<PAGE> 1
[FLAGSHIP LOGO]
October 25, 1996
DEAR FLAGSHIP SHAREHOLDER:
As recently announced, 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. At this meeting, you will
be asked to vote on a proposal to reorganize your fund and combine it with a
similar Nuveen fund, facilitating the integration of the Flagship and Nuveen
mutual fund families.
THE BOARD OF TRUSTEES 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 FLAGSHIP AND NUVEEN SHOULD LEAD TO THE FOLLOWING
BENEFITS:
- Lower operating costs from expanded distribution
- Access to a wider range of investment products
- Greater choices in the method for purchasing shares
THE ENCLOSED PROXY STATEMENT 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 LETTERHEAD]
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nuveen logo
October 25, 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 this proposal 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
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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 NEW JERSEY DOUBLE TAX EXEMPT FUND
FLAGSHIP NEW YORK TAX EXEMPT FUND
TO THE SHAREHOLDERS:
Notice is hereby given that a Special Meeting of Shareholders of each of
Flagship New Jersey Double Tax Exempt Fund and Flagship New York 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
either the Nuveen Multistate Tax-Free Trust or the Nuveen Tax-Free Bond
Fund, Inc. (the "Nuveen Fund") into a new series ("New Fund") of Nuveen
Flagship Multistate Trust II, 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
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NOTICE OF SPECIAL MEETING 333 West Wacker Drive
OF SHAREHOLDERS Chicago, Illinois
DECEMBER 12, 1996 60606
800-621-7227
NUVEEN MULTISTATE TAX-FREE TRUST NUVEEN TAX-FREE BOND FUND, INC.
NUVEEN NEW JERSEY TAX-FREE VALUE FUND NUVEEN NEW YORK TAX-FREE VALUE FUND
</TABLE>
TO THE SHAREHOLDERS:
Notice is hereby given that a Special Meeting of Shareholders of each of Nuveen
New Jersey Tax-Free Value Fund, (a "Nuveen Fund"), a series of the Nuveen
Multistate Tax-Free Trust ("Nuveen Trust"), a Massachusetts business trust, and
Nuveen New York Tax-Free Value Fund (a "Nuveen Fund"), a series of the Nuveen
Tax-Free Bond Fund, Inc. ("Nuveen Corp."), a Minnesota corporation 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) members to the Board.
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 II, a newly
created investment company. In the case of Nuveen New York Tax-Free
Value Fund, a vote in favor of the Agreement will be considered a vote
in favor of an amendment to the articles of incorporation of the Nuveen
Corp. required to effect the reorganization contemplated by the
Agreement.
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 UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR ALL PROPOSALS.
James J. Wesolowski
Secretary
<PAGE> 5
<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
NUVEEN MULTISTATE TAX-FREE TRUST
NUVEEN NEW JERSEY TAX-FREE VALUE FUND
NUVEEN TAX-FREE BOND FUND, INC.
NUVEEN NEW YORK TAX-FREE VALUE FUND
FLAGSHIP TAX EXEMPT FUNDS TRUST
FLAGSHIP NEW JERSEY DOUBLE TAX EXEMPT FUND
FLAGSHIP NEW YORK TAX EXEMPT FUND
PROSPECTUS
NUVEEN FLAGSHIP MULTISTATE TRUST II
NUVEEN FLAGSHIP NEW JERSEY MUNICIPAL BOND FUND
NUVEEN FLAGSHIP NEW YORK MUNICIPAL BOND FUND
</TABLE>
This Joint Proxy Statement-Prospectus is being furnished to shareholders of
Nuveen New Jersey Tax-Free Value Fund ("Nuveen New Jersey," a "Fund," an
"Acquired Fund" or a "Nuveen Fund"), a series of the Nuveen Multistate Tax-Free
Trust (a "Company", "Trust" or "Nuveen Trust"), a Massachusetts business trust,
Nuveen New York Tax-Free Value Fund ("Nuveen New York", a "Fund", an "Acquired
Fund" or a "Nuveen Fund") a series of the Nuveen Tax-Free Bond Fund, Inc. (a
"Company" or "Nuveen Corp."), a Minnesota corporation, and Flagship New Jersey
Double Tax Exempt Fund ("Flagship New Jersey"), and Flagship New York Tax Exempt
Fund ("Flagship New York") (each a "Fund," an "Acquired Fund" or a "Flagship
Fund"), each of which is a series of the Flagship Tax Exempt Funds Trust (a
"Company", "Trust" or "Flagship Trust"), a Massachusetts business trust, in
connection with the solicitation of proxies by each Company's Board 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) board members:
(a) for the Flagship Funds, to the Board of the Flagship Trust,
(b1) for Nuveen New Jersey, to the Board of the Nuveen Trust;
(b2) for Nuveen New York, to the Board of the Nuveen Corp.;
(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 New Jersey and Flagship New Jersey will be
asked to approve an Agreement and Plan of Reorganization (the "New
Jersey Agreement") whereby substantially all the assets and
liabilities of Nuveen New Jersey and Flagship New Jersey will be
acquired by Nuveen Flagship New Jersey Municipal Bond Fund ("New New
Jersey"), in exchange for shares of New New Jersey; and
(b) shareholders of Nuveen New York and Flagship New York will be asked
to approve an Agreement and Plan of Reorganization (the "New York
Agreement") whereby substantially all the assets and liabilities of
Nuveen New York and Flagship New York will be acquired by Nuveen
Flagship New York Municipal Bond Fund ("New New York") in exchange
for Shares of New New York.
The New Jersey Agreement and the New York Agreement are each referred to as an
"Agreement." For Nuveen New York, a vote in favor of the New York Agreement will
be considered a vote in favor of an amendment to the articles of incorporation
of the Nuveen Corp. required to effect the reorganization contemplated by the
Agreement.
<PAGE> 6
New New Jersey and New New York (the "New Funds") are new series of the Nuveen
Flagship Multistate Trust II (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 Nuveen
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 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 25, 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 New Jersey
Prospectus dated May 31, 1996, as supplemented August 26, 1996, and the Nuveen
New York Prospectus dated July 1, 1996, as supplemented August 26, 1996, contain
additional information about the Nuveen Funds, have been filed with the
Securities and Exchange Commission, are incorporated herein by reference and are
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 25, 1996.
<PAGE> 7
TABLE OF CONTENTS
<TABLE>
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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
Board Members 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................ 8
General..................................... 8
New Jersey.................................. 8
New York.................................... 8
Comparative Considerations.................. 9
THE MEETINGS.................................... 9
General..................................... 9
Voting; Proxies............................. 10
AVAILABLE INFORMATION........................... 11
PROPOSAL NO. 1--ELECTION OF BOARD MEMBERS....... 11
PROPOSAL 1A. FLAGSHIP FUNDS..................... 11
Officers............................... 13
PROPOSAL 1B. NUVEEN FUNDS....................... 13
Officers............................... 15
Votes Required.............................. 16
PROPOSAL NO. 2--INVESTMENT ADVISORY
AGREEMENTS.................................... 16
Reasons for Shareholders Vote............... 1
Flagship--Acquisition.................. 16
Board Recommendation........................ 17
Investment Advisory Agreement............... 17
The New Advisory Agreement.................. 18
Information Concerning Flagship, Nuveen and
the Acquisition........................... 18
Flagship.................................... 18
Nuveen Advisory............................. 19
Votes Required.............................. 19
PROPOSAL NO. 3--RULE 12B-1 PLAN................. 20
Description of the New Rule 12b-1 Plan...... 20
Existing 12b-1 Plan.................... 20
Board Recommendation........................ 21
Votes Required.............................. 21
PROPOSAL NO. 4--THE REORGANIZATIONS............. 21
General..................................... 22
Terms of Each Reorganization................ 22
Reasons for the Reorganization.............. 23
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Board Recommendation........................ 24
Votes Required.............................. 24
Description of the Shares to be Issued in
the Reorganization........................ 25
General................................ 25
Distributions.......................... 25
Comparison of Rights of Holders of the
Funds..................................... 25
Comparison of the Investment Objectives and
Policies.................................. 26
Diversification........................ 26
Investment Grade Quality............... 26
Average Maturity....................... 26
AMT Bonds.............................. 26
Concentration.......................... 26
Lease Obligations...................... 27
Temporary Investments.................. 27
Futures and Options.................... 27
Borrowing.............................. 27
Illiquid Securities.................... 27
Other Investment Restrictions.......... 27
Comparison of Management.................... 27
Comparison of Distribution.................. 28
Waiver Comparison........................... 29
Certain Provisions in the New Trust's
Declaration
of Trust.................................. 29
Other Comparisons........................... 29
Board Members and Officers............. 29
Fiscal Year............................ 29
Purchase, Exchange and Redemption
Features and Privileges.............. 29
Transfer Agent and Custodian........... 30
Auditors............................... 30
Organization........................... 30
Surrender and Exchange of Acquired Fund
Share Certificates................... 30
Costs Associated with the Reorganizations... 31
Appraisal Rights............................ 31
Tax Consequences of the Reorganizations..... 31
Capitalization.............................. 32
Comparative Performance Information......... 33
LEGAL OPINIONS.................................. 33
EXPERTS......................................... 33
SHAREHOLDER PROPOSALS........................... 33
GENERAL......................................... 34
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> 8
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 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,
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 New Jersey and Flagship New Jersey are "non-diversified"
under the 1940 Act; Flagship New York, Nuveen New York, New New York and
Nuveen New Jersey are "diversified." Being non-diversified, New New Jersey
will
1
<PAGE> 9
be able to, and Flagship New Jersey currently is able to, invest more than 5%
of their assets in the obligations of an issuer, subject to the
diversification requirements of Subchapter M of the Code. This allows each of
these Funds, 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 New Jersey
and Flagship New Jersey may invest a relatively high percentage of their
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 other Funds, which are diversified.
- - Definition of Investment Grade Quality. The New Funds and the Flagship Funds
may rely on ratings from Moody's Investor Service, Inc., ("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. Nuveen New
Jersey may only invest up to 20% in unrated securities, while the New Funds,
Nuveen New York 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 Nuveen New Jersey 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 dependent 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 by governments or political subdivisions, and 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 Nuveen
Fund is expected to serve as the portfolio manager for the corresponding New
Fund. 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.
BOARD MEMBERS AND OFFICERS. The board members and officers of each of the New
Trust, the Nuveen Trust, Nuveen Corp. and the Flagship Trust differ. See
Proposal No. 1--Election of Board Members 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 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
2
<PAGE> 10
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.
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
3
<PAGE> 11
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.
Shareholder Services, Inc. will be the transfer agent and Chase Manhattan Bank
will be the custodian for the New Funds. They currently serve as the transfer
agent and custodian for the Nuveen Funds. State Street Bank and Trust Company
currently serves as the transfer agent and custodian for the Flagship Funds.
AUDITORS.
The auditors for the New Funds, the Nuveen Trust and the Nuveen Corp. are Arthur
Andersen LLP. The auditors for the Flagship Trust are Deloitte & Touche LLP.
ORGANIZATION.
The Nuveen Trust, the Flagship Trust and the New Trust are all Massachusetts
business trusts; Nuveen Corp. is a Minnesota corporation.
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 EACH OF THE NUVEEN TRUST, THE NUVEEN CORP. 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 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 Management Personnel -- Senior personnel of Flagship have agreed
to sign long-term employment contracts with Nuveen.
In addition, the Nuveen Trust Board and the Nuveen Corp. 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.
4
<PAGE> 12
- - Increased Range of Investment Products -- Nuveen Fund shareholders will have
access to an expanded selection of investment products in the combined Nuveen
Flagship family of funds.
- - Continuity of Portfolio Management -- It is expected that the current
portfolio managers for the Nuveen Funds will continue as managers of the New
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.
5
<PAGE> 13
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 Nuveen New Jersey,
February 29, 1996 for Nuveen New York 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>
NEW JERSEY
Class A
Nuveen .55% .25% .45% 1.25% 1.00% 1.00%
Flagship .50% .40% .73% 1.63% .44% .45%
New .55% .20% .27% 1.02% .74% .74%
Class B
Nuveen -- -- -- -- -- --
Flagship -- -- -- -- -- --
New .55% .95% .27% 1.77% 1.49% 1.49%
Class C
Nuveen .55% 1.00% .41% 1.96% 1.75% 1.75%
Flagship -- -- -- -- -- --
New .55% .75% .27% 1.57% 1.29% 1.29%
Class R
Nuveen .55% None .43% .98% .75% .75%
Flagship -- -- -- -- -- --
New .55% None .27% .82% .54% .54%
NEW YORK
Class A
Nuveen .55% .25% .22% 1.02% .99% .97%
Flagship .50% .40% .30% 1.20% .70% .75%
New .54% .20% .16% .90% .79% .79%
Class B
Nuveen -- -- -- -- -- --
Flagship -- -- -- -- -- --
New .54% .95% .16% 1.65% 1.54% 1.54%
Class C
Nuveen .55% 1.00% .44% 1.99% 1.73% 1.72%
Flagship .50% .95% .32% 1.77% 1.35% 1.40%
New .54% .75% .16% 1.45% 1.34% 1.34%
Class R
Nuveen .55% None .21% .76% .74% .72%
Flagship -- -- -- -- -- --
New .54% None .16% .70% .59% .59%
- ------------------------------------------------------------------------------------------------------------------------
</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 those shown or
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.
6
<PAGE> 14
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> <C> <C>
NEW JERSEY
Class A
Nuveen $55 $75 $98 $162
Flagship $46 $56 $66 $ 95
New $49 $65 $81 $130
Class B
Nuveen -- -- -- --
Flagship -- -- -- --
New $64 (d) $90(d) $104(d) $158 (a)
Class C
Nuveen $28 (b) $55 $95 $168 (c)
Flagship -- -- -- --
New $23 (b) $41 $71 $156 (c)
Class R
Nuveen $ 8 $24 $42 $ 93
Flagship -- -- -- --
New $ 6 $17 $30 $ 68
NEW YORK
Class A
Nuveen $55 $75 $97 $161
Flagship $49 $63 $79 $125
New $50 $66 $84 $136
Class B
Nuveen -- -- -- --
Flagship -- -- -- --
New $65 (d) $91(d) $107(d) $163 (a)
Class C
Nuveen $28 (b) $54 $94 $166 (c)
Flagship $24 (b) $43 $74 $162 (c)
New $24 (b) $42 $73 $161 (c)
Class R
Nuveen $ 8 $24 $41 $ 92
Flagship -- -- -- --
New $ 6 $19 $33 $ 74
- ---------------------------------------------------------------------------------------------------------------------
</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 Fund would have been $14. The expenses for the New Jersey New Fund
would have been $13 and for the New York New Fund the expenses would have been
$14.
(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 have 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 Class C shareholders of the New Fund does not reflect this
conversion. Had this conversion been reflected the expenses would have been as
follows: $127 for New Jersey and $132 for New York.
(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--$55 for both
Funds, 3 years--$79 for New New Jersey and $81 for New New York, and 5
years--$93 for New New Jersey and $95 for New New York. 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.
7
<PAGE> 15
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. The New Funds 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.
NEW JERSEY
New Jersey is the ninth largest state in population and the fifth smallest in
land area. In 1994 New Jersey ranked second among all states in per capita
personal income. New Jersey's economic base is diversified, consisting of a
variety of manufacturing, construction and service industries. The national
recession adversely affected employment in New Jersey; the unemployment rate
increased from 3.6% in early 1989 to 6.6% in April 1996. There was a surplus in
the general fund of $1 million at the end of fiscal year 1990, $1.4 million at
the end of fiscal year 1991, $760.8 million at the end of fiscal year 1992,
$937.4 million at the end of fiscal year 1993, $926.0 million at the end of
fiscal year 1994, and it is estimated that New Jersey closed its fiscal year
1995 with a surplus of approximately $569 million. In 1990 and 1991, increases
in New Jersey sales and use tax and income tax took effect in order to increase
revenue from those sources, although there have been recent reductions in both
the sales and use tax and the income tax. Currently, Moody's rates New Jersey
general obligation bonds Aa1, and S&P rates them AA+ See the Statement of
Additional Information for further information relating to fiscal and revenue
matters affecting the State.
NEW YORK
New York State has historically been one of the wealthiest states in the nation.
For decades, however, the State's economy has grown more slowly than that of the
nation as a whole, gradually eroding the State's relative economic affluence.
Statewide, urban centers have experienced significant changes involving
migration of the more affluent to the suburbs and an influx of generally less
affluent residents. Regionally, the older Northeast cities have suffered because
of the relative success that the South and the West have had in attracting
people and business. New York City has faced greater competition as other major
cities have developed financial and business resources which make them less
dependent on the specialized services traditionally available almost exclusively
in New York City, which has had an additional negative impact on New York City's
recovery. The State has for many years had a very high State and local tax
burden relative to other states. The burden of State and local taxation, in
combination with the many other causes of regional economic dislocation, has
contributed to the decisions of some businesses and individuals to relocate
outside, or not locate within, the State.
The State's economic growth continues to lag behind the nation's due in part to
continued consolidation in the banking and financial services industries and
further reductions in manufacturing employment. The State has projected the rate
of economic growth to slow within New York during 1996 and 1997 despite
continued moderate expansion of the national economy.
The State ended its 1995-96 fiscal year in balance on a cash basis with a
General Fund cash surplus of approximately $445 million. The State Legislature
enacted the State's 1995-96 fiscal year budget on June 7, 1995, more than two
months after the start of that fiscal year.
The State budget for the 1996-97 fiscal year was enacted on July 13, 1996, more
than two months after the start of the fiscal year. The State Financial Plan
dated July 25, 1996 for such fiscal year projected a balanced general fund and
receipts and disbursements of $33.2 billion and $33.1 billion, respectively. The
State's 1996-97 fiscal year budget projects savings in a number of areas and
increased revenues based on continuing improvement in the State's economy. The
delay in the
8
<PAGE> 16
enactment of the budget may negatively affect certain proposed actions and
reduce projected savings and various factors could reduce economic activity and
tax receipts.
While the City was forced to close unexpected budget gaps during fiscal year
1996, the City has projected that it ended such fiscal year with a balanced
budget. The City's budget is balanced for fiscal year 1997 and includes $2.6
billion of budget gap closing measures. The City's 1997-2000 financial plan
projects budget gaps of $1.7 billion, $2.7 billion and $3.4 billion for fiscal
years 1998, 1999 and 2000, respectively. If State or Federal aid in later years
is less than the levels projected in the Mayor's proposal, projected savings may
be negatively impacted and the Mayor may be required to propose significant
additional spending reductions or tax increases to balance the City's budget for
the 1997 and later fiscal years. If the State, the State Agencies, New York
City, other municipalities or school districts were to suffer serious financial
difficulties jeopardizing their respective access to the public credit markets,
or increasing the risk of a default, the market price of Municipal Obligations
issued by such entities could be adversely affected.
Absent appropriate legislative relief, the City may also face limitations on its
borrowing capacity after 1998 under the State's Constitution that will prevent
it from borrowing additional funds, as a result of the decrease in real estate
values within the City. The inability to finance capital improvements would
increase the City's budget gaps in later years.
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. PORTFOLIO QUALITY(3)
SEC DURATION(2) ---------------------------------------------------------
YIELD(1) (YEARS) AAA AA A BBB UNRATED OTHER
AVG.
MATURITY(2)
(YEARS)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NEW JERSEY
Nuveen 4.87% 16.18 6.80 43.00% 5.70% 30.20% 8.20% 11.40% 1.50 %
Flagship 5.35% 18.86 8.34 54.47% 8.09% 22.03% 13.14% 2.27% --
New (Pro forma)(4) 5.03% 16.61 7.05 44.86% 6.09% 28.87% 9.00% 9.92% 1.26 %
NEW YORK
Nuveen 4.76% 18.77 7.84 29.60% 11.90% 12.20% 44.90% 1.40% --
Flagship 5.11% 20.90 8.49 12.90% 19.50% 14.61% 46.33% 3.19% 3.47 %
New (Pro forma)(4) 4.93% 19.27 7.99 25.74% 13.66% 12.76% 45.23% 1.81% .80 %
- -----------------------------------------------------------------------------------------------------------------------------
</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. The pro forma SEC yield reflects the New Fund's up-front sales charge
and estimated expense ratio, and, therefore, is not necessarily indicative of
the actual yield to any particular shareholder. The SEC yield for Class C and
Class B would vary.
(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 years should have roughly half the
interest rate sensitivity of a Fund with a duration of 10.0 years.
(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 Companies 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) board members:
(a) for the Flagship Funds, to the Board of the Flagship Trust,
(b1) for Nuveen New Jersey, to the Board of the Nuveen Trust;
(b2) for Nuveen New York, to the Board of Nuveen Corp.
9
<PAGE> 17
(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 New Jersey and Flagship New Jersey will be
asked to approve an Agreement and Plan of Reorganization (the "New
Jersey Agreement") whereby substantially all the assets and liabilities
of Nuveen New Jersey and Flagship New Jersey will be acquired by Nuveen
Flagship New Jersey Municipal Bond Fund ("New New Jersey"), in exchange
for shares of New New Jersey; and
(b) shareholders of Nuveen New York and Flagship New York will be asked
to approve an Agreement and Plan of Reorganization (the "New York
Agreement") whereby substantially all the assets and liabilities of
Nuveen New York and Flagship New York will be acquired by Nuveen
Flagship New York Municipal Bond Fund ("New New York") in exchange for
Shares of New New York.
The New Jersey Agreement and the New York 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 NUVEEN NUVEEN
PROPOSAL NEW JERSEY NEW YORK NEW JERSEY NEW YORK
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1) Election of Board Members X X X X
2) Investment Advisory Agreements X X
3) Rule 12b-1 Plan X X
4) Reorganizations 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 Companies, 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 Company 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 meetings. 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 New Jersey 1,547,561 200,744 4,224,753
NUVEEN CORP.
Nuveen New York 1,882,858 78,211 14,632,817
FLAGSHIP TRUST
Flagship New Jersey 1,108,252 -- --
Flagship New York 4,771,223 208,765 --
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
This Joint Proxy Statement--Prospectus is first being mailed to shareholders of
the Acquired Funds on or about November 6, 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.
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 Board Members
for the applicable Company and FOR Proposals 2, 3 and 4.
10
<PAGE> 18
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 and the Nuveen Corp., respectively, is required
to take action at each 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, (ii) in the case of the Flagship
Trust and the Nuveen Trust, abstentions and broker non-votes will have no effect
on the election of Board Members and (iii) in the case of the Nuveen Corp.,
abstentions and broker non-votes will have the same effect as a vote against the
election of Board Members.
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 Company
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 Company to permit further soliciting of
proxies from shareholders of the Company. Any such adjournment will require the
affirmative vote of a majority of the shares of the Company (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 Company'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.
PROPOSAL NO. 1--ELECTION OF BOARD MEMBERS
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
11
<PAGE> 19
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, the Nuveen Corp. 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 as of July 31, 1996, 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>
</TABLE>
<TABLE>
<S> <C> <C>
Robert P. Bremner (55) Since 1983 None
Private Investor and Management Consultant
William J. Schneider (51) 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 60 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. 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.
12
<PAGE> 20
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
TRUSTEE 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 as of July 31,
1996, 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 (61) Vice President since 1992 Vice President, Operations Flagship Funds Inc.
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 each of the Nuveen Trust's Board and the
Nuveen Corp.'s Board. The nominees include the Company's current four
disinterested Board Members, the Company's current two interested Board Members,
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 a Board Member will be
from the date of the consummation of the Acquisition until the next meeting held
for the purpose of electing Board Members and until his or her successor is
elected and qualified. If the Flagship Acquisition is not consummated, the
current Board Members of the Nuveen Trust and the Nuveen Corp. will continue to
serve as the Nuveen Trust's Board and the Nuveen Corp.'s Board respectively.
All of the nominees have consented to serve as Board Members. 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.
13
<PAGE> 21
The following table shows each nominee and the year in which the nominee was
first elected or appointed to the Board of each of the Nuveen Trust and the
Nuveen Corp., 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 -- Nuveen Trust None
Since 1986 -- Nuveen Corp.
Peter R. Sawers Since 1991 None
*Timothy R. Schwertfeger Since 1994 None
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
* Board Members 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 60 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 board members of each of the Nuveen
Trust and the Nuveen Corp. 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 and of the Nuveen Corp.'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
of the Nuveen Trust held twelve meetings for the fiscal year ended January 31,
1996 and the executive committee of the Nuveen Corp. held twelve meetings for
the fiscal year ended February 29, 1996 . All the executive committee meetings
were held for the sole purpose of declaring dividends.
Each Board has an audit committee composed of L. Brown, A. Impellizzeri, M.
Rosenheim and P. Sawers, disinterested Board Members of each Board. The audit
committee reviews the work and any recommendations of the Company'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 and the audit committee of the Nuveen
Corp. held two meetings for the fiscal year ended February 29, 1996.
Nomination of those Board Members who are disinterested Board Members of each of
the Nuveen Trust and the Nuveen Corp. is the responsibility of a nominating
committee composed of the disinterested Board Members of such Company. It
identifies and recommends individuals to be nominated for election as Board
Members. The nominating committee of the Nuveen Trust held one meeting for the
fiscal year ended January 31, 1996 and the nominating committee of the Nuveen
Corp. held one meeting for the fiscal year ended February 29, 1996. No policy or
procedure has been established as to the recommendation of nominees by
shareholders.
The Board of the Nuveen Trust held five meetings for the fiscal year ended
January 31, 1996. The Board of the Nuveen Corp. held six meetings for the fiscal
year ended February 29, 1996. During the fiscal year, each Board Member proposed
for election attended 75% or more of the respective Company's Board meetings and
the committee meetings (if a member thereof).
The interested Board Members serve without any compensation from either the
Nuveen Trust or the Nuveen Corp. The disinterested Board Members 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 and the Nuveen Corp. each has adopted a Directors' Deferred Compensation
Plan pursuant to which a Board Member may elect to have all or a portion of the
Board Member's fee deferred. Board Members 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 Board Members wishes to begin deferral.
14
<PAGE> 22
The table below shows, for each disinterested Board Member, the aggregate
compensation paid or accrued by the Nuveen Trust for the fiscal year ended
January 31, 1996 by the Nuveen Corp. for the fiscal year ended February 29, 1996
and the total compensation that all Nuveen Funds paid to each Trustee during the
calendar year 1995.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
TOTAL COMPENSATION
AGGREGATE AGGREGATE FROM TRUST AND
COMPENSATION COMPENSATION FUND COMPLEX
TRUSTEES FROM NUVEEN TRUST FROM NUVEEN CORP. PAID TO TRUSTEES
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Lawrence H. Brown $1,873 $1,255 $55,500
Anne E.
Impellizzeri $1,873 $1,255 $63,000
Margaret K.
Rosenheim $1,971 $1,370(1) $62,322(2)
Peter R. Sawers $1,873 $1,255 $55,500
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes $161 in interest accrued on deferred compensation from prior years.
(2) Includes $1,572 in interest accrued on deferred compensation from prior
years.
OFFICERS. Information about the executive officers of the Nuveen Trust and the
Nuveen Corp. as of July 31, 1996, 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 1991)
Analyst.
Steven J. Krupa, 38 Vice President
Vice President of Nuveen Advisory Corp. (since 1990)
Anna R. Kucinskis, 50 Vice President
Vice President of John Nuveen & Co. Incorporated. (since 1991)
Larry W. Martin, 45 Vice President (since 1993) &
Vice President (since September 1992), Assistant Secretary and Assistant Secretary (since 1987)
Assistant General Counsel of John Nuveen & Co. Incorporated; 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 (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 each Company's
March 1992), John Nuveen & Co. Incorporated, Nuveen Advisory Corp. organization)
and Nuveen Institutional Advisory Corp.
Thomas C. Spalding, Jr., 45 Vice President
Vice President of Nuveen Advisory Corp. and Nuveen Institutional (since each Company's
Advisory Corp.; Chartered Financial Analyst. organization)
H. William Stabenow, 62 Vice President & Treasurer
Vice President and Treasurer of The John Nuveen Company (since (since 1988)
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 1988)
Company (since March 1992), John Nuveen & Co. Incorporated, Nuveen
Advisory Corp. and Nuveen Institutional Corp.
</TABLE>
15
<PAGE> 23
<TABLE>
<S> <C>
Gifford R. Zimmerman, 39 Vice President (since 1993) &
Vice President (since September 1992); Assistant Secretary and Assistant Secretary (since 1988)
Assistant General Counsel of John Nuveen & Co. Incorporated; 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>
It is anticipated that, after completion of the Acquisition, the restructured
Boards will elect new officers who are expected to include persons affiliated
with Nuveen and Flagship.
As of July 31, 1996, the Board Members and executive officers of each Company as
a group did not own beneficially any shares of the Nuveen Funds, the Nuveen
Trust or the Nuveen Corp.
As of July 31, 1996, no person is known to either Company 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, all series of the Nuveen
Corp. 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 board members requires an affirmative vote of
a plurality of the shares of the Nuveen Trust present and entitled to vote at
the meeting.
For the Nuveen Corp., election of board members requires an affirmative vote of
a majority of the shares of the Nuveen Corp. present and entitled to vote at the
meeting.
For the Flagship Trust, election of board members 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., 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
and 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
16
<PAGE> 24
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. 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. If the shareholders of a Flagship Fund do not
approve the new advisory agreement, The John Nuveen Company and Flagship
Resources Inc. nevertheless intend to proceed with the Flagship Acquisition
(assuming all conditions precedent have been satisfied or waived, including the
92.5% conditions). In that event, the Flagship Trust's Board would take such
action as it deemed to be in the best interests of the shareholders of the Fund,
including, if necessary, seeking exemptive relief from the SEC so that Nuveen
Advisory could provide investment advisory services to the Fund on an interim
basis. If the Flagship Acquisition is not consummated for any reason, then the
current advisory agreement with the Funds will continue.
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.
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 Board Members
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 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 $59,000 for
Flagship New Jersey and $257,000 for Flagship New York. The expenses were
reimbursed to Flagship by uniform pro rata deductions from the net asset value
of the Flagship Fund accrued daily and paid monthly over the five-year period
ended May 31, 1996. 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.
17
<PAGE> 25
<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>
New Jersey September 16, 1992 May 15, 1992 August 23, 1996 May 15, 1992(1) August 23, 1997
New York January 16, 1991 July 20, 1987 August 23, 1996 December 16, 1991(1) August 23, 1997
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The current investment advisory agreement was last submitted to the public
shareholders for approval after commencement of operations.
THE NEW ADVISORY AGREEMENT
The New Advisory Agreement provides that Nuveen Advisory will act as investment
adviser 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 of .50% of the
average daily net assets of such fund computed daily for the period from the
date of the consummation of the Flagship Acquisition through January 31, 1997,
which is the same rate as the current schedule. Commencing February 1, 1997,
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 term of up to two years, and may continue
thereafter from year to year if approved 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, by 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 service and distribution
fees on the 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 (with the new 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>
- -------------------------------------------------------------------------------------------------------------
MANAGEMENT
FUND FEES 12B-1 FEES
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
New Jersey
Class A
Current .50% $ 48,257 .40% $ 38,444
Pro forma .55% $ 53,083 .20% $ 19,250
Class C
Current N/A N/A N/A N/A
Pro forma N/A N/A N/A N/A
New York
Class A
Current .50% $250,480 .40% $200,142
Pro forma .55% $275,528 .20% $ 99,918
Class C
Current .50% $ 291 .95% $ 533
Pro forma .55% $ 320 .75% $ 437
- -------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 26
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 and President 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 Financial 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 81
management investment company portfolios with approximately $32 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.
19
<PAGE> 27
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 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.
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.
On July 15, 1996, the Board, including all of the disinterested Board Members,
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, for the period from the date of the consummation of the
Flagship Acquisition through January 31, 1997, each Fund may spend up to .20 of
1% per year of the average daily net assets of Class A shares as a distribution
fee and .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; and up to .75 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. The foregoing fees
are consistent with the Fund's current fee structure. Commencing February 1,
1997, 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, up to .75 of 1% per year of the average daily net assets of Class B
shares as a distribution fee under the Plan applicable to Class B shares, 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, up to .55 of 1% per
year of the average daily net assets of Class C shares as a distribution fee
under the Plan applicable to Class C shares 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.
20
<PAGE> 28
The distribution fees applicable to the 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 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 fees applicable to the 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.
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>
New Jersey May 15, 1992 September 3, 1992 August 23, 1996 August 23, 1997
New York July 20, 1987 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>
New Jersey $ 38,444 N/A
New York $200,142 $533
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
The new Rule 12b-1 Plan will be in effect for an initial term beginning upon the
date of the consummation of the Acquisition through August 1, 1997 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, by 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 Plan and to submit it to the shareholders for their
approval.
The Board recommends that shareholders vote FOR approval of the new Rule 12b-1
Plan.
21
<PAGE> 29
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 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. In the case of Nuveen New York, this
liquidation and distribution is to be accomplished under the Agreement by
amending the articles of incorporation of the Nuveen Corp. 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.
22
<PAGE> 30
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 either the
Nuveen Trust or the Nuveen Corp., as the case may be, the Flagship Trust and the
New Trust, (b) by either Acquired Fund or the New Fund if any condition to that
Fund's obligations 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
in May, June, July and October, 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 and to the Board of Directors of the Nuveen Corp.
for consideration at numerous Board meetings held in June, July and October,
1996. Each Board concluded unanimously that the respective Reorganization is in
the best interests of the Nuveen Trust and the Nuveen Corp., each respective
Nuveen Fund and the shareholders of the Nuveen Funds.
REASONS FOR THE REORGANIZATION
During its review and deliberations, the Board of each of the Flagship Trust,
the Nuveen Trust and the Nuveen Corp. 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 board members. 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 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 Trust 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
23
<PAGE> 31
Flagship personnel in distribution of the New Funds. The Board of each of the
Nuveen Trust and the Nuveen Corp. 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 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 Nuveen 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,
including all its disinterested Board Members, of each Company, 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 Nuveen New York, approval of the Agreement requires the affirmative vote of
the holders of a majority of the shares of each class outstanding, voting as
separate classes. Approval of the Agreement will also be deemed approval of the
amendment to the articles of incorporation of the Nuveen Corp. required to
effect the reorganization.
For Nuveen New Jersey, 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.
24
<PAGE> 32
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 JERSEY
Class A 1,250
Class B 1,250
Class C 1,250
Class R 1,250
NEW YORK
Class A 1,250
Class B 1,250
Class C 1,250
Class R 1,250
</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 Nuveen
Corp. is organized as a corporation under the laws of the State of Minnesota.
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 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 provisions of
the Declaration of Trust of the New Trust are substantially similar to the
Articles of Incorporation of the Nuveen Corp., except; the Declaration of the
New Trust provides for removal of trustees for cause only by vote of 66 2/3% of
the remaining trustees or shareholders, whereas a majority of the
25
<PAGE> 33
shareholders of the Nuveen Corp. can remove a director with or without cause;
under the New Trust, 30% of the outstanding shares constitutes a quorum whereas
a majority of the outstanding shares of the Nuveen Corp. is necessary for a
quorum at shareholder's meetings; under the New Trust, the Trust (or a series)
can be terminated (i) by the Trustees, upon 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 Nuveen Corp. may be terminated by
action of a majority of the affected shareholders; under the Declaration of the
New Trust, trustees may be elected by a plurality of votes cast when a quorum is
present, whereas directors of the Nuveen Corp. may only be elected by the vote
of a majority of a quorum; the Declaration of the New Trust (other than the
Article 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 Articles of the Nuveen Corp. 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 and the Articles of
Incorporation 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 New Jersey and Flagship New Jersey are "non-diversified"
under the 1940 Act; Flagship New York, Nuveen New York, New New York and Nuveen
New Jersey are "diversified." Being non-diversified, New New Jersey will be able
to, and Flagship New Jersey currently is able to, invest more than 5% of their
assets in the obligations of an issuer, subject to the diversification
requirements of Subchapter M of the Code. This allows each of these Funds, 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 New Jersey and Flagship New Jersey may
invest a relatively high percentage of their 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 other Funds, which are diversified.
Investment Grade Quality. The New Funds and the Flagship Funds may rely on
ratings from Moody's Investor Service, Inc., ("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. Nuveen New Jersey may
only invest up to 20% in unrated securities, while the New Funds, Nuveen New
York 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 Nuveen New Jersey 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 dependent 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. If 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 Funds may invest more than 25% of their assets in a particular segment
of the municipal
26
<PAGE> 34
bond market, such as Hospital Revenue Bonds, Housing Agency Bonds, Industrial
Development Bonds, Airport Bonds or U.S. Territorial Bonds.
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> 35
The portfolio managers for the New Funds are expected to be the current
portfolio managers for the Nuveen Funds. Stephen S. Peterson, an Assistant Vice
President of Nuveen Advisory, currently manages nine Nuveen-sponsored funds,
including Nuveen New Jersey and is expected to be the manager for New New
Jersey. Prior to joining Nuveen Advisory in October 1991, he was an analyst in
Nuveen's Research Department. Richard E. Huber is the current manager for
Flagship New Jersey. Daniel S. Solender, an Assistant Portfolio Manager of
Nuveen Advisory, currently manages ten Nuveen-sponsored funds, including Nuveen
New York, and is expected to be the manager for New New York. Prior to joining
Nuveen Advisory in January 1992, Mr. Solender attended the University of Chicago
(from September 1990 to June 1992) where he received his M.B.A. and worked part
time in the Research Department of Nuveen. From June 1989 to August 1990, Mr.
Solender worked for Citibank Investment Services in the areas of investment
research and product development. Richard Huber is the current manager for
Flagship New York.
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.
28
<PAGE> 36
**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.
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
BOARD MEMBERS AND OFFICERS
The Board Members and officers of the New Trust differ from those of the Nuveen
Trust, the Nuveen Corp. and the Flagship Trust. The Trustees of the New Trust
currently are 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 Board Members and the Statement of
Additional Information for further information.
FISCAL YEAR
The New Trust currently intends to have a February 28 fiscal year-end. The
Flagship Trust has a May 31 fiscal year-end, the Nuveen Trust has a January 31
fiscal year-end and the Nuveen Corp. has a February 28 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.
29
<PAGE> 37
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.
Shareholder Services, Inc., P.O. Box 5330, Denver, Colorado 80217, will be the
transfer agent and the Chase Manhattan Bank, 770 Broadway, New York, New York
10003, will be the custodian for the New Funds. They currently serve as the
transfer agent and custodian for the Nuveen Funds. State Street Bank and Trust
Company, currently serves as the transfer agent and custodian for the Flagship
Funds.
AUDITORS.
The auditors for the New Funds, the Nuveen Trust and the Nuveen Corp. are Arthur
Andersen LLP. The auditors for the Flagship Trust are Deloitte & Touche LLP.
ORGANIZATION.
The Nuveen Trust, the Flagship Trust and the New Trust are all Massachusetts
business trusts, the Nuveen Corp. is a Minnesota corporation.
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
30
<PAGE> 38
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 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 New Jersey and Nuveen New Jersey who receive
shares of New New Jersey pursuant to the Reorganization will recognize no gain
or loss for New Jersey income taxes purposes. Shareholders of Flagship New York
and Nuveen New York who receive shares of New New York pursuant to the
Reorganization will recognize no gain or loss for New York income taxes
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 NEW JERSEY OR NEW YORK 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 NEW YORK
DEPARTMENT OF TAXATION OR THE NEW JERSEY DIVISION 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.
31
<PAGE> 39
CAPITALIZATION
The following table sets forth the unaudited capitalization of the Acquired
Funds as of January 31, 1996 for New Jersey and February 29, 1996 for New York
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 JANUARY 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
NEW
NUVEEN FLAGSHIP NEW JERSEY
NEW JERSEY NEW JERSEY (PRO
(ACTUAL) (ACTUAL) FORMA)
----------- ----------- ----------
NEW
NEW JERSEY
(AS ADJUSTED)(1)
----------------
<S> <C> <C> <C> <C>
Common shares, $.01 par value per share.............. $ 52,854 $ -- $ 50 $ 65,700(2)
Paid-in surplus...................................... 52,998,976 10,224,031 49,950 63,260,161(3)
Balance of undistributed net investment income....... 8,128 -- -- --(4)
Accumulated net realized gain (loss) from investment
transactions....................................... (482,912 ) (169,510 ) -- (652,422)(5)
Net unrealized appreciation of investments........... 2,452,854 574,127 -- 3,026,981
----------- ----------- -------- ------------
Net assets....................................... $55,029,900 $10,628,648 $ 50,000 $ 65,700,420
=========== =========== ======== ============
</TABLE>
(1) The adjusted balances are presented as if the Reorganization was effective
as of January 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 1,065,913 and 1,062,865 class A shares, 106,486
class C shares and 4,329,778 class R shares of New New Jersey in exchange for
the net assets of class A, C and R of Nuveen New Jersey and Flagship New Jersey,
respectively. These numbers are based on the net assets of each class of Nuveen
New Jersey and Flagship New Jersey, and the net asset values of each respective
class of New New Jersey, as of January 31, 1996, after adjustment for the
distributions referred to in (4) below. The issuance of such number of New New
Jersey shares would result in the distribution of 1.0401918 and 1.0363892 class
A shares, 1.0381906 class C shares and 1.0412762 class R shares for each share
of each respective class of Nuveen New Jersey and Flagship New Jersey,
respectively, upon liquidation of each respective class of Nuveen New Jersey and
Flagship New Jersey.
(3) Includes the impact of $12,796 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 New
Jersey share issued in exchange for each Flagship New Jersey share.
(4) Assumes Nuveen New Jersey distributes all of its undistributed net
investment income to shareholders.
(5) Assumes Nuveen New Jersey and Flagship New Jersey carry forward their net
realized losses from investment transactions to New Jersey, as permitted under
applicable tax regulations.
