<PAGE>
[LOGO OF NUVEEN] Prospectus
Municipal
Mutual
Funds
[PHOTO OF WOMAN APPEARS HERE]
Dependable, tax-free income
to help you keep more
of what you earn.
Connecticut
New York
New Jersey
February 1, 1997
<PAGE>
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INVESTING IN NUVEEN MUTUAL FUNDS
Since our founding in 1898, John Nuveen & Co. has been synonymous with invest-
ments that withstand the test of time. Today, we offer a range of equity and
fixed-income mutual funds designed to suit the unique circumstances and finan-
cial planning needs of mature investors. More than 1.3 million investors have
entrusted Nuveen to help them maintain the lifestyle they currently enjoy.
Value-investing -- purchasing securities of strong companies and communities
at an attractive price -- is the cornerstone of Nuveen's investment philoso-
phy. A long-term strategy that offers the potential for above average returns
over time with moderated risk, successful value-investing begins with in-depth
research and a discerning eye for value. Our team of investment professionals
is backed by the discipline, resources and expertise of Nuveen's almost a
century of investment experience, including one of the most recognized
research departments in the industry.
This prospectus describes in detail the investment objectives, policies and
risks of certain Nuveen municipal bond funds. We invite you to discuss the
contents with your financial adviser, or you may call us at 800-621-7227 for
additional information.
<PAGE>
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PROSPECTUS
Nuveen Flagship Connecticut Municipal Bond Fund
Nuveen Flagship New Jersey Municipal Bond Fund
Nuveen Flagship New Jersey Intermediate Municipal Bond Fund
Nuveen Flagship New York Municipal Bond Fund
Nuveen New York Insured Municipal Bond Fund
- --------------------------------------------------------------------------------
OVERVIEW
The funds listed above are part of the Nuveen Flagship Multistate Trust II, an
open-end investment company. Each fund seeks to provide high double or triple
tax-free income and preservation of capital through investments in diversified
portfolios of quality municipal bonds whose income is exempt from regular
federal, state and, in some cases, local income taxes.
Each fund offers a set of flexible purchase options which permit you to
purchase fund shares in the way that is best suited to your individual circum-
stances and investment needs. For detailed information about these flexible
purchase options, please refer to "How to Select a Purchase Option" later in
this prospectus.
This prospectus contains important information you should know before invest-
ing. Please read it carefully and keep it for future reference. You can find
more detailed information about each fund in the statement of additional infor-
mation which is part of this prospectus by reference. For a free copy, write to
Nuveen or call (800) 621-7227.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, OR ANY OTHER U.S. GOVERNMENT AGENCY. SHARES OF THE FUNDS
INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL AMOUNT
INVESTED.
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.
- --------------------------------------------------------------------------------
CONTENTS
<TABLE>
<S> <C>
OVERVIEW 1
FUND SUMMARIES AND FINANCIAL HIGHLIGHTS 2
FUND STRATEGIES
Investment Objective 12
How the Funds Select Investments 12
Risk Reduction Strategies 13
INVESTING IN THE FUNDS
How to Buy Fund Shares 14
How to Select a Purchase Option 14
How to Sell Fund Shares 16
Exchanging Shares 17
Optional Features and Services 17
DIVIDENDS AND TAXES
How the Funds Pay Dividends 19
Taxes and Tax Reporting 19
Taxable Equivalent Yields 20
GENERAL INFORMATION
How to Contact Nuveen 20
Fund Service Providers 20
How the Funds Report Performance 21
How Fund Shares are Priced 21
Organization 22
APPENDIX
Special State Considerations 22
</TABLE>
FEBRUARY 1, 1997
<PAGE>
- --------------------------------------------------------------------------------
Nuveen Flagship Connecticut Municipal Bond Fund
PERFORMANCE INFORMATION
INCEPTION: July 13, 1987
NET ASSETS: $216.6 million
- --------------------------------------------------------------------------------
TOTAL RETURN (ANNUALIZED)
<TABLE>
<CAPTION>
CLASS A
(OFFER CLASS A
PRICE) (NAV) CLASS B CLASS C CLASS R
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 YEAR 1.31% 5.76% 1.18% 5.18% 5.76%
5 YEARS 6.50% 7.42% 6.68% 6.80% 7.42%
INCEPTION 7.01% 7.50% 7.00% 6.89% 7.50%
</TABLE>
Class A total returns reflect actual performance for all periods; Class C total
returns reflect Class A performance for periods prior to class inception,
adjusted for the differences in sales charges and fees between the classes.
Class B and R total returns reflect Class A performance for all periods,
adjusted for the differences in sales charges (and for Class B, fees) between
the classes. See Overview of Fund Operating Expenses and Shareholder Transac-
tion Expenses.
The fund assumes investment risk in pursuit of its investment objective,
chiefly in the form of interest rate risk and credit risk. The fund limits this
risk by purchasing only certain types and maturities of municipal bonds and by
diversifying its investment portfolio geographically and by industry. See Risk
Reduction Strategies in the prospectus for further information.
- --------------------------------------------------------------------------------
MATURITY (YEARS)
[BAR CHART APPEARS HERE]
Average Maturity 19.6
Average Modified Duration 7.2
- --------------------------------------------------------------------------------
CREDIT QUALITY
[PIE CHART APPEARS HERE]
AAA (46%)
AA (17%)
A (25%)
BBB (11%)
NR (1%)
- --------------------------------------------------------------------------------
INDUSTRY DIVERSIFICATION (TOP 5)
[PIE CHART APPEARS HERE]
Health Care (20%)
Education (15%)
Resource Recovery (14%)
Hospitals (13%)
Non-State General Obligations (8%)
Other (30%)
EXPENSE INFORMATION
SHAREHOLDER TRANSACTION EXPENSES
(Maximum, as % of Offering Price)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS R
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SALES CHARGE ON PURCHASES 4.20%(1) -- -- --
SALES CHARGE ON REINVESTED DIVIDENDS -- -- -- --
CONTINGENT DEFERRED SALES CHARGE (CDSC) ON REDEMPTIONS --(1) 5%(2) 1%(3) --
</TABLE>
- --------------------------------------------------------------------------------
OVERVIEW OF FUND OPERATING EXPENSES (4)
(Annual, as % of Average Net Assets)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS R
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MANAGEMENT FEES 0.54% 0.54% 0.54% 0.54%
12b-1 FEES 0.20% 0.95% 0.75% --
OTHER 0.12% 0.12% 0.12% 0.12%
- ---------------------------------------------------------------------------------------------
TOTAL (GROSS) 0.86% 1.61% 1.41% 0.66%
WAIVERS/
REIMBURSEMENTS (0.19%) (0.19%) (0.19%) (0.19%)
- ---------------------------------------------------------------------------------------------
TOTAL (NET) 0.67% 1.42% 1.22% 0.47%
</TABLE>
- --------------------------------------------------------------------------------
SUMMARY OF SHAREHOLDER EXPENSES (5)
The example illustrates the expenses on a hypothetical $1,000 investment in the
fund based on the Total Expenses shown at left, an assumed annual total return
of 5% and reinvestment of all dividends.
<TABLE>
<CAPTION>
HOLDING PERIOD CLASS A CLASS B CLASS C CLASS R
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 YEAR $ 49 $ 54 $ 12 $ 5
3 YEARS $ 63 $ 77 $ 39 $15
5 YEARS $ 78 $ 89 $ 67 $26
10 YEARS $122 $150 $148 $59
</TABLE>
Information as of 11/30/96 See Notes on Next Page
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PAGE 2
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The financial highlights below are excerpted from the fund's latest annual
report which has been audited by Deloitte & Touche LLP, the fund's independent
auditors, and the fund's subsequent unaudited semi-annual report. For a free
copy of the fund's latest annual and semi-annual reports, write to Nuveen or
call (800) 621-7227.
<TABLE>
<CAPTION>
- ---------------- ------------------------------------------------------------------
CLASS INVESTMENT OPERATIONS AND DISTRIBUTIONS:
(INCEPTION DATE)
Net Realized Distribu-
and Unreal- Dividends tions
Beginning Net ized Gain from Net from Ending
Year Ending Net Asset Investment (Loss) From Investment Capital Net Asset
May 31, Value Income(c) Investments(a) Income Gains Value
- ---------------- --------- ---------- -------------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
CLASS A (7/87)
1997 (d) $10.23 $.28 $ .34 $(.28) $ -- $10.57
- ------------------------------------------------------------------------------------
1996 10.38 .57 (.14) (.58) -- 10.23
- ------------------------------------------------------------------------------------
1995 10.17 .58 .22 (.59) -- 10.38
- ------------------------------------------------------------------------------------
1994 10.66 .59 (.39) (.60) (.09) 10.17
- ------------------------------------------------------------------------------------
1993 10.05 .61 .61 (.61) -- 10.66
- ------------------------------------------------------------------------------------
1992 9.84 .63 .21 (.63) -- 10.05
- ------------------------------------------------------------------------------------
1991 9.64 .63 .20 (.63) -- 9.84
- ------------------------------------------------------------------------------------
1990 9.78 .63 (.13) (.63) (.01) 9.64
- ------------------------------------------------------------------------------------
1989 9.25 .63 .55 (.64) (.01) 9.78
- ------------------------------------------------------------------------------------
1988 (e) 9.58 .54 (.31) (.56) -- 9.25
- ------------------------------------------------------------------------------------
CLASS C (10/93)
1997 (d) 10.22 .25 .34 (.25) -- 10.56
- ------------------------------------------------------------------------------------
1996 10.36 .52 (.14) (.52) -- 10.22
- ------------------------------------------------------------------------------------
1995 10.16 .53 .20 (.53) -- 10.36
- ------------------------------------------------------------------------------------
1994 (e) 11.06 .33 (.84) (.33) (.06) 10.16
- ------------------------------------------------------------------------------------
<CAPTION>
- ----------------- --------------------------------------------------------
CLASS RATIOS/SUPPLEMENTAL DATA:
(INCEPTION DATE)
Ratio of Net
Ratio of Investment
Ending Expenses to Income to Portfolio
Year Ending Total Net Assets Average Net Average Turnover
May 31, Return(b) (millions) Assets(c) Net Assets(c) Rate
- ----------------- --------- ---------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C>
CLASS A (7/87)
1997 (d) 12.26%+ $209.9 .82%+ 5.37%+ 18%
- --------------------------------------------------------------------------
1996 4.18 202.2 .74 5.52 24
- --------------------------------------------------------------------------
1995 8.21 203.2 .73 5.84 25
- --------------------------------------------------------------------------
1994 1.70 202.6 .65 5.52 30
- --------------------------------------------------------------------------
1993 12.48 184.7 .66 5.88 19
- --------------------------------------------------------------------------
1992 8.81 141.2 .65 6.30 18
- --------------------------------------------------------------------------
1991 8.97 103.6 .67 6.49 18
- --------------------------------------------------------------------------
1990 5.34 73.0 .60 6.55 31
- --------------------------------------------------------------------------
1989 13.36 49.0 .70 6.62 32
- --------------------------------------------------------------------------
1988 (e) 3.09 25.6 .54 6.54 71
- --------------------------------------------------------------------------
CLASS C (10/93)
1997 (d) 11.70+ 6.7 1.37+ 4.84+ 18
- --------------------------------------------------------------------------
1996 3.71 7.2 1.29 4.96 24
- --------------------------------------------------------------------------
1995 7.53 5.5 1.28 5.27 25
- --------------------------------------------------------------------------
1994 (e) (6.48) 4.4 1.22 4.77 30
- --------------------------------------------------------------------------
</TABLE>
+ Annualized.
(a) Net of any applicable taxes.
(b) Total returns are calculated on net asset value and are annualized for
periods of less than 12 months.
(c) After waiver of certain management fees or reimbursement of expenses, if
applicable, by Flagship Financial, predecessor to Nuveen Advisory.
(d) For the six months ending November 30, 1996.
(e) From commencement of class operations as noted.
- --------------------------------------------------------------------------------
NOTES:
(1) The sales charge may be reduced or waived based on the amount of purchase
or for certain eligible categories of investors. A CDSC of 1% is imposed on
redemptions of certain purchases of $1 million or more within 18 months of
purchase.
(2) CDSC declines to 0% at the end of six years.
(3) Imposed only on redemptions within 12 months of purchase.
(4) Effective February 1, 1997, the fund eliminated the 0.20% distribution fee
on Class A shares and reduced the distribution fee on Class C shares from
0.75% to 0.55%. These lower expenses are reflected in the table and are
expected to reduce total operating expenses on Class A from 0.87% to 0.67%
and on Class C from 1.42% to 1.22%, as reflected in the table. Long-term
holders of Class B and C shares may pay more in distribution fees and CDSCs
than the maximum initial sales charge permitted under National Association
of Securities Dealers (NASD) Rules of Fair Practice. The
waiver/reimbursement levels shown reflect Nuveen's current undertaking,
made in connection with its acquisition of Flagship Resources as described
in "Fund Service Providers--Investment Adviser," to continue Flagship's
general dividend-setting practices.
(5) The expenses shown assume that you redeem your shares at the end of each
holding period. Class B shares convert to Class A shares after eight years.
If instead you redeemed your shares immediately prior to the end of each
holding period, your expenses would be higher. This example does not repre-
sent past or future expenses; actual expenses may be higher or lower.
- -------------------------------------------------------------------------------
PAGE 3
<PAGE>
- ----------------------------------------------------------------------
Nuveen Flagship New Jersey Municipal Bond Fund
PERFORMANCE INFORMATION
INCEPTION: December 13, 1991
NET ASSETS: $58.3 million
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
TOTAL RETURN (ANNUALIZED)
CLASS A
(OFFER CLASS A
PRICE) (NAV) CLASS B CLASS C CLASS R
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 YEAR 1.23% 5.66% 1.01% 4.87% 6.01%
INCEPTION 5.79% 6.80% 5.90% 6.05% 7.10%
</TABLE>
Class R total returns reflect actual performance for all periods; Class A and C
total returns reflect actual performance for periods since class inception (see
"Financial Highlights" for dates), and Class R performance for periods prior to
class inception, adjusted for the differences in sales charges and fees between
the classes. Class B total returns reflect Class R performance for all periods,
adjusted for the differences in sales charges and fees between the classes. See
Overview of Fund Operating Expenses and Shareholder Transaction Expenses.
The fund assumes investment risk in pursuit of its investment objective,
chiefly in the form of interest rate risk and credit risk. The fund limits this
risk by purchasing only certain types and maturities of municipal bonds and by
diversifying its investment portfolio geographically and by industry. See Risk
Reduction Strategies in the prospectus for further information.
- --------------------------------------------------------------------------------
MATURITY (YEARS)
[BAR CHART APPEAR HERE]
Average Maturity 18.8
Average Modified Duration 7.7
- --------------------------------------------------------------------------------
CREDIT QUALITY
[PIE CHART APEARS HERE]
AAA (54%)
AA (9%)
A (18%)
BBB (15%)
NR (4%)
- --------------------------------------------------------------------------------
INDUSTRY DIVERSIFICATION (TOP 5)
[PIE CHART APPEARS HERE]
Non-State General Obligations (19%)
Industrial Development and Polution Control (17%)
Hospitals (12%)
Municipal Revenue/Water & Sewer (11%)
State/Territorial General Obligations (6%)
Other (35%)
EXPENSE INFORMATION
SHAREHOLDER TRANSACTION EXPENSES
(Maximum, as % of Offering Price)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS R
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SALES CHARGE ON PURCHASES 4.20%(1) -- -- --
SALES CHARGE ON REINVESTED DIVIDENDS -- -- -- --
CONTINGENT DEFERRED SALES CHARGE (CDSC) ON REDEMPTIONS --(1) 5%(2) 1%(3) --
</TABLE>
- --------------------------------------------------------------------------------
OVERVIEW OF FUND OPERATING EXPENSES (4)
(Annual, as % of Average Net Assets)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS R
- ---------------------------------------------------
<S> <C> <C> <C> <C>
MANAGEMENT FEES 0.55% 0.55% 0.55% 0.55%
12B-1 FEES 0.20% 0.95% 0.75% --
OTHER EXPENSES 0.36% 0.36% 0.36% 0.36%
- ---------------------------------------------------
TOTAL (GROSS) 1.11% 1.86% 1.66% 0.91%
WAIVERS/
REIMBURSEMENTS (0.16%) (0.16%) (0.16%) (0.16%)
- ---------------------------------------------------
TOTAL (NET) 0.95% 1.70% 1.50% 0.75%
</TABLE>
- --------------------------------------------------------------------------------
SUMMARY OF SHAREHOLDER EXPENSES (5)
The example illustrates the expenses on a hypothetical $1,000 investment in the
fund based on the Total Expenses shown at left, an assumed annual total return
of 5% and reinvestment of all dividends.
<TABLE>
<CAPTION>
HOLDING PERIOD CLASS A CLASS B CLASS C CLASS R
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 YEAR $ 51 $ 57 $ 15 $ 8
3 YEARS $ 71 $ 85 $ 47 $24
5 YEARS $ 92 $104 $ 82 $42
10 YEARS $154 $181 $179 $93
</TABLE>
Information as of 7/31/96 See Notes on Next Page
- --------------------------------------------------------------------------------
PAGE 4
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The financial highlights below are excerpted from the fund's latest annual
report which has been audited by Arthur Andersen LLP, the fund's independent
auditors, and the fund's subsequent unaudited semi-annual report. For a free
copy of the fund's latest annual and semi-annual reports, write to Nuveen or
call (800) 621-7227.
<TABLE>
- ------------------- -----------------------------------------------------------------
<CAPTION>
CLASS INVESTMENT OPERATIONS AND DISTRIBUTIONS:
(INCEPTION DATE)
Net Realized Distribu-
and Unreal- Dividends tions
Beginning Net ized Gain from Net from Ending
Year Ending Net Asset Investment (Loss) From Investment Capital Net Asset
January 31, Value Income(c) Investments(a) Income Gains Value
---------------- --------- ---------- -------------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
CLASS A (9/94)
1997 (d) $10.400 $.261 $(.287) $(.254) $ -- $10.120
- -------------------------------------------------------------------------------------
1996 9.730 .519 .685 (.534) -- 10.400
- -------------------------------------------------------------------------------------
1995 (e) 10.030 .205 (.209) (.210) (.086) 9.730
- -------------------------------------------------------------------------------------
CLASS C (9/94)
1997 (d) 10.380 .227 (.292) (.215) -- 10.100
- -------------------------------------------------------------------------------------
1996 9.710 .443 .683 (.456) -- 10.380
- -------------------------------------------------------------------------------------
1995 (e) 9.770 .159 (.050) (.169) -- 9.710
- -------------------------------------------------------------------------------------
CLASS R (12/91)
1997 (d) 10.410 .266 (.280) (.266) -- 10.130
- -------------------------------------------------------------------------------------
1996 9.740 .551 .677 (.558) -- 10.410
- -------------------------------------------------------------------------------------
1995 10.710 .524 (.886) (.522) (.086) 9.740
- -------------------------------------------------------------------------------------
1994 9.960 .513 .810 (.513) (.060) 10.710
- -------------------------------------------------------------------------------------
1993 (e) 9.525 .445 .431 (.441) -- 9.960
- -------------------------------------------------------------------------------------
1992 9.525 -- -- -- -- 9.525
- -------------------------------------------------------------------------------------
<CAPTION>
- ------------------- -----------------------------------------------------------------
CLASS RATIOS/SUPPLEMENTAL DATA:
(INCEPTION DATE)
Ratio of Net
Ratio of Investment
Ending Expenses to Income to Portfolio
Year Ending Total Net Assets Average Net Average Turnover
January 31, Return(b) (millions) Assets(c) Net Assets(c) Rate
- ------------------ --------- ---------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C>
CLASS A (9/94)
1997 (d) (.23)% $13.9 1.00%+ 5.02%+ 8%
- -------------------------------------------------------------------------------------
1996 12.63 10.7 1.00 5.10 39
- -------------------------------------------------------------------------------------
1995 (e) .02 2.7 1.00+ 5.34+ 32
- -------------------------------------------------------------------------------------
CLASS C (9/94)
1997 (d) (.61) 1.9 1.75+ 4.27+ 8
- -------------------------------------------------------------------------------------
1996 11.80 1.1 1.75 4.37 39
- -------------------------------------------------------------------------------------
1995 (e) 1.16 .5 1.75+ 4.62+ 32
- -------------------------------------------------------------------------------------
CLASS R (12/91)
1997 (d) (.11) 42.4 .75+ 5.27+ 8
- -------------------------------------------------------------------------------------
1996 12.88 43.3 .75 5.43 39
- -------------------------------------------------------------------------------------
1995 (3.27) 39.6 .75 5.32 32
- -------------------------------------------------------------------------------------
1994 13.60 36.5 .75 4.84 52
- -------------------------------------------------------------------------------------
1993 (e) 9.36 16.2 .75+ 4.96+ 9
- -------------------------------------------------------------------------------------
1992 -- .02 -- -- --
- -------------------------------------------------------------------------------------
</TABLE>
+ Annualized.
(a) Net of any applicable taxes.
(b) Total returns are calculated on net asset value and are not annualized for
periods of less than 12 months.
(c) After waiver of certain management fees or reimbursement of expenses, if
applicable, by Nuveen Advisory.
(d) For the six months ending July 31, 1996.
(e) From commencement of class operations as noted.
- --------------------------------------------------------------------------------
NOTES:
(1)Sales charge in effect February 1, 1997. The sales charge may be reduced or
waived based on the amount of purchase or for certain eligible categories of
investors. A CDSC of 1% is imposed on redemptions of certain purchases of $1
million or more within 18 months of purchase.
(2)CDSC declines to 0% at the end of six years.
(3)Imposed only on redemptions within 12 months of purchase.
(4)Effective February 1, 1997, the funds reduced the service fee on Class A and
C shares from 0.25% to 0.20% and reduced the distribution fee on Class C
shares from 0.75% to 0.55%. These lower expenses are reflected in the table
and are expected to reduce total operating expenses on Class A from 1.00% to
0.95% and on Class C from 1.75% to 1.50%, as reflected in the table. Long-
term holders of Class B and C shares may pay more in distribution fees and
CDSCs than the maximum initial sales charge permitted under National Associ-
ation of Securities Dealers (NASD) Rules of Fair Practice. Nuveen has under-
taken, in connection with its acquisition of Flagship Resources as described
in "Fund Service Providers--Investment Adviser," to continue Flagship's
general dividend-setting practices. Nuveen Advisory also has voluntarily
agreed through July 31, 1997 to waive fees or reimburse expenses so that the
total operating expenses (not counting distribution and service fees) for
the fund do not exceed 0.75% of average daily net assets.
(5)The expenses shown assume that you redeem your shares at the end of each
holding period. Class B shares convert to Class A shares after eight years.
If instead you redeemed your shares immediately prior to the end of each
holding period, your expenses would be higher. This example does not repre-
sent past or future expenses; actual expenses may be higher or lower.
- --------------------------------------------------------------------------------
PAGE 5
<PAGE>
- --------------------------------------------------------------------------------
Nuveen Flagship New Jersey Intermediate Municipal Bond Fund
PERFORMANCE INFORMATION
INCEPTION: September 16, 1992
NET ASSETS: $7.5 million
- --------------------------------------------------------------------------------
TOTAL RETURN (ANNUALIZED)
<TABLE>
<CAPTION>
CLASS A
(OFFER CLASS A
PRICE) (NAV) CLASS C CLASS R
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 YEAR 1.19% 4.32% 3.96% 4.32%
INCEPTION 5.94% 6.72% 6.34% 6.72%
</TABLE>
Class A total returns reflect actual performance for all periods; Class C and R
total returns reflect Class A performance for all periods, adjusted for the
differences in sales charges (and for Class C, fees) between the classes. See
Overview of Fund Operating Expenses and Shareholder Transaction Expenses.
The fund assumes investment risk in pursuit of its investment objective,
chiefly in the form of interest rate risk and credit risk. The fund limits this
risk by purchasing only certain types and maturities of municipal bonds and by
diversifying its investment portfolio geographically and by industry. See Risk
Reduction Strategies in the prospectus for further information.
- --------------------------------------------------------------------------------
MATURITY (YEARS)
[BAR CHART APPEARS HERE]
Average Maturity 7.6
Average Modified Duration 5.4
- --------------------------------------------------------------------------------
CREDIT QUALITY
[PIE CHART APPEARS HERE]
AA (20%)
A (10%)
BBB (23%)
NR (6%)
AAA (41%)
- --------------------------------------------------------------------------------
INDUSTRY DIVERSIFICATION (TOP 5)
[PIE CHART APPEARS HERE]
Non-State General Obligations (28%)
Hospitals (15%)
Education (9%)
Industrial Development and Pollution Control (15%)
Municipal Revenue/Other (8%)
Other (25%)
EXPENSE INFORMATION
SHAREHOLDER TRANSACTION EXPENSES
(Maximum, as % of Offering Price)
<TABLE>
<CAPTION>
CLASS A CLASS C CLASS R
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
SALES CHARGE ON PURCHASES 3.00%(1) -- --
SALES CHARGE ON REINVESTED DIVIDENDS -- -- --
CONTINGENT DEFERRED SALES CHARGE (CDSC) ON REDEMPTIONS --(1) 1%(2) --
</TABLE>
- --------------------------------------------------------------------------------
OVERVIEW OF FUND OPERATING EXPENSES (3)
(Annual, as % of Average Net Assets)
<TABLE>
<CAPTION>
CLASS A CLASS C CLASS R
- ------------------------------------------
<S> <C> <C> <C>
MANAGEMENT FEES 0.55% 0.55% 0.55%
12B-1 FEES 0.20% 0.75% --
OTHER EXPENSES 1.00% 1.00% 1.00%
- ------------------------------------------
TOTAL (GROSS) 1.75% 2.30% 1.55%
WAIVERS/
REIMBURSEMENTS (1.10%) (1.10%) (1.10%)
- ------------------------------------------
TOTAL (NET) 0.65% 1.20% 0.45%
</TABLE>
- --------------------------------------------------------------------------------
SUMMARY OF SHAREHOLDER EXPENSES (4)
The example illustrates the expenses on a hypothetical $1,000 investment in the
fund based on the Total Expenses shown at left, an assumed annual total return
of 5% and reinvestment of all dividends.
<TABLE>
<CAPTION>
HOLDING PERIOD CLASS A CLASS C CLASS R
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1 YEAR $ 36 $ 12 $ 5
3 YEARS $ 50 $ 38 $14
5 YEARS $ 65 $ 66 $25
10 YEARS $109 $145 $57
</TABLE>
Information as of 11/30/96 See Notes on Next Page
- --------------------------------------------------------------------------------
PAGE 6
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The financial highlights below are excerpted from the fund's latest annual
report which has been audited by Deloitte & Touche LLP, the fund's independent
auditors at that time, and the fund's subsequent unaudited semi-annual report.
For a free copy of the fund's latest annual and semi-annual reports, write to
Nuveen or call (800) 621-7227.
- --------- ---------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS INVESTMENT OPERATIONS AND DISTRIBUTIONS:
(INCEPTION
DATE)
Net Realized Distribu-
and Unreal- Dividends tions
Beginning Net ized Gain from Net from Ending
Year Ending Net Asset Investment (Loss) From Investment Capital Net Asset
May 31 Value Income(c) Investments(a) Income Gains Value
------------- --------- ---------- -------------- ---------- --------- ---------
<C> <C> <C> <C> <C> <C> <C>
CLASS A
(9/92)
1997(e) $10.14 $.25 $.22 $(.25) $-- $10.36
- ---------------------------------------------------------------------------------
1996 10.25 .51 (.11) (.51) -- 10.14
- ---------------------------------------------------------------------------------
1995 10.04 .50 .22 (.51) -- 10.25
- ---------------------------------------------------------------------------------
1994 10.15 .53 (.10) (.52) (.02) 10.04
- ---------------------------------------------------------------------------------
1993(d) 9.70 .34 .45 (.34) -- 10.15
- ---------------------------------------------------------------------------------
<CAPTION>
RATIOS/SUPPLEMENTAL DATA:
Ratio of Net
Ratio of Investment
Ending Expenses to Income to Portfolio
Total Net Assets Average Net Average Turnover
Return(b) (millions) Assets(c) Net Assets(c) Rate
-------------------- -------------------------- ---------
<C> <C> <C> <S> <C>
9.44%+ $7.5 .74%+ 4.85%+ 7%
- ---------------------------------------------------------------------------------
3.89 8.3 .60 4.90 17
- ---------------------------------------------------------------------------------
7.42 9.2 .69 5.04 35
- ---------------------------------------------------------------------------------
4.27 9.3 .16 5.10 27
- ---------------------------------------------------------------------------------
11.07 5.6 .40+ 4.84+ 29
- ---------------------------------------------------------------------------------
</TABLE>
+ Annualized.
