinion is based upon the above referenced representations and the
following facts and assumptions, any alteration of which could adversely affect
our conclusions.
The Acquired Funds have been registered and operated since they
commenced operations as series of open-end, management investment companies
under the Investment Company Act of 1940, 15 U.S.C. Section 80a, et seq. (the
"1940 Act"). Each Acquired Fund has qualified and will qualify as a regulated
investment company under Section 851 of the Code for each of its taxable
<PAGE> 22
VEDDER PRICE
Flagship Virginia Double Tax Exempt Fund
Nuveen Virginia Tax-Free Value Fund
Nuveen Flagship Virginia Municipal Bond Fund
October 17, 1996
Page 4
years, and has distributed and will distribute all or substantially all its
income so that it and its shareholders have been and will be taxed in
accordance with Section 852 of the Code.
The Acquiring Fund is registered, and will operate once it commences
operations, as a series of an open-end, management investment company under the
1940 Act. It will qualify as a regulated investment company under Section 851
of the Code for its current taxable year, which is its first year of existence,
and anticipates so qualifying for all future years, and has distributed and
will distribute all or substantially all its income so that it and its
shareholders will be taxed in accordance with Section 852 of the Code.
Upon satisfaction of certain terms and conditions set forth in the
Plan on or before the Effective Time, the following will occur: (a) the
Acquiring Fund will acquire substantially all the assets of the Acquired Funds
in exchange for the Acquiring Fund's assumption of substantially all the
liabilities of the Acquired Funds and the issuance of Acquiring Fund shares to
such Acquired Funds; (b) the Acquiring Fund shares will be distributed to the
shareholders of the Acquired Funds in exchange for their Acquired Fund shares;
and (c) the Acquired Funds will be dissolved and liquidated. The assets of the
Acquired Funds to be acquired by the Acquiring Fund consist primarily of bonds
whose interest is exempt from federal income taxation, cash and other
securities held in the Acquired Funds' portfolios.
As soon as practicable after the Effective Time, each Acquired Fund
will be liquidated and will distribute the newly issued Acquiring Fund shares
it receives pro rata to its shareholders of record in exchange for such
shareholders' interests in such Acquired Fund. Such liquidation and
distribution will be accomplished by opening accounts on the books of the
Acquiring Fund in the names of the shareholders of each Acquired Fund (on a
class by class basis) and transferring to those shareholder accounts the pro
rata number of Acquiring Fund shares of each respective class as was previously
credited to the Acquired Fund on such books.
As a result of the Reorganization, every shareholder of each Acquired
Fund will own Acquiring Fund shares that would have an aggregate per share net
asset value immediately after the Effective Time equal to the aggregate per
share net asset value of that shareholder's Acquired Fund shares immediately
prior to the Effective Time. Since the Acquiring Fund shares issued to the
shareholders of the Acquired Funds will be issued at net asset value in
exchange for the net assets of such Acquired Funds having a value equal to the
aggregate per share net asset value of those Acquiring Fund shares so issued,
the net asset value of the Acquiring Fund shares should remain virtually
unchanged by the Reorganization.
<PAGE> 23
VEDDER PRICE
Flagship Virginia Double Tax Exempt Fund
Nuveen Virginia Tax-Free Value Fund
Nuveen Flagship Virginia Municipal Bond Fund
October 17, 1996
Page 5
The investment objectives of the Acquiring Fund will be substantially
similar or identical to those of the Acquired Funds and the Acquiring Fund will
continue the historic business of each Acquired Fund or use a significant
portion of each Acquired Fund's historic assets in its business.
The management of each Acquired Fund has represented to us that, to
the best of their knowledge, there is no plan or intention on the part of any
Acquired Fund shareholders to sell, exchange, or otherwise dispose of a number
of Acquiring Fund shares received in the Reorganization that would reduce the
ownership by shareholders of such Acquired Fund to a number of shares of
Acquiring Fund having a value, as of the Effective Time, of less than 50
percent of all the formerly outstanding shares of such Acquired Fund as of the
same time. In issuing our opinion, we have assumed that there is, in fact, no
such plan or intention. If such assumption were inaccurate, it would adversely
affect the opinions contained herein.
In approving the Reorganization, the Boards of Trustees of the Nuveen
Trust and the Flagship Trust each identified certain benefits that are likely
to result from combining the funds, including administrative and operating
efficiencies, potential for asset growth, additional investment options for
purchase of shares, and an expanded selection of investment products for their
shareholders. Each Board also considered the possible risks and costs of
combining the funds and determined that the Reorganization is likely to provide
benefits to the shareholders of each fund that outweigh the costs incurred.
CONCLUSION
Based on the foregoing, it is our opinion that the acquisition by the
Acquiring Fund, pursuant to the Plan, of substantially all the assets and
liabilities of the Nuveen Fund in exchange for voting shares of the Acquiring
Fund will qualify as a reorganization under Code Section 368(a)(1)(C) and the
acquisition by the Acquiring Fund, pursuant to the Plan, of substantially all
the assets and liabilities of the Flagship Fund in exchange for voting shares
of the Acquiring Fund will qualify as a reorganization under Code Section
368(a)(1)(D).
Our opinions set forth above with respect to (1) the nonrecognition of
gain or loss to the Acquired Funds and the Acquiring Fund, (2) the basis and
holding period of the assets received by the Acquiring Fund, (3) the
nonrecognition of gain or loss to the Acquired Funds' shareholders upon the
receipt of the Acquiring Fund shares, and (4) the basis and holding period of
the Acquiring Fund shares received by the Acquired Funds' shareholders, follow
as a matter
<PAGE> 24
VEDDER PRICE
Flagship Virginia Double Tax Exempt Fund
Nuveen Virginia Tax-Free Value Fund
Nuveen Flagship Virginia Municipal Bond Fund
October 17, 1996
Page 6
of law from the opinion that the acquisitions under the Plan will qualify as
reorganizations under Code Section 368(a)(1)(C) or Code Section 368(a)(1)(D).
The opinions expressed in this letter are based on the Code, the
Income Tax Regulations promulgated by the Treasury Department thereunder and
judicial authority reported as of the date hereof. We have also considered the
position of the Internal Revenue Service (the "Service") reflected in published
and private rulings. Although we are not aware of any pending changes to these
authorities that would alter our opinions, there can be no assurances that
future legislative or administrative changes, court decisions or Service
interpretations will not significantly modify the statements or opinions
expressed herein.
Our opinions are limited to those federal income tax issues
specifically considered herein and are addressed to and are only for the
benefit of the Acquired Funds and Acquiring Fund. We do not express any
opinion as to any other federal income tax issues, or any state or local law
issues, arising from the transactions contemplated by the Plan. Although the
discussion herein is based upon our best interpretation of existing sources of
law and expresses what we believe a court would properly conclude if presented
with these issues, no assurance can be given that such interpretations would be
followed if they were to become the subject of judicial or administrative
proceedings.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to the use of our name under the captions "Proposal
No. 4 - The Reorganizations - Tax Consequences of the Reorganizations" and
"Legal Opinions" in the Joint Proxy Statement - Prospectus contained in such
Registration Statement. In giving such consent, we do not thereby concede that
we are within the category of persons whose consent is required under Section 7
of the Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission thereunder.
Very truly yours,
VEDDER, PRICE, KAUFMAN & KAMMHOLZ
<PAGE> 1
Exhibit 99.13
TRANSFER AGENCY AND SERVICE AGREEMENT
between
(Name of Mutual Fund, Trust or Company)
and
STATE STREET BANK AND TRUST COMPANY
1C-Domestic Trust/Series
<PAGE> 2
TABLE OF CONTENTS
-----------------
Page
----
1. Terms of Appointment; Duties of the Bank......................... 1
2. Fees and Expenses ............................................... 3
3. Representations and Warranties of the Bank....................... 4
4. Representations and Warranties of the Fund....................... 4
5. Indemnification.................................................. 5
6. Covenants of the Fund and the Bank............................... 8
7. Termination of Agreement......................................... 9
8. Additional Funds................................................. 9
9. Assignment....................................................... 9
10. Amendment....................................................... 10
11. Massachusetts Law to Apply...................................... 10
12. Merger of Agreement............................................. 10
13. No Liability of Shareholders, Trustees, Officers, Etc........... 10
<PAGE> 3
TRANSFER AGENCY AND SERVICE AGREEMENT
AGREEMENT made as of the day of , 199 , by and between Nuveen
Flagship Multistate Trust I, a business trust, having its principal office and
place of business at (the "Fund"), and STATE STREET BANK AND TRUST COMPANY, a
Massachusetts trust company having its principal office and place of business
at 225 Franklin Street, Boston, Massachusetts 02110 (the "Bank").