PRO FORMA CAPITALIZATION AS OF FEBRUARY 29, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
NUVEEN FLAGSHIP NEW
NEW YORK NEW YORK NEW YORK
(ACTUAL) (ACTUAL) (PRO FORMA)
------------ ----------- -----------
NEW
NEW YORK
(AS ADJUSTED)(1)
----------------
<S> <C> <C> <C> <C>
Common shares, $.01 par value per share............. $ 160,928 $ -- $ 50 $ 221,925(2)
Paid-in surplus..................................... 161,152,782 49,282,603 49,950 210,424,388(3)
Balance of undistributed net investment income...... 126,818 -- -- --(4)
Accumulated net realized gain (loss) from
investment transactions......................... 649,435 (1,203,387) -- (1,203,387)(5)
Net unrealized appreciation of investments........ 9,063,280 3,418,392 -- 12,481,672
============ =========== ======== ============
Net assets.................................... $171,153,243 $51,497,608 $50,000 $221,924,598
============ =========== ======== ============
</TABLE>
(1) The adjusted balances are presented as if the Reorganization was effective
as of February 29, 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 1,566,039 and 5,149,761 class A shares, 64,295 class
C shares and 15,407,365 class R shares of New New York in exchange for the net
assets of class A, C and R of the Nuveen New York and Flagship New York,
respectively. These numbers are based on the net assets of each class of Nuveen
New York and Flagship New York, and the net asset values of each respective
class of New New York, as of February 29, 1996, after adjustment for the
distributions referred to in (4) and (5) below. The issuance of such number of
New New York shares would result in the distribution of 1.0559659 and 1.0855577
class A shares, 1.0587575 class C shares and 1.0589984 class R shares for each
class of Nuveen New York and Flagship New York, respectively, upon liquidation
of each respective class of Nuveen New York and Flagship New York.
(3) Includes the impact of $60,947 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 New York
share issued in exchange for each Flagship New York share.
(4) Assumes Nuveen New York distributes all of its undistributed net investment
income to shareholders.
(5) Assumes Nuveen New York distributes all of its net realized gains from
investment transactions to shareholders and Flagship New York carries forward
its net realized losses from investment transactions to New New York, as
permitted under applicable tax regulations.
32
<PAGE> 40
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 FUND CLASS
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NEW JERSEY
Class A(1)
Nuveen 3.87% N/A N/A 5.98% 9/6/94
Flagship 3.97% 5.43% N/A 6.88% 9/16/92
Class C
Nuveen 3.09% N/A N/A 6.21% 9/21/94
Flagship N/A N/A N/A N/A N/A
Class R
Nuveen 4.21% 5.47% N/A 7.01% 12/13/91
Flagship N/A N/A N/A N/A N/A
NEW YORK
Class A(1)
Nuveen 3.79% N/A N/A 6.22% 9/6/94
Flagship 4.15% 5.05% 8.46% 8.44% 1/16/91
Class C
Nuveen 3.12% N/A N/A 6.31% 9/13/94
Flagship N/A N/A N/A (2.88)% 3/4/96
Class R
Nuveen 4.07% 5.07% 7.91% 7.46% 12/10/86
Flagship 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 for the
funds including sales charge are as follows; one year and life of fund for
Nuveen New Jersey (.81)% and 3.20%, respectively; one year, three years and life
of fund for Flagship New Jersey (.39)%, 3.93% and 5.65%; one year and life of
fund for Nuveen New York (.88)% and 3.43%; one year, three years, five years and
life of fund for Flagship New York (.23)%, 3.56%, 7.53% and 7.58%.
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. 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.
EXPERTS
The statement of the Assets of the New Funds appearing in the Statement of
Additional Information and 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 New and the Nuveen
Funds' annual financial statements, reviews certain regulatory reports and the
New 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 New and the Nuveen Funds.
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 Flagship Funds' annual financial statements, reviews certain
regulatory reports 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 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
33
<PAGE> 41
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
James J. Wesolowski
Secretary
Nuveen Tax-Free Bond Fund, Inc.
Michael D. Kalbfleisch
Secretary
Flagship Tax-Exempt Funds Trust
34
<PAGE> 42
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 as is consistent, in the view of the Fund's
management, with preservation of capital. 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; 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 supply and demand or other temporary circumstances
affecting the municipal market, each Fund may invest without limit in
A-1
<PAGE> 43
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. New Jersey is "non-diversified" under the 1940 Act. Being
non-diversified, New Jersey will be able to invest more than 5% of its total
assets in the obligations of a single issuer, subject to the diversification
requirements of Subchapter M of the Code. This allows New Jersey, 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. Since a non-diversified Fund may invest a
relatively high percentage of its assets in the obligations of a limited number
of issuers, New Jersey may be more susceptible to any single economic, political
or regulatory occurrence than a diversified fund.
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 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
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<PAGE> 44
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 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, New York 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 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.
FLEXIBLE PRICING PROGRAM
The 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
A-3
<PAGE> 45
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>
- ----------------------------------------------------------------------------------------------------------------------
UP-FRONT SALES ANNUAL 12B-1 ANNUAL 12B-1
CHARGE DISTRIBUTION FEE SERVICE FEE
CONTINGENT DEFERRED
SALES CHARGE
"CDSC"
- ----------------------------------------------------------------------------------------------------------------------
<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.
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
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<PAGE> 46
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 SSI of any
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 SSI Financial
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<PAGE> 47
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 SSI 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 ten 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 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.
A-6
<PAGE> 48
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 SSI 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 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.
A-7
<PAGE> 49
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 800-843-6765. 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, SSI. 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 SSI
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 SSI, 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 800-621-7227.
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.
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.
A-8
<PAGE> 50
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 SSI 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 Shareholder
Services, Inc., P.O. Box 5330, Denver, CO 80217-5330. 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.
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
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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 800-621-7227, 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 SSI. 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
SSI 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 SSI 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 SSI at 800-621-7227. 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 SSI, 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 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
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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 Shareholder Services, Inc., P.O. Box 5330,
Denver, CO 80217-5330. 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
Nuveen at 800-621-7227. 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 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 Nuveen at
800-621-7227. 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
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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 SSI. 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 800-621-7227. 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 SSI 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, SSI, 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 800-621-7227.
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 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,
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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.
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.
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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.
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.
NEW JERSEY
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 (1) 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 and gain on which is exempt
from New Jersey Gross Income Tax under New Jersey law or Federal law, and (2)
per gains attributable to the redemption or exchange of New Jersey Fund shares,
provided that the New Jersey Fund qualifies as a "qualified investment fund."
Qualified investment funds include, among others, any registered investment
company or series thereof (such as the New Jersey Fund), which invests at least
80% of its assets, excluding cash and certain hedging transactions, in the
obligations described above, and which has no investments other than
interest-bearing or discounted obligations, cash and certain hedging
transactions. A corporate shareholder, including an S corporation, subject to
the New Jersey Corporation Business Tax or the New Jersey Corporation Income Tax
will be required to include in its entire net income distributions of interest
or gain, or both, from the New Jersey Fund, less any interest expense incurred
to carry such investment to the extent such interest expense has not been
deducted in computing Federal taxable income, and net gain derived on the
redemption or exchange of New Jersey Fund shares.
NEW YORK
Individual shareholders of the New York Fund who are subject to New York State
or New York City personal income taxation will not be required to include in
their New York adjusted gross income that portion of their exempt-interest
dividends (as determined for federal income tax purposes) which the New York
Fund clearly identifies as directly attributable to interest earned on Municipal
Obligations issued by governmental authorities in New York ("New York Municipal
Obligations") and which are specifically exempted from personal income taxation
in New York State or New York City, or interest earned on obligations of U.S.
territories or possessions that is exempt from taxation by the states pursuant
to federal law. Distributions to individual shareholders of dividends derived
from interest that does not qualify as exempt-interest dividends (as determined
for federal income tax purposes), distributions of exempt-interest dividends (as
determined for federal income
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tax purposes) which are derived from interest on Municipal Obligations issued by
governmental authorities in states other than New York State, and distributions
derived from interest earned on federal obligations will be included in their
New York adjusted gross income as ordinary income. Distributions to individual
shareholders of the New York Fund of capital gain dividends (as determined for
federal income tax purposes) will be included in their New York adjusted gross
income as long-term capital gains. Distributions to individual shareholders of
the New York Fund of dividends derived from any net income received from taxable
temporary investments and any net short-term capital gains realized by the New
York Fund will be included in their New York adjusted gross income as ordinary
income. Gain or loss, if any, resulting from an exchange or redemption of shares
of the New York Fund that is recognized by individual shareholders of the New
York Fund for federal income tax purposes will be recognized for purposes of New
York personal income taxation.
For purposes of New York State franchise taxation (or New York City general
corporation taxation), entire income will include dividends received from the
New York Fund (as determined for federal income tax purposes), as well as any
gain or loss recognized from an exchange or redemption of shares of the New York
Fund that is recognized for federal income tax purposes, and investment capital
will include a corporate shareholder's shares of the New York Fund. If a
shareholder of the New York Fund is subject to the New York City unincorporated
business tax, income and gains derived from the New York Fund will be subject to
such tax, except for exempt-interest dividends (as determined for federal income
tax purposes) which the New York Fund clearly identifies as directly
attributable to interest earned on New York Municipal Obligations.
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 800 621-7227.
Custodian and Transfer and Shareholder Services Agent. The Custodian of the
assets of the Funds is Chase Manhattan Bank 770 Broadway, New York, NY 10003.
Shareholder Services, Inc., P.O. Box 5330, Denver, CO 80217-5330, the Funds'
transfer, shareholder 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 New Jersey
Fund is "non-diversified" and the New York Fund is "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 ten 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. There 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 and certain Class C
Shares may be converted to Class A shares of the same Fund, both 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/Nuveen Tax-Free Bond
Fund, Inc. (the "Nuveen Corp."), a Minnesota Corporation], 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 II (the "New Trust"), a
Massachusetts business trust, on behalf of its series of shares
designated (the "New Fund"). The [Nuveen Trust/Nuveen Corp.] and
the Flagship Trust are referred to as the "Acquired Companies," and,
collectively, with the New Trust as the "Companies," 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. [The distribution of New Fund Shares to the Nuveen Fund shareholders
and the termination of the Nuveen Fund will be effected pursuant to an amendment
to the articles of incorporation of the Nuveen Corp. to be adopted by the Nuveen
Corp. in accordance with the Minnesota Business Corporation Act.]
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.
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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 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 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).
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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.
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 Company represents and warrants as follows:
4.1.1 The Acquired Company is a duly organized, validly existing
[business trust/corporation] and in good standing under the laws
of the [Commonwealth of Massachusetts/State of Minnesota] 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 Company 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 Company is not, and the execution, delivery and
performance of this Agreement will not result, in violation of any
provision of the [Declaration of Trust/Articles of Incorporation]
or By-Laws of the Acquired Company or of any material agreement,
indenture, instrument, contract, lease or other undertaking to
which the Acquired Company is a party or by which the Acquired
Company is bound.
4.1.4 The Acquired Company 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/CORP.: 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
, 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
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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/CORP.: Since , 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 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 Company'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 Company consists of
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/Directors of the Acquired
Company 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
Company 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
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<PAGE> 61
and in conformity with information furnished by the New Trust or any other
Acquired Company 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 set forth in the New Fund's
registration statement and under applicable law. From the date of
this Agreement to and 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 Company 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 October 16, 1996, which will be 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) that will not be 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.
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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 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 Companies 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 COMPANIES
5.1 Except as may otherwise be required by paragraph 1.4, each Company will
operate its respective business in the ordinary course between the date
hereof and the Closing Date.
5.2 Each Acquired Company 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 Company 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 Company 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 Company 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 Company will, from time to time, as and when requested by
any other Company, 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 Company 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 Flagship Financial Inc. and Nuveen Advisory Corp.
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<PAGE> 63
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRED COMPANIES
The obligations of each Acquired Company 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 Company 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 Company 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 Company shall reasonably request.
6.3 The Acquired Company 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 Company, 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 Company shall, at its election, be subject
to the performance by the Acquired Company 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 Company 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.
B-7
<PAGE> 64
7.2 The Acquired Company shall have delivered to the Acquiring Fund a
certificate executed in its name by the President or Vice President of
the Acquired Company, 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 Company 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 Company 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 Company.
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.
7.5 The New Trust shall have received an opinion from Vedder, Price, Kaufman
& Kammholz with respect to the Nuveen Trust/Corp., dated as of the
Closing Date, to the effect that:
7.5.1 The Acquired Company has been duly organized and is validly
existing as a [business trust/corporation] in good standing under
the laws of the [Commonwealth of Massachusetts/State of Minnesota]
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 Company and, assuming due authorization, execution
and delivery of the Agreement by the New Trust, constitutes a
valid and binding obligation of the Acquired Company 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 Company's [Declaration of Trust/Articles of
Incorporation] 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/State of Minnesota] applicable to
the Acquired Company; 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 Company 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 Company under the
federal laws of the United States and the laws of the
[Commonwealth of Massachusetts/State of Minnesota] for the
consummation of the transactions contemplated by this Agreement
have been obtained or made;
7.5.5 The Acquired Company 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 Company or the Acquired Fund or any of its properties or
assets, and (b) the Acquired Company 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 Company 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 Company and, assuming due authorization, execution
and delivery of the Agreement by the New Trust, constitutes a
valid and binding obligation of the Acquired Company 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;
B-8
<PAGE> 65
7.6.3 Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby violate (i)
the Acquired Company'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 Company; 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 Company 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 Company 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 Company 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
7.6.6 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 Company or the Acquired Fund or any of its properties or
assets, and (b) the Acquired Company 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 COMPANIES
The obligations of each Company 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/Directors
of each Company and (b) the holders of the outstanding shares of each
Acquired Fund in accordance with the provisions of each Acquired
Company's Declaration of Trust/Articles of Incorporation and By-Laws,
and each Company shall have delivered certified copies of the
resolutions evidencing such approvals to the other Companies.
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 Company 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 Companies shall have received an opinion of Vedder, Price, Kaufman &
Kammholz satisfactory to the Companies 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
B-9
<PAGE> 66
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
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.
8.7 The amendment to the articles of incorporation of the Nuveen Corp. shall
have been filed in accordance with the applicable provisions of
Minnesota law.
9. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
9.1 This Agreement constitutes the entire agreement among the Companies.
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 Companies;
10.2 By any Company, if a condition to the obligations of such Company shall
not have been met and it reasonably appears that it will not or cannot
be met; or
10.3 By any Company, 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 Company or any Trustee, Director or officer of any Company.
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 Acquired Companies 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
Acquired Companies' Boards of Trustees/Directors 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.
B-10
<PAGE> 67
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/Corp., 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.
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 Company must look solely to the
property of the applicable Acquired Fund for the enforcement of any
claims against the Acquired Company as neither the Trustees, Directors,
officers, agents or shareholders of the Acquired Company 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 Company.
NUVEEN MULTISTATE TAX-FREE
TRUST/NUVEEN TAX-FREE BOND FUND, INC.
By:
------------------------------------
President
FLAGSHIP TAX-EXEMPT FUNDS TRUST II
By:
------------------------------------
President
NUVEEN FLAGSHIP MULTISTATE TRUST II
By:
------------------------------------
President
B-11
<PAGE> 68
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 New Jersey......................... Merrill Lynch Pierce Fenner & Smith 97393 19.22%
Attn: Book Entry
P.O. Box 45286
Jacksonville, FL 32232-5286
Flagship New York
Class A................................... Merrill Lynch Pierce Fenner & Smith 97393 47.06%
Attn: Book Entry
P.O. Box 45286
Jacksonville, FL 32232-5286
Flagship New York
Class C................................... Merrill Lynch Pierce Fenner & Smith 97393 72.28%
Attn: Book Entry
P.O. Box 45286
Jacksonville, FL 32232-5286
Prudential Securities Inc. FBO 10.23%
Ms. Hanifa Omerhodzic
170 Windom Ave.
Orchard Park, NY 14127-1518
Painewebber For the Benefit of 8.77%
Deborah M. Stocker
59 Newport Drive
Nanuet, NY 10954-3124
Nuveen New Jersey
Class A................................... NFSC FEBO #AAR-452009 5.18%
Olga Schadas
28 Madison Street
S. Bound Brook, NJ 08880
Nicholas A. Rao & 7.11%
Catherine F. Rao
JT TEN WROS NOT TC
9 Marlin Ave. W
Edison, NJ 08820-3164
Merrill Lynch Pierce Fenner & Smith Inc. 7.35%
97E82
Attn: Book Entry Dept.
4800 Deer Lake Dr. E. Fl. 3
Jacksonville, FL 32246-6484
Nuveen New Jersey
Class C................................... NFSC FEBO #A7D-004987 5.55%
Doris Sicora
103 W. Spray Way
Lavallette, NJ 08735
Donaldson Lufkin Jenrette Securities 5.57%
Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303-9998
William G. Osborne 24.49%
c/o Aurachem Corp.
South 3R & Somerset St.
P.O. Box 471
Harrison, NJ 07029-0471
Alvin H. Frankel Agent for 8.73%
Louise I. Grill
U/POA DTD Jun 17 94
601 Haddon Ave.
Collingswood, NJ 08108-3703
</TABLE>
C-1
<PAGE> 69
<TABLE>
<CAPTION>
NAME OF FUND AND CLASS NAME AND ADDRESS OF OWNER PERCENTAGE OF OWNERSHIP
- -------------------------------------------- -------------------------------------------- -----------------------
<S> <C> <C>
Nuveen New York
Class A................................... Donaldson Lufkin Jenrette Securities 7.33%
Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303-9998
BHC Securities Inc. 7.35%
FAO 72893684
Attn: Mutual Funds
One Commerce Square
2005 Market Street, Suite 1200
Philadelphia, PA 19103
Nuveen New York
Class C................................... Katherine C. Hinton & 14.12%
Lorin W. Lyle
JT TEN WROS NOT TC
100 LaSalle St., Apt. 11F
New York, NY 10027-4738
Leila W. Bugenhagen & 7.24%
Kenneth Bugenhagen
JT TEN WROS NOT TC
552 Forest Edge Dr.
East Amherst, NY 14051-2468
Carol Wieder 12.02%
315 Vista Dr.
Jericho, NY 11753-2808
Adam S. Katz & 6.03%
Karen Katz
JT TEN WROS NOT TC
2276 Merrick Ave.
Merrick, NY 11566
Nuveen New York
Class R................................... BHC Securities Inc. 8.75%
FAO 84809126
Attn: Mutual Funds
One Commerce Square
2005 Market Street, Suite 1200
Philadelphia, PA 19103
</TABLE>
C-2
<PAGE> 70
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:
[As described in Joint Proxy Statement-Prospectus]
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.
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
D-1
<PAGE> 71
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.
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<PAGE> 72
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> 73
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 Fund (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
[As described in Joint Proxy Statement-Prospectus]
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 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 to the Authorized Dealer
of record.
The Distributor may retain any Distribution or Service Fees not so paid.
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<PAGE> 74
(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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FLAG-MS-2
<PAGE> 76
NUV-MS-2
<PAGE> 77
NUVEEN FLAGSHIP MULTISTATE TRUST II
Nuveen Flagship New Jersey Municipal Bond Fund
Nuveen Flagship New York 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 II (the "New
Trust") dated October 25, 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, the Statement of Additional Information for the Nuveen
Tax-Free Bond Fund, Inc. dated July 1, 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-18
Investment Adviser and Investment Management Agreement.................................... S-19
Portfolio Transactions.................................................................... S-20
Net Asset Value........................................................................... S-21
Tax Matters............................................................................... S-21
Performance Information................................................................... S-26
Additional Information on the Purchase and Redemption of Fund Shares...................... S-29
Distribution and Service Plans............................................................ S-30
Independent Public Accountants and Custodian.............................................. S-31
Financial Statements...................................................................... F-1
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 -- Nuveen Corp............................. C-1
Annex D -- Statement of Additional Information -- Flagship Trust.......................... D-1
</TABLE>
THE DATE OF THIS STATEMENT OF ADDITIONAL INFORMATION IS OCTOBER 25, 1996.
<PAGE> 78
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;
(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 New York Fund, 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.
In addition, each of the Funds, as a non-fundamental policy, may not invest
more than 15% of its net assets in "illiquid securities."
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<PAGE> 79
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 New Trust is an open-end management series company under SEC Rule
18f-2. Each Fund is a separate series issuing its own shares. The New Jersey
Fund is "non-diversified" and the New York Fund is "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.
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
S-3
<PAGE> 80
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 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
S-4
<PAGE> 81
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 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.
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
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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 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
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$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 NEW YORK
As described above, except to the extent the New York Fund invests in
temporary investments, the New York Fund will invest substantially all of its
assets in New York Municipal Obligations. The New York Fund is therefore
susceptible to political, economic or regulatory factors affecting New York
State and governmental bodies within New York State. Some of the more
significant events and conditions relating to the financial situation in New
York are summarized below. The following information provides only a brief
summary of the complex factors affecting the financial situation in New York, is
derived from sources that are generally available to investors and is believed
to be accurate. It is based on information drawn from official statements and
prospectuses issued by, and other information reported by, the State of New York
(the "State"), by its various public bodies (the "Agencies"), and by other
entities located within the State, including the City of New York (the "City"),
in connection with the issuance of their respective securities.
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 New York
Municipal Obligations held in the portfolio of the New York Fund or the ability
of particular obligors to make timely payments of debt service on (or relating
to) those obligations.
(1) The State: The State has historically been one of the wealthiest
states in the nation. For decades, however, the State economy has grown more
slowly than that of the nation as a whole, gradually eroding the State's
relative economic affluence. Statewide, urban centers have experienced
significant changes involving migration of the more affluent to the suburbs and
an influx of generally less affluent residents. Regionally, the older Northeast
cities have suffered because of the relative success that the South and the West
have had in attracting people and business. The City has also had to face
greater competition as other major cities have developed financial and business
resources which make them less dependent on the specialized services
traditionally available almost exclusively in the City. The State has for many
years had a very high state and local tax burden relative to other states. The
burden of State and local taxation, in combination with the many other causes of
regional economic dislocation, has contributed to the decisions of some
businesses and individuals to relocate outside, or not locate within, the State.
The State's economic growth continues to lag behind the nation's, due in
part to continued consolidation in the banking and financial services industries
and further reductions in manufacturing employment. The State has projected
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the rate of economic growth to slow within New York during the 1996-97 fiscal
year despite continued moderate expansion of the national economy. Many
uncertainties exist in forecasts of both the national and State economies and
there can be no assurance that the State's economy will perform at a level
sufficient to meet the State's projections of receipts and disbursements.
1996-97 Fiscal Year. The State Budget for the 1996-97 fiscal year (the
"State Budget") was enacted on July 13, 1996, more than two months after the
start of the fiscal year, which commenced on April 1, 1996. The State Financial
Plan dated July 25, 1996 for such fiscal year projected a balanced general fund
and receipts and disbursements of $33.2 billion and $33.1 billion, respectively.
The State's 1996-97 fiscal year budget projects savings in a number of areas and
increased revenues based on continuing improvement in the State's economy. The
delay in the enactment of the State Budget may negatively affect certain
proposed actions and reduce projected savings and various factors could reduce
economic activity and tax receipts.
The State Budget and the 1996-97 State Financial Plan provide for the
closing of a projected $3.9 billion budget gap in the 1996-97 fiscal year by
cost-containment savings in social welfare programs, savings from State agency
restructurings, decreasing the level of some categories of local aid, new
revenue measures and a reduction in the number of state employees. Up to $1.3
billion of gap closing measures by the State are dependent upon actions from
non-recurring sources or savings, which may make it more difficult to close
projected budget gaps in later years. Both the State Comptroller and rating
agencies have criticized the use of such "one-shots" to close the gap in the
State Budget.
The State Budget and the 1996-97 State Financial Plan may be impacted
negatively by uncertainties relating to the economy and tax collections. In
particular, should the national economy grow more slowly than forecasted by the
State, revenues received by the State would be adversely affected. The impact of
recent federal legislation on welfare programs and expenses has not been
determined but is not expected to affect results for the 1996-97 fiscal year. In
addition, proposed retroactive changes to the federal tax treatment of capital
gains would flow through to the State and could significantly reduce tax
receipts.
1995-96 Fiscal Year. The State ended its 1995-96 fiscal year in balance on
a cash basis with a General Fund cash surplus of approximately $445 million. The
State Legislature enacted the State's 1995-96 fiscal year budget on June 7,
1995, more than two months after the start of that fiscal year.
Future Fiscal Years. There can be no assurance that the State will not face
substantial potential budget gaps in the future resulting from a significant
disparity between tax revenues projected from a lower recurring receipts base
and the spending required to maintain State programs at current levels. To
address any potential budgetary imbalance, the State may need to take
significant actions to align recurring receipts and disbursements. The
Governor's budget for fiscal year 1996-97 projected that budget gaps of $1.4
billion and $2.5 billion may need to be closed for fiscal years 1997-98 and
1998-99, respectively. The State has indicated that the gap for fiscal year
1997-98 is expected to be larger. The State Comptroller warned on August 13,
1996 that the budget gap for the 1997-98 fiscal year may be as high as $3
billion. Recent federal welfare reform legislation may increase the State's
welfare burden and increase future year budget gaps.
Indebtedness. As of March 31, 1995, the total amount of long-term State
general obligation debt authorized but unissued stood at $1.8 billion. As of the
same date, the State had approximately $5.2 billion in general obligation bonds,
including $149 million in bond anticipation notes outstanding.
The State received $333 million of proceeds from bonds and notes during
fiscal year 1995-96. The State Budget projects borrowings for capital purposes,
as well as $1.75 billion of bonds for environmental purposes, during fiscal year
1996-97. The projections of the State regarding its borrowings for any fiscal
year are subject to change if actual receipts fall short of State projections or
if other circumstances require.
In June 1990, legislation was enacted creating the New York Local
Government Assistance Corporation ("LGAC"), a public benefit corporation
empowered to issue long-term obligations to fund certain payments to local
governments traditionally funded through the State's annual seasonal borrowing.
As of June 30, 1995, LGAC has issued its bonds to provide net proceeds of $4.7
billion completing the program.
Financing of capital programs by other public authorities of the State is
also obtained from lease-purchase and contractual-obligation financing
arrangements, the debt service for which is paid from State appropriations. As
of March 31, 1995, there were $18 billion of such other financing arrangements
outstanding and additional financings of this nature by public authorities. In
addition, certain agencies had issued and outstanding approximately $7.0 billion
of "moral obligation financings" as of March 31, 1995, which are to be repaid
from project revenues. While there has
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never been a default on moral obligation debt of the State, the State would be
required to make up any shortfall in debt service.
Ratings. Moody's rating of the State's general obligation bonds stood at A
on January 24, 1996, and S&P's rating stood at A- with a positive outlook, on
January 24, 1996, an improvement from S&P's stable outlook from February 1994
through April 1993 and negative outlook prior to April 1993. Previously, Moody's
lowered its rating to A on June 6, 1990, its rating having been A1 since May 27,
1986. S&P lowered its rating from A to A- on January 13, 1992. S&P's previous
ratings were A from March 1990 to January 1992, AA- from August 1987 to March
1990 and A+ from November 1982 to August 1987.
Moody's maintained its A rating and S&P continued its A- rating in
connection with the State's issuance of $226 million of general obligation bonds
in August 1996.
(2) The City and the Municipal Assistance Corporation ("MAC"): The City
accounts for approximately 40% of the State's population and personal income,
and the City's financial health affects the State in numerous ways.
In response to the City's fiscal crisis in 1975, the State took a number of
steps to assist the City in returning to fiscal stability. Among other actions,
the State Legislature (i) created MAC to assist with long-term financing for the
City's short-term debt and other cash requirements and (ii) created the State
Financial Control Board (the "Control Board") to review and approve the City's
budgets and four-year financial plans (the financial plans also apply to certain
City-related public agencies).
In recent years, the rate of economic growth in the City slowed
substantially as the City's economy entered a recession. While by some measures
the City's economy may have begun to recover, a number of factors, including
poor performance by the City's financial services companies, may prevent a
significant improvement in the City's economy and may in fact negatively impact
upon the City's finances by reducing tax receipts. The City Comptroller has
issued reports concluding that the recession of the City's economy may be
ending, but there is little prospect of any significant improvement in the near
term.
Fiscal Year 1997 and the 1997-2000 Financial Plan. On June 13, 1996, the
City Council adopted a fiscal year 1997 budget, which provided for a balanced
budget, expenditures and receipts of $33 billion in each case, and gap closing
measures of $2.6 billion. Projected actions to reduce this budget gap, include
$1.2 billion of actions affecting City agencies, $385 million of increased tax
revenues through extension of the personal income tax surcharge, cost
containment measures, receipt of $269 million of disputed airport rental
payments and pension cost savings. The personal income tax surcharge has been
extended, but whether the increase in tax revenues is realized is subject to
factors outside of the City's control. On August 15, 1996, the Mayor called for
$500 million of additional cuts to addresses risks in the fiscal year 1997
budget and address budget gaps in later years. The Control Board and rating
agencies have criticized the City's reliance on "one-shots" to balance its
current budget.
The 1997-2000 Financial Plan (the "Plan") projected budget gaps of $1.7
billion, $2.7 billion and $3.4 billion for fiscal years 1998, 1999 and 2000,
respectively. The City Comptroller and State Comptroller have each warned that
the fiscal year 1997 budget includes significant revenue risks and an unclosed
budget gap of as much as $900 million. Reports issued by the State Comptroller,
City Comptroller and Control Board have projected that budget gaps in later
years may be higher than those forecast in the Plan and may be as high as $5.4
billion in fiscal year 2000.
Given the foregoing, there can be no assurance that the City will continue
to maintain a balanced budget during fiscal year 1997 or thereafter, or that it
can maintain a balanced budget without additional tax or other revenue increases
or reductions in City services, which could adversely affect the City's economic
base.
Pursuant to State law, the City prepares a four-year annual financial plan,
which is reviewed and revised on a quarterly basis and which includes the City's
capital, revenue and expense projections. The City is required to submit its
financial plans to review bodies, including the Control Board. If the City were
to experience certain adverse financial circumstances, including the occurrence
or the substantial likelihood and the imminence of the occurrence of an annual
operating deficit of more than $100 million or the loss of access to the public
credit markets to satisfy the City's capital and seasonal financial
requirements, the Control Board would be required by State law to exercise
certain powers, including prior approval of City financial plans, proposed
borrowings and certain contracts.
The City depends on the State for State aid both to enable the City to
balance its budget and to meet its cash requirements. If the State experiences
revenue shortfalls or spending increases beyond its projections during its
1996-97 fiscal year or subsequent years, such developments could result in
reductions in projected State aid to the City. In addition, there can be no
assurance that State budgets for the 1997-98 or future fiscal years will be
adopted by the April 1 statutory deadline and that there will not be adverse
effects on the City's cash flow and additional City expenditures as a result of
such delays.
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The City projections set forth in the Plan are based on various assumptions
and contingencies which are uncertain and which may not materialize. Changes in
major assumptions could significantly affect the City's ability to balance its
budget as required by State law and to meet its annual cash flow and financing
requirements. Such assumptions and contingencies include the timing of any
regional and local economic recovery, the absence of wage increases in excess of
the increases assumed in its financial plan, employment growth, provision of
State and Federal aid and mandate relief, State legislative approval of future
State budgets, levels of education expenditures as may be required by State law,
adoption of future City budgets by the New York City Council, approval by the
Governor or the State Legislature and the cooperation of MAC with respect to
various other actions proposed in the Plan and changes in federal tax law.
The City's ability to maintain a balanced operating budget is dependent on
whether it can implement necessary service and personnel reduction programs
successfully. As discussed above, the City must identify additional expenditure
reductions and revenue sources to achieve balanced operating budgets for fiscal
year 1997 and thereafter. Any such proposed expenditure reductions will be
difficult to implement because of their size and the substantial expenditure
reductions already imposed on City operations in recent years.
Attaining a balanced budget is also dependent upon the City's ability to
market its securities successfully in the public credit markets. On May 3, 1996,
the Mayor announced a $1 billion reduction in City capital spending over a five
year period through fiscal year 2000. The City's financing program for fiscal
years 1997 through 2000 contemplates capital spending of $14.5 billion, which
will be financed through issuance of general obligation bonds, Water Authority
Revenue Bonds and Covered Organization obligations, and will be used primarily
to reconstruct and rehabilitate the City's infrastructure and physical assets
and to make capital investments. The City's financing program assumes the
receipt of approximately $1 billion from the sale of City's sewer and water
systems. However, the City Comptroller has obtained a court order blocking such
sale. An appellate court affirmed this ruling in June 1996 and the City has
sought permission to appeal. In the event such leave to appeal is not granted or
ultimately appeal is unsuccessful the City would be required to reduce capital
spending during the next four years or find additional sources of funds in such
amount. A significant portion of such bond financing is used to reimburse the
City's general fund for capital expenditures already incurred. In addition, the
City issues revenue and tax anticipation notes to finance its seasonal working
capital requirements. The terms and success of projected public sales of City
general obligation bonds and notes will be subject to prevailing market
conditions at the time of the sale, and no assurance can be given that the
credit markets will absorb the projected amounts of public bond and note sales.
In addition, future developments concerning the City and public discussion of
such developments, the City's future financial needs and other issues may affect
the market for outstanding City general obligation bonds and notes. If the City
were unable to sell its general obligation bonds and notes, it would be
prevented from meeting its planned operating and capital expenditures.
Absent appropriate legislative relief, the City may also face limitations
on its borrowing capacity after 1998 under the State's Constitution that will
prevent it from borrowing additional funds, as a result of the decrease in real
estate values within the City. The inability to finance capital improvements
would increase the City's budget gaps in later years or require it to
significantly curtail capital spending which would lead to a deterioration in
the City's infrastructure and ability to deliver services.
Litigation The City is a defendant in a significant number of lawsuits and
is subject to numerous claims and investigations, including, but not limited to,
actions commenced and claims asserted against the City arising out of alleged
constitutional violations, torts, breaches of contracts, and other violations of
law and condemnation proceedings. While the ultimate outcome and fiscal impact,
if any, on the proceedings and claims are not currently predictable, adverse
determinations in certain of them might have a material adverse effect upon the
City's ability to carry out its financial plan. As of June 30, 1995, the City
estimated its potential future liability on outstanding claims to be $2.5
billion.
On January 30, 1995, Robert L. Schulz and other defendants commenced a
federal district court action seeking among other matters to cancel the issuance
on January 31, 1995 of $659 million of City bonds. The action was dismissed on
April 30, 1996 and plaintiffs have appealed. While the City believes the action
to be without merit as it relates to the City, there can be no assurance as to
the outcome of the litigation and an adverse result would have a negative impact
on the City's financial condition and its ability to fund its operations. On
June 26, 1996, the National Resources Defense Council and other petitioners
moved to enforce the terms of a court order imposing recycling requirements upon
the City. The City contends that it is in compliance, but if petitioners are
granted relief or the City cannot obtain legislative relief from such
requirements, it will likely incur substantial additional recycling costs. The
federal government is seeking $112 million of treble damages for violations of
the Social Security Act in an action commenced on January 31, 1996 against the
City and the State. The City has not yet responded to this action. In addition,
a State court has enjoined the City from reducing its support for the Health and
Hospitals Corporation ("HHC") below fiscal year 1996 levels in connection with
an action commenced on April 15, 1996 seeking
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reimbursements to the HHC of at least $791 million with respect to subsidies for
prior years. The City has not yet responded to this action.
Fiscal Year 1996. While the City was forced to close unexpected budget gaps
during fiscal year 1996, the City has projected that it ended such fiscal year
with a balanced budget. A surplus of approximately $240 million at fiscal year
end has been transferred to other funds for use in later fiscal years.
Fiscal Years 1991 through 1995. The City achieved balanced operating
results in accordance with generally accepted accounting principles for fiscal
years 1991 through 1995. The City was required to close substantial budget gaps
in these fiscal years in order to maintain balanced operating results.
Ratings. As of the date of this prospectus, Moody's rating of the City's
general obligation bonds stood at Baa1 and S&P's rating stood at BBB+ with a
stable outlook. On February 11, 1991, Moody's had lowered its rating from A. S&P
lowered its rating from A- to BBB+ on July 10, 1995.
Moody's confirmed its rating in connection with a scheduled August 1996
sale of approximately $980 million of the City's general obligation bonds. S&P
also confirmed its rating of the City's general obligation bonds in connection
with such general obligation bond issue in August 1996.
Both rating agencies have expressed concern with the City's high level of
debt and continuing budget gaps and continue to monitor the City's financial
condition for a possible downgrade of their respective ratings. Any rating
decrease would negatively affect the marketability of the City's bonds and
significantly increase the City's financing costs.
On October 12, 1993, Moody's increased its rating of the City's issuance of
$650 million of Tax Anticipation Notes ("TANs") to MIG-1 from MIG-2. Prior to
that date, on May 9, 1990, Moody's revised downward its rating on outstanding
City revenue anticipation notes from MIG-1 to MIG-2 and rated the $900 million
notes then being sold MIG-2. S&P's rating of the October 1993 TANs issue
increased to SP-1 from SP-2. Prior to that date, on April 29, 1991, S&P revised
downward its rating on City revenue anticipation notes from SP-1 to SP-2.
As of June 30, 1996, the City and MAC had, respectively, $25.1 billion and
$4.1 billion of outstanding net long-term indebtedness.
(3) The State Agencies: Certain Agencies of the State have faced
substantial financial difficulties which could adversely affect the ability of
such Agencies to make payments of interest on, and principal amounts of, their
respective bonds. The difficulties have in certain instances caused the State
(under so-called "moral obligation" provisions, which are non-binding statutory
provisions for State appropriations to maintain various debt service reserve
funds) to appropriate funds on behalf of the Agencies. Moreover, it is expected
that the problems faced by these Agencies will continue and will require
increasing amounts of State assistance in future years. Failure of the State to
appropriate necessary amounts or to take other action to permit those Agencies
having financial difficulties to meet their obligations could result in a
default by one or more of the Agencies. Such default, if it were to occur, would
be likely to have a significant adverse affect on investor confidence in, and
therefore the market price of, obligations of the defaulting Agencies. In
addition, any default in payment on any general obligation of any Agency whose
bonds contain a moral obligation provision could constitute a failure of certain
conditions that must be satisfied in connection with Federal guarantees of City
and MAC obligations and could thus jeopardize the City's long-term financing
plans.
As of September 30, 1994, the State reported that eighteen Agencies each
had outstanding debt of $100 million or more and an aggregate of $70.3 billion
of outstanding debt, some of which was state-supported, state-related debt.
(4) State Litigation: The State is a defendant 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 a number of
cases challenging the constitutionality or the adequacy and effectiveness of a
variety of significant social welfare programs primarily involving the State's
mental hygiene programs. Adverse judgments in these matters generally could
result in injunctive relief coupled with prospective changes in patient care
which could require substantial increased financing of the litigated programs in
the future.
The State is also engaged in a variety of claims wherein significant
monetary damages are sought. Actions commenced by several Indian nations claim
that significant amounts of land were unconstitutionally taken from the Indians
in violation of various treaties and agreements during the eighteenth and
nineteenth centuries. The claimants seek recovery of approximately six million
acres of land, as well as compensatory and punitive damages.
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(5) Other Municipalities: Certain localities in addition to New York City
could have financial problems leading to requests for additional State
assistance. The potential impact on the State of such actions by localities is
not included in projections of State receipts and expenditures in the State's
1996-97 fiscal year.
Fiscal difficulties experienced by the City of Yonkers ("Yonkers") resulted
in the creation of the Financial Control Board for the City of Yonkers (the
"Yonkers Board") by the State in 1984. The Yonkers Board is charged with
oversight of the fiscal affairs of Yonkers. Future actions taken by the Governor
or the State Legislature to assist Yonkers could result in allocation of State
resources in amounts that cannot yet be determined.
Municipalities and school districts have engaged in substantial short-term
and long-term borrowings. In 1993, the total indebtedness of all localities in
the State (other than New York City) was approximately $17.7 billion. State law
requires the Comptroller to review and make recommendations concerning the
budgets of those local government units other than New York City authorized by
State law to issue debt to finance deficits during the period that such deficit
financing is outstanding. Fifteen localities had outstanding indebtedness for
State financing at the close of their fiscal year ending in 1993. In December
1995, in reaction to continuing financial problems, the Troy Municipal
Assistance Corp., which was created in 1995, imposed a 1996 budget plan upon
Troy, New York. A similar municipal assistance corporation has also been
established for Newburgh. In addition, several other smaller New York cities,
including Utica, Rome, Schenectady and Niagara Falls have faced continuing
budget deficits, as federal and state aid and local tax revenues have declined
while government expenses have increased. The financial problems being
experienced by the State's smaller urban centers place additional strains upon
the State's financial condition at a time when the State is struggling with its
own budget gaps.
Certain proposed Federal expenditure reductions could reduce, or in some
cases eliminate, Federal funding of some local programs and accordingly might
impose substantial increased expenditure requirements on affected localities to
increase local revenues to sustain those expenditures. Federal welfare reform
legislation may increase the local burden for welfare benefits. In addition,
proposed changes in the treatment of capital gains for federal income tax
purposes could reduce tax receipts of the state and city. If the State, New York
City or any of the Agencies were to suffer serious financial difficulties
jeopardizing their respective access to the public credit markets, the
marketability of notes and bonds issued by localities within the State,
including notes or bonds in the Fund, could be adversely affected. Localities
also face anticipated and potential problems resulting from certain pending
litigation, judicial decisions, and long-range economic trends. The longer-range
potential problems of declining urban population, increasing expenditures, and
other economic trends could adversely affect certain localities and require
increasing State assistance in the future.
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
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<PAGE> 89
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 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
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<PAGE> 90
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.
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.
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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.
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
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<PAGE> 92
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. 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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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 Transfers
will be expanded to eight and R. Bromner 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 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.
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 Institute
3 West 29th Street (since December 1990); prior thereto, Vice President of New York
New York, NY 10001 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 of
Northfield, IL 60093 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).
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.
</TABLE>
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<PAGE> 94
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND ADDRESS AGE OFFICES WITH TRUST DURING PAST FIVE YEARS
- ------------------------------- --- ---------------------- ---------------------------------------------------------------
<S> <C> <C> <C>
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............................................ $6,714 --
Lawrence H. Brown............................................ $2,038 $ 55,500
Anne E. Impellizzeri......................................... $2,038 $ 63,000
Margaret K. Rosenheim........................................ $2,238 $ 62,322(1)
Peter R. Sawers.............................................. $2,038 $ 55,500
William J. Schneider......................................... $6,714 --
</TABLE>
- ---------------
(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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<PAGE> 95
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 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
S-19
<PAGE> 96
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 Chase Manhattan Bank, 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 securities and securities of other
regulated investment
S-20
<PAGE> 97
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.
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
- ---------------
1If 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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<PAGE> 98
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 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 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.
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<PAGE> 99
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.
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(h)(5) of the Code. You should
consult your own tax adviser for more detailed information concerning state
taxes to which you may be subject.
NUVEEN FLAGSHIP NEW JERSEY MUNICIPAL BOND 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
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<PAGE> 100
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 FLAGSHIP NEW YORK MUNICIPAL BOND FUND
The following is based upon the advice of Edwards & Angell, special state
tax counsel to the New York Fund.