(a) Net of any applicable taxes.
(b) Total returns are calculated on net asset value and are annualized for
periods of less than 12 months.
(c) After waiver of certain management fees or reimbursement of expenses, if
applicable, by Flagship Financial, predecessor to Nuveen Advisory.
(d) From commencement of class operations as noted.
(e) For the six months ending November 30, 1996.
- --------------------------------------------------------------------------------
NOTES:
(1) The sales charge may be reduced or waived based on the amount of purchase
or for certain eligible categories of investors. A CDSC of 1% is imposed on
redemptions of certain purchases of $1 million or more within 18 months of
purchase.
(2) Imposed only on redemptions within 12 months of purchase.
(3) Effective February 1, 1997, the fund eliminated the 0.20% distribution fee
on Class A shares and reduced the distribution fee on Class C shares from
0.75% to 0.55%. These lower expenses are reflected in the table and are
expected to reduce total operating expenses on Class A from 0.85% to 0.65%
and on Class C from 1.40% to 1.20%, as reflected in the table. Long-term
holders of Class C shares may pay more in distribution fees and CDSCs than
the maximum initial sales charge permitted under National Association of
Securities Dealers (NASD) Rules of Fair Practice. The waiver/reimbursement
levels shown reflect Nuveen's current undertaking, made in connection with
its acquisition of Flagship Resources as described in "Fund Service Provid-
ers--Investment Adviser," to continue Flagship's general dividend-setting
practices.
(4) The expenses shown assume that you redeem your shares at the end of each
holding period. If instead you redeemed your shares immediately prior to
the end of each holding period, your expenses would be higher. This example
does not represent past or future expenses; actual expenses may be higher
or lower.
- --------------------------------------------------------------------------------
PAGE 7
<PAGE>
- --------------------------------------------------------------------------------
Nuveen Flagship New York Municipal Bond Fund
PERFORMANCE INFORMATION
INCEPTION: December 22, 1986
NET ASSETS: $171.9 million
- --------------------------------------------------------------------------------
TOTAL RETURN (ANNUALIZED)
<TABLE>
<CAPTION>
CLASS A
(OFFER CLASS A
PRICE) (NAV) CLASS B CLASS C CLASS R
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 YEAR 1.26% 5.69% 0.98% 5.00% 5.98%
5 YEARS 6.42% 7.34% 6.50% 6.65% 7.67%
INCEPTION 6.72% 7.19% 6.61% 6.53% 7.50%
</TABLE>
Class R total returns reflect actual performance for all periods; Class A and C
total returns reflect actual performance for periods since class inception (see
"Financial Highlights" for dates), and Class R performance for periods prior to
class inception, adjusted for the differences in sales charges and fees between
the classes. Class B total returns reflect Class R performance for all periods,
adjusted for the differences in sales charges and fees between the classes. See
Overview of Fund Operating Expenses and Shareholder Transaction Expenses.
The fund assumes investment risk in pursuit of its investment objective,
chiefly in the form of interest rate risk and credit risk. The fund limits this
risk by purchasing only certain types and maturities of municipal bonds and by
diversifying its investment portfolio geographically and by industry. See Risk
Reduction Strategies in the prospectus for further information.
- --------------------------------------------------------------------------------
MATURITY (YEARS)
[BAR CHART APPEARS HERE]
Average Maturity 21.9
Average Modified Duration 8.0
- --------------------------------------------------------------------------------
CREDIT QUALITY
[PIE CHART APPEARS HERE]
AAA (14%)
AA (19%)
A (21%)
BBB (38%)
NR (5%)
Below Inv. Grade (3%)
- --------------------------------------------------------------------------------
INDUSTRY DIVERSIFICATION (TOP 5)
[PIE CHART APPEARS HERE]
Municipal Appropriation
Obligations (25%)
Industrial Development
and Pollution
Control (13%)
Education (9%)
Health Care (8%)
Non-State General
Obligations (7%)
Other (38%)
EXPENSE INFORMATION
SHAREHOLDER TRANSACTION EXPENSES
(Maximum, as % of Offering Price)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS R
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SALES CHARGE ON PURCHASES 4.20%(1) -- -- --
SALES CHARGE ON REINVESTED DIVIDENDS -- -- -- --
CONTINGENT DEFERRED SALES CHARGE (CDSC) ON REDEMPTIONS --(1) 5%(2) 1%(3) --
</TABLE>
- --------------------------------------------------------------------------------
OVERVIEW OF FUND OPERATING EXPENSES (4)
(Annual, as % of Average Net Assets)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS R
- --------------------------------------------------------
<S> <C> <C> <C> <C>
MANAGEMENT FEES 0.55% 0.55% 0.55% 0.55%
12B-1 FEES 0.20% 0.95% 0.75% --
OTHER EXPENSES 0.16% 0.16% 0.16% 0.16%
- --------------------------------------------------------
TOTAL (GROSS) 0.91% 1.66% 1.46% 0.71%
WAIVERS/ REIMBURSEMENTS -- -- -- --
- --------------------------------------------------------
TOTAL (NET) 0.91% 1.66% 1.46% 0.71%
</TABLE>
- --------------------------------------------------------------------------------
SUMMARY OF SHAREHOLDER EXPENSES (5)
The example illustrates the expenses on a hypothetical $1,000 investment in the
fund based on the Total Expenses shown at left, an assumed annual total return
of 5% and reinvestment of all dividends.
<TABLE>
<CAPTION>
HOLDING PERIOD CLASS A CLASS B CLASS C CLASS R
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 YEAR $ 51 $ 56 $ 15 $ 7
3 YEARS $ 70 $ 84 $ 46 $23
5 YEARS $ 90 $102 $ 80 $40
10 YEARS $149 $177 $175 $88
</TABLE>
Information as of 8/31/96 See Notes on Next Page
- --------------------------------------------------------------------------------
PAGE 8
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The financial highlights below are excerpted from the fund's latest annual
report which has been audited by Arthur Andersen LLP, the fund's independent
auditors, and the fund's subsequent unaudited semi-annual report. For a free
copy of the fund's latest annual and semi-annual reports, write to Nuveen or
call (800) 621-7227.
<TABLE>
- ------------------ ------------------------------------------------------------------
<CAPTION>
CLASS INVESTMENT OPERATIONS AND DISTRIBUTIONS:
(INCEPTION DATE)
Net Realized Distribu-
and Unreal- Dividends tions
Beginning Net ized Gain from Net from Ending
Year Ending Net Asset Investment (Loss) From Investment Capital Net Asset
February 28/29, Value Income(c) Investments(a) Income Gains Value
--------------- --------- ---------- -------------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
CLASS A (9/94)
1997(g) $10.610 $.282 $(.246) $(.276) $ -- $10.370
- -------------------------------------------------------------------------------------
1996 10.120 .555 .487 (.552) -- 10.610
- -------------------------------------------------------------------------------------
1995(d) 10.230 .277 (.067) (.273) (.047) 10.120
- -------------------------------------------------------------------------------------
CLASS C (9/94)
1997(g) 10.640 .239 (.242) (.237) -- 10.400
- -------------------------------------------------------------------------------------
1996 10.110 .478 .528 (.476) -- 10.640
- -------------------------------------------------------------------------------------
1995(d) 10.110 .231 .038 (.222) (.047) 10.110
- -------------------------------------------------------------------------------------
CLASS R (12/86)
1997(g) 10.640 .291 (.240) (.291) -- 10.400
- -------------------------------------------------------------------------------------
1996 10.150 .582 .490 (.582) -- 10.640
- -------------------------------------------------------------------------------------
1995 10.720 .579 (.529) (.573) (.047) 10.150
- -------------------------------------------------------------------------------------
1994 10.610 .578 .161 (.580) (.049) 10.720
- -------------------------------------------------------------------------------------
1993 9.880 .603 .806 (.598) (.081) 10.610
- -------------------------------------------------------------------------------------
1992(e) 9.820 .163 .053 (.156) -- 9.880
- -------------------------------------------------------------------------------------
1991(f) 9.380 .629 .441 (.630) -- 9.820
- -------------------------------------------------------------------------------------
1990(f) 9.560 .631 (.181) (.630) -- 9.380
- -------------------------------------------------------------------------------------
1989(f) 9.180 .633 .380 (.633) -- 9.560
- -------------------------------------------------------------------------------------
1988(f) 8.760 .625 .420 (.625) -- 9.180
- -------------------------------------------------------------------------------------
1987(d)(f) 9.600 .612 (.840) (.612) -- 8.760
- -------------------------------------------------------------------------------------
<CAPTION>
- ------------------ ------------------------------------------------------------------
CLASS RATIOS/SUPPLEMENTAL DATA:
(INCEPTION DATE)
Ratio of Net
Ratio of Investment
Ending Expenses to Income to Portfolio
Year Ending Total Net Assets Average Net Average Turnover
February 28/29, Return(b) (millions) Assets(c) Net Assets(c) Rate
--------------- --------- ---------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C>
CLASS A (9/94)
1997(g) .37% $18.9 .96%+ 5.29%+ 18%
- -------------------------------------------------------------------------------------
1996 10.52 15.7 .99 5.31 47
- -------------------------------------------------------------------------------------
1995(d) 2.21 3.2 1.00+ 5.87+ 29
- -------------------------------------------------------------------------------------
CLASS C (9/94)
1997(g) (.01) .7 1.71+ 4.54+ 18
- -------------------------------------------------------------------------------------
1996 10.13 .6 1.73 4.55 47
- -------------------------------------------------------------------------------------
1995(d) 2.80 .1 1.75+ 5.16+ 29
- -------------------------------------------------------------------------------------
CLASS R (12/86)
1997(g) .51 152.3 .71+ 5.54+ 18
- -------------------------------------------------------------------------------------
1996 10.80 154.8 .74 5.57 47
- -------------------------------------------------------------------------------------
1995 .75 149.5 .74 5.79 29
- -------------------------------------------------------------------------------------
1994 7.10 146.3 .75 5.33 15
- -------------------------------------------------------------------------------------
1993 14.79 107.1 .75 5.84 12
- -------------------------------------------------------------------------------------
1992(e) 2.21 66.5 .75+ 6.27+ 16
- -------------------------------------------------------------------------------------
1991(f) 11.79 59.4 .75 6.50 19
- -------------------------------------------------------------------------------------
1990(f) 4.92 44.3 .75 6.65 51
- -------------------------------------------------------------------------------------
1989(f) 11.34 29.0 .75 6.63 85
- -------------------------------------------------------------------------------------
1988(f) 12.20 15.0 .75 6.89 71
- -------------------------------------------------------------------------------------
1987(d)(f) (2.44) 8.2 .37+ 6.46+ 20
- -------------------------------------------------------------------------------------
</TABLE>
+ Annualized.
(a) Net of any applicable taxes.
(b) Total returns are calculated on net asset value and are not annualized for
periods of less than 12 months.
(c) After waiver of certain management fees or reimbursement of expenses, if
applicable, by Nuveen Advisory.
(d) From commencement of class operations as noted.
(e) For the three months ending February 29.
(f) For the year ending November 30.
(g) For the six months ending August 31, 1996.
- --------------------------------------------------------------------------------
NOTES:
(1)Reflects sales charge in effect February 1, 1997. The sales charge may be
reduced or waived based on the amount of purchase or for certain eligible
categories of investors. A CDSC of 1% is imposed on redemptions of certain
purchases of $1 million or more within 18 months of purchase.
(2)CDSC declines to 0% at the end of six years.
(3)Imposed only on redemptions within 12 months of purchase.
(4)Effective February 1, 1997, the funds reduced the service fee on Class A and
C shares from 0.25% to 0.20% and reduced the distribution fee on Class C
shares from 0.75% to 0.55%. These lower expenses are reflected in the table
and are expected to reduce total operating expenses on Class A from 0.96% to
0.91% and on Class C from 1.71% to 1.46%, as reflected in the table. Long-
term holders of Class B and C shares may pay more in distribution fees and
CDSCs than the maximum initial sales charge permitted under National Associ-
ation of Securities Dealers (NASD) Rules of Fair Practice. Nuveen has under-
taken, in connection with its acquisition of Flagship Resources as described
in "Fund Service Providers--Investment Adviser," to continue Flagship's
general dividend-setting practices. Nuveen Advisory has agreed to waive some
or all of its fees or reimburse expenses to prevent total operating expenses
(not counting distribution and service fees) from exceeding 0.75% of the
fund's average daily net assets.
(5)The expenses shown assume that you redeem your shares at the end of each
holding period. Class B shares convert to Class A shares after eight years.
If instead you redeemed your shares immediately prior to the end of each
holding period, your expenses would be higher. This example does not repre-
sent past or future expenses; actual expenses may be higher or lower.
- --------------------------------------------------------------------------------
PAGE 9
<PAGE>
- --------------------------------------------------------------------------------
Nuveen New York Insured Municipal Bond Fund
PERFORMANCE INFORMATION
INCEPTION: December 22, 1986
NET ASSETS: $359.0 million
- --------------------------------------------------------------------------------
TOTAL RETURN (ANNUALIZED)
<TABLE>
<CAPTION>
CLASS A
(OFFER CLASS A
PRICE) (NAV) CLASS B CLASS C CLASS R
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 YEAR 0.78% 5.20% 0.46% 4.33% 5.45%
5 YEARS 6.17% 7.07% 6.21% 6.35% 7.37%
INCEPTION 6.34% 6.81% 6.22% 6.14% 7.09%
</TABLE>
Class R total returns reflect actual performance for all periods; Class A and C
total returns reflect actual performance for periods since class inception (see
"Financial Highlights" for dates), and Class R performance for periods prior to
class inception, adjusted for the differences in sales charges and fees between
the classes. Class B total returns reflect Class R performance for all periods,
adjusted for the differences in sales charges and the fees between the classes.
See Overview of Fund Operating Expenses and Shareholder Transaction Expenses.
The fund assumes investment risk in pursuit of its investment objective,
chiefly in the form of interest rate risk and credit risk. The fund limits this
risk by purchasing only certain types and maturities of municipal bonds and by
diversifying its investment portfolio geographically and by industry. See Risk
Reduction Strategies in the prospectus for further information.
- --------------------------------------------------------------------------------
MATURITY (YEARS)
[BAR CHART APPEARS HERE]
Average Maturity 21.9
Average Modified Duration 7.7
- --------------------------------------------------------------------------------
CREDIT QUALITY
[PIE CHART APPEARS HERE]
Escrowed (15%)
Insured (85%)
- --------------------------------------------------------------------------------
INDUSTRY DIVERSIFICATION (TOP 5)
[PIE CHART APPEARS HERE]
Housing Facilities (18%)
General Obligation Bonds (17%)
Escrowed Bonds (15%)
Water/Sewer Facilities (11%)
Transporation (11%)
Other (28%)
EXPENSE INFORMATION
SHAREHOLDER TRANSACTION EXPENSES
(Maximum, as % of Offering Price)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS R
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SALES CHARGE ON PURCHASES 4.20%(1) -- -- --
SALES CHARGE ON REINVESTED DIVIDENDS -- -- -- --
CONTINGENT DEFERRED SALES CHARGE (CDSC) ON REDEMPTIONS --(1) 5%(2) 1%(3) --
</TABLE>
- --------------------------------------------------------------------------------
OVERVIEW OF FUND OPERATING EXPENSES (4)
(Annual, as % of Average Net Assets)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS R
- ------------------------------------------------
<S> <C> <C> <C> <C>
MANAGEMENT FEES 0.54% 0.54% 0.54% 0.54%
12B-1 FEES 0.20% 0.95% 0.75% --
OTHER EXPENSES 0.15% 0.15% 0.15% 0.15%
- ------------------------------------------------
TOTAL (GROSS) 0.89% 1.64% 1.44% 0.69%
WAIVERS/
REIMBURSEMENTS -- -- -- --
- ------------------------------------------------
TOTAL (NET) 0.89% 1.64% 1.44% 0.69%
</TABLE>
- --------------------------------------------------------------------------------
SUMMARY OF SHAREHOLDER EXPENSES (5)
The example illustrates the expenses on a hypothetical $1,000 investment in the
fund based on the Total Expenses shown at left, an assumed annual total return
of 5% and reinvestment of all dividends.
<TABLE>
<CAPTION>
HOLDING
PERIOD CLASS A CLASS B CLASS C CLASS R
- -----------------------------------------
<S> <C> <C> <C> <C>
1 YEAR $ 51 $ 56 $ 15 $ 7
3 YEARS $ 69 $ 84 $ 46 $22
5 YEARS $ 89 $101 $ 79 $38
10 YEARS $147 $174 $172 $86
</TABLE>
Information as of 8/31/96 See Notes on Next Page
- --------------------------------------------------------------------------------
PAGE 10
<PAGE>
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The financial highlights below are excerpted from the fund's latest annual
report which has been audited by Arthur Andersen LLP, the fund's independent
auditors, and the fund's subsequent unaudited semi-annual report. For a free
copy of the fund's latest annual and semi-annual reports, write to Nuveen or
call (800) 621-7227.
<TABLE>
- ------------------ ----------------------------------------------------------------------
<CAPTION>
CLASS INVESTMENT OPERATIONS AND DISTRIBUTIONS:
(INCEPTION DATE)
Net Realized Distribu-
and Unreal- Dividends tions
Beginning Net ized Gain from Net from Ending
Year Ending Net Asset Investment (Loss) From Investment Capital Net Asset
February 28/29, Value Income(c) Investments(a) Income Gains Value
---------------- --------- ---------- -------------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
CLASS A (9/94)
1997 (e) $10.610 $.266 $(.285) $(.261) $ -- $10.330
- -----------------------------------------------------------------------------------------
1996 10.150 .521 .492 (.524) (.029)(f) 10.610
- -----------------------------------------------------------------------------------------
1995 (d) 10.160 .253 .037 (.260) (.040)(f) 10.150
- -----------------------------------------------------------------------------------------
CLASS C (9/94)
1997 (e) 10.610 .226 (.284) (.222) -- 10.330
- -----------------------------------------------------------------------------------------
1996 10.120 .442 .524 (.447) (.029)(f) 10.610
- -----------------------------------------------------------------------------------------
1995 (d) 10.030 .207 .133 (.210) (.040)(f) 10.120
- -----------------------------------------------------------------------------------------
CLASS R (12/86)
1997 (e) 10.610 .273 (.280) (.273) -- 10.330
- -----------------------------------------------------------------------------------------
1996 10.150 .548 .495 (.554) (.029)(f) 10.610
- -----------------------------------------------------------------------------------------
1995 10.630 .555 (.440) (.555) (.040)(f) 10.150
- -----------------------------------------------------------------------------------------
1994 10.620 .550 .035 (.543) (.032) 10.630
- -----------------------------------------------------------------------------------------
1993 9.780 .566 .849 (.562) (.013) 10.620
- -----------------------------------------------------------------------------------------
1992 9.320 .590 .467 (.597) -- 9.780
- -----------------------------------------------------------------------------------------
1991 9.250 .598 .068 (.596) -- 9.320
- -----------------------------------------------------------------------------------------
1990 9.060 .596 .190 (.596) -- 9.250
- -----------------------------------------------------------------------------------------
1989 9.100 .593 (.040) (.593) -- 9.060
- -----------------------------------------------------------------------------------------
1988 9.830 .606 (.730) (.606) -- 9.100
- -----------------------------------------------------------------------------------------
1987 (d) 9.600 .130 .230 (.130) -- 9.830
- -----------------------------------------------------------------------------------------
<CAPTION>
- ------------------ ----------------------------------------------------------------------
CLASS RATIOS/SUPPLEMENTAL DATA:
(INCEPTION DATE)
Ratio of Net
Ratio of Investment
Ending Expenses to Income to Portfolio
Year Ending Total Net Assets Average Net Average Turnover
February 28/29, Return(b) (millions) Assets(c) Net Assets(c) Rate
- ------------------ --------- ---------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C>
CLASS A (9/94)
1997 (e) (.15)% $30.6 .94%+ 5.00%+ 14%
- -----------------------------------------------------------------------------------------
1996 10.19 24.7 .93 4.97 17
- -----------------------------------------------------------------------------------------
1995 (d) 3.01 7.3 1.05+ 5.41+ 11
- -----------------------------------------------------------------------------------------
CLASS C (9/94)
1997 (e) (.53) 2.2 1.69+ 4.25+ 14
- -----------------------------------------------------------------------------------------
1996 9.71 1.4 1.69 4.21 17
- -----------------------------------------------------------------------------------------
1995 (d) 3.53 .3 1.80+ 4.65+ 11
- -----------------------------------------------------------------------------------------
CLASS R (12/86)
1997 (e) (.03) 326.2 .69+ 5.25+ 14
- -----------------------------------------------------------------------------------------
1996 10.51 343.3 .67 5.26 17
- -----------------------------------------------------------------------------------------
1995 1.37 345.1 .65 5.57 11
- -----------------------------------------------------------------------------------------
1994 5.57 388.2 .68 5.11 5
- -----------------------------------------------------------------------------------------
1993 14.96 314.9 .73 5.56 6
- -----------------------------------------------------------------------------------------
1992 11.66 167.0 .69 6.08 4
- -----------------------------------------------------------------------------------------
1991 7.61 80.5 .73 6.46 13
- -----------------------------------------------------------------------------------------
1990 8.75 40.4 .85 6.35 30
- -----------------------------------------------------------------------------------------
1989 6.37 20.2 .97 6.58 62
- -----------------------------------------------------------------------------------------
1988 (.85) 14.1 .61 6.73 36
- -----------------------------------------------------------------------------------------
1987 (d) 3.76 5.2 -- 4.97+ --
- -----------------------------------------------------------------------------------------
</TABLE>
+ Annualized.
(a) Net of any applicable taxes.
(b) Total returns are calculated on net asset value and are not annualized for
periods of less than 12 months.
(c) After waiver of certain management fees or reimbursement of expenses, if
applicable, by Nuveen Advisory.
(d) From commencement of class operations as noted.
(e) For the six months ending August 31, 1996.
(f) The amounts shown include distributions in excess of capital gains of
$.0024 per share for the year ended 2/29/96 and $.0015 per share for the
year ended 2/28/95.
- -------------------------------------------------------------------------------
NOTES:
(1)Sales charge in effect February 1, 1997. The sales charge may be reduced or
waived based on the amount of purchase or for certain eligible categories
of investors. A CDSC of 1% is imposed on redemptions of certain purchases
of $1 million or more within 18 months of purchase.
(2)CDSC declines to 0% at the end of six years.
(3)Imposed only on redemptions within 12 months of purchase.
(4)Effective February 1, 1997, the funds reduced the service fee on Class A
and C shares from 0.25% to 0.20% and reduced the distribution fee on Class
C shares from 0.75% to 0.55%. These lower expenses are reflected in the
table and are expected to reduce total operating expenses on Class A from
0.94% to 0.89% and on Class C from 1.69% to 1.44%, as reflected in the
table. Long-term holders of Class B and C shares may pay more in distribu-
tion fees and CDSCs than the maximum initial sales charge permitted under
National Association of Securities Dealers (NASD) Rules of Fair Practice.
Nuveen Advisory has agreed to waive some or all of its fees or reimburse
expenses to prevent total operating expenses (not counting distribution and
service fees) from exceeding 0.975% of the fund's average daily net assets.
(5)The expenses shown assume that you redeem your shares at the end of each
holding period. Class B shares convert to Class A shares after eight years.
If instead you redeemed your shares immediately prior to the end of each
holding period, your expenses would be higher. This example does not repre-
sent past or future expenses; actual expenses may be higher or lower.
- -------------------------------------------------------------------------------
PAGE 11
<PAGE>
FUND STRATEGIES
- -------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of each fund is to provide you with as high a level
of current interest income exempt from regular federal, state and, in some
cases, local income taxes as is consistent with preservation of capital. There
is no assurance that the funds will achieve their investment objective.
INVESTOR SUITABILITY
The funds are a suitable investment for tax-conscious investors seeking to:
. Earn regular monthly tax-free dividends;
. Preserve investment capital over time;
. Reduce taxes on investment income;
. Set aside money systematically for retirement, estate planning or college
funding.
The funds are not a suitable investment for individuals seeking to:
. Pursue an aggressive, high-growth investment strategy;
. Invest through an IRA or 401k plan;
. Avoid fluctuations in share price.
- -------------------------------------------------------------------------------
HOW THE FUNDS SELECT
INVESTMENTS
TAX-FREE MUNICIPAL BONDS
The funds invest substantially all of their assets (at least 80%) in municipal
bonds that pay interest that is exempt from regular federal, state and, in
some cases, local income taxes. Income from these bonds may be subject to the
federal alternative minimum tax.
Municipal bonds are either general obligation or revenue bonds and typically
are issued to finance public projects (such as roads or public buildings), to
pay general operating expenses, or to refinance outstanding debt. Municipal
bonds may also be issued for private activities, such as housing, medical and
educational facility construction, or for privately owned industrial develop-
ment and pollution control projects. General obligation bonds are backed by
the full faith and credit, or taxing authority, of the issuer and may be
repaid from any revenue source; revenue bonds may be repaid only from the
revenues of a specific facility or source.
The New York Insured Fund primarily purchases insured municipal bonds. See
"Insurance" below. Under normal market conditions, the Nuveen New York Insured
Fund will invest at least 65% of its assets in insured municipal bonds.
FOCUS ON QUALITY MUNICIPAL BONDS
The funds focus on quality municipal bonds that are either rated investment
grade (AAA/Aaa to BBB/Baa) by independent ratings agencies at the time of
purchase or are non-rated but judged to be investment grade by the funds'
investment adviser. If suitable municipal bonds from a specific state are not
available at attractive prices and yields, a fund may invest in municipal
bonds of U.S. territories (such as Puerto Rico and Guam) which are exempt from
regular federal, state, and local income taxes. The New York Fund, New York
Insured Fund and the New Jersey Fund may not invest more than 20% of their net
assets in these territorial municipal bonds. The New York Insured Fund will
invest at least 80% of its net assets in insured municipal bonds or municipal
bonds backed by an escrow or trust account that contains sufficient U.S.
government-backed securities to assure timely payment of interest and princi-
pal.
The funds may purchase municipal bonds that represent lease obligations. These
carry special risks because the issuer of the bonds may not be obligated to
appropriate money annually to make payments under the lease. In order to
reduce this risk, the funds will only purchase leases where the issuer has a
strong incentive to continue making appropriations until maturity.
Bond ratings are furnished by Standard & Poor's Corporation, Fitch Investors
Services, and Moody's Investors Services. The ratings BBB and Baa are not
identical--S&P and Fitch consider bonds rated BBB to have adequate capacity to
pay principal and interest; Moody's considers bonds rated Baa to have some
speculative characteristics. Bond ratings represent the opinions of the
ratings agencies; they are not absolute standards of quality.
VALUE INVESTING STRATEGY
The funds' investment adviser uses a value-oriented strategy and looks for
higher-yielding and undervalued municipal bonds that offer above-average total
return potential. The adviser emphasizes fundamental research and selects
municipal bonds on the basis of its evaluation of each bond's relative value
in terms of current yield, price, credit quality and future prospects. The
adviser then monitors each fund's portfolio to assure that municipal bonds
purchased continue to represent over time, in its opinion, the best values
available.
PORTFOLIO MATURITY
Each fund purchases municipal bonds with different maturities in pursuit of
its investment objective, but
- -------------------------------------------------------------------------------
PAGE 12
<PAGE>
maintains under normal market conditions an investment portfolio with an
overall weighted average maturity within a defined range. The New Jersey
Intermediate Fund maintains a weighted average portfolio maturity of 5 to 10
years. The Connecticut Fund, the New York Fund, the New York Insured Fund, and
the New Jersey Fund are long-term funds and normally maintain a weighted
average portfolio maturity of 15 to 30 years. See "Defensive Investment Strat-
egies" below for further information.
INSURANCE
Insured municipal bonds are purchased primarily by the New York Insured Fund.
Insured municipal bonds are either covered by individual, permanent insurance
policies (obtained either at the time of issuance or subsequently), or covered
"while in fund" under a master portfolio insurance policy purchased by a fund.
Insurance guarantees only the timely payment of interest and principal on the
bonds; it does not guarantee the value of either individual bonds or fund
shares.
Portfolio insurance policies are effective only so long as the fund continues
to own the covered bond, and the price the fund would receive upon sale of
such a bond would not benefit from the insurance. Insurers under master port-
folio insurance policies currently include MBIA Insurance Corp., AMBAC Indem-
nity Corp., Financial Security Assurance, Inc., and Financial Guaranty Insur-
ance Co. The fund's investment adviser may obtain master policies from other
insurers, but only from insurers that specialize in insuring municipal bonds
and whose claims-paying ability is rated Aaa or AAA by Moody's and S&P.