WHEREAS, the Fund is authorized to issue shares in separate series, with each
such series representing interests in a separate portfolio of securities and
other assets; and
WHEREAS, the Fund intends to initially offer shares in series, the
(NAME EACH PORTFOLIO) (each such series, together with all other series
subsequently established by the Fund and made subject to this Agreement in
accordance with Article 10, being herein referred to as a "Portfolio", and
collectively as the "Portfolios");
WHEREAS, the Fund on behalf of the Portfolios desires to appoint the Bank as
its transfer agent, dividend disbursing agent, custodian of certain retirement
plans and agent in connection with certain other activities, and the Bank
desires to accept such appointment;
NOW, THEREFORE, in consideration of the mutual covenants herein contained, the
parties hereto agree as follows:
1. Terms of Appointment; Duties of the Bank
1.1 Subject to the terms and conditions set forth in this Agreement, the
Fund, on behalf of the Portfolios, hereby employs and appoints the
Bank to act as, and the Bank agrees to act as its transfer agent for
the Fund's authorized and issued common shares, $.01 par value,
("Shares"), dividend disbursing agent, custodian of certain retirement
plans and agent in connection with any accumulation, open-account or
similar plans provided to the shareholders of each of the respective
Portfolios of the Fund ("Shareholders") and set out in the currently
effective prospectus and statement of additional information
("prospectus") of the Fund on behalf of the applicable Portfolio,
including without limitation any periodic investment plan or periodic
withdrawal program.
1.2 The Bank agrees that it will perform the following services:
(a) In accordance with procedures established from time to time by
agreement between the Fund on behalf of each of the Portfolios,
as applicable and the Bank, the Bank shall:
(i) Receive for acceptance, orders for the purchase of Shares,
and promptly deliver payment and appropriate documentation
thereof to the Custodian of
<PAGE> 4
the Fund authorized pursuant to resolutions adopted by the
Board of Trustees (the "Custodian");
(ii) Pursuant to purchase orders, issue the appropriate number
of Shares and hold such Shares in the appropriate
Shareholder account;
(iii) Receive for acceptance redemption requests and redemption
directions and deliver the appropriate documentation
thereof to the Custodian;
(iv) At the appropriate time as and when it receives monies paid
to it by the Custodian with respect to any redemption, pay
over or cause to be paid over in the appropriate manner
such monies as instructed by the redeeming Shareholders;
(v) Effect transfers of Shares by the registered owners thereof
upon receipt of appropriate instructions;
(vi) Prepare and transmit payments for dividends and
distributions declared by the Fund on behalf of the
applicable Portfolio;
(vii) Maintain records of account for and advise the Fund and its
Shareholders as to the foregoing.
2
<PAGE> 5
(b) In addition to and neither in lieu nor in contravention of
the services set forth in the above paragraph (a), the Bank
shall: (i) perform the customary services of a transfer agent,
dividend disbursing agent, custodian of certain retirement plans
and, as relevant, agent in connection with accumulation,
open-account or similar plans (including without limitation any
periodic investment plan or periodic withdrawal program),
including but not limited to: maintaining all Shareholder
accounts, preparing Shareholder meeting lists, mailing proxies,
mailing Shareholder reports and prospectuses to current
Shareholders, withholding taxes on U.S. resident and non-resident
alien accounts, preparing and filing U.S. Treasury Department
Forms 1099 and other appropriate forms required with respect to
dividends and distributions by federal authorities for all
Shareholders, preparing and mailing confirmation forms and
statements of account to Shareholders for all purchases and
redemptions of Shares and other confirmable transactions in
Shareholder accounts, preparing and mailing activity statements
for Shareholders, and providing Shareholder account information
and (ii) provide a system which will enable the Fund to monitor
the total number of Shares sold in each State.
(c) In addition, the Fund shall (i) identify to the Bank in
writing those transactions and assets to be treated as exempt
from blue sky reporting for each State and (ii) verify the
establishment of transactions for each State on the system prior
to activation and thereafter monitor the daily activity for each
State. The responsibility of the Bank for the Fund's blue sky
State registration status is solely limited to the initial
establishment of transactions subject to blue sky compliance by
the Fund and the daily reporting of such transactions to the Fund
as provided above.
(d) Procedures applicable to certain of these services may be
established from time to time by agreement between the Fund and
the Bank.
2. Fees and Expenses
2.1 For the performance by the Bank pursuant to this Agreement, the Fund
agrees on behalf of each of the Portfolios to pay the Bank an
annual maintenance fee for each Shareholder account as set out in the
initial fee schedule attached hereto. Such fees and out-of-pocket
expenses and advances identified under Section 2.2 below may be changed
from time to time subject to mutual written agreement between the Fund
and the Bank.
3
<PAGE> 6
2.2 In addition to the fee paid under Section 2.1 above, the Fund
agrees on behalf of each of the Portfolios to reimburse the Bank
for out-of-pocket expenses or advances incurred by the Bank
for the items set out in the fee schedule attached hereto. In addition,
any other expenses incurred by the Bank at the request or with the
consent of the Fund, will be reimbursed by the Fund on behalf of the
applicable Portfolio.
2.3 The Fund agrees on behalf of each of the Portfolios to pay all fees and
reimbursable expenses within five days following the receipt of the
respective billing notice. Postage for mailing of dividends,
proxies, Fund reports and other mailings to all shareholder accounts
shall be advanced to the Bank by the Fund at least seven (7) days prior
to the mailing date of such materials.
3. Representations and Warranties of the Bank
The Bank represents and warrants to the Fund that:
3.1 It is a trust company duly organized and existing and in good
standing under the laws of the Commonwealth of Massachusetts.
3.2 It is duly qualified to carry on its business in the Commonwealth
of Massachusetts.
3.3 It is empowered under applicable laws and by its Charter and By-Laws to
enter into and perform this Agreement.
3.4 All requisite corporate proceedings have been taken to authorize it to
enter into and perform this Agreement.
3.5 It has and will continue to have access to the necessary facilities,
equipment and personnel to perform its duties and obligations under
this Agreement.
4. Representations and Warranties of the Fund
The Fund represents and warrants to the Bank that:
4.1 It is a business trust duly organized and existing and in good standing
under the laws of the Commonwealth of Massachusetts.
4.2 It is empowered under applicable laws and by its Declaration of Trust
and By-Laws to enter into and perform this Agreement.
4
<PAGE> 7
4.3 All corporate proceedings required by said Declaration of Trust and
By-Laws have been taken to authorize it to enter into and perform this
Agreement.
4.4 It is an open-end management investment company registered under the
Investment Company Act of 1940, as amended.
4.5 A registration statement under the Securities Act of 1933, as amended
on behalf of each of the Portfolios will be effective on or before the
effective date of this agreement and will remain effective, and
appropriate state securities law filings have been made and will
continue to be made, with respect to all Shares of the Fund being
offered for sale.
5. Idemnification
5
<PAGE> 8
5.1 The Bank shall not be responsible for, and the Fund shall on behalf of
the applicable Portfolio indemnify and hold the Bank harmless from and
against, any and all losses, damages, costs, charges, counsel fees,
payments, expenses and liability arising out of or attributable to:
(a) All actions of the Bank or its agents or subcontractors required
to be taken pursuant to this Agreement, provided that such
actions are taken in good faith and without negligence or
willfull misconduct.
(b) Refusal or failure to comply with the terms of this agreement,
or which arise out of the Fund's lack of good faith, negligence
or willful misconduct which arise out of the breach of any
representation or warranty of the Fund hereunder.
(c) The reliance on or use by the Bank or its agents or
subcontractors of information, records and documents which (i)
are received by the Bank or its agents or
6
<PAGE> 9
furnished to it on behalf of the Fund and (ii) have been
prepared maintained or performed by the Fund or any other
person or firm on behalf of the Fund.
(d) The reliance on, or the carrying out by the Bank or its agents or
subcontractors of any instructions or requests of the Fund on
behalf of the applicable Portfolio.
(e) The offer or sale of Shares in violation of any requirement under
the federal securities laws or regulations or the securities laws
or regulations of any state that such Shares be registered in
such state or in violation of any stop order or other
determination or ruling by any federal agency or any state with
respect to the offer or sale of such Shares in such state.