Individual shareholders of the New York Fund who are subject to New York
State (or New York City) personal income taxation will not be required to
include in their New York adjusted gross income that portion of their exempt-
interest dividends (as determined for federal income tax purposes) which the New
York Fund clearly identifies as directly attributable to interest earned on
Municipal Obligations issued by governmental authorities in New York ("New York
Municipal Obligations") and which are specifically exempted from personal income
taxation in New York State (or New York City), or interest earned on obligations
of United States possessions or territories to the extent interest earned on
such obligations is exempt from taxation by the states pursuant to federal law.
Distributions to individual shareholders of dividends derived from interest that
does not qualify as an exempt-interest dividend (as determined for federal
income tax purposes), distributions of exempt-interest dividends (as determined
for federal income tax purposes) which are derived from interest earned on
Municipal Obligations issued by governmental authorities in states other than
New York State, and distributions derived from interest earned on federal
obligations will be included in their New York adjusted gross income as ordinary
income.
Distributions to individual shareholders of the New York Fund of capital
gain dividends (as determined for federal income tax purposes) will be included
in their New York adjusted gross income as long-term capital gains.
Distributions to individual shareholders of the New York Fund of dividends
derived from any net income received from taxable temporary investments and any
net short-term capital gains realized by the New York Fund will be included in
S-24
<PAGE> 101
their New York adjusted gross income as ordinary income. Present New York law
taxes long-term capital gains at the rates applicable to ordinary income.
Gain or loss, if any, resulting from an exchange or redemption of shares of
the New York Fund that is recognized by individual shareholders of the New York
Fund for federal income tax purposes will be recognized for purposes of New York
State (or New York City) personal income taxation.
Generally, corporate shareholders of the New York Fund which are subject to
New York State franchise taxation (or New York City general corporation
taxation) will be taxed upon their entire net income, business and investment
capital, or at a flat rate minimum tax. Entire income will include dividends
received from the New York Fund (as determined for federal income tax purposes),
as well as any gain or loss recognized from an exchange or redemption of shares
of the New York Fund that is recognized for federal income tax purposes.
Investment capital will include the corporate shareholder's shares of the New
York Fund. Corporate shareholders of the New York Fund, which are subject to the
temporary metropolitan transportation surcharge, will be required to pay a tax
surcharge on the franchise taxes imposed by New York State.
Shareholders of the New York Fund will not be subject to New York City
unincorporated business taxation solely by reason of their ownership of shares
of the New York Fund. If a shareholder of the New York Fund is subject to the
New York City unincorporated business tax, income and gains derived from the New
York Fund will be subject to such tax, except for exempt-interest dividends (as
determined for federal income tax purposes) which the New York Fund clearly
identifies as directly attributable to interest earned on New York Municipal
Obligations.
Shares of the New York Fund will be exempt from local property taxes in New
York State and New York City, but will be includible in the New York gross
estate of a deceased individual shareholder who is a resident of New York for
purposes of the New York Estate Tax.
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
Yield = 2 [ +1 6 - 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.
S-25
<PAGE> 102
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
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
S-26
<PAGE> 103
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-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.
In addition, each Fund may from time to time in its advertising and sales
materials compare its current yield or total return with the yield or total
return on taxable investments such as corporate or U.S. Government bonds, bank
certificates of deposit (CDs) or money market funds. These taxable investments
have investment characteristics that differ from those of the Funds. U.S.
Government bonds, for example, are long-term investments backed by the full
faith and credit of the U.S. Government, and bank CDs are generally short-term,
FDIC-insured investments, which pay fixed principal and interest but are subject
to fluctuating rollover rates. Money market funds are short-term investments
with stable net asset values, fluctuating yields and special features enhancing
liquidity. Additionally, each Fund may compare its current yield or total return
history with a widely-followed, unmanaged municipal market index such as the
Bond Buyer 20 Index, the Merrill Lynch 500 Municipal Market Index or the Lehman
Brothers Municipal Bond Index. Comparative performance information may also be
used from time to time in advertising or marketing a Fund's shares, including
data from Lipper Analytical Services, Inc., Morningstar, Inc. and other industry
publications.
S-27
<PAGE> 104
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.
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.
S-28
<PAGE> 105
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 Fund's 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 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.
S-29
<PAGE> 106
INDEPENDENT PUBLIC ACCOUNTANTS AND CUSTODIAN
Arthur Andersen LLP, independent public accountants, 33 West 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 custodian of the assets of the Funds is The Chase Manhattan Bank, 770
Broadway, New York, New York 10003. The custodian performs custodial, fund
accounting and portfolio accounting services.
S-30
<PAGE> 107
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Trustees
Nuveen Flagship Multistate Trust II
We have audited the accompanying statement of net assets of the Nuveen Flagship
Multistate Trust II (a Massachusetts business trust comprising the Nuveen
Flagship New Jersey Municipal Bond Fund and Nuveen Flagship New York Municipal
Bond Fund) as of October 16, 1996. This statement of net assets is the
responsibility of the Trust's management. Our responsibility is to express an
opinion on the statement of net assets 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 statement of net assets is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statement of net assets. Our procedures
included confirmation of cash held by the custodian as of August 1, 1996. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the statement of net assets presents fairly, in all material
respects, the net assets of the Funds constituting the Nuveen Flagship
Multistate Trust II as of October 16, 1996, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
October 16, 1996
S-31
<PAGE> 108
NUVEEN FLAGSHIP MULTISTATE TRUST II
STATEMENT OF NET ASSETS
OCTOBER 16, 1996
<TABLE>
<CAPTION>
NEW JERSEY NEW YORK
---------- --------
<S> <C> <C>
ASSETS
Cash.................................................................. $ 50,000 $50,000
Deferred organization costs (note 2).................................. NONE NONE
-------- -------
Total assets.................................................. 50,000 50,000
-------- -------
LIABILITIES............................................................. NONE NONE
-------- -------
NET ASSETS.............................................................. $ 50,000 $50,000
======== =======
Shares of beneficial interest ("shares") issued and outstanding;
unlimited shares authorized (note 1):
Class A shares........................................................ 1,250 1,250
Class B shares........................................................ 1,250 1,250
Class C shares........................................................ 1,250 1,250
Class R shares........................................................ 1,250 1,250
Net asset value and redemption price per share:
Class A, B, C and R shares............................................ $ 10.00 $ 10.00
======== =======
Offering price per share:
Class B, C and R shares at net asset value............................ $ 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
======== =======
</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 New Jersey Municipal Bond
Fund and Nuveen Flagship New York 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 and
Nuveen Tax-Free Bond Fund, Inc. (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.
S-32
<PAGE> 109
PRO FORMA FINANCIAL INFORMATION
NEW JERSEY
PRO FORMA CAPITALIZATION AS OF JANUARY 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
NUVEEN FLAGSHIP NEW NEW
NEW JERSEY NEW JERSEY NEW JERSEY NEW JERSEY
(ACTUAL) (ACTUAL) (PRO FORMA) (AS ADJUSTED) (1)
----------- ----------- ----------- -----------------
<S> <C> <C> <C> <C>
Common shares, $.01 par value per share....................... $ 52,854 $ -- $ 50 $ 65,700(2)
Paid-in surplus............................................... 52,998,976 10,224,031 49,950 63,260,161(3)
Balance of undistributed net investment income................ 8,128 -- -- --(4)
Accumulated net realized gain (loss) from investment
transactions................................................ (482,912) (169,510) -- (652,422)(5)
Net unrealized appreciation of investments.................... 2,452,854 574,127 -- 3,026,981
------------ ------------ -------- ------------
Net assets................................................ $55,029,900 $10,628,648 $50,000 $65,700,420
============ ============ ======== ============
</TABLE>
(1) The adjusted balances are presented as if the Reorganization was effective
as of January 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 1,065,913 and 1,062,865 class A shares, 106,486
class C shares and 4,329,778 class R shares of New Jersey in exchange for
the net assets of class A, C and R of Nuveen New Jersey and Flagship New
Jersey, respectively. These numbers are based on the net assets of each
class of Nuveen New Jersey and Flagship New Jersey, and the net asset
values of each respective class of New Jersey, as of January 31, 1996,
after adjustment for the distribution referred to in (4) below. The
issuance of such number of New Jersey shares would result in the
distribution of 1.0401918 and 1.0363892 class A shares, 1.0381906 class C
shares and 1.0412762 class R shares for each share of each respective class
of Nuveen New Jersey and Flagship New Jersey, respectively, upon
liquidation of each respective class of Nuveen New Jersey and Flagship New
Jersey.
(3) Includes the impact of $12,796 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
Jersey share issued in exchange for each Flagship New Jersey share.
(4) Assumes Nuveen New Jersey distributes all of its undistributed net
investment income to shareholders.
(5) Assumes Nuveen New Jersey and Flagship New Jersey carry forward their net
realized losses from investment transactions to New Jersey, as permitted
under applicable tax regulations.
PRO FORMA CONDENSED BALANCE SHEET AS OF JANUARY 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
NUVEEN FLAGSHIP NEW NEW
NEW JERSEY NEW JERSEY NEW JERSEY PRO FORMA NEW JERSEY
(ACTUAL) (ACTUAL) (PRO FORMA) ADJUSTMENTS (AS ADJUSTED)
----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Investments in municipal securities, at market
value........................................... $53,254,264 $10,525,366 $ -- $ -- $63,779,630
Temporary investments in short-term municipal
securities, at amortized cost................... -- -- -- -- --
Cash.............................................. 1,227,903 -- 50,000 (8,128)(1) 1,269,775
Other assets less liabilities..................... 547,733 103,282 -- -- 651,015
------------ ------------ -------- --------- ------------
Net assets........................................ $55,029,900 $10,628,648 $50,000 $ (8,128) $65,700,420
============ ============ ======== ========= ============
Class A Shares:
Net assets........................................ $10,660,701 $10,628,648 $12,500 $ (1,575) $21,300,274
============ ============ ======== ========= ============
Shares outstanding................................ 1,024,727 1,025,546 1,250 78,504(2) 2,130,027
============ ============ ======== ========= ============
Net asset value and redemption price per share.... $ 10.40 $ 10.36 $ 10.00 $ 10.00
============ ============ ======== ============
Offering price per share (net asset value per
share plus maximum sales charge of 4.50%, 4.20%,
4.20% and 4.20%, respectively, of offering
price).......................................... $ 10.89 $ 10.81 $ 10.44 $ 10.44
============ ============ ======== ============
Class B Shares:
Net assets........................................ N/A N/A $12,500 $ 12,500
============ ============ ======== ============
Shares outstanding................................ N/A N/A 1,250 1,250
============ ============ ======== ============
Net asset value................................... N/A N/A $ 10.00 $ 10.00
============ ============ ======== ============
Class C Shares:
Net assets........................................ $ 1,065,019 N/A $12,500 $ (157) $ 1,077,362
============ ============ ======== ========= ============
Shares outstanding................................ 102,569 N/A 1,250 3,917(2) 107,736
============ ============ ======== ========= ============
Net asset value, offering and redemption price per
share........................................... $ 10.38 N/A $ 10.00 $ 10.00
============ ============ ======== ============
Class R Shares:
Net assets........................................ $43,304,180 N/A $12,500 $ (6,396) $43,310,284
============ ============ ======== ========= ============
Shares outstanding................................ 4,158,146 N/A 1,250 171,632(2) 4,331,028
============ ============ ======== ========= ============
Net asset value and redemption price per share.... $ 10.41 N/A $ 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 New Jersey.
(2) See note (1) to Pro Forma Capitalization table. Based on the issuance of
1,065,913 and 1,062,865 class A shares, 106,486 class C shares and
4,329,778 class R shares of New Jersey and the cancellation of all shares
of each class of Nuveen New Jersey and Flagship New Jersey, respectively.
P-1
<PAGE> 110
PRO FORMA FINANCIAL INFORMATION
PRO FORMA CONDENSED INCOME STATEMENT FOR THE TWELVE MONTHS ENDED JANUARY 31,
1996 (UNAUDITED)
<TABLE>
<CAPTION>
NUVEEN FLAGSHIP NEW
NEW JERSEY NEW JERSEY PRO FORMA NEW JERSEY
(ACTUAL) (ACTUAL) ADJUSTMENTS (AS ADJUSTED)
---------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
Investment Income:
Tax-exempt interest income..................................... $3,006,443 $ 500,111 $ -- $ 3,506,554
----------- ----------- --------- -----------
Expenses:
Management fees (1).......................................... 268,050 42,217 4,297 314,564
12b-1 fees (2)............................................... 23,280 33,773 (21,895) 35,158
Other expenses............................................... 212,581 71,136 (63,544)(3) 220,173
----------- ----------- --------- -----------
Total expenses............................................. 503,911 147,126 (81,142) 569,895
Expense waiver/reimbursement from investment adviser (4)..... (115,121 ) (114,022 ) (116,512) (345,655)
----------- ----------- --------- -----------
Net expenses............................................... 388,790 33,104 (197,654) 224,240
----------- ----------- --------- -----------
Net investment income............................................ 2,617,653 467,007 197,654 3,282,314
----------- ----------- --------- -----------
Realized and Unrealized Gain (Loss) from Investments:
Net realized gain (loss) from investment transactions, net of
taxes, if applicable......................................... (30,019 ) 16,063 -- (13,956)
Net change in unrealized appreciation or depreciation of
investments.................................................. 3,249,789 638,885 -- 3,888,674
----------- ----------- --------- -----------
Net gain on investments.................................... 3,219,770 654,948 -- 3,874,718
----------- ----------- --------- -----------
Net increase in net assets from operations....................... $5,837,423 $1,121,955 $ 197,654 $ 7,157,032
=========== =========== ========= ===========
</TABLE>
(1) Reflects a management fee of .55% of net assets for the first $125 million
of Nuveen New Jersey and New New Jersey (as adjusted) and .50% of net
assets of Flagship New Jersey.
(2) Reflects a 12b-1 service fee of .25% of net assets for classes A and C of
Nuveen New Jersey and .20% of net assets for classes A and C of Flagship
New Jersey. New New Jersey (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 .75% of net assets for class C only of Nuveen New
Jersey. Flagship New Jersey has a 12b-1 distribution fee of .20% and .75%
of net assets for classes A and C, respectively. New New Jersey Fund (as
adjusted) reflects a 12b-1 distribution fee of .55% of net assets for class
C only. 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 New Jersey (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 .24% of net assets of Nuveen
New Jersey and 1.35% of net assets of Flagship New Jersey. New New Jersey
(as adjusted) reflects an expense waiver/reimbursement of .60% of net
assets.
P-2
<PAGE> 111
PRO FORMA FINANCIAL INFORMATION
NEW NEW JERSEY
PRO FORMA PORTFOLIO OF INVESTMENTS
JANUARY 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
NUVEEN FLAGSHIP PRO FORMA
PRINCIPAL MARKET MARKET MARKET
AMOUNT DESCRIPTION VALUE VALUE VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Union County Utilities Authority, Solid Waste System, Alternative
Minimum Tax:
$ 50,000 Atlantic City NJ Muni Util Auth, 5.650%, 05/01/07...................... $ -- $ 50,986 $ 50,986
100,000 Atlantic City NJ Muni Wtr Util, 5,750%, 05/01/17....................... -- 101,498 101,498
50,000 Atlantic City NJ Brd of Ed Ambac, 6.150%, 12/01/12..................... -- 54,185 54,185
200,000 Atlantic City NJ G.O., 5.650%, 08/15/04................................ -- 207,534 207,534
200,000 Atlantic County NJ G.O. Mbia, 6.000%, 01/01/07......................... -- 217,982 217,982
150,000 Bergen Cnty NJ Pcr Util Wtr Fgic, 6.000%, 12/15/13..................... -- 159,528 159,528
1,000,000 Camden County Pollution Control Finance Authority, Solid Waste Disposal
and Resource Recovery, Alternative Minimum Tax, 7.125%, 12/01/01..... 1,034,220 -- 1,034,220
2,645,000 Camden County Pollution Control Finance Authority, Solid Waste Disposal
and Resource Recovery System, 7.250%, 12/01/10....................... 2,803,197 -- 2,803,197
25,000 Cherry Hill Twp NJ G.O., 6,300%, 06/01/12.............................. -- 27,039 27,039
1,415,000 Delaware River and Bay Authority, 5.000%, 1/01/17...................... 1,372,975 -- 1,372,975
1,000,000 Delaware River Port Authority, 5.500%, 1/01/26......................... 1,004,720 -- 1,004,720
350,000 East Orange NJ Fsa, 8.400%, 08/01/06................................... -- 456,700 456,700
450,000 Essex Cnty NJ Impt Lease Newark, 6.600%, 04/01/14...................... -- 477,670 477,670
300,000 Essex Cnty NJ Impt Lease Newark, 6.350%, 04/01/07...................... -- 318,669 318,669
100,000 Essex Cnty NJ Impt G.O., 6.900%, 12/01/14.............................. -- 115,730 115,730
500,000 Essex County Improvement Authority, 6.500%, 12/01/12................... 536,010 -- 536,010
75,000 Evensham NJ Municipal Util Auth Mbia, 5.600%, 07/01/15................. -- 75,872 75,872
500,000 Hillsborough Township School District, 5.875%, 8/01/11................. 545,105 -- 545,105
100,000 Hoboken NJ Parking Auth Ser A, 6.625%, 03/01/09........................ -- 104,667 104,667
250,000 Hoboken-Weehawken NJ Swr Mbia, 6.200%, 08/01/19........................ -- 266,470 266,470
400,000 Hudson County Improvement Authority Multi-Family Housing (Observer Park
Project), Alternative Minimum Tax, 6.900%, 6/01/22................... 421,688 -- 421,688
1,605,000 Little Ferry Board of Education, Certificates of Participation, 6.300%,
1/15/08.............................................................. 1,664,337 -- 1,664,337
50,000 Monmouth Cnty NJ Impt Howell Twp, 6.450%, 07/01/08..................... -- 55,186 55,186
Monroe Township Board of Education, General Obligation:
725,000 5.200%, 8/01/11........................................................ 738,550 -- 738,550
825,000 5.200%, 8/01/14........................................................ 840,263 -- 840,263
600,000 Morris County General Obligation, 5.000%, 7/15/09...................... 606,972 -- 606,972
625,000 NJ Econ Dev Edl Testing Mbia, 6.125%, 05/15/15......................... -- 670,525 670,525
185,000 NJ Econ Dev Auth Econ Growth Amt, 6.550%, 12/01/07..................... -- 196,100 196,100
100,000 NJ Econ Dev Auth American Wtr Co Fgic, 5.500%, 06/01/23................ -- 99,432 99,432
335,000 NJ Econ Dev Auth Vineland Energy Amt, 6.750%, 06/01/99................. -- 355,720 355,720
100,000 NJ Econ Deb Auth Trigen Trenton Ser A, 6.200%, 12/01/10................ -- 103,107 103,107
350,000 NJ Econ Dev Clara Maass Hlth Syst Fsa, 5.000%, 07/01/25................ -- 332,927 332,927
150,000 NJ Eda Hackensack Wtr Mbia, 5.900%, 03/01/24........................... -- 154,238 154,238
300,000 NJ Econ Dev Auth Fsa, 6.000%, 03/15/21................................. -- 315,423 315,423
300,000 NJ Econ Dev Auth Fsa, 6.250%, 07/01/14................................. -- 324,822 324,822
2,965,000 New Jersey Economic Development Authority (Bridgewater Resources,
Inc.), Alternative Minimum Tax, 8.375%, 11/01/04..................... 3,148,237 -- 3,148,237
1,000,000 New Jersey Economic Development Authority (Yeshiva K'tana of Passaic),
8.000%, 9/15/18...................................................... 1,191,120 -- 1,191,120
1,285,000 New Jersey Economic Development Authority, Alternative Minimum Tax,
5.300%, 12/01/07..................................................... 1,291,849 -- 1,291,849
1,025,000 New Jersey Economic Development Authority (Educational Testing
Service), 6.500%, 5/15/05............................................ 1,138,601 -- 1,138,601
1,050,000 New Jersey Economic Development Authority (Elizabethtown Gas Company),
Alternative Minimum Tax, 6.750%, 10/01/21............................ 1,031,330 51,560 1,082,890
200,000 New Jersey Economic Development Authority (Liberty State Park Project),
6.800%, 3/15/22...................................................... 218,124 -- 218,124
650,000 New Jersey Economic Development Authority, 5.875%, 7/01/11............. 690,554 -- 690,554
250,000 New Jersey Economic Development Authority, Solid Waste Disposal
Facility (Garden State Paper Company), 7.125%, 4/01/22............... 274,143 -- 274,143
</TABLE>
P-3
<PAGE> 112
PRO FORMA FINANCIAL INFORMATION
<TABLE>
<CAPTION>
NUVEEN FLAGSHIP PRO FORMA
PRINCIPAL MARKET MARKET MARKET
AMOUNT DESCRIPTION VALUE VALUE VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 410,000 NJ ST Educ Facs Monmouth College, 5.625%, 07/01/13..................... $ -- $ 398,241 $ 398,241
1,500,000 New Jersey Educational Facilities Authority (Higher Education
Facilities Trust Fund), 5.125%, 9/01/02.............................. 1,576,830 -- 1,576,830
835,000 New Jersey Educational Facilities Authority (Princeton University),
5.875%, 7/01/11...................................................... 889,375 -- 889,375
975,000 New Jersey Educational Facilities Authority (Trenton State College),
6.750%, 7/01/08...................................................... 981,962 -- 981,962
1,000,000 New Jersey General Obligation, 5.800%, 2/15/07......................... 1,108,150 -- 1,108,150
200,000 NJ Hlth Care Facs Bayonne Hosp Fsa, 6.250%, 07/01/12................... -- 217,326 217,326
250,000 NJ Hlth Care Facs Irvington Med Ctr, 6.375%, 08/01/15.................. -- 267,893 267,893
250,000 NJ Health Care Facs Monmouth Med Ctr, 6.250%, 07/01/16................. -- 270,268 270,268
200,000 NJ Hlth Newark Beth Israel Med Ctr Fsa, 6.000%, 07/01/16............... -- 210,922 210,922
850,000 New Jersey Health Care Facilities Financing Authority (Palisades
Medical Center), 7.500%, 7/01/06..................................... 879,011 -- 879,011
480,000 New Jersey Health Care Facilities Authority (Community Memorial
Hospital), 8.000%, 7/01/14........................................... 523,474 -- 523,474
400,000 New Jersey Health Care Facilities Financing Authority (Atlantic City
Medical Center), 6.800%, 7/01/05..................................... 436,828 -- 436,828
700,000 New Jersey Health Care Facilities Financing Authority (Community
Medical Center/Kensington Manor Care Center), 7.000%, 7/01/20........ 777,427 -- 777,427
1,215,000 New Jersey Health Care Facilities Financing Authority (Hackensack
Hospital), 8.750%, 7/01/09........................................... 1,479,323 -- 1,479,323
250,000 NJ St Hsg & Mtg Fin Agy Rev Mbia, 6.300%, 10/01/18..................... -- 258,078 258,078
700,000 New Jersey Housing and Mortgage Finance Agency, 6.950%, 11/01/13....... 745,500 -- 745,500
2,000,000 New Jersey Housing and Mortgage Finance Agency, Multi-Family Housing,
6.000%, 11/01/14..................................................... 2,059,160 -- 2,059,160
1,750,000 New Jersey Housing Finance Agency, 9.000%, 11/01/18.................... 1,827,245 -- 1,827,245
500,000 NJ Hsg Fin Rev, 6.600%, 11/01/14....................................... -- 521,515 521,515
50,000 NJ South Jersey Trans Auth Sys Mbia, 6.000%, 11/01/12.................. -- 53,322 53,322
250,000 NJ Sports & Expo Mbia, 6.250%, 07/01/20................................ -- 268,460 268,460
100,000 NJ Sports & Expo Mbia, 5.500%, 07/01/22................................ -- 100,128 100,128
New Jersey Turnpike Authority:
375,000 10.375%, 1/01/03....................................................... 466,973 -- 466,973
1,750,000 6.500%, 1/01/08........................................................ 2,025,293 -- 2,025,293
200,000 NJ Wastewater Treatment Trust, 6.500%, 04/01/14........................ -- 219,032 219,032
500,000 North Bergen Housing Development Corporation, FHA-Insured,
7.400%, 9/01/20...................................................... 512,850 -- 512,850
300,000 North Bergen Township General Obligation, 6.500%, 8/15/12.............. 332,100 -- 332,100
200,000 Nth Jersey NJ Wtr Dist Wanaque Mbia, 6.000%, 07/01/21.................. -- 210,565 210,565
25,000 Ocean Cnty NJ Util Auth Fgic, 6.750%, 01/01/13......................... -- 26,119 26,119
2,350,000 Ocean County Utilities Authority, 5.000%, 1/01/14...................... 2,210,692 -- 2,210,692
165,000 Parsippany Troy Hills Twp NJ, 0.000%, 04/01/07......................... -- 96,203 96,203
2,215,000 Passaic County General Obligation, 5.125%, 9/01/12..................... 2,234,647 -- 2,234,647
200,000 Port Auth NY & NJ Cons 100th Ser, 5.750%, 12/15/20..................... -- 205,192 205,192
125,000 Port Auth NY/NJ Cons 96th Ser Fgic Amt, 6.600%, 10/01/23............... -- 137,233 137,233
50,000 Port Auth NY & NJ Cons 95th Ser Amt, 5.875%, 07/15/09.................. -- 53,279 53,279
775,000 Rutgers State University, 8.000%, 5/01/18 (Pre-refunded to 5/01/98).... 860,514 -- 860,514
50,000 Stafford NJ Util Auth Rev Fgic, 6.125%, 12/01/22....................... -- 52,510 52,510
35,000 Stafford NJ Util Auth Rev Fgic, 6.000%, 12/01/12....................... -- 36,899 36,899
250,000 Union Cnty NJ American Cyanamid, 5.800%, 09/01/09...................... -- 263,473 263,473
195,000 7.100%, 6/15/06........................................................ 209,307 -- 209,307
1,100,000 7.200%, 6/15/14........................................................ 1,176,076 -- 1,176,076
270,000 6.850%, 6/15/14........................................................ 289,697 -- 289,697
250,000 Union City NJ G.O. Fsa, 6.375%, 11/01/10............................... -- 286,958 286,958
100,000 University of Medicine and Dentistry of New Jersey, 6.500%, 12/01/18
(Pre-refunded to 12/01/01)........................................... 113,743 -- 113,743
1,175,000 Virgin Islands Housing Finance Authority, Alternative Minimum Tax,
6.450%, 3/01/16...................................................... 1,211,519 -- 1,211,519
300,000 Wanaque Borough Sewerage Authority, 7.000%, 12/01/21................... 323,658 -- 323,658
75,000 Wanaque Valley NJ Sewer Ser A, 6.125%, 09/01/22........................ -- 75,889 75,889
25,000 Woodbridge Twp NJ G.O., 6.150%, 08/15/06............................... -- 27,434 27,434
250,000 Puerto Rico General Obligation, 7.750%, 07/01/06....................... -- 278,013 278,013
165,000 Puerto Rico General Obligation, 8.000%, 07/01/07....................... -- 182,040 182,040
</TABLE>
P-4
<PAGE> 113
PRO FORMA FINANCIAL INFORMATION
<TABLE>
<CAPTION>
NUVEEN FLAGSHIP PRO FORMA
PRINCIPAL MARKET MARKET MARKET
AMOUNT DESCRIPTION VALUE VALUE VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 1,000,000 Puerto Rico Aqueduct and Sewer Authority, 7.875%, 7/01/17 (Pre-refunded
to 7/01/98).......................................................... $ 1,115,660 $ -- $ 1,115,660
60,000 Puerto Rico Highway Transportation Authority, 6.625%, 7/01/18
(Pre-refunded to 7/01/02)............................................ 69,015 -- 69,015
2,000,000 Puerto Rico Commonwealth General Obligation, 5.750%, 7/01/24........... 2,075,380 -- 2,075,380
200,000 Puerto Rico Elec Ser R, 6.250%, 07/01/17............................... -- 210,535 210,535
Puerto Rico Electric Power Authority:
790,000 7.000%, 7/01/07........................................................ 928,778 -- 928,778
1,875,000 7.000%, 7/01/21 (Pre-refunded to 7/01/01).............................. 2,172,693 -- 2,172,693
300,000 Puerto Rico Hwy Ser Q, 6.000%, 07/01/20................................ -- 304,269 304,269
1,000,000 Puerto Rico Industrial Medical and Environmental Authority, 6.250%,
7/01/16.............................................................. 1,089,389 -- 1,089,389
$ 60,095,000 Total Investment in Securities--(cost $60,752,649)--97.1% $53,254,264 $10,525,366 63,779,630
============ ----------------------------------------------------------------------------------------------------------------
Other Assets less Liabilities--2.9% 1,920,790
----------------------------------------------------------------------------------------------------------------
Total Net Assets--100.0% $65,700,420
================================================================================================================
</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-5
<PAGE> 114
PRO FORMA FINANCIAL INFORMATION
NEW NEW YORK
PRO FORMA CAPITALIZATION AS OF FEBRUARY 29, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
NUVEEN FLAGSHIP NEW NEW
NEW YORK NEW YORK NEW YORK NEW YORK
(ACTUAL) (ACTUAL) (PRO FORMA) (AS ADJUSTED)(1)
------------ ----------- ----------- ----------------
<S> <C> <C> <C> <C>
Common shares, $.01 par value per share....................... $ 160,928 $ -- $ 50 $ 221,925(2)
Paid-in surplus............................................... 161,152,782 49,282,603 49,950 210,424,388(3)
Balance of undistributed net investment income................ 126,818 -- -- --(4)
Accumulated net realized gain (loss) from investment
transactions................................................ 649,435 (1,203,387) -- (1,203,387)(5)
Net unrealized appreciation of investments.................... 9,063,280 3,418,392 -- 12,481,672
============ ============= ======== =============
Net assets.............................................. $171,153,243 $51,497,608 $50,000 $221,924,598
============ ============= ======== =============
</TABLE>
(1) The adjusted balances are presented as if the Reorganization was effective
as of February 29, 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 1,566,039 and 5,149,761 class A shares, 64,295 class
C shares and 15,407,365 class R shares of New New York in exchange for the
net assets of class A, C and R of Nuveen New York and Flagship New York,
respectively. These numbers are based on the net assets of each class of
Nuveen New York and Flagship New York, and the net asset values of each
respective class of New New York, as of February 29, 1996, after adjustment
for the distributions referred to in (4) and (5) below. The issuance of such
number of New New York shares would result in the distribution of 1.0559659
and 1.0855577 class A shares, 1.0587575 class C shares and 1.0589984 class R
shares for each class of Nuveen New York and Flagship New York,
respectively, upon liquidation of each respective class of Nuveen New York
and Flagship New York.
(3) Includes the impact of $60,947 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
New York share issued in exchange for each Flagship New York share.
(4) Assumes Nuveen New York distributes all of its undistributed net investment
income to shareholders.
(5) Assumes Nuveen New York distributes all of its net realized gains from
investment transactions to shareholders and Flagship New York carries
forward its net realized losses from investments, to New New York, as
permitted under applicable tax regulations.
PRO FORMA CONDENSED BALANCE SHEET AS OF FEBRUARY 29, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
NUVEEN FLAGSHIP NEW NEW
NEW YORK NEW YORK NEW YORK PRO FORMA NEW YORK
(ACTUAL) (ACTUAL) (PRO FORMA) ADJUSTMENTS (AS ADJUSTED)
------------ ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Investments in municipal securities, at market
value............................................ $165,378,435 $50,709,376 $ -- $ -- $216,087,811
Temporary investments in short-term municipal
securities,
at amortized cost................................ 3,800,000 -- -- (665,000)(1) 3,135,000
Cash............................................... 112,018 299,929 50,000 (111,253)(2) 350,694
Other assets less liabilities...................... 1,862,790 488,303 -- -- 2,351,093
------------- ------------ -------- ---------- -------------
Net assets......................................... $171,153,243 $51,497,608 $50,000 $(776,253) $221,924,598
============= ============ ======== ========== =============
Class A Shares:
Net assets......................................... $ 15,731,737 $51,497,608 $12,500 $ (71,350) $ 67,170,495
============= ============ ======== ========== =============
Shares outstanding................................. 1,483,039 4,743,885 1,250 488,875(3) 6,717,049
============= ============ ======== ========== =============
Net asset value and redemption price per share..... $ 10.61 $ 10.86 $ 10.00 $ 10.00
============= ============ ======== =============
Offering price per share (net asset value per share
plus maximum sales charge of 4.50%, 4.20%, 4.20%
and 4.20%, respectively, of offering price)...... $ 11.11 $ 11.34 $ 10.44 $ 10.44
============= ============ ======== =============
Class B Shares:
Net assets......................................... N/A N/A $12,500 $ 12,500
============= ============ ======== =============
Shares outstanding................................. N/A N/A 1,250 1,250
============= ============ ======== =============
Net asset value.................................... N/A N/A $ 10.00 $ 10.00
============= ============ ======== =============
Class C Shares:
Net assets......................................... $ 645,881 N/A $12,500 $ (2,929) $ 655,452
============= ============ ======== ========== =============
Shares outstanding................................. 60,727 N/A 1,250 3,568(3) 65,545
============= ============ ======== ========== =============
Net asset value, offering and redemption price per
share............................................ $ 10.64 N/A $ 10.00 $ 10.00
============= ============ ======== =============
Class R Shares:
Net assets......................................... $154,775,625 N/A $12,500 $(701,974) $154,086,151
============= ============ ======== ========== =============
Shares outstanding................................. 14,548,997 N/A 1,250 858,368(3) 15,408,615
============= ============ ======== ========== =============
Net asset value and redemption price per share..... $ 10.64 N/A $ 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
and net realized capital gains of Nuveen New York.
(2) Net effect on cash after sales of temporary investments and distribution of
net investment income and net realized gains of Nuveen New York.
(3) See note (1) to Pro Forma Capitalization table. Based on the issuance of
1,566,039 and 5,149,761 class A shares, 64,295 class C shares and 15,407,365
class R shares of New New York and the cancellation of all shares of each
class of Nuveen New York and Flagship New York, respectively.
P-6
<PAGE> 115
PRO FORMA FINANCIAL INFORMATION
PRO FORMA CONDENSED INCOME STATEMENT FOR THE TWELVE MONTHS ENDED FEBRUARY 29,
1996 (UNAUDITED)
<TABLE>
<CAPTION>
NUVEEN FLAGSHIP NEW
NEW YORK NEW YORK PRO FORMA NEW YORK
(ACTUAL) (ACTUAL) ADJUSTMENTS (AS ADJUSTED)
----------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
Investment Income
Tax-exempt interest income.......................................... $10,173,134 $3,121,491 $ -- $13,294,625
----------- ---------- --------- -----------
Expenses:
Management fees (1)............................................... 882,509 247,370 17,953 1,147,832
12b-1 fees (2).................................................... 30,739 197,757 (105,428) 123,068
Other expenses.................................................... 338,976 136,385 (32,701)(3) 442,660
----------- ---------- --------- -----------
Total expenses.................................................. 1,252,224 581,512 (120,176) 1,713,560
Expense waiver/reimbursement from investment adviser (4).......... (29,700) (303,479) (193,368) (526,547)
----------- ---------- --------- -----------
Net expenses.................................................... 1,222,524 278,033 (313,544) 1,187,013
----------- ---------- --------- -----------
Net investment income................................................. 8,950,610 2,843,458 313,544 12,107,612
----------- ---------- --------- -----------
Realized and Unrealized Gain from Investments
Net realized gain from investment transactions, net of taxes, if
applicable........................................................ 1,772,126 378,033 -- 2,150,159
Net change in unrealized appreciation or depreciation of
investments....................................................... 5,658,638 3,483,151 -- 9,141,789
----------- ---------- --------- -----------
Net gain from investments..................................... 7,430,764 3,861,184 -- 11,291,948
----------- ---------- --------- -----------
Net increase in net assets from operations............................ $16,381,374 $6,704,642 $ 313,544 $23,399,560
=========== ========== ========= ===========
</TABLE>
(1) Reflects a management fee of .55% of net assets for the first $125 million
and .5375% of net assets over $125 million of Nuveen New York and New New
York (as adjusted) and .50% of net assets of Flagship New York.
(2) Reflects a 12b-1 service fee of .25% of net assets for classes A and C of
Nuveen New York and .20% of net assets for classes A and C of Flagship New
York. New New York (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 .75% of net assets for Class C of Nuveen New York. Flagship New York has
a 12b-1 distribution fee of .20% and .75% of net assets for classes A and
C, respectively. New New York (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 New York (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 .02% of net assets of Nuveen
New York and .62% of net assets of Flagship New York. New New York (as
adjusted) reflects an expense waiver/reimbursement of .25% of net assets.