Insurers are responsible for making their own assessment of the insurability
of a municipal bond.
The New York Insured Fund can invest up to 20% of its net assets in uninsured
municipal bonds which are backed by an escrow containing sufficient U.S.
Government or U.S. Government agency securities to ensure timely payment of
principal and interest. Such bonds are normally regarded as having the credit
characteristics of the underlying U.S. Government-backed securities.
PORTFOLIO TURNOVER
A fund buys and sells portfolio securities in the normal course of its invest-
ment activities. The proportion of the fund's investment portfolio that is
sold and replaced with new securities during a year is known as the fund's
portfolio turnover rate. The funds intend to keep portfolio turnover rela-
tively low in order to reduce trading costs and the realization of taxable
capital gains. Each fund, however, may make limited short-term trades to take
advantage of market opportunities and reduce market risk.
DELAYED DELIVERY TRANSACTIONS
Each fund may buy or sell bonds on a when-issued or delayed delivery basis,
making payment or taking delivery at a later date, normally within 15 to 45
days of the trade date. This type of transaction may involve an element of
risk because no interest accrues on the bonds prior to settlement and, since
securities are subject to market fluctuation, the value of the bonds at time
of delivery may be less (or more) than cost.
- -------------------------------------------------------------------------------
RISK REDUCTION STRATEGIES
In pursuit of its investment objective, each fund assumes investment risk,
chiefly in the form of interest rate and credit risk. Interest rate risk is
the risk that changes in market interest rates will affect the value of a
fund's investment portfolio. In general, the value of a municipal bond falls
when interest rates rise, and increases when interest rates fall. Credit risk
is the risk that an issuer of a municipal bond is unable to meet its obliga-
tion to make interest and principal payments. In general, lower rated munic-
ipal bonds are perceived to carry a greater degree of risk in the issuer's
ability to make interest and principal payments. Municipal bonds with longer
maturities (durations) or lower ratings generally provide higher current
income, but are subject to greater price fluctuation due to changes in market
conditions than bonds with shorter maturities or higher ratings, respectively.
Because the funds primarily purchase municipal bonds from a specific state,
each fund also bears investment risk from the economic, political or regula-
tory changes that could adversely affect municipal bond issuers in that state
and therefore the value of the fund's investment portfolio. These risks may be
greater for the Connecticut, New Jersey and New Jersey Intermediate Funds,
which as "non-diversified" funds may concentrate their investments in munic-
ipal bonds of certain issuers to a greater extent than the New York and New
York Insured Funds described in this prospectus, which are diversified funds.
The funds limit your investment risk generally by restricting the types and
maturities of municipal bonds they purchase, and by diversifying their invest-
ment portfolios across different industry sectors. The funds should be consid-
ered long-term investments and may not be suitable for investors with short-
term investment horizons.
INVESTMENT LIMITATIONS
The funds have adopted certain investment limitations (based on total fund
assets) designed to limit your investment risk and maintain portfolio diversi-
fication. Each fund may not have more than:
. 25% in any one industry sector, such as electric utilities or health care;
- -------------------------------------------------------------------------------
PAGE 13
<PAGE>
. 10% in borrowings (33% if used to meet redemptions).
As diversified funds, the New York and the New York Insured Funds also may not
have more than:
. 5% in securities of any one issuer (except U.S. government securities or for
25% of each fund's assets).
DEFENSIVE INVESTMENT STRATEGIES
Each fund may invest in high quality short-term municipal securities in order
to reduce risk and preserve capital. Under normal market conditions, each fund
may invest only up to 20% of net assets in short-term municipal securities
that are exempt from regular federal income tax, although the funds may invest
up to 100% as a temporary defensive measure in response to adverse market
conditions. During temporary defensive periods, the weighted average maturity
of a fund's investment portfolio may fall below the defined range described
above under "Portfolio Maturity."
If suitable short-term municipal investments are not reasonably available, the
funds may invest in short-term taxable securities that are rated Aaa or AAA,
by Moody's or S&P, respectively, or issued by the U.S. government, and that
have a maturity of one year or less or have a variable interest rate.
Each fund may also use various investment strategies designed to limit the
risk of bond price fluctuations and to preserve capital. These hedging strate-
gies include using financial futures contracts, options on financial futures,
or options based on either an index of long-term tax-free securities or on
debt securities whose prices, in the opinion of the funds' investment adviser,
correlate with the prices of the funds' investments. The funds, however, have
no present intent to use these strategies.
FUNDAMENTAL INVESTMENT POLICIES
Each fund's investment objective as well as the policies described above in
"Focus on Quality Municipal Bonds," "Insurance," and "Risk Reduction Strate-
gies" are fundamental and may not be changed without the approval of a
majority of the shareholders of each fund.
INVESTING IN THE FUNDS
- -------------------------------------------------------------------------------
HOW TO BUY FUND SHARES
You may open an account with $3,000 and make additional investments at any
time with as little as $50. Reinvestment of Nuveen unit trust distributions
have no purchase minimums. The share price you pay will depend on when Nuveen
receives your order: orders received before the close of regular trading on
the New York Stock Exchange (normally 4:00 p.m. Eastern time) will receive
that day's share price; otherwise you will receive the next business day's
share price.
BUYING SHARES THROUGH A FINANCIAL ADVISER
You may buy fund shares through your financial adviser, who can handle all the
details for you, including establishing an account with Nuveen. Financial
advisers can also help you review your financial needs and formulate long-term
investment goals and objectives. In addition, financial advisers generally can
help you develop a customized financial plan, select investments, and monitor
and review your portfolio on an ongoing basis to assure your investments
continue to meet your needs as circumstances change.
Financial advisers are usually paid either from fund sales charges and fees or
by charging you a separate fee in lieu of a sales charge for ongoing invest-
ment advice and services.
If you do not have a financial adviser, call (800) 621-7227 and Nuveen can
refer you to one in your area.
BUYING SHARES BY MAIL
You may also open an account and purchase shares by mail by completing the
enclosed Nuveen application and mailing it along with your check (payable to
the appropriate fund) to the address listed under "How to Contact Nuveen."
Sales charges are not waived when you buy shares by mail.
Each fund reserves the right to reject any purchase order and waive or
increase minimum investment requirements. The funds also reserve the right to
suspend the issuance of shares at any time; any suspension, however, will not
affect your ability to redeem shares.
- -------------------------------------------------------------------------------
HOW TO SELECT A PURCHASE OPTION
The funds offer you a variety of flexible options when buying shares. Whether
you typically work with a financial adviser on a commission or a fee basis or
- -------------------------------------------------------------------------------
PAGE 14
<PAGE>
prefer to work on a more self-directed basis, you can purchase shares in the
way that is most suited to your individual circumstances and investment needs.
Each of the four available ways to purchase fund shares is called a class of
shares: Class A, Class B, Class C and Class R. While each of these classes
features different sales charges, on-going fees and eligibility requirements,
each entitles you to a share of the same portfolio of municipal bonds.
Selecting the class of shares which is most appropriate for you will depend on
a variety of factors. You should weigh carefully whether you and your financial
adviser work on a commission or fee basis, the types of services that you will
receive, the amount you intend to buy, how long you plan to own your investment
and whether or not you will reinvest dividends. If you compensate your finan-
cial adviser directly, you should consider the fees your financial adviser
charges for investment advice or handling your trades in addition to any sales
charges and fees imposed by the funds. Please refer to your financial adviser's
sales material for further information. Each class of shares is described in
more detail below and under "Fund Service Providers--The Distributor." Your
financial adviser can explain each option and help you determine which is most
appropriate for you, or you can call (800) 621-7227.
BUYING CLASS A SHARES
You may buy Class A shares at their public offering price on the day of
purchase. The price you pay will equal the Class A NAV (net asset value) plus a
sales charge based upon the amount of your purchase. Class A shares also bear a
0.20% annual service fee which compensates your financial adviser for providing
you with ongoing service.
The following Class A sales charges and commissions apply to all funds
described in this prospectus except the New Jersey Intermediate Fund:
- --------------------------------------------------------------------------------
CLASS A SALES CHARGES AND COMMISSIONS
<TABLE>
<CAPTION>
AUTHORIZED DEALER
SALES CHARGE COMMISSION
------------------------------------- -----------------
AS % OF
AS % OF PUBLIC YOUR NET AS % OF PUBLIC
PURCHASE AMOUNT OFFERING PRICE INVESTMENT OFFERING PRICE
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Up to $50,000 4.20% 4.38% 3.70%
$50,000-100,000 4.00 4.18 3.50
$100,000-250,000 3.50 3.63 3.00
$250,000-500,000 2.50 2.56 2.00
$500,000-1,000,000 2.00 2.04 1.50
$1,000,000 and over --(1) -- --(1)
</TABLE>
The following Class A sales charges and commissions apply to the New Jersey
Intermediate Fund:
- --------------------------------------------------------------------------------
CLASS A SALES CHARGES AND COMMISSIONS
<TABLE>
<CAPTION>
AUTHORIZED DEALER
SALES CHARGE COMMISSION
------------------------------------- -----------------
AS % OF
AS % OF PUBLIC YOUR NET AS % OF PUBLIC
PURCHASE AMOUNT OFFERING PRICE INVESTMENT OFFERING PRICE
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Up to $50,000 3.00% 3.09% 2.50%
$50,000-100,000 2.50 2.56 2.00
$100,000-250,000 2.00 2.04 1.50
$250,000-500,000 1.50 1.52 1.25
$500,000-1,000,000 1.25 1.27 1.00
$1,000,000 and over --(1) -- --(1)
</TABLE>
(1) Nuveen pays authorized dealers a commission equal to the sum of 1% of the
first $2.5 million, plus 0.50% of the next $2.5 million, plus 0.25% of any
amount over $5 million. Unless the authorized dealer waived the commission,
you may be assessed a contingent deferred sales charge (CDSC) of 1% if you
redeem any of your shares within 18 months of purchase. The CDSC is calcu-
lated on the lower of your purchase price or redemption proceeds.
Nuveen periodically undertakes sales promotion programs with authorized dealers
and may pay them the full applicable sales charge as a commission. In addition,
Nuveen may provide support at its own expense to authorized dealers in connec-
tion with sales meetings, seminars, prospecting seminars and other events at
which Nuveen presents its products and services. Under certain circumstances,
Nuveen also will share with authorized dealers up to half the costs of adver-
tising that features the products and services of both parties. The statement
of additional information contains further information about these programs.
- --------------------------------------------------------------------------------
OTHER SALES CHARGE DISCOUNTS
Nuveen offers a number of programs that enable you to reduce or eliminate the
sales charge on Class A shares:
Sales Charge Reductions
Sales Charge Waivers
. Rights of Accumulation
. Unit Trust Reinvestment
. Letter of Intent (LOI)
. Group Purchase . Purchases using Redemptions from Unrelated Funds
. Fee-Based Programs
. Bank Trust Departments
. Certain Employees of Nuveen or Authorized Dealers
Please refer to the statement of additional information for detailed descrip-
tions of these programs. Further information on these programs is also avail-
able through your financial adviser or by calling (800) 621-7227. Your finan-
cial adviser can also provide and
- --------------------------------------------------------------------------------
PAGE 15
<PAGE>
help you prepare the necessary application forms. You or your financial adviser
are responsible for notifying Nuveen about your eligibility for any sales
charge reduction or waiver at the time of each purchase.
The funds may modify or discontinue these programs at any time upon written
notice to shareholders.
BUYING CLASS B SHARES
You may buy Class B shares at their public offering price on the day of
purchase. The price you pay will equal the Class B NAV. There is no initial
sales charge, but Class B shares bear a 0.20% annual service fee which compen-
sates your financial adviser for providing you with ongoing service, and a
0.75% annual distribution fee which compensates Nuveen for paying your finan-
cial adviser a 4% commission at the time of purchase. The New Jersey Interme-
diate Fund does not currently offer Class B shares.
Class B shares convert automatically to Class A shares eight years after
purchase. Class B shares will convert only if the fund is assured that the
conversion does not generate tax consequences for investors, based upon the
opinion of outside counsel or the written assurance of the IRS.
- --------------------------------------------------------------------------------
CLASS B CONTINGENT DEFERRED SALES CHARGE
If you redeem Class B shares within six years of purchase, you will be assessed
a contingent deferred sales charge (CDSC) based upon the following schedule:
<TABLE>
<CAPTION>
DURING YEAR
------------------------------------------
1 2 3 4 5 6 7+
----- ----- ----- ----- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
CDSC 5% 4% 4% 3% 2% 1% 0%
</TABLE>
The CDSC is calculated on the lower of your purchase price or redemption
proceeds.
BUYING CLASS C SHARES
You may buy Class C shares at their public offering price on the day of
purchase. The price you pay will equal the Class C NAV. There is no initial
sales charge, Class C shares bear a 0.20% annual service fee which compensates
your financial adviser for providing you with ongoing service, and a 0.55%
annual distribution fee which compensates Nuveen for paying your financial
adviser for the sale, including a 1% commission at the time of sale.
If you redeem your Class C shares within one year of purchase, you may be
assessed a CDSC of 1%. The CDSC is calculated on the lower of your purchase
price or redemption proceeds.
BUYING CLASS R SHARES
You may purchase Class R shares at their public offering price on the day of
purchase. The price you pay will equal the Class R NAV. You may purchase Class
R shares only if you are investing at least $1 million or would otherwise
qualify to purchase Class A shares without a sales charge as described under
"Other Sales Charge Discounts" above. There are no sales charges or ongoing
fees. Class R Shares have lower ongoing expenses than Class A Shares.
- --------------------------------------------------------------------------------
HOW TO SELL FUND SHARES
You may use one of the methods described below to redeem your shares on any
day the New York Stock Exchange is open. You will receive the share price next
determined after Nuveen has received your redemption request in good order.
Your redemption request must be received before the close of trading of the
New York Stock Exchange (normally 4 p.m. Eastern time) for you to receive that
day's price. The funds do not charge any redemption fees, although you will be
assessed a CDSC where applicable.
SELLING SHARES THROUGH YOUR FINANCIAL ADVISER
You may sell fund shares by contacting your financial adviser who can provide
and help you prepare all the necessary documentation. Your financial adviser
may charge you for this service.
SELLING SHARES BY TELEPHONE
Unless you have declined telephone redemption privileges, you may sell fund
shares by calling (800) 621-7227. Your redemption must not exceed $50,000 and
you may not redeem by telephone shares held in certificate form. Checks will
be issued only to the shareholder on record and mailed to the address on
record. If you have established electronic funds transfer privileges on your
account, you may have redemption proceeds transferred electronically to your
bank account; if you are redeeming $1,000 or more, you may expedite your
request by having your redemption proceeds wired directly into your bank
account.
Nuveen and Shareholder Services, Inc. ("SSI") will be liable for losses
resulting from unauthorized telephone redemptions only if they do not follow
reasonable procedures designed to verify the identity of the caller. You
should immediately verify your trade confirmations when you receive them.
SELLING SHARES BY MAIL
You may sell fund shares by mail by sending a written request to Nuveen at the
address listed below under "How to Contact Nuveen." Your request must include
the following information:
. The fund's name;
. Your name and account number;
. The dollar or share amount you wish to redeem;
. The signature of each owner exactly as it appears on the account;
- -------------------------------------------------------------------------------
PAGE 16
<PAGE>
. The name of the person you want your redemption proceeds paid to, if other
than to the shareholder of record;
. The address you want your redemption proceeds sent to, if other than to the
address of record;
. Any certificates you have for the shares; and
. Any required signature guarantees.
Signatures must be guaranteed if you are redeeming more than $50,000, you want
the check payable to someone other than the shareholder on record, or you want
the check sent to another address (or the address on record has been changed
within the last 60 days). Signature guarantees must be obtained from a bank,
brokerage firm or other financial intermediary that is a member of an approved
Medallion Guarantee Program or that is otherwise approved by the fund. A notary
public cannot provide a signature guarantee.
Unless other arrangements are made, checks will be sent to your address on
record. Checks will normally be mailed within one business day, but in no event
more than seven days from receipt of your redemption request. If any shares
were purchased less than 15 days prior to your request, the fund will not mail
your redemption proceeds until the check for your purchase has cleared, which
may take up to 15 days.
Each fund may suspend redemptions or delay payment on redemptions for more than
seven days (three days for street name accounts) in certain extraordinary
circumstances as described in the statement of additional information.
OPERATION OF THE CDSC
When you redeem Class A, Class B, or Class C shares subject to a CDSC, the fund
will first redeem any shares that are not subject to a CDSC or that represent
an increase in the value of your fund account due to capital appreciation, and
then redeem the shares you have owned for the longest period of time, unless
you ask the fund to redeem your shares in a different order. No CDSC is imposed
on shares you buy through the reinvestment of dividends and capital gains. The
holding period is calculated on a monthly basis and begins on the first day of
the month in which you buy shares. When you redeem shares subject to CDSC, the
CDSC is calculated on the lower of your purchase price or redemption proceeds,
deducted from your redemption proceeds, and paid to Nuveen. The CDSC may be
waived under certain special circumstances as described in the statement of
additional information.
ACCOUNT MINIMUMS
From time to time, the funds may establish minimum account size requirements.
The funds reserve the right to liquidate your account upon 30 days written
notice if the value of your account falls below an established minimum. The
funds presently have set a minimum balance of $100 unless you have an active
unit trust reinvestment account. You will not be assessed a CDSC on an involun-
tary redemption.
- --------------------------------------------------------------------------------
EXCHANGING SHARES
You may exchange fund shares at any time for the same class of shares in
another Nuveen mutual fund that is available within your state. You may
exchange fund shares by calling (800) 621-7227 or by mailing your written
request to Nuveen at the address listed under "How to Contact Nuveen."
You must have owned your fund shares for at least 15 days and your exchange
must meet the minimum purchase requirements of the fund into which you are
exchanging. No CDSC will be assessed on an exchange, and the holding period of
your investment will be carried over to the new fund for purposes of deter-
mining any future CDSC. You may not exchange Class B shares for shares of a
Nuveen money market fund.
Because an exchange is treated for tax purposes as the concurrent sale and
purchase of fund shares, you should consult your tax adviser about the tax
consequences of any contemplated exchange. Each fund reserves the right to
limit or terminate exchange privileges if it believes doing so is in the best
interests of fund shareholders.
RESTRICTIONS ON MARKET TIMING
The exchange privilege is not intended to permit you to use a fund for short-
term trading. Excessive exchange activity may interfere with portfolio manage-
ment, raise fund operating expenses or otherwise have an adverse effect on fund
shareholders. In order to limit excessive exchange activity and in other
circumstances where the funds' investment adviser believes doing so would be in
the best interests of the fund, each fund reserves the right to revise or
terminate the exchange privilege, limit the amount or number of exchanges, or
reject any exchange. You will be notified in the event this happens to the
extent required by law.
- --------------------------------------------------------------------------------
OPTIONAL FEATURES AND SERVICES
SYSTEMATIC INVESTMENT
Once you have opened an account, you may make regular investments of $50 or
more a month through automatic deductions from your bank account (see "Fund
Direct--Electronic Funds Transfer" below), or directly from your paycheck. To
invest regularly from your bank account, simply complete the appropriate
section of the account application. To invest regularly from your paycheck,
call Nuveen for a Payroll Direct Deposit Enrollment form. If you need
- --------------------------------------------------------------------------------
PAGE 17
<PAGE>
additional copies of these forms, or would like assistance completing them,
contact your financial adviser or call Nuveen toll-free at (800) 621-7227.
One of the benefits of systematic investing is "dollar cost averaging."
Because you are making fixed payments, you buy fewer shares when the price is
high, and more when the price is low. As a result, the average price you pay
will be less than the average share price of fund shares over this 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.
Systematic investing may also make you eligible for reduced sales charges on
shares of the fund as well as other Nuveen mutual funds (see "Other Sales
Charge Discounts").
- --------------------------------------------------------------------------------
THE POWER OF SYSTEMATIC INVESTING
The chart below illustrates the benefits of systematic investing based on a
$3,000 initial investment and subsequent monthly investments of $100 over 20
years. The example assumes you earn a return of 4%, 5% or 6% annually on your
investment and that you reinvest all dividends. Theses annual returns do not
reflect past or projected fund performance.
<TABLE>
<CAPTION>
(CHART APPEARS HERE)
ACCOUNT VALUES FOR TOTAL RETURNS OF
AMOUNT ------------------------------------
YEAR INVESTED 4.00% 5.00% 6.00%
---- -------- ------- ------- -------
<S> <C> <C> <C> <C>
0 $ 2,874 $ 2,874 $ 2,874 $ 2,874
5 8,622 9,861 10,203 10,561
10 14,370 18,391 19,610 20,929
15 20,118 28,807 31,681 34,913
20 25,866 41,525 47,173 53,779
</TABLE>
SYSTEMATIC WITHDRAWALS
If the value of your fund account is at least $10,000, you may request to have
$50 or more withdrawn automatically from your account. You may elect to
receive payments monthly, quarterly or semi-annually, and may choose to
receive a check, have the monies transferred directly into your bank account
(see "Fund Direct--Electronic Funds Transfer" below), paid to a third party or
sent payable to you at an address other than your address of record. You must
complete the appropriate section of the account application to participate in
the fund's systematic withdrawal plan.
You should not establish systematic withdrawals if you intend to make concur-
rent purchases of Class A, B or C shares because you may unnecessarily pay a
sales charge or CDSC on these purchases.
REINSTATEMENT PRIVILEGE
If you redeem fund shares on which you paid an initial sales charge or contin-
gent deferred sales charge (CDSC), you may reinvest all or part of your
redemption proceeds up to one year later without incurring any additional
charge. You may only reinvest into the same class of shares you redeemed and
will receive the share price next determined after Nuveen receives your rein-
vestment request. You may exercise this privilege only once per redemption
request.
If you paid a CDSC, your CDSC will be refunded and your holding period rein-
stated. You should consult your tax adviser about the tax consequences of
exercising your reinstatement privilege.
FUND DIRECT--ELECTRONIC FUNDS TRANSFER
You may arrange to transfer funds electronically between your bank account and
your fund account by completing the appropriate section of the account appli-
cation. If you need additional copies of this form, or would like assistance
completing it, contact your financial adviser or call Nuveen at (800) 621-
7227. You may use Fund Direct to quickly and conveniently purchase or sell
shares by telephone, systematically invest or withdraw funds, or send dividend
payments directly to your bank account.
If you have established electronic funds transfer privileges on your account,
you may request that redemption proceeds of $1,000 or more be wired directly
into your bank account. While you will generally receive your redemption
proceeds more quickly than a regular telephone redemption, the fund may charge
you a fee for this expedited service.
- -------------------------------------------------------------------------------
PAGE 18
<PAGE>
DIVIDENDS AND TAXES
- --------------------------------------------------------------------------------
HOW THE FUNDS PAY DIVIDENDS
The funds pay tax-free dividends monthly and any taxable capital gains or other
distributions once a year in December. The funds declare dividends on or about
the ninth of each month and generally pay dividends on the first business day
of the following month.
PAYMENT AND REINVESTMENT OPTIONS
The funds automatically reinvest your dividends each month in additional fund
shares unless you request otherwise. You may request to have your dividends
paid to you by check, deposited directly into your bank account, paid to a
third party, sent to an address other than your address of record or reinvested
in shares of another Nuveen mutual fund. If you wish to do so, complete the
appropriate section of the account application, contact your financial adviser
or call Nuveen at (800) 621-7227.
CALCULATION OF FUND DIVIDENDS
Each fund pays dividends based upon its past and projected net income in order
to distribute substantially all of its net income each fiscal year.
In order to maintain a more stable monthly dividend, each fund may sometimes
distribute less or more than the amount of net income earned in a particular
period as a result of fluctuations in a fund's net income. Undistributed net
income is included in the fund's share price; similarly, distributions from
previously undistributed net income reduce the fund's share price. This divi-
dend policy is not expected to affect the management of a fund's portfolio.
Dividends for Class A, B, C and R shares are determined in the same manner and
at the same time. Dividends per share will vary based on which class of fund
shares you own, reflecting the different ongoing fees and other expenses of
each class.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TAXES AND TAX REPORTING
The discussion below and in the statement of additional information provides
general tax information related to an investment in fund shares. Because tax
laws are complex and often change, you should consult your tax adviser about
the tax consequences of a specific fund investment.
Each fund primarily invests in municipal bonds from a specific state or in
municipal bonds whose income is otherwise exempt from regular federal, state
and local income taxes. Consequently, the regular monthly dividends you receive
will be exempt from regular federal, state and, in some cases, local income
taxes. All or a portion of these dividends, however, may be subject to the
federal alternative minimum tax (AMT).
Although the funds do not seek to realize taxable income or capital gains, the
funds may realize and distribute taxable income or capital gains from time to
time as a result of each fund's normal investment activities. Each fund will
distribute in December any taxable income or capital gains realized over the
preceding year. Net short-term gains are taxable as ordinary income. Net long-
term capital gains are taxable as long-term capital gains regardless of how
long you have owned your investment. Taxable dividends do not qualify for a
dividends received deduction if you are a corporate shareholder.
Each year, you will receive a year-end statement that describes the tax status
of dividends paid to you during the preceding year, including the source of its
investment income by state and the portion of its income that is subject to
AMT. You will receive this statement from the firm where you purchased your
fund shares if you hold your investment in street name; Nuveen will send you
this statement if you hold your shares in registered form.
The tax status of your dividends is not affected by whether you reinvest your
dividends or receive them in cash.
BUYING OR SELLING SHARES CLOSE TO A RECORD DATE
If you purchase fund shares shortly before the record date for a taxable divi-
dend, the entire dividend you receive may be taxable to you even though a
portion of the dividend effectively represents a return of your purchase price.
This is commonly known as "buying a dividend." Similarly, if you sell or
exchange fund shares shortly before the record date for a tax-exempt dividend,
a portion of the price you receive may be treated as a taxable capital gain
even though it reflects tax-free income earned but not yet distributed by the
fund.
TAX CONSEQUENCES OF PRIVATE ACTIVITY BONDS
Because each fund may invest in private activity bonds, the portion of your
regular monthly dividends derived from the income earned on these bonds that
would otherwise be tax-exempt will be treated as taxable income if:
. you are subject to the AMT (including corporate shareholders);
. you are a "substantial user" of a facility financed by these bonds; or
. you are a "related person" of a substantial user.
REDEEMING SHARES HELD LESS THAN SIX MONTHS
If you sell or exchange shares that you have owned for less than six months and
you recognized a short-
- --------------------------------------------------------------------------------
PAGE 19
<PAGE>
term capital loss when you redeemed your shares, the loss you can claim will
be reduced by the amount of tax-free dividends paid to you on those shares.
Any remaining short-term capital loss will be treated as long-term capital
loss to the extent you also received capital gain dividends on those shares.
You should consult your tax adviser for complete information about these
rules. Please consider the tax consequences carefully when contemplating a
redemption.
OTHER IMPORTANT TAX INFORMATION
In order to avoid corporate taxation of its earnings and to pay tax-free divi-
dends, each fund must meet certain I.R.S. requirements that govern the fund's
sources of income, diversification of assets and distribution of earnings to
shareholders. Each fund has met these requirements in the past and intends to
do so in the future. If a fund failed to do so, the fund would be required to
pay corporate taxes on its earnings and all your distributions would be
taxable as ordinary income.
A fund may be required to withhold 31% of certain of your dividends if you
have not provided the fund with your correct taxpayer identification number
(normally your social security number), or if you are otherwise subject to
back-up withholding.
If you receive social security benefits, you should be aware that tax-free
income is taken into account in calculating the amount of these benefits that
may be subject to federal income tax.
If you borrow money to buy fund shares, you may not deduct the interest on
that loan. Under I.R.S. rules, fund shares may be treated as having been
bought with borrowed money even if the purchase cannot be traced directly to
borrowed money.
- -------------------------------------------------------------------------------
TAXABLE EQUIVALENT YIELDS
The taxable equivalent yield is the current yield you would need to earn on a
taxable investment in order to equal a stated tax-free yield on a municipal
investment. To assist you to more easily compare municipal investments like
the funds with taxable alternative investments, the table below presents the
taxable equivalent yields for a range of hypothetical tax-free yields and tax
rates:
- -------------------------------------------------------------------------------
TAXABLE EQUIVALENT OF TAX-FREE YIELDS
<TABLE>
<CAPTION>
TAX-FREE YIELD
TAX RATE 4.00% 4.50% 5.00% 5.50% 6.00%
- ------
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
28.0% 5.56% 6.25% 6.94% 7.64% 8.33%
31.0% 5.80% 6.52% 7.25% 7.97% 8.70%
36.0% 6.25% 7.03% 7.81% 8.59% 9.37%
39.6% 6.62% 7.45% 8.28% 9.11% 9.93%
</TABLE>
The yields and tax rates shown above are hypothetical and do not predict your
actual returns or effective tax rate. For more detailed information, see the
statement of additional information or consult your tax adviser.