5.2 The Bank shall at all times act in good faith and agrees to use its
best efforts within reasonable limits to insure the accuracy of all
services performed under this Agreement, but assumes no responsibility
and shall not be liable for loss or damage due to errors unless said
errors are caused by its negligence, bad faith, or willful misconduct
or that of its employees.
5.3 At any time the Bank may apply to any officer of the Fund for
instructions, and may consult with legal counsel with respect to any
matter arising in connection with the services to be performed by the
Bank under this Agreement, and the Bank and its agents or
subcontractors shall not be liable and shall be indemnified by the Fund
on behalf of the applicable Portfolio for any action taken or omitted
by it in reliance upon such instructions or upon the opinion of such
counsel. The Bank, its agents and subcontractors shall be protected and
indemnified in acting upon any paper or document furnished by or on
behalf of the Fund, reasonably believed to be genuine and to have been
signed by the proper person or persons, or upon any instruction,
information, data, records or documents provided the Bank or its agents
or subcontractors by machine readable input, telex, CRT data entry or
other similar means authorized by the Fund, and shall not be held to
have notice of any change of authority of any person, until receipt of
written notice thereof from the Fund. The Bank, its agents and
subcontractors shall also be protected and indemnified in recognizing
stock certificates which are reasonably believed to bear the proper
manual or facsimile signatures of the officers of the Fund, and the
proper countersignature of any former transfer agent or former
registrar, or of a co-transfer agent or co-registrar.
5.4 In the event either party is unable to perform its obligations under
the terms of this Agreement because of acts of God, strikes, equipment
or transmission failure or damage reasonably beyond its control, or
other causes reasonably beyond its control, such party shall not be
liable for damages to the other for any damages resulting from such
failure to perform or otherwise from such causes.
5.5 Neither party to this Agreement shall be liable to the other party for
consequential damages under any provision of this Agreement or for any
act or failure to act hereunder.
5.6 In order that the indemnification provisions contained in this Section
6 shall apply, upon the assertion of a claim for which the Fund may
be required to indemnify the Bank, the Bank shall promptly notify the
Fund of such assertion, and shall keep the Fund advised with respect to
all developments concerning such claim. The Fund shall have the option
to participate with the Bank in the defense of such claim or to defend
against said claim in its own name or in the name of the Bank. The Bank
shall in no case confess any claim or
7
<PAGE> 10
6. Covenants of the Fund and the Bank
6.1 The Fund shall on behalf of each of the Portfolios promptly furnish to
the Bank the following:
(a) A certified copy of the resolution of the Board of Trustees of
the Fund authorizing the appointment of the Bank and the
execution and delivery of this Agreement.
(b) A copy of the Declaration of Trust and By-Laws of the Fund and all
amendments thereto.
6.2 The Bank hereby agrees to establish and maintain facilities and
procedures reasonably acceptable to the Fund 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.
6.3 The Bank shall keep records relating to the services to be performed
hereunder, in the 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 thereunder, the Bank agrees that all such
records prepared or maintained by the Bank relating to the services to
be performed by the Bank hereunder are the property of the Fund and
will be preserved, maintained and made available in accordance with
such Section and Rules, and will be surrendered promptly to the Fund on
and in accordance with its request.
6.4 The Bank 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.
6.5 In case of any requests or demands for the inspection of the
Shareholder records of the Fund, the Bank will endeavor to notify
the Fund and to secure instructions from an authorized officer of the
Fund as to such inspection. The Bank reserves the right,
8
<PAGE> 11
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.
7. Termination of Agreement
7.1 This Agreement may be terminated by either party upon one hundred twenty
(120) days written notice to the other.
7.2 Should the Fund exercise its right to terminate, all out-of-pocket
expenses associated with the movement of records and material
will be borne by the Fund on behalf of the applicable Portfolio(s).
Additionally, the Bank reserves the right to charge for any other
reasonable expenses associated with such termination and/or a charge
equivalent to the average of three (3) months' fees.
8. Additional Funds
In the event that the Fund establishes one or more series of Shares in
addition to (LIST FUNDS) with respect to which it desires to
have the Bank render services as transfer agent under the terms hereof,
it shall so notify the Bank in writing, and if the Bank agrees in
writing to provide such services, such series of Shares shall become a
Portfolio hereunder.
9. Assignment
9.1 Except as provided in Section 9.3 below, neither this Agreement nor
any rights or obligations hereunder may be assigned by either party
without the written consent of the other party.
9.2 This Agreement shall inure to the benefit of and be binding upon the
parties and their respective permitted successors and assigns.
9.3 The Bank may, without further consent on the part of the Fund,
subcontract for the performance hereof with (i) Boston Financial Data
Services, Inc., a Massachusetts corporation ("BFDS") which is
duly registered as a transfer agent pursuant to Section 17A(c)(2) of
the Securities Exchange Act of 1934, as amended ("Section 17A(c)(2)") or
(ii) a BFDS subsidiary duly registered as a transfer agent pursuant to
Section 17A(c)(2); provided, however, that the Bank shall be as fully
responsible to the Fund for the acts and omissions of any subcontractor
as it is for its own acts and omissions.
9
<PAGE> 12
10. Amendment
This Agreement may be amended or modified by a written agreement
executed by both parties and authorized or approved by a resolution
of the Board of Trustees of the Fund.
11. Massachusetts Law to Apply
This Agreement shall be construed and the provisions thereof
interpreted under and in accordance with the laws of the Commonwealth
of Massachusetts.
12. Merger of Agreement
This Agreement constitutes the entire agreement between the parties
hereto and supersedes any prior agreement with respect to the
subject matter hereof whether oral or written.
13. No Liability of Shareholders, Trustees, Officers, Etc.
The Trusteees have authorized the execution of this contract in their
capacity as Trustees and not individually and the bank acknowledges and
agrees that neither the shareholders, trustees, officers, employees and
other agents of the Trust and the Funds shall personally be bound by or
be liable hereunder, nor shall any resort to their personal property be
had for the satisfaction of any obligation or claim hereunder.
10
<PAGE> 13
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in their names and on their behalf by and through their duly
authorized officers, as of the day and year first above written.
NUVEEN FLAGSHIP MULTISTATE TRUST I
BY:_____________________________
ATTEST:
_____________________________
STATE STREET BANK AND TRUST COMPANY
BY:_____________________________
Executive Vice President
ATTEST:
_____________________________
<PAGE> 1
Exhibit 99.14(a)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated March 1, 1996, for the Nuveen Multistate Tax-Free Trust, comprising the
Arizona, Florida, Pennsylvania and Virginia Tax-Free Value Funds, and to all
references to our firm included in or made a part of this registration
statement on Form N-14 of Nuveen Flagship Multistate Trust I.
ARTHUR ANDERSEN LLP
Chicago, Illinois
October 16, 1996
<PAGE> 1
EXHIBIT 99.14(b)
NUVEEN FLAGSHIP MULTISTATE TRUST I
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Pre-Effective Amendment No. 1 to Registration
Statement under the Securities Act of 1933, filed under Registration Statement
No. 333-09521 of our reports dated July 3, 1996, relating to the Flagship
Arizona Double Tax Exempt Fund, Flagship Florida Double Tax Exempt Fund,
Flagship Pennsylvania Triple Tax Exempt Fund and Flagship Virginia Double Tax
Exempt Fund and our report dated October 16, 1996, relating to the Nuveen
Flagship Multistate Trust I (which includes the Nuveen Flagship Arizona
Municipal Bond Fund, Nuveen Flagship Florida Municipal Bond Fund, Nuveen
Flagship Pennsylvania Municipal Bond Fund and Nuveen Flagship Virginia
Municipal Bond Fund), included in the Statement of Additional Information and
to the reference to us under the caption "Experts", in such Registration
Statement.
DELOITTE & TOUCHE LLP
Dayton, Ohio
October 16, 1996
<PAGE> 1
EXHIBIT 99.14(c)
[CHAPMAN AND CUTLER LETTERHEAD]
October 17, 1996
Nuveen Flagship Multistate Trust I
333 West Wacker Drive
Chicago, Illinois 60606
Re: Reorganization of Nuveen Arizona Tax-Free Value Fund
and
Flagship Arizona Double Tax Exempt Fund
Ladies and Gentlemen:
We have acted as Special Arizona counsel for Nuveen Flagship Multistate
Trust I, a Massachusetts business Trust (the "Fund"), concerning a Registration
Statement of the Fund on Form N-14 (Registration Nos. 333-09521 and 811-07747)
with respect to shares of the Fund, as indicated in the Registration Statement.