P-7
<PAGE> 116
PRO FORMA FINANCIAL INFORMATION
NEW NEW YORK
PRO FORMA PORTFOLIO OF INVESTMENTS
FEBRUARY 29, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
NUVEEN FLAGSHIP PRO FORMA
PRINCIPAL MARKET MARKET MARKET
AMOUNT DESCRIPTION VALUE VALE VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 500,000 Albany NY Parking Auth Rev, 7.150%, 09/15/16..................... $ -- $ 556,255 $ 556,255
1,000,000 Albany NY Hsng Auth Ltd, 5.850%, 10/01/07........................ -- 1,010,760 1,010,760
500,000 Albany NY Ind Dev Auth Ser A1, 7.750%, 01/01/10.................. -- 553,025 553,025
1,500,000 Albany NY Parking Auth Rev, 0.000%, 11/01/17..................... -- 412,200 412,200
2,100,000 Babylon Industrial Development Agency, Resource Recovery, 8.500%,
1/01/19........................................................ 2,376,927 -- 2,376,927
1,000,000 Batavia Housing Authority, FHA-Insured (Washington Towers),
6.500%, 1/01/23................................................ 1,025,060 -- 1,025,060
1,750,000 Brookhaven Industrial Development Agency, Civic Facility (Dowling
College/National Aviation Center), 6.750%, 3/01/23............. 1,041,710 780,233 1,821,943
3,500,000 Dormitory Authority of the State of New York (Nursing Homes),
5.750%, 7/01/17................................................ 3,438,505 -- 3,438,505
750,000 Dormitory Authority of the State of New York, GNMA (Park Ridge
Housing, Inc), 7.850%, 2/01/29................................. 819,203 -- 819,203
Dormitory Authority of the State of New York (City University):
1,500,000 5.750%, 7/01/07................................................ 1,522,980 -- 1,522,980
750,000 7.500%, 7/01/10................................................ 886,005 -- 886,005
2,225,000 5.750%, 7/01/12................................................ 2,244,780 -- 2,244,780
1,500,000 5.500%, 7/01/12................................................ 1,440,540 -- 1,440,540
500,000 8.200%, 7/01/13................................................ 553,735 -- 553,735
1,000,000 7.625%, 7/01/20................................................ 1,154,640 -- 1,154,640
500,000 Dormitory Authority of the State of New York (Long Island Jewish
Medical Center), FHA-Insured, 7.750%, 8/15/27.................. 536,535 -- 536,535
2,135,000 Dormitory Authority of the State of New York (United Health
Services), 7.350%, 8/01/29..................................... 2,165,159 163,587 2,328,746
2,195,000 Dormitory Authority of the State of New York (Upstate Community
Colleges), 6.500%, 7/01/07..................................... 2,362,786 -- 2,362,786
Dormitory Authority of the State of New York (State University):
2,000,000 7.400%, 5/15/01................................................ 2,187,740 -- 2,187,740
2,000,000 5.500%, 5/15/08................................................ 1,998,060 -- 1,998,060
1,125,000 5.250%, 5/15/09................................................ 1,086,446 -- 1,086,446
2,000,000 5.500%, 5/15/13................................................ 1,964,900 -- 1,964,900
4,000,000 Dormitory Authority of the State of New York, Court Facilities,
5.625%, 5/15/13................................................ 3,835,840 -- 3,835,840
2,250,000 Dormitory Authority of the State of New York, Judicial Facilities
(Suffolk County), 9.500%, 4/15/14.............................. 2,625,480 -- 2,625,480
1,375,000 Dormitory Authority of the State of New York (University of
Rochester, Strong Memorial Hospital), 5.500%, 7/01/21.......... 1,337,353 -- 1,337,353
2,470,000 Dutchess County Industrial Development Authority, Civic
Facilities
(Bard College), 7.000%, 11/01/17............................... 2,643,369 -- 2,643,369
50,000 Endwell NY Fire Dist G.O., 7.000%, 03/01/12...................... -- 57,278 57,278
50,000 Endwell NY Fire Dist G.O., 7.000%, 03/01/14...................... -- 57,197 57,197
50,000 Endwell NY Fire Dist G.O., 7.000%, 03/01/15...................... -- 57,106 57,106
50,000 Endwell NY Fire Dist G.O., 7.000%, 03/01/16...................... -- 57,308 57,308
50,000 Endwell NY Fire Dist G.O., 7.000%, 01/01/13...................... -- 57,255 57,255
75,000 Endwell NY Fire Dist G.O., 7.000%, 01/01/11...................... -- 85,811 85,811
1,600,000 Franklin County Industrial Development Agency (County
Correctional Facility), 6.750%, 11/01/12....................... 1,068,490 640,884 1,709,374
750,000 Hempstead Industrial Development Authority, Civic Facility
(United Cerebral Palsy Association of Nassau County), 7.500%,
10/01/09....................................................... 797,168 -- 797,168
1,000,000 Herkimer Cnty NY Burrow-Phys Amt, 8.000%, 01/01/09............... -- 1,062,800 1,062,800
2,500,000 Housing New York Corporation, 5.000%, 11/01/13................... 2,298,650 -- 2,298,650
750,000 Jefferson Cnty NY Ida Waste Amt, 7.200%, 12/01/20................ -- 815,025 815,025
150,000 Leray NY G.O., 7.600%, 11/15/06.................................. -- 180,914 180,914
275,000 Leray NY G.O., 7.600%, 11/15/04.................................. -- 327,236 327,236
275,000 Leray NY G.O., 7.600%, 11/15/02.................................. -- 320,524 320,524
</TABLE>
P-8
<PAGE> 117
PRO FORMA FINANCIAL INFORMATION
<TABLE>
<CAPTION>
NUVEEN FLAGSHIP PRO FORMA
PRINCIPAL MARKET MARKET MARKET
AMOUNT DESCRIPTION VALUE VALE VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 1,000,000 Metropolitan Transportation Authority, Commuter Facilities,
6.250%, 7/01/17................................................ $ 1,064,320 $ -- $ 1,064,320
1,000,000 Metropolitan Transportation Authority, Commuter Facilities
Service Contract, 7.500%, 7/01/16 (Pre-refunded to 7/01/00).... 1,149,720 -- 1,149,720
1,025,000 Metropolitan Transportation Authority, Transit Facilities,
6.500%, 7/01/18................................................ 1,130,503 -- 1,130,503
225,000 Minerva NY Central Schl Dist, 7.000%, 06/15/06................... -- 259,277 259,277
1,055,000 Monroe County Water Authority, Water System, 6.000%, 8/01/17..... 1,076,944 -- 1,076,944
1,500,000 NE Energy Con Edison Ambac, 6.100%, 08/15/20..................... -- 1,586,745 1,586,745
1,000,000 New Rochell NY Ida College, 6.625%, 07/01/12..................... -- 1,057,900 1,057,900
1,000,000 New York City G.O. Ser A, 6.500%, 08/01/19....................... -- 1,043,370 1,043,370
New York City Housing Development Corporation, Multi-Family
Mortgage (FHA Insured):
2,000,000 6.550%, 10/01/15............................................... 2,093,180 -- 2,093,180
2,500,000 5.850%, 5/01/26................................................ 2,492,724 -- 2,492,724
New York City Industrial Development Agency (College of New
Rochelle):
1,000,000 6.200%, 9/01/10................................................ 1,010,320 -- 1,010,320
1,000,000 6.300%, 9/01/15................................................ 1,006,090 -- 1,006,090
New York City General Obligation:
2,500,000 7.000%, 8/01/04................................................ 2,732,325 -- 2,732,325
2,000,000 7.500%, 2/01/06................................................ 2,236,000 -- 2,236,000
45,000 6.625%, 8/01/13................................................ 49,738 -- 49,738
2,500,000 6.000%, 2/15/20................................................ 2,424,300 -- 2,424,300
1,250,000 New York City Housing Development Corporation, Multi-Unit
Mortgage (FHA Insured), 7.350%, 6/01/19........................ 1,073,680 268,185 1,341,865
4,000,000 New York City Industrial Development Agency, Civic Facility (The
Lighthouse Project), 6.500%, 7/01/22........................... 3,642,240 519,650 4,161,890
New York City Municipal Water Finance Authority, Water and
Sewer System:
3,000,000 5.375%, 6/15/19................................................ 2,899,230 -- 2,899,230
1,500,000 7.750%, 6/15/20 (Pre-refunded to 6/15/01)...................... 1,766,790 -- 1,766,790
2,000,000 5.500%, 6/15/20................................................ 1,910,880 -- 1,910,880
1,500,000 New York NY G.O., 5.750%, 02/01/06............................... -- 1,489,860 1,489,860
3,000,000 New York State Energy Research and Development Authority, 6.100%,
8/15/20........................................................ 3,106,530 -- 3,106,530
200,000 New York State Housing Finance Agency, State University
Construction, 8.000%, 5/01/11.................................. 255,060 -- 255,060
1,250,000 New York State Medical Care Facilities Finance Agency, Hospital
and Nursing Home, FHA-Insured (Catholic Medical Center),
8.300%, 2/15/22 (Pre-refunded to 2/15/98)...................... 1,381,725 -- 1,381,725
1,520,000 New York State Medical Care Facilities Finance Agency, Hospital
and Nursing Home, FHA-Insured (Bayley Seton/St. Joseph's
Hospital), 6.450%, 2/15/09..................................... 1,662,698 -- 1,662,698
1,250,000 New York State Medical Care Facilities Finance Agency, Hospital
and Nursing Home (New York Downtown Hospital), 6.700%,
2/15/12........................................................ 1,298,638 -- 1,298,638
1,000,000 New York State Urban Development Corporation, 6.750%, 1/01/26.... 1,106,060 -- 1,106,060
2,000,000 New York State Urban Development Corporation (Clarkson Center for
Advanced Materials Processing), 7.800%, 1/01/20 (Pre-refunded
to 1/01/01).................................................... 2,335,260 -- 2,335,260
1,000,000 New York State Urban Development Corporation (Cornell Center for
Theory and Simulation), 6.000%, 1/01/14........................ 1,005,010 -- 1,005,010
1,100,000 New York State Urban Development Corporation (Syracuse University
Center for Science and Technology), 7.875%, 1/01/17
(Pre-refunded to 1/01/98)...................................... 1,200,573 -- 1,200,573
New York State Urban Development Corporation, Correctional
Capital Facilities:
1,000,000 5.625%, 1/01/07................................................ 1,002,330 -- 1,002,330
2,490,000 5.750%, 1/01/13................................................ 2,421,799 -- 2,421,799
1,250,000 5.500%, 1/01/15................................................ 1,195,538 -- 1,195,538
1,000,000 7.500%, 1/01/20 (Pre-refunded to 1/01/00)...................... 1,137,820 -- 1,137,820
2,900,000 New York State Urban Development Corporation, State Facilities,
7.500%, 4/01/20 (Pre-refunded to 4/01/01)...................... 3,378,268 -- 3,378,268
2,615,000 New York State Urban Development Corporation (Pine Barrens),
5.375%, 4/01/17................................................ 2,391,574 -- 2,391,574
500,000 New York State (Commissioner of Office of Mental Health),
Certificates of Participation, 8.300%, 9/01/12................. 536,065 -- 536,065
</TABLE>
P-9
<PAGE> 118
PRO FORMA FINANCIAL INFORMATION
<TABLE>
<CAPTION>
NUVEEN FLAGSHIP PRO FORMA
PRINCIPAL MARKET MARKET MARKET
AMOUNT DESCRIPTION VALUE VALE VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 1,545,000 New York State Environmental Facilities Corporation (State Park
Infrastructure), 5.750%, 3/15/13............................... $ 1,535,823 $ -- $ 1,535,823
3,000,000 New York State General Obligation, 5.625%, 10/01/20.............. 3,004,890 -- 3,004,890
1,650,000 New York State Housing Finance Agency, Insured Multi-Family
Mortgage Housing, 6.950%, 8/15/12.............................. 1,770,104 -- 1,770,104
New York State Housing Finance Agency, Service Contract
Obligation:
500,000 6.125%, 3/15/20................................................ 511,215 -- 511,215
3,750,000 5.500%, 9/15/22................................................ 3,528,450 -- 3,528,450
3,000,000 6.500%, 3/15/25................................................ 3,170,940 -- 3,170,940
2,000,000 New York State Medical Care Facilities Finance Agency, Hospital
and Nursing Home FHA-Insured, 6.200%, 8/15/22.................. 2,087,460 -- 2,087,460
2,480,000 New York State Medical Care Facilities Finance Agency, Hospital
and Nursing Home, 6.400%, 8/15/14.............................. 2,622,327 -- 2,622,327
1,000,000 New York State Medical Care Facilities Finance Agency, Hospital
and Nursing Home (Health Care Center), 6.375%, 11/15/19........ 1,048,710 -- 1,048,710
New York State Medical Care Facilities Finance Agency, Hospital
and Nursing Home (Mental Health Services):
1,460,000 7.500%, 2/15/21................................................ 1,696,038 -- 1,696,038
2,000,000 5.500%, 8/15/21................................................ 1,947,860 -- 1,947,860
1,500,000 6.500%, 8/15/24................................................ 1,583,250 -- 1,583,250
New York State Medical Care Facilities Finance Agency, Hospital
and Nursing Home (Brookdale Hospital Medical Center):
1,000,000 6.400%, 2/15/01................................................ 1,035,520 -- 1,035,520
2,700,000 6.800%, 8/15/12................................................ 2,826,306 -- 2,826,306
1,000,000 New York State Medical Care Facilities Finance Agency, Hospital
and Nursing Home, FHA-Insured, 7.350%, 2/15/29................. 1,083,640 -- 1,083,640
1,000,000 New York State Medical Care Facilities Finance Agency, Hospital
and Nursing Home, Insured Mortgage (St. Vincent's Hospital),
8.000%, 2/15/27 (Pre-refunded to 8/15/97)...................... 1,065,830 -- 1,065,830
995,000 New York State Medical Care Facilities Finance Agency, Hospital
and Nursing Home, Insured Mortgage (Albany Medical Center),
8.000%, 2/15/28................................................ 1,085,396 -- 1,085,396
2,500,000 New York State Medical Care Facilities Finance Agency, Hospital
and Nursing Home, FHA-Insured (St. Vincent's Medical Center),
6.200%, 2/15/21................................................ 2,581,475 -- 2,581,475
New York State Medical Care Facilities Finance Agency, Hospital
and Nursing Home, FHA-Insured New York Hospital:
1,000,000 6.750%, 8/15/14................................................ 1,125,190 -- 1,125,190
1,000,000 6.800%, 8/15/24................................................ 1,134,930 -- 1,134,930
1,000,000 New York State Medical Care Facilities Finance Agency, Hospital
and Nursing Home, FHA-Insured (Buffalo General Hospital),
7.700%, 2/15/22 (Pre-refunded to 8/15/98)...................... 1,111,020 -- 1,111,020
380,000 New York State Mortgage Agency, 8.100%, 10/01/17................. 404,768 -- 404,768
2,000,000 New York State, Certificates of Participation (John Jay College
of Criminal Justice), 6.000%, 8/15/06.......................... 2,077,080 -- 2,077,080
2,405,000 Newark-Wayne Community Hospital, 7.600%, 9/01/15................. 2,429,242 -- 2,429,242
4,000,000 New York Local Government Assistance Corporation, 5.500%,
4/01/21........................................................ 3,844,720 -- 3,844,720
2,000,000 New York State Housing Finance Agency, Health Facilities (New
York City), 8.000%, 11/01/08................................... 2,257,780 -- 2,257,780
2,250,000 New York State Medical Care Facilities Finance Agency, Hospital
and Nursing Home (Columbia-Presbyterian), 8.000%, 2/15/25
(Pre-refunded to 8/15/97)...................................... 2,430,315 -- 2,430,315
1,000,000 NY Home Mtg Agy Ser 46 Amt, 6.600%, 10/01/19..................... -- 1,047,170 1,047,170
230,000 NY City Ida Protestant Welfare, 6.950%, 11/01/11................. -- 246,047 246,047
300,000 NY Dorm Auth Revs Dept of Ed, 7.750%, 07/01/21................... -- 338,298 338,298
2,100,000 NY Dorm -- Rochester, 6.500%, 07/01/19........................... -- 2,295,048 2,295,048
</TABLE>
P-10
<PAGE> 119
PRO FORMA FINANCIAL INFORMATION
<TABLE>
<CAPTION>
NUVEEN FLAGSHIP PRO FORMA
PRINCIPAL MARKET MARKET MARKET
AMOUNT DESCRIPTION VALUE VALE VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 1,000,000 NY Dorm Auth Upstate Comm College, 6.250%, 07/01/25.............. $ -- $ 1,028,540 $ 1,028,540
500,000 NY Dorm Buffalo Athletic Fac, 7.250%, 07/01/21................... -- 552,340 552,340
1,500,000 NY Dorm City Univ, 5.625%, 07/01/16.............................. -- 1,484,640 1,484,640
1,500,000 NY Dorm Dept of Health, 6.625%, 07/01/24......................... -- 1,599,060 1,599,060
245,000 NY Dorm Iroquois Nsg Home Fha, 7.000%, 02/01/15.................. -- 265,612 265,612
400,000 NY Dorm Menorah Cmps Fha Gnma, 7.400%, 02/01/31.................. -- 448,968 448,968
1,000,000 NY Dorm St Univ Ser B, 5.250%, 05/15/19.......................... -- 938,710 938,710
985,000 NY Dorm St Univ Ser X, 7.400%, 07/01/24.......................... -- 1,183,812 1,183,812
250,000 NY Dorm Veterans Home, 7.250%, 07/01/21.......................... -- 276,170 276,170
500,000 NY Energy Brooklyn Mbia Amt, 6.750%, 02/01/24.................... -- 543,895 543,895
350,000 NY Energy Con Ed Amt, 7.500%, 01/01/26........................... -- 381,931 381,931
500,000 NY Energy Long Island Amt, 6.900%, 08/01/22...................... -- 510,430 510,430
1,250,000 NY Energy Long Island Amt, 7.150%, 09/01/18...................... -- 1,293,525 1,293,525
300,000 NY G.O., 7.300%, 03/01/12........................................ -- 338,757 338,757
710,000 NY G.O., 6.625%, 11/01/09........................................ -- 771,159 771,159
1,000,000 NY City G.O. Ser B, 7.000%, 08/15/16............................. -- 1,093,900 1,093,900
40,000 NY City G.O. Ser F, 8.250%, 11/15/19............................. -- 46,126 46,126
2,000,000 NY Hfa Svc Contrct Ser A, 6.375%, 09/15/15....................... -- 2,092,300 2,092,300
250,000 NY Home Mtg Agy Mm1 Amt, 7.950%, 10/01/21........................ -- 267,948 267,948
1,500,000 NY Home Mtg Agy Ser 43, 6.450%, 10/01/17......................... -- 1,557,960 1,557,960
595,000 NY Home Mtg Ser UU Amt, 7.750%, 10/01/23......................... -- 630,777 630,777
500,000 NY Hsng Fin Auth Fha, 7.000%, 08/15/22........................... -- 527,355 527,355
1,000,000 NY Med Care Hosp Fha, 6.100%, 02/15/15........................... -- 1,028,960 1,028,960
300,000 NY Med Care Lady Vctory Ambac, 6.625%, 11/01/16.................. -- 330,993 330,993
500,000 NY Med Care Hosp Nurs Home, 7.450%, 08/15/31..................... -- 551,380 551,380
50,000 NY Med Care Mtl Hlth, 7.750%, 02/15/20........................... -- 55,688 55,688
110,000 NY Medical Care Mental Health, 7.700%, 02/15/18.................. -- 118,270 118,270
1,000,000 NY Mta Commuter Rev Ser A Mbia, 6.375%, 07/01/18................. -- 1,077,100 1,077,100
250,000 NY Muni Bond Bank Buffalo, 6.875%, 03/15/06...................... -- 270,428 270,428
250,000 NY Muni Bond Bank Rochester, 6.750%, 03/15/11.................... -- 271,833 271,833
1,000,000 NY Hsng Fin Auth Multi-Fam, 6.450%, 08/15/14..................... -- 1,037,900 1,037,900
1,450,000 NY Pwr Ser Z, 6.500%, 01/01/19................................... -- 1,581,356 1,581,356
500,000 NY Triborough Brdg & Tunnel Ser E, 7.250%, 01/01/10.............. -- 578,658 578,658
1,500,000 NY Udc Ctr For Indl Innovation, 5.500%, 01/01/13................. -- 1,467,675 1,467,675
950,000 NY Udc Syracuse, 7.875%, 01/01/17................................ -- 1,036,498 1,036,498
1,750,000 NY Udc, 5.700%, 04/01/20......................................... -- 1,729,578 1,729,578
2,125,000 NY Urban Dev Corp Grants, 5.500%, 01/01/19....................... -- 2,062,993 2,062,993
750,000 Onondaga Cnty NY Res Rec Amt, 7.000%, 05/01/15................... -- 769,808 769,808
1,000,000 Onondaga Cnty NY Convention, 6.250%, 01/01/20.................... -- 1,030,280 1,030,280
1,000,000 Orangetown Housing Authority, Housing Facilities, (Orangetown
Guaranty), 7.600%, 4/01/30 (Pre-refunded to 10/01/00).......... 1,157,040 -- 1,157,040
3,015,000 Suffolk County Industrial Development Agency (Dowling College
Civic Facility), 6.625%, 6/01/24............................... 3,191,769 -- 3,191,769
500,000 Suffolk Cnty NY Indl Dev Dowling College, 6.625%, 06/01/24....... -- 529,115 529,115
South Orangetown Central School District, General Obligation:
390,000 6.875%, 10/01/08............................................... 454,697 -- 454,697
390,000 6.875%, 10/01/09............................................... 454,939 -- 454,939
Triborough Bridge and Tunnel Authority:
2,000,000 7.100%, 1/01/10................................................ 2,214,880 -- 2,214,880
2,000,000 7.100%, 1/01/10................................................ 2,242,460 -- 2,242,460
2,100,000 UFA Development Corporation, FHA-Insured
(Loretto-Utica Project), 5.950%, 7/01/35......................... 2,105,418 -- 2,105,418
2,000,000 Westchester County Industrial Development Agency, Civic Facility
(Jewish Board of Family and Children Services), 6.750%,
12/15/12....................................................... 2,066,620 -- 2,066,620
2,000,000 34th Street Partnership Business Improvement District, Capital
Improvement, 5.500%, 1/01/23................................... 1,904,340 -- 1,904,340
- -------------------------------------------------------------------------------------------------------------------------------
$207,925,000 Total Investments--(Cost $203,606,139)--97.4%.................... $165,378,435 $50,709,376 216,087,811
=========== ---------------------------------------------------------------------------------------------------------------
</TABLE>
P-11
<PAGE> 120
PRO FORMA FINANCIAL INFORMATION
<TABLE>
<CAPTION>
NUVEEN FLAGSHIP PRO FORMA
PRINCIPAL MARKET MARKET MARKET
AMOUNT DESCRIPTION VALUE VALE VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
TEMPORARY INVESTMENTS IN SHORT-TERM MUNICIPAL SECURITIES--1.4%
New York City General Obligation, Variable Rate Demand Bonds:
$ 900,000 3.450%, 8/15/05+............................................... $ 900,000 $ -- $ 900,000
800,000 3.400%, 8/15/20+............................................... 800,000 -- 800,000
835,000 3.300%, 8/01/22+............................................... 835,000 -- 835,000
600,000 3.450%, 8/15/22+............................................... 600,000 -- 600,000
- -------------------------------------------------------------------------------------------------------------------------------
$ 3,135,000 Total Temporary Investments--1.4%................................ $ 3,135,000 $ -- 3,135,000
=========== ---------------------------------------------------------------------------------------------------------------
Other Assets Less Liabilities--1.2%.............................. 2,701,787
---------------------------------------------------------------------------------------------------------------
Net Assets--100%................................................. $221,924,598
===============================================================================================================
</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 and 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.
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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.
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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.
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<PAGE> 123
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.
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<PAGE> 124
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>
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<PAGE> 125
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..............................................
Management.................................................................................
Investment Adviser and Investment Management Agreement.....................................
Portfolio Transactions.....................................................................
Net Asset Value............................................................................
Tax Matters................................................................................
Performance Information....................................................................
Additional Information on the Purchase and Redemption of Fund Shares.......................
Distribution and Service Plan..............................................................
Independent Public Accountants and Custodian...............................................
</TABLE>
The audited financial statements for the fiscal year ended January 31, 1996
for the Nuveen New Jersey 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 the Fund accompany this Statement of Additional
Information.
B-1
<PAGE> 126
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;
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<PAGE> 127
(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.
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<PAGE> 128
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. 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
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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.
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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> 150
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> 151
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> 152
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> 153
<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> 154
<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> 155
<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> 156
<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
B-32
<PAGE> 157
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.
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(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.
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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> 165
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> 166
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
Yield = 2 [ +1 6 - 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> 167
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> 168
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> 169
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> 170
(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
ONE YEAR ENDED JANUARY 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> 171
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> 172
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> 173
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> 174
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> 175
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> 176
NUVEEN TAX-FREE MUTUAL FUNDS
PORTFOLIO OF INVESTMENTS
NEW JERSEY
JANUARY 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL OPT. CALL MARKET
AMOUNT DESCRIPTION PROVISIONS* RATINGS** VALUE
- ------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 1,000,000 New Jersey Economic Development Authority (Elizabethtown Gas Company),
Alternative Minimum Tax, 6.750%, 10/01/21............................ 10/96 at 102 A3 $ 1,031,330
200,000 New Jersey Economic Development Authority (Liberty State Park Project),
6.800%, 3/15/22...................................................... 3/02 at 102 A1 218,124
1,000,000 New Jersey Economic Development Authority (Yeshiva K'tana of Passaic),
8.000%, 9/15/18...................................................... No Opt. Call N/R 1,191,120
2,965,000 New Jersey Economic Development Authority (Bridgewater Resources,
Inc.), Alternative Minimum Tax, 8.375%, 11/01/04..................... No Opt. Call N/R 3,148,237
250,000 New Jersey Economic Development Authority, Solid Waste Disposal
Facility
(Garden State Paper Company), 7.125%, 4/01/22........................ 4/02 at 102 Aa1 274,143
1,285,000 New Jersey Economic Development Authority, Alternative Minimum Tax,
5.300%, 12/01/07..................................................... 12/03 at 102 Aa1 1,291,849
1,025,000 New Jersey Economic Development Authority (Educational Testing
Service), 6.500%, 5/15/05............................................ No Opt. Call Aaa 1,138,601
650,000 New Jersey Economic Development Authority, 5.875%, 7/01/11............. 7/04 at 102 Aaa 690,554
975,000 New Jersey Educational Facilities Authority (Trenton State College),
6.750%, 7/01/08...................................................... 7/96 at 100 A+ 981,962
835,000 New Jersey Educational Facilities Authority (Princeton University),
5.875%, 7/01/11...................................................... 7/04 at 100 Aaa 889,375
1,500,000 New Jersey Educational Facilities Authority (Higher Education
Facilities Trust Fund), 5.125%, 9/01/02.............................. No Opt. Call Aaa 1,576,830
1,000,000 New Jersey General Obligation, 5.800%, 2/15/07......................... No Opt. Call Aa1 1,108,150
1,215,000 New Jersey Health Care Facilities Financing Authority (Hackensack
Hospital), 8.750%, 7/01/09........................................... No Opt. Call Aaa 1,479,323
700,000 New Jersey Health Care Facilities Financing Authority (Community
Medical Center/Kensington Manor Care Center), 7.000%, 7/01/20........ 7/00 at 102 Aaa 777,427
480,000 New Jersey Health Care Facilities Authority (Community Memorial
Hospital), 8.000%, 7/01/14........................................... 7/98 at 102 A 523,474
400,000 New Jersey Health Care Facilities Financing Authority (Atlantic City
Medical Center), 6.800%, 7/01/05..................................... 7/02 at 102 A 436,828
850,000 New Jersey Health Care Facilities Financing Authority (Palisades
Medical Center), 7.500%, 7/01/06..................................... 7/02 at 102 Ba 879,011
1,750,000 New Jersey Housing Finance Agency, 9.000%, 11/01/18.................... 11/99 at 100 A1 1,827,245
2,000,000 New Jersey Housing and Mortgage Finance Agency, Multi-Family Housing,
6.000%, 11/01/14..................................................... 5/05 at 102 Aaa 2,059,160
700,000 New Jersey Housing and Mortgage Finance Agency, 6.950%, 11/01/13....... 5/02 at 102 A+ 745,500
New Jersey Turnpike Authority:
375,000 10.375%, 1/01/03....................................................... No Opt. Call AAA 466,973
1,750,000 6.500%, 1/01/08........................................................ No Opt. Call A 2,025,293
1,415,000 Delaware River and Bay Authority, 5.000%, 1/01/17...................... 1/04 at 102 Aaa 1,372,975
1,000,000 Delaware River Port Authority, 5.500%, 1/01/26......................... 1/06 at 102 Aaa 1,004,720
1,000,000 Camden County Pollution Control Finance Authority, Solid Waste Disposal
and Resource Recovery, Alternative Minimum Tax, 7.125%, 12/01/01..... No Opt. Call BBB+ 1,034,220
2,645,000 Camden County Pollution Control Finance Authority, Solid Waste Disposal
and Resource Recovery System, 7.250%, 12/01/10....................... 12/01 at 102 BBB+ 2,803,197
500,000 Essex County Improvement Authority, 6.500%, 12/01/12................... 12/02 at 102 Baa1 536,010
500,000 Hillsborough Township School District, 5.875%, 8/01/11................. No Opt. Call AA 545,105
400,000 Hudson County Improvement Authority Multi-Family Housing (Observer Park
Project), Alternative Minimum Tax, 6.900%, 6/01/22................... 6/04 at 100 AAA 421,688
1,605,000 Little Ferry Board of Education, Certificates of Participation, 6.300%,
1/15/08.............................................................. No Opt. Call N/R 1,664,337
Monroe Township Board of Education, General Obligation:
725,000 5.200%, 8/01/11........................................................ No Opt. Call Aaa 738,550
825,000 5.200%, 8/01/14........................................................ No Opt. Call Aaa 840,263
600,000 Morris County General Obligation, 5.000%, 7/15/09...................... 7/05 at 100 Aaa 606,972
500,000 North Bergen Housing Development Corporation, FHA-Insured,
7.400%, 9/01/20...................................................... 8/96 at N/R 512,850
102 1/2
300,000 North Bergen Township General Obligation, 6.500%, 8/15/12.............. 8/02 at 102 Aaa 332,100
2,350,000 Ocean County Utilities Authority, 5.000%, 1/01/14...................... 1/97 at 100 Aaa 2,210,692
2,215,000 Passaic County General Obligation, 5.125%, 9/01/12..................... No Opt. Call Aaa 2,234,647
</TABLE>
B-52
<PAGE> 177
<TABLE>
<CAPTION>
PRINCIPAL OPT. CALL MARKET
AMOUNT DESCRIPTION PROVISIONS* RATINGS** VALUE
- ------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 775,000 Rutgers State University, 8.000%, 5/01/18 (Pre-refunded to 5/01/98).... 5/98 at 102 Aaa $ 860,514
Union County Utilities Authority, Solid Waste System, Alternative
Minimum Tax:
195,000 7.100%, 6/15/06........................................................ 6/02 at 102 A- 209,307
1,100,000 7.200%, 6/15/14........................................................ 6/02 at 102 A- 1,176,076
270,000 6.850%, 6/15/14........................................................ 6/02 at 102 Aaa 289,697
100,000 University of Medicine and Dentistry of New Jersey, 6.500%, 12/01/18
(Pre-refunded to 12/01/01)........................................... 12/01 at 102 AA 113,743
300,000 Wanaque Borough Sewerage Authority, 7.000%, 12/01/21................... 12/02 at 102 Baa1 323,658
1,175,000 Virgin Islands Housing Finance Authority, Alternative Minimum Tax,
6.450%, 3/01/16...................................................... 3/05 at 102 AAA 1,211,519
2,000,000 Puerto Rico Commonwealth General Obligation, 5.750%, 7/01/24........... 7/05 at Aaa 2,075,380
101 1/2
1,000,000 Puerto Rico Aqueduct and Sewer Authority, 7.875%, 7/01/17 (Pre-refunded
to
7/01/98)............................................................. 7/98 at 102 A 1,115,660
60,000 Puerto Rico Highway Transportation Authority, 6.625%, 7/01/18
(Pre-refunded to 7/01/02)............................................ 7/02 at A 69,015
101 1/2
Puerto Rico Electric Power Authority:
790,000 7.000%, 7/01/07........................................................ No Opt. Call A- 928,778
1,875,000 7.000%, 7/01/21 (Pre-refunded to 7/01/01).............................. 7/01 at 102 A- 2,172,693
1,000,000 Puerto Rico Industrial Medical and Environmental Authority, 6.250%,
7/01/16.............................................................. 1/05 at 102 Aaa 1,089,389
- ------------
$ 50,125,000 Total Investments--(Cost $50,801,410)--96.8%........................... 53,254,264
=========== ----------------------------------------------------------------------------------------------------------------
Other Assets Less Liabilities--3.2%.................................... 1,775,636
----------------------------------------------------------------------------------------------------------------
Net Assets--100%....................................................... $ 55,029,900
===========================================================================================================
</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 22 $24,367,349 46%
PORTFOLIO OF INVESTMENTS: AA+, AA, AA- Aa1, Aa, Aa2, Aa3 5 3,332,990 6
A+ A1 4 3,772,831 7
A, A- A, A2, A3 10 9,688,454 18
BBB+, BBB, BBB- Baa1, Baa, Baa2, Baa3 4 4,697,085 9
BB+, BB, BB- Ba1, Ba, Ba2, Ba3 1 879,011 2
Non-rated Non-rated 4 6,516,544 12
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL 50 $53,254,264 100%
========================================================================================================================
</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> 178
NUVEEN TAX-FREE MUTUAL FUNDS
STATEMENT OF NET ASSETS
JANUARY 31, 1996
<TABLE>
<CAPTION>
NJ
-----------
<S> <C>
ASSETS
Investments in municipal securities, at market value (note 1)....................... $53,254,264
Cash................................................................................ 1,227,903
Receivables:
Interest....................................................................... 664,668
Shares sold.................................................................... 103,874
Deferred organization costs (note 1)................................................ 7,390
Other assets........................................................................ 14,133
-----------
Total assets.............................................................. 55,272,232
-----------
LIABILITIES
Payables for shares reacquired...................................................... 12,384
Accrued expenses:
Management fees (note 7)....................................................... 25,346
Other.......................................................................... 43,227
Dividends payable................................................................... 161,375
-----------
Total liabilities......................................................... 242,332
-----------
Net assets (note 8)................................................................. $55,029,900
==========
Class A Shares (note 1)
Net assets.......................................................................... $10,660,701
==========
Shares outstanding.................................................................. 1,024,727
==========
Net asset value and redemption price per share...................................... $ 10.40
==========
Offering price per share (net asset value per share plus maximum sales charge of
4.50% of offering price).......................................................... $ 10.89
==========
Class C Shares (note 1)
Net assets.......................................................................... $ 1,065,019
==========
Shares outstanding.................................................................. 102,569
==========
Net asset value, offering and redemption price per share............................ $ 10.38
==========
Class R Shares (note 1)
Net assets.......................................................................... $43,304,180
==========
Shares outstanding.................................................................. 4,158,146
==========
Net asset value and redemption price per share...................................... $ 10.41
==========
</TABLE>
See accompanying notes to financial statements.
B-54
<PAGE> 179
NUVEEN TAX-FREE MUTUAL FUNDS
STATEMENT OF OPERATIONS
YEAR ENDED JANUARY 31, 1996
<TABLE>
<CAPTION>
NJ
----------
<S> <C>
INVESTMENT INCOME
Tax-exempt interest income (note 1).................................................. $3,006,443
----------
Expenses (note 2):
Management fees (note 7)........................................................ 268,050
12b-1 distribution and service fees (note 1).................................... 23,280
Shareholders' servicing agent fees and expenses................................. 61,463
Custodian's fees and expenses................................................... 43,166
Trustees' fees and expenses (note 7)............................................ 1,276
Professional fees............................................................... 23,290
Shareholders' reports -- printing and mailing expenses.......................... 66,799
Federal and state registration fees............................................. 2,991
Amortization of deferred organization costs (note 1)............................ 6,895
Other expenses.................................................................. 6,701
----------
Total expenses before expense reimbursement................................ 503,911
Expense reimbursement from investment adviser (note 7).......................... (115,121)
----------
Net expenses............................................................... 388,790
----------
Net investment income................................................. 2,617,653
----------
REALIZED AND UNREALIZED GAIN (LOSS) FROM INVESTMENTS
Net realized gain (loss) from investment transactions, net of taxes, if applicable
(notes 1 and 5).................................................................... (30,019)
Net change in unrealized appreciation or depreciation of investments................. 3,249,789
----------
Net gain from investments.................................................. 3,219,770
----------
Net increase in net assets from operations........................................... $5,837,423
==========
</TABLE>
See accompanying notes to financial statements.
B-55
<PAGE> 180
NUVEEN TAX-FREE MUTUAL FUNDS
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
NJ
--------------------------
YEAR ENDED YEAR ENDED
1/31/96 1/31/95
----------- -----------
<S> <C> <C>
OPERATIONS
Net investment income................................................... $ 2,617,653 $ 2,037,788
Net realized gain (loss) from investment transactions, net of taxes, if
applicable............................................................ (30,019) (452,878)
Net change in unrealized appreciation or depreciation of investments.... 3,249,789 (2,665,300)
----------- -----------
Net increase (decrease) in net assets from operations......... 5,837,423 (1,080,390)
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS (note 1)
From undistributed net investment income:
Class A............................................................... (329,633) (35,663)
Class C............................................................... (32,025) (5,043)
Class R............................................................... (2,282,656) (1,973,703)
From accumulated net realized gains from investment transactions:
Class A............................................................... -- (773)
Class C............................................................... -- --
Class R............................................................... -- (341,737)
----------- -----------
Decrease in net assets from distributions to shareholders..... (2,644,314) (2,356,919)
----------- -----------
FUND SHARE TRANSACTIONS (note 3)
Net proceeds from sale of shares:
Class A............................................................... 7,757,684 2,826,031
Class C............................................................... 573,759 458,588
Class R............................................................... 4,461,592 10,783,764
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............................................................... 181,529 18,788
Class C............................................................... 16,615 2,567
Class R............................................................... 1,567,807 1,592,197
----------- -----------
14,558,986 15,681,935
----------- -----------
Cost of shares redeemed:
Class A............................................................... (406,168) (122,722)
Class C............................................................... (32,865) (1,205)
Class R............................................................... (5,070,204) (5,795,917)
----------- -----------
(5,509,237) (5,919,844)
----------- -----------
Net increase in net assets derived from Fund share transactions....... 9,049,749 9,762,091
----------- -----------
Net increase (decrease) in net assets......................... 12,242,858 6,324,782
Net assets at the beginning of year..................................... 42,787,042 36,462,260
----------- -----------
Net assets at the end of year........................................... $55,029,900 $42,787,042
=========== ===========
Balance of undistributed net investment income at end of year........... $ 8,128 $ 34,789
=========== ===========
</TABLE>
See accompanying notes to financial statements.
B-56
<PAGE> 181
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, the Nuveen Michigan Tax-Free Value Fund and the Nuveen
Pennsylvania Tax-Free Value Fund had purchase commitments of $1,184,207 and
$3,015,938, respectively. There were no such purchase commitments in any of the
other Funds.
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-57
<PAGE> 182
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-58
<PAGE> 183
NUVEEN TAX-FREE MUTUAL FUNDS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. EXPENSE ALLOCATION
Expenses of the Fund 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 Fund 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>
NJ
-------
<S> <C>
12b-1 distribution and service fees (for the year ended January 31, 1996):
Class A....................................................................... $16,159
Class C....................................................................... 7,121
Shareholders' servicing agent fees and expenses (for the six month period ended
July 31, 1995):
Class A....................................................................... 3,208
Class C....................................................................... 185
Class R....................................................................... 15,598
Shareholders' reports -- printing and mailing expenses (for the six month period
ended
July 31, 1995):
Class A....................................................................... 1,760
Class C....................................................................... 205
Class R....................................................................... 36,338
Federal and state registration fees (for the six month period ended July 31,
1995):
Class A....................................................................... 886
Class C....................................................................... 69
Class R....................................................................... 749
</TABLE>
3. FUND SHARES
Transactions in shares were as follows:
<TABLE>
<CAPTION>
NJ
------------------------
YEAR ENDED YEAR ENDED
1/31/96 1/31/95
---------- ----------
<S> <C> <C>
Shares sold:
Class A........................................................... 765,342 292,386
Class C........................................................... 56,488 47,588
Class R........................................................... 440,121 1,077,289
Shares issued to shareholders due to reinvestment of distributions
from net investment income and from net realized gains from
investment transactions:
Class A........................................................... 17,820 1,978
Class C........................................................... 1,638 270
Class R........................................................... 154,754 161,549
--------- ---------
1,436,163 1,581,060
--------- ---------
Shares redeemed:
Class A........................................................... (40,094 ) (12,705 )
Class C........................................................... (3,290 ) (125 )
Class R........................................................... (500,152 ) (581,386 )
--------- ---------
(543,536 ) (594,216 )
--------- ---------
Net increase........................................................ 892,627 986,844
========= =========
</TABLE>
B-59
<PAGE> 184
NUVEEN TAX-FREE MUTUAL FUNDS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. DISTRIBUTIONS TO SHAREHOLDERS
On February 9, 1996, the Fund declared a dividend distribution from its
ordinary income which was paid on March 1, 1996, to shareholders of record on
February 9, 1996, as follows:
<TABLE>
<CAPTION>
NJ
------
<S> <C>
Dividend per share:
Class A...................................................................... $.0440
Class C...................................................................... .0375
Class R...................................................................... .0460
======
</TABLE>
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>
NJ
-----------
<S> <C>
PURCHASES
Investments in municipal
securities............................................................... $27,941,714
Temporary municipal investments............................................ 19,400,000
SALES
Investments in municipal securities........................................ 17,713,121
Temporary municipal investments............................................ 21,000,000
==========
</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 the Fund.
At January 31, 1996, the Fund 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>
NJ
--------
<S> <C>
Expiration year:
2003................................................................ $ 35,921
2004................................................................ 419,632
--------
Total....................................................... $455,553
========
</TABLE>
6. UNREALIZED APPRECIATION (DEPRECIATION)
Gross unrealized appreciation and gross unrealized depreciation of
investments at January 31, 1996, were as follows:
<TABLE>
<CAPTION>
NJ
----------
<S> <C>
Gross unrealized:
Appreciation...................................................... $2,520,888
Depreciation...................................................... (68,034)
----------
Net unrealized appreciation......................................... $2,452,854
==========
</TABLE>
B-60
<PAGE> 185
NUVEEN TAX-FREE MUTUAL FUNDS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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, the
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 the
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
the Fund in order to limit total expenses to .75 of 1% of the average daily net
asset value of the 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>
NJ
-----------
<S> <C>
Capital paid-in............................................................ $53,051,830
Balance of undistributed net investment income............................. 8,128
Accumulated net realized gain (loss) from investment transactions.......... (482,912)
Net unrealized appreciation of investments................................. 2,452,854
-----------
Net assets....................................................... $55,029,900
===========
</TABLE>
9. INVESTMENT COMPOSITION
The 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>
NJ
---
<S> <C>
Revenue Bonds:
Pollution Control.............................................................. 13%
Housing Facilities............................................................. 10
Health Care Facilities......................................................... 7
Water/Sewer Facilities......................................................... 5
Electric Utilities............................................................. 2
Educational Facilities......................................................... 9
Transportation................................................................. 8
Lease Rental Facilities........................................................ 3
Other.......................................................................... 12
General Obligation Bonds......................................................... 19
Escrowed Bonds................................................................... 12
---
100%
===
</TABLE>
B-61
<PAGE> 186
NUVEEN TAX-FREE MUTUAL FUNDS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Certain long-term and intermediate-term investments owned by the Fund 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 (47% for New Jersey). 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 the Fund.
B-62
<PAGE> 187
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
RATIOS/SUPPLEMENTAL
OPERATIONS DATA
-------------------------- ----------
NET REALIZED LESS DISTRIBUTIONS
AND --------------------------
NET ASSET UNREALIZED DIVIDENDS TOTAL NET ASSETS
VALUE NET GAIN (LOSS) FROM NET DISTRIBUTIONS NET ASSET RETURN ON END OF
BEGINNING INVESTMENT FROM INVESTMENT FROM CAPITAL VALUE END NET ASSET PERIOD (IN
OF PERIOD INCOME++ INVESTMENTS** INCOME GAINS OF PERIOD VALUE+ THOUSANDS)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NEW JERSEY
- ----------------------------------------------------------------------------------------------------------------------------
CLASS A
Year ended 1/31,
1996 $ 9.730 $ .519 $ .685 $(.534) $ -- $10.400 12.63% $ 10,661
9/6/94 to 1/31/95 10.030 .205 (.209) (.210) (.086) 9.730 .02 2,741
CLASS C
Year ended 1/31,
1996 9.710 .443 .683 (.456) -- 10.380 11.80 1,065
9/21/94 to 1/31/95 9.770 .159 (.050) (.169) -- 9.710 1.16 464
CLASS R
Year ended 1/31,
1996 9.740 .551 .677 (.558) -- 10.410 12.88 43,304
1995 10.710 .524 (.886) (.522) (.086) 9.740 (3.27) 39,582
1994 9.960 .513 .810 (.513) (.060) 10.710 13.60 36,462
1993 9.525 .445 .431 (.441) -- 9.960 9.36 16,208
12/13/91 to
1/31/92 9.525 -- -- -- -- 9.525 -- 15
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
RATIO OF NET RATIO OF NET
RATIO OF INVESTMENT RATIO OF INVESTMENT
EXPENSES TO INCOME TO EXPENSES TO INCOME TO
AVERAGE NET AVERAGE NET AVERAGE NET AVERAGE NET PORTFOLIO
ASSETS BEFORE ASSETS BEFORE ASSETS AFTER ASSETS AFTER TURNOVER
REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT++ REIMBURSEMENT++ RATE
- ------------------
<S> <<C> <C> <C> <C> <C>
NEW JERSEY
- ------------------
CLASS A
Year ended 1/31,
1996 1.25% 4.85% 1.00% 5.10% 39%
9/6/94 to 1/31/95 1.31* 5.03* 1.00* 5.34* 32
CLASS C
Year ended 1/31,
1996 1.96 4.16 1.75 4.37 39
9/21/94 to 1/31/95 2.00* 4.37* 1.75* 4.62* 32
CLASS R
Year ended 1/31,
1996 .98 5.20 .75 5.43 39
1995 .89 5.18 .75 5.32 32
1994 .98 4.61 .75 4.84 52
1993 1.43* 4.28* .75* 4.96* 9
12/13/91 to
1/31/92 -- -- -- -- --
- ------------------
</TABLE>
* 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-63
<PAGE> 188
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Trustees and Shareholders of
Nuveen Multistate Tax-Free Trust:
We have audited the accompanying statement of net assets of Nuveen
Multistate Tax-Free Trust (a Massachusetts business trust comprising the Nuveen
New Jersey Tax-Free Value Fund), including the portfolio of investments, as of
January 31, 1996, and the related statement of operations for the year then
ended, the statement 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 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
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
New Jersey Tax-Free Value Fund as of January 31, 1996, the results of its
operations for the year then ended, the changes in its 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-64
<PAGE> 189
ANNEX C
JULY 1, 1996
NUVEEN TAX-FREE BOND FUND, INC.
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 July 1, 1996.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fundamental Policies and Investment Portfolio.............................................. 2
Management................................................................................. 24
Investment Adviser and Investment Management Agreement..................................... 27
Portfolio Transactions..................................................................... 28
Net Asset Value............................................................................ 29
Tax Matters................................................................................ 29
Performance Information.................................................................... 34
Additional Information on the Purchase and Redemption of Fund Shares....................... 38
Distribution and Service Plan.............................................................. 41
Independent Public Accountants and Custodian............................................... 42
</TABLE>
The audited financial statements for the fiscal year ended February 29,
1996 for the Nuveen New York Tax-Free Value Fund, appearing in the Annual Report
of Nuveen Tax-Free Bond Fund, Inc. are incorporated herein by reference. The
audited financial statements for that Fund accompany this Statement of
Additional Information.