GENERAL INFORMATION
- -------------------------------------------------------------------------------
HOW TO CONTACT NUVEEN
GENERAL INFORMATION
If you would like general information about Nuveen Mutual Funds or any other
Nuveen product, call (800) 621-7227 between 7:30 a.m. and 7:00 p.m. Central
time.
PURCHASES, REDEMPTIONS AND OTHER TRANSACTIONS
If you are calling to purchase or redeem shares, request an exchange or
conduct other account transactions, call (800) 621-7227 between 7:30 a.m. and
7:00 p.m. Central time. If you are sending a written request to Nuveen, you
should mail your request to the following address:
Nuveen Mutual Funds
c/o Shareholder Services Inc.
P.O. Box 5330
Denver, CO 80217-5330
When purchasing fund shares by mail, please be sure to include a check made
out to the name of the Fund and mark clearly on your check which class of
shares you are purchasing. If you do not specify which class of shares you are
purchasing, Nuveen will assume you are buying Class A shares if you are
opening a new account; if you are adding to an existing account, Nuveen will
assume you wish to buy more shares of the class you already own.
- -------------------------------------------------------------------------------
FUND SERVICE PROVIDERS
INVESTMENT ADVISER
Nuveen Advisory Corp. ("Nuveen Advisory") serves as the investment adviser to
the funds and in this capacity is responsible for the selection and on-going
monitoring of the municipal bonds in each fund's investment portfolio. Nuveen
Advisory serves as investment adviser to investment portfolios with more than
$35 billion in municipal assets under management. The activities of Nuveen
Advisory, which also include managing the funds' business affairs and
providing certain clerical, bookkeeping and other administrative services, are
overseen by the funds' Board of Trustees. Established in 1976, Nuveen Advisory
is a wholly-owned subsidiary of John Nuveen & Co. Incorporated, which itself
is approximately 78% owned by the St. Paul Companies, Inc. Effective January
1, 1997, The John Nuveen Company acquired Flagship Resources Inc., and as part
of that acquisition, Flagship Financial, the adviser to the Flagship Funds,
was merged with Nuveen Advisory.
- -------------------------------------------------------------------------------
PAGE 20
<PAGE>
For providing these services, Nuveen Advisory is paid an annual management fee
according to the following schedule:
- -------------------------------------------------------------------------------
MANAGEMENT FEES
<TABLE>
<CAPTION>
AVERAGE DAILY MANAGEMENT
NET ASSET VALUE FEE
- --------------------------------------
<S> <C>
For the first $125 million 0.5500%
For the next $125 million 0.5375%
For the next $250 million 0.5250%
For the next $500 million 0.5125%
For the next $1 billion 0.5000%
For assets over $2 billion 0.4750%
</TABLE>
For more information about fees and expenses, see the fund operating expense
tables in the Fund Summaries.
PORTFOLIO MANAGERS
Overall investment management strategy and operating policies for the funds
are set by the Investment Policy Committee of Nuveen Advisory. The Investment
Policy Committee is comprised of the principal executive officers and port-
folio managers of Nuveen Advisory and meets regularly to review economic
conditions, the outlook for the financial markets in general and the status of
the municipal markets in particular. Day-to-day operation of each fund and the
execution of its specific investment strategies is the responsibility of the
designated portfolio manager described below.
Daniel S. Solender is the portfolio manager for the New York Fund and the New
York Insured Fund. Mr. Solender has managed the funds since September 1994 and
joined Nuveen Advisory in January 1992. Stephen S. Peterson is an Assistant
Vice President of Nuveen Advisory and the portfolio manager for the New Jersey
Fund. Mr. Peterson has managed the fund since its inception in March 1992 and
joined Nuveen Advisory in October 1991. Richard Huber is the portfolio manager
for the Connecticut Fund and the New Jersey Intermediate Fund. Mr. Huber has
managed the funds since 1993 and since 1995 had been a Vice President of Flag-
ship Financial Inc., the fund's prior investment adviser, until becoming a
Vice President of Nuveen Advisory upon the acquisition of Flagship Resources
Inc. by The John Nuveen Company in January 1997.
THE DISTRIBUTOR
John Nuveen and Co. Incorporated serves as the selling agent and distributor
of the funds' shares. In this capacity, Nuveen manages the offering of the
funds' shares and is responsible for all sales and promotional activities. In
order to reimburse Nuveen for its costs in connection with these activities,
including compensation paid to authorized dealers, each fund has adopted a
distribution and service plan under Rule 12b-1 of the Investment Company Act
of 1940.
The plan authorizes each fund to pay Nuveen an annual 0.20% service fee on the
average daily net assets of Class A, B and C shares outstanding and annual
distribution fees of 0.75% and 0.55%, respectively, on the average daily net
assets of Class B and C shares outstanding. In order to help compensate Nuveen
for the sales commission paid to financial advisers at the time of sale on
sales of Class B and
Class C shares, Nuveen retains the first year's service fee on sales of Class
B shares and all Class B distribution fees; and retains the first year's
service and distribution fees on sales of Class C shares. Otherwise, Nuveen
pays these fees to the broker of record. The statement of additional informa-
tion contains a detailed description of the plan and its provisions.
TRANSFER AGENT
Each fund has appointed a transfer agent which is responsible for distributing
dividend payments and providing certain bookkeeping, data processing and other
administrative services in connection with the maintenance of shareholder
accounts. Shareholder Services, Inc., P.O. Box 5330, Denver, CO 80217-5330,
currently serves as transfer agent for each fund.
- -------------------------------------------------------------------------------
HOW THE FUNDS REPORT
PERFORMANCE
Each fund may quote its yield and total return in reports to shareholders,
sales literature and advertisements. The funds may also compare their invest-
ment results to various passive indices or other mutual funds with similar
investment objectives. Comparative performance information may include data
from Lipper Analytical Services, Inc., Morningstar, Inc. and other industry
publications. See the statement of additional information for a more detailed
discussion.
- -------------------------------------------------------------------------------
HOW FUND SHARES ARE PRICED
The share price for each class of fund shares, also called its net asset value
(NAV), is calculated every business day as of the close of regular trading on
the New York Stock Exchange (normally 4 p.m. Eastern time). The net asset
value for a class of fund shares is computed by calculating the total value of
the class' portion of the fund's portfolio investments and other assets,
subtracting any liabilities or other debts, and dividing by the total number
of its shares outstanding.
The prices of municipal bonds in each fund's investment portfolio are provided
by a pricing service approved and supervised by the fund's Board of Trustees.
When price quotes are not readily available (which is usually the case for
municipal securities), the pricing service establishes fair market value based
on yields or prices of municipal bonds of comparable quality, type of issue,
coupon, maturity and rating,
- -------------------------------------------------------------------------------
PAGE 21
<PAGE>
indications of value from securities dealers and general market conditions.
- --------------------------------------------------------------------------------
ORGANIZATION
The Trust is an open-end investment company under the Investment Company Act of
1940, consisting of multiple funds. The shares of each fund are divided into
classes. Each class of shares represents an interest in the same portfolio of
investments and the shares of each class have equal rights as to voting,
redemption, dividends and liquidation. However, each class bears different
sales charges and service fees. B shares convert to A shares after 8 years. C
shares purchased before February 1, 1997 convert to A shares six years after
purchase, but only if you request conversion. You must submit your request to
SSI no later than the last business day of the 71st month following the month
in which you purchased your shares.
The funds are not required to and do not intend to hold annual meetings. Share-
holders owning ten percent or more of a fund's outstanding shares may call a
special meeting for any purpose, including to elect or remove trustees or to
change fundamental policies.
The New York and New Jersey Funds were formed as a result of mergers between
existing Nuveen and Flagship funds. The performance and the financial informa-
tion of each fund reflects that of the predecessor Nuveen fund.
APPENDIX
- --------------------------------------------------------------------------------
SPECIAL STATE CONSIDERATIONS
Because the funds primarily purchase municipal bonds from a specific state,
each fund also bears investment risk from economic, political or regulatory
changes that could adversely affect municipal bond issuers in that state and
therefore the value of the fund's investment portfolio. The following discus-
sion of special state considerations was obtained from official offering state-
ments of these issuers and has not been independently verified by the funds.
The discussion includes general state tax information related to an investment
in fund shares. Because tax laws are complex and often change, you should
consult your tax adviser about the state tax consequences of a specific fund
investment. See the statement of additional information for further informa-
tion.
CONNECTICUT
Connecticut's economy, historically based on the insurance, defense manufactur-
ing, finance and real estate industries, is slowly recovering from one of the
most severe recessions in the country, which was due in part to reductions in
defense spending and the downsizing of the foregoing industries. The construc-
tion, trade and service industries are expected to lead the state's economic
recovery. Connecticut is the highest income state in the nation.
While the state's per capital personal income levels are 135% of the national
average, the state's ratio of tax-supported debt to personal income is among
the highest in the nation. These high debts are expected to limit the state's
financial flexibility. The state's general obligation bonds are rated Aa by
Moody's and AA- by Standard and Poor's.
Tax Treatment:
The Connecticut Fund's regular monthly dividends will not be subject to the
Connecticut personal income tax to the extent they are paid out of income
earned on or capital gains realized from the sale of Connecticut municipal
bonds or out of income earned on obligations of U.S. territories and posses-
sions. The portion of the Connecticut Fund's monthly dividends that is attrib-
utable to income earned on other obligations will be subject to the Connecticut
personal income tax. You also will be subject to Connecticut personal income
tax to the extent the Connecticut Fund distributes any taxable income or real-
ized capital gains (other than capital gains on Connecticut municipal bonds),
or if you sell or exchange Connecticut Fund shares and realize a capital gain
on the transaction.
- --------------------------------------------------------------------------------
PAGE 22
<PAGE>
The treatment of corporate shareholders of the Connecticut Fund differs from
that described above. Corporate shareholders should refer to the statement of
additional information for more detailed information and are urged to consult
their tax adviser.
NEW YORK
While New York State historically has been one of the wealthiest states in the
nation, for decades its economy has grown more slowly than the nation as a
whole. There are many reasons for this slow growth. New York has a very high
state and local tax burden relative to other states. Declines in the banking
and financial services industry, cutbacks in defense spending, and an over-
built real estate market have hurt the State's economy. High taxes and other
factors have prompted some businesses and individuals to leave the State, or
not to move to the State. More affluent residents of its cities have moved to
the suburbs and been replaced by less affluent residents, who may require more
government support. Cities outside the state have developed financial and
business resources which make them less dependent on New York City, which has
hindered its economic recovery. The State projects a slow rate of economic
growth in 1996. The State's 1995 unemployment rate was 6.3%. New York City's
1995 unemployment rate was 8.2%. New York State general obligation bonds are
rated A by Moody's and A- by Standard & Poor's; New York City general obliga-
tion bonds are rated Baa1 by Moody's and BBB+ by Standard & Poor's.
The State ended its 1995-96 fiscal year with a GAAP operating deficit. The
$378 million proposed 1996-97 State budget projects a balanced general fund,
receipts of $31.9 billion, and disbursements of $31.2 billion. The Governor
also proposed an alternative budget to replace over $1 billion in Medicaid
reimbursements which the federal government might not pay.
New York City ended its 1996 fiscal year with an operating surplus of approxi-
mately $5 million. Before the State enacted its 1996-97 budget, New York City
adopted a fiscal year 1997 budget in June 1996 which provided for $33.4
billion in spending. In March 1996, Moody's announced that it was reviewing
the City's general obligation bond rating pending adoption of the City's 1997
budget. S&P placed the City on negative credit watch in January 1995. The
City's 1997 budget of $33.3 billion reduces spending from the previous year
and cuts $1.1 billion from City agencies. The Governor and the legislature
have not agreed on how much State aid to provide the City in fiscal 1998, and
the City may have to adopt further budget cuts after the 1998 State budget is
adopted. Recent changes in federal law may lower the amount of federal aid the
City receives. If State and federal aid to the City declines, savings in the
City's budget may be lower than projected and the Mayor may be required to
propose additional spending cuts or tax increases to balance the City's budget
in 1997 and beyond.
If serious financial difficulties arise that hamper the ability of the State,
its agencies, New York City, other municipalities, or school districts to
issue bonds or increase the risk that they may default on their obligations to
pay bondholders, the market value of the bonds they have issued may decrease.
In addition, without help from the State legislature, the State Constitution
may prevent the City from issuing bonds after 1997 because of declining real
estate values within the City. If the City cannot issue bonds to pay for
capital improvements, this would increase its budget deficits in later years.
Tax Treatment.
The New York Funds' regular monthly dividends will not be subject to New York
state or New York city personal income taxes to the extent they are paid out
of income earned on New York municipal bonds or out of income earned on obli-
gations of U.S. territories and possessions. The portion of the New York
Funds' monthly dividends that is attributable to income earned on other obli-
gations will be subject to the New York state or the New York city personal
income taxes. You also will be subject to New York state and New York city
personal income taxes to the extent the New York Funds distribute any taxable
income or realized capital gains, or if you sell or exchange shares of the New
York Funds and realize a capital gain on the transaction.
The treatment of corporate and unincorporated business shareholders of the New
York Funds differs from that described above. Corporate shareholders should
refer to the statement of additional information for more detailed information
and are urged to consult their tax adviser.
NEW JERSEY
New Jersey has a diversified economic base comprised of various manufacturing,
construction and service industries. Compared to other states, New Jersey
ranks high in per capita personal income. The national recession, however,
adversely affected the State's employment rate. Economic recovery is expected
to be slow and uneven.
The fiscal year 1997 budget totaled $15.8 billion, a 1.3% decrease from the
previous year. The balanced budget includes $607 million in surplus. Whether
the State can achieve a balanced budget depends on its ability to reduce
expenditures and collect estimated tax revenues.
The 1995 fiscal year audited general fund revenues were $16.6 billion against
expenditures of $16.5 billion, leaving a general fund surplus of approximately
$100 million. In October 1996, the unemployment rate was 6.1%. The state ranks
second in the U.S. to Connecticut in per capita income. New
- -------------------------------------------------------------------------------
PAGE 23
<PAGE>
Jersey's general obligation bonds are rated Aa1 by Moody's and AA+ by Standard
and Poor's.
Tax Treatment.
The New Jersey Funds' regular monthly dividends will not be subject to New
Jersey gross income tax to the extent they are paid out of income earned on or
capital gains realized from the sale of New Jersey municipal bonds or U.S.
government securities. You will be subject to New Jersey gross income tax,
however, to the extent the New Jersey Funds distribute any taxable income. If
you realize a capital gain on the sale or exchange of shares of the New Jersey
Funds, you will not be subject to New Jersey gross income tax. If you realize a
capital loss on the sale or exchange of shares of the New Jersey Funds, you may
not use the loss to offset other New Jersey taxable capital gains.
The treatment of corporate shareholders of the New Jersey Funds differs from
that described above. Corporate shareholders should refer to the statement of
additional information for more detailed information and are urged to consult
their tax adviser.
- --------------------------------------------------------------------------------
PAGE 24
<PAGE>
Nuveen Family of Mutual Funds
Nuveen's family of funds offers a variety of funds designed to help
you reach your financial goals. The funds below are grouped by
investment objectives.
GROWTH AND INCOME FUNDS
Growth and Income Stock Fund
Balanced Stock and Bond Fund
Balanced Municipal and Stock Fund
MUNICIPAL BOND FUNDS
National Funds/1/
State Funds
Alabama Michigan
Arizona Missouri
California/2/ New Jersey/3/
Colorado New Mexico
Connecticut New York/2/
Florida/3/ North Carolina
Georgia Ohio
Kansas Pennsylvania
Kentucky/4/ South Carolina
Louisiana Tennessee
Maryland Virginia
Massachusetts/2/ Wisconsin
Notes
1. Long-term, insured long-term, intermediate-term and limited-term
portfolios.
2. Long-term and insured long-term portfolios.
3. Long-term and intermediate-term portfolios.
4. Long-term and limited-term portfolios.
NUVEEN
John Nuveen & Co. Incorporated
333 West Wacker Drive
Chicago, IL 60606-1286
(800) 621-7227 VPR-MS3
<PAGE>
[LOGO OF NUVEEN] Prospectus
Municipal
Mutual
Funds
[PHOTO OF WOMAN APPEARS HERE]
Dependable, tax-free income
to help you keep more
of what you earn.
California
February 1, 1997
<PAGE>
- --------------------------------------------------------------------------------
INVESTING IN NUVEEN MUTUAL FUNDS
Since our founding in 1898, John Nuveen & Co. has been synonymous with invest-
ments that withstand the test of time. Today, we offer a range of equity and
fixed-income mutual funds designed to suit the unique circumstances and finan-
cial planning needs of mature investors. More than 1.3 million investors have
entrusted Nuveen to help them maintain the lifestyle they currently enjoy.
Value-investing -- purchasing securities of strong companies and communities
at an attractive price -- is the cornerstone of Nuveen's investment philoso-
phy. A long-term strategy that offers the potential for above average returns
over time with moderated risk, successful value-investing begins with in-depth
research and a discerning eye for value. Our team of investment professionals
is backed by the discipline, resources and expertise of Nuveen's almost a
century of investment experience, including one of the most recognized
research departments in the industry.
This prospectus describes in detail the investment objectives, policies and
risks of certain Nuveen municipal bond funds. We invite you to discuss the
contents with your financial adviser, or you may call us at 800-621-7227 for
additional information.
<PAGE>
- --------------------------------------------------------------------------------
PROSPECTUS
Nuveen California Municipal Bond Fund
Nuveen California Insured Municipal Bond Fund
- --------------------------------------------------------------------------------
OVERVIEW
The funds listed above are part of the Nuveen Flagship Multistate Trust II, an
open-end investment company. Each fund seeks to provide high double tax-free
income and preservation of capital through investments in diversified portfo-
lios of quality municipal bonds whose income is exempt from regular federal and
state income taxes.
Each fund offers a set of flexible purchase options which permit you to
purchase fund shares in the way that is best suited to your individual circum-
stances and investment needs. For detailed information about these flexible
purchase options, please refer to "How to Select a Purchase Option" later in
this prospectus.
This prospectus contains important information you should know before invest-
ing. Please read it carefully and keep it for future reference. You can find
more detailed information about each fund in the statement of additional infor-
mation which is part of this prospectus by reference. For a free copy, write to
Nuveen or call (800) 621-7227.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, OR ANY OTHER U.S. GOVERNMENT AGENCY. SHARES OF THE FUNDS
INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL AMOUNT
INVESTED.
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.
- --------------------------------------------------------------------------------
CONTENTS
<TABLE>
<S> <C>
OVERVIEW 1
FUND SUMMARIES AND FINANCIAL HIGHLIGHTS 2
FUND STRATEGIES
Investment Objective 6
How the Funds Select Investments 6
Risk Reduction Strategies 7
INVESTING IN THE FUNDS
How to Buy Fund Shares 8
How to Select a Purchase Option 9
How to Sell Fund Shares 10
Exchanging Shares 11
Optional Features and Services 11
DIVIDENDS AND TAXES
How the Funds Pay Dividends 13
Taxes and Tax Reporting 13
Taxable Equivalent Yields 14
GENERAL INFORMATION
How to Contact Nuveen 15
Fund Service Providers 15
How the Funds Report Performance 16
How Fund Shares are Priced 16
Organization 16
APPENDIX
Special State Considerations 17
</TABLE>
FEBRUARY 1, 1997
<PAGE>
- --------------------------------------------------------------------------------
Nuveen California Municipal Bond Fund
PERFORMANCE INFORMATION
INCEPTION: July 1, 1986
NET ASSETS: $228.0 million
- --------------------------------------------------------------------------------
TOTAL RETURN (ANNUALIZED)
<TABLE>
<CAPTION>
CLASS A
(OFFER CLASS A
PRICE) (NAV) CLASS B CLASS C CLASS R
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 YEAR 1.80% 6.26% 1.64% 5.47% 6.65%
5 YEARS 5.62% 6.51% 5.70% 5.79% 6.86%
10 YEARS 6.42% 6.86% 6.27% 6.23% 7.18%
INCEPTION 6.63% 7.08% 6.49% 6.44% 7.38%
</TABLE>
Class R total returns reflect actual performance for all periods; Class A and C
total returns reflect actual performance for periods since class inception (see
"Financial Highlights" for dates), and Class R performance for periods prior to
class inception, adjusted for the differences in sales charges and fees between
the classes. Class B total returns reflect Class R performance for all periods,
adjusted for the differences in sales charges and fees between the classes. See
Overview of Fund Operating Expenses and Shareholder Transaction Expenses.
The fund assumes investment risk in pursuit of its investment objective,
chiefly in the form of interest rate risk and credit risk. The fund limits this
risk by purchasing only certain types and maturities of municipal bonds and by
diversifying its investment portfolio geographically and by industry. See Risk
Reduction Strategies in the prospectus for further information.
- --------------------------------------------------------------------------------
MATURITY (YEARS)
[BAR CHART APPEARS HERE:]
Average Maturity 20.9
Average Modified
Duration 8.1
- --------------------------------------------------------------------------------
CREDIT QUALITY
[PIE CHART APPEARS HERE:]
AAA (50%)
AA (20%)
A (21%)
BBB (4%)
BB (2%)
NR (3%)
- --------------------------------------------------------------------------------
INDUSTRY DIVERSIFICATION (TOP 5)
[PIE CHART APPEARS HERE:]
Health Care
Facilities (16%)
Other (31%)
Escrowed Bonds (10%)
Educational
Facilities (15%)
Housing Facilities (14%)
Lease Rental
Facilities (14%)
EXPENSE INFORMATION
SHAREHOLDER TRANSACTION EXPENSES
(Maximum, as % of Offering Price)
<TABLE>
<CAPTION>
TRANSACTION EXPENSE CLASS A CLASS B CLASS C CLASS R
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SALES CHARGE ON PURCHASES 4.20%(1) -- -- --
SALES CHARGE ON REINVESTED DIVIDENDS -- -- -- --
CONTINGENT DEFERRED SALES CHARGE (CDSC) ON REDEMPTIONS -- (1) 5%(2) 1%(3) --
</TABLE>
- --------------------------------------------------------------------------------
OVERVIEW OF FUND OPERATING EXPENSES (4)
(Annual, as % of Average Net Assets)
<TABLE>
<CAPTION>
FUND EXPENSE CLASS A CLASS B CLASS C CLASS R
- ------------------------------------------------------
<S> <C> <C> <C> <C>
MANAGEMENT FEES 0.55% 0.55% 0.55% 0.55%
12B-1 FEES 0.20% 0.95% 0.75% --
OTHER 0.15% 0.15% 0.15% 0.15%
- ------------------------------------------------------
TOTAL (GROSS) 0.90% 1.65% 1.45% 0.70%
WAIVERS/
REIMBURSEMENTS -- -- -- --
- ------------------------------------------------------
TOTAL EXPENSES (NET) 0.90% 1.65% 1.45% 0.70%
</TABLE>
- --------------------------------------------------------------------------------
SUMMARY OF SHAREHOLDER EXPENSES (5)
The example illustrates the expenses on a hypothetical $1,000 investment in the
fund based on the Total Expenses shown at left, an assumed annual total return
of 5% and reinvestment of all dividends.
<TABLE>
<CAPTION>
HOLDING PERIOD CLASS A CLASS B CLASS C CLASS R
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 YEAR $ 51 $ 56 $ 15 $ 7
3 YEARS $ 69 $ 84 $ 46 $22
5 YEARS $ 90 $101 $ 79 $39
10 YEARS $148 $175 $174 $87
</TABLE>
- --------------------------------------------------------------------------------
PAGE 2
Information as of 8/31/96 See Notes on Next Page
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The financial highlights below are excerpted from the fund's latest annual
report which has been audited by Arthur Andersen LLP, the fund's independent
auditors, and the fund's subsequent unaudited semi-annual report. For a free
copy of the fund's latest annual and semi-annual reports, write to Nuveen or
call (800) 621-7227.
- ---------- ---------------------------------- ---------------------------------
<TABLE>
<CAPTION>
CLASS INVESTMENT OPERATIONS AND DISTRIBUTIONS:
(INCEPTION DATE)
Net Realized Distribu-
and Unreal- Dividends tions
Year Ending Beginning Net ized Gain from Net from Ending
February Net Asset Investment (Loss) From Investment Capital Net Asset
28/29, Value Income(c) Investments(a) Income Gains Value
-------------- --------- ---------- -------------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
CLASS A (9/94)
1997(g) $10.580 $.275 $(.238) $(.267) $ -- $10.350
- -------------------------------------------------------------------------------------
1996 10.100 .549 .473 (.542) -- 10.580
- -------------------------------------------------------------------------------------
1995(d) 10.210 .270 (.031) (.275) (.074) 10.100
- -------------------------------------------------------------------------------------
CLASS C (9/94)
1997(g) 10.580 .237 (.239) (.228) -- 10.350
- -------------------------------------------------------------------------------------
1996 10.100 .470 .474 (.464) -- 10.580
- -------------------------------------------------------------------------------------
1995(d) 10.040 .218 .139 (.223) (.074) 10.100
- -------------------------------------------------------------------------------------
CLASS R (7/86)
1997(g) 10.600 .283 (.221) (.282) -- 10.380
- -------------------------------------------------------------------------------------
1996 10.130 .575 .467 (.572) -- 10.600
- -------------------------------------------------------------------------------------
1995 10.740 .582 (.531) (.587) (.074) 10.130
- -------------------------------------------------------------------------------------
1994 10.850 .598 (.054) (.596) (.058) 10.740
- -------------------------------------------------------------------------------------
1993 10.140 .633 .707 (.626) (.004) 10.850
- -------------------------------------------------------------------------------------
1992(e) 9.920 .429 .218 (.427) -- 10.140
- -------------------------------------------------------------------------------------
1991(f) 9.790 .639 .133 (.642) -- 9.920
- -------------------------------------------------------------------------------------
1990(f) 9.850 .641 (.058) (.643) -- 9.790
- -------------------------------------------------------------------------------------
1989(f) 9.240 .649 .610 (.649) -- 9.850
- -------------------------------------------------------------------------------------
1988(f) 9.280 .647 (.040) (.647) -- 9.240
- -------------------------------------------------------------------------------------
1987(f) 9.600 .652 (.320) (.652) -- 9.280
- -------------------------------------------------------------------------------------
<CAPTION>
CLASS RATIOS/SUPPLEMENTAL DATA:
(INCEPTION DATE)
Ratio of Net
Ratio of Investment
Year Ending Ending Expenses to Income to Portfolio
February Total Net Assets Average Net Average Turnover
28/29, Return(b) (millions) Assets(c) Net Assets(c) Rate
- ------------------ --------- ---------- ------------- --------------- ----------
<S> <C> <C> <C> <C> <C>
CLASS A (9/94)
1997(g) .38% $17.0 .95%+ 5.17%+ 31%
- -------------------------------------------------------------------------------------
1996 10.36 12.7 .96 5.27 36
- -------------------------------------------------------------------------------------
1995(d) 2.52 3.1 1.00+ 5.81+ 32
- -------------------------------------------------------------------------------------
CLASS C (9/94)
1997(g) -- .7 1.70+ 4.43+ 31
- -------------------------------------------------------------------------------------
1996 9.53 .7 1.71 4.52 36
- -------------------------------------------------------------------------------------
1995(d) 3.71 .2 1.75+ 5.03+ 32
- -------------------------------------------------------------------------------------
CLASS R (7/86)
1997(g) .62 210.4 .70+ 5.43+ 31
- -------------------------------------------------------------------------------------
1996 10.54 216.4 .71 5.53 36
- -------------------------------------------------------------------------------------
1995 .78 208.1 .71 5.83 32
- -------------------------------------------------------------------------------------
1994 5.08 218.4 .73 5.47 19
- -------------------------------------------------------------------------------------
1993 13.66 183.2 .71 6.05 5
- -------------------------------------------------------------------------------------
1992(e) 6.61 133.4 .67+ 6.30+ --
- -------------------------------------------------------------------------------------
1991(f) 8.16 107.5 .69 6.48 15
- -------------------------------------------------------------------------------------
1990(f) 6.14 78.7 .69 6.51 8
- -------------------------------------------------------------------------------------
1989(f) 14.12 52.0 .75 6.79 22
- -------------------------------------------------------------------------------------
1988(f) 6.87 29.6 .70 7.09 48
- -------------------------------------------------------------------------------------
1987(f) 3.28 19.1 .18 6.62 17
- -------------------------------------------------------------------------------------
</TABLE>
+Annualized.
(a)Net of any applicable taxes.
(b)Total returns are calculated on net asset value and are not annualized for
periods of less than 12 months.
(c)After waiver of certain management fees or reimbursement of expenses, if
applicable, by Nuveen Advisory.