We hereby consent to the filing of this letter as an exhibit to such
Registration Statement and to the reference to our firm under the caption "TAX
MATTERS -- STATE TAX MATTERS" in the Statement of Additional Information which
is related to such Registration Statement. In giving such consent, we do not
thereby admit that we are within the category of persons whose consent is
required by Section 7 of the Securities Act of 1933, as amended, and the rules
and regulations thereunder.
Very truly yours
CHAPMAN AND CUTLER
\s\ Chapman and Cutler
JSOverdorff
JSO/lsb
<PAGE> 1
EXHIBIT 99.14(d)
[BAKER & MCKENZIE LETTERHEAD]
October 17, 1996
Nuveen Flagship Multistate Trust I
333 West Wacker Drive
Chicago, IL 60606
Re: Reorganization of Nuveen Florida Tax-Free Value Fund and Flagship
Florida Double Tax Exempt Fund
Ladies and Gentlemen:
We have acted as special Florida counsel for Nuveen Flagship Multistate Trust I
(the "Trust") and Nuveen Florida Tax-Free Fund (the "Acquiring Fund") in
connection with a Reorganization whereunder the Acquiring Fund will acquire
through merger Flagship Florida Double Tax Exempt Fund (the "Acquired Fund"),
concerning a Registration Statement being filed by the Trust on Form N-14
(Registration Nos. 333-09521 and 811-07747, respectively) with respect to such
Reorganization. The Trust is a business trust organized under the laws of the
Commonwealth of Massachusetts.
We hereby consent to the filing of this letter as an exhibit to such
Registration Statement and to the reference to our firm under the caption "Tax
Matters - State Tax Matters" in the Statement of Additional Information which
is a part of such Registration Statement. In giving such consent, we do not
thereby admit that we are within the category of persons whose consent is
required by Section 7 of the Securities Act of 1933, as amended, and the rules
and regulations thereunder.
Sincerely,
/s/ Jonathan H. (Jason) Warner
Jonathan H. (Jason) Warner
JHW/jhw
<PAGE> 1
EXHIBIT 99.14(e)
[CHRISTIAN & BARTON LETTERHEAD]
October 17, 1996
Nuveen Flagship Multistate Trust I
333 West Wacker Drive
Chicago, Illinois 60606
Re: Nuveen Flagship Virginia Municipal Bond Fund
Ladies and Gentlemen:
We have acted as special Virginia counsel for Nuveen Flagship
Multistate Trust I, a Massachusetts business Trust (the "Fund"), concerning a
Registration Statement of the Fund on Form N-14 (Registration Nos. 333-09521
and 811-07747 with respect to shares on the Fund, as indicated in the
Registration Statement. We hereby consent to the filing of this letter as an
exhibit to such Registration Statement and to the reference to our firm under
the caption "State Tax Matters - Nuveen Flagship Virginia Municipal Bond Fund"
in the Statement of Additional Information which is related to such
Registration Statement. In giving such consent, we do not thereby admit that
we are within the category of persons whose consent is required by Section 7 of
the Securities Act of 1933, as amended, and the rules and regulations
thereunder.
Very truly yours,
/s/ Christian & Barton, LLP
<PAGE> 1
EXHIBIT 99.14(f)
[DECHERT PRICE & RHOADS LETTERHEAD]
October 17, 1996
Nuveen Flagship Multistate Trust I
333 West Wacker Drive
Chicago, IL 60606
Re: Reorganization of Nuveen Pennsylvania Tax-Free
Value Fund and Flagship Pennsylvania Triple Tax Exempt Fund
Gentlemen:
We have acted as special Pennsylvania counsel for the Commonwealth of
Pennsylvania portion of the Nuveen Flagship Multistate Trust I (the "Fund"),
concerning the Registration Statement of the Fund on Form N-14 (Registration
Nos. 333-09521 under the Securities Act of 1933 and Registration No. 811-07747
under the Investment Company Act of 1940). We hereby consent to the filing of
this letter as an exhibit to such Registration Statement and to the references
to our firm under the caption "Tax Matters -- State Tax Matters" in the
Statement of Additional Information which is a part of such Registration
Statement. In giving such consent, we do not thereby admit that we are within
the category of persons whose consent is required by Section 7 of the
Securities Act of 1933, as amended, and the rules and regulations thereunder.
Very truly yours,
\s\ Dechert Price & Rhoads
<PAGE> 1
Exhibit 99.17(a)
A special meeting of shareholders will be held Thursday, December 12, 1996, at
10:00 a.m., Chicago time, in the 31st floor conference room of John Nuveen & Co.
Incorporated, 333 W. Wacker Drive, Chicago, Illinois. At this meeting, you will
be asked to vote on a proposal to reorganize your fund and combine it with a
similar Flagship fund, facilitating the integration of the Nuveen and Flagship
mutual fund families.
THE BOARD OF YOUR FUND HAS UNANIMOUSLY AGREED THAT THIS PROPOSAL IS IN THE BEST
INTERESTS OF SHAREHOLDERS AND URGES YOU TO VOTE IN FAVOR OF THE PROPOSAL. THE
INTEGRATION OF NUVEEN AND FLAGSHIP SHOULD LEAD TO THE FOLLOWING BENEFITS:
o Lower operating costs
o Access to a wider range of investment products
o Greater choices in the method for purchasing shares
WHETHER OR NOT YOU PLAN TO JOIN US AT THE MEETING, PLEASE COMPLETE, DATE AND
SIGN YOUR PROXY CARD AND RETURN IT IN THE ENCLOSED ENVELOPE SO THAT YOUR VOTE
WILL BE COUNTED.
---- Please fold at perforation before detaching ----
- --------------------------------------------------------------------------------
NUVEEN ARIZONA TAX-FREE VALUE FUND PROXY BALLOT
COMMON SHARES
PROXY SOLICITED BY THE BOARD OF TRUSTEES
FOR SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 12, 1996
The undersigned hereby appoints Anthony T. Dean, Timothy R. Schwertfeger, James
J. Wesolowski, and Gifford R. Zimmerman, and each of them, with full power of
substitution, Proxies for the undersigned to represent and vote the common
shares of the undersigned at the Special Meeting of Shareholders of Nuveen
Arizona Tax-Free Value Fund to be held on December 12, 1996, or any adjournment
or adjournments thereof:
1. Election of Trustees:
NOMINEES: Robert P. Bremner, Lawrence H. Brown, Anthony T. Dean,
Anne E. Impellizzeri, Margaret K. Rosenheim, Peter R. Sawers,
William J. Schneider, Timothy R. Schwertfeger.
2. Approval of an Agreement and Plan of Reorganization.
3. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the Special Meeting.
- ------------------------------------------------------------------------------
You are encouraged to specify your choices by marking the appropriate boxes ON
THE REVERSE SIDE. If you do not mark any boxes, your Proxy will be voted in
accordance with the Board of Trustees' recommendations. Please sign, date and
return this Proxy card promptly using the enclosed envelope.
- ------------------------------------------------------------------------------
SEE REVERSE SIDE
NUV-AZ
<PAGE> 2
<TABLE>
<S><C>
THE BOARD OF TRUSTEES RECOMMENDS A VOTE FOR ALL NOMINEES AND THE PROPOSALS: Please mark your votes as in this example. /X/
- ----------------------------------------------------------------------------------------------------------------------------------
1. ELECTION OF TRUSTEES: / / FOR / / WITHHOLD authority / / WITHHOLD authority to vote
(SEE REVERSE FOR NOMINEES) all nominees to vote for all nominees for nominees indicated below:
-----------------------------
INSTRUCTIONS:
To grant authority to vote FOR ALL nominees, mark the box on the left above OR do not mark any box above.
To WITHHOLD authority to vote FOR ALL nominees, mark the box in the middle above.
To WITHHOLD authority to vote FOR ANY ONE OR MORE of the nominees, mark the box on the right above AND write each
nominee's name in the space provided.
FOR AGAINST ABSTAIN
2. APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION. / / / / / /
3. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER BUSINESS AS MAY
PROPERLY COME BEFORE THE SPECIAL MEETING.