C-1
<PAGE> 190
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;
(15) Purchase or retain the securities of any issuer other than the
securities of the Fund if, to the Fund's knowledge, those directors of
Nuveen Tax-Free Bond Fund, Inc., or those officers and directors of Nuveen
C-2
<PAGE> 191
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 Tax-Free Bond Fund, Inc. is an open-end diversified management
series company under SEC Rule 18f-2. Each Fund is a separate series issuing its
own shares. Nuveen Tax-Free Bond Fund, Inc. currently has three authorized
series with shares outstanding: the Nuveen Massachusetts Tax-Free Value Fund
(the "Massachusetts Fund"), the Nuveen New York Tax-Free Value Fund (the "New
York Fund") and the Nuveen Ohio Tax-Free Value Fund (the "Ohio Fund"). 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 or certain U.S. possessions or territories. 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 cities 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, 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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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 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. 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 Massachusetts Fund, the New York Fund and the Ohio Fund for the
fiscal year ended February 29, 1996, were 6%, 47% and 33%, respectively, and for
the fiscal year ended February 28, 1995, were 17%, 29% and 28%, respectively.
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 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
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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 respective 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 these states. 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 MASSACHUSETTS
As described above, except to the extent the Massachusetts Fund invests in
temporary investments, the Massachusetts Fund will invest substantially all of
its net assets in Massachusetts Municipal Obligations. The Massachusetts Fund is
therefore susceptible to political, economic or regulatory factors affecting
issuers of Massachusetts Municipal Obligations. Without intending to be
complete, the following briefly summarizes the current financial situation, as
well as some of the complex factors affecting the financial situation, in the
Commonwealth of Massachusetts (the "Commonwealth"). It is derived from sources
that are generally available to investors and is based in part on information
obtained from various agencies in Massachusetts. 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 Commonwealth or local
governmental finances generally, will not adversely affect the market value of
Massachusetts Obligations in the Fund or the ability of particular obligors to
make timely payments of debt service on (or relating to) those obligations.
Since 1988, there has been a significant slowdown in the Commonwealth's
economy, as indicated by a rise in unemployment, a slowing of its per capita
income growth and declining state revenues. Since fiscal 1992, the
Commonwealth's revenues for state government programs have exceeded
expenditures, however, no assurance can be given that lower than expected tax
revenues will not resume and continue.
1996 Fiscal Year Budget. On June 21, 1995, the Governor signed the
Commonwealth's budget for fiscal 1996. The fiscal 1996 budget is based on
estimated budgeted revenues and other sources of approximately $16.778 billion,
which includes fiscal 1996 tax revenues of $11.653 billion. Estimated fiscal
1996 tax revenues are approximately $490 million, or 4.3%, higher than estimated
fiscal 1995 tax revenues.
Fiscal 1996 non-tax revenues are projected to total $5.158 billion,
approximately $66 million, or 1.3%, less than fiscal 1995 non-tax revenues of
approximately $5.224 billion. Federal reimbursements are projected to decrease
by approximately $1 million from approximately $2.970 billion in fiscal 1995 to
approximately $2.969 billion in fiscal 1996, primarily as a result of increased
reimbursements for Medicare spending, offset by a reduction in reimbursements
received in 1995 for one-time Medicare expenses incurred in fiscal 1994 and
fiscal 1995. Fiscal 1996 departmental revenues are projected to decline by
approximately $94 million, or 7.4%, from approximately $1.273 billion in fiscal
1995 to approximately $1.179 billion in fiscal 1996. Major changes in projected
non-tax received for fiscal 1996 include a decline in motor vehicle license and
registration fees, reduction of abandoned property revenues and a decrease due
to non-recurring revenues received in fiscal 1995 from hospitals and nursing
homes as part of Medicare fiscal rate settlements and other reimbursements by
municipal hospitals to the state.
Fiscal 1996 appropriations in the Annual Appropriations Act total
approximately $16.847 billion, including approximately $25 million in
gubernatorial vetoes overridden by the legislature. In the final supplemental
budget for fiscal 1995, approved on August 24, 1995, another $71.1 million of
appropriations were continued for use in for 1996.
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As of February 1, 1996, the Governor had signed into law fiscal 1996
supplemental appropriations totalling approximately $23.5 million, including
approximately $12.6 million to fund higher education collective bargaining
contracts and $5.6 million for the Department of Social Services. These
appropriations were offset by approximately $10.4 million in line item
reductions, including a reduction of $9.8 million for the state's debt service
contract assistance to the MBTA. Both the House and Senate have passed
supplemental appropriation bills totalling $64.8 million primarily relating to
snow and ice removal costs incurred by both the Commonwealth and cities and
towns. The bills are currently awaiting resolution by a conference committee of
the House and Senate. On January 26, 1996 and February 9, 1996, the Governor
filed additional supplemental appropriation bills totalling approximately $7.3
million for costs relating to prison overcrowding relief as well as
reimbursement costs associated with a court settlement. No action has been taken
on these bills by either branch of the Legislature.
As of May 28, 1996, fiscal 1996 projected spending is approximately $16.963
billion, including approximately $153.2 million reserved for contingencies.
Projected revenues are approximately $16.851 billion. The fiscal 1996 tax
revenue projection is $11.684 billion, which represents an increase of
approximately $80 million from the earlier estimate, based upon tax revenue
collections through April, 1996.
The fiscal 1996 budget is based on numerous spending and revenue estimates
the achievement of which cannot be assured.
1995 Fiscal Year. Budgeted revenues and other sources, including non-tax
revenues, collected in fiscal 1995 were approximately $16.387 billion,
approximately $837 million, or 5.4%, above fiscal 1994 revenues of $15.550
billion. Estimated fiscal 1995 tax revenues collections were approximately
$11.163 billion, approximately $12 million above the Department of Revenue's
revised fiscal year 1995 tax revenue estimate of $10.151 billion and $544
million, or 5.2%, above fiscal year tax revenues of $10.607 billion.
Budgeted expenditures and other uses of funds in fiscal 1995 were
approximately $16.251 billion, approximately $728 million, or 4.7% above fiscal
1994 budgeted expenditures and uses of $15.523 billion. The Commonwealth ended
fiscal 1995 with an operating gain of $134 million and an ending fund balance of
$726 million.
On February 10, 1995, the Governor signed into law certain reforms to the
Commonwealth's program for Aid to Families with Dependent Children ("AFDC")
which take effect on July 1, 1995, subject to federal approval of certain
waivers. The revised program reduces AFDC benefits to able bodied recipients by
2.75%, while allowing them to keep a larger portion of their earned wages,
requires approximately 22,000 able-bodied parents of school-aged children to
work or perform community service for 20 hours per week and requires
approximately 16,000 recipients who have children between the ages of two and
six to participate in an education or training program or perform community
service. The plan also establishes a pilot program for up to 2,000 participants
that offers tax credits and wage subsidies to employers who hire welfare
recipients. Parents who find employment will be provided with extended medical
benefits and day care benefits for up to one year. The plan mandates paternal
identification, expands funding for anti-fraud initiatives, and requires parents
on AFDC to immunize their children. Parents who are disabled, caring for a
disabled child, have a child under the age of two, or are teen-agers living at
home and attending high school, will continue to receive cash assistance. Since
most provisions of the new law do not take effect until July 1, 1995, the
Executive Office for Administration projects that the reforms will not
materially affect fiscal 1995 public assistance spending. The fiscal 1995
expenditure estimate of $16.449 billion includes $247.8 million appropriated to
fund the Commonwealth's public assistance programs for the last four months of
fiscal 1995. The Commonwealth is currently evaluating the new law's impact on
fiscal 1996 projected spending for public assistance programs.
On November 8, 1994, the voters in the statewide general election approved
an initiative petition that would slightly increase the portion of the gasoline
tax revenue credited to the Highway Fund, one of the Commonwealth's three major
budgetary funds, prohibit the transfer of money from the Highway Fund to other
funds for non-highway purposes and not permit including the Highway Fund balance
in the computation "consolidated net surplus" for purposes of state finance
laws. The initiative petition also provides that no more than 15% of gasoline
tax revenues may be used for mass transportation purposes, such as expenditures
related to the Massachusetts Bay Transit Authority. The Executive Office of
Administration and Finance is analyzing the effect, if any, this initiative
petition, which became law on December 8, 1994, may have on the fiscal 1995
budget and it currently does not expect it to have any materially adverse
impact. This is not a constitutional amendment and is subject to amendment or
repeal by the Legislature, which may also, notwithstanding the terms of the
petition, appropriate moneys from the Highway Fund in such amounts and for such
purposes as it determines, subject only to a constitutional restriction that
such moneys be used for highways or mass transit purposes.
1994 Fiscal Year. Fiscal 1994 tax revenue collections were approximately
$10.607 billion, $87 million below the Department of Revenue's fiscal year 1994
tax revenue estimate of $10.694 billion and $677 million above fiscal 1993
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tax revenues of $9.930 billion. Budgeted revenues and other sources, including
non-tax revenues, collected in fiscal 1994 were approximately $15.550 billion.
Total revenues and other sources increased by approximately 5.7% from fiscal
1993 to fiscal 1994 while tax revenues increased by 6.8% for the same period.
Budgeted expenditures and other uses of funds in fiscal 1994 were approximately
$15.523 billion, which is $826.5 million or approximately 5.6% higher than
fiscal 1993 budgeted expenditures and other uses.
As of June 30, 1994, the Commonwealth showed a year-end cash position of
approximately $757 million, as compared to a projected position of $599 million.
In June, 1993, the Legislature adopted and the Governor signed into law
comprehensive education reform legislation. This legislation required an
increase in expenditures for education purposes above fiscal 1993 base spending
of $1.288 billion of approximately $175 million in fiscal 1994. The Executive
Office for Administration and Finance expects the annual increases in
expenditures above the fiscal 1993 base spending of $1.288 billion to be
approximately $396 million in fiscal 1995, $625 million in fiscal 1996 and $868
million in fiscal 1997. Additional annual increases are also expected in later
fiscal years. The fiscal 1995 budget as signed by the Governor includes $896
million in appropriations to satisfy this legislation.
1993 Fiscal Year. The Commonwealth's budgeted expenditures and other uses
were approximately $14.696 billion in fiscal 1993, which is approximately $1.280
billion or 9.6% higher than fiscal 1992 expenditures and other uses. Final
fiscal 1993 budgeted expenditures were $23 million lower than the initial July
1992 estimates of fiscal 1993 budgeted expenditures. Budgeted revenues and other
sources for fiscal 1993 totalled approximately $14.710 billion, including tax
revenues of $9.930 billion. Total revenues and other sources increased by
approximately 6.9% from fiscal 1992 to fiscal 1993, while tax revenues increased
by 4.7% for the same period. Overall, fiscal 1993 ended with a surplus of
revenues and other sources over expenditures and other uses of $13.1 million and
aggregate ending fund balances in the budgeted operating funds of the
Commonwealth of approximately $562.5 million. After payment in full of the
distribution of local aid to the Commonwealth's cities and towns ("Local Aid")
and the retirement of short term debt, the Commonwealth showed a year end cash
position of approximately $622.2 million, as compared to a projected position of
$485.1 million.
1992 Fiscal Year. The Commonwealth's budgeted expenditures and other uses
were approximately $13.4 billion in fiscal 1992, which is $238.7 million or 1.7%
lower than fiscal 1991 budgeted expenditures. Final fiscal 1992 budgeted
expenditures were $300 million more than the initial July 1991 estimates of
budgetary expenditures, due in part to increases in certain human services
programs, including an increase of $268.7 million for the Medicaid program and
$50.0 million for mental retardation consent decree requirements. Budgeted
revenues and other sources for fiscal 1992 totalled approximately $13.7 billion
(including tax revenues of approximately $9.5 billion), reflecting an increase
of approximately 0.7% from fiscal 1991 to 1992 and an increase of 5.4% in tax
revenues for the same period. Overall, fiscal 1992 is estimated to have ended
with an excess of revenues and other sources over expenditures and other uses of
$312.3 million. After payment in full of Local Aid in the amount of $514.0
million due on June 30, 1992, retirement of the Commonwealth's outstanding
commercial paper (except for approximately $50 million of bond anticipation
notes) and certain other short term borrowings, as of June 30, 1992, the end of
fiscal 1992, the Commonwealth showed a year-end cash position of approximately
$731 million, as compared with the Commonwealth's cash balance of $182.3 million
at the end of fiscal 1991.
1991 Fiscal Year. Budgeted expenditures for fiscal 1991 were approximately
$13.659 billion, as against budgeted revenues and other sources of approximately
$13.634 billion. The Commonwealth suffered an operating loss of approximately
$21.2 million. Application of the adjusted fiscal 1990 fund balances of $258.3
million resulted in a fiscal 1991 budgetary surplus of $237.1 million. State law
requires that approximately $59.2 million of the fiscal year ending balances of
$237.1 million be placed in the Stabilization Fund, a reserve from which funds
can be appropriated (i) to make up any difference between actual state revenues
in any fiscal year in which actual revenues fall below the allowable amount,
(ii) to replace state and local losses by federal funds or (iii) for any event,
as determined by the legislature, which threatens the health, safety or welfare
of the people or the fiscal stability of the Commonwealth or any of its
political subdivisions.
Upon taking office in January 1991, the new Governor proposed a series of
legislative and administrative actions, including withholding of allotments
under Section 9C of Chapter 29 of the General Laws, intended to eliminate the
projected deficits. The new Governor's review of the Commonwealth's budget
indicated projected spending of approximately $14.1 billion with an estimated
$850 million in budget balancing measures that would be needed prior to the
close of fiscal 1991. At that time, estimated tax revenues were revised to
approximately $8.8 billion, $903 million less than was estimated at the time the
fiscal 1991 budget was adopted. The Legislature adopted a number of the
Governor's recommendations and the Governor took certain administrative actions
not requiring legislative approval, including the adoption of a state employee
furlough program. It is estimated by the Commonwealth that spending
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reductions achieved through savings initiatives and withholding of allotments
total approximately $484.3 million in aggregate for fiscal 1991. However, these
savings and reductions may be impacted negatively by litigation pursued by third
parties concerning the Governor's actions under Section 9C of Chapter 29 of the
General Laws and with regard to the state employee furlough program.
In addition, the new administration in May 1991 filed an amendment to its
Medicaid state plan that enables it to claim 50% federal reimbursement on
uncompensated care payments for certain hospitals in the Commonwealth. As a
result, in fiscal 1991, the Commonwealth obtained additional non-tax revenues in
the form of federal reimbursements equal to approximately $513 million on
account of uncompensated care payments. This reimbursement claim was based upon
recent amendments of federal law contained in the Omnibus Budget Reconciliation
Act of 1990 and, consequently, on relatively undeveloped federal laws,
regulations and guidelines. At the request of the federal Health Care Financing
Administration, the Office of Inspector General of the United States Department
of Health and Human Services has commenced an audit of the reimbursement. The
administration, which had reviewed the matter with the Health Care Financing
Administration prior to claiming the reimbursement, believes that the
Commonwealth will prevail in the audit. If the Commonwealth does not prevail,
the Commonwealth would have the right to contest an appeal, but could be
required to pay all or part of Medicaid reimbursements with interest and to have
such amount deducted from future reimbursement payments.
Employment. Reversing a trend of relatively low unemployment during the
early and mid 1980's, the Massachusetts unemployment rate beginning in 1990
increased significantly to where the Commonwealth's unemployment rate exceeded
the national unemployment rate. During 1990, the Massachusetts unemployment rate
increased from 4.5% in January to 6.1% in July to 6.7% in August. During 1991,
the Massachusetts unemployment rate averaged 9.0% while the average United
States unemployment rate was 6.7%. The Massachusetts unemployment rate during
1992 averaged 8.5% while the average United States unemployment rate was 7.4%.
Since 1993, the average monthly unemployment rate has declined steadily. The
Massachusetts unemployment rate in February 1996 was 5.0%, as compared with the
United States unemployment rate of 5.5% for the same period. Other factors which
may significantly and adversely affect the employment rate in the Commonwealth
include reductions in federal government spending on defense-related industries.
Due to this and other considerations, there can be no assurance that
unemployment in the Commonwealth will not increase in the future.
Debt Ratings. S&P currently rates the Commonwealth's uninsured general
obligation bonds at A+. At the same time, S&P currently rates state and agency
notes at SP1. From 1989 through 1992, the Commonwealth had experienced a steady
decline in its S&P rating, with its decline beginning in May 1989, when S&P
lowered its rating on the Commonwealth's general obligation bonds and other
Commonwealth obligations from AA+ to AA and continuing a series of further
reductions until March 1992, when the rating was affirmed at BBB.
Moody's currently rates the Commonwealth's uninsured general obligation
bonds at A1. From 1989 through 1992, the Commonwealth had experienced a steady
decline in its rating by Moody's since May 1989. In May 1989, Moody's lowered
its rating on the Commonwealth's notes from MIG-1 to MIG-2, and its rating on
the Commonwealth's commercial paper from P-1 to P-2. On June 21, 1989, Moody's
reduced the Commonwealth's general obligation rating from Aa to A. On November
15, 1989, Moody's reduced the rating on the Commonwealth's general obligations
from A to Baa1, and on March 9, 1990, Moody's reduced the rating of the
Commonwealth's general obligation bonds from Baa1 to Baa. There can be no
assurance that these ratings will continue.
In recent years, the Commonwealth and certain of its public bodies and
municipalities have faced serious financial difficulties which have affected the
credit standing and borrowing abilities of Massachusetts and its respective
entities and may have contributed to higher interest rates on debt obligations.
The continuation of, or an increase in, such financial difficulties could result
in declines in the market values of, or default on, existing obligations
including Massachusetts Obligations in the Fund. Should there be during the term
of the Fund a financial crisis relating to Massachusetts, its public bodies or
municipalities, the market value and marketability of all outstanding bonds
issued by the Commonwealth and its public authorities or municipalities
including the Massachusetts Obligations in the Fund and interest income to the
Fund could be adversely affected.
Total Bond and Note Liabilities. The total general obligation bond
indebtedness of the Commonwealth (including Dedicated Income Tax Debt and
Special Obligation Debt) as of April 1, 1996 was approximately $10.093 billion.
There were also outstanding approximately $240 million in general obligation
notes and other short term general obligation debt. The total bond and note
liabilities of the Commonwealth as of April 1, 1996, including guaranteed bond
and contingent liabilities was approximately $13.818 billion.
Debt Service. During the 1980s, capital expenditures were increased
substantially, which has had a short term impact on the cash needs of the
Commonwealth and also accounts for a significant rise in debt service during
that
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period. In November, 1988, the Executive Office for Administration and Finance
established an administrative limit on state-financed capital spending in the
Capital Projects Fund of $925 million per fiscal year. Capital expenditures were
$847.0 million, $694.1 million, $575.9 million, $760.6 million and $902.2
million in fiscal 1991, fiscal 1992, fiscal 1993, fiscal 1994 and fiscal 1995,
respectively. Commonwealth-financed capital expenditures are projected to be
approximately $894.0 million in fiscal 1996. Debt service expenditures for
fiscal 1991, fiscal 1992, fiscal 1993, fiscal 1994 and fiscal 1995 were $942.3
million, $898.3 million, $1,140 billion, $1.149 billion, and $1.230 billion,
respectively, and are projected to be approximately $1.196 billion for fiscal
1996. The amounts represented do not include debt service on notes issued to
finance certain Medicare-related liabilities, certain debt service contract
assistance payment to Massachusetts Bay Transportation Authority ($205.9 million
projected in fiscal 1996), the Massachusetts Convention Center ($24.6 million
projected in fiscal 1996), the Massachusetts Government Land Bank ($6 million
projected in fiscal 1996), the Massachusetts Water Pollution Abatement Trust
($16.6 million projected in fiscal 1996) and grants to municipalities under the
school building assistance program to defray a portion of the debt service costs
on local school bonds ($174.5 million projected in fiscal 1996).
In January 1990, legislation was passed to impose a limit on debt service
beginning in fiscal 1991, providing that no more than 10% of the total
appropriations in any fiscal year may be expended for payment of interest and
principal on general obligation debt (excluding the Fiscal Recovery Bonds). The
percentage of total appropriations expended from the budgeted operating funds
for debt service (excluding debt service on Fiscal Recovery Bonds) for fiscal
1994 is 5.6% which is projected to increase to 5.9% in fiscal 1995.
Certain Liabilities. Among the material future liabilities of the
Commonwealth are significant unfunded general liabilities of its retirement
systems and a program to fund such liabilities; a program whereby, starting in
1978, the Commonwealth began assuming full financial responsibility for all
costs of the administration of justice within the Commonwealth; continuing
demands to raise aggregate aid to cities, towns, schools and other districts and
transit authorities above current levels; and Medicaid expenditures which have
increased each year since the program was initiated. The Commonwealth has signed
consent decrees to continue improving mental health care and programs for the
mentally retarded in order to meet federal standards, including those governing
receipt of federal reimbursements under various programs, and the parties in
those cases have worked cooperatively to resolve the disputed issues.
As a result of comprehensive legislation approved in January, 1988, the
Commonwealth is required, beginning in fiscal 1989 to fund future pension
liabilities currently and to amortize the Commonwealth's unfunded liabilities
over 40 years. The funding schedule must provide for annual payments in each of
the ten years ending fiscal 1998 which are at least equal to the total estimated
pay-as-you-go pension costs in each year. As a result of this requirement, the
funding requirements for fiscal 1995, 1996, 1997 and 1998 are estimated to be
increased to approximately $959.9 million, $1.007 billion, $1.061 billion and
$1.128 billion, respectively.
Litigation. The Commonwealth is engaged in various lawsuits involving
environmental and related laws, including an action brought on behalf of the
U.S. Environmental Protection Agency alleging violations of the Clean Water Act
and seeking to enforce the clean-up of Boston Harbor. The MWRA, successor in
liability to the Metropolitan District Commission, has assumed primary
responsibility for developing and implementing a court-approved plan for the
construction of the treatment facilities necessary to achieve compliance with
federal requirements. Under the Clean Water Act, the Commonwealth may be liable
for costs of compliance in these or any other Clean Water cases if the MWRA or a
municipality is prevented from raising revenues necessary to comply with a
judgment. The MWRA currently projects that the total cost of construction of the
treatment facilities required under the court's order is approximately $3.557
billion in current dollars, with approximately $1.046 billion to be spent on or
after June 30, 1995. On October 18, 1995, the court entered an order which
reduced the MWRA'S obligation to build certain additional secondary treatment
facilities, which is estimated by the MWRA will save ratepayers approximately
$165 million.
The Department of Public Welfare has been sued for the alleged unlawful
denial of personal care attendant services to certain disabled Medicaid
recipients. The Superior Court has denied the plaintiff's motion for preliminary
injunction and has also denied the plaintiff's motion for class certification.
If the plaintiffs were to prevail on their claims and the Commonwealth were
required to provide all of the services sought by the plaintiffs to all
similarly situation persons, it would substantially increase the annual cost to
the Commonwealth if these services are eventually required. The Department of
Public Welfare currently estimates this increase to be as much as $200 million
per year.
There are also actions pending in which recipients of human services
benefits, such as welfare recipients, the mentally retarded, the elderly, the
handicapped, children, residents of state hospitals and inmates of corrections
institutions, seek expanded levels of services and benefits and in which
providers of services to such recipients challenge the rates at which they are
reimbursed by the Commonwealth. To the extent that such actions result in
judgments requiring the Commonwealth to provide expanded services or benefits or
pay increased rates, additional operating and capital expenditures might be
needed to implement such judgments.
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In 1995, the Spaulding Rehabilitation Hospital ("Spaulding") filed an
action to enforce an agreement to acquire its property by eminent domain in
connection with the Central Artery/Third Harbor Tunnel Project. If successful,
Spaulding could recover the fair market value of its property in addition to its
relocation costs with respect to its personal property. The Commonwealth
estimates its potential liability at approximately $50 million.
The Commonwealth faces an additional potential liability of approximately
$40 million in connection with a taking by the Massachusetts Highway Department
related to the relocation of Northern Avenue in Boston.
In addition there are several tax matters in litigation which could result
in significant refunds to taxpayers if decisions unfavorable to the Commonwealth
are rendered. In BayBank, et al. v. Commissioner of Revenue, the banks challenge
the inclusion of income from tax exempt obligations in the measure of the bank
excise tax. The Appellate Tax Board issued findings of fact and a report in
favor of the Commissioner of Revenue on September 30, 1993. The case is pending
before the Supreme Judicial Court. The potential liability is approximately $55
million, including similarly situated banks and tax years after 1990.
In National Association of Government Employees v. Commonwealth, the
Superior Court declared that a line item in the Commonwealth's general
appropriations act for fiscal 1994 that increased the state employees'
percentage share of their group health insurance premiums from 10% to 15%
violated the terms of several collective bargaining agreements, and therefore
was invalid under the United States Constitution as regards employees covered by
the agreements. On February 9, 1995, the Supreme Judicial Court vacated the
Superior Court's decision and declared that the fiscal 1994 line item did not
violate the contracts clause. In June, 1995, the United States Supreme Court
denied the plaintiff's writ of certiorari. Several other unions have filed a
companion suit asserting that the premium increase similarly violated other
collective bargaining agreements. The latter suit is in its initial stages.
Prior to the Supreme Judicial Court's decision, the Commonwealth's aggregate
liability is estimated to be approximately $32 million.
A variety of other civil suits pending against the Commonwealth may also
affect its future liabilities. There include challenges to the Commonwealth's
allocation of school aid under Section 9C of Chapter 29 of the General Laws and
to adopt a state employee furlough program. No prediction is possible as to the
ultimate outcome of these proceedings.
On March 22, 1995, the Supreme Judicial Court held in Perini Corporation v.
Commission of Revenue that certain deductions from the net worth measure of the
Massachusetts corporate excise tax violate the Commerce Clause of the United
States Constitution. On October 2, 1995, the United States Supreme Court denied
the Commonwealth's petition for writ of certiorari. The Department of Revenue
estimates that tax revenues in the amount of $40 to $55 million may be abated as
a result of the Supreme Judicial Court's decision.
Many factors, in addition to those cited above, do or may have a bearing
upon the financial condition of the Commonwealth, including social and economic
conditions, many of which are not within the control of the Commonwealth.
Expenditure and Tax Limitation Measures. Limits have been established on
state tax revenues by legislation approved by the Governor on October 25, 1986
and by an initiative petition approved by the voters on November 4, 1986. The
Executive Office for Administration and Finance currently estimates that state
tax revenues will not reach the limit imposed by either the initiative petition
or the legislative enactment in fiscal 1992.
Proposition 2 1/2, passed by the voters in 1980, led to large reductions in
property taxes, the major source of income for cities and towns and large
increases in state aid to offset such revenue losses. According to the Executive
Office for Administration and Finance, all of the 351 cities and towns have now
achieved a property tax level of no more than 2.5% of full property values.
Under the terms of Proposition 2 1/2, the property tax levy can now be increased
annually for all cities and towns, almost all by 2.5% of the prior fiscal year's
tax levy plus 2.5% of the value of new properties and of significant
improvements to property. Legislation has also been enacted providing for
certain local option taxes. A voter initiative petition approved at the
statewide general election in November, 1990 further regulates the distribution
of Local Aid of no less than 40% of collections from individual income taxes,
sales and use taxes, corporate excise taxes, and the balance of the state
lottery fund. If implemented in accordance with its terms (including
appropriation of the necessary funds), the petition as approved would shift
several hundred million dollars to direct Local Aid.
Other Tax Measures. To provide revenue to pay debt service on both the
deficit and Medicaid-related borrowings and to fund certain direct Medicaid
expenditures, legislation was enacted imposing an additional tax on certain
types of personal income for 1989 and 1990 taxable years at rates of 0.375% and
0.75%, respectively, effectively raising the tax rate of 1989 from 5% to 5.375%
and for 1990 to 5.75%. Recent legislation has effectively further increased tax
rates to 5.95% for tax year 1990 to 6.25% for tax year 1991 and returning to
5.95% for tax year 1992 and subsequent tax years.
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The tax is applicable to all personal income except income derived from
dividends, capital gains, unemployment compensation, alimony, rent, interest,
pensions, annuities and IRA/Keogh distributions. The income tax rate on other
interest (excluding interest on obligations of the United States and of the
Commonwealth and its subdivisions), dividends and net capital gains (after a 50%
reduction) was increased from 10% to 12% for tax year 1990 and subsequent years,
by recently enacted legislation.
Estate Tax Revisions. The fiscal 1993 budget included legislation which
gradually phases out the current Massachusetts estate tax and replaces it with a
"sponge tax" in 1997. The "sponge tax" is based on the maximum amount of the
credit for state taxes allowed for federal estate tax purposes. The estate tax
is phased out by means of annual increases in the basic exemption from the
current $200,000 level. The exemption is increased to $300,000 for 1993,
$400,000 for 1994, $500,000 for 1995 and $600,000 for 1996. In addition, the
legislation includes a full marital deduction starting July 1, 1994. Currently
the marital deduction is limited to 50% of the Massachusetts adjusted gross
estate. The static fiscal impact of the phase out of the estate tax was
estimated to be approximately $24.8 million in fiscal 1994 and is estimated to
be approximately $72.5 million in fiscal 1995.
Other Issuers of Massachusetts 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. The brief
summary above does not address, nor does it attempt to address, any difficulties
and the financial situations of those other issuers of Massachusetts
Obligations.
FACTORS PERTAINING TO NEW YORK
As described above, except to the extent the New York Fund invests in
temporary investments, the New York Fund will invest substantially all of its
assets in New York Municipal Obligations. The New York Fund is therefore
susceptible to political, economic or regulatory factors affecting New York
State and governmental bodies within New York State. Some of the more
significant events and conditions relating to the financial situation in New
York are summarized below. The following information provides only a brief
summary of the complex factors affecting the financial situation in New York, is
derived from sources that are generally available to investors and is believed
to be accurate. It is based on information drawn from official statements and
prospectuses issued by, and other information reported by, the State of New York
(the "State"), by its various public bodies (the "Agencies"), and by other
entities located within the State, including the City of New York (the "City"),
in connection with the issuance of their respective securities.
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 New York
Municipal Obligations held in the portfolio of the New York Fund or the ability
of particular obligors to make timely payments of debt service on (or relating
to) those obligations.
(1) The State: The State has historically been one of the wealthiest
states in the nation. For decades, however, the State economy has grown more
slowly than that of the nation as a whole, gradually eroding the State's
relative economic affluence. Statewide, urban centers have experienced
significant changes involving migration of the more affluent to the suburbs and
an influx of generally less affluent residents. Regionally, the older Northeast
cities have suffered because of the relative success that the South and the West
have had in attracting people and business. The City has also had to face
greater competition as other major cities have developed financial and business
capabilities which make them less dependent on the specialized services
traditionally available almost exclusively in the City. The State has for many
years had a very high state and local tax burden relative to other states. The
burden of State and local taxation, in combination with the many other causes of
regional economic dislocation, has contributed to the decisions of some
businesses and individuals to relocate outside, or not locate within, the State.
Slowdown of Regional Economy. A national recession commenced in mid-1990.
The downturn continued throughout the State's 1990-91 fiscal year and was
followed by a period of weak economic growth during the 1991 and 1992 calendar
years. For calendar year 1993, the economy grew faster than in 1992, but still
at a very moderate rate as compared to other recoveries. Moderate economic
growth continued in calendar year 1994. Economic growth slowed within New York
during 1995 as the expansion of the national economy moderated. The State has
forecasted a slowdown in the expansion of the State's economy in 1996. Economic
recovery started considerably later in the State than in the nation as a whole,
the State's economic growth continues to lag behind the nation's, due in part to
a significant retrenchment in the banking and financial services industries,
downsizing by major corporations, cutbacks in defense spending, and an
oversupply of office buildings. Many uncertainties exist in forecasts of both
the national and
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State economies and there can be no assurance that the State's economy will
perform at a level sufficient to meet the State's projections of receipts and
disbursements.
1996-97 Fiscal Year. The Governor issued a proposed Executive Budget for
the 1996-97 fiscal year (the "Proposed Budget") on December 15, 1995, which
projected a balanced general fund and receipts and disbursements of $31.3
billion and $31.2 billion, respectively. As of June 10, 1996, the State
legislature had not yet enacted, nor had the Governor and the legislature
reached an agreement on, the budget for the 1996-97 fiscal year which commenced
on April 1, 1996. The Governor and the State's legislature have agreed on or
proposed a series of short-term stopgap spending measures to fund State payrolls
and advances to certain municipalities and certain State programs. The delay in
the enactment of the budget may negatively affect certain proposed actions and
reduce projected savings.
The Proposed Budget and the 1996-97 Financial Plan provide for the closing
of a projected $3.9 billion budget gap in the 1996-97 fiscal year by
cost-containment savings in social welfare programs, savings from State agency
restructurings, decreasing the level of some categories of local aid, new
revenue measures and a reduction in the number of state employees. Up to $1.3
billion of gap closing measures by the State are dependent upon federal actions
with respect to the Medicaid program that have not been enacted due to the
federal budget impact. The Governor has proposed that, depending upon the
ultimate form of Medicaid relief provided to the states, any resulting gap would
be filled through a combination of increased revenues, additional cuts in
spending for social services, and so-called "one shot" sources of revenue or
cost savings.
The Proposed Budget and the 1996-97 Financial Plan may be impacted
negatively by uncertainties relating to the economy and tax collections. In
particular, should the national economy grow more slowly than forecasted by the
State, revenues received by the State would be adversely affected. In addition,
proposed retroactive changes to the federal tax treatment of capital gains would
flow through to the State and could significantly reduce tax receipts.
1995-96 Fiscal Year. The Governor announced on April 3, 1996 that the State
ended its 1994-95 fiscal year with an operating surplus of approximately $445
million. The State Legislature enacted the State's 1995-96 fiscal year budget on
June 7, 1995, more than two months after the start of that fiscal year. As of
January 19, 1996, the updated 1995-96 State Financial Plan (the "Plan")
projected total general fund receipts and disbursements each of $32.7 billion
representing reductions in receipts and disbursements of $144 million and $103
million, respectively, from the amounts set forth in the 1995-96 budget. The
Plan projected for a General Fund balance of approximately $172 million at the
close of the 1995-96 fiscal year.
1994-95 Fiscal Year. The State ended the 1994-95 fiscal year with a General
Fund balance of approximately $158 million.
Future Fiscal Years. There can be no assurance that the State will not face
substantial potential budget gaps in the future resulting from a significant
disparity between tax revenues projected from a lower recurring receipts base
and the spending required to maintain State programs at current levels. To
address any potential budgetary imbalance, the State may need to take
significant actions to align recurring receipts and disbursements. The
Governor's budget for fiscal year 1996-97 projects that budget gaps of $1.4
billion and $2.5 billion may need to be closed for fiscal years 1997-98 and
1998-99, respectively.
Indebtedness. As of March 31, 1995, the total amount of long-term State
general obligation debt authorized but unissued stood at $1.8 billion. As of the
same date, the State had approximately $5.2 billion in general obligation bonds,
including $149 million in bond anticipation notes outstanding.
The State originally projected that its borrowings for capital purposes
during the State's 1995-96 fiscal year would consist of $248 million in general
obligation bonds and bond anticipation notes and $186 million in general
obligation commercial paper. The Legislature authorized the issuance of up to
$33 million in certificates of participation in pools of leases for equipment
and real property to be utilized by State agencies in fiscal year 1995-96. The
Governor's budget for fiscal year 1996-97 projects approximately $400 million of
borrowings by the state for capital purposes. The projections of the State
regarding its borrowings for any fiscal year are subject to change if actual
receipts fall short of State projections or if other circumstances require.
In June 1990, legislation was enacted creating the New York Local
Government Assistance Corporation ("LGAC"), a public benefit corporation
empowered to issue long-term obligations to fund certain payments to local
governments traditionally funded through the State's annual seasonal borrowing.
As of June 30, 1995, LGAC has issued its bonds to provide net proceeds of $4.7
billion completing the program.
Financing of capital programs by other public authorities of the State is
also obtained from lease-purchase and contractual-obligation financing
arrangements, the debt service for which is paid from State appropriations. As
of March 31, 1995, there were $18 billion of such other financing arrangements
outstanding and additional financings of
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this nature by public authorities. In addition, certain agencies had issued and
outstanding approximately $7.0 billion of "moral obligation financings" as of
March 31, 1995, which are to be repaid from project revenues. While there has
never been a default on moral obligation debt of the State, the State would be
required to make up any shortfall in debt service.
Ratings. Moody's rating of the State's general obligation bonds stood at A
on January 24, 1996, and S&P's rating stood at A- with a positive outlook, on
January 24, 1996, an improvement from S&P's stable outlook from February 1994
through April 1993 and negative outlook prior to April 1993. Previously, Moody's
lowered its rating to A on June 6, 1990, its rating having been A1 since May 27,
1986. S&P lowered its rating from A to A- on January 13, 1992. S&P's previous
ratings were A from March 1990 to January 1992, AA- from August 1987 to March
1990 and A+ from November 1982 to August 1987.
Moody's maintained its A rating and S&P continued its A- rating in
connection with the State's issuance of $116 million of general obligation bonds
in January 1996.
(2) The City and the Municipal Assistance Corporation ("MAC"): The City
accounts for approximately 40% of the State's population and personal income,
and the City's financial health affects the State in numerous ways.
In response to the City's fiscal crisis in 1975, the State took a number of
steps to assist the City in returning to fiscal stability. Among other actions,
the State Legislature (i) created MAC to assist with long-term financing for the
City's short-term debt and other cash requirements and (ii) created the State
Financial Control Board (the "Control Board") to review and approve the City's
budgets and four-year financial plans (the financial plans also apply to certain
City-related public agencies).
In recent years, the rate of economic growth in the City slowed
substantially as the City's economy entered a recession. While by some measures
the City's economy may have begun to recover, a number of factors, including
poor performance by the City's financial services companies, may prevent a
significant improvement in the City's economy and may in fact negatively impact
upon the City's finances by reducing tax receipts. The City Comptroller has
issued reports concluding that the recession of the City's economy may be
ending, but there is little prospect of any significant improvement in the near
term.
Fiscal Year 1997 and the 1996-1999 Financial Plan. On January 31, 1996, the
Mayor released his preliminary $31 billion budget for fiscal year 1997, which
included $2.0 billion of deficit reduction measures. The Mayor is seeking a $750
million reduction in mandated welfare and Medicaid expenditures from the State
and a $643 million reduction in expenditures by City agencies and the Board of
Education ("BOE") budget. The Mayor has also received from MAC for $125 million
in fiscal year 1996 in return for a commitment by the City to cut projected City
spending by $125 million in fiscal year 1997 and each of the next three fiscal
years. On May 9, 1996, the Mayor released a revised fiscal year 1997 budget of
$32.7 billion that would reduce overall spending from fiscal year 1996 and
impose $1.1 billion of budget cuts on City agencies. The revised budget reduces
reliance on savings in welfare and Medicaid expenditures by $250 million and
restores $300 million of proposed tax cuts, including a recommended four year
extension of the City surcharge on personal income taxes.
The City Council has not yet approved the Mayor's revised fiscal year 1997
budget, although a tentative agreement on the budget was announced on June 10,
1996.
The 1996-1999 Financial Plan (the "Plan"), as revised in May 1996,
projected budget gaps of $1.4 billion and $2.3 billion for fiscal years 1998 and
1999, respectively. The 1996-1999 Financial Plan (the "Plan"), as revised in May
1996 by the Mayor, projected budget gaps of $1.4 and $2.3 billion for fiscal
years 1998 and 1999, respectively. The forecasted budget shortfall in fiscal
year 2000 could be as much as $2.9 million. The City Comptroller and State
Comptroller have each warned that the fiscal year 1997 budget includes
significant revenue risks. The State Comptroller has expressed concern that
projected budget gaps for fiscal years 1999 and 2000 are each in excess of $2
billion despite the City's significant cost-cutting efforts.
The amount of gap closing measures requiring State action set forth in the
Plan is well in excess of proposed assistance to the City outlined in the
Governor's Proposed Budget. Due to the continuing federal budget impasse, the
City cannot be assured that its assumptions regarding the amount of federal aid
or the impact of changes in federal law upon its operations or tax receipts. An
extended delay by the State in adopting its 1996-97 fiscal year budget or in the
adoption of the federal budget would negatively impact upon the City's financial
condition and ability to close budget gaps for fiscal years 1997 and thereafter.
The Mayor was required to submit an executive budget for fiscal year 1997
to the City Council in late April 1996. Due to continuing uncertainties related
to the amount of State and federal aid, the City Council extended the date by
which the Mayor was to submit such executive budget.
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Given the foregoing, there can be no assurance that the City will continue
to maintain a balanced budget during fiscal year 1997 or thereafter, or that it
can maintain a balanced budget without additional tax or other revenue increases
or reductions in City services, which could adversely affect the City's economic
base.
Pursuant to State law, the City prepares a four-year annual financial plan,
which is reviewed and revised on a quarterly basis and which includes the City's
capital, revenue and expense projections. The City is required to submit its
financial plans to review bodies, including the Control Board. If the City were
to experience certain adverse financial circumstances, including the occurrence
or the substantial likelihood and the imminence of the occurrence of an annual
operating deficit of more than $100 million or the loss of access to the public
credit markets to satisfy the City's capital and seasonal financial
requirements, the Control Board would be required by State law to exercise
certain powers, including prior approval of City financial plans, proposed
borrowings and certain contracts.
The City depends on the State for State aid both to enable the City to
balance its budget and to meet its cash requirements. If the State experiences
revenue shortfalls or spending increases beyond its projections during its
1996-97 fiscal year or subsequent years, such developments could result in
reductions in projected State aid to the City. In addition, there can be no
assurance that State budgets for the 1997-98 or future fiscal years will be
adopted by the April 1 statutory deadline and that there will not be adverse
effects on the City's cash flow and additional City expenditures as a result of
such delays.
The City projections set forth in the Plan are based on various assumptions
and contingencies which are uncertain and which may not materialize. Changes in
major assumptions could significantly affect the City's ability to balance its
budget as required by State law and to meet its annual cash flow and financing
requirements. Such assumptions and contingencies include the timing of any
regional and local economic recovery, the absence of wage increases in excess of
the increases assumed in its financial plan, employment growth, provision of
State and Federal aid and mandate relief, State legislative approval of future
State budgets, levels of education expenditures as may be required by State law,
adoption of future City budgets by the New York City Council, approval by the
Governor or the State Legislature and the cooperation of MAC with respect to
various other actions proposed in the Plan and changes in federal tax law.