(d)From commencement of class operations as noted.
(e)For the eight months ending February 29.
(f)For the year ending June 30.
(g)For the six months ending August 31, 1996.
- --------------------------------------------------------------------------------
NOTES:
(1) Sales charge in effect February 1, 1997. The sales charge may be reduced or
waived based on the amount of purchase or for certain eligible categories
of investors. A CDSC of 1% is imposed on redemptions of certain purchases
of $1 million or more within 18 months of purchase.
(2) CDSC declines to 0% at the end of six years.
(3) Imposed only on redemptions within 12 months of purchase.
(4) Effective February 1, 1997, the funds reduced the service fee on Class A and
C shares from 0.25% to 0.20% and reduced the distribution fee on Class C
shares from 0.75% to 0.55%. These lower expenses are reflected in the table
and are expected to reduce total operating expenses on Class A from 0.95% to
0.90% and on Class C from 1.70% to 1.45%, as reflected in the table. Long-
term holders of Class B and C shares may pay more in distribution fees and
CDSCs than the maximum initial sales charge permitted under National
Association of Securities Dealers (NASD) Rules of Fair Practice. Nuveen
Advisory has agreed to waive some or all of its fees or reimburse expenses
to prevent total operating expenses (not counting distribution and service
fees) from exceeding 0.75% of the fund's average daily net assets.
(5) The expenses shown assume that you redeem your shares at the end of each
holding period. Class B shares convert to Class A shares after eight years.
If instead you redeemed your shares immediately prior to the end of each
holding period, your expenses would be higher. This example does not repre-
sent past or future expenses; actual expenses may be higher or lower.
- --------------------------------------------------------------------------------
PAGE 3
<PAGE>
- --------------------------------------------------------------------------------
Nuveen California Insured Municipal Bond Fund
PERFORMANCE INFORMATION (AS OF 8/31/96)
INCEPTION: July 1, 1986
NET ASSETS: $220.8 million
- --------------------------------------------------------------------------------
TOTAL RETURN (ANNUALIZED)
<TABLE>
<CAPTION>
CLASS A
(OFFER CLASS A
PRICE) (NAV) CLASS B CLASS C CLASS R
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 YEAR 1.73% 6.19% 1.44% 5.41% 6.45%
5 YEARS 6.11% 7.01% 6.09% 6.12% 7.26%
10 YEARS 6.37% 6.82% 6.22% 6.10% 7.08%
INCEPTION 6.52% 6.96% 6.37% 6.23% 7.22%
</TABLE>
Class R total returns reflect actual performance for all periods; Class A and C
total returns reflect actual performance for periods since class inception (see
"Financial Highlights" for dates), and Class R performance for periods prior to
class inception, adjusted for the differences in sales charges and fees between
the classes. Class B total returns reflect Class R performance for all periods,
adjusted for the differences in sales charges and fees between the classes. See
Overview of Fund Operating Expenses and Shareholder Transaction Expenses.
The fund assumes investment risk in pursuit of its investment objective,
chiefly in the form of interest rate risk and credit risk. The fund limits this
risk by purchasing only certain types and maturities of municipal bonds and by
diversifying its investment portfolio geographically and by industry. See Risk
Reduction Strategies in the prospectus for further information.
- --------------------------------------------------------------------------------
MATURITY (YEARS)
[BAR CHART APPEARS HERE]
Average Maturity 22.9
Average Modified Duration 7.9
- --------------------------------------------------------------------------------
CREDIT QUALITY
[PIE CHART APPEARS HERE]
Insured (95%)
Escrowed (5%)
- --------------------------------------------------------------------------------
INDUSTRY DIVERSIFICATION (TOP 5)
[PIE CHART APPEARS HERE]
Escrowed Bonds (17%)
Lease Rental Facilities (16%)
Health Care Facilities (15%)
Housing Facilities (10%)
Water/Sewer Facilities (9%)
Other (33%)
EXPENSE INFORMATION (AS OF 8/31/96)
SHAREHOLDER
(Maximum, as % of Offering Price)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS R
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SALES CHARGE ON PURCHASES 4.20%(1) -- -- --
SALES CHARGE ON REINVESTED DIVIDENDS -- -- -- --
CONTINGENT DEFERRED SALES CHARGE (CDSC) ON REDEMPTIONS --(1) 5%(2) 1%(3) --
</TABLE>
- --------------------------------------------------------------------------------
OVERVIEW OF FUND OPERATING EXPENSES (4)
(Annual, as % of Average Net Assets)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS R
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MANAGEMENT FEES 0.55% 0.55% 0.55% 0.55%
12B-1 FEE 0.20% 0.95% 0.75% --
OTHER 0.15% 0.15% 0.15% 0.15%
- --------------------------------------------------------------------------------------------------
TOTAL (GROSS) 0.90% 1.65% 1.45% 0.70%
WAIVERS/
REIMBURSEMENTS -- -- -- --
- --------------------------------------------------------------------------------------------------
TOTAL (NET) 0.90% 1.65% 1.45% 0.70%
- --------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
SUMMARY OF SHAREHOLDER EXPENSES (5)
The example illustrates the expenses on a hypothetical $1,000 investment in the
fund based on the Total Expenses shown at left, an assumed annual total return
of 5% and reinvestment of all dividends.
<TABLE>
<CAPTION>
HOLDING
PERIOD CLASS A CLASS B CLASS C CLASS R
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 YEAR $ 51 $ 56 $ 15 $ 7
3 YEARS $ 69 $ 84 $ 46 $22
5 YEARS $ 90 $101 $ 79 $39
10 YEARS $148 $175 $174 $87
- --------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
PAGE 4
Information as of 8/31/96 See Notes on Next Page
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The financial highlights below are excerpted from the fund's latest annual
report which has been audited by Arthur Andersen LLP, the fund's independent
auditors, and the fund's subsequent unaudited semi-annual report. For a free
copy of the fund's latest annual and semi-annual reports, write to Nuveen or
call (800) 621-7227.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS INVESTMENT OPERATIONS AND DISTRIBUTIONS:
(INCEPTION
DATE)
Net Realized Distribu-
and Unreal- Dividends tions
Year Ending Beginning Net ized Gain from Net from Ending
February Net Asset Investment (Loss) From Investment Capital Net Asset
28/29, Value Income(c) Investments(a) Income Gains Value
-------------- --------- ---------- -------------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
CLASS A (9/94)
1997 (g) $10.760 $.271 $(.267) $(.264) $ -- $10.500
- ------------------------------------------------------------------------------------
1996 10.250 .530 .505 (.525) -- 10.760
- ------------------------------------------------------------------------------------
1995 (d) 10.220 .255 .068 (.265) (.028) 10.250
- ------------------------------------------------------------------------------------
CLASS C (9/94)
1997 (g) 10.670 .223 (.251) (.222) -- 10.420
- ------------------------------------------------------------------------------------
1996 10.150 .448 .516 (.444) -- 10.670
- ------------------------------------------------------------------------------------
1995 (d) 10.060 .210 .123 (.215) (.028) 10.150
- ------------------------------------------------------------------------------------
CLASS R (7/86)
1997 (g) 10.740 .278 (.262) (.276) -- 10.480
- ------------------------------------------------------------------------------------
1996 10.230 .556 .507 (.553) -- 10.740
- ------------------------------------------------------------------------------------
1995 10.670 .559 (.412) (.559) (.028) 10.230
- ------------------------------------------------------------------------------------
1994 10.850 .560 (.101) (.556) (.083) 10.670
- ------------------------------------------------------------------------------------
1993 10.010 .584 .871 (.579) (.036) 10.850
- ------------------------------------------------------------------------------------
1992 (e) 9.650 .401 .360 (.401) -- 10.010
- ------------------------------------------------------------------------------------
1991 (f) 9.480 .600 .176 (.606) -- 9.650
- ------------------------------------------------------------------------------------
1990 (f) 9.630 .608 (.151) (.607) -- 9.480
- ------------------------------------------------------------------------------------
1989 (f) 9.020 .607 .610 (.607) -- 9.630
- ------------------------------------------------------------------------------------
1988 (f) 8.980 .600 .040 (.600) -- 9.020
- ------------------------------------------------------------------------------------
1987 (f) 9.600 .630 (.620) (.630) -- 8.980
- ------------------------------------------------------------------------------------
<CAPTION>
CLASS RATIOS/SUPPLEMENTAL DATA:
(INCEPTION
DATE)
Ratio of Net
Ratio of Investment
Year Ending Ending Expenses to Income to Portfolio
February Total Net Assets Average Net Average Turnover
28/29, Return(b) (in thousands) Assets(c) Net Assets(c) Rate
- ----------------- --------- -------------- ----------- -------------- ---------
<S> <C> <C> <C> <C> <C>
CLASS A (9/94)
1997 (g) .07% $ 22.7 .95%+ 5.02%+ 26%
- ------------------------------------------------------------------------------------
1996 10.32 17.3 .97 5.00 38
- ------------------------------------------------------------------------------------
1995 (d) 3.33 4.8 1.05+ 5.45+ 25
- ------------------------------------------------------------------------------------
CLASS C (9/94)
1997 (g) (.24) .9 1.70+ 4.28+ 26
- ------------------------------------------------------------------------------------
1996 9.67 1.0 1.71 4.26 38
- ------------------------------------------------------------------------------------
1995 (d) 3.45 .2 1.80+ 4.69+ 25
- ------------------------------------------------------------------------------------
CLASS R (7/86)
1997 (g) .18 197.1 .70+ 5.28+ 26
- ------------------------------------------------------------------------------------
1996 10.63 205.6 .70 5.29 38
- ------------------------------------------------------------------------------------
1995 1.68 198.9 .70 5.60 25
- ------------------------------------------------------------------------------------
1994 4.27 208.1 .71 5.12 14
- ------------------------------------------------------------------------------------
1993 15.05 168.9 .75 5.72 9
- ------------------------------------------------------------------------------------
1992 (e) 7.99 100.9 .64+ 5.97+ 7
- ------------------------------------------------------------------------------------
1991 (f) 8.43 74.6 .68 6.26 29
- ------------------------------------------------------------------------------------
1990 (f) 4.93 50.6 .70 6.36 13
- ------------------------------------------------------------------------------------
1989 (f) 13.97 35.0 .82 6.52 23
- ------------------------------------------------------------------------------------
1988 (f) 7.44 22.4 .82 6.77 31
- ------------------------------------------------------------------------------------
1987 (f) (.13) 16.2 .17 6.48 4
- ------------------------------------------------------------------------------------
</TABLE>
+ Annualized.
(a) Net of any applicable taxes
(b) Total returns are calculated on net asset value and are not annualized for
periods of less than 12 months.
(c) After waiver of certain management fees or reimbursement of expenses, if
applicable, by Nuveen Advisory.
(d) From commencement of class operations as noted.
(e) For the three months ending February 29.
(f) For the year ending June 30.
(g) For the six months ending August 31, 1996.
- --------------------------------------------------------------------------------
NOTES:
(1)Sales charge in effect February 1, 1997. The sales charge may be reduced or
waived based on the amount of purchase or for certain eligible categories of
investors. A CDSC of 1% is imposed on redemptions of certain purchases of $1
million or more within 18 months of purchase.
(2)CDSC declines to 0% at the end of six years.
(3)Imposed only on redemptions within 12 months of purchase.
(4)Effective February 1, 1997, the funds reduced the service fee on Class A and
C shares from 0.25% to 0.20% and reduced the distribution fee on Class C
shares from 0.75% to 0.55%. These lower expenses are reflected in the table
and are expected to reduce total operating expenses on Class A from 0.95% to
0.90% and on Class C from 1.70% to 1.45%, as reflected in the table. Long-
term holders of Class B and C shares may pay more in distribution fees and
CDSCs than the maximum initial sales charge permitted under National
Association of Securities Dealers (NASD) Rules of Fair Practice. Nuveen
Advisory has agreed to waive some or all of its fees or reimburse expenses to
prevent total operating expenses (not counting distribution and service fees)
from exceeding 0.975% of the fund's average daily net assets.
(5)The expenses shown assume that you redeem your shares at the end of each
holding period. Class B shares convert to Class A shares after eight years.
If instead you redeemed your shares immediately prior to the end of each
holding period, your expenses would be higher. This example does not
represent past or future expenses; actual expenses may be higher or
lower.
- --------------------------------------------------------------------------------
PAGE 5
<PAGE>
FUND STRATEGIES
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of each fund is to provide you with as high a level of
current interest income exempt from regular federal and state income taxes as
is consistent with preservation of capital. There is no assurance that the
funds will achieve their investment objective.
INVESTOR SUITABILITY
The funds are a suitable investment for tax-conscious investors seeking to:
. Earn regular monthly tax-free dividends;
. Preserve investment capital over time;
. Reduce taxes on investment income;
. Set aside money systematically for retirement, estate planning or college
funding.
The funds are not a suitable investment for individuals seeking to:
. Pursue an aggressive, high-growth investment strategy;
. Invest through an IRA or 401k plan;
. Avoid fluctuations in share price.
- --------------------------------------------------------------------------------
HOW THE FUNDS SELECT
INVESTMENTS
TAX-FREE MUNICIPAL BONDS
The funds invest substantially all of their assets (at least 80%) in municipal
bonds from California that pay interest that is exempt from regular federal and
state income taxes. Income from these bonds may be subject to the federal
alternative minimum tax.
Municipal bonds are either general obligation or revenue bonds and typically
are issued to finance public projects (such as roads or public buildings), to
pay general operating expenses, or to refinance outstanding debt. Municipal
bonds may also be issued for private activities, such as housing, medical and
educational facility construction, or for privately owned industrial develop-
ment and pollution control projects. General obligation bonds are backed by the
full faith and credit, or taxing authority, of the issuer and may be repaid
from any revenue source; revenue bonds may be repaid only from the revenues of
a specific facility or source.
The California Insured Fund primarily purchases insured municipal bonds. See
"Insurance" below. Under normal market conditions, the California Insured Fund
will invest at least 65% of its assets in insured municipal bonds.
FOCUS ON QUALITY MUNICIPAL BONDS
The funds focus on quality municipal bonds that are either rated investment
grade (AAA/Aaa to BBB/Baa) by independent ratings agencies at the time of
purchase or are non-rated but judged to be investment grade by the funds'
investment adviser. If suitable municipal bonds from California are not avail-
able at attractive prices and yields, a fund may invest in municipal bonds of
U.S. territories (such as Puerto Rico and Guam) which are exempt from regular
federal, state, and local income taxes. The funds may not invest more than 20%
of their net assets in these territorial municipal bonds.
The funds may purchase municipal bonds that represent lease obligations. These
carry special risks because the issuer of the bonds may not be obligated to
appropriate money annually to make payments under the lease. In order to reduce
this risk, the funds will only purchase leases where the issuer has a strong
incentive to continue making appropriations until maturity.
Bond ratings are furnished by Standard & Poor's Corporation, Fitch Investors
Services, and Moody's Investors Services. The ratings BBB and Baa are not iden-
tical--S&P and Fitch consider bonds rated BBB to have adequate capacity to pay
principal and interest; Moody's considers bonds rated Baa to have some specula-
tive characteristics. Bond ratings represent the opinions of the ratings agen-
cies; they are not absolute standards of quality.
VALUE INVESTING STRATEGY
The funds' investment adviser uses a value-oriented strategy and looks for
higher-yielding and undervalued municipal bonds that offer above-average total
return potential. The adviser emphasizes fundamental research and selects
municipal bonds on the basis of its evaluation of each bond's relative value in
terms of current yield, price, credit quality and future prospects. The adviser
then monitors each fund's portfolio to assure that municipal bonds purchased
continue to represent over time, in its opinion, the best values available.
PORTFOLIO MATURITY
Each fund purchases municipal bonds with different maturities in pursuit of its
investment objective, but maintains under normal market conditions an invest-
ment portfolio with an overall weighted average maturity within a defined
range. All of the funds described in this prospectus are long-term funds and
normally maintain a weighted average portfolio maturity of 15 to 30 years. See
"Defensive Investment Strategies" below for further information.
- --------------------------------------------------------------------------------
PAGE 6
<PAGE>
INSURANCE
Insured municipal bonds are purchased primarily by the California Insured Fund.
Insured municipal bonds are either covered by individual, permanent insurance
policies (obtained either at the time of issuance or subsequently), or covered
"while in fund" under a master portfolio insurance policy purchased by a fund.
Insurance guarantees only the timely payment of interest and principal on the
bonds; it does not guarantee the value of either individual bonds or fund
shares.
Portfolio insurance policies are effective only so long as the fund continues
to own the covered bond, and the price the fund would receive upon sale of such
a bond would not benefit from the insurance. Insurers under master portfolio
insurance policies currently include MBIA Insurance Corp., AMBAC Indemnity
Corp., Financial Security Assurance, Inc., and Financial Guaranty Insurance Co.
The funds' investment adviser may obtain master policies from other insurers,
but only from insurers that specialize in insuring municipal bonds and whose
claims-paying ability is rated Aaa or AAA by Moody's or S&P. Insurers are
responsible for making their own assessment of the insurability of a municipal
bond.
The California Insured Fund can invest up to 20% of its net assets in
uninusured municipal bonds which are backed by an escrow containing sufficient
U.S. Government or U.S. Government agency securities to ensure timely payment
of principal and interest. Such bonds are normally regarded as having the
credit characteristics of the underlying U.S. Government-backed securities.
PORTFOLIO TURNOVER
A fund buys and sells portfolio securities in the normal course of its invest-
ment activities. The proportion of the fund's investment portfolio that is sold
and replaced with new securities during a year is known as the fund's portfolio
turnover rate. The funds intend to keep portfolio turnover relatively low in
order to reduce trading costs and the realization of taxable capital gains.
Each fund, however, may make limited short-term trades to take advantage of
market opportunities and reduce market risk.
DELAYED DELIVERY TRANSACTIONS
Each fund may buy or sell bonds on a when-issued or delayed delivery basis,
making payment or taking delivery at a later date, normally within 15 to 45
days of the trade date. This type of transaction may involve an element of risk
because no interest accrues on the bonds prior to settlement and, since securi-
ties are subject to market fluctuation, the value of the bonds at time of
delivery may be less (or more) than cost.
- --------------------------------------------------------------------------------
RISK REDUCTION STRATEGIES
In pursuit of its investment objective, each fund assumes investment risk,
chiefly in the form of interest rate and credit risk. Interest rate risk is the
risk that changes in market interest rates will affect the value of a fund's
investment portfolio. In general, the value of a municipal bond falls when
interest rates rise, and increases when interest rates fall. Credit risk is the
risk that an issuer of a municipal bond is unable to meet its obligation to
make interest and principal payments. In general, lower rated municipal bonds
are perceived to carry a greater degree of risk in the issuer's ability to make
interest and principal payments. Municipal bonds with longer maturities (dura-
tions) or lower ratings generally provide higher current income, but are
subject to greater price fluctuation due to changes in market conditions than
bonds with shorter maturities or higher ratings, respectively.
Because the funds primarily purchase municipal bonds from California, each fund
also bears investment risk from the economic, political or regulatory changes
that could adversely affect municipal bond issuers in the state and therefore
the value of the fund's investment portfolio.
The funds limit your investment risk generally by restricting the types and
maturities of municipal bonds they purchase, and by diversifying their invest-
ment portfolios across different industry sectors. The funds should be consid-
ered long-term investments and may not be suitable for investors with short-
term investment horizons.
INVESTMENT LIMITATIONS
The funds have adopted certain investment limitations (based on total fund
assets) designed to limit your investment risk and maintain portfolio diversi-
fication. Each fund may not have more than:
. 25% in any one industry sector, such as electric utilities or health care;
. 10% in borrowings (33% if used to meet redemptions).
As diversified funds, the funds also may not have more than:
. 5% in securities of any one issuer (except U.S. government securities or for
25% of each fund's assets).
DEFENSIVE INVESTMENT STRATEGIES
Each fund may invest in high quality short-term municipal securities in order
to reduce risk and preserve capital. Under normal market conditions, each fund
may invest only up to 20% of net assets in short-term municipal securities that
are exempt from regular federal income tax, although the funds may invest up to
100% as a temporary defensive measure
- --------------------------------------------------------------------------------
PAGE 7
<PAGE>
in response to adverse market conditions. During temporary defensive periods,
the weighted average maturity of a fund's investment portfolio may fall below
the defined range described above under "Portfolio Maturity."
If suitable short-term municipal investments are not reasonably available, the
funds may invest in short-term taxable securities that are rated Aaa or AAA,
by Moody's or S&P, respectively, or issued by the U.S. government, and that
have a maturity of one year or less or have a variable interest rate.
Each fund may also use various investment strategies designed to limit the
risk of bond price fluctuations and to preserve capital. These hedging strate-
gies include using financial futures contracts, options on financial futures,
or options based on either an index of long-term tax-free securities or on
debt securities whose prices, in the opinion of the funds' investment adviser,
correlate with the prices of the funds' investments. The funds, however, have
no present intent to use these strategies.
FUNDAMENTAL INVESTMENT POLICIES
Each fund's investment objective as well as the policies described above in
"Focus on Quality Municipal Bonds," "Insurance," and "Risk Reduction Strate-
gies" are fundamental and may not be changed without the approval of a
majority of the shareholders of each fund.
INVESTING IN THE FUNDS
- -------------------------------------------------------------------------------
HOW TO BUY FUND SHARES
You may open an account with $3,000 and make additional investments at any
time with as little as $50. Reinvestment of Nuveen unit trust distributions
have no purchase minimums. The share price you pay will depend on when Nuveen
receives your order: orders received before the close of regular trading on
the New York Stock Exchange (normally 4:00 p.m. Eastern time) will receive
that day's share price; otherwise you will receive the next business day's
share price.
BUYING SHARES THROUGH A FINANCIAL ADVISER
You may buy fund shares through your financial adviser, who can handle all the
details for you, including establishing an account with Nuveen. Financial
advisers can also help you review your financial needs and formulate long-term
investment goals and objectives. In addition, financial advisers generally can
help you develop a customized financial plan, select investments, and monitor
and review your portfolio on an ongoing basis to assure your investments
continue to meet your needs as circumstances change.
Financial advisers are usually paid either from fund sales charges and fees or
by charging you a separate fee in lieu of a sales charge for ongoing invest-
ment advice and services.
If you do not have a financial adviser, call (800) 621-7227 and Nuveen can
refer you to one in your area.
BUYING SHARES BY MAIL
You may also open an account and purchase shares by mail by completing the
enclosed Nuveen application and mailing it along with your check (payable to
the appropriate fund) to the address listed under "How to Contact Nuveen."
Sales charges are not waived when you buy shares by mail.
Each fund reserves the right to reject any purchase order and waive or
increase minimum investment requirements. The funds also reserve the right to
suspend the issuance of shares at any time; any suspension, however, will not
affect your ability to redeem shares.
- -------------------------------------------------------------------------------
PAGE 8
<PAGE>
- --------------------------------------------------------------------------------
HOW TO SELECT A PURCHASE
OPTION
The funds offer you a variety of flexible options when buying shares. Whether
you typically work with a financial adviser on a commission or a fee basis or
prefer to work on a more self-directed basis, you can purchase shares in the
way that is most suited to your individual circumstances and investment needs.
Each of the four available ways to purchase fund shares is called a class of
shares: Class A, Class B, Class C and Class R. While each of these classes
features different sales charges, on-going fees and eligibility requirements,
each entitles you to a share of the same portfolio of municipal bonds.
Selecting the class of shares which is most appropriate for you will depend on
a variety of factors. You should weigh carefully whether you and your financial
adviser work on a commission or fee basis, the types of services that you will
receive, the amount you intend to buy, how long you plan to own your investment
and whether or not you will reinvest dividends. If you compensate your finan-
cial adviser directly, you should consider the fees your financial adviser
charges for investment advice or handling your trades in addition to any sales
charges and fees imposed by the funds. Please refer to your financial adviser's
sales material for further information. Each class of shares is described in
more detail below and under "Fund Service Providers--The Distributor." Your
financial adviser can explain each option and help you determine which is most
appropriate for you, or you can call (800) 621-7227.
BUYING CLASS A SHARES
You may buy Class A shares at their public offering price on the day of
purchase. The price you pay will equal the Class A NAV (net asset value) plus a
sales charge based upon the amount of your purchase. Class A shares also bear a
0.20% annual service fee which compensates your financial adviser for providing
you with ongoing service.
The following Class A sales charges and commissions apply to all funds
described in this prospectus:
- --------------------------------------------------------------------------------
CLASS A SALES CHARGES AND COMMISSIONS
<TABLE>
<CAPTION>
AUTHORIZED DEALER
SALES CHARGE COMMISSION
------------------------------------- -----------------
AS % OF AS % OF
PUBLIC AS % OF PUBLIC
OFFERING YOUR NET OFFERING
PURCHASE AMOUNT PRICE INVESTMENT PRICE
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Up to $50,000 4.20% 4.38% 3.70%
$50,000-100,000 4.00 4.18 3.50
$100,000-250,000 3.50 3.63 3.00
$250,000-500,000 2.50 2.56 2.00
$500,000-1,000,000 2.00 2.04 1.50
$1,000,000 and over --(1) -- --(1)
</TABLE>
(1) Nuveen pays authorized dealers a commission equal to the sum of 1% of the
first $2.5 million, plus 0.50% of the next $2.5 million, plus 0.25% of any
amount over $5 million. Unless the authorized dealer waived the commission,
you may be assessed a contingent deferred sales charge (CDSC) of 1% if you
redeem any of your shares within 18 months of purchase. The CDSC is calcu-
lated on the lower of your purchase price or redemption proceeds.
Nuveen periodically undertakes sales promotion programs with authorized dealers
and may pay them the full applicable sales charge as a commission. In addition,
Nuveen may provide support at its own expense to authorized dealers in connec-
tion with sales meetings, seminars, prospecting seminars and other events at
which Nuveen presents its products and services. Under certain circumstances,
Nuveen also will share with authorized dealers up to half the costs of adver-
tising that features the products and services of both parties. The statement
of additional information contains further information about these programs.
- --------------------------------------------------------------------------------
OTHER SALES CHARGE DISCOUNTS
Nuveen offers a number of programs that enable you to reduce or eliminate the
sales charge on Class A shares:
Sales Charge Reductions Sales Charge Waivers
. Rights of Accumulation . Unit Trust Reinvestment
. Letter of Intent (LOI) . Purchases using Redemptions from
Unrelated Funds
. Group Purchase
. Fee-Based Programs
. Bank Trust Departments
. Certain Employees of Nuveen or
Authorized Dealers
Please refer to the statement of additional information for detailed descrip-
tions of these programs. Further information on these programs is also avail-
able through your financial adviser or by calling (800) 621-7227. Your finan-
cial adviser can also provide and help you prepare the necessary application
forms. You or your financial adviser are responsible for notifying Nuveen about
your eligibility for any sales charge reduction or waiver at the time of each
purchase.
The funds may modify or discontinue these programs at any time upon written
notice to shareholders.
BUYING CLASS B SHARES
You may buy Class B shares at their public offering price on the day of
purchase. The price you pay will equal the Class B NAV. There is no initial
sales
- --------------------------------------------------------------------------------
PAGE 9
<PAGE>
charge, but Class B shares bear a 0.20% annual service fee which compensates
your financial adviser for providing you with ongoing service, and a 0.75%
annual distribution fee which compensates Nuveen for paying your financial
adviser a 4% commission at the time of purchase.
Class B shares convert automatically to Class A shares eight years after
purchase. Class B shares will convert only if the fund is assured that the
conversion does not generate tax consequences for investors, based upon the
opinion of outside counsel or the written assurance of the IRS.
- -------------------------------------------------------------------------------
CLASS B CONTINGENT DEFERRED SALES CHARGE
If you redeem Class B shares within six years of purchase, you will be
assessed a contingent deferred sales charge (CDSC) based upon the following
schedule:
The CDSC is calculated on the lower of your purchase price or redemption
proceeds.
DURING YEAR
---------------------------
1 2 3 4 5 6 7+
--- --- --- --- --- --- ---
CDSC 5% 4% 4% 3% 2% 1% 0%
BUYING CLASS C SHARES
You may buy Class C shares at their public offering price on the day of
purchase. The price you pay will equal the Class C NAV. There is no initial
sales charge, Class C shares bear a 0.20% annual service fee which compensates
your financial adviser for providing you with ongoing service, and a 0.55%
annual distribution fee which compensates Nuveen for paying your financial
adviser for the sale, including a 1% commission at the time of sale.
If you redeem your Class C shares within one year of purchase, you may be
assessed a CDSC of 1%. The CDSC is calculated on the lower of your purchase
price or redemption proceeds.