- ----------------------------------------------------------------------------------------------------------------------------------
THE SHARES TO WHICH THIS PROXY RELATES WILL BE VOTED AS SPECIFIED. IF NO SPECIFICATION IS MADE, SUCH SHARES WILL BE VOTED FOR THE
ELECTION OF TRUSTEES AND FOR THE PROPOSALS SET FORTH ON THIS PROXY.
Please be sure to sign and date this Proxy.
- ---------------------------------------------------------------------------
Shareholder sign here ________________________ Date _____________________
Co-owner sign here ________________________ Date _____________________
NOTE: Please sign exactly as your
name appears on this Proxy. If signing
for estates, trusts or corporations,
title or capacity should be stated.
If shares are held jointly, each holder
should sign.
/ / BK NUV-MS-1 NUV-AZ
</TABLE>
<PAGE> 3
A special meeting of shareholders will be held Thursday, December 12, 1996, at
10:00 a.m., Chicago time, in the 31st floor conference room of John Nuveen & Co.
Incorporated, 333 W. Wacker Drive, Chicago, Illinois. At this meeting, you
will be asked to vote on a proposal to reorganize your fund and combine it
with a similar Flagship fund, facilitating the integration of the Nuveen and
Flagship mutual fund families.
THE BOARD OF YOUR FUND HAS UNANIMOUSLY AGREED THAT THIS PROPOSAL IS IN THE BEST
INTERESTS OF SHAREHOLDERS AND URGES YOU TO VOTE IN FAVOR OF THE PROPOSAL. THE
INTEGRATION OF NUVEEN AND FLAGSHIP SHOULD LEAD TO THE FOLLOWING BENEFITS:
o Lower operating costs
o Access to a wider range of investment products
o Greater choices in the method for purchasing shares
WHETHER OR NOT YOU PLAN TO JOIN US AT THE MEETING, PLEASE COMPLETE, DATE AND
SIGN YOUR PROXY CARD AND RETURN IT IN THE ENCLOSED ENVELOPE SO THAT YOUR VOTE
WILL BE COUNTED.
---- Please fold at perforation before detaching ----
- --------------------------------------------------------------------------------
NUVEEN FLORIDA TAX-FREE VALUE FUND PROXY BALLOT
COMMON SHARES
PROXY SOLICITED BY THE BOARD OF TRUSTEES
FOR SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 12, 1996
The undersigned hereby appoints Anthony T. Dean, Timothy R. Schwertfeger, James
J. Wesolowski, and Gifford R. Zimmerman, and each of them, with full power of
substitution, Proxies for the undersigned to represent and vote the common
shares of the undersigned at the Special Meeting of Shareholders of Nuveen
Florida Tax-Free Value Fund to be held on December 12, 1996, or any adjournment
or adjournments thereof:
1. Election of Trustees:
NOMINEES: Robert P. Bremner, Lawrence H. Brown, Anthony T. Dean,
Anne E. Impellizzeri, Margaret K. Rosenheim, Peter R. Sawers,
William J. Schneider, Timothy R. Schwertfeger.
2. Approval of an Agreement and Plan of Reorganization.
3. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the Special Meeting.
- ------------------------------------------------------------------------------
You are encouraged to specify your choices by marking the appropriate boxes ON
THE REVERSE SIDE. If you do not mark any boxes, your Proxy will be voted in
accordance with the Board of Trustees' recommendations. Please sign, date and
return this Proxy card promptly using the enclosed envelope.
- ------------------------------------------------------------------------------
SEE REVERSE SIDE
NUV-FL
<PAGE> 4
<TABLE>
<S><C>
THE BOARD OF TRUSTEES RECOMMENDS A VOTE FOR ALL NOMINEES AND THE PROPOSALS: Please mark your votes as in this example. /X/
- ----------------------------------------------------------------------------------------------------------------------------------
1. ELECTION OF TRUSTEES: / / FOR / / WITHHOLD authority / / WITHHOLD authority to vote
(SEE REVERSE FOR NOMINEES) all nominees to vote for all nominees for nominees indicated below:
-----------------------------
INSTRUCTIONS:
To grant authority to vote FOR ALL nominees, mark the box on the left above OR do not mark any box above.
To WITHHOLD authority to vote FOR ALL nominees, mark the box in the middle above.
To WITHHOLD authority to vote FOR ANY ONE OR MORE of the nominees, mark the box on the right above AND write each
nominee's name in the space provided.
FOR AGAINST ABSTAIN
2. APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION / / / / / /
3. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER BUSINESS AS MAY
PROPERLY COME BEFORE THE SPECIAL MEETING.
- ----------------------------------------------------------------------------------------------------------------------------------
THE SHARES TO WHICH THIS PROXY RELATES WILL BE VOTED AS SPECIFIED. IF NO SPECIFICATION IS MADE, SUCH SHARES WILL BE VOTED FOR THE
ELECTION OF TRUSTEES AND FOR THE PROPOSALS SET FORTH ON THIS PROXY.
Please be sure to sign and date this Proxy.
- ---------------------------------------------------------------------------
Shareholder sign here ________________________ Date _____________________
Co-owner sign here ________________________ Date _____________________
NOTE: Please sign exactly as your
name appears on this Proxy. If signing
for estates, trusts or corporations,
title or capacity should be stated.
If shares are held jointly, each holder
should sign.
/ / BK NUV-MS-1 NUV-FL
</TABLE>
<PAGE> 5
A special meeting of shareholders will be held Thursday, December 12, 1996, at
10:00 a.m., Chicago time, in the 31st floor conference room of John Nuveen & Co.
Incorporated, 333 W. Wacker Drive, Chicago, Illinois. At this meeting, you will
be asked to vote on a proposal to reorganize your fund and combine it with a
similar Flagship fund, facilitating the integration of the Nuveen and Flagship
mutual fund families.
THE BOARD OF YOUR FUND HAS UNANIMOUSLY AGREED THAT THIS PROPOSAL IS IN THE
BEST INTERESTS OF SHAREHOLDERS AND URGES YOU TO VOTE IN FAVOR OF THE PROPOSAL.
THE INTEGRATION OF NUVEEN AND FLAGSHIP REORGANIZATION SHOULD LEAD TO THE
FOLLOWING BENEFITS:
o Lower operating costs
o Access to a wider range of investment products
o Greater choices in the method for purchasing shares
WHETHER OR NOT YOU PLAN TO JOIN US AT THE MEETING, PLEASE COMPLETE, DATE AND
SIGN YOUR PROXY CARD AND RETURN IT IN THE ENCLOSED ENVELOPE SO THAT YOUR VOTE
WILL BE COUNTED.
---- Please fold at perforation before detaching ----
- --------------------------------------------------------------------------------
NUVEEN PENNSYLVANIA TAX-FREE VALUE FUND PROXY BALLOT
COMMON SHARES
PROXY SOLICITED BY THE BOARD OF TRUSTEES
FOR SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 12, 1996
The undersigned hereby appoints Anthony T. Dean, Timothy R. Schwertfeger, James
J. Wesolowski, and Gifford R. Zimmerman, and each of them, with full power of
substitution, Proxies for the undersigned to represent and vote the common
shares of the undersigned at the Special Meeting of Shareholders of Nuveen
Pennsylvania Tax-Free Value Fund to be held on December 12, 1996, or any
adjournment or adjournments thereof:
1. Election of Trustees:
NOMINEES: Robert P. Bremner, Lawrence H. Brown, Anthony T. Dean,
Anne E. Impellizzeri, Margaret K. Rosenheim, Peter R. Sawers,
William J. Schneider, Timothy R. Schwertfeger.
2. Approval of an Agreement and Plan of Reorganization.
3. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the Special Meeting.
- ------------------------------------------------------------------------------
You are encouraged to specify your choices by marking the appropriate boxes ON
THE REVERSE SIDE. If you do not mark any boxes, your Proxy will be voted in
accordance with the Board of Trustees' recommendations. Please sign, date and
return this Proxy card promptly using the enclosed envelope.
- ------------------------------------------------------------------------------
SEE REVERSE SIDE
NUV-PA
<PAGE> 6
<TABLE>
<S><C>
THE BOARD OF TRUSTEES RECOMMENDS A VOTE FOR ALL NOMINEES AND THE PROPOSALS: Please mark your votes as in this example. /X/
- ----------------------------------------------------------------------------------------------------------------------------------
1. ELECTION OF TRUSTEES: / / FOR / / WITHHOLD authority / / WITHHOLD authority to vote
(SEE REVERSE FOR NOMINEES) all nominees to vote for all nominees for nominees indicated below:
-----------------------------
INSTRUCTIONS:
To grant authority to vote FOR ALL nominees, mark the box on the left above OR do not mark any box above.