The City's ability to maintain a balanced operating budget is dependent on
whether it can implement necessary service and personnel reduction programs
successfully. As discussed above, the City must identify additional expenditure
reductions and revenue sources to achieve balanced operating budgets for fiscal
year 1997 and thereafter. Any such proposed expenditure reductions will be
difficult to implement because of their size and the substantial expenditure
reductions already imposed on City operations in recent years.
Attaining a balanced budget is also dependent upon the City's ability to
market its securities successfully in the public credit markets. On May 3, 1996,
the Mayor announced a $1 billion reduction in City capital spending over a five
year period through fiscal year 2000. The City's financing program for fiscal
years 1996 through 1999 contemplates capital spending of $14.1 billion, which
will be financed through issuance of general obligation bonds, Water Authority
Revenue Bonds and Covered Organization obligations, and will be used primarily
to reconstruct and rehabilitate the City's infrastructure and physical assets
and to make capital investments. The City's financing program assumes the
receipt of approximately $1 billion from the sale of City's sewer and water
systems. However, the City Comptroller has obtained a court order blocking such
sale, which the City is appealing. In the event such appeal is unsuccessful the
City would be required to reduce capital spending during the next four years or
find additional sources of funds in such amount. A significant portion of such
bond financing is used to reimburse the City's general fund for capital
expenditures already incurred. In addition, the City issues revenue and tax
anticipation notes to finance its seasonal working capital requirements. The
terms and success of projected public sales of City general obligation bonds and
notes will be subject to prevailing market conditions at the time of the sale,
and no assurance can be given that the credit markets will absorb the projected
amounts of public bond and note sales. In addition, future developments
concerning the City and public discussion of such developments, the City's
future financial needs and other issues may affect the market for outstanding
City general obligation bonds and notes. If the City were unable to sell its
general obligation bonds and notes, it would be prevented from meeting its
planned operating and capital expenditures.
Absent appropriate legislative relief, the City may also face limitations
on its borrowing capacity after 1998 under the State's Constitution that will
prevent it from borrowing additional funds, as a result of the decrease in real
estate values within the City. The inability to finance capital improvements
would increase the City's budget gaps in later years or require it to
significantly curtail capital spending which would lead to a deterioration in
the City's infrastructure and ability to deliver services.
The City is a defendant in a significant number of lawsuits and is subject
to numerous claims and investigations, including, but not limited to, actions
commenced and claims asserted against the City arising out of alleged
constitutional violations, torts, breaches of contracts, and other violations of
law and condemnation proceedings. While
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the ultimate outcome and fiscal impact, if any, on the proceedings and claims
are not currently predictable, adverse determinations in certain of them might
have a material adverse effect upon the City's ability to carry out its
financial plan. As of June 30, 1995, the City estimated its potential future
liability on outstanding claims to be $2.5 billion.
On January 30, 1995, Robert L. Schulz and other defendants commenced a
federal district court action seeking among other matters to cancel the issuance
on January 31, 1995 of $659 million of City bonds. While the federal courts have
rejected requests for temporary restraining orders and expedited appeals, the
case is still pending. The City has indicated that it believes the action to be
without merit as it relates to the City, but there can be no assurance as to the
outcome of the litigation and an adverse ruling or the granting of a permanent
injunction would have a negative impact on the City's financial condition and
its ability to fund its operations.
Fiscal Year 1996. New York City adopted its fiscal year 1996 budget in
June, 1995 and submitted its Financial Plan for the 1996 fiscal year to the
Control Board on July 11, 1995. The fiscal 1996 budget and Financial Plan
originally provided for spending of $31.4 billion and closed a budget gap of
$3.1 billion. However, in January 1996 additional unexpected budget gaps
totaling approximately $760 million were identified in the fiscal 1996 budget.
The widening of the budget gap for fiscal year 1996 resulted from shortfalls in
tax revenues and State and federal aid and the failure to achieve Medicaid,
welfare and other savings at the levels projected. The City has undertaken a
number of actions to close the recently discovered gap, including additional
agency cuts, refinancing of MAC debt, the proposed sale of the City's parking
meters and the proposed sale of approximately $250 million of uncollected tax
liens. The City Comptroller has questioned whether the City will be able to
close the remaining budget gap for fiscal year 1996 prior to fiscal year-end on
June 30, 1996 and has criticized certain gap-closing measures as being at the
expense of future revenues.
Fiscal Years 1991 through 1995. The City achieved balanced operating
results in accordance with generally accepted accounting principles for fiscal
years 1991 through 1995. The City was required to close substantial budget gaps
in these fiscal years in order to maintain balanced operating results.
Ratings. As of the date of this prospectus, Moody's rating of the City's
general obligation bonds stood at Baa1 and S&P's rating stood at A-. On February
11, 1991, Moody's had lowered its rating from A.
On March 1, 1996, Moody's confirmed its Baa1 rating in connection with a
scheduled March 1996 sale of $1.3 billion of the City's general obligation bonds
but indicated that it would review such rating for a possible downgrade
following adoption of the City's 1997 fiscal year budget. S&P also confirmed its
rating of the City's general obligation bonds in connection with such general
obligation bond issue in March 1996.
In January 1995, in response to the City's plan to borrow $120 million to
refund debt due in February without imposing additional cuts in the fiscal 1995
budget, S&P's placed the City on negative credit watch. In late May 1996, S&P
confirmed the City's rating citing improvements in the revised fiscal year 1997
budget. Any rating decrease would negatively affect the marketability of the
City's bonds and significantly increase the City's financing costs.
On October 12, 1993, Moody's increased its rating of the City's issuance of
$650 million of Tax Anticipation Notes ("TANs") to MIG-1 from MIG-2. Prior to
that date, on May 9, 1990, Moody's revised downward its rating on outstanding
City revenue anticipation notes from MIG-1 to MIG-2 and rated the $900 million
notes then being sold MIG-2. S&P's rating of the October 1993 TANs issue
increased to SP-1 from SP-2. Prior to that date, on April 29, 1991, S&P revised
downward its rating on City revenue anticipation notes from SP-1 to SP-2.
As of December 31, 1995, the City and MAC had, respectively, $24.4 billion
and $4.0 billion of outstanding net long-term indebtedness.
(3) The State Agencies: Certain Agencies of the State have faced
substantial financial difficulties which could adversely affect the ability of
such Agencies to make payments of interest on, and principal amounts of, their
respective bonds. The difficulties have in certain instances caused the State
(under so-called "moral obligation" provisions, which are non-binding statutory
provisions for State appropriations to maintain various debt service reserve
funds) to appropriate funds on behalf of the Agencies. Moreover, it is expected
that the problems faced by these Agencies will continue and will require
increasing amounts of State assistance in future years. Failure of the State to
appropriate necessary amounts or to take other action to permit those Agencies
having financial difficulties to meet their obligations could result in a
default by one or more of the Agencies. Such default, if it were to occur, would
be likely to have a significant adverse affect on investor confidence in, and
therefore the market price of, obligations of the defaulting Agencies. In
addition, any default in payment on any general obligation of any Agency whose
bonds contain a moral obligation provision could constitute a failure of certain
conditions that must be satisfied in connection with Federal guarantees of City
and MAC obligations and could thus jeopardize the City's long-term financing
plans.
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As of September 30, 1994, the State reported that eighteen Agencies each
had outstanding debt of $100 million or more and an aggregate of $70.3 billion
of outstanding debt, some of which was state-supported, state-related debt.
(4) State Litigation: The State is a defendant 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 a number of
cases challenging the constitutionality or the adequacy and effectiveness of a
variety of significant social welfare programs primarily involving the State's
mental hygiene programs. Adverse judgments in these matters generally could
result in injunctive relief coupled with prospective changes in patient care
which could require substantial increased financing of the litigated programs in
the future.
The State is also engaged in a variety of claims wherein significant
monetary damages are sought. Actions commenced by several Indian nations claim
that significant amounts of land were unconstitutionally taken from the Indians
in violation of various treaties and agreements during the eighteenth and
nineteenth centuries. The claimants seek recovery of approximately six million
acres of land, as well as compensatory and punitive damages.
(5) Other Municipalities: Certain localities in addition to New York City
could have financial problems leading to requests for additional State
assistance. The potential impact on the State of such actions by localities is
not included in projections of State receipts and expenditures in the State's
1994-95 fiscal year.
Fiscal difficulties experienced by the City of Yonkers ("Yonkers") resulted
in the creation of the Financial Control Board for the City of Yonkers (the
"Yonkers Board") by the State in 1984. The Yonkers Board is charged with
oversight of the fiscal affairs of Yonkers. Future actions taken by the Governor
or the State Legislature to assist Yonkers could result in allocation of State
resources in amounts that cannot yet be determined.
Municipalities and school districts have engaged in substantial short-term
and long-term borrowings. In 1993, the total indebtedness of all localities in
the State (other than New York City) was approximately $17.7 billion. State law
requires the Comptroller to review and make recommendations concerning the
budgets of those local government units other than New York City authorized by
State law to issue debt to finance deficits during the period that such deficit
financing is outstanding. Fifteen localities had outstanding indebtedness for
State financing at the close of their fiscal year ending in 1993. In December
1995, in reaction to continuing financial problems, the Troy Municipal
Assistance Corp., which was created in 1995, imposed a 1996 budget plan upon
Troy, New York. Troy MAC had been expected to refinance $35 million of revenue
bonds issued by Troy, for which Troy lacks resources to fund debt service. Such
revenue bonds have not to date been refinanced. A similar municipal assistance
corporation has also been established for Newburgh. In addition, several other
smaller New York cities, including Utica, Rome, Schenectady and Niagara Falls
have faced continuing budget deficits, as federal and state aid and local tax
revenues have declined while government expenses have increased. The financial
problems being experienced by the State's smaller urban centers place additional
strains upon the State's financial condition at a time when the State is
struggling with its own budget gaps.
Certain proposed Federal expenditure reductions could reduce, or in some
cases eliminate, Federal funding of some local programs and accordingly might
impose substantial increased expenditure requirements on affected localities to
increase local revenues to sustain those expenditures. In addition, proposed
changes in the treatment of capital gains for federal income tax purposes could
reduce tax receipts of the state and city. If the State, New York City or any of
the Agencies were to suffer serious financial difficulties jeopardizing their
respective access to the public credit markets, the marketability of notes and
bonds issued by localities within the State, including notes or bonds in the
Fund, could be adversely affected. Localities also face anticipated and
potential problems resulting from certain pending litigation, judicial
decisions, and long-range economic trends. The longer-range potential problems
of declining urban population, increasing expenditures, and other economic
trends could adversely affect certain localities and require increasing State
assistance in the future.
However, the information below is intended only as a general summary, and
is not intended as a discussion of any specific factor that may affect any
particular obligation or issuer.
General. Ohio is the seventh most populous state. The 1990 Census count of
10,847,000 indicated a 0.5% population increase from 1980. The Census estimate
for 1994 is 11,102,000.
While diversifying more into the service and other non-manufacturing areas,
the Ohio economy continues to rely in part on durable goods manufacturing
largely concentrated in motor vehicles and equipment, steel, rubber products and
household appliances. As a result, general economic activity, as in many other
industrially-developed states, tends to be more cyclical than in some other
states and in the nation as a whole. Agriculture is an important segment of the
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economy, with over half the State's area devoted to farming and approximately
16% of total employment in agribusiness.
In prior years, the State's overall unemployment rate was commonly somewhat
higher than the national figure. For example, the reported 1990 average monthly
State rate was 5.7%, compared to the 5.5% national figure. However, for the last
five years the State rates were below the national rates (4.8% versus 5.6% in
1995. The unemployment rate and its effects vary among geographic areas of the
State.
There can be no assurance that future national, regional or state-wide
economic difficulties, and the resulting impact on State or local government
finances generally, will not adversely affect the market value of Ohio
Obligations held in the Ohio Fund or the ability of particular obligors to make
timely payments of debt service on (or lease payments relating to) those
Obligations.
State Finances. The State operates on the basis of a fiscal biennium for
its appropriations and expenditures, and is precluded by law from ending its
July 1 to June 30 fiscal year (FY) or fiscal biennium in a deficit position.
Most State operations are financed through the General Revenue Fund (GRF), for
which the personal income and sales-use taxes are the major sources. Growth and
depletion of GRF ending fund balances show a consistent pattern related to
national economic conditions, with the ending FY balance reduced during less
favorable and increased during more favorable economic periods. The State has
well-established procedures for, and has timely taken, necessary actions to
ensure resource/expenditure balances during less favorable economic periods.
Those procedures included general and selected reductions in appropriations
spending.
Key biennium-ending fund balances at June 30, 1989 were $475.1 million in
the GRF and $353 million in the Budget Stabilization Fund (BSF, a cash and
budgetary management fund). June 30, 1991 ending fund balances were $135.3
million (GRF) and $300 million (BSF).
The next biennium, 1992-1993 presented significant challenges to state
finances, successfully addressed. To allow time to resolve certain budget
differences, an interim appropriations act was enacted effective July 1, 1991;
it included GRF debt service and lease rental appropriations for the entire
biennium, while continuing most other appropriations for a month. Pursuant to
the general appropriations act for the entire biennium, passed on July 11, 1991,
$200 million was transferred from the BSF to the GRF in FY 1992.
Based on updated results and forecasts in the course of that FY, both in
light of a continuing uncertain nationwide economic situation, there was
projected -- and then timely addressed -- an FY 1992 imbalance in GRF resources
and expenditures. In response, the Governor ordered most State agencies to
reduce GRF spending in the last six months of FY 1992 by a total of
approximately $184 million; the $100.4 million BSF balance and additional
amounts from certain other funds were transferred late in the FY to the GRF; and
adjustments were made in the timing of certain tax payments.
A significant GRF shortfall (approximately $520 million) was then projected
for FY 1993. It was addressed by appropriate legislative and administrative
actions including the Governor's ordering $300 million in selected GRF spending
reductions and subsequent executive and legislative action (a combination of tax
revisions and additional spending reductions). The June 30, 1993 ending GRF fund
balance was approximately $111 million, of which, as a first step to BSF
replenishment, $21 million was deposited in the BSF.
None of the spending reductions were applied to appropriations needed for
debt service on or lease rentals relating to any State obligations.
The 1994-95 biennium presented a more affirmative financial picture. Based
on June 30, 1994 balances, an additional $260 million was deposited in the BSF.
The biennium ended June 30, 1995 with a GRF ending fund balance of $928 million,
of which $535.2 million was transferred into the BSF (which had an April 3, 1996
balance of over $828 million).
The GRF appropriations act for the 1995-96 biennium was passed on June 28,
1995 and promptly signed (after selective vetoes) by the Governor. All necessary
GRF appropriations for State debt service and lease rental payments then
projected for the biennium were included in that act.
Debt. The State's incurrence or assumption of debt without a vote of the
people is, with limited exceptions, prohibited by current State constitutional
provisions. The State may incur debt, limited in amount to $750,000, to cover
casual deficits or failures in revenues or to meet expenses not otherwise
provided for. The Constitution expressly precludes the State from assuming the
debts of any local government or corporation. (An exception is made in both
cases for any debt incurred to repel invasion, suppress insurrection or defend
the State in war.)
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By 14 constitutional amendments, the last adopted in 1995, Ohio voters have
authorized the incurrence of State debt and the pledge of taxes or excises to
its payment. At April 3, 1996, $892 million (excluding certain highway bonds
payable primarily from highway use charges) of this debt was outstanding. The
only such State debt at that date still authorized to be incurred were portions
of the highway bonds, and the following: (a) up to $100 million of obligations
for coal research and development may be outstanding at any one time ($39.6
million outstanding); (b) $240 million of obligations previously authorized for
local infrastructure improvements, no more than $120 million of which may be
issued in any calendar year ($805.4 million outstanding); and (c) up to $200
million in general obligation bonds for parks, recreation and natural resources
purposes which may be outstanding at any one time ($47.2 million outstanding,
with no more than $50 million to be issued in any one year).
The electors approved in November 1995 a constitutional amendment that
extends the local infrastructure bond program (authorizing an additional $1.2
billion of State full faith and credit obligations to be issued over 10 years
for the purpose), and authorizes additional highway bonds (expected to be
payable primarily from highway use receipts). The latter supersedes the prior
$500 million highway obligation authorization, and authorizes not more than $1.2
billion to be outstanding at any time and not more than $220 million to be
issued in a fiscal year.
Common resolutions are pending in both houses of the General Assembly that
would submit a constitutional amendment relating to certain other aspects of
State debt. The proposal would authorize, among other things, the issuance of
State general obligation debt for a variety of purposes with debt service on all
State general obligation debt and GRF-supported obligations not to exceed 5% of
the preceding fiscal year's GRF expenditures.
The Constitution also authorizes the issuance of State obligations for
certain purposes, the owners of which do not have the right to have excises or
taxes levied to pay debt service. Those special obligations include obligations
issued by the Ohio Public Facilities Commission and the Ohio Building Authority,
and certain obligations issued by the State Treasurer, over $4.8 billion of
which was outstanding or awaiting delivery at April 3, 1996.
A 1990 constitutional amendment authorizes greater State and political
subdivision participation (including financing) in the provision of housing. The
General Assembly may for that purpose authorize the issuance of State
obligations secured by a pledge of all or such portion as it authorizes of State
revenues or receipts (but not by a pledge of the State's full faith and credit).
A 1994 constitutional amendment pledges the full faith and credit and
taxing power of the State to meeting certain guarantees under the State's
tuition credit program which provides for purchase of tuition credits, for the
benefit of State residents, guaranteed to cover a specified amount when applied
to the cost of higher education tuition. (A 1965 constitutional provision that
authorized student loan guarantees payable from available State moneys has never
been implemented, apart from a "guarantee fund" approach funded essentially from
program revenues.)
The House has adopted a resolution that would submit to the electors a
constitutional amendment prohibiting the General Assembly from imposing a new
tax or increasing an existing tax unless approved by a three-fifths vote of each
house or by a majority vote of the electors. It cannot be predicted whether
required Senate concurrence to submission will be received.
State and local agencies issue obligations that are payable from revenues
from or relating to certain facilities (but not from taxes). By judicial
interpretation, these obligations are not "debt" within constitutional
provisions. In general, payment obligations under lease-purchase agreements of
Ohio public agencies (in which certificates of participation may be issued) are
limited in duration to the agency's fiscal period, and are renewable only upon
appropriations being made available for the subsequent fiscal period.
Debt Rating. The outstanding State tax supported bonds are currently rated
"Aa" by Moody's and "AAA" (highway obligations) and "AA" by S&P, and the
outstanding State bonds issued by the Ohio Public Facilities Commission and Ohio
Building Authority are rated "A1" by Moody's and "A+" by S&P.
Schools and Municipalities. Local school districts in Ohio receive a major
portion (state-wide aggregate of approximately 44% in recent years) of their
operating moneys from State subsidies, but are dependent on local property
taxes, and in 120 districts from voter-authorized income taxes, for significant
portions of their budgets. Litigation, similar to that in other states, is
pending questioning the constitutionality of Ohio's system of school funding.
The trial court concluded that aspects of the system (including basic operating
assistance) are unconstitutional, and ordered the State to provide for and fund
a system complying with the Ohio Constitution. The State appealed and a court of
appeals reversed the trial court's findings for plaintiff districts. The case is
now pending on appeal in the Ohio Supreme Court. A small number of the State's
612 local school districts have in any year required special assistance to avoid
year-end deficits. A current program provides for school district cash need
borrowing directly from commercial lenders, with diversion of State subsidy
distributions to repayment if needed. Recent borrowings under this program
totalled
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$94.5 million for 27 districts (including $75 million for one) in FY 1993, $41.1
million for 28 districts in FY 1994, and $71.1 million for 29 districts in FY
1995.
Ohio's 943 incorporated cities and villages rely primarily on property and
municipal income taxes for their operations. With other subdivisions, they also
receive local government support and property tax relief moneys distributed by
the State. For those few municipalities that on occasion have faced significant
financial problems, there are statutory procedures for a joint State/local
commission to monitor the municipality's fiscal affairs and for development of a
financial plan to eliminate deficits and cure any defaults. Since inception in
1979, these procedures have been applied to 23 cities and villages; for 19 of
them the fiscal situation was resolved and the procedures terminated.
Property Taxes. At present the State itself does not levy ad valorem taxes
on real or tangible personal property. Those taxes are levied by political
subdivisions and other local taxing districts. The Constitution has since 1934
limited to 1% of true value in money the amount of the aggregate levy (including
a levy for unvoted general obligations) of property taxes by all overlapping
subdivisions, without a vote of the electors or a municipal charter provision,
and statutes limit the amount of that aggregate levy to 10 mills per $1 of
assessed valuation (commonly referred to as the "ten-mill limitation"). Voted
general obligations of subdivisions are payable from property taxes that are
unlimited as to amount or rate.
Litigation. According to recent State official statements, the State is a
party to various legal proceedings seeking damages or injunctive or other relief
and generally incidental to its operations. The ultimate disposition of those
proceedings is not determinable.
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 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
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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.
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.
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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.
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
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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 of 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 an extremely 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
C-22
<PAGE> 211
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.
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<PAGE> 212
MANAGEMENT
The management of Nuveen Tax-Free Bond Fund, Inc., including general
supervision of the duties performed for the Funds under the Investment
Management Agreement, is the responsibility of its Board of Directors. Currently
there are six directors, 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
directors and officers of Nuveen Tax-Free Bond Fund, Inc. and their principal
occupations and other affiliations during the past five years are set forth
below, with those directors who are "interested persons" indicated by an
asterisk.
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND ADDRESS AGE OFFICES WITH FUNDS DURING PAST FIVE YEARS
- ------------------------- --- --------------------- -------------------------------------------------------------
<S> <C> <C> <C>
Timothy R. Schwertfeger* 47 Chairman of the Board Chairman (since July 1, 1996) and Director, formerly
333 West Wacker Drive and Director Executive Vice President of The John Nuveen Company (since
Chicago, IL 60606 March 1992) and of John Nuveen & Co. Incorporated; Chairman
(since July 1, 1996) and Director (since October 1, 1992) of
Nuveen Advisory Corp. and Nuveen Institutional Advisory Corp.
Anthony T. Dean* 51 President and President (since July 1, 1996) and Director, formerly
333 West Wacker Drive Director Executive Vice President of The John Nuveen Company (since
Chicago, IL 60606 March 1992) and of John Nuveen & Co. Incorporated; President
(since July 1, 1996) and Director (since October 1, 1992) of
Nuveen Advisory Corp. and Nuveen Institutional Advisory Corp.
Lawrence H. Brown 61 Director Retired (August 1989) as Senior Vice President of The
201 Michigan Avenue Northern Trust Company.
Highwood, IL 60040
Anne E. Impellizzeri 63 Director President and Chief Executive Officer of Blanton-Peale,
3 West 29th Street Institutes of Religion and Health (since December 1990);
New York, NY 10001 prior thereto, Vice President of New York City Partnership
(from 1987 to 1990).
Margaret K. Rosenheim 69 Director Helen Ross Professor of Social Welfare Policy, School of
969 East 60th Street Social Service Administration, University of Chicago.
Chicago, IL 60637
Peter R. Sawers 63 Director 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 M. Fitzgerald 32 Vice President Vice President of Nuveen Advisory Corp. (since December
33 West Wacker Drive 1995); Assistant Vice President of Nuveen Advisory Corp.
Chicago, Illinois 60606 (from 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
333 West Wacker Drive Assistant Secretary and Assistant General Counsel of John Nuveen & Co.
Chicago, IL 60606 Incorporated; 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
333 West Wacker Drive Treasurer (since March 1992), John Nuveen & Co. Incorporated, Nuveen
Chicago, IL 60606 Advisory 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
333 West Wacker Drive Assistant Secretary and Assistant General Counsel of John Nuveen & Co.
Chicago, IL 60606 Incorporated; 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>
C-24
<PAGE> 213
Timothy R. Schwertfeger and Margaret K. Rosenheim serve as members of the
Executive Committee of the Board of Directors. The Executive Committee, which
meets between regular meetings of the Board of Directors, is authorized to
exercise all of the powers of the Board of Directors.
The directors of Nuveen Tax-Free Bond Fund, Inc. are also directors or
trustees, as the case may be, of 18 other Nuveen open-end fund portfolios and 53
Nuveen closed-end funds.
The following table sets forth compensation paid by Nuveen Tax-Free Bond
Fund, Inc. during the fiscal year ended February 29, 1996 to each of the
directors. The Nuveen Tax-Free Bond Fund, Inc. has no retirement or pension
plans. The officers and directors affiliated with Nuveen serve without any
compensation from the Nuveen Tax-Free Bond Fund, Inc.
<TABLE>
<CAPTION>
TOTAL COMPENSATION
AGGREGATE FROM THE FUND
COMPENSATION AND FUND COMPLEX
NAME OF DIRECTOR FROM THE FUND PAID TO DIRECTORS(1)
- ------------------------------------------------------------------------------------ ------------- --------------------
<S> <C> <C>
Richard J. Franke*.................................................................. $ 0 $ 0
Timothy R. Schwertfeger............................................................. 0 0
Lawrence H. Brown................................................................... 1,255 55,500
Anne E. Impellizzeri................................................................ 1,255 63,000
John E. O'Toole..................................................................... 1,031 47,000
Margaret K. Rosenheim............................................................... 1,378(2) 62,322(3)
Peter R. Sawers..................................................................... 1,255 55,500
</TABLE>
- ---------------
* Mr. Franke retired as of June 30, 1996.
(1) The directors of the Nuveen Tax-Free Bond Fund, Inc. are directors or
trustees, as the case may be, of 21 Nuveen open-end funds and 53 Nuveen
closed-end funds.
(2) Includes $161 in interest earned on deferred compensation from prior years.
(3) Includes $1,572 in interest earned on deferred compensation from prior
years.
Each director 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 Funds require no employees other than their officers, all of whom are
compensated by Nuveen.
C-25
<PAGE> 214
On June 5, 1996, the officers and directors of Nuveen Tax-Free Bond Fund,
Inc. 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
June 5, 1996, owned of record or was known by Nuveen Tax-Free Bond Fund, Inc. to
own of record or beneficially 5% or more of any class of shares of a Fund.
<TABLE>
<CAPTION>
NAME OF FUND AND CLASS NAME AND ADDRESS OF OWNER PERCENTAGE OF OWNERSHIP
- --------------------------------------------------------- ------------------------------------- -----------------------
<S> <C> <C>
Massachusetts Fund
Class A Shares......................................... Smith Barney Inc. 4.64%
00148920601
388 Greenwich Street
New York, NY 10013
Alex Brown & Sons Incorporated 5.89%
FBO 252-09790-10
PO Box 1346
Baltimore, MD 21203
MFSC FEBO # OC8-412740 5.83%
Barbara Polverari
PO Box 30
Springfield, MA 01090
Massachusetts Fund
Class C Shares......................................... Hudson & Matson 18.69%
39 Greggs Rd.
Sutton, MA 01590-1015
Swastika Sengupta 11.06%
23 Loumar Dr., #2
Pittsfield, MA 01201-5932
Anthony Macolini 6.96%
17 Nossdale Rd.
Jamaica Plain, MA 02130-3022
Charles G. Allen, Jr. TR. 6.39%
UA MAR 05 54
UW Flora A. Generess
FBO Charles G. Allen, Jr. et al.
221 James St., #65
Barre, MA 01005-8805
Mary W. Melville 5.16%
4 Paul Revere Rd.
Worcester, MA 01609-1210
New York Fund
Class A Shares......................................... BHC Securities, Inc. 7.65%
ATTN: Mutual Funds
One Commerce Square
2005 Market St., Ste. 1200
Philadelphia, PA 19103-7042
Donaldson Lufkin Jenrette Securities 7.04%
Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303-9998
New York Fund
Class C Shares......................................... Katherine C. Hinton & 15.63%
Lorin W. Lyle
JT TEN WROS NOT TC
100 LaSalle St., Apt. 11F
New York, NY 10027-4738
Carol Wieder 13.36%
315 Vista Dr.
Jericho, NY 11753-2808
Ceila W. Bugenhagen & 8.04%
Kenneth Bugenhagen
JT TEN WROS NOT TC
552 Forest Edge Dr.
East Amherst, NY 14051-2468
Adam S. Katz & 6.67%
Karen Katz
JT TEN WROS NOT TC
2276 Merrick Ave.
Merrick, NY 11566
Carol P. & Yale Rosen Tr. 5.47%
UA DCT 16 95
Carol P. Rosen Living Trust
854 Oakland Ct.
North Bellmore, NY 11710-1018
New York Fund
Class R Shares......................................... BHC Securities, Inc. 9.25%
ATTN: Mutual Funds
One Commerce Square
2005 Market St., Ste. 1200
Philadelphia, PA 19103-7042
</TABLE>
C-26
<PAGE> 215
<TABLE>
<CAPTION>
NAME OF FUND AND CLASS NAME AND ADDRESS OF OWNER PERCENTAGE OF OWNERSHIP
- --------------------------------------------------------- ------------------------------------- -----------------------
<S> <C> <C>
Ohio Fund
Class A Shares......................................... Ann Zlatoper 8.26%
100 Windrush Dr.
Chagrin Falls, OH 44022-6843
Ohio Fund
Class C Shares......................................... Timothy L. Horn 14.86%
2109 Fishinger Rd.
Columbus, OH 43221-1246
Milo L. Renz 10.24%
119 Cardinal Drive
Bryan, OH 43506
NFSC FEBO # A7D-559865 10.09%
ADCO Distributors, Inc.
ATTN: Barry Adelman
221 Cherry, N.E.
Canton, OH 44702
</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 Nuveen Tax-Free Bond Fund Inc.'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 directors or officers if elected to such positions. See
"Management of the Funds" in the Prospectus.
Pursuant to an investment management agreement between Nuveen Advisory and
Nuveen Tax-Free Bond Fund, Inc., 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 any fiscal
year, Nuveen Advisory has agreed to waive all or a portion of its management
fees or reimburse certain expenses of each Fund. Nuveen Advisory may also
voluntarily agree to reimburse additional expenses from time to time, which
voluntary reimbursements may be terminated at any time in its discretion. For
the last three fiscal years, the Funds paid net management fees to Nuveen
Advisory as follows:
<TABLE>
<CAPTION>
MANAGEMENT FEES NET OF EXPENSE FEE WAIVERS AND
REIMBURSEMENT PAID TO NUVEEN EXPENSE REIMBURSEMENTS FOR
ADVISORY FOR THE YEAR ENDED THE YEAR ENDED
---------------------------------------- --------------------------------
2/28/94 2/28/95 2/29/96 2/28/94 2/28/95 2/29/96
---------- ---------- ---------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Massachusetts Fund................................ $ 320,135 $ 370,394 $ 366,859 $37,413 $17,319 $ 59,879
New York Fund..................................... 688,156 786,847 852,809 34,007 4,556 29,700
Ohio Fund......................................... 831,787 873,409 914,277 6,228 3,524 42,592
Total For All Funds............................... 1,840,078 2,030,650 2,133,945 77,648 25,399 132,171
</TABLE>
As discussed in the Prospectus, in addition to the management fees of
Nuveen Advisory, each Fund pays all other costs and expenses of its operations
and a portion of Nuveen Tax-Free Bond Fund Inc.'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 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
C-27
<PAGE> 216
Company which, in turn, is approximately 80% 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, 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 interest of Fund shareholders are placed before the
interest 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 Directors.
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 Directors 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 Directors, including a majority of the directors who are not interested
persons of the Funds.
C-28
<PAGE> 217
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 Funds' 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. The annual distribution fee to which Class C
shares are subject is accrued each day as a liability of the Fund with respect
to the Class C shares, and accordingly reduces the net asset value of those
shares.
In determining net asset value for each of the Funds, the Funds' custodian
utilizes the valuations of portfolio securities furnished by a pricing service
approved by the directors. 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 Funds under the general
supervision of the Board of Directors.
TAX MATTERS
FEDERAL INCOME TAX MATTERS
The following discussion of federal income tax matters is based upon the
advice of Fried, Frank, Harris, Shriver and Jacobson, Washington, D.C., counsel
to the Funds.
As described in the Prospectus, each Fund intends to qualify, as it has in
prior years, 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 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.
C-29
<PAGE> 218
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 investment
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 United States 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 in 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 deduction 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.
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.
- ---------------
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.
C-30
<PAGE> 219
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 rate of tax 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 gain 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 in determining the amount of ordinary taxable income
for the current calendar year (and, instead, include such gains and losses in
determining ordinary taxable income for the succeeding 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.
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
C-31
<PAGE> 220
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 back-up 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 or 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. The state tax information below assumes that each Fund
qualifies as a regulated investment company for federal income tax purposes
under Subchapter M of the Code, and that the amounts so designated by each Fund
to its shareholders qualify as "exempt-interest dividends" under Section
852(b)(5) of the Code. 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 MASSACHUSETTS TAX-FREE VALUE FUND
Individual shareholders of the Massachusetts Fund who are subject to
Massachusetts income taxation will not be required to include that portion of
their federally tax-exempt dividends in Massachusetts gross income which the
Massachusetts Fund clearly identifies as directly attributable to interest
earned on Municipal Obligations issued by governmental authorities in
Massachusetts and which are specifically exempted from income taxation in
Massachusetts; provided that such portion is identified in a written notice
mailed to the shareholders of the Massachusetts Fund not later than sixty days
after the close of the Massachusetts Fund's tax year. Also, the individual
shareholders of the Massachusetts Fund will not be required to include in gross
income interest earned on obligations of United States possessions and
territories to the extent interest earned on such obligations is exempt from
taxation by the states pursuant to federal law.
Similarly, such shareholders will not be required to include in
Massachusetts gross income capital gain dividends designated by the
Massachusetts Fund to the extent such dividends are attributable to gains
derived from Municipal Obligations issued by Massachusetts governmental
authorities and are specifically exempted from income taxation in Massachusetts,
provided that such dividends are identified in a written notice mailed to the
shareholders of the Massachusetts Fund not later than sixty days after the close
of the Massachusetts Fund's tax year. Lastly, any dividends of the Massachusetts
Fund attributable to interest on U.S. obligations exempt from state taxation and
included in Federal gross income will not be included in Massachusetts gross
income if identified by the Massachusetts Fund in a written notice mailed to
shareholders within sixty days after the close of the Massachusetts Fund's tax
year. Massachusetts shareholders will be required to include all remaining
dividends in their Massachusetts income.
C-32
<PAGE> 221
To the extent not otherwise exempted from Massachusetts income taxation as
provided above, the Massachusetts Fund's long-term capital gains for federal
income tax purposes will be taxed as long-term capital gains to the individual
shareholders of the Massachusetts Fund for purposes of Massachusetts income
taxation. Massachusetts shareholders will be required to recognize any taxable
gain or loss that is recognized for federal income tax purposes upon an exchange
or redemption of their shares.
If a shareholder of the Massachusetts Fund is a Massachusetts business
corporation or any foreign business corporation which exercises its charter,
qualifies to do business, actually does business or owns or uses any part of its
capital, plant or other property in Massachusetts, then it will be subject to
Massachusetts excise taxation either as a tangible property corporation or as an
intangible property corporation. If the corporate shareholder is a tangible
property corporation, it will be taxed upon its net income allocated to
Massachusetts and the value of certain tangible property. If it is an intangible
property corporation, it will be taxed upon its net income and net worth
allocated to Massachusetts. Net income is gross income less allowable deductions
for federal income tax purposes, subject to specified modifications. Dividends
received from the Massachusetts Fund are includable in gross income and
generally may not be deducted by a corporate shareholder in computing its net
income. The corporation's shares in the Massachusetts Fund are not includable in
the computation of the tangible property base of a tangible
property corporation, but are includable in the computation of the net worth
base of an intangible property corporation.
Shares of the Massachusetts Fund will be includable in the Massachusetts
gross estate of a deceased individual shareholder who is a resident of
Massachusetts for purposes of the Massachusetts Estate Tax.
Shares of the Massachusetts Fund will be exempt from local property taxes
in Massachusetts.
NUVEEN NEW YORK TAX-FREE VALUE FUND
Individual shareholders of the New York Fund who are subject to New York
State (or New York City) personal income taxation will not be required to
include in their New York adjusted gross income that portion of their exempt-
interest dividends (as determined for federal income tax purposes) which the New
York Fund clearly identifies as directly attributable to interest earned on
Municipal Obligations issued by governmental authorities in New York ("New York
Municipal Obligations") and which are specifically exempted from personal income
taxation in New York State (or New York City), or interest earned on obligations
of United States possessions or territories to the extent interest earned on
such obligations is exempt from taxation by the states pursuant to federal law.
Distributions to individual shareholders of dividends derived from interest that
does not qualify as an exempt-interest dividend (as determined for federal
income tax purposes), distributions of exempt-interest dividends (as determined
for federal income tax purposes) which are derived from interest earned on
Municipal Obligations issued by governmental authorities in states other than
New York State, and distributions derived from interest earned on federal
obligations will be included in their New York adjusted gross income as ordinary
income.
Distributions to individual shareholders of the New York Fund of capital
gain dividends (as determined for federal income tax purposes) will be included
in their New York adjusted gross income as long-term capital gains.
Distributions to individual shareholders of the New York Fund of dividends
derived from any net income received from taxable temporary investments and any
net short-term capital gains realized by the New York Fund will be included in
their New York adjusted gross income as ordinary income. Present New York law
taxes long-term capital gains at the rates applicable to ordinary income.
Gain or loss, if any, resulting from an exchange or redemption of shares of
the New York Fund that is recognized by individual shareholders of the New York
Fund for federal income tax purposes will be recognized for purposes of New York
State (or New York City) personal income taxation.
Generally, corporate shareholders of the New York Fund which are subject to
New York State franchise taxation (or New York City general corporation
taxation) will be taxed upon their entire net income, business and investment
capital, or at a flat rate minimum tax. Entire income will include dividends
received from the New York Fund (as determined for federal income tax purposes),
as well as any gain or loss recognized from an exchange or redemption of shares
of the New York Fund that is recognized for federal income tax purposes.
Investment capital will include the corporate shareholder's shares of the New
York Fund. Corporate shareholders of the New York Fund, which are subject to the
temporary metropolitan transportation surcharge, will be required to pay a tax
surcharge on the franchise taxes imposed by New York State.
Shareholders of the New York Fund will not be subject to New York City
unincorporated business taxation solely by reason of their ownership of shares
of the New York Fund. If a shareholder of the New York Fund is subject to the
New York City unincorporated business tax, income and gains derived from the New
York Fund will be subject to such
C-33
<PAGE> 222
tax, except for exempt-interest dividends (as determined for federal income tax
purposes) which the New York Fund clearly identifies as directly attributable to
interest earned on New York Municipal Obligations.
Shares of the New York Fund will be exempt from local property taxes in New
York State and New York City, but will be includible in the New York gross
estate of a deceased individual shareholder who is a resident of New York for
purposes of the New York Estate Tax.
NUVEEN OHIO TAX-FREE VALUE FUND
The Ohio Fund is not subject to the Ohio personal income tax, municipal or
school district income taxes in Ohio, the Ohio corporation franchise tax, or the
Ohio dealers in intangibles tax, provided that, with respect to the Ohio
corporation franchise tax and the Ohio dealers in intangibles tax, the Ohio Fund
timely files the annual report required by Section 5733.09 of the Ohio Revised
Code.
Shareholders of the Ohio Fund ("Shareholders") who are otherwise subject to
the Ohio personal income tax, or municipal or school district income taxes in
Ohio will not be subject to such taxes on distributions with respect to shares
of the Ohio Fund to the extent that such distributions are properly attributable
to interest on or gain from the sale of interest-bearing obligations issued by
or on behalf of the State of Ohio, political subdivisions thereof and agencies
or instrumentalities of the State or its political subdivisions ("Ohio
Obligations") provided that the Ohio Fund continues to qualify as a regulated
investment company for federal income tax purposes and that at all times at
least 50% of the value of the total assets of the Ohio Fund consists of Ohio
Obligations or similar obligations of other states or their subdivisions. It is
assumed for purposes of this discussion of Ohio taxation that these requirements
are satisfied. Gain recognized by such individual shareholders on the exchange
or redemption of shares of the Fund will be subject to the Ohio personal income
tax and school district income taxes in Ohio; such gain may be subjected to
municipal income tax only by those Ohio municipalities that are authorized by
State law to tax intangible income.
Shareholders that are otherwise subject to the Ohio corporation franchise
tax computed on the net income basis will not be subject to such tax on
distributions with respect to shares of the Ohio Fund to the extent that such
distributions either (a) are properly attributable to interest on or gain from
the sale of Ohio Obligations, or (b) represent "exempt-interest dividends" for
federal income tax purposes. Shares of the Ohio Fund will be included in a
Shareholder's tax base for purposes of computing the Ohio corporation franchise
tax on the net worth basis. Corporate Shareholders that are subject to Ohio
municipal income taxes will not be subject to such taxes on distributions
received from the Ohio Fund to the extent such distributions consist of interest
on or gain from the sale of Ohio Obligations.
Distributions by the Ohio Fund that consist of interest on obligations of
the United States or the governments of Puerto Rico, the Virgin Islands or Guam
or their authorities or municipalities are exempt from Ohio personal income tax,
and municipal and school district income taxes in Ohio, and are excluded from
the net income base of the Ohio corporation franchise tax to the same extent
that such interest would be so exempt or excluded if the obligations were held
directly by the Shareholders.
The value of shares of the Fund is included in the value of the gross
estate of decedents domiciled in Ohio for purposes of the Ohio estate tax. The
value of shares of the Fund may be included in the value of the gross estate of
decedents not domiciled in Ohio for such purposes only if the shares were
employed in carrying on business in Ohio.
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:
<TABLE>
<S> <C> <C>
a - b
Yield = 2 [ ( ______ +1 ) 6 - 1]
cd
</TABLE>
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%.
C-34
<PAGE> 223
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
the Fund's financial statements. Yields for each class of shares of each Fund as
of February 29, 1996 are set forth below.
Taxable equivalent yield is computed by dividing that portion of the yield
which is tax-exempt by remainder of (1 minus the stated combined federal and
state income tax rate, taking into account the deductibility of state income
taxes for federal income tax purposes) and adding the result to that portion, if
any, of the yield of 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 February 29, 1996 quoted in
the left-hand column.