BUYING CLASS R SHARES
You may purchase Class R shares at their public offering price on the day of
purchase. The price you pay will equal the Class R NAV. You may purchase Class
R shares only if you are investing at least $1 million or would otherwise
qualify to purchase Class A shares without a sales charge as described under
"Other Sales Charge Discounts" above. There are no sales charges or ongoing
fees. Class R Shares have lower ongoing expenses than Class A Shares.
- -------------------------------------------------------------------------------
HOW TO SELL FUND SHARES
You may use one of the methods described below to redeem your shares on any
day the New York Stock Exchange is open. You will receive the share price next
determined after Nuveen has received your redemption request in good order.
Your redemption request must be received before the close of trading of the
New York Stock Exchange (normally 4 p.m. Eastern time) for you to receive that
day's price. The funds do not charge any redemption fees, although you will be
assessed a CDSC where applicable.
SELLING SHARES THROUGH YOUR FINANCIAL ADVISER
You may sell fund shares by contacting your financial adviser who can provide
and help you prepare all the necessary documentation. Your financial adviser
may charge you for this service.
SELLING SHARES BY TELEPHONE
Unless you have declined telephone redemption privileges, you may sell fund
shares by calling (800) 621-7227. Your redemption must not exceed $50,000 and
you may not redeem by telephone shares held in certificate form. Checks will
be issued only to the shareholder on record and mailed to the address on
record. If you have established electronic funds transfer privileges on your
account, you may have redemption proceeds transferred electronically to your
bank account; if you are redeeming $1,000 or more, you may expedite your
request by having your redemption proceeds wired directly into your bank
account.
Nuveen and Shareholder Services, Inc. ("SSI") will be liable for losses
resulting from unauthorized telephone redemptions only if they do not follow
reasonable procedures designed to verify the identity of the caller. You
should immediately verify your trade confirmations when you receive them.
SELLING SHARES BY MAIL
You may sell fund shares by mail by sending a written request to Nuveen at the
address listed below under "How to Contact Nuveen." Your request must include
the following information:
. The fund's name;
. Your name and account number;
. The dollar or share amount you wish to redeem;
. The signature of each owner exactly as it appears on the account;
. The name of the person you want your redemption proceeds paid to, if other
than to the shareholder of record;
. The address you want your redemption proceeds sent to, if other than to the
address of record;
. Any certificates you have for the shares; and
. Any required signature guarantees.
Signatures must be guaranteed if you are redeeming more than $50,000, you want
the check payable to someone other than the shareholder on record, or you want
the check sent to another address (or the
- -------------------------------------------------------------------------------
PAGE 10
<PAGE>
address on record has been changed within the last 60 days). Signature guaran-
tees must be obtained from a bank, brokerage firm or other financial interme-
diary that is a member of an approved Medallion Guarantee Program or that is
otherwise approved by the fund. A notary public cannot provide a signature
guarantee.
Unless other arrangements are made, checks will be sent to your address on
record. Checks will normally be mailed within one business day, but in no event
more than seven days from receipt of your redemption request. If any shares
were purchased less than 15 days prior to your request, the fund will not mail
your redemption proceeds until the check for your purchase has cleared, which
may take up to 15 days.
Each fund may suspend redemptions or delay payment on redemptions for more than
seven days (three days for street name accounts) in certain extraordinary
circumstances as described in the statement of additional information.
OPERATION OF THE CDSC
When you redeem Class A, Class B, or Class C shares subject to a CDSC, the fund
will first redeem any shares that are not subject to a CDSC or that represent
an increase in the value of your fund account due to capital appreciation, and
then redeem the shares you have owned for the longest period of time, unless
you ask the fund to redeem your shares in a different order. No CDSC is imposed
on shares you buy through the reinvestment of dividends and capital gains. The
holding period is calculated on a monthly basis and begins on the first day of
the month in which you buy shares. When you redeem shares subject to a CDSC,
the CDSC is calculated on the lower of your purchase price or redemption
proceeds, deducted from your redemption proceeds, and paid to Nuveen. The CDSC
may be waived under certain special circumstances as described in the statement
of additional information.
ACCOUNT MINIMUMS
From time to time, the funds may establish minimum account size requirements.
The funds reserve the right to liquidate your account upon 30 days written
notice if the value of your account falls below an established minimum. The
funds presently have set a minimum balance of $100 unless you have an active
unit trust reinvestment account. You will not be assessed a CDSC on an involun-
tary redemption.
- --------------------------------------------------------------------------------
EXCHANGING SHARES
You may exchange fund shares at any time for the same class of shares in
another Nuveen mutual fund that is available within your state of residence.
You may exchange fund shares by calling (800) 621-7227 or by mailing your
written request to Nuveen at the address listed under "How to Contact Nuveen."
You must have owned your fund shares for at least 15 days and your exchange
must meet the minimum purchase requirements of the fund into which you are
exchanging. No CDSC will be assessed on an exchange, and the holding period of
your investment will be carried over to the new fund for purposes of deter-
mining any future CDSC. You may not exchange Class B shares for shares of a
Nuveen money market fund.
Because an exchange is treated for tax purposes as the concurrent sale and
purchase of fund shares, you should consult your tax adviser about the tax
consequences of any contemplated exchange. Each fund reserves the right to
limit or terminate exchange privileges if it believes doing so is in the best
interests of fund shareholders.
RESTRICTIONS ON MARKET TIMING
The exchange privilege is not intended to permit you to use a fund for short-
term trading. Excessive exchange activity may interfere with portfolio manage-
ment, raise fund operating expenses or otherwise have an adverse effect on fund
shareholders. In order to limit excessive exchange activity and in other
circumstances where the funds' investment adviser believes doing so would be in
the best interests of the fund, each fund reserves the right to revise or
terminate the exchange privilege, limit the amount or number of exchanges, or
reject any exchange. You will be notified in the event this happens to the
extent required by law.
- --------------------------------------------------------------------------------
OPTIONAL FEATURES AND SERVICES
SYSTEMATIC INVESTMENT
Once you have opened an account, you may make regular investments of $50 or
more a month through automatic deductions from your bank account (see "Fund
Direct--Electronic Funds Transfer" below), or directly from your paycheck. To
invest regularly from your bank account, simply complete the appropriate
section of the account application. To invest regularly from your paycheck,
call Nuveen for a Payroll Direct Deposit Enrollment form. If you need addi-
tional copies of these forms, or would like assistance completing them, contact
your financial adviser or call Nuveen toll-free at (800) 621-7227.
One of the benefits of systematic investing is "dollar cost averaging." Because
you are making fixed payments, you buy fewer shares when the price is high, and
more when the price is low. As a result, the average price you pay will be less
than the average share price of fund shares over this period. Dollar cost aver-
aging 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.
- --------------------------------------------------------------------------------
PAGE 11
<PAGE>
Systematic investing may also make you eligible for reduced sales charges on
shares of the fund as well as other Nuveen mutual funds (see "Other Sales
Charge Discounts").
- -------------------------------------------------------------------------------
THE POWER OF SYSTEMATIC INVESTING
The chart below illustrates the benefits of systematic investing based on a
$3,000 initial investment and subsequent monthly investments of $100 over 20
years. The example assumes you earn a return of 4%, 5% or 6% annually on your
investment and that you reinvest all dividends. These annual returns do not
reflect past or projected fund performance.
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
ACCOUNT VALUES FOR TOTAL RETURNS OF
AMOUNT -----------------------------------
YEAR INVESTED 4.00% 5.00% 6.00%
---- -------- ------- ------- -------
<S> <C> <C> <C> <C>
0 $ 2,874 $ 2,874 $ 2,874 $ 2,874
5 8,622 9,861 10,203 10,561
10 14,370 18,391 19,610 20,929
15 20,118 28,807 31,681 34,913
20 25,866 41,525 47,173 53,779
</TABLE>
SYSTEMATIC WITHDRAWALS
If the value of your fund account is at least $10,000, you may request to have
$50 or more withdrawn automatically from your account. You may elect to
receive payments monthly, quarterly or semi-annually, and may choose to
receive a check, have the monies transferred directly into your bank account
(see "Fund Direct--Electronic Funds Transfer" below), paid to a third party or
sent payable to you at an address other than your address of record. You must
complete the appropriate section of the account application to participate in
the fund's systematic withdrawal plan.
You should not establish systematic withdrawals if you intend to make concur-
rent purchases of Class A, B or C shares because you may unnecessarily pay a
sales charge or CDSC on these purchases.
REINSTATEMENT PRIVILEGE
If you redeem fund shares on which you paid an initial sales charge or contin-
gent deferred sales charge (CDSC), you may reinvest all or part of your
redemption proceeds up to one year later without incurring any additional
charge. You may only reinvest into the same class of shares you redeemed and
will receive the share price next determined after Nuveen receives your rein-
vestment request. You may exercise this privilege only once per redemption
request.
If you paid a CDSC, your CDSC will be refunded and your holding period rein-
stated. You should consult your tax adviser about the tax consequences of
exercising your reinstatement privilege.
FUND DIRECT--ELECTRONIC FUNDS TRANSFER
You may arrange to transfer funds electronically between your bank account and
your fund account by completing the appropriate section of the account appli-
cation. If you need additional copies of this form, or would like assistance
completing it, contact your financial adviser or call Nuveen at (800) 621-
7227. You may use Fund Direct to quickly and conveniently purchase or sell
shares by telephone, systematically invest or withdraw funds, or send dividend
payments directly to your bank account.
If you have established electronic funds transfer privileges on your account,
you may request that redemption proceeds of $1,000 or more be wired directly
into your bank account. While you will generally receive your redemption
proceeds more quickly than a regular telephone redemption, the fund may charge
you a fee for this expedited service.
- -------------------------------------------------------------------------------
PAGE 12
<PAGE>
DIVIDENDS AND TAXES
- --------------------------------------------------------------------------------
HOW THE FUNDS PAY DIVIDENDS
The funds pay tax-free dividends monthly and any taxable capital gains or other
distributions once a year in December. The funds declare dividends on the ninth
of each month and generally pay dividends or about on the first business day of
the following month.
PAYMENT AND REINVESTMENT OPTIONS
The funds automatically reinvest your dividends each month in additional fund
shares unless you request otherwise. You may request to have your dividends
paid to you by check, deposited directly into your bank account, paid to a
third party, sent to an address other than your address of record or reinvested
in shares of another Nuveen mutual fund. If you wish to do so, complete the
appropriate section of the account application, contact your financial adviser
or call Nuveen at (800) 621-7227.
CALCULATION OF FUND DIVIDENDS
Each fund pays dividends based upon its past and projected net income in order
to distribute substantially all of its net income each fiscal year.
In order to maintain a more stable monthly dividend, each fund may sometimes
distribute less or more than the amount of net income earned in a particular
period as a result of fluctuations in a fund's net income. Undistributed net
income is included in the fund's share price; similarly, distributions from
previously undistributed net income reduce the fund's share price. This divi-
dend policy is not expected to affect the management of a fund's portfolio.
Dividends for Class A, B, C and R shares are determined in the same manner and
at the same time. Dividends per share will vary based on which class of fund
shares you own, reflecting the different ongoing fees and other expenses of
each class.
- --------------------------------------------------------------------------------
TAXES AND TAX REPORTING
The discussion below and in the statement of additional information provides
general tax information related to an investment in fund shares. Because tax
laws are complex and often change, you should consult your tax adviser about
the tax consequences of a specific fund investment.
Each fund primarily invests in municipal bonds from California or in municipal
bonds whose income is otherwise exempt from regular federal and state income
taxes. Consequently, the regular monthly dividends you receive will be exempt
from regular federal and state income taxes. All or a portion of these divi-
dends, however, may be subject to the federal alternative minimum tax (AMT).
More specific state tax information can be found below in the Appendix.
Although the funds do not seek to realize taxable income or capital gains, the
funds may realize and distribute taxable income or capital gains from time to
time as a result of each fund's normal investment activities. Each fund will
distribute in December any taxable income or capital gains realized over the
preceding year. Net short-term gains are taxable as ordinary income. Net long-
term capital gains are taxable as long-term capital gains regardless of how
long you have owned your investment. Taxable dividends do not qualify for a
dividends received deduction if you are a corporate shareholder.
Each year, you will receive a year-end statement that describes the tax status
of dividends paid to you during the preceding year, including the source of its
investment income by state and the portion of its income that is subject to
AMT. You will receive this statement from the firm where you purchased your
fund shares if you hold your investment in street name; Nuveen will send you
this statement if you hold your shares in registered form.
The tax status of your dividends is not affected by whether you reinvest your
dividends or receive them in cash.
BUYING OR SELLING SHARES CLOSE TO A RECORD DATE
If you purchase fund shares shortly before the record date for a taxable divi-
dend, the entire dividend you receive may be taxable to you even though a
portion of the dividend effectively represents a return of your purchase price.
This is commonly known as "buying a dividend." Similarly, if you sell or
exchange fund shares shortly before the record date for a tax-exempt dividend,
a portion of the price you receive may be treated as a taxable capital gain
even though it reflects tax-free income earned but not yet distributed by the
fund.
TAX CONSEQUENCES OF PRIVATE ACTIVITY BONDS
Because each fund may invest in private activity bonds, the portion of your
regular monthly dividends derived from the income earned on these bonds that
would otherwise be tax-exempt will be treated as taxable income if:
. you are subject to the AMT (including corporate shareholders);
. you are a "substantial user" of a facility financed by these bonds; or
. you are a "related person" of a substantial user.
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PAGE 13
<PAGE>
REDEEMING SHARES HELD LESS THAN SIX MONTHS
If you sell or exchange shares that you have owned for less than six months
and you recognized a short-term capital loss when you redeemed your shares,
the loss you can claim will be reduced by the amount of tax-free dividends
paid to you on those shares. Any remaining short-term capital loss will be
treated as long-term capital loss to the extent you also received capital gain
dividends on those shares. You should consult your tax adviser for complete
information about these rules. Please consider the tax consequences carefully
when contemplating a redemption.
OTHER IMPORTANT TAX INFORMATION
In order to avoid corporate taxation of its earnings and to pay tax-free divi-
dends, each fund must meet certain I.R.S. requirements that govern the fund's
sources of income, diversification of assets and distribution of earnings to
shareholders. Each fund has met these requirements in the past and intends to
do so in the future. If a fund failed to do so, the fund would be required to
pay corporate taxes on its earnings and all your distributions would be
taxable as ordinary income.
A fund may be required to withhold 31% of certain of your dividends if you
have not provided the fund with your correct taxpayer identification number
(normally your social security number), or if you are otherwise subject to
back-up withholding.
If you receive social security benefits, you should be aware that tax-free
income is taken into account in calculating the amount of these benefits that
may be subject to federal income tax.
If you borrow money to buy fund shares, you may not deduct the interest on
that loan. Under I.R.S. rules, fund shares may be treated as having been
bought with borrowed money even if the purchase cannot be traced directly to
borrowed money.
- -------------------------------------------------------------------------------
TAXABLE EQUIVALENT YIELDS
The taxable equivalent yield is the current yield you would need to earn on a
taxable investment in order to equal a stated tax-free yield on a municipal
investment. To assist you to more easily compare municipal investments like
the funds with taxable alternative investments, the table below presents the
taxable equivalent yields for a range of hypothetical tax-free yields and tax
rates:
- -------------------------------------------------------------------------------
TAXABLE EQUIVALENT OF TAX-FREE YIELDS
<TABLE>
<CAPTION>
TAX-FREE YIELD
TAX RATE 4.00% 4.50% 5.00% 5.50% 6.00%
- ------- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
28.0% 5.56% 6.25% 6.94% 7.64% 8.33%
31.0% 5.80% 6.52% 7.25% 7.97% 8.70%
36.0% 6.25% 7.03% 7.81% 8.59% 9.37%
39.6% 6.62% 7.45% 8.28% 9.11% 9.93%
</TABLE>
The yields and tax rates shown above are hypothetical and do not predict your
actual returns or effective tax rate. For more detailed information, see the
statement of additional information or consult your tax adviser.
- -------------------------------------------------------------------------------
PAGE 14
<PAGE>
GENERAL INFORMATION
- --------------------------------------------------------------------------------
HOW TO CONTACT NUVEEN
GENERAL INFORMATION
If you would like general information about Nuveen Mutual Funds or any other
Nuveen product, call (800) 621-7227 between 7:30 a.m. and 7:00 p.m. Central
time.
PURCHASES, REDEMPTIONS AND OTHER TRANSACTIONS
If you are calling to purchase or redeem shares, request an exchange or conduct
other account transactions, call (800) 621-7227 between 7:30 a.m. and 7:00 p.m.
Central time. If you are sending a written request to Nuveen, you should mail
your request to the following address:
Nuveen Mutual Funds
c/o Shareholder Services Inc.
P.O. Box 5330
Denver, CO 80217-5330
When purchasing fund shares by mail, please be sure to include a check made out
to the name of the Fund and mark clearly on your check which class of shares
you are purchasing. If you do not specify which class of shares you are
purchasing, Nuveen will assume you are buying Class A shares if you are opening
a new account; if you are adding to an existing account, Nuveen will assume you
wish to buy more shares of the class you already own.
- --------------------------------------------------------------------------------
FUND SERVICE PROVIDERS
INVESTMENT ADVISER
Nuveen Advisory Corp. ("Nuveen Advisory") serves as the investment adviser to
the funds and in this capacity is responsible for the selection and on-going
monitoring of the municipal bonds in each fund's investment portfolio. Nuveen
Advisory serves as investment adviser to investment portfolios with more than
$35 billion in municipal assets under management. The activities of Nuveen
Advisory, which also include managing the funds' business affairs and providing
certain clerical, bookkeeping and other administrative services, are overseen
by the funds' Board of Trustees. Established in 1976, Nuveen Advisory is a
wholly-owned subsidiary of John Nuveen & Co. Incorporated, which itself is
approximately 78% owned by the St. Paul Companies, Inc. Effective January 1,
1997, The John Nuveen Company acquired Flagship Resources Inc., and as part of
that acquisition, Flagship Financial, the adviser to the Flagship Funds, was
merged with Nuveen Advisory.
For providing these services, Nuveen Advisory is paid an annual management fee
according to the following schedule:
- --------------------------------------------------------------------------------
MANAGEMENT FEES
<TABLE>
<CAPTION>
AVERAGE DAILY MANAGEMENT
NET ASSET VALUE FEE
- --------------------------------------
<S> <C>
For the first $125 million 0.5500%
For the next $125 million 0.5375%
For the next $250 million 0.5250%
For the next $500 million 0.5125%
For the next $1 billion 0.5000%
For assets over $2 billion 0.4750%
</TABLE>
For more information about fees and expenses, see the fund operating expense
tables in the Fund Summaries.
PORTFOLIO MANAGERS
Overall investment management strategy and operating policies for the funds are
set by the Investment Policy Committee of Nuveen Advisory. The Investment
Policy Committee is comprised of the principal executive officers and portfolio
managers of Nuveen Advisory and meets regularly to review economic conditions,
the outlook for the financial markets in general and the status of the munic-
ipal markets in particular. Day-to-day operation of each fund and the execution
of its specific investment strategies is the responsibility of the designated
portfolio manager described below.
Steven J. Krupa is the portfolio manager for the California Fund and the Cali-
fornia Insured Fund. Mr. Krupa has been a Vice President of Nuveen Advisory
since 1990.
THE DISTRIBUTOR
John Nuveen and Co. Incorporated serves as the selling agent and distributor of
the funds' shares. In this capacity, Nuveen manages the offering of the funds'
shares and is responsible for all sales and promotional activities. In order to
reimburse Nuveen for its costs in connection with these activities, including
compensation paid to authorized dealers, each fund has adopted a distribution
and service plan under Rule 12b-1 of the Investment Company Act of 1940.
The plan authorizes each fund to pay Nuveen an annual 0.20% service fee on the
average daily net assets of Class A, B and C shares outstanding and annual
distribution fees of 0.75% and 0.55%, respectively, on the average daily net
assets of Class B and C shares outstanding. In order to help compensate Nuveen
for the sales commission paid to financial advisers at the time of sale on
sales of Class B and
Class C shares, Nuveen retains the first year's service fee on sales of Class B
shares and all Class B distribution fees; and retains the first year's service
and distribution fees on sales of Class C shares. Otherwise,
- --------------------------------------------------------------------------------
PAGE 15
<PAGE>
Nuveen pays these fees to the broker of record. The statement of additional
information contains a detailed description of the plan and its provisions.
TRANSFER AGENT
Each fund has appointed a transfer agent which is responsible for distributing
dividend payments and providing certain bookkeeping, data processing and other
administrative services in connection with the maintenance of shareholder
accounts. Shareholder Services, Inc., P.O. Box 5330, Denver, CO 80217-5330,
currently serves as transfer agent for each fund.
- --------------------------------------------------------------------------------
HOW THE FUNDS REPORT
PERFORMANCE
Each fund may quote its yield and total return in reports to shareholders,
sales literature and advertisements. The funds may also compare their invest-
ment results to various passive indices or other mutual funds with similar
investment objectives. Comparative performance information may include data
from Lipper Analytical Services, Inc., Morningstar, Inc. and other industry
publications. See the statement of additional information for a more detailed
discussion.
- --------------------------------------------------------------------------------
HOW FUND SHARES ARE PRICED
The share price for each class of fund shares, also called its net asset value
(NAV), is calculated every business day as of the close of regular trading on
the New York Stock Exchange (normally 4 p.m. Eastern time). The net asset value
for a class of fund shares is computed by calculating the total value of the
class' portion of the fund's portfolio investments and other assets,
subtracting any liabilities or other debts, and dividing by the total number of
its shares outstanding.
The prices of municipal bonds in each fund's investment portfolio are provided
by a pricing service approved and supervised by the fund's Board of Trustees.
When price quotes are not readily available (which is usually the case for
municipal securities), the pricing service establishes fair market value based
on yields or prices of municipal bonds of comparable quality, type of issue,
coupon, maturity and rating, indications of value from securities dealers and
general market conditions.
- --------------------------------------------------------------------------------
ORGANIZATION
The Trust is an open-end investment company under the Investment Company Act of
1940, consisting of multiple funds. The shares of each fund are divided into
classes. Each class of shares represents an interest in the same portfolio of
investments and the shares of each class have equal rights as to voting,
redemption, dividends and liquidation. However, each class bears different
sales charges and service fees. B shares convert to A shares after 8 years. C
shares purchased before February 1, 1997 convert to A shares six years after
purchase, but only if you request conversion. You must submit your request to
SSI no later than the last business day of the 71st month following the month
in which you purchased your shares.
The funds are not required to and do not intend to hold annual meetings. Share-
holders owning ten percent or more of a fund's outstanding shares may call a
special meeting for any purpose, including to elect or remove trustees or to
change fundamental policies.
- --------------------------------------------------------------------------------
PAGE 16
<PAGE>
APPENDIX
- -------------------------------------------------------------------------------
SPECIAL STATE CONSIDERATIONS
Because the funds primarily purchase municipal bonds from California, each
fund also bears investment risk from economic, political or regulatory changes
that could adversely affect municipal bond issuers in the state and therefore
the value of the fund's investment portfolio. The following discussion of
special state considerations was obtained from official offering statements of
these issuers and has not been independently verified by the funds. The
discussion includes general state tax information related to an investment in
fund shares. Because tax laws are complex and often change, you should consult
your tax adviser about the state tax consequences of a specific fund invest-
ment. See the statement of additional information for further information.
CALIFORNIA
California's economy, the largest in the nation, is undergoing a slow, steady
growth following a recession from mid-1990 to late 1993 in which the construc-
tion, manufacturing and financial services industries were adversely affected,
job losses were severe, and substantial, broad-based revenue shortfalls
affected both the state and local governments. The state's 1995 unemployment
rate was % and average personal income was $20,406. California's general
obligation bonds are rated A1 by Moody's and A+ by Standard and Poor's.
The taxing authority of California's governmental entities is limited due to
the adoption of "Proposition 13" and other amendments to the California
Constitution. Proposition 13, adopted by voters in 1978, limits to 1% of full
cash value the rate of ad valorem property taxes on real property and gener-
ally restricts the reassessment of property to 2% per year, except upon new
construction or change of ownership (subject to a number of exemptions).
Because the basic 1% ad valorem tax levy is applied against the assessed value
of property as of the owner's date of acquisition, the amount of tax on simi-
larly situated properties varies widely. The state and local governments are
also subject to annual "appropriations limits" imposed by Article XIIIB of the
California Constitution, which limits the state and local governments from
spending the proceeds of tax revenues, regulatory licenses, user charges or
other fees beyond imposed appropriations limits which are adjusted annually to
reflect changes in cost of living and population. Revenues in excess of the
limitations are measured over a two year cycle. Local governments must return
any excess to taxpayers by rate reductions; the state must refund 50% of any
excess, with the other 50% paid to schools and community colleges. A 1986
initiative statute called "Proposition 62" requires either a majority or 2/3
voter approval for any increase in general or special taxes. Court decisions
had struck down most of Proposition 62, but the California Supreme Court
upheld its constitutionality in September 1995. Many aspects of the decision,
such as whether it applies retroactively, remain unclear, but its future
effect will be to further limit the fiscal flexibility of many local govern-
ments. The complex and ambiguous nature of the foregoing limitations makes it
impossible to fully determine their impact on California Municipal Obligations
or the ability of the state and local governments to pay debt service on Cali-
fornia Municipal Obligations.
On November 5, 1996, California voters approved Proposition 218 which added
Articles XIIIC and XIIID to the California Constitution, imposing certain vote
requirements and other limitations on the imposition of new or increased and
in some cases existing taxes, assessments and property-related fees and
charges. Proposition 218 also extends the initiative power to include the
reduction or repeal of any local taxes, assessments, fees and charges. This
extension of the initiative power is not limited to taxes imposed on or after
the effective date of Proposition 218, and could result in the retroactive
repeal or reduction in any existing taxes, assessments, fees or charges. If
such a repeal or reduction occurs in a particular California entity, the
financial condition of that entity may be adversely impacted and rating down-
grades and/or defaults may result. Additionally, the voter approval require-
ment reduces the financial flexibility of local governments to deal with
fiscal problems by limiting the ability to increase taxes, assessments, fees
or charges. In some cases, this loss of flexibility may, and in fact has, been
cited as the reason for rating downgrades. No assurances can be given that
California entities will be able to raise taxes to meet future spending
requirements. In addition, at this time it is not clear exactly how Proposi-
tion 218 will be interpreted by a court.
California ended its 1994-95 fiscal year with a general fund surplus of
approximately $590 million, reducing the accumulated budget deficit to approx-
imately $1.14 billion. As a result of the improved revenues, the state's cash
position has substantially recovered. Only $2 billion of cash flow borrowing
was needed during 1995-96, and only about $3 billion is projected for 1996-97,
with no external borrowing over the end of the fiscal year. The Governor's
proposed budget for 1996-97 projects $47.1 billion of revenues and transfers,
and $46.5 billion of expenditures, resulting in a budget reserve at June 30,
1997 of about $500 million. A number of issues related to the 1996-97 budget
still have to be resolved, including the Governor's tax reduction proposals
and his proposals for future health and welfare cuts.
- -------------------------------------------------------------------------------
PAGE 17
<PAGE>
California's finances have improved since 1994 after its significant financial
difficulties reduced its credit standing in the early 1990's. However, should
the financial condition of California deteriorate again, its credit ratings
could be further reduced, and the market value and marketability of all
outstanding notes and bonds issued by California, its public authorities or
local governments could be adversely affected.
Tax Treatment.
The California Funds' regular monthly dividends will not be subject to Cali-
fornia personal income taxes to the extent they are paid out of income earned
on California municipal obligations or U.S. government securities. You will be
subject to California personal income taxes, however, to the extent the Cali-
fornia Funds distribute any taxable income or realized capital gains, or if you
sell or exchange shares of the California Funds and realize capital gain on the
transaction.
The treatment of corporate shareholders of the California Funds differs from
that described above. Corporate shareholders should refer to the statement of
additional information for more detailed information.
- --------------------------------------------------------------------------------
PAGE 18
<PAGE>
Nuveen Family of Mutual Funds
Nuveen's family of funds offers a variety of funds designed to help
you reach your financial goals. The funds below are grouped by
investment objectives.
GROWTH AND INCOME FUNDS
Growth and Income Stock Fund
Balanced Stock and Bond Fund
Balanced Municipal and Stock Fund
MUNICIPAL BOND FUNDS
National Funds/1/
State Funds
Alabama Michigan
Arizona Missouri
California/2/ New Jersey/3/
Colorado New Mexico
Connecticut New York/2/
Florida/3/ North Carolina
Georgia Ohio
Kansas Pennsylvania
Kentucky/4/ South Carolina
Louisiana Tennessee
Maryland Virginia
Massachusetts/2/ Wisconsin
Notes
1. Long-term, insured long-term, intermediate-term and limited-term
portfolios.