To WITHHOLD authority to vote FOR ALL nominees, mark the box in the middle above.
To WITHHOLD authority to vote FOR ANY ONE OR MORE of the nominees, mark the box on the right above AND write each
nominee's name in the space provided.
FOR AGAINST ABSTAIN
2. APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION / / / / / /
3. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER BUSINESS AS MAY
PROPERLY COME BEFORE THE SPECIAL MEETING.
- ----------------------------------------------------------------------------------------------------------------------------------
THE SHARES TO WHICH THIS PROXY RELATES WILL BE VOTED AS SPECIFIED. IF NO SPECIFICATION IS MADE, SUCH SHARES WILL BE VOTED FOR THE
ELECTION OF TRUSTEES AND FOR THE PROPOSALS SET FORTH ON THIS PROXY.
Please be sure to sign and date this Proxy.
- ---------------------------------------------------------------------------
Shareholder sign here ________________________ Date _____________________
Co-owner sign here ________________________ Date _____________________
NOTE: Please sign exactly as your
name appears on this Proxy. If signing
for estates, trusts or corporations,
title or capacity should be stated.
If shares are held jointly, each holder
should sign.
/ / BK NUV-MS-1 NUV-PA
</TABLE>
<PAGE> 7
A special meeting of shareholders will be held Thursday, December 12, 1996, at
10:00 a.m., Chicago time, in the 31st floor conference room of John Nuveen & Co.
Incorporated, 333 W. Wacker Drive, Chicago, Illinois. At this meeting, you
will be asked to vote on a proposal to reorganize your fund and combine it with
a similar Flagship fund, facilitating the integration of the Nuveen and
Flagship mutual fund families.
THE BOARD OF YOUR FUND HAS UNANIMOUSLY AGREED THAT THIS PROPOSAL IS IN THE BEST
INTERESTS OF SHAREHOLDERS AND URGES YOU TO VOTE IN FAVOR OF THE PROPOSAL. THE
INTEGRATION OF NUVEEN AND FLAGSHIP SHOULD LEAD TO THE FOLLOWING BENEFITS:
o Lower operating costs
o Access to a wider range of investment products
o Greater choices in the method for purchasing shares
WHETHER OR NOT YOU PLAN TO JOIN US AT THE MEETING, PLEASE COMPLETE, DATE AND
SIGN YOUR PROXY CARD AND RETURN IT IN THE ENCLOSED ENVELOPE SO THAT YOUR VOTE
WILL BE COUNTED.
---- Please fold at perforation before detaching ----
- --------------------------------------------------------------------------------
NUVEEN VIRGINIA TAX-FREE VALUE FUND PROXY BALLOT
COMMON SHARES
PROXY SOLICITED BY THE BOARD OF TRUSTEES
FOR SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 12, 1996
The undersigned hereby appoints Anthony T. Dean, Timothy R. Schwertfeger, James
J. Wesolowski, and Gifford R. Zimmerman, and each of them, with full power of
substitution, Proxies for the undersigned to represent and vote the common
shares of the undersigned at the Special Meeting of Shareholders of Nuveen
Virginia Tax-Free Value Fund to be held on December 12, 1996, or any
adjournment or adjournments thereof:
1. Election of Trustees:
NOMINEES: Robert P. Bremner, Lawrence H. Brown, Anthony T. Dean,
Anne E. Impellizzeri, Margaret K. Rosenheim, Peter R. Sawers,
William J. Schneider, Timothy R. Schwertfeger.
2. Approval of an Agreement and Plan of Reorganization.
3. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the Special Meeting.
- ------------------------------------------------------------------------------
You are encouraged to specify your choices by marking the appropriate boxes ON
THE REVERSE SIDE. If you do not mark any boxes, your Proxy will be voted in
accordance with the Board of Trustees' recommendations. Please sign, date and
return this Proxy card promptly using the enclosed envelope.
- ------------------------------------------------------------------------------
SEE REVERSE SIDE
NUV-VA
<PAGE> 8
<TABLE>
<S><C>
THE BOARD OF TRUSTEES RECOMMENDS A VOTE FOR ALL NOMINEES AND THE PROPOSALS: Please mark your votes as in this example. /X/
- ----------------------------------------------------------------------------------------------------------------------------------
1. ELECTION OF TRUSTEES: / / FOR / / WITHHOLD authority / / WITHHOLD authority to vote
(SEE REVERSE FOR NOMINEES) all nominees to vote for all nominees for nominees indicated below:
-----------------------------
INSTRUCTIONS:
To grant authority to vote FOR ALL nominees, mark the box on the left above OR do not mark any box above.
To WITHHOLD authority to vote FOR ALL nominees, mark the box in the middle above.
To WITHHOLD authority to vote FOR ANY ONE OR MORE of the nominees, mark the box on the right above AND write each
nominee's name in the space provided.
FOR AGAINST ABSTAIN
2. APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION. / / / / / /
3. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER BUSINESS AS MAY
PROPERLY COME BEFORE THE SPECIAL MEETING.
- ----------------------------------------------------------------------------------------------------------------------------------
THE SHARES TO WHICH THIS PROXY RELATES WILL BE VOTED AS SPECIFIED. IF NO SPECIFICATION IS MADE, SUCH SHARES WILL BE VOTED FOR THE
ELECTION OF TRUSTEES AND FOR THE PROPOSALS SET FORTH ON THIS PROXY.
Please be sure to sign and date this Proxy.
- ---------------------------------------------------------------------------
Shareholder sign here ________________________ Date _____________________
Co-owner sign here ________________________ Date _____________________
NOTE: Please sign exactly as your
name appears on this Proxy. If signing
for estates, trusts or corporations,
title or capacity should be stated.
If shares are held jointly, each holder
should sign.
/ / BK NUV-MS-1 NUV-VA
</TABLE>
<PAGE> 1
Exhibit 99.17(b)
A special meeting of shareholders will be held Thursday, December 12, 1996,
at 10:00 a.m., Chicago time, in the 31st floor conference room of John
Nuveen & Co. Incorporated, 333 W. Wacker Drive, Chicago, Illinois. Subject to
shareholder approval at this meeting, your fund will be reorganized and combined
with a similar Nuveen fund into a new fund that will be part of the Nuveen
Flagship Multistate Trust I.
THE BOARD OF TRUSTEES OF YOUR FUND HAS UNANIMOUSLY AGREED THAT THE PROPOSAL YOU
WILL VOTE ON IS ADVISABLE AND IN THE BEST INTERESTS OF ALL SHAREHOLDERS. THE
REORGANIZATIONS SHOULD LEAD TO THE FOLLOWING BENEFITS:
o Increased fund administration and operating efficiencies
o Access to a wider range of investment products
o Greater choices in the method for purchasing shares
WHETHER OR NOT YOU PLAN TO JOIN US AT THE MEETING, PLEASE COMPLETE, DATE AND
SIGN YOUR PROXY CARD AND RETURN IT IN THE ENCLOSED ENVELOPE SO THAT YOUR VOTE
WILL BE COUNTED.
---- Please fold at perforation before detaching ----
- --------------------------------------------------------------------------------
FLAGSHIP ARIZONA DOUBLE TAX EXEMPT FUND PROXY BALLOT
COMMON SHARES
PROXY SOLICITED BY THE BOARD OF TRUSTEES
FOR SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 12, 1996
The undersigned hereby appoints Bruce P. Bedford and Michael D. Kalbfleisch,
and each of them, with full power of substitution, Proxies for the
undersigned to represent and vote the common shares of the undersigned
at the Special Meeting of Shareholders of Flagship Arizona Double Tax Exempt
Fund to be held on December 12, 1996, or any adjournment or
adjournments thereof:
1. Election of Trustees:
NOMINEES: Robert P. Bremner, Lawrence H. Brown, Anthony T. Dean,
Anne E. Impellizzeri, Margaret K. Rosenheim, Peter R. Sawers,
William J. Schneider, Timothy R. Schwertfeger.
2. Approval of a new investment advisory agreement with Nuveen Advisory Corp.
3. Approval of a new Rule 12b-1 Plan.
4. Approval of an Agreement and Plan of Reorganization.
5. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the Special Meeting.