<TABLE>
<CAPTION>
COMBINED
FEDERAL TAXABLE
AND STATE EQUIVALENT
AS OF FEBRUARY 29, 1996 YIELD TAX RATE* YIELD
- ------------------------------------------------------------------------------------ ------ ---------- -----------
<S> <C> <C> <C>
Massachusetts Fund
Class A Shares.................................................................... 4.16% 47.0% 7.85%
Class C Shares.................................................................... 3.60% 47.0% 6.79%
Class R Shares.................................................................... 4.61% 47.0% 8.70%
New York Fund
Class A Shares.................................................................... 4.29% 46.5%** 8.02%
Class C Shares.................................................................... 3.74% 46.5%** 6.99%
Class R Shares.................................................................... 4.75% 46.5%** 8.88%
Ohio Fund
Class A Shares.................................................................... 4.06% 44.0% 7.25%
Class C Shares.................................................................... 3.49% 44.0% 6.23%
Class R Shares.................................................................... 4.51% 44.0% 8.05%
</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 New York City 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 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. The distribution
rates as of February 29, 1996, based on 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>
Massachusetts Fund.................................................................... 4.96% 4.49% 5.45%
New York Fund......................................................................... 4.97% 4.45% 5.47%
Ohio Fund............................................................................. 4.86% 4.32% 5.33%
</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
C-35
<PAGE> 224
during the period. The average annual total return figures, including the effect
of the current maximum sales charge for Class A Shares, for the one-year and
five-year periods ended February 29, 1996, and for the period from inception (on
December 10, 1986, 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 February
29, 1996, respectively, were as follows:
<TABLE>
<CAPTION>
ANNUAL TOTAL RETURN
-------------------------------------------------------------
ONE YEAR FIVE YEARS FROM INCEPTION
ENDED ENDED THROUGH
FEBRUARY 29, 1996 FEBRUARY 29, 1996 FEBRUARY 29, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Massachusetts Fund Class A Shares................................ 4.69% N/A 5.25%
Class C Shares................................................. 8.87% N/A 9.91%
Class R Shares................................................. 9.80% 8.32% 6.82%
New York Fund Class A Shares..................................... 5.55% N/A 5.25%
Class C Shares................................................. 10.13% N/A 8.86%
Class R Shares................................................. 10.80% 8.97% 7.86%
Ohio Fund Class A Shares......................................... 4.51% N/A 5.53%
Class C Shares................................................. 8.55% N/A 8.41%
Class R Shares................................................. 9.70% 8.34% 7.80%
</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 cumulative total return figures, including the effect of the current
maximum sales charge for the Class A Shares, for the one-year and five-years
periods ended February 29, 1996, and for the period from inception (on December
10, 1986 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 February 29,
1996, respectively, were as follows:
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN
-------------------------------------------------------------
ONE YEAR FIVE YEARS FROM INCEPTION
ENDED ENDED THROUGH
FEBRUARY 29, 1996 FEBRUARY 29, 1996 FEBRUARY 29, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Massachusetts Fund Class A Shares................................ 4.69% N/A 7.88%
Class C Shares................................................. 8.87% N/A 14.16%
Class R Shares................................................. 9.80% 49.12% 83.38%
New York Fund Class A Shares..................................... 5.55% N/A 7.88%
Class C Shares................................................. 10.13% N/A 13.21%
Class R Shares................................................. 10.80% 53.70% 100.49%
Ohio Fund Class A Shares......................................... 4.51% N/A 8.30%
Class C Shares................................................. 8.55% N/A 12.48%
Class R Shares................................................. 9.70% 49.27% 99.39%
</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
1995, and assuming that no front-end sales charge is imposed, the annualized
taxable equivalent total returns for each Fund's Shares for the one-year and
five-year periods ended February 28, 1994, and for all classes for the period
from inception (on December 10, 1986 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 February 29, 1996, respectively, were as follows:
C-36
<PAGE> 225
<TABLE>
<CAPTION>
ONE YEAR ENDED FIVE YEARS ENDED FROM INCEPTION THROUGH
FEBRUARY 29, 1996 FEBRUARY 29, 1996 FEBRUARY 29, 1996
---------------------- ---------------------- ----------------------
WITH WITH WITH COMBINED
MAXIMUM AT NET MAXIMUM AT NET MAXIMUM AT NET FEDERAL
4.50% SALES ASSET 4.50% SALES ASSET 4.50% SALES ASSET AND STATE
CHARGE VALUE CHARGE VALUE CHARGE VALUE TAX RATE*
----------- ------ ----------- ------ ----------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Massachusetts Fund
Class A Shares................... 9.41% 14.57% N/A N/A 10.16% 13.64% 47.0%
Class C Shares................... N/A 13.14% N/A N/A N/A 14.53% 47.0%
Class R Shares................... N/A 15.00% N/A 13.63% N/A 12.48% 47.0%
New York Fund**
Class A Shares................... 10.19% 15.38% N/A N/A 10.03% 13.51% 46.5%
Class C Shares................... N/A 14.31% N/A N/A N/A 13.10% 46.5%
Class R Shares................... N/A 15.92% N/A 14.19% N/A 13.47% 46.5%
Ohio Fund
Class A Shares................... 8.59% 13.71% N/A N/A 9.80% 13.26% 44.0%
Class C Shares................... N/A 12.21% N/A N/A N/A 12.18% 44.0%
Class R Shares................... N/A 14.18% N/A 12.97% N/A 12.82% 44.0%
</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 New York City 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 deviation of monthly returns for the three
years ended February 29, 1996, for the Class R Shares of each of the Funds, was
as follows:
<TABLE>
<CAPTION>
STANDARD
DEVIATION
OF RETURN
---------
<S> <C>
Massachusetts Fund.................................................................... 5.40%
New York Fund......................................................................... 5.79%
Ohio Fund............................................................................. 5.74%
</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
February 29, 1996, for the Class R Shares of each of the Funds, was as follows:
<TABLE>
<CAPTION>
SHARPE
MEASURE
----------
<S> <C>
Massachusetts Fund................................................................... 0.488
New York Value Fund.................................................................. 0.518
Ohio Fund............................................................................ 0.489
</TABLE>
C-37
<PAGE> 226
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 be typically 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 fees. 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-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 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 February 29, 1996 of Class
A shares from the Massachusetts
C-38
<PAGE> 227
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....................................................................... $ 9.94
Per Share Sales Charge--4.50% of public offering price (4.71% of net asset value per share)..... $ 0.468
Per Share Offering Price to the Public.......................................................... $10.408
</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 and distribution 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 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.
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." 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, directors and retired directors of the Fund;
- bona fide, full-time and retired employees of Nuveen and its
affiliates, 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
C-39
<PAGE> 228
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.
Exchange 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.
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 Nuveen Tax-Free Bond Fund, Inc., dated January 2, 1990, and last
renewed on July 27, 1995 ("Distribution Agreement"). Pursuant to the
Distribution Agreement, Nuveen Tax-Free Bond Fund, Inc. 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
Nuveen Tax-Free Bond Fund, Inc. 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
Nuveen Tax-Free Bond Fund, Inc. 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
such 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. Nuveen also receives any CDSCs imposed on redemptions of
certain Class A Shares redeemed within 18 months of purchase.
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
FEBRUARY 29, 1996 FEBRUARY 28, 1995 FEBRUARY 28, 1994
---------------------------- ---------------------------- ----------------------------
AMOUNT OF AMOUNT AMOUNT OF AMOUNT AMOUNT OF AMOUNT
UNDERWRITING RETAINED BY UNDERWRITING RETAINED BY UNDERWRITING RETAINED BY
FUND COMMISSIONS NUVEEN COMMISSIONS NUVEEN COMMISSIONS NUVEEN
- --------------------------------- ------------ ----------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Massachusetts Fund............... $ 96 $12 $170 $20 $430 $ 52
New York Fund.................... $272 $33 $428 $64 $989 $ 146
Ohio Fund........................ $228 $34 $471 $55 $980 $ 144
</TABLE>
C-40
<PAGE> 229
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 Directors.
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 February 29, 1996, 100% of service 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
February 29, 1996 for each Fund per class of shares were as follows:
<TABLE>
<CAPTION>
COMPENSATION PAID TO
AUTHORIZED DEALERS FOR YEAR
ENDED FEBRUARY 29, 1996
---------------------------
<S> <C>
Massachusetts Fund
Class A..................................................................... $ 6,732
Class C..................................................................... $ 2,609
Class R..................................................................... N/A
New York Fund
Class A..................................................................... $26,638
Class C..................................................................... $ 4,101
Class R..................................................................... N/A
Ohio Fund
Class A..................................................................... $21,336
Class C..................................................................... $14,282
Class R..................................................................... N/A
</TABLE>
Under each Fund's Plan, the Fund will report quarterly to the Board of
Directors for its review of 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
directors 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 Directors and a vote of the non-interested
directors 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 directors 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
directors 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 directors of the Fund will be committed to
the discretion of the non-interested directors then in office.
C-41
<PAGE> 230
INDEPENDENT PUBLIC ACCOUNTANTS AND CUSTODIAN
Arthur Andersen LLP, independent public accountants, 33 W. Monroe Street,
Chicago, Illinois 60603 have been selected as auditors for Nuveen Tax-Free Bond
Fund, Inc. 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.
C-42
<PAGE> 231
NUVEEN TAX-FREE MUTUAL FUNDS
PORTFOLIO OF INVESTMENTS
NEW YORK
FEBRUARY 29, 1996
<TABLE>
<CAPTION>
PRINCIPAL OPT. CALL MARKET
AMOUNT DESCRIPTION PROVISIONS* RATINGS** VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 4,000,000 New York Local Government Assistance Corporation, 5.500%, 4/01/21... 4/03 at 102 A $ 3,844,720
500,000 New York State (Commissioner of Office of Mental Health),
Certificates of Participation, 8.300%, 9/01/12.................... 9/97 at 102 Baa1 536,065
3,000,000 New York State Energy Research and Development Authority, 6.100%,
8/15/20........................................................... 7/05 at 102 A1 3,106,530
1,545,000 New York State Environmental Facilities Corporation (State Park
Infrastructure), 5.750%, 3/15/13.................................. 3/03 at 101 Baa1 1,535,823
3,000,000 New York State General Obligation, 5.625%, 10/01/20................. 10/05 at 101 A 3,004,890
200,000 New York State Housing Finance Agency, State University
Construction, 8.000%, 5/01/11..................................... No Opt. Aaa 255,060
Calls
1,650,000 New York State Housing Finance Agency, Insured Multi-Family Mortgage
Housing, 6.950%, 8/15/12.......................................... 8/02 at 102 Aa 1,770,104
2,000,000 New York State Housing Finance Agency, Health Facilities (New York
City), 8.000%, 11/01/08........................................... 11/00 at 102 BBB+ 2,257,780
New York State Housing Finance Agency, Service Contract Obligation:
500,000 6.125%, 3/15/20................................................... 9/03 at 102 Baa1 511,215
3,750,000 5.500%, 9/15/22................................................... 9/03 at 102 Baa1 3,528,450
3,000,000 6.500%, 3/15/25................................................... 9/05 at 102 Baa1 3,170,940
1,000,000 New York State Medical Care Facilities Finance Agency, Hospital and
Nursing Home, Insured Mortgage (St. Vincent's Hospital), 8.000%,
2/15/27 (Pre-refunded to 8/15/97)................................. 8/97 at 102 Aaa 1,065,830
995,000 New York State Medical Care Facilities Finance Agency, Hospital and
Nursing Home, Insured Mortgage (Albany Medical Center), 8.000%,
2/15/28........................................................... 8/98 at 102 AAA 1,085,396
1,000,000 New York State Medical Care Facilities Finance Agency, Hospital and
Nursing Home, FHA-Insured, 7.350%, 2/15/29........................ 8/99 at 102 Aa 1,083,640
1,000,000 New York State Medical Care Facilities Finance Agency, Hospital and
Nursing Home, FHA-Insured (Buffalo General Hospital), 7.700%,
2/15/22 (Pre-refunded to 8/15/98)................................. 8/98 at 102 AAA 1,111,020
1,250,000 New York State Medical Care Facilities Finance Agency, Hospital and
Nursing Home, FHA-Insured (Catholic Medical Center), 8.300%,
2/15/22 (Pre-refunded to 2/15/98)................................. 2/98 at 102 AAA 1,381,725
2,250,000 New York State Medical Care Facilities Finance Agency, Hospital and
Nursing Home (Columbia-Presbyterian), 8.000%, 2/15/25
(Pre-refunded to 8/15/97)......................................... 8/97 at 102 Aaa 2,430,315
New York State Medical Care Facilities Finance Agency, Hospital and
Nursing Home (Mental Health Services):
1,460,000 7.500%, 2/15/21................................................... 2/01 at 102 AAA 1,696,038
2,000,000 5.500%, 8/15/21................................................... 2/02 at 100 AAA 1,947,860
1,500,000 6.500%, 8/15/24................................................... 8/04 at 102 Baal 1,583,250
2,000,000 New York State Medical Care Facilities Finance Agency, Hospital and
Nursing Home FHA-Insured, 6.200%, 8/15/22......................... 8/02 at 102 AAA 2,087,460
1,520,000 New York State Medical Care Facilities Finance Agency, Hospital and
Nursing Home, FHA-Insured (Bayley Seton/St. Joseph's Hospital),
6.450%, 2/15/09................................................... 2/03 at 102 AAA 1,662,698
2,500,000 New York State Medical Care Facilities Finance Agency, Hospital and
Nursing Home, FHA-Insured (St. Vincent's Medical Center), 6.200%,
2/15/21........................................................... 2/04 at 102 AAA 2,581,475
1,250,000 New York State Medical Care Facilities Finance Agency, Hospital and
Nursing Home (New York Downtown Hospital), 6.700%, 2/15/12........ 2/05 at 102 Baa 1,298,638
2,480,000 New York State Medical Care Facilities Finance Agency, Hospital and
Nursing Home, 6.400%, 8/15/14..................................... 8/04 at 102 AAA 2,622,327
New York State Medical Care Facilities Finance Agency, Hospital and
Nursing Home, FHA-Insured New York Hospital:
1,000,000 6.750%, 8/15/14................................................... 2/05 at 102 Aaa 1,125,190
1,000,000 6.800%, 8/15/24................................................... 2/05 at 102 Aaa 1,134,930
New York State Medical Care Facilities Finance Agency, Hospital and
Nursing Home (Brookdale Hospital Medical Center):
1,000,000 6.400%, 2/15/01................................................... No Opt. Call Baa 1,035,520
2,700,000 6.800%, 8/15/12................................................... 2/05 at 102 Baa 2,826,306
1,000,000 New York State Medical Care Facilities Finance Agency, Hospital and
Nursing Home (Health Care Center), 6.375%, 11/15/19............... 11/05 at 102 Aa 1,048,710
380,000 New York State Mortgage Agency, 8.100%, 10/01/17.................... 4/98 at 102 Aa 404,768
</TABLE>
C-43
<PAGE> 232
<TABLE>
<CAPTION>
PRINCIPAL OPT. CALL MARKET
AMOUNT DESCRIPTION PROVISIONS* RATINGS** VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 1,000,000 New York State Urban Development Corporation, 6.750%, 1/01/26....... 1/02 at 102 Aaa $ 1,106,060
1,100,000 New York State Urban Development Corporation (Syracuse University
Center for Science and Technology), 7.875%, 1/01/17 (Pre-refunded
to 1/01/98)....................................................... 1/98 at 102 Baal 1,200,573
New York State Urban Development Corporation, Correctional Capital
Facilities:
1,000,000 5.625%, 1/01/07................................................... 1/03 at 102 Baal 1,002,330
2,490,000 5.750%, 1/01/13................................................... 1/03 at 102 Baal 2,421,799
1,250,000 5.500%, 1/01/15................................................... 1/03 at 102 Baal 1,195,538
1,000,000 7.500%, 1/01/20 (Pre-refunded to 1/01/00)......................... 1/00 at 102 AAA 1,137,820
2,000,000 New York State Urban Development Corporation (Clarkson Center for
Advanced Materials Processing), 7.800%, 1/01/20 (Pre-refunded
to 1/01/01)....................................................... 1/01 at 102 Baal 2,335,260
2,900,000 New York State Urban Development Corporation, State Facilities,
7.500%, 4/01/20 (Pre-refunded to 4/01/01)......................... 4/01 at 102 Aaa 3,378,268
1,000,000 New York State Urban Development Corporation (Cornell Center for
Theory and Simulation), 6.000%, 1/01/14........................... 1/03 at 102 Baa 1,005,010
2,615,000 New York State Urban Development Corporation (Pine Barrens), 5.375%,
4/01/17........................................................... 4/05 at 102 Baal 2,391,574
2,100,000 Babylon Industrial Development Agency, Resource Recovery, 8.500%,
1/01/19........................................................... 7/98 at 103 Baal 2,376,927
1,000,000 Batavia Housing Authority, FHA-Insured (Washington Towers), 6.500%,
1/01/23........................................................... 7/01 at 102 Aaa 1,025,060
1,000,000 Brookhaven Industrial Development Agency, Civic Facility (Dowling
College/National Aviation Center), 6.750%, 3/01/23................ 3/03 at 102 BBB 1,041,710
2,000,000 New York State, Certificates of Participation (John Jay College of
Criminal Justice), 6.000%, 8/15/06................................ No Opt. Call Baal 2,077,080
500,000 Dormitory Authority of the State of New York (Long Island Jewish
Medical Center), FHA-Insured, 7.750%, 8/15/27..................... 2/98 at 102 AAA 536,535
Dormitory Authority of the State of New York (City University):
1,500,000 5.750%, 7/01/07................................................... No Opt. Call Baal 1,522,980
750,000 7.500%, 7/01/10................................................... No Opt. Call Baal 886,005
2,225,000 5.750%, 7/01/12................................................... No Opt. Call Baal 2,244,780
1,500,000 5.500%, 7/01/12................................................... 7/03 at 102 Baal 1,440,540
500,000 8.200%, 7/01/13................................................... 7/98 at 102 Baal 553,735
1,000,000 7.625%, 7/01/20................................................... 7/00 at 102 AAA 1,154,640
750,000 Dormitory Authority of the State of New York, GNMA (Park Ridge
Housing, Inc), 7.850%, 2/01/29.................................... 2/99 at 102 AAA 819,203
1,985,000 Dormitory Authority of the State of New York (United Health
Services), 7.350%, 8/01/29........................................ 2/00 at 102 AAA 2,165,159
3,500,000 Dormitory Authority of the State of New York (Nursing Homes),
5.750%, 7/01/17................................................... 7/05 at 102 Aa3 3,438,505
Dormitory Authority of the State of New York (State University):
2,000,000 7.400%, 5/15/01................................................... 5/00 at 102 Baal 2,187,740
2,000,000 5.500%, 5/15/08................................................... No Opt. Call Baal 1,998,060
1,125,000 5.250%, 5/15/09................................................... No Opt. Call Baal 1,086,446
2,000,000 5.500%, 5/15/13................................................... No Opt. Call Baal 1,964,900
2,250,000 Dormitory Authority of the State of New York, Judicial Facilities
(Suffolk County), 9.500%, 4/15/14................................. 4/96 at Baa1 2,625,480
116 3/32
1,375,000 Dormitory Authority of the State of New York (University of
Rochester, Strong Memorial Hospital), 5.500%, 7/01/21............. 7/04 at 102 A1 1,337,353
4,000,000 Dormitory Authority of the State of New York, Court Facilities,
5.625%, 5/15/13................................................... 5/03 at Baal 3,835,840
101 1/2
2,195,000 Dormitory Authority of the State of New York (Upstate Community
Colleges), 6.500%, 7/01/07........................................ No Opt. Call Baal 2,362,786
2,470,000 Dutchess County Industrial Development Authority, Civic Facilities
(Bard College), 7.000%, 11/01/17.................................. 11/03 at 102 A 2,643,369
1,000,000 Franklin County Industrial Development Agency (County Correctional
Facility), 6.750%, 11/01/12....................................... 11/02 at 102 BBB 1,068,490
750,000 Hempstead Industrial Development Authority, Civic Facility (United
Cerebral Palsy Association of Nassau County), 7.500%, 10/01/09.... 10/99 at 102 Aa2 797,168
2,500,000 Housing New York Corporation, 5.000%, 11/01/13...................... 11/03 at 102 AA 2,298,650
1,000,000 Metropolitan Transportation Authority, Commuter Facilities, 6.250%,
7/01/17........................................................... 7/02 at 102 Aaa 1,064,320
1,000,000 Metropolitan Transportation Authority, Commuter Facilities Service
Contract, 7.500%, 7/01/16 (Pre-refunded to 7/01/00)............... 7/00 at 102 Aaa 1,149,720
1,025,000 Metropolitan Transportation Authority, Transit Facilities, 6.500%,
7/01/18........................................................... 7/02 at 102 Aaa 1,130,503
1,055,000 Monroe County Water Authority, Water System, 6.000%, 8/01/17........ 8/02 at 102 AA 1,076,944
New York City General Obligation:
2,500,000 7.000%, 8/01/04................................................... No Opt. Call Baal 2,732,325
2,000,000 7.500%, 2/01/06................................................... 2/02 at Baal 2,236,000
101 1/2
45,000 6.625%, 8/01/13................................................... 8/02 at Aaa 49,738
101 1/2
2,500,000 6.000%, 2/15/20................................................... 2/05 at 101 Baal 2,424,300
</TABLE>
C-44
<PAGE> 233
<TABLE>
<CAPTION>
PRINCIPAL OPT. CALL MARKET
AMOUNT DESCRIPTION PROVISIONS* RATINGS** VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
New York City Housing Development Corporation, Multi-Family Mortgage
(FHA Insured):
$ 2,000,000 6.550%, 10/01/15.................................................. 4/03 at 102 AAA $ 2,093,180
2,500,000 5.850%, 5/01/26................................................... 5/03 at 102 AA 2,492,724
1,000,000 New York City Housing Development Corporation, Multi-Unit Mortgage
(FHA Insured), 7.350%, 6/01/19.................................... 6/01 at 102 AAA 1,073,680
New York City Municipal Water Finance Authority, Water and
Sewer System:
3,000,000 5.375%, 6/15/19................................................... 6/04 at 101 AAA 2,899,230
1,500,000 7.750%, 6/15/20 (Pre-refunded to 6/15/01)......................... 6/01 at Aaa 1,766,790
101 1/2
2,000,000 5.500%, 6/15/20................................................... 6/02 at 100 A 1,910,880
3,500,000 New York City Industrial Development Agency, Civic Facility (The
Lighthouse Project), 6.500%, 7/01/22.............................. 7/02 at 102 Aa2 3,642,240
New York City Industrial Development Agency (College of New
Rochelle):
1,000,000 6.200%, 9/01/10................................................... 9/05 at 102 Baa 1,010,320
1,000,000 6.300%, 9/01/15................................................... 9/05 at 102 Baa 1,006,090
2,405,000 Newark-Wayne Community Hospital, 7.600%, 9/01/15.................... 9/03 at 102 N/R 2,429,242
1,000,000 Orangetown Housing Authority, Housing Facilities, (Orangetown
Guaranty), 7.600%, 4/01/30 (Pre-refunded to 10/01/00)............. 10/00 at 102 A 1,157,040
South Orangetown Central School District, General Obligation:
390,000 6.875%, 10/01/08.................................................. No Opt. Call A 454,697
390,000 6.875%, 10/01/09.................................................. No Opt. Call A 454,939
3,015,000 Suffolk County Industrial Development Agency (Dowling College Civic
Facility), 6.625%, 6/01/24........................................ 6/04 at 102 BBB 3,191,769
2,000,000 34th Street Partnership Business Improvement District, Capital
Improvement, 5.500%, 1/01/23...................................... 1/03 at 102 A1 1,904,340
Triborough Bridge and Tunnel Authority:
2,000,000 7.100%, 1/01/10................................................... 1/01 at 102 A1 2,214,880
2,000,000 7.100%, 1/01/10................................................... 1/01 at 102 Aaa 2,242,460
2,100,000 UFA Development Corporation, FHA-Insured
(Loretto-Utica Project), 5.950%, 7/01/35............................ 7/04 at 102 Aa 2,105,418
2,000,000 Westchester County Industrial Development Agency, Civic Facility
(Jewish Board of Family and Children Services), 6.750%,
12/15/12.......................................................... 12/02 at 102 BBB- 2,066,620
$158,685,000 Total Investments--(Cost $156,315,155)--96.6%....................... 165,378,435
------------
TEMPORARY INVESTMENTS IN SHORT-TERM MUNICIPAL SECURITIES--2.2%
New York City General Obligation, Variable Rate Demand Bonds:
$ 900,000 3.450%, 8/15/05+.................................................. VMIG-1 900,000
800,000 3.400%, 8/15/20+.................................................. VMIG-1 800,000
1,500,000 3.300%, 8/01/22+.................................................. VMIG-1 1,500,000
600,000 3.450%, 8/15/22+.................................................. VMIG-1 600,000
$ 3,800,000 Total Temporary Investments--2.2%................................... 3,800,000
------------
Other Assets Less Liabilities--1.2%................................. 1,974,808
------------
Net Assets--100%.................................................... $171,153,243
============
</TABLE>
C-45
<PAGE> 234
<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 $ 46,979,690 28%
PORTFOLIO OF INVESTMENTS AA+, AA, AA- Aa1, Aa, Aa2, Aa3 11 20,158,871 12
(EXCLUDING TEMPORARY A+ A1 4 8,563,103 5
INVESTMENTS): A, A- A, A2, A3 7 13,470,535 8
BBB+, BBB, BBB- Baa1, Baa, Baa2, 40 73,776,994 45
Baa3
Non-Rated Non-Rated 1 2,429,242 2
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL 94 $165,378,435 100%
========================================================================================================================
</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 and 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.
+ 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.
C-46
<PAGE> 235
NUVEEN TAX-FREE MUTUAL FUNDS
STATEMENT OF NET ASSETS
FEBRUARY 29, 1996
<TABLE>
<CAPTION>
NY
------------
<S> <C>
ASSETS
Investments in municipal securities, at market value (note 1)...................... $165,378,435
Temporary investments in short-term municipal securities, at amortized cost (note
1)............................................................................... 3,800,000
Cash............................................................................... 112,018
Receivables:
Interest......................................................................... 2,344,826
Shares sold...................................................................... 195,831
Investments sold................................................................. --
Other assets....................................................................... 5,854
------------
Total assets............................................................. 171,836,964
------------
LIABILITIES
Payable for shares reacquired...................................................... 2,756
Accrued expenses:
Management fees (note 7)......................................................... 74,192
Other............................................................................ 68,252
Dividends payable.................................................................. 538,521
------------
Total liabilities........................................................ 683,721
------------
Net assets (note 8)................................................................ $171,153,243
============
Class A Shares (note 1)
Net Assets......................................................................... $ 15,731,737
============
Shares outstanding................................................................. 1,483,039
============
Net asset value and redemption price per share..................................... $ 10.61
============
Offering price per share (net asset value per share plus maximum sales charge of
4.50% of
offering price).................................................................. $ 11.11
============
Class C Shares (note 1)
Net Assets......................................................................... $ 645,881
============
Shares outstanding................................................................. 60,727
============
Net asset value, offering and redemption price per share........................... $ 10.64
============
Class R Shares (note 1)
Net Assets......................................................................... $154,775,625
============
Shares outstanding................................................................. 14,548,997
============
Net asset value and redemption price per share..................................... $ 10.64
============
</TABLE>
See accompanying notes to financial statements.
C-47
<PAGE> 236
NUVEEN TAX-FREE MUTUAL FUNDS
STATEMENT OF OPERATIONS
YEAR ENDED FEBRUARY 29, 1996
<TABLE>
<CAPTION>
NY
-----------
<S> <C>
INVESTMENT INCOME
Tax-exempt interest income (note 1)................................................. $10,173,134
-----------
Expenses (note 2):
Management fees (note 7)....................................................... 882,509
12b-1 distribution and service fees (note 1)................................... 30,739
Shareholders' servicing agent fees and expenses................................ 143,133
Custodian's fees and expenses.................................................. 58,808
Directors' fees and expenses (note 7).......................................... 1,440
Professional fees.............................................................. 24,971
Shareholders' reports - printing and mailing expenses.......................... 99,517
Federal and state registration fees............................................ 2,874
Other expenses................................................................. 8,233
-----------
Total expenses before expense reimbursement............................... 1,252,224
Expense reimbursement from investment adviser (note 7)......................... (29,700)
-----------
Net expenses.............................................................. 1,222,524
-----------
Net investment income..................................................... 8,950,610
-----------
REALIZED AND UNREALIZED GAIN (LOSS) FROM INVESTMENTS
Net realized gain (loss) from investment transactions, net of taxes, if applicable
(notes 1 and 5)................................................................... 1,772,126
Net change in unrealized appreciation or depreciation of investments................ 5,658,638
-----------
Net gain from investments................................................. 7,430,764
-----------
Net increase in net assets from operations.......................................... $16,381,374
===========
</TABLE>
See accompanying notes to financial statements.
C-48
<PAGE> 237
NUVEEN TAX-FREE MUTUAL FUNDS
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
NY
----------------------------
YEAR ENDED YEAR ENDED
2/29/96 2/28/95
------------ ------------
<S> <C> <C>
OPERATIONS
Net investment income................................................. $ 8,950,610 $ 8,356,495
Net realized gain (loss) from investment transactions, net of taxes,
if applicable....................................................... 1,772,126 (1,122,982)
Net change in unrealized appreciation or depreciation of
investments......................................................... 5,658,638 (6,026,320)
------------ ------------
Net increase in net assets from operations....................... 16,381,374 1,207,193
------------ ------------
DISTRIBUTION TO SHAREHOLDERS (note 1)
From net investment income:
Class A............................................................. (551,771) (35,341)
Class C............................................................. (18,002) (818)
Class R............................................................. (8,358,840) (8,216,539)
From accumulated net realized gains from investment transactions:
Class A............................................................. -- (2,464)
Class C............................................................. -- (28)
Class R............................................................. -- (697,769)
------------ ------------
Decrease in net assets from distributions to shareholders........ (8,928,613) (8,952,959)
------------ ------------
FUND SHARE TRANSACTIONS (note 3)
Net proceeds from sale of shares:
Class A............................................................. 13,070,637 3,107,225
Class C............................................................. 556,433 81,795
Class R............................................................. 12,367,225 26,513,287
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............................................................. 358,186 18,206
Class C............................................................. 12,262 417
Class R............................................................. 6,297,279 6,975,322
------------ ------------
32,662,022 36,696,252
------------ ------------
Cost of shares redeemed:
Class A............................................................. (1,336,675) (51,915)
Class C............................................................. (23,961) --
Class R............................................................. (20,329,583) (22,466,951)
------------ ------------
(21,690,219) (22,518,866)
------------ ------------
Net increase (decrease) in net assets derived from Fund share
transactions..................................................... 10,971,803 14,177,386
------------ ------------
Net increase (decrease) in net assets............................ 18,424,564 6,431,620
Net assets at the beginning of year................................... 152,728,679 146,297,059
------------ ------------
Net assets at the end of year......................................... $171,153,243 $152,728,679
============ ============
Balance of undistributed net investment income at end of year......... $ 126,818 $ 104,821
============ ============
</TABLE>
See accompanying notes to financial statements.
C-49
<PAGE> 238
NUVEEN TAX-FREE MUTUAL FUNDS
NOTES TO FINANCIAL STATEMENTS
1. GENERAL INFORMATION AND SIGNIFICANT ACCOUNTING POLICIES
At February 29, 1996, the state Funds (the "Funds") covered in this report
are Nuveen California Tax-Free Fund, Inc. (comprising the Nuveen California and
California Insured Tax-Free Value Funds), Nuveen Tax-Free Bond Fund, Inc.
(comprising the Nuveen Massachusetts, New York and Ohio Tax-Free Value Funds)
and Nuveen Insured Tax-Free Bond Fund, Inc. (comprising the Nuveen Massachusetts
and New York Insured Tax-Free Value Funds).
Additional state Funds covering other states may be established in the
future. Each Fund invests primarily in a diversified portfolio of municipal
obligations issued by state and local government authorities in a single state.
The Funds are registered under the Investment Company Act of 1940 as
open-end, diversified management investment companies.
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 Directors. 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 using the specific
identification method. Securities purchased 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 fluctuations during this period. The Funds
have instructed the custodian to segregate assets in a separate account with a
current value at least equal to the amount of their purchase commitments. At
February 29, 1996, there were no such purchase commitments in the Fund.
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 investment transactions are distributed to shareholders not
less frequently than annually only to 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 tax
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 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
C-50
<PAGE> 239
NUVEEN TAX-FREE MUTUAL FUNDS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
and designated state income taxes, to retain such tax exempt status when
distributed to the shareholders of the Funds. All income dividends paid during
the year ended February 29, 1996, have been designated Exempt Interest
Dividends.
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 will generally be 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 February 29, 1996,
other than occasional purchases of high quality synthetic money market
securities, if applicable.
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.
2. EXPENSE ALLOCATION
Expenses of the Fund 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 Fund 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,
C-51
<PAGE> 240
NUVEEN TAX-FREE MUTUAL FUNDS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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>
NY
-------
<S> <C>
12b-1 distribution and service fees (for the year ended February 29, 1996):
Class A............................................................................ $26,638
Class C............................................................................ 4,101
Shareholders' servicing agent fees and expenses (for the five month period ended July
31, 1995):
Class A............................................................................ 5,805
Class C............................................................................ 925
Class R............................................................................ 56,825
Shareholders' reports-printing and mailing expenses (for the five month period ended
July 31, 1995):
Class A............................................................................ 1,599
Class C............................................................................ 91
Class R............................................................................ 65,948
Federal and state registration fees (for the five month period ended July 31, 1995):
Class A............................................................................ 821
Class C............................................................................ 194
Class R............................................................................ 448
</TABLE>
3. FUND SHARES
Transactions in shares were as follows:
<TABLE>
<CAPTION>
NY
------------------------
YEAR ENDED YEAR ENDED
2/29/96 2/28/95
---------- ----------
<S> <C> <C>
Shares sold:
Class A.............................................................. 1,261,309 318,594
Class C.............................................................. 53,367 8,430
Class R.............................................................. 1,182,028 2,613,112
Shares issued to shareholders due to reinvestment of distributions from
net
investment income and from net realized gains from investment
transactions:
Class A.............................................................. 34,236 1,882
Class C.............................................................. 1,167 43
Class R.............................................................. 603,620 701,622
---------- ------------
3,135,727 3,643,683
---------- ------------
Shares redeemed:
Class A.............................................................. (127,601) (5,381)
Class C.............................................................. (2,280) --
Class R.............................................................. (1,956,584) (2,245,562)
---------- ------------
(2,086,465) (2,250,943)
---------- ------------
Net increase (decrease)................................................... 1,049,262 1,392,740
========== ============
</TABLE>
4. DISTRIBUTIONS TO SHAREHOLDERS
On March 8, 1996, the Fund declared a dividend distribution from its
ordinary income which was paid on April 1, 1996, to shareholders of record on
March 8, 1996, as follows:
<TABLE>
<CAPTION>
NY
------
<S> <C>
Dividend per share:
Class A........................................................................ $.0460
Class C........................................................................ .0395
Class R........................................................................ .0485
======
</TABLE>
C-52
<PAGE> 241
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 February 29,
1996, were as follows:
<TABLE>
<CAPTION>
NY
----------
<S> <C>
PURCHASES
Investments in municipal securities......................................... $78,935,027
Temporary municipal investments............................................. 30,250,000
SALES
Investments in municipal securities......................................... 73,742,136
Temporary municipal investments............................................. 27,650,000
==========
</TABLE>
At February 29, 1996, the cost of investments for federal income tax
purposes was the same as the cost for financial reporting purposes for the Fund.
6. UNREALIZED APPRECIATION (DEPRECIATION)
Gross unrealized appreciation and gross unrealized depreciation of
investments at February 29, 1996, were as follows:
<TABLE>
<CAPTION>
NY
----------
<S> <C>
Gross unrealized:
Appreciation.............................................................. $9,487,337
Depreciation.............................................................. (424,057)
----------
Net unrealized appreciation................................................. $9,063,280
==========
</TABLE>
7. MANAGEMENT FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Under the Funds' investment management agreements with Nuveen Advisory
Corp. (the "Adviser"), a wholly owned subsidiary of The John Nuveen Company, the
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 the
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>
The management fee is reduced by, or the Adviser assumes certain expenses
of the Fund, in an amount necessary to prevent the total expenses of the Fund
(including the management fee, but excluding interest, taxes, fees incurred in
acquiring and disposing of portfolio securities, 12b-1 Service and Distribution
fees, and to the extent permitted, extraordinary expenses) in any fiscal year
from exceeding .75 of 1% of the average daily net asset value. The Adviser may
also voluntarily agree to reimburse additional expenses from time to time, which
may be voluntarily terminated at any time at its discretion.
The management fee referred to above compensates the Adviser for overall
investment advisory and administrative services, and general office facilities.
The Fund pays no compensation directly to its directors who are affiliated with
the Adviser or to their officers, all of whom receive remuneration for their
services to the Fund from the Adviser.
C-53
<PAGE> 242
NUVEEN TAX-FREE MUTUAL FUNDS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. COMPOSITION OF NET ASSETS
At February 29, 1996, each Fund had common stock authorized at $.01 par
value per share. The composition of net assets as well as the number of
authorized shares were as follows:
<TABLE>
<CAPTION>
NY
------------
<S> <C>
Capital paid-in....................................................... $161,313,710
Balance of undistributed net investment income........................ 126,818
Accumulated net realized gain (loss) from investment transactions..... 649,435
Net unrealized appreciation of investments............................ 9,063,280
------------
Net assets.................................................. $171,153,243
===========
Authorized shares:
Class A..................................................... 200,000,000
Class C..................................................... 220,000,000
Class R..................................................... 80,000,000
===========
</TABLE>
9. INVESTMENT COMPOSITION
The Fund invests in municipal securities which include general obligation,
escrowed and revenue bonds. At February 29, 1996, the revenue sources by
municipal purpose for these investments, expressed as a percent of total
investments, were as follows:
<TABLE>
<CAPTION>
NY
---
<S> <C>
Revenue Bonds:
Health Care Facilities.............................................. 4%
Housing Facilities.................................................. 17
Lease Rental Facilities............................................. 19
Educational Facilities.............................................. 16
Water/Sewer Facilities.............................................. 4
Transportation...................................................... 1
Pollution Control................................................... 5
Other............................................................... 9
General Obligation Bonds................................................. 12
Escrowed Bonds........................................................... 13
---
100%
===
</TABLE>
Certain long-term and intermediate-term investments owned by the Fund are
either 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, both of which ensure the timely payment of principal and interest in
the event of default (22% for New York). Such insurance, however, does not
guarantee the market value of the municipal securities or the value of the
Fund's 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 the Fund.
C-54
<PAGE> 243
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
----------------------------- LESS DISTRIBUTIONS
NET REALIZED ----------------------------
NET ASSET AND UNREALIZED DIVIDENDS
VALUE NET GAIN (LOSS) FROM NET DISTRIBUTIONS NET ASSET TOTAL RETURN
BEGINNING INVESTMENT FROM INVESTMENT FROM CAPITAL VALUE END ON NET ASSET
OF PERIOD INCOME INVESTMENTS+++ INCOME GAINS OF PERIOD VALUE++
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NY
- ---------------------------------------------------------------------------------------------------------------------------------
CLASS A
Year ended 2/29/96 $10.120 $ .555* $ .487 $(.552) $ -- $10.610 10.52%
9/6/94 to 2/28/95 10.230 .277* (.067) (.273) (.047) 10.120 2.21
CLASS C
Year ended 2/29/96 10.110 .478* .528 (.476) -- 10.640 10.13
9/13/94 to 2/28/95 10.110 .231* .038 (.222) (.047) 10.110 2.80
CLASS R
Year ended 2/29/96 10.150 .582* .490 (.582) -- 10.640 10.80
Year ended 2/28,
1995 10.720 .579 (.529) (.573) (.047) 10.150 .75
1994 10.610 .578* .161 (.580) (.049) 10.720 7.10
1993 9.880 .603* .806 (.598) (.081) 10.610 14.79
3 months ended
2/29/92 9.820 .163 .053 (.156) -- 9.880 2.21
Year ended 11/30,
1991 9.380 .629* .441 (.630) -- 9.820 11.79
1990 9.560 .631* (.181) (.630) -- 9.380 4.92
1989 9.180 .633* .380 (.633) -- 9.560 11.34
1988 8.760 .625* .420 (.625) -- 9.180 12.20
12/10/86 to 11/30/87 9.600 .612* (.840) (.612) -- 8.760 (2.44)
- ---------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
-------------------------------------------------------------------------------------------------------------
RATIO OF RATIO OF NET RATIO OF RATIO OF NET
EXPENSES TO INVESTMENT INCOME EXPENSES TO INVESTMENT INCOME
NET ASSETS END AVERAGE NET TO AVERAGE NET AVERAGE NET TO AVERAGE NET PORTFOLIO
OF PERIOD (IN ASSETS BEFORE ASSETS BEFORE ASSETS AFTER ASSETS AFTER TURNOVER
THOUSANDS) REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT* REIMBURSEMENT* RATE
- ---------------------
<S> <C><C> <C> <C> <C> <C> <C>
NY
- ---------------------
CLASS A
Year ended 2/29/96 $ 15,732 1.02% 5.28% .99% 5.31% 47%
9/6/94 to 2/28/95 3,189 1.56+ 5.31+ 1.00+ 5.87+ 29
CLASS C
Year ended 2/29/96 646 1.99 4.29 1.73 4.55 47
9/13/94 to 2/28/95 86 7.97+ (1.06)+ 1.75+ 5.16+ 29
CLASS R
Year ended 2/29/96 154,776 .76 5.55 .74 5.57 47
Year ended 2/28,
1995 149,454 .74 5.79 .74 5.79 29
1994 146,297 .78 5.30 .75 5.33 15
1993 107,146 .84 5.75 .75 5.84 12
3 months ended
2/29/92 66,491 .75+ 6.27+ .75+ 6.27+ 16
Year ended 11/30,
1991 59,351 .79 6.46 .75 6.50 19
1990 44,347 .81 6.59 .75 6.65 51
1989 29,040 .98 6.40 .75 6.63 85
1988 14,975 1.09 6.55 .75 6.89 71
12/10/86 to 11/30/87 8,239 1.38+ 5.45+ .37+ 6.46+ 20
- ---------------------
</TABLE>
* Reflects the waiver of certain management fees and reimbursement of certain
other expenses by the Adviser, if applicable. See note 7 of Notes to
Financial Statements.