2. Long-term and insured long-term portfolios.
3. Long-term and intermediate-term portfolios.
4. Long-term and limited-term portfolios.
NUVEEN
John Nuveen & Co. Incorporated
333 West Wacker Drive
Chicago, IL 60606-1286
(800) 621-7227
VPR-CA
<PAGE>
[LOGO OF NUVEEN] Prospectus
Municipal
Mutual
Funds
[PHOTO OF WOMAN APPEARS HERE]
Dependable, tax-free income to help
you keep more of what you earn.
Massachusetts
February 1, 1997
<PAGE>
- --------------------------------------------------------------------------------
INVESTING IN NUVEEN MUTUAL FUNDS
Since our founding in 1898, John Nuveen & Co. has been synonymous with invest-
ments that withstand the test of time. Today, we offer a range of equity and
fixed-income mutual funds designed to suit the unique circumstances and finan-
cial planning needs of mature investors. More than 1.3 million investors have
entrusted Nuveen to help them maintain the lifestyle they currently enjoy.
Value-investing -- purchasing securities of strong companies and communities
at an attractive price -- is the cornerstone of Nuveen's investment philoso-
phy. A long-term strategy that offers the potential for above average returns
over time with moderated risk, successful value-investing begins with in-depth
research and a discerning eye for value. Our team of investment professionals
is backed by the discipline, resources and expertise of Nuveen's almost a
century of investment experience, including one of the most recognized
research departments in the industry.
This prospectus describes in detail the investment objectives, policies and
risks of certain Nuveen municipal bond funds. We invite you to discuss the
contents with your financial adviser, or you may call us at 800-621-7227 for
additional information.
<PAGE>
- --------------------------------------------------------------------------------
PROSPECTUS
Nuveen Massachusetts Municipal Bond Fund
Nuveen Massachusetts Insured Municipal Bond Fund
- --------------------------------
OVERVIEW
The funds listed above are part of the Nuveen Flagship Multistate Trust II, an
open-end investment company. Each fund seeks to provide high double tax-free
income and preservation of capital through investments in diversified portfo-
lios of quality municipal bonds whose income is exempt from regular federal and
state income taxes.
Each fund offers a set of flexible purchase options which permit you to
purchase fund shares in the way that is best suited to your individual circum-
stances and investment needs. For detailed information about these flexible
purchase options, please refer to "How to Select a Purchase Option" later in
this prospectus.
This prospectus contains important information you should know before invest-
ing. Please read it carefully and keep it for future reference. You can find
more detailed information about each fund in the statement of additional infor-
mation which is part of this prospectus by reference. For a free copy, write to
Nuveen or call (800) 621-7227.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, OR ANY OTHER U.S. GOVERNMENT AGENCY. SHARES OF THE FUNDS
INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL AMOUNT
INVESTED.
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.
- --------------------------------
CONTENTS
<TABLE>
<S> <C>
OVERVIEW 1
FUND SUMMARIES AND FINANCIAL HIGHLIGHTS 2
FUND STRATEGIES
Investment Objective 6
How the Funds Select Investments 6
Risk Reduction Strategies 7
INVESTING IN THE FUNDS
How to Buy Fund Shares 8
How to Select a Purchase Option 8
How to Sell Fund Shares 10
Exchanging Shares 11
Optional Features and Services 11
DIVIDENDS AND TAXES
How the Funds Pay Dividends 13
Taxes and Tax Reporting 13
Taxable Equivalent Yields 14
GENERAL INFORMATION
How to Contact Nuveen 15
Fund Service Providers 15
How the Funds Report Performance 16
How Fund Shares are Priced 16
Organization 16
APPENDIX
Special State Considerations 17
</TABLE>
FEBRUARY 1, 1997
<PAGE>
- ---------------------------------------------------------------------
Nuveen Massachusetts Municipal Bond Fund
PERFORMANCE INFORMATION
INCEPTION: December 10, 1986
NET ASSETS: $80.9 million
- --------------------------------------------------------------------------------
TOTAL RETURN (ANNUALIZED)
<TABLE>
<CAPTION>
CLASS A
(OFFER CLASS A
PRICE) (NAV) CLASS B CLASS C CLASS R
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 YEAR 1.10% 5.53% 0.69% 4.68% 5.69%
5 YEARS 6.32% 7.21% 6.27% 6.40% 7.44%
INCEPTION 5.85% 6.31% 5.68% 5.57% 6.56%
</TABLE>
Class R total returns reflect actual performance for all periods; Class A and C
total returns reflect actual performance for periods since class inception (see
"Financial Highlights" for dates), and Class R performance for periods prior to
class inception, adjusted for the differences in sales charges and fees between
the classes. Class B total returns reflect Class R performance for all periods,
adjusted for the differences in sales charges and fees between the classes. See
Overview of Fund Operating Expenses and Shareholder Transaction Expenses.
The fund assumes investment risk in pursuit of its investment objective,
chiefly in the form of interest rate risk and credit risk. The fund limits this
risk by purchasing only certain types and maturities of municipal bonds and by
diversifying its investment portfolio geographically and by industry. See Risk
Reduction Strategies in the prospectus for further information.
- --------------------------------------------------------------------------------
MATURITY (YEARS)
[BAR CHART APPEAR HERE:]
Average Maturity 20.3
Average Modified Duration 5.9
- --------------------------------------------------------------------------------
CREDIT QUALITY
[PIE CHART APPEAR HERE:]
AAA (48%)
AA (13%)
A (23%)
BBB (14%)
NR (2%)
- --------------------------------------------------------------------------------
INDUSTRY DIVERSIFICATION (TOP 5)
[PIE CHART APPEARS HERE:]
Escrowed Bonds (24%)
General Obligation Bonds (22%)
Housing Facilities (19%)
Health Care Facilities (15%)
Educational Facilities (14%)
Other (6%)
EXPENSE INFORMATION
SHAREHOLDER TRANSACTION EXPENSES
(Maximum, as % of Offering Price)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS R
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SALES CHARGE ON PURCHASES 4.20%(1) -- -- --
SALES CHARGE ON REINVESTED DIVIDENDS -- -- -- --
CONTINGENT DEFERRED SALES CHARGE (CDSC) ON REDEMPTIONS -- (1) 5%(2) 1%(3) --
</TABLE>
- --------------------------------------------------------------------------------
OVERVIEW OF FUND OPERATING EXPENSES (4)
(Annual, as % of Average Net Assets)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS R
- ---------------------------------------------------
<S> <C> <C> <C> <C>
MANAGEMENT FEES 0.55% 0.55% 0.55% 0.55%
12B-1 FEES 0.20% 0.95% 0.75% --
OTHER EXPENSES 0.21% 0.21% 0.21% 0.21%
- ---------------------------------------------------
TOTAL (GROSS) 0.96% 1.71% 1.51% 0.76%
WAIVERS/
REIMBURSEMENTS (0.01%) (0.01%) (0.01%) (0.01%)
- ---------------------------------------------------
TOTAL (NET) 0.95% 1.70% 1.50% 0.75%
</TABLE>
- --------------------------------------------------------------------------------
SUMMARY OF SHAREHOLDER EXPENSES (5)
The example illustrates the expenses on a hypothetical $1,000 investment in the
fund based on the Total Expenses shown at left, an assumed annual total return
of 5% and reinvestment of all dividends.
<TABLE>
<CAPTION>
HOLDING PERIOD CLASS A CLASS B CLASS C CLASS R
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 YEAR $ 51 $ 57 $ 15 $ 8
3 YEARS $ 71 $ 85 $ 47 $24
5 YEARS $ 92 $104 $ 82 $42
10 YEARS $154 $181 $179 $93
</TABLE>
Information as of 8/31/96 See Notes on Next Page
- --------------------------------------------------------------------------------
PAGE 2
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The financial highlights below are excerpted from the fund's latest annual
report which has been audited by Arthur Andersen LLP, the fund's independent
auditors, and the fund's subsequent unaudited semi-annual report. For a free
copy of the fund's latest annual and semi-annual reports, write to Nuveen or
call (800) 621-7227.
- --------------------------------------------- --------------------------------
<TABLE>
<CAPTION>
CLASS INVESTMENT OPERATIONS AND DISTRIBUTIONS:
(INCEPTION
DATE)
Net Realized Distribu-
and Unreal- Dividends tions
Year Ending Beginning Net ized Gain from Net from Ending
February Net Asset Investment (Loss) From Investment Capital Net Asset
28/29, Value Income(c) Investments(a) Income Gains Value
------------- --------- ---------- -------------- ---------- --------- ---------
<C> <C> <C> <C> <C> <C> <C>
CLASS A
(9/94)
1997(g) $9.940 $.263 $ (.181) $(.252) $ -- $9.770
- ---------------------------------------------------------------------------------
1996 9.560 .513 .388 (.521) -- 9.940
- ---------------------------------------------------------------------------------
1995(d) 9.540 .254 .025 (.259) -- 9.560
- ---------------------------------------------------------------------------------
CLASS C
(9/94)
1997(g) 9.890 .223 (.177) (.216) -- 9.720
- ---------------------------------------------------------------------------------
1996 9.510 .437 .392 (.449) -- 9.890
- ---------------------------------------------------------------------------------
1995(d) 9.280 .188 .254 (.212) -- 9.510
- ---------------------------------------------------------------------------------
CLASS R
(12/86)
1997(g) 9.910 .267 (.173) (.264) -- 9.740
- ---------------------------------------------------------------------------------
1996 9.540 .537 .378 (.545) -- 9.910
- ---------------------------------------------------------------------------------
1995 9.940 .541 (.403) (.538) -- 9.540
- ---------------------------------------------------------------------------------
1994 9.910 .543 .038 (.541) (.010) 9.940
- ---------------------------------------------------------------------------------
1993 9.210 .563 .704 (.563) (.004) 9.910
- ---------------------------------------------------------------------------------
1992(e) 9.130 .146 .077 (.143) -- 9.210
- ---------------------------------------------------------------------------------
1991(f) 8.760 .577 .375 (.582) -- 9.130
- ---------------------------------------------------------------------------------
1990(f) 8.900 .587 (.144) (.583) -- 8.760
- ---------------------------------------------------------------------------------
1989(f) 8.600 .587 .300 (.587) -- 8.900
- ---------------------------------------------------------------------------------
1988(f) 8.250 .581 .350 (.581) -- 8.600
- ---------------------------------------------------------------------------------
1987(d)(f) 9.600 .577 (1.350) (.577) -- 8.250
- ---------------------------------------------------------------------------------
<CAPTION>
RATIOS/SUPPLEMENTAL DATA:
Ratio of Net
Ratio of Investment
Year Ending Ending Expenses to Income to Portfolio
February Total Net Assets Average Net Average Turnover
28/29, Return(b) (millions) Assets(c) Net Assets(c) Rate
------------- -------------------- -------------------------- ---------
<C> <C> <C> <C> <S> <C>
CLASS A
(9/94)
1997(g) .85% $5.6 1.00%+ 5.21%+ 3%
- --------------------------------------------------------------------------
1996 9.62 4.3 1.00 5.21 6
- --------------------------------------------------------------------------
1995(d) 3.05 1.1 1.00+ 5.75+ 17
- --------------------------------------------------------------------------
CLASS C
(9/94)
1997(g) .49 .8 1.75+ 4.46+ 3
- --------------------------------------------------------------------------
1996 8.87 .6 1.75 4.45 6
- --------------------------------------------------------------------------
1995(d) 4.86 .1 1.75+ 5.11+ 17
- --------------------------------------------------------------------------
CLASS R
(12/86)
1997(g) .98 74.5 .75+ 5.46+ 3
- --------------------------------------------------------------------------
1996 9.80 76.8 .75 5.49 6
- --------------------------------------------------------------------------
1995 1.64 71.6 .75 5.77 17
- --------------------------------------------------------------------------
1994 5.96 71.9 .75 5.38 3
- --------------------------------------------------------------------------
1993 14.21 53.2 .75 5.91 5
- --------------------------------------------------------------------------
1992(e) 2.44 34.5 .71+ 6.31+ 5
- --------------------------------------------------------------------------
1991(f) 11.19 31.2 .75 6.39 19
- --------------------------------------------------------------------------
1990(f) 5.21 20.8 .75 6.68 23
- --------------------------------------------------------------------------
1989(f) 10.62 15.5 .75 6.64 31
- --------------------------------------------------------------------------
1988(f) 11.56 9.5 .75 6.74 55
- --------------------------------------------------------------------------
1987(d)(f) (8.19) 5.7 .37+ 6.47+ 34
- --------------------------------------------------------------------------
</TABLE>
+ Annualized.
(a)Net of any applicable taxes.
(b)Total returns are calculated on net asset value and are not annualized.
(c)After waiver of certain management fees or reimbursement of expenses, if
applicable, by Nuveen Advisory.
(d)From commencement of class operations as noted.
(e)For the three months ending February 29.
(f)For the year ending November 30.
(g)For the six months ending August 31, 1996.
- --------------------------------------------------------------------------------
NOTES:
(1)Sales charge in effect February 1, 1997. The sales charge may be reduced or
waived based on the amount of purchase or for certain eligible categories of
investors. A CDSC of 1% is imposed on redemptions of certain purchases of $1
million or more within 18 months of purchase.
(2)CDSC declines to 0% at the end of six years.
(3)Imposed only on redemptions within 12 months of purchase.
(4)Effective February 1, 1997, the funds reduced the service fee on Class A and
C shares from 0.25% to 0.20% and reduced the distribution fee on Class C
shares from 0.75% to 0.55%. These lower expenses are reflected in the table
and are expected to reduce total operating expenses on Class A from 1.00% to
0.95% and on Class C from 1.75% to 1.50%, as reflected in the table. Long-
term holders of Class B and C shares may pay more in distribution fees and
CDSCs than the maximum initial sales charge permitted under National Associ-
ation of Securities Dealers (NASD) Rules of Fair Practice. Nuveen Advisory
will waive some or all of its fees or reimburse expenses so that the total
operating expenses (not counting distribution and service fees) for the fund
(through July 31, 1997) do not exceed 0.75% of average daily net assets.
(5)The expenses shown assume that you redeem your shares at the end of each
holding period. Class B shares convert to Class A shares after eight years.
If instead you redeemed your shares immediately prior to the end of each
holding period, your expenses would be higher. This example does not repre-
sent past or future expenses; actual expenses may be higher or lower.
- --------------------------------------------------------------------------------
PAGE 3
<PAGE>
- --------------------------------------------------------------------------------
Nuveen Massachusetts Insured Municipal Bond Fund
PERFORMANCE INFORMATION
INCEPTION:
December 22, 1986
NET ASSETS:
$64.4 million
- --------------------------------------------------------------------------------
TOTAL RETURN (ANNUALIZED)
<TABLE>
<CAPTION>
CLASS A
(OFFER CLASS A
PRICE) (NAV) CLASS B CLASS C CLASS R
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 YEAR 0.58% 4.98% 0.23% 4.12% 5.23%
5 YEARS 6.00% 6.89% 6.02% 6.11% 7.19%
INCEPTION 6.01% 6.47% 5.86% 5.76% 6.76%
</TABLE>
Class R total returns reflect actual performance for all periods; Class A and C
total returns reflect actual performance for periods since class inception (see
"Financial Highlights" for dates), and Class R performance for periods prior to
class inception, adjusted for the differences in sales charges and fees between
the classes. Class B total returns reflect Class R performance for all periods,
adjusted for the differences in sales charges and fees between the classes. See
Overview of Fund Operating Expenses and Shareholder Transaction Expenses.
The fund assumes investment risk in pursuit of its investment objective,
chiefly in the form of interest rate risk and credit risk. The fund limits this
risk by purchasing only certain types and maturities of municipal bonds and by
diversifying its investment portfolio geographically and by industry. See Risk
Reduction Strategies in the prospectus for further information.
- --------------------------------------------------------------------------------
MATURITY (YEARS)
[BAR CHART APPEARS HERE]
Average Maturity 18.5
Average Modified Duration 6.2
- --------------------------------------------------------------------------------
CREDIT QUALITY
[PIE CHART APPEARS HERE]
Insured (80%)
Escrowed (20%)
- --------------------------------------------------------------------------------
INDUSTRY DIVERSIFICATION (TOP 5)
[PIE CHART APPEARS HERE]
General Obligation Bonds (39%)
Escrowed Bonds (20%)
Health Care Facilities (17%)
Educational Facilities (16%)
Electric Utilities (3%)
Other (5%)
EXPENSE INFORMATION
SHAREHOLDER TRANSACTION EXPENSES
(Maximum, as % of Offering Price)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS R
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SALES CHARGE ON PURCHASES 4.20%(1) -- -- --
SALES CHARGE ON REINVESTED DIVIDENDS -- -- -- --
CONTINGENT DEFERRED SALES CHARGE (CDSC) ON REDEMPTIONS -- (1) 5%(2) 1%(3) --
</TABLE>
- --------------------------------------------------------------------------------
OVERVIEW OF FUND OPERATING EXPENSES (4)
(Annual, as % of Average Net Assets)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS R
- ------------------------------------------------
<S> <C> <C> <C> <C>
MANAGEMENT FEES 0.55% 0.55% 0.55% 0.55%
12B-1 FEES 0.20% 0.95% 0.75% --
OTHER 0.23% 0.23% 0.23% 0.23%
- ------------------------------------------------
TOTAL (GROSS) 0.98% 1.73% 1.53% 0.78%
WAIVERS/
REIMBURSEMENTS -- -- -- --
- ------------------------------------------------
TOTAL (NET) 0.98% 1.73% 1.53% 0.78%
</TABLE>
- --------------------------------------------------------------------------------
SUMMARY OF SHAREHOLDER EXPENSES (5)
The example illustrates the expenses on a hypothetical $1,000 investment in the
fund based on the Total Expenses shown at left, an assumed annual total return
of 5% and reinvestment of all dividends.
<TABLE>
<CAPTION>
HOLDING
PERIOD CLASS A CLASS B CLASS C CLASS R
- -----------------------------------------
<S> <C> <C> <C> <C>
1 YEAR $ 52 $ 57 $ 16 $ 8
3 YEARS $ 72 $ 86 $ 48 $25
5 YEARS $ 94 $105 $ 83 $43
10 YEARS $157 $184 $182 $97
</TABLE>
Information as of 8/31/96 See Notes on Next Page
- --------------------------------------------------------------------------------
PAGE 4
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The financial highlights below are excerpted from the fund's latest annual
report which has been audited by Arthur Andersen LLP, the fund's independent
auditors, and the fund's subsequent unaudited semi-annual report. For a free
copy of the fund's latest annual and semi-annual reports, write to Nuveen or
call (800) 621-7227.
<TABLE>
<CAPTION>
- ---------------- --------------------------------------------------------
CLASS INVESTMENT OPERATIONS AND DISTRIBUTIONS:
(INCEPTION
DATE)
Net Realized Distribu-
Year and Unreal- Dividends tions
Ending Beginning Net ized Gain from Net from Ending
February Net Asset Investment (Loss) From Investment Capital Net Asset
28/29, Value Income(c) Investments(a) Income Gains Value
--------------- --------- ---------- -------------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
CLASS A
(9/94)
1997
(e) $10.490 $.261 $(.243) $(.258) $ -- $10.250
- -------------------------------------------------------------------------------------------
1996 10.060 .512 .433 (.515) -- 10.490
- -------------------------------------------------------------------------------------------
1995
(d) 10.030 .249 .039 (.258) -- 10.060
- -------------------------------------------------------------------------------------------
CLASS C
(9/94)
1997
(e) 10.470 .223 (.254) (.219) -- 10.220
- -------------------------------------------------------------------------------------------
1996 10.040 .434 .435 (.439) -- 10.470
- -------------------------------------------------------------------------------------------
1995
(d) 9.910 .202 .137 (.209) -- 10.040
- -------------------------------------------------------------------------------------------
CLASS R
(12/86)
1997
(e) 10.500 .270 (.250) (.270) -- 10.250
- -------------------------------------------------------------------------------------------
1996 10.060 .538 .445 (.543) -- 10.500
- -------------------------------------------------------------------------------------------
1995 10.450 .545 (.386) (.549) -- 10.060
- -------------------------------------------------------------------------------------------
1994 10.440 .537 -- (.527) -- 10.450
- -------------------------------------------------------------------------------------------
1993 9.650 .551 .784 (.545) -- 10.440
- -------------------------------------------------------------------------------------------
1992 9.360 .570 .301 (.581) -- 9.650
- -------------------------------------------------------------------------------------------
1991 9.140 .568 .219 (.567) -- 9.360
- -------------------------------------------------------------------------------------------
1990 8.960 .571 .178 (.569) -- 9.140
- -------------------------------------------------------------------------------------------
1989 9.030 .576 (.070) (.576) -- 8.960
- -------------------------------------------------------------------------------------------
1988 9.540 .582 (.510) (.582) -- 9.030
- -------------------------------------------------------------------------------------------
1987
(d) 9.600 .131 (.060) (.131) -- 9.540
- -------------------------------------------------------------------------------------------
CLASS RATIOS/SUPPLEMENTAL DATA:
(INCEPTION
DATE)
Ratio of Net
Year Ratio of Investment
Ending Ending Expenses to Income to Portfolio
February Total Net Assets Average Net Average Turnover
28/29, Return(b) (millions) Assets(c) Net Assets(c) Rate
- ---------------- --------- ---------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C>
CLASS A
(9/94)
1997
(e) .20% $ 6.4 1.03%+ 4.99%+ 1%
- -------------------------------------------------------------------------------------------
1996 9.59 5.3 1.07 4.94 1
- -------------------------------------------------------------------------------------------
1995
(d) 2.99 2.0 1.15+ 5.34+ 10
- -------------------------------------------------------------------------------------------
CLASS C
(9/94)
1997
(e) (.28) .8 1.78+ 4.25+ 1
- -------------------------------------------------------------------------------------------
1996 8.80 .7 1.81 4.20 1
- -------------------------------------------------------------------------------------------
1995
(d) 3.52 .3 1.90+ 4.58+ 10
- -------------------------------------------------------------------------------------------
CLASS R
(12/86)
1997
(e) .22 57.2 .78+ 5.24+ 1
- -------------------------------------------------------------------------------------------
1996 9.99 60.1 .81 5.21 1
- -------------------------------------------------------------------------------------------
1995 1.77 57.1 .79 5.54 10
- -------------------------------------------------------------------------------------------
1994 5.22 58.3 .84 5.09 3
- -------------------------------------------------------------------------------------------
1993 14.28 47.1 .86 5.47 2
- -------------------------------------------------------------------------------------------
1992 9.57 28.2 .72 5.93 5
- -------------------------------------------------------------------------------------------
1991 8.95 15.6 .85 6.19 6
- -------------------------------------------------------------------------------------------
1990 8.52 8.6 .97 6.17 15
- -------------------------------------------------------------------------------------------
1989 5.84 5.4 .97 6.44 41
- -------------------------------------------------------------------------------------------
1988 1.14 4.9 .59 6.53 42
- -------------------------------------------------------------------------------------------
1987
(d) .75 2.3 -- 5.82+ --
- -------------------------------------------------------------------------------------------
</TABLE>
+Annualized.
(a)Net of any applicable taxes.
(b)Total returns are calculated on net asset value and are not annualized.
(c)After waiver of certain management fees or reimbursement of expenses, if
applicable, by Nuveen Advisory.
(d)From commencement of class operations as noted.
(e)For the six months ending August 31, 1996.
- --------------------------------------------------------------------------------
NOTES:
(1)Sales charge in effect February 1, 1997. The sales charge may be reduced or
waived based on the amount of purchase or for certain eligible categories of
investors. A CDSC of 1% is imposed on redemptions of certain purchases of $1
million or more within 18 months of purchase.
(2)CDSC declines to 0% at the end of six years.
(3)Imposed only on redemptions within 12 months of purchase.
(4)Effective February 1, 1997, the funds reduced the service fee on Class A and
C shares from 0.25% to 0.20% and reduced the distribution fee on Class C
shares from 0.75% to 0.55%. These lower expenses are reflected in the table
and are expected to reduce total operating expenses on Class A from 1.03% to
0.98% and on Class C from 1.78% to 1.53%, as reflected in the table. Long-
term holders of Class B and C shares may pay more in distribution fees and
CDSCs than the maximum initial sales charge permitted under National Associ-
ation of Securities Dealers (NASD) Rules of Fair Practice. Nuveen Advisory
has agreed to waive some or all of its fees or reimburse expenses to prevent
total operating expenses (not counting distribution and service fees) from
ex-ceeding 0.975% of the fund's average daily net assets.
(5)The expenses shown assume that you redeem your shares at the end of each
holding period. Class B shares convert to Class A shares after eight years.
If instead you redeemed your shares immediately prior to the end of each
holding period, your expenses would be higher. This example does not repre-
sent past or future expenses; actual expenses may be higher or lower.
- --------------------------------------------------------------------------------
PAGE 5
<PAGE>
FUND STRATEGIES
- -------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of each fund is to provide you with as high a level
of current interest income exempt from regular federal, state and, in some
cases, local income taxes as is consistent with preservation of capital. There
is no assurance that the funds will achieve their investment objective.
INVESTOR SUITABILITY
The funds are a suitable investment for tax-conscious investors seeking to:
. Earn regular monthly tax-free dividends;
. Preserve investment capital over time;
. Reduce taxes on investment income;
. Set aside money systematically for retirement, estate planning or college
funding.
The funds are not a suitable investment for individuals seeking to:
. Pursue an aggressive, high-growth investment strategy;
. Invest through an IRA or 401k plan;
. Avoid fluctuations in share price.
- -------------------------------------------------------------------------------
HOW THE FUNDS SELECT
INVESTMENTS
TAX-FREE MUNICIPAL BONDS
The funds invest substantially all of their assets (at least 80%) in Massachu-
setts municipal bonds that pay interest that is exempt from regular federal
and state income taxes. Income from these bonds may be subject to the federal
alternative minimum tax.
Municipal bonds are either general obligation or revenue bonds and typically
are issued to finance public projects (such as roads or public buildings), to
pay general operating expenses, or to refinance outstanding debt. Municipal
bonds may also be issued for private activities, such as housing, medical and
educational facility construction, or for privately owned industrial develop-
ment and pollution control projects. General obligation bonds are backed by
the full faith and credit, or taxing authority, of the issuer and may be
repaid from any revenue source; revenue bonds may be repaid only from the
revenues of a specific facility or source.
The Massachusetts Insured Fund primarily purchases insured municipal bonds.
See "Insurance" below. Under normal market conditions, the Massachusetts
Insured Fund will invest at least 65% of its assets in insured municipal
bonds.
FOCUS ON QUALITY MUNICIPAL BONDS
The funds focus on quality municipal bonds that are either rated investment
grade (AAA/Aaa to BBB/Baa) by independent ratings agencies at the time of
purchase or are non-rated but judged to be investment grade by the funds'
investment adviser. If suitable municipal bonds from a specific state are not
available at attractive prices and yields, a fund may invest in municipal
bonds of U.S. territories (such as Puerto Rico and Guam) which are exempt from
regular federal, state, and local income taxes. The funds may not invest more
than 20% of their net assets in these territorial municipal bonds. The Massa-
chusetts Insured Fund will invest at least 80% of its net assets in insured
municipal bonds or municipal bonds backed by an escrow or trust account that
contains sufficient U.S. government-backed securities to assure timely payment
of interest and principal.
The funds may purchase municipal bonds that represent lease obligations. These
carry special risks because the issuer of the bonds may not be obligated to
appropriate money annually to make payments under the lease. In order to
reduce this risk, the funds will only purchase leases where the issuer has a
strong incentive to continue making appropriations until maturity.
Bond ratings are furnished by Standard & Poor's Corporation, Fitch Investors
Services, and Moody's Investors Services. The ratings BBB and Baa are not
identical--S&P and Fitch consider bonds rated BBB to have adequate capacity to
pay principal and interest; Moody's considers bonds rated Baa to have some
speculative characteristics. Bond ratings represent the opinions of the
ratings agencies; they are not absolute standards of quality.
VALUE INVESTING STRATEGY
The funds' investment adviser uses a value-oriented strategy and looks for
higher-yielding and undervalued municipal bonds that offer above-average total
return potential. The adviser emphasizes fundamental research and selects
municipal bonds on the basis of its evaluation of each bond's relative value
in terms of current yield, price, credit quality and future prospects. The
adviser then monitors each fund's portfolio to assure that municipal bonds
purchased continue to represent over time, in its opinion, the best values
available.
PORTFOLIO MATURITY
Each fund purchases municipal bonds with different maturities in pursuit of
its investment objective, but maintains under normal market conditions an
investment portfolio with an overall weighted average maturity within a
defined range. All of the funds described in this prospectus are long-term
funds and normally maintain a weighted average portfolio maturity of 15 to 30
years. See "Defensive Investment Strategies" below for further information.