- ------------------------------------------------------------------------------
You are encouraged to specify your choices by marking the appropriate boxes ON
THE REVERSE SIDE. If you do not mark any boxes, your Proxy will be voted in
accordance with the Board of Trustees' recommendations. Please sign, date and
return this Proxy card promptly using the enclosed envelope.
- ------------------------------------------------------------------------------
SEE REVERSE SIDE
FLAG-AZ
<PAGE> 2
<TABLE>
<S><C>
THE BOARD OF TRUSTEES RECOMMENDS A VOTE FOR ALL NOMINEES AND THE PROPOSALS: Please mark your votes as in this example. /X/
- ----------------------------------------------------------------------------------------------------------------------------------
1. ELECTION OF TRUSTEES: / / FOR / / WITHHOLD authority / / WITHHOLD authority to vote
(SEE REVERSE FOR NOMINEES) all nominees to vote for all nominees for nominees indicated below:
-----------------------------
INSTRUCTIONS:
To grant authority to vote FOR ALL nominees, mark the box on the left above OR do not mark any box above.
To WITHHOLD authority to vote FOR ALL nominees, mark the box in the middle above.
To WITHHOLD authority to vote FOR ANY ONE OR MORE of the nominees, mark the box on the right above AND write each
nominee's name in the space provided.
FOR AGAINST ABSTAIN
2. APPROVAL OF NEW INVESTMENT ADVISORY AGREEMENT WITH NUVEEN ADVISORY CORP. / / / / / /
3. APPROVAL OF NEW RULE 12b-1 PLAN. / / / / / /
4. APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION. / / / / / /
5. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER BUSINESS AS MAY
PROPERLY COME BEFORE THE SPECIAL MEETING.
- ----------------------------------------------------------------------------------------------------------------------------------
THE SHARES TO WHICH THIS PROXY RELATES WILL BE VOTED AS SPECIFIED. IF NO SPECIFICATION IS MADE, SUCH SHARES WILL BE VOTED FOR THE
ELECTION OF TRUSTEES AND FOR THE PROPOSALS SET FORTH ON THIS PROXY.
Please be sure to sign and date this Proxy.
- ---------------------------------------------------------------------------
Shareholder sign here ________________________ Date _____________________
Co-owner sign here ________________________ Date _____________________
NOTE: Please sign exactly as your
name appears on this Proxy. If signing
for estates, trusts or corporations,
title or capacity should be stated.
If shares are held jointly, each holder
should sign.
/ / BK FLAG-MS-1 FLAG-AZ
</TABLE>
<PAGE> 3
A special meeting of shareholders will be held Thursday, December 12, 1996,
at 10:00 a.m., Chicago time, in the 31st floor conference room of John
Nuveen & Co. Incorporated, 333 W. Wacker Drive, Chicago, Illinois. Subject to
shareholder approval at this meeting, your fund will be reorganized and combined
with a similar Nuveen fund into a new fund that will be part of the Nuveen
Flagship Multistate Trust I.
THE BOARD OF TRUSTEES OF YOUR FUND HAS UNANIMOUSLY AGREED THAT THE PROPOSAL YOU
WILL VOTE ON IS ADVISABLE AND IN THE BEST INTERESTS OF ALL SHAREHOLDERS. THE
REORGANIZATIONS SHOULD LEAD TO THE FOLLOWING BENEFITS:
o Increased fund administration and operating efficiencies
o Access to a wider range of investment products
o Greater choices in the method for purchasing shares
WHETHER OR NOT YOU PLAN TO JOIN US AT THE MEETING, PLEASE COMPLETE, DATE AND
SIGN YOUR PROXY CARD AND RETURN IT IN THE ENCLOSED ENVELOPE SO THAT YOUR VOTE
WILL BE COUNTED.
---- Please fold at perforation before detaching ----
- --------------------------------------------------------------------------------
FLAGSHIP FLORIDA DOUBLE TAX EXEMPT FUND PROXY BALLOT
COMMON SHARES
PROXY SOLICITED BY THE BOARD OF TRUSTEES
FOR SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 12, 1996
The undersigned hereby appoints Bruce P. Bedford and Michael D. Kalbfleisch,
and each of them, with full power of substitution, Proxies for the undersigned
to represent and vote the common shares of the undersigned at the Special
Meeting of Shareholders of Flagship Florida Double Tax Exempt Fund to be
held on December 12, 1996, or any adjournment or adjournments thereof:
1. Election of Trustees:
NOMINEES: Robert P. Bremner, Lawrence H. Brown, Anthony T. Dean,
Anne E. Impellizzeri, Margaret K. Rosenheim, Peter R. Sawers,
William J. Schneider, Timothy R. Schwertfeger.
2. Approval of a new investment advisory agreement with Nuveen Advisory Corp.
3. Approval of a new Rule 12b-1 Plan.
4. Approval of an Agreement and Plan of Reorganization.
5. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the Special Meeting.
- ------------------------------------------------------------------------------
You are encouraged to specify your choices by marking the appropriate boxes ON
THE REVERSE SIDE. If you do not mark any boxes, your Proxy will be voted in
accordance with the Board of Trustees' recommendations. Please sign, date and
return this Proxy card promptly using the enclosed envelope.
- ------------------------------------------------------------------------------
SEE REVERSE SIDE
FLAG-FL
<PAGE> 4
<TABLE>
<S><C>
THE BOARD OF TRUSTEES RECOMMENDS A VOTE FOR ALL NOMINEES AND THE PROPOSALS: Please mark your votes as in this example. /X/
- ----------------------------------------------------------------------------------------------------------------------------------
1. ELECTION OF TRUSTEES: / / FOR / / WITHHOLD authority / / WITHHOLD authority to vote
(SEE REVERSE FOR NOMINEES) all nominees to vote for all nominees for nominees indicated below:
-----------------------------
INSTRUCTIONS:
To grant authority to vote FOR ALL nominees, mark the box on the left above OR do not mark any box above.
To WITHHOLD authority to vote FOR ALL nominees, mark the box in the middle above.
To WITHHOLD authority to vote FOR ANY ONE OR MORE of the nominees, mark the box on the right above AND write each
nominee's name in the space provided.
FOR AGAINST ABSTAIN
2. APPROVAL OF NEW INVESTMENT ADVISORY AGREEMENT WITH NUVEEN ADVISORY CORP. / / / / / /
3. APPROVAL OF NEW RULE 12b-1 PLAN. / / / / / /
4. APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION. / / / / / /
5. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER BUSINESS AS MAY
PROPERLY COME BEFORE THE SPECIAL MEETING.
- ----------------------------------------------------------------------------------------------------------------------------------
THE SHARES TO WHICH THIS PROXY RELATES WILL BE VOTED AS SPECIFIED. IF NO SPECIFICATION IS MADE, SUCH SHARES WILL BE VOTED FOR THE
ELECTION OF TRUSTEES AND FOR THE PROPOSALS SET FORTH ON THIS PROXY.
Please be sure to sign and date this Proxy.
- ---------------------------------------------------------------------------
Shareholder sign here ________________________ Date _____________________
Co-owner sign here ________________________ Date _____________________
NOTE: Please sign exactly as your
name appears on this Proxy. If signing
for estates, trusts or corporations,
title or capacity should be stated.
If shares are held jointly, each holder
should sign.
/ / BK FLAG-MS-1 FLAG-FL
</TABLE>
<PAGE> 5
A special meeting of shareholders will be held Thursday, December 12, 1996,
at 10:00 a.m., Chicago time, in the 31st floor conference room of John
Nuveen & Co. Incorporated, 333 W. Wacker Drive, Chicago, Illinois. Subject to
shareholder approval at this meeting, your fund will be reorganized and combined
with a similar Nuveen fund into a new fund that will be part of the Nuveen
Flagship Multistate Trust I.
THE BOARD OF TRUSTEES OF YOUR FUND HAS UNANIMOUSLY AGREED THAT THE PROPOSAL YOU
WILL VOTE ON IS ADVISABLE AND IN THE BEST INTERESTS OF ALL SHAREHOLDERS. THE
REORGANIZATIONS SHOULD LEAD TO THE FOLLOWING BENEFITS:
o Increased fund administration and operating efficiencies
o Access to a wider range of investment products
o Greater choices in the method for purchasing shares
WHETHER OR NOT YOU PLAN TO JOIN US AT THE MEETING, PLEASE COMPLETE, DATE AND
SIGN YOUR PROXY CARD AND RETURN IT IN THE ENCLOSED ENVELOPE SO THAT YOUR VOTE
WILL BE COUNTED.