+ Annualized.
++ Total Return on Net Asset Value is the combination of reinvested dividend
income, reinvested capital gain distributions if any, and changes in net
asset value per share.
+++ Net of taxes, if applicable. See note 1 of Notes to Financial Statements.
C-55
<PAGE> 244
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Nuveen Tax-Free Bond Fund, Inc.:
We have audited the accompanying statement of net assets of Nuveen Tax-Free
Bond Fund, Inc. (a Minnesota corporation comprising the New York Tax-Free Value
Fund), including the portfolio of investments, as of February 29, 1996, and the
related statement of operations for the year then ended, the statement 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 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
February 29, 1996, by correspondence with the custodian and brokers. As to
securities purchased but not received, we requested confirmation from brokers
and, when replies were not received, we carried out other alternative auditing
procedures. 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
New York Tax-Free Value Fund as of February 29, 1996, the results of its
operations for the year then ended, the changes in its 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
April 8, 1996
C-56
<PAGE> 245
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
D-1
<PAGE> 246
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.
D-2
<PAGE> 247
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objectives and Policies........................................................ 4
Shares of the Fund........................................................................ 6
Officers and Trustees..................................................................... 7
Investment Advisory Services.............................................................. 9
Distributor............................................................................... 13
Custodian and Transfer Agent.............................................................. 17
Auditors.................................................................................. 17
Portfolio Transactions.................................................................... 17
Yield and Total Return Calculation........................................................ 18
Dividend Payment Options.................................................................. 19
Purchase, Redemption and Pricing of Shares................................................ 20
Taxes..................................................................................... 23
Exchange and Reinvestment Privilege....................................................... 24
Systematic Withdrawal Plan................................................................ 24
Servicemarks.............................................................................. 25
Other Information......................................................................... 25
Index to Financial Statements............................................................. F-1
Appendix I -- Description of Municipal Securities Ratings................................. D-26
Appendix II -- Description of Hedging Techniques.......................................... D-30
</TABLE>
D-3
<PAGE> 248
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 obligations is
D-4
<PAGE> 249
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.
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
D-5
<PAGE> 250
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 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
D-6
<PAGE> 251
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.
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.
D-7
<PAGE> 252
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,
4249 Honeybrook Avenue College of Business and
Dayton, Ohio 45415 Administration, Wright State
University.
Paul F. Nezi Trustee Executive Vice President and
227 E. Dixon Avenue Chief Marketing Officer,
Dayton, Ohio 45419 ChoiceCare; prior to March 1993,
Vice President and General
Manager, Advanced Imaging
Products, a division of AM
International; prior to 1991,
Partner, Hooper & Nezi, a
marketing and communications
firm.
William J. Schneider Trustee Senior Partner, Miller-Valentine
4000 Miller-Valentine Ct. Partners; Vice President, Miller-
P.O. Box 744 Valentine Realty, Inc.
Dayton, OH 45401
M. Patricia Madden Vice President Vice President, Operations of the
Distributor
Michael D. Kalbfleisch Treasurer and Vice President and Chief
Secretary 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
FUND COMPLEX
AGGREGATE PAID TO TRUSTEES
NAME OF PERSON COMPENSATION (NUMBER OF OTHER
POSITION FROM REGISTRANT 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>
D-8
<PAGE> 253
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 ary
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 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.
D-9
<PAGE> 254
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>
D-10
<PAGE> 255
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>
D-11
<PAGE> 256
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.
<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.
D-12
<PAGE> 257
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 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
D-13
<PAGE> 258
expenses incurred by the Distributor and others, such as broker-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>
SALARIES MATERIALS
BROKER & INCENTIVE AND SELLING
STATE SERIES CLASS PAYMENTS BENEFITS COMPENSATION FULFILMENT 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 SALARIES
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>
D-14
<PAGE> 259
<TABLE>
<CAPTION>
COMPENSATION UPFRONT ADVERTISING SALARIES
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).
D-15
<PAGE> 260
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>
D-16
<PAGE> 261
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 affiliates,
acting either as principal or as
D-17
<PAGE> 262
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.
D-18
<PAGE> 263
Yield and Total Return Calculation as of May 31, 1996 (there is no
historical data for Class B or R Shares):
<TABLE>
<CAPTION>
CURRENT
YIELD AVERAGE ANNUAL TOTAL 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
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.
D-19
<PAGE> 264
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, non-binding
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.
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.
D-20
<PAGE> 265
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.
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
D-21
<PAGE> 266
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 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
D-22
<PAGE> 267
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,
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
D-23
<PAGE> 268
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 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.
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<PAGE> 269
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(@)" 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.
D-25
<PAGE> 270
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.
D-26
<PAGE> 271
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.
D-27
<PAGE> 272
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.
D-28
<PAGE> 273
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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<PAGE> 274
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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<PAGE> 275
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.
D-31
<PAGE> 276
FLAGSHIP NEW JERSEY
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS
MUNICIPAL BONDS--NEW JERSEY DOUBLE TAX EXEMPT
MAY 31, 1996
<TABLE>
<CAPTION>
FACE
AMOUNT FACE MARKET
(000) DESCRIPTION RATE MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
EDUCATION
$410 New Jersey State Educational Facilities Authority--Monmouth College--Series
1993 A....................................................................... 5.625% 07/01/13 $ 379,656
HOSPITALS
200 New Jersey Health Care Facilities Financing Authority Revenue-- Newark Beth
Israel Medical Center--Series 1994........................................... 6.000 07/01/16 200,438
250 New Jersey Health Care Facilities Financing Authority Revenue-- Irvington
General Hospital--Series 1994................................................ 6.375 08/01/15 256,078
200 New Jersey Health Care Facilities Financing Authority Revenue-- Bayonne
Hospital--
Series 1994.................................................................. 6.250 07/01/12 205,404
250 New Jersey Health Care Facilities Financing Authority Revenue-- Monmouth
Medical Center--Series C..................................................... 6.250 07/01/16 255,990
450 New Jersey Economic Development Authority Revenue--Clara Maass Health System
Obligated Group--Series 1995................................................. 5.000 07/01/25 388,418
HOUSING/MULTIFAMILY
500 New Jersey State Housing and Mortgage Finance Agency--Home Buyer
Project--Series 1............................................................ 6.600 11/01/14 515,240
HOUSING/SINGLE FAMILY
250 New Jersey State Housing and Mortgage Finance Agency Revenue--Series 1994 K.... 6.300 10/01/16 252,398
200 New Jersey State Housing and Mortgage Finance Agency Revenue--Series 1994 K.... 6.375 10/01/26 200,916
INDUSTRIAL DEVELOPMENT AND POLLUTION CONTROL
50 New Jersey Economic Development Authority--Natural Gas Facilities
Revenue--Elizabethtown Gas Company--Series A................................. 6.750 10/01/21 51,214
235 New Jersey Economic Development Authority--Electric Energy Facility Revenue--
Vineland Cogeneration Project--Series 1992................................... 6.750 06/01/99 244,767
100 New Jersey Economic Development Authority--Water Facilities Revenue--New
Jersey-American Water Company Incorporated Project--Series 1993 A and B...... 5.500 06/01/23 92,354
150 New Jersey Economic Development Authority Water Facilities Revenue--Hackensack
Water Company--Series 1994 B................................................. 5.900 03/01/24 146,385
185 New Jersey Economic Development Authority Revenue--Economic Growth--
Series 1992A-3............................................................... 6.550 12/01/07 191,854
625 New Jersey Economic Development Authority Revenue--Educational Testing
Services--
Series 1995 B................................................................ 6.125 05/15/15 636,712
250 Union County, NJ Industrial Pollution Control Financing Authority
Revenue--American Cyanamid--Series 1994...................................... 5.800 09/01/09 262,328
MUNICIPAL APPROPRIATION OBLIGATIONS
300 New Jersey Economic Development Authority Revenue--RWJ Health Care
Corporation--Series 1994..................................................... 6.250 07/01/14 308,796
300 New Jersey Economic Development Authority Revenue--Economic Recovery--
Series 1992 A................................................................ 6.000 03/15/21 299,199
MUNICIPAL REVENUE/OTHER
100 Hoboken, NJ Parking Authority Revenue--Hudson County--Series 1992A............. 6.625 03/01/09 101,284
100 New Jersey Economic Development Authority District--Heating and Cooling
Revenue--
Trigen Trenton Project--Series 1993 A........................................ 6.200 12/01/10 98,639
MUNICIPAL REVENUE/TRANSPORTATION
125 Port Authority of New York and New Jersey--Series 96........................... 6.600 10/01/23 130,948
200 Port Authority of New York and New Jersey--Series 100.......................... 5.750 12/15/20 193,864
100 Port Authority of New York and New Jersey--Series 95........................... 5.875 07/15/09 101,786
50 South Jersey Transportation System Revenue Authority--Series 1992 B............ 6.000 11/01/12 51,156
MUNICIPAL REVENUE/UTILITY
200 Commonwealth of Puerto Rico Electric Power Authority--Series 1992 R............ 6.250 07/01/17 201,498
MUNICIPAL REVENUE/WATER & SEWER
50 Atlantic City, NJ Municipal Utilities Authority--Water System Revenue--Series
1993......................................................................... 5.650 05/01/07 48,696
100 Atlantic City, NJ Municipal Utilities Authority--Water System Revenue--Series
1993......................................................................... 5.750 05/01/17 95,209
150 Bergen County, NJ Utilities Authority--Water Pollution Control System Revenue--
Series 1992 B................................................................ 6.000 12/15/13 153,004
250 Camden County, NJ Municipal Utilities Authority--County Agreement Sewer
Revenue--Series 1996......................................................... 5.125 07/15/17 228,165
75 Evesham Municipal Utilities Authority--Burlington County, NJ--Series 1993 B.... 5.600 07/01/15 72,731
</TABLE>
D-32
<PAGE> 277
FLAGSHIP NEW JERSEY
<TABLE>
<CAPTION>
FACE
AMOUNT FACE MARKET
(000) DESCRIPTION RATE MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$250 Hoboken-Union City, NJ Weehawken Sewerage Authority Revenue--Series 1992....... 6.200% 08/01/19 $ 254,618
200 New Jersey Wastewater Treatment Trust--Series 1994............................. 6.500 04/01/14 210,666
200 North Jersey District Water Supply--Wanaque South Project--Series 1993......... 6.000 07/01/21 200,404
25 Ocean County, NJ Utilities Authority--Wastewater Revenue 6.750 01/01/13 25,790
35 Stafford, NJ Municipal Utility Authority--Water and Sewer Revenue--Series 1992
A............................................................................ 6.000 12/01/12 35,659
50 Stafford, NJ Municipal Utility Authority--Water and Sewer Revenue--Series 1992
A............................................................................ 6.125 12/01/22 50,493
75 Wanaque Valley, NJ Regional Sewer Authority--Series 1993 A..................... 6.125 09/01/22 70,045
NON-STATE GENERAL OBLIGATIONS
200 Atlantic City, NJ General Obligation--Series 1994.............................. 5.650 08/15/04 200,162
50 Atlantic City, NJ Board of Education--School Revenue--Series 1992.............. 6.150 12/01/12 51,942
200 Atlantic County, NJ General Obligation--Series 1994............................ 6.000 01/01/07 209,092
25 Cherry Hill Township New Jersey General Obligation--Camden County--Series
1992......................................................................... 6.300 06/01/12 26,100
340 East Orange, NJ General Obligation--Essex County, New Jersey--Series 1992...... 8.400 08/01/06 421,318
450 Essex County, NJ Improvement Authority--General Obligation Lease
Revenue--Series 1994......................................................... 6.600 04/01/14 459,405
300 Essex County, NJ Improvement Authority--General Obligation Lease
Revenue--Series 1994......................................................... 6.350 04/01/07 305,232
50 Monmouth County, NJ Improvement Authority Revenue--Howell Township Board of
Education Project--Series 1992............................................... 6.450 07/01/08 53,844
165 Parsippany Troy Hills Township, NJ General Obligation--Morris County,
New Jersey--Series 1992...................................................... 0.000 04/01/07 92,638
250 Union City, NJ General Obligation--Series 1992................................. 6.375 11/01/10 269,235
25 Woodbridge Township, NJ General Obligation--Series 1992........................ 6.150 08/15/06 26,445
PRE-REFUNDED OR ESCROWED
100 Essex County, NJ Improvement Authority--General Obligation Lease
Revenue--County Jail and Youth House--Series 1994............................ 6.900 12/01/14 113,997
SPECIAL TAX REVENUE
100 New Jersey Sports and Exposition Authority--Convention Center Luxury Tax--
Series 1992 A................................................................ 5.500 07/01/22 94,322
250 New Jersey Sports and Exposition Authority--Convention Center Luxury Tax--
Series 1992 A................................................................ 6.250 07/01/20 255,708
300 Commonwealth of Puerto Rico Highway Authority Revenue--Series 1990 Q........... 6.000 07/01/20 295,848
STATE/TERRITORIAL GENERAL OBLIGATIONS
550 Commonwealth of Puerto Rico Public Improvement--General Obligation--Series 1996
A............................................................................ 5.400 07/01/25 495,786
165 Commonwealth of Puerto Rico--General Obligation--Series 1988................... 8.000 07/01/07 179,015
------------------------------------------------------------------------------------------------------------------
Total Investments in Securities--Municipal Bonds (cost $10,652,274)--96.8%..... 10,762,891
------------------------------------------------------------------------------------------------------------------
Excess of Other Assets over Liabilities--3.2%.................................. 350,967
------------------------------------------------------------------------------------------------------------------
Total Net Assets--100.0%....................................................... $11,113,858
==============================================================================================================
</TABLE>
See notes to financial statements.
D-33
<PAGE> 278
FLAGSHIP NEW JERSEY
NEW JERSEY DOUBLE TAX EXEMPT
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 1996
<TABLE>
<S> <C>
ASSETS
Investments, at market value (cost $10,652,274)..................................... $10,762,891
Cash................................................................................ 42,004
Receivable for investments sold..................................................... 100,000
Receivable for Fund shares sold..................................................... 76,450
Interest receivable................................................................. 204,726
Other............................................................................... 635
-----------
Total assets.............................................................. 11,186,706
-----------
LIABILITIES
Distributions payable............................................................... 51,789
Accrued expenses.................................................................... 21,059
-----------
Total liabilities......................................................... 72,848
-----------
NET ASSETS
Applicable to 1,119,318 shares of beneficial interest issued and outstanding........ $11,113,858
===========
Net asset value per share........................................................... $ 9.93
===========
</TABLE>
D-34
<PAGE> 279
FLAGSHIP NEW JERSEY
NEW JERSEY DOUBLE TAX EXEMPT
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MAY 31, 1996
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest.............................................................................. $ 564,064
---------
Expenses:
Distribution fees (note E)....................................................... 38,444
Investment advisory fees (note E)................................................ 48,257
Custody and accounting fees...................................................... 45,484
Transfer agent's fees............................................................ 12,980
Registration fees................................................................ 1,224
Legal fees....................................................................... 77
Audit fees....................................................................... 10,570
Trustees' fees................................................................... 183
Shareholder services fees (note E)............................................... 1,309
Other............................................................................ 428
Advisory fees waived (note E).................................................... (48,257)
Expense subsidy (note E)......................................................... (67,802)
---------
Total expenses before credits............................................... 42,897
Custodian fee credit (note B).................................................... (2,174)
---------
Net expenses................................................................ 40,723
---------
Net investment income.................................................. 523,341
---------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on security transactions..................................... 12,350
Change in unrealized appreciation (depreciation) of investments....................... (194,748)
---------
Net loss on investments................................................ (182,398)
---------
Net increase in net assets resulting from operations.................................. $ 340,943
=========
</TABLE>
See notes to financial statements.
D-35
<PAGE> 280
FLAGSHIP NEW JERSEY
NEW JERSEY 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................................................... $ 523,341 $ 362,726
Net realized gain (loss) on security transactions....................... 12,350 (58,873)
Change in unrealized appreciation (depreciation) of investments......... (194,748) 299,124
------------ ------------
Net increase in net assets resulting from operations.......... 340,943 602,977
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income.............................................. (528,114) (361,591)
------------ ------------
Net decrease in net assets from distributions to
shareholders................................................. (528,114) (361,591)
------------ ------------
Net increase in net assets from Fund share transactions (note
C)........................................................... 3,577,978 2,602,038
------------ ------------
Total increase in net assets.................................. 3,390,807 2,843,424
NET ASSETS:
Beginning of year....................................................... 7,723,051 4,879,627
------------ ------------
End of year............................................................. $ 11,113,858 $7,723,051
============ ============
NET ASSETS CONSIST OF:
Paid-in surplus......................................................... $ 11,170,517 $7,596,177
Undistributed net investment income..................................... 1,135
Accumulated net realized gain (loss) on security transactions........... (167,276) (179,626)
Unrealized appreciation (depreciation) of investments................... 110,617 305,365
------------ ------------
$ 11,113,858 $7,723,051
============ ============
</TABLE>
See notes to financial statements.
D-36
<PAGE> 281
FLAGSHIP NEW JERSEY
NOTES TO FINANCIAL STATEMENTS
A. DESCRIPTION OF BUSINESS
Flagship's New Jersey Double Tax Exempt Fund (New Jersey 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 Fund is an open-end,
non-diversified management investment company registered under the Investment
Company Act of 1940, as amended. The Fund commenced investment operations on
September 16, 1992. 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 having remaining maturities of 60 days or less 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.
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
D-37
<PAGE> 282
FLAGSHIP NEW JERSEY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
value of these securities is determined in the same manner as other portfolio
securities. There were no "when-issued" purchase commitments included in the New
Jersey Double Tax Exempt Fund's statements 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>
NEW JERSEY DOUBLE TAX EXEMPT
Shares sold............................................ 403,389 $4,073,080 366,626 $ 3,549,177
Shares issued on reinvestment.......................... 25,230 255,146 17,363 166,570
Shares reacquired...................................... (74,581) (750,248) (116,890) (1,113,709)
-------- ----------- -------- -----------
Net increase........................................... 354,038 $3,577,978 267,099 $ 2,602,038
======== =========== ======== ===========
</TABLE>
D. PURCHASES AND SALES OF MUNICIPAL BONDS
Purchases and sales of municipal bonds for the year ended May 31, 1996,
aggregated:
<TABLE>
<CAPTION>
FUND PURCHASES SALES
- -------------------------------------------------------------------------- ---------- ----------
<S> <C> <C>
New Jersey Double Tax Exempt.............................................. $4,743,627 $1,470,773
</TABLE>
At May 31, 1996, cost for federal income tax purposes is $10,652,274 for
the New Jersey Double Tax Exempt Fund, and net unrealized appreciation
aggregated $110,617, which includes:
<TABLE>
<CAPTION>
FUND UNREALIZED APPRECIATION UNREALIZED DEPRECIATION
- ---------------------------------------------------------- ----------------------- -----------------------
<S> <C> <C>
New Jersey Double Tax Exempt.............................. $ 208,639 $98,022
</TABLE>
At May 31, 1996, the Fund had an available capital loss carryforward of
approximately $167,300, to offset future net capital gains expiring in May 31,
2003.
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 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 all of its advisory fees for the
Fund amounting to $48,257 for the New Jersey Double Tax Exempt Fund. 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 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 sales of the Fund's
shares. The maximum amount payable for these expenses on an annual basis is .40%
of the Fund's average daily net assets. Included in accrued expenses at May 31,
1996 are accrued distribution fees of $3,750 for New Jersey Double Tax Exempt
Fund. 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, as follows:
<TABLE>
<CAPTION>
FUND GROSS COMMISSIONS PAID TO OTHER DEALERS
- --------------------------------------------------------------- ----------------- ---------------------
<S> <C> <C>
New Jersey Double Tax Exempt................................... $ 105,700 $92,300
</TABLE>
D-38
<PAGE> 283
FLAGSHIP NEW JERSEY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 Fund, amounting to
approximately $58,900 for the New Jersey Double Tax Exempt Fund, will be
reimbursed to the Advisor on a straight-line basis over a period of three years
beginning June 1, 1996. 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.
D-39
<PAGE> 284
FLAGSHIP NEW JERSEY
NEW JERSEY DOUBLE TAX EXEMPT
FINANCIAL HIGHLIGHTS
Selected data for each share of beneficial interest outstanding throughout
the period.
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED YEAR ENDED YEAR ENDED SEPTEMBER 16, 1992 TO
MAY 31, 1996 MAY 31, 1995 MAY 31, 1994 MAY 31, 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period....... $ 10.09 $ 9.79 $10.12 $ 9.58
------- ------ ------ ------
Income from investment operations:
Net investment income.................... 0.55 0.55 0.57 0.38
Net realized and unrealized gain (loss)
on securities......................... (0.16) 0.30 (0.23) 0.54
------- ------ ------ ------
Total from investment operations........... 0.39 0.85 0.34 0.92
------- ------ ------ ------
Less distributions:
From net investment income............... (0.55) (0.55) (0.57) (0.38)
In excess of net realized capital
gains................................. -- -- (0.10) --
------- ------ ------ ------
Total distributions........................ (0.55) (0.55) (0.67) (0.38)
------- ------ ------ ------
Net asset value, end of period............. $ 9.93 $10.09 $ 9.79 $ 10.12
======= ====== ====== ======
Total return(a)............................ 3.97% 9.16% 3.24% 13.02%
Ratios to average net assets:
(annualized where appropriate)
Actual net of waivers and reimbursements:
Expenses(b)........................... 0.44% 0.36% 0.01% 0.00%
Net investment income................. 5.42% 5.75% 5.52% 5.43%
Assuming credits and no waivers or
reimbursements:
Expenses.............................. 1.63% 2.07% 2.81% 5.80%
Net investment income................. 4.23% 4.04% 2.72% (0.37)%
Net assets at end of period (000's)........ $ 11,114 $7,723 $4,880 $ 2,388
Portfolio turnover rate.................... 15.61% 33.58% 90.63% 75.40%
</TABLE>
(a) The total returns shown do not include the effect of applicable front-end
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 0.42%; prior period numbers have not
been restated to reflect these credits.
D-40
<PAGE> 285
FLAGSHIP NEW JERSEY
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS AND TRUSTEES
FLAGSHIP NEW JERSEY
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 New Jersey Intermediate Tax Exempt Fund and the Flagship New Jersey
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 New
Jersey Intermediate Tax Exempt Fund and the New Jersey 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
D-41
<PAGE> 286
FLAGSHIP NEW YORK
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS
MUNICIPAL BONDS
MAY 31, 1996
<TABLE>
<CAPTION>
FACE
AMOUNT FACE MARKET
(000) DESCRIPTION RATE MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
EDUCATION
$ 750 Brookhaven, NY Industrial Development Agency--Civic Facility Revenue--Dowling
College/The National Aviation and Transportation Center--Series 1993......... 6.750% 03/01/23 $ 763,162
1,000 New Rochelle, NY Industrial Development Agency--Civic Facility Revenue--College
of New Rochelle--Series 1992................................................. 6.625 07/01/12 1,029,830
2,100 New York State Dormitory Authority Revenue--University of Rochester--Series
1994 A....................................................................... 6.500 07/01/19 2,230,683
500 Suffolk County, NY Industrial Development Authority Revenue--Dowling College--
Series 1994.................................................................. 6.625 06/01/24 514,910
HEALTH CARE
400 New York State Dormitory Authority Revenue--Menorah Campus..................... 7.400 02/01/31 439,400
250 New York State Dormitory Authority Revenue--Department of Health--Veteran's
Home......................................................................... 7.250 07/01/21 269,828
1,500 New York State Dormitory Authority Revenue--Department of Health--Series
1995......................................................................... 6.625 07/01/24 1,528,770
2,000 New York State Dormitory Authority Revenue--Bishop Henry B. Hucles Nursing
Home, Incorporated--Series 1996.............................................. 6.000 07/01/24 1,921,320
HOSPITALS
150 New York State Dormitory Authority Revenue--United Health Services--Series
1989......................................................................... 7.350 08/01/29 161,284
245 New York State Dormitory Authority Revenue--Iroquois Nursing Home.............. 7.000 02/01/15 261,219
1,000 New York State Dormitory Authority Revenue--Nyack Hospital--Series 1996........ 6.000 07/01/06 984,370
500 New York State Medical Care Facilities Finance Agency Revenue--Hospital and
Nursing Home--Series 1991A................................................... 7.450 08/15/31 542,095
1,000 New York State Medical Care Facilities Finance Agency--Mortgage Revenue--
Series 1995 B................................................................ 6.100 02/15/15 978,090
HOUSING/MULTIFAMILY
250 New York City Housing Development Corporation--Multifamily..................... 7.350 06/01/19 265,440
500 New York State Housing Finance Agency Revenue--Multifamily--Series 1992A....... 7.000 08/15/22 523,070
1,000 New York State Housing Finance Agency Revenue--Multifamily--Series 1994C....... 6.450 08/15/14 1,029,660
HOUSING/SINGLE FAMILY
1,500 New York State Mortgage Agency Revenue--Series 43.............................. 6.450 10/01/17 1,534,800
250 New York State Mortgage Agency Revenue--Homeowner.............................. 7.950 10/01/21 265,072
595 New York State Mortgage Agency Revenue--Single Family--Series UU............... 7.750 10/01/23 624,744
1,000 New York State Mortgage Agency Revenue--Homeowner--Series 46................... 6.600 10/01/19 1,030,290
INDUSTRIAL DEVELOPMENT AND POLLUTION CONTROL
1,000 Herkimer County, NY Industrial Development Agency Revenue--Burrows Paper
Recycling.................................................................... 8.000 01/01/09 1,040,920
750 Jefferson County, NY Industrial Development Agency--Solid Waste Disposal
Revenue--Champion International.............................................. 7.200 12/01/20 796,268
350 New York State Energy Research and Development Authority Electric
Facility--Consolidated Edison Company--Series A.............................. 7.500 01/01/26 377,212
1,250 New York State Energy Research and Development Authority Electric
Facility--Long Island Lighting Company--Series 1992 A........................ 7.150 09/01/19 1,231,300
500 New York State Energy Research and Development Authority Electric
Facility--Long Island Lighting Company--Series 1992 D........................ 6.900 08/01/22 484,830
1,500 New York State Energy Research and Development Authority Facilities
Revenue--Edison Company of New York--Series 1995 A........................... 6.100 08/15/20 1,510,710
MUNICIPAL APPROPRIATION OBLIGATIONS
500 Albany, NY Industrial Development Agency Lease Revenue--New York State Assembly
Building--Series A........................................................... 7.750 01/01/10 538,415
600 Franklin County, NY Industrial Development Agency Lease Revenue--County
Correctional Facility--Series 1992........................................... 6.750 11/01/12 625,338
300 New York State Dormitory Authority Revenue--Department of Education............ 7.750 07/01/21 331,719
500 New York State Dormitory Authority Revenue--State University Athletic
Facility..................................................................... 7.250 07/01/21 539,655
1,000 New York State Dormitory Authority Revenue--State University Educational
Facilities Revenue--Series 1993 B............................................ 5.250 05/15/19 874,520
1,000 New York State Dormitory Authority Revenue--Upstate Community Colleges--
Series 1995 A................................................................ 6.250 07/01/25 972,540
1,500 New York State Dormitory Authority--City University System Consolidated
Revenue--
Series 1995 A, B, C and Series 1995 1, 2 and 3............................... 5.625 07/01/16 1,387,050
</TABLE>
D-42
<PAGE> 287
FLAGSHIP NEW YORK
<TABLE>
<CAPTION>
FACE
AMOUNT FACE MARKET
(000) DESCRIPTION RATE MATURITY VALUE
- ----------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$1,000 New York State Housing Finance Agency--Health Facilities Revenue--New York
City--
Series 1996 A................................................................ 6.000% 11/01/08 $ 966,020
2,000 New York State Housing Finance Agency Revenue--Service Contract--Series 1995
A............................................................................ 6.375 09/15/15 1,985,520
250 New York State Municipal Bond Bank Agency Special Program Revenue--Buffalo--
Series A..................................................................... 6.875 03/15/06 265,458
250 New York State Municipal Bond Bank Agency Special Program Revenue--Rochester--
Series A..................................................................... 6.750 03/15/11 266,118
110 New York State Medical Care Facilities Finance Agency Revenue--Mental Health
Services--Series A........................................................... 7.700 02/15/18 116,808
50 New York State Medical Care Facilities Finance Agency Revenue--Mental Health
Services..................................................................... 7.750 02/15/20 54,748
1,750 New York State Urban Development Corporation Revenue--State Facilities--Series
1995......................................................................... 5.700 04/01/20 1,619,135
1,500 New York State Urban Development Corporation Revenue--Center for Industrial
Innovation--Series 1995...................................................... 5.500 01/01/13 1,381,875
2,125 New York State Urban Development Corporation Project Revenue--University
Facilities Grants--Series 1995............................................... 5.500 01/01/19 1,923,890
1,000 New York State Urban Development Corporation Revenue--Onondaga County
Convention Center--Series 1995............................................... 6.250 01/01/20 977,050
500 Triborough Bridge and Tunnel Authority New York Revenue--Convention Center
Project--Series 1990 E....................................................... 7.250 01/01/10 555,445
MUNICIPAL REVENUE/OTHER
500 Albany, NY Parking Authority Revenue--Green and Hudson Street Garage--Series
A............................................................................ 7.150 09/15/16 544,145
1,500 Albany, NY Parking Authority Revenue--Series 1992A............................. 0.000 11/01/17 385,950
230 New York City Industrial Development Agency Civic Facility Revenue--Federation
of Protestant Welfare........................................................ 6.950 11/01/11 242,321
500 New York City Industrial Development Agency Civic Facility Revenue--Lighthouse
Incorporated Project......................................................... 6.500 07/01/22 506,320
MUNICIPAL REVENUE/TRANSPORTATION
1,000 Metropolitan Transit Authority of New York--Commuter Facilities Revenue--
Series 1994 A................................................................ 6.375 07/01/18 1,028,000
1,000 Metropolitan Transportation Authority, NY--Transit Facilities Revenue--Series
1996 A....................................................................... 6.100 07/01/21 1,002,480
NON-STATE GENERAL OBLIGATIONS
75 Endwell, NY Fire District--General Obligation.................................. 7.000 03/01/11 82,264
50 Endwell, NY Fire District--General Obligation.................................. 7.000 03/01/12 54,774
50 Endwell, NY Fire District--General Obligation.................................. 7.000 03/01/13 54,674
50 Endwell, NY Fire District--General Obligation.................................. 7.000 03/01/14 54,546
50 Endwell, NY Fire District--General Obligation.................................. 7.000 03/01/15 54,392
50 Endwell, NY Fire District--General Obligation.................................. 7.000 03/01/16 54,513
275 Leray, NY General Obligation--Public Improvement............................... 7.600 11/15/02 311,275
275 Leray, NY General Obligation--Public Improvement............................... 7.600 11/15/04 316,352
150 Leray, NY General Obligation--Public Improvement............................... 7.600 11/15/06 174,141
225 Minerva, NY Central School District--General Obligation........................ 7.000 06/15/06 249,847
1,000 New York City, NY General Obligation--Series 1994.............................. 7.000 08/15/16 1,046,930
40 New York City, NY General Obligation--Series 1991 F............................ 8.250 11/15/19 45,205
PRE-REFUNDED OR ESCROWED
985 New York State Dormitory Authority Revenue--State University College--Series
1994 X....................................................................... 7.400 07/01/24 1,152,046
950 New York State Urban Development Corporation Revenue--Syracuse University
Center of Science and Technology--Series 1987................................ 7.875 01/01/17 1,024,005
RESOURCE RECOVERY
750 Onondaga County, NY Resource Recovery Agency Project Revenue--Resource Recovery
Facility--Series 1992........................................................ 7.000 05/01/15 754,590
STATE/TERRITORIAL GENERAL OBLIGATIONS
1,000 Albany, NY Housing Authority--Multifamily Revenue--Series 1995................. 5.850 10/01/07 976,550
300 New York State General Obligation--Series 1991................................. 7.300 03/01/12 332,490
1,500 Commonwealth of Puerto Rico Public Improvement--General Obligation--Series 1996
A............................................................................ 5.400 07/01/25 1,352,145
------------------------------------------------------------------------------------------------------------------
Total Investments in Securities--Municipal Bonds (cost $48,113,039)--98.5%..... 49,520,536
------------------------------------------------------------------------------------------------------------------
Excess of Other Assets over Liabilities--1.5%.................................. 756,271
------------------------------------------------------------------------------------------------------------------
Total Net Assets--100.0%....................................................... $50,276,807
==============================================================================================================
</TABLE>
See notes to financial statements.
D-43
<PAGE> 288
FLAGSHIP NEW YORK
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 1996
<TABLE>
<S> <C>
ASSETS:
Investments, at market value (cost $48,113,039)..................................... $49,520,536
Receivable for Fund shares sold..................................................... 290,704
Interest receivable................................................................. 971,595
Other............................................................................... 3,100
-----------
Total assets.............................................................. 50,785,935
-----------
LIABILITIES:
Bank overdraft...................................................................... 146,986
Payable for Fund shares reacquired.................................................. 78,829
Distributions payable............................................................... 240,712
Accrued expenses.................................................................... 42,601
-----------
Total liabilities......................................................... 509,128
-----------
NET ASSETS.......................................................................... $50,276,807
===========
Class A:
Applicable to 4,748,782 shares of beneficial interest issued and outstanding........ $49,643,402
===========
Net asset value per share........................................................... $ 10.45
===========
Class C:
Applicable to 60,603 shares of beneficial interest issued and outstanding........... $ 633,405
===========
Net asset value per share........................................................... $ 10.45
===========
</TABLE>
D-44
<PAGE> 289
FLAGSHIP NEW YORK
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MAY 31, 1996
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest............................................................................ $ 3,141,419
-----------
Expenses:
Distribution fees Class A (note E)............................................. 200,142
Distribution fees Class C (note E)............................................. 533
Investment advisory fees (note E).............................................. 250,771
Custody and accounting fees.................................................... 66,151
Transfer agent's fees.......................................................... 28,990
Registration fees.............................................................. 643
Legal fees..................................................................... 1,290
Audit fees..................................................................... 11,725
Reimbursement of organizational expenses (note F).............................. 51,551
Trustees' fees................................................................. 1,464
Shareholder services fees (note E)............................................. 5,120
Other.......................................................................... 1,795
Advisory fees waived (note E).................................................. (244,412)
Expense subsidy (note E)....................................................... (26,209)
-----------
Total expenses before credits............................................. 349,554
-----------
Custodian fee credit (note B).................................................. (17,661)
Net expenses.............................................................. 331,893
-----------
Net investment income................................................ 2,809,526
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on security transactions................................... 478,081
Change in unrealized appreciation (depreciation) of investments..................... (1,249,236)
-----------
Net loss on investments.............................................. (771,155)
-----------
Net increase in net assets resulting from operations................................ $ 2,038,371
===========
</TABLE>
See notes to financial statements.
D-45
<PAGE> 290
FLAGSHIP NEW YORK
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.................................................. $ 2,809,526 $ 2,907,972
Net realized gain (loss) on security transactions...................... 478,081 (1,184,251)
Change in unrealized appreciation (depreciation) of investments........ (1,249,236) 2,143,233
----------- ------------
Net increase in net assets resulting from operations......... 2,038,371 3,866,954
----------- ------------
DISTRIBUTIONS TO CLASS A SHAREHOLDERS
From net investment income............................................. (2,844,780) (2,892,313)
DISTRIBUTIONS TO CLASS C SHAREHOLDERS
From net investment income............................................. (2,773) --
----------- ------------
Net decrease in net assets from distributions to
shareholders............................................... (2,847,553) (2,892,313)
----------- ------------
FUND SHARE TRANSACTIONS (note C)
Proceeds from shares sold.............................................. 9,271,700 8,779,466
Net asset value of shares issued in reinvestment of distributions...... 1,441,365 1,503,289
Cost of shares reacquired.............................................. (8,644,636) (10,673,547)
----------- ------------
Net increase (decrease) in net assets from
Fund share transactions.................................... 2,068,429 (390,792)
----------- ------------
Total increase in net assets................................. 1,259,247 583,849
NET ASSETS
Beginning of year...................................................... 49,017,560 48,433,711
----------- ------------
End of year............................................................ $ 50,276,807 $ 49,017,560
=========== ============
NET ASSETS CONSIST OF
Paid-in surplus........................................................ $ 49,966,701 $ 47,920,640
Undistributed net investment income.................................... 15,659
Accumulated net realized gain (loss) on security transactions.......... (1,097,391) (1,575,472)
Unrealized appreciation (depreciation) of investments.................. 1,407,497 2,656,733
----------- ------------
$ 50,276,807 $ 49,017,560
=========== ============
</TABLE>
See notes to financial statements.
D-46
<PAGE> 291
FLAGSHIP NEW YORK
NOTES TO FINANCIAL STATEMENTS
A. DESCRIPTION OF BUSINESS
The Flagship New York 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 January 16, 1991. On March 4, 1996, 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.
D-47
<PAGE> 292
FLAGSHIP NEW YORK
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........................................ 809,698 $ 8,632,992 865,004 $ 8,779,466
Shares issued on reinvestment...................... 135,396 1,441,291 148,376 1,503,289
Shares reacquired.................................. (813,050) (8,644,636) (1,060,848) (10,673,547)
-------- ----------- ---------- ------------
Net increase (decrease)............................ 132,044 $ 1,429,647 (47,468) $ (390,792)
======== =========== ========== ============
</TABLE>
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 4, 1996 TO MAY
31, 1996
-----------------------
SHARES AMOUNT
-------- -----------
<S> <C> <C> <C> <C>
CLASS C:
Shares sold........................................ 60,596 $ 638,708
Shares issued on reinvestment...................... 7 74
Shares reacquired.................................. -- --
-------- -----------
Net increase....................................... 60,603 $ 638,782
======== ===========
</TABLE>
D. PURCHASES AND SALES OF MUNICIPAL BONDS
Purchases and sales of municipal bonds for the year ended May 31, 1996,
aggregated $28,131,982 and $26,503,249, respectively. At May 31, 1996, cost for
federal income tax purposes is $48,113,039 and net unrealized appreciation
aggregated $1,407,497, of which $1,869,137, related to appreciated securities
and $461,640 related to depreciated securities.
At May 31, 1996, the Fund has available a capital loss carryforward of
approximately $1,097,400 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 advisory fees amounting to
$244,412. Included in accrued expenses at May 31, 1996 are accrued advisory fees
of $2,134. 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
D-48
<PAGE> 293
FLAGSHIP NEW YORK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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
$16,944 and $294 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.
In its capacity as national wholesale underwriter for the shares of the
Fund, the Distributor received commissions on sales of the Fund's shares of
approximately $202,800 for the year ended May 31, 1996, of which approximately
$175,900 was paid to other dealers. For the year ended May 31, 1996, the
Distributor did not receive any 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 Fund (approximately
$257,000) are being reimbursed to the Advisor on a straight-line basis over a
period of five years. As of May 31, 1996, $205,781 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 $99,900, at a
weighted average annualized interest rate of 6.17%. At May 31, 1996, the Fund
had no borrowings outstanding under the line of credit.
D-49
<PAGE> 294
FLAGSHIP NEW YORK
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... $ 10.62 $ 10.38 $ 10.91 $ 10.10 $ 9.69
------- ------- ------- ------- -------
Income from investment operations:
Net investment income.............. 0.60 0.62 0.64 0.66 0.68
Net realized and unrealized gain
(loss) on securities............ (0.17) 0.24 (0.37) 0.88 0.41
------- ------- ------- ------- -------
Total from investment operations..... 0.43 0.86 0.27 1.54 1.09
------- ------- ------- ------- -------
Less distributions:
From net investment income......... (0.60) (0.62) (0.64) (0.66) (0.68)
From net realized capital gains.... -- -- (0.07) (0.07) --
In excess of net realized capital
gains........................... -- -- (0.09) -- --
------- ------- ------- ------- -------
Total distributions.................. (0.60) (0.62) (0.80) (0.73) (0.68)
------- ------- ------- ------- -------
Net asset value, end of year......... $ 10.45 $ 10.62 $ 10.38 $ 10.91 $ 10.10
======= ======= ======= ======= =======
Total return(a)...................... 4.15% 8.74% 2.38% 15.87% 11.71%
Ratios to average net assets:
Actual net of waivers and
reimbursements:
Expenses(b)..................... 0.70% 0.43% 0.30% 0.28% 0.18%
Net investment income........... 5.58% 6.15% 5.83% 6.28% 6.89%
Assuming credits and no waivers or
reimbursements:
Expenses........................ 1.20% 1.22% 1.26% 1.44% 1.43%
Net investment income........... 5.08% 5.36% 4.87% 5.12% 5.64%
Net assets at end of year (000's).... $ 49,643 $ 49,018 $ 48,434 $ 33,996 $ 20,701
Portfolio turnover rate.............. 53.53% 58.69% 59.70% 45.65% 36.89%
</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 0.66%; prior year numbers have not
been restated to reflect these credits.
D-50
<PAGE> 295
FLAGSHIP NEW YORK
FINANCIAL HIGHLIGHTS
Selected data for each share of beneficial interest outstanding throughout
the period.
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 4, 1996 TO
MAY 31, 1996
- -----------------------------------------------------------------------------------------------------
<S> <C>
CLASS C
Net asset value, beginning of period.............................................. $10.89
-------
Income from investment operations:
Net investment income........................................................... 0.12
Net realized and unrealized gain (loss) on securities........................... (0.44)
-------
Total from investment operations.................................................. (0.32)
-------
Less distributions:
From net investment income...................................................... (0.12)
From net realized capital gains................................................. --
In excess of net realized capital gains
-------
Total distributions............................................................... (0.12)
-------
Net asset value, end of period.................................................... $10.45
=======
Total return(a)................................................................... (11.83)%
Ratios to average net assets
(annualized where appropriate):
Actual net of waivers and reimbursements:
Expenses(b).................................................................. 1.35%
Net investment income........................................................ 4.49%
Assuming credits and no waivers or reimbursements:
Expenses..................................................................... 1.77%
Net investment income........................................................ 4.07%
Net assets at end of period (000's)............................................... $ 633
Portfolio turnover rate........................................................... 53.53%
</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 1.31%.
D-51
<PAGE> 296
FLAGSHIP NEW YORK
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS AND TRUSTEES
FLAGSHIP NEW YORK
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 New York 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 New
York 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
D-52