---- Please fold at perforation before detaching ----
- --------------------------------------------------------------------------------
FLAGSHIP PENNSYLVANIA TRIPLE TAX EXEMPT FUND PROXY BALLOT
COMMON SHARES
PROXY SOLICITED BY THE BOARD OF TRUSTEES
FOR SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 12, 1996
The undersigned hereby appoints Bruce P. Bedford and Michael D. Kalbfleisch,
and each of them, with full power of substitution, Proxies for the undersigned
to represent and vote the common shares of the undersigned at the Special
Meeting of Shareholders of Flagship Pennsylvania Triple Tax Exempt Fund
to be held on December 12, 1996, or any adjournment or
adjournments thereof:
1. Election of Trustees:
NOMINEES: Robert P. Bremner, Lawrence H. Brown, Anthony T. Dean,
Anne E. Impellizzeri, Margaret K. Rosenheim, Peter R. Sawers,
William J. Schneider, Timothy R. Schwertfeger.
2. Approval of a new investment advisory agreement with Nuveen Advisory Corp.
3. Approval of a new Rule 12b-1 Plan.
4. Approval of an Agreement and Plan of Reorganization.
5. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the Special Meeting.
- ------------------------------------------------------------------------------
You are encouraged to specify your choices by marking the appropriate boxes ON
THE REVERSE SIDE. If you do not mark any boxes, your Proxy will be voted in
accordance with the Board of Trustees' recommendations. Please sign, date and
return this Proxy card promptly using the enclosed envelope.
- ------------------------------------------------------------------------------
SEE REVERSE SIDE
FLAG-PA
<PAGE> 6
<TABLE>
<S><C>
THE BOARD OF TRUSTEES RECOMMENDS A VOTE FOR ALL NOMINEES AND THE PROPOSALS: Please mark your votes as in this example. /X/
- ----------------------------------------------------------------------------------------------------------------------------------
1. ELECTION OF TRUSTEES: / / FOR / / WITHHOLD authority / / WITHHOLD authority to vote
(SEE REVERSE FOR NOMINEES) all nominees to vote for all nominees for nominees indicated below:
-----------------------------
INSTRUCTIONS:
To grant authority to vote FOR ALL nominees, mark the box on the left above OR do not mark any box above.
To WITHHOLD authority to vote FOR ALL nominees, mark the box in the middle above.
To WITHHOLD authority to vote FOR ANY ONE OR MORE of the nominees, mark the box on the right above AND write each
nominee's name in the space provided.
FOR AGAINST ABSTAIN
2. APPROVAL OF NEW INVESTMENT ADVISORY AGREEMENT WITH NUVEEN ADVISORY CORP. / / / / / /
3. APPROVAL OF NEW RULE 12b-1 PLAN. / / / / / /
4. APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION. / / / / / /
5. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER BUSINESS AS MAY
PROPERLY COME BEFORE THE SPECIAL MEETING.
- ----------------------------------------------------------------------------------------------------------------------------------
THE SHARES TO WHICH THIS PROXY RELATES WILL BE VOTED AS SPECIFIED. IF NO SPECIFICATION IS MADE, SUCH SHARES WILL BE VOTED FOR THE
ELECTION OF TRUSTEES AND FOR THE PROPOSALS SET FORTH ON THIS PROXY.
Please be sure to sign and date this Proxy.
- ---------------------------------------------------------------------------
Shareholder sign here ________________________ Date _____________________
Co-owner sign here ________________________ Date _____________________
NOTE: Please sign exactly as your
name appears on this Proxy. If signing
for estates, trusts or corporations,
title or capacity should be stated.
If shares are held jointly, each holder
should sign.
/ / BK FLAG-MS-1 FLAG-PA
</TABLE>
<PAGE> 7
A special meeting of shareholders will be held Thursday, December 12, 1996,
at 10:00 a.m., Chicago time, in the 31st floor conference room of John
Nuveen & Co. Incorporated, 333 W. Wacker Drive, Chicago, Illinois. Subject to
shareholder approval at this meeting, your fund will be reorganized and combined
with a similar Nuveen fund into a new fund that will be part of the Nuveen
Flagship Multistate Trust I.
THE BOARD OF TRUSTEES OF YOUR FUND HAS UNANIMOUSLY AGREED THAT THE PROPOSAL YOU
WILL VOTE ON IS ADVISABLE AND IN THE BEST INTERESTS OF ALL SHAREHOLDERS. THE
REORGANIZATIONS SHOULD LEAD TO THE FOLLOWING BENEFITS:
o Increased fund administration and operating efficiencies
o Access to a wider range of investment products
o Greater choices in the method for purchasing shares
WHETHER OR NOT YOU PLAN TO JOIN US AT THE MEETING, PLEASE COMPLETE, DATE AND
SIGN YOUR PROXY CARD AND RETURN IT IN THE ENCLOSED ENVELOPE SO THAT YOUR VOTE
WILL BE COUNTED.
---- Please fold at perforation before detaching ----
- --------------------------------------------------------------------------------
FLAGSHIP VIRGINIA DOUBLE TAX EXEMPT FUND PROXY BALLOT
COMMON SHARES
PROXY SOLICITED BY THE BOARD OF TRUSTEES
FOR SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 12, 1996
The undersigned hereby appoints Bruce P. Bedford and Michael D. Kalbfleisch,
and each of them, with full power of substitution, Proxies for the
undersigned to represent and vote the common shares of the undersigned at the
Special Meeting of Shareholders of Flagship Virginia Double Tax Exempt Fund
to be held on December 12, 1996, or any adjournment or adjournments thereof:
1. Election of Trustees:
NOMINEES: Robert P. Bremner, Lawrence H. Brown, Anthony T. Dean,
Anne E. Impellizzeri, Margaret K. Rosenheim, Peter R. Sawers,
William J. Schneider, Timothy R. Schwertfeger.
2. Approval of a new investment advisory agreement with Nuveen Advisory Corp.
3. Approval of a new Rule 12b-1 Plan.
4. Approval of an Agreement and Plan of Reorganization.
5. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the Special Meeting.
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You are encouraged to specify your choices by marking the appropriate boxes ON
THE REVERSE SIDE. If you do not mark any boxes, your Proxy will be voted in
accordance with the Board of Trustees' recommendations. Please sign, date and
return this Proxy card promptly using the enclosed envelope.
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SEE REVERSE SIDE
FLAG-VA
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THE BOARD OF TRUSTEES RECOMMENDS A VOTE FOR ALL NOMINEES AND THE PROPOSALS: Please mark your votes as in this example. /X/
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1. ELECTION OF TRUSTEES: / / FOR / / WITHHOLD authority / / WITHHOLD authority to vote
(SEE REVERSE FOR NOMINEES) all nominees to vote for all nominees for nominees indicated below:
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INSTRUCTIONS:
To grant authority to vote FOR ALL nominees, mark the box on the left above OR do not mark any box above.
To WITHHOLD authority to vote FOR ALL nominees, mark the box in the middle above.
To WITHHOLD authority to vote FOR ANY ONE OR MORE of the nominees, mark the box on the right above AND write each
nominee's name in the space provided.
FOR AGAINST ABSTAIN
2. APPROVAL OF NEW INVESTMENT ADVISORY AGREEMENT WITH NUVEEN ADVISORY CORP. / / / / / /
3. APPROVAL OF NEW RULE 12b-1 PLAN. / / / / / /
4. APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION. / / / / / /
5. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER BUSINESS AS MAY
PROPERLY COME BEFORE THE SPECIAL MEETING.
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THE SHARES TO WHICH THIS PROXY RELATES WILL BE VOTED AS SPECIFIED. IF NO SPECIFICATION IS MADE, SUCH SHARES WILL BE VOTED FOR THE
ELECTION OF TRUSTEES AND FOR THE PROPOSALS SET FORTH ON THIS PROXY.
Please be sure to sign and date this Proxy.
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Shareholder sign here ________________________ Date _____________________
Co-owner sign here ________________________ Date _____________________
NOTE: Please sign exactly as your
name appears on this Proxy. If signing
for estates, trusts or corporations,
title or capacity should be stated.
If shares are held jointly, each holder
should sign.
/ / BK FLAG-MS-1 FLAG-VA
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