- -------------------------------------------------------------------------------
PAGE 6
<PAGE>
INSURANCE
Insured municipal bonds are purchased primarily by the Massachusetts Insured
Fund. Insured municipal bonds are either covered by individual, permanent
insurance policies (obtained either at the time of issuance or subsequently),
or covered "while in fund" under a master portfolio insurance policy purchased
by a fund. Insurance guarantees only the timely payment of interest and prin-
cipal on the bonds; it does not guarantee the value of either individual bonds
or fund shares.
Portfolio insurance policies are effective only so long as the fund continues
to own the covered bond, and the price the fund would receive upon sale of such
a bond would not benefit from the insurance. Insurers under master portfolio
insurance policies currently include MBIA Insurance Corp., AMBAC Indemnity
Corp., Financial Security Assurance, Inc., and Financial Guaranty Insurance Co.
The fund's investment adviser may obtain master policies from other insurers,
but only from insurers that specialize in insuring municipal bonds and whose
claims-paying ability is rated Aaa or AAA by Moody's or S&P. Insurers are
responsible for making their own assessment of the insurability of a municipal
bond.
An insured fund can invest up to 20% of its net assets in uninsured municipal
bonds which are backed by an escrow containing sufficient U.S. Government or
U.S. Government agency securities to ensure timely payment of principal and
interest. Such bonds are normally regarded as having the credit characteristics
of the underlying U.S. Government-backed securities.
PORTFOLIO TURNOVER
A fund buys and sells portfolio securities in the normal course of its invest-
ment activities. The proportion of the fund's investment portfolio that is sold
and replaced with new securities during a year is known as the fund's portfolio
turnover rate. The funds intend to keep portfolio turnover relatively low in
order to reduce trading costs and the realization of taxable capital gains.
Each fund, however, may make limited short-term trades to take advantage of
market opportunities and reduce market risk.
DELAYED DELIVERY TRANSACTIONS
Each fund may buy or sell bonds on a when-issued or delayed delivery basis,
making payment or taking delivery at a later date, normally within 15 to 45
days of the trade date. This type of transaction may involve an element of risk
because no interest accrues on the bonds prior to settlement and, since securi-
ties are subject to market fluctuation, the value of the bonds at time of
delivery may be less (or more) than cost.
- --------------------------------------------------------------------------------
RISK REDUCTION STRATEGIES
In pursuit of its investment objective, each fund assumes investment risk,
chiefly in the form of interest rate and credit risk. Interest rate risk is the
risk that changes in market interest rates will affect the value of a fund's
investment portfolio. In general, the value of a municipal bond falls when
interest rates rise, and increases when interest rates fall. Credit risk is the
risk that an issuer of a municipal bond is unable to meet its obligation to
make interest and principal payments. In general, lower rated municipal bonds
are perceived to carry a greater degree of risk in the issuer's ability to make
interest and principal payments. Municipal bonds with longer maturities (dura-
tions) or lower ratings generally provide higher current income, but are subject
to greater price fluctuation due to changes in market conditions than bonds with
shorter maturities or higher ratings, respec-tively.
Because the funds primarily purchase municipal bonds from Massachusetts, each
fund also bears investment risk from the economic, political or regulatory
changes that could adversely affect municipal bond issuers in the state and
therefore the value of the fund's investment portfolio. These risks may be
greater for the Massachusetts and Massachusetts Insured Funds, which as "non-
diversified" funds may concentrate their investments in municipal bonds of
certain issuers to a greater extent than diversified funds.
The funds limit your investment risk generally by restricting the types and
maturities of municipal bonds they purchase, and by diversifying their invest-
ment portfolios across different industry sectors. The funds should be consid-
ered long-term investments and may not be suitable for investors with short-
term investment horizons.
INVESTMENT LIMITATIONS
The funds have adopted certain investment limitations (based on total fund
assets) designed to limit your investment risk and maintain portfolio diversi-
fication. Each fund may not have more than:
. 25% in any one industry sector, such as electric utilities or health care;
. 10% in borrowings (33% if used to meet redemptions).
DEFENSIVE INVESTMENT STRATEGIES
Each fund may invest in high quality short-term municipal securities in order
to reduce risk and preserve capital. Under normal market conditions, each fund
may invest only up to 20% of net assets in short-term municipal securities that
are exempt from regular federal income tax, although the funds may invest up to
100% as a temporary defensive measure in response to adverse market conditions.
During
- --------------------------------------------------------------------------------
PAGE 7
<PAGE>
temporary defensive periods, the weighted average maturity of a fund's invest-
ment portfolio may fall below the defined range described above under "Port-
folio Maturity."
If suitable short-term municipal investments are not reasonably available, the
funds may invest in short-term taxable securities that are rated Aaa or AAA,
by Moody's or S&P, respectively, or issued by the U.S. government, and that
have a maturity of one year or less or have a variable interest rate.
Each fund may also use various investment strategies designed to limit the
risk of bond price fluctuations and to preserve capital. These hedging strate-
gies include using financial futures contracts, options on financial futures,
or options based on either an index of long-term tax-free securities or on
debt securities whose prices, in the opinion of the funds' investment adviser,
correlate with the prices of the funds' investments. The funds, however, have
no present intent to use these strategies.
FUNDAMENTAL INVESTMENT POLICIES
Each fund's investment objective as well as the policies described above in
"Focus on Quality Municipal Bonds," "Insurance," and "Risk Reduction Strate-
gies" are fundamental and may not be changed without the approval of a
majority of the shareholders of each fund.
INVESTING IN THE FUNDS
- -------------------------------------------------------------------------------
HOW TO BUY FUND SHARES
You may open an account with $3,000 and make additional investments at any
time with as little as $50. Reinvestment of Nuveen unit trust distributions
have no purchase minimums. The share price you pay will depend on when Nuveen
receives your order: orders received before the close of regular trading on
the New York Stock Exchange (normally 4:00 p.m. Eastern time) will receive
that day's share price; otherwise you will receive the next business day's
share price.
BUYING SHARES THROUGH A FINANCIAL ADVISER
You may buy fund shares through your financial adviser, who can handle all the
details for you, including establishing an account with Nuveen. Financial
advisers can also help you review your financial needs and formulate long-term
investment goals and objectives. In addition, financial advisers generally can
help you develop a customized financial plan, select investments, and monitor
and review your portfolio on an ongoing basis to assure your investments
continue to meet your needs as circumstances change.
Financial advisers are usually paid either from fund sales charges and fees or
by charging you a separate fee in lieu of a sales charge for ongoing invest-
ment advice and services.
If you do not have a financial adviser, call (800) 621-7227 and Nuveen can
refer you to one in your area.
BUYING SHARES BY MAIL
You may also open an account and purchase shares by mail by completing the
enclosed Nuveen application and mailing it along with your check (payable to
the appropriate fund) to the address listed under "How to Contact Nuveen."
Sales charges are not waived when you buy shares by mail.
Each fund reserves the right to reject any purchase order and waive or
increase minimum investment requirements. The funds also reserve the right to
suspend the issuance of shares at any time; any suspension, however, will not
affect your ability to redeem shares.
- -------------------------------------------------------------------------------
HOW TO SELECT A PURCHASE
OPTION
The funds offer you a variety of flexible options when buying shares. Whether
you typically work with a financial adviser on a commission or a fee basis or
- -------------------------------------------------------------------------------
PAGE 8
<PAGE>
prefer to work on a more self-directed basis, you can purchase shares in the
way that is most suited to your individual circumstances and investment needs.
Each of the four available ways to purchase fund shares is called a class of
shares: Class A, Class B, Class C and Class R. While each of these classes
features different sales charges, on-going fees and eligibility requirements,
each entitles you to a share of the same portfolio of municipal bonds.
Selecting the class of shares which is most appropriate for you will depend on
a variety of factors. You should weigh carefully whether you and your financial
adviser work on a commission or fee basis, the types of services that you will
receive, the amount you intend to buy, how long you plan to own your investment
and whether or not you will reinvest dividends. If you compensate your finan-
cial adviser directly, you should consider the fees your financial adviser
charges for investment advice or handling your trades in addition to any sales
charges and fees imposed by the funds. Please refer to your financial adviser's
sales material for further information. Each class of shares is described in
more detail below and under "Fund Service Providers--The Distributor." Your
financial adviser can explain each option and help you determine which is most
appropriate for you, or you can call (800) 621-7227.
BUYING CLASS A SHARES
You may buy Class A shares at their public offering price on the day of
purchase. The price you pay will equal the Class A NAV (net asset value) plus a
sales charge based upon the amount of your purchase. Class A shares also bear a
0.20% annual service fee which compensates your financial adviser for providing
you with ongoing service.
The following Class A sales charges and commissions apply to all funds
described in this prospectus:
- --------------------------------------------------------------------------------
CLASS A SALES CHARGES AND COMMISSIONS
<TABLE>
<CAPTION>
AUTHORIZED DEALER
SALES CHARGE COMMISSION
------------------------------------- -----------------
AS % OF AS % OF
PUBLIC AS % OF PUBLIC
OFFERING YOUR NET OFFERING
PURCHASE AMOUNT PRICE INVESTMENT PRICE
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Up to $50,000 4.20% 4.38% 3.70%
$50,000-100,000 4.00 4.18 3.50
$100,000-250,000 3.50 3.63 3.00
$250,000-500,000 2.50 2.56 2.00
$500,000-1,000,000 2.00 2.04 1.50
$1,000,000 and over --(1) -- --(1)
</TABLE>
(1) Nuveen pays authorized dealers a commission equal to the sum of 1% of the
first $2.5 million, plus 0.50% of the next $2.5 million, plus 0.25% of any
amount over $5 million. Unless the authorized dealer waived the commission,
you may be assessed a contingent deferred sales charge (CDSC) of 1% if you
redeem any of your shares within 18 months of purchase. The CDSC is calcu-
lated on the lower of your purchase price or redemption proceeds.
Nuveen periodically undertakes sales promotion programs with authorized dealers
and may pay them the full applicable sales charge as a commission. In addition,
Nuveen may provide support at its own expense to authorized dealers in connec-
tion with sales meetings, seminars, prospecting seminars and other events at
which Nuveen presents its products and services. Under certain circumstances,
Nuveen also will share with authorized dealers up to half the costs of adver-
tising that features the products and services of both parties. The statement
of additional information contains further information about these programs.
- --------------------------------------------------------------------------------
OTHER SALES CHARGE DISCOUNTS
Nuveen offers a number of programs that enable you to reduce or eliminate the
sales charge on Class A shares:
Sales Charge Reductions Sales Charge Waivers
. Rights of Accumulation . Unit Trust Reinvestment
. Letter of Intent (LOI) . Purchases using Redemptions from Unrelated Funds
. Group Purchase . Fee-Based Programs
. Bank Trust Departments
. Certain Employees of Nuveen or Authorized Dealers
Please refer to the statement of additional information for detailed descrip-
tions of these programs. Further information on these programs is also avail-
able through your financial adviser or by calling (800) 621-7227. Your finan-
cial adviser can also provide and help you prepare the necessary application
forms. You or your financial adviser are responsible for notifying Nuveen about
your eligibility for any sales charge reduction or waiver at the time of each
purchase.
The funds may modify or discontinue these programs at any time upon written
notice to shareholders.
BUYING CLASS B SHARES
You may buy Class B shares at their public offering price on the day of
purchase. The price you pay will equal the Class B NAV. There is no initial
sales charge, but Class B shares bear a 0.20% annual service fee which compen-
sates your financial adviser for providing you with ongoing service, and a
0.75% annual distribution fee which compensates Nuveen for paying your finan-
cial adviser a 4% commission at the time of purchase.
- --------------------------------------------------------------------------------
PAGE 9
<PAGE>
Class B shares convert automatically to Class A shares eight years after
purchase. Class B shares will convert only if the fund is assured that the
conversion does not generate tax consequences for investors, based upon the
opinion of outside counsel or the written assurance of the IRS.
- -------------------------------------------------------------------------------
CLASS B CONTINGENT DEFERRED SALES CHARGE
If you redeem Class B shares within six years of purchase, you will be
assessed a contingent deferred sales charge (CDSC) based upon the following
schedule:
<TABLE>
<CAPTION>
DURING YEAR
---------------------------
1 2 3 4 5 6 7+
--- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C>
CDSC 5% 4% 4% 3% 2% 1% 0%
</TABLE>
The CDSC is calculated on the lower of your purchase price or redemption
proceeds.
BUYING CLASS C SHARES
You may buy Class C shares at their public offering price on the day of
purchase. The price you pay will equal the Class C NAV. There is no initial
sales charge, Class C shares bear a 0.20% annual service fee which compensates
your financial adviser for providing you with ongoing service, and a 0.55%
annual distribution fee which compensates Nuveen for paying your financial
adviser for the sale, including a 1% commission at the time of sale.
If you redeem your Class C shares within one year of purchase, you may be
assessed a CDSC of 1%. The CDSC is calculated on the lower of your purchase
price or redemption proceeds.
BUYING CLASS R SHARES
You may purchase Class R shares at their public offering price on the day of
purchase. The price you pay will equal the Class R NAV. You may purchase Class
R shares only if you are investing at least $1 million or would otherwise
qualify to purchase Class A shares without a sales charge as described under
"Other Sales Charge Discounts" above. There are no sales charges or ongoing
fees. Class R Shares have lower ongoing expenses than Class A Shares.
- -------------------------------------------------------------------------------
HOW TO SELL FUND SHARES
You may use one of the methods described below to redeem your shares on any
day the New York Stock Exchange is open. You will receive the share price next
determined after Nuveen has received your redemption request in good order.
Your redemption request must be received before the close of trading of the
New York Stock Exchange (normally 4 p.m. Eastern time) for you to receive that
day's price. The funds do not charge any redemption fees, although you will be
assessed a CDSC where applicable.
SELLING SHARES THROUGH YOUR FINANCIAL ADVISER
You may sell fund shares by contacting your financial adviser who can provide
and help you prepare all the necessary documentation. Your financial adviser
may charge you for this service.
SELLING SHARES BY TELEPHONE
Unless you have declined telephone redemption privileges, you may sell fund
shares by calling (800) 621-7227. Your redemption must not exceed $50,000 and
you may not redeem by telephone shares held in certificate form. Checks will
be issued only to the shareholder on record and mailed to the address on
record. If you have established electronic funds transfer privileges on your
account, you may have redemption proceeds transferred electronically to your
bank account; if you are redeeming $1,000 or more, you may expedite your
request by having your redemption proceeds wired directly into your bank
account.
Nuveen and Shareholder Services, Inc. ("SSI") will be liable for losses
resulting from unauthorized telephone redemptions only if they do not follow
reasonable procedures designed to verify the identity of the caller. You
should immediately verify your trade confirmations when you receive them.
SELLING SHARES BY MAIL
You may sell fund shares by mail by sending a written request to Nuveen at the
address listed below under "How to Contact Nuveen." Your request must include
the following information:
. The fund's name;
. Your name and account number;
. The dollar or share amount you wish to redeem;
. The signature of each owner exactly as it appears on the account;
. The name of the person you want your redemption proceeds paid to, if other
than to the shareholder of record;
. The address you want your redemption proceeds sent to, if other than to the
address of record;
. Any certificates you have for the shares; and
. Any required signature guarantees.
Signatures must be guaranteed if you are redeeming more than $50,000, you want
the check payable to someone other than the shareholder on record, or you want
the check sent to another address (or the address on record has been changed
within the last 60 days). Signature guarantees must be obtained from a bank,
brokerage firm or other financial intermediary that is a member of an approved
Medallion Guarantee Program or that is otherwise approved by the fund. A
notary public cannot provide a signature guarantee.
- -------------------------------------------------------------------------------
PAGE 10
<PAGE>
Unless other arrangements are made, checks will be sent to your address on
record. Checks will normally be mailed within one business day, but in no
event more than seven days from receipt of your redemption request. If any
shares were purchased less than 15 days prior to your request, the fund will
not mail your redemption proceeds until the check for your purchase has
cleared, which may take up to 15 days.
Each fund may suspend redemptions or delay payment on redemptions for more
than seven days (three days for street name accounts) in certain extraordinary
circumstances as described in the statement of additional information.
OPERATION OF THE CDSC
When you redeem Class A, Class B, or Class C shares subject to a CDSC, the
fund will first redeem any shares that are not subject to a CDSC or that
represent an increase in the value of your fund account due to capital appre-
ciation, and then redeem the shares you have owned for the longest period of
time, unless you ask the fund to redeem your shares in a different order. No
CDSC is imposed on shares you buy through the reinvestment of dividends and
capital gains. The holding period is calculated on a monthly basis and begins
on the first day of the month in which you buy shares. When you redeem shares
subject to a CDSC, the CDSC is calculated on the lower of your purchase price
or redemption proceeds, deducted from your redemption proceeds, and paid to
Nuveen. The CDSC may be waived under certain special circumstances as
described in the statement of additional information.
ACCOUNT MINIMUMS
From time to time, the funds may establish minimum account size requirements.
The funds reserve the right to liquidate your account upon 30 days written
notice if the value of your account falls below an established minimum. The
funds presently have set a minimum balance of $100 unless you have an active
unit trust reinvestment account. You will not be assessed a CDSC on an invol-
untary redemption.
- -------------------------------------------------------------------------------
EXCHANGING SHARES
You may exchange fund shares at any time for the same class of shares in
another Nuveen mutual fund that is available within your state. You may
exchange fund shares by calling (800) 621-7227 or by mailing your written
request to Nuveen at the address listed under "How to Contact Nuveen."
You must have owned your fund shares for at least 15 days and your exchange
must meet the minimum purchase requirements of the fund into which you are
exchanging. No CDSC will be assessed on an exchange, and the holding period of
your investment will be carried over to the new fund for purposes of deter-
mining any future CDSC. You may not exchange Class B shares for shares of a
Nuveen money market fund.
Because an exchange is treated for tax purposes as the concurrent sale and
purchase of fund shares, you should consult your tax adviser about the tax
consequences of any contemplated exchange. Each fund reserves the right to
limit or terminate exchange privileges if it believes doing so is in the best
interests of fund shareholders.
RESTRICTIONS ON MARKET TIMING
The exchange privilege is not intended to permit you to use a fund for short-
term trading. Excessive exchange activity may interfere with portfolio manage-
ment, raise fund operating expenses or otherwise have an adverse effect on
fund shareholders. In order to limit excessive exchange activity and in other
circumstances where the funds' investment adviser believes doing so would be
in the best interests of the fund, each fund reserves the right to revise or
terminate the exchange privilege, limit the amount or number of exchanges, or
reject any exchange. You will be notified in the event this happens to the
extent required by law.
- -------------------------------------------------------------------------------
OPTIONAL FEATURES AND SERVICES
SYSTEMATIC INVESTMENT
Once you have opened an account, you may make regular investments of $50 or
more a month through automatic deductions from your bank account (see "Fund
Direct--Electronic Funds Transfer" below), or directly from your paycheck. To
invest regularly from your bank account, simply complete the appropriate
section of the account application. To invest regularly from your paycheck,
call Nuveen for a Payroll Direct Deposit Enrollment form. If you need addi-
tional copies of these forms, or would like assistance completing them,
contact your financial adviser or call Nuveen toll-free at (800) 621-7227.
One of the benefits of systematic investing is "dollar cost averaging."
Because you are making fixed payments, you buy fewer shares when the price is
high, and more when the price is low. As a result, the average price you pay
will be less than the average share price of fund shares over this 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.
Systematic investing may also make you eligible for reduced sales charges on
shares of the fund as well as other Nuveen mutual funds (see "Other Sales
Charge Discounts").
- -------------------------------------------------------------------------------
PAGE 11
<PAGE>
- -------------------------------------------------------------------------------
THE POWER OF SYSTEMATIC INVESTING
The chart below illustrates the benefits of systematic investing based on a
$3,000 initial investment and subsequent monthly investments of $100 over 20
years. The example assumes you earn a return of 4%, 5% or 6% annually on your
investment and that you reinvest all dividends. These annual returns do not
reflect past or projected fund performance.
<TABLE>
<CAPTION>
[CHART APPEARS HERE]
ACCOUNT VALUES FOR TOTAL RETURNS OF
AMOUNT -------------------------------------
YEAR INVESTED 4.00% 5.00% 6.00%
---- -------- ------- ------- -------
<S> <C> <C> <C> <C>
0 $ 2,874 $ 2,874 $ 2,874 $ 2,874
5 8,622 9,861 10,203 10,561
10 14,370 18,391 19,610 20,929
15 20,118 28,807 31,681 34,913
20 25,866 41,525 47,173 53,779
</TABLE>
SYSTEMATIC WITHDRAWALS
If the value of your fund account is at least $10,000, you may request to have
$50 or more withdrawn automatically from your account. You may elect to
receive payments monthly, quarterly or semi-annually, and may choose to
receive a check, have the monies transferred directly into your bank account
(see "Fund Direct--Electronic Funds Transfer" below), paid to a third party or
sent payable to you at an address other than your address of record. You must
complete the appropriate section of the account application to participate in
the fund's systematic withdrawal plan.
You should not establish systematic withdrawals if you intend to make concur-
rent purchases of Class A, B or C shares because you may unnecessarily pay a
sales charge or CDSC on these purchases.
REINSTATEMENT PRIVILEGE
If you redeem fund shares on which you paid an initial sales charge or contin-
gent deferred sales charge (CDSC), you may reinvest all or part of your
redemption proceeds up to one year later without incurring any additional
charge. You may only reinvest into the same class of shares you redeemed and
will receive the share price next determined after Nuveen receives your rein-
vestment request. You may exercise this privilege only once per redemption
request.
If you paid a CDSC, your CDSC will be refunded and your holding period rein-
stated. You should consult your tax adviser about the tax consequences of
exercising your reinstatement privilege.
FUND DIRECT--ELECTRONIC FUNDS TRANSFER
You may arrange to transfer funds electronically between your bank account and
your fund account by completing the appropriate section of the account appli-
cation. If you need additional copies of this form, or would like assistance
completing it, contact your financial adviser or Nuveen at (800) 621-7227. You
may use Fund Direct to quickly and conveniently purchase or sell shares by
telephone, systematically invest or withdraw funds, or send dividend payments
directly to your bank account.
If you have established electronic funds transfer privileges on your account,
you may request that redemption proceeds of $1,000 or more be wired directly
into your bank account. While you will generally receive your redemption
proceeds more quickly than a regular telephone redemption, the fund may charge
you a fee for this expedited service.
- -------------------------------------------------------------------------------
PAGE 12
<PAGE>
DIVIDENDS AND TAXES
- --------------------------------------------------------------------------------
HOW THE FUNDS PAY DIVIDENDS
The funds pay tax-free dividends monthly and any taxable capital gains or other
distributions once a year in December. The funds declare dividends on or about
the ninth of each month and generally pay dividends on the first business day
of the following month.
PAYMENT AND REINVESTMENT OPTIONS
The funds automatically reinvest your dividends each month in additional fund
shares unless you request otherwise. You may request to have your dividends
paid to you by check, deposited directly into your bank account, paid to a
third party, sent to an address other than your address of record or reinvested
in shares of another Nuveen mutual fund. If you wish to do so, complete the
appropriate section of the account application, contact your financial adviser
or call Nuveen at (800) 621-7227.
CALCULATION OF FUND DIVIDENDS
Each fund pays dividends based upon its past and projected net income in order
to distribute substantially all of its net income each fiscal year.
In order to maintain a more stable monthly dividend, each fund may sometimes
distribute less or more than the amount of net income earned in a particular
period as a result of fluctuations in a fund's net income. Undistributed net
income is included in the fund's share price; similarly, distributions from
previously undistributed net income reduce the fund's share price. This divi-
dend policy is not expected to affect the management of a fund's portfolio.
Dividends for Class A, B, C and R shares are determined in the same manner and
at the same time. Dividends per share will vary based on which class of fund
shares you own, reflecting the different ongoing fees and other expenses of
each class.
- --------------------------------------------------------------------------------
TAXES AND TAX REPORTING
The discussion below and in the statement of additional information provides
general tax information related to an investment in fund shares. Because tax
laws are complex and often change, you should consult your tax adviser about
the tax consequences of a specific fund investment.
Each fund primarily invests in Massachusetts municipal bonds or in municipal
bonds whose income is otherwise exempt from regular federal and state income
taxes. Consequently, the regular monthly dividends you receive will be exempt
from regular federal and state income taxes. All or a portion of these divi-
dends, however, may be subject to the federal alternative minimum tax (AMT).
Although the funds do not seek to realize taxable income or capital gains, the
funds may realize and distribute taxable income or capital gains from time to
time as a result of each fund's normal investment activities. Each fund will
distribute in December any taxable income or capital gains realized over the
preceding year. Net short-term gains are taxable as ordinary income. Net long-
term capital gains are taxable as long-term capital gains regardless of how
long you have owned your investment. Taxable dividends do not qualify for a
dividends received deduction if you are a corporate shareholder.
Each year, you will receive a year-end statement that describes the tax status
of dividends paid to you during the preceding year, including the source of its
investment income by state and the portion of its income that is subject to
AMT. You will receive this statement from the firm where you purchased your
fund shares if you hold your investment in street name; Nuveen will send you
this statement if you hold your shares in registered form.
The tax status of your dividends is not affected by whether you reinvest your
dividends or receive them in cash.
BUYING OR SELLING SHARES CLOSE TO A RECORD DATE
If you purchase fund shares shortly before the record date for a taxable divi-
dend, the entire dividend you receive may be taxable to you even though a
portion of the dividend effectively represents a return of your purchase price.
This is commonly known as "buying a dividend." Similarly, if you sell or
exchange fund shares shortly before the record date for a tax-exempt dividend,
a portion of the price you receive may be treated as a taxable capital gain
even though it reflects tax-free income earned but not yet distributed by the
fund.
TAX CONSEQUENCES OF PRIVATE ACTIVITY BONDS
Because each fund may invest in private activity bonds, the portion of your
regular monthly dividends derived from the income earned on these bonds that
would otherwise be tax-exempt will be treated as taxable income if:
. you are subject to the AMT (including corporate shareholders);
. you are a "substantial user" of a facility financed by these bonds; or
. you are a "related person" of a substantial user.
- --------------------------------------------------------------------------------
PAGE 13
<PAGE>
REDEEMING SHARES HELD LESS THAN SIX MONTHS
If you sell or exchange shares that you have owned for less than six months
and you recognized a short-term capital loss when you redeemed your shares,
the loss you can claim will be reduced by the amount of tax-free dividends
paid to you on those shares. Any remaining short-term capital loss will be
treated as long-term capital loss to the extent you also received capital gain
dividends on those shares. You should consult your tax adviser for complete
information about these rules. Please consider the tax consequences carefully
when contemplating a redemption.
OTHER IMPORTANT TAX INFORMATION
In order to avoid corporate taxation of its earnings and to pay tax-free divi-
dends, each fund must meet certain I.R.S. requirements that govern the fund's
sources of income, diversification of assets and distribution of earnings to
shareholders. Each fund has met these requirements in the past and intends to
do so in the future. If a fund failed to do so, the fund would be required to
pay corporate taxes on its earnings and all your distributions would be
taxable as ordinary income.
A fund may be required to withhold 31% of certain of your dividends if you
have not provided the fund with your correct taxpayer identification number
(normally your social security number), or if you are otherwise subject to
back-up withholding.
If you receive social security benefits, you should be aware that tax-free
income is taken into account in calculating the amount of these benefits that
may be subject to federal income tax.
If you borrow money to buy fund shares, you may not deduct the interest on
that loan. Under I.R.S. rules, fund shares may be treated as having been
bought with borrowed money even if the purchase cannot be traced directly to
borrowed money.
- -------------------------------------------------------------------------------
TAXABLE EQUIVALENT YIELDS
The taxable equivalent yield is the current yield you would need to earn on a
taxable investment in order to equal a stated tax-free yield on a municipal
investment. To assist you to more easily compare municipal investments like
the funds with taxable alternative investments, the table below presents the
taxable equivalent yields for a range of hypothetical tax-free yields and tax
rates:
- -------------------------------------------------------------------------------
TAXABLE EQUIVALENT OF TAX-FREE YIELDS
<TABLE>
<CAPTION>
TAX-FREE YIELD
TAX RATE 4.00% 4.50% 5.00% 5.50% 6.00%
- ------ --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
28.0% 5.56% 6.25% 6.94% 7.64% 8.33%
31.0% 5.80% 6.52% 7.25% 7.97% 8.70%
36.0% 6.25% 7.03% 7.81% 8.59% 9.37%
39.6% 6.62% 7.45% 8.28% 9.11% 9.93%
</TABLE>
The yields and tax rates shown above are hypothetical and do not predict your
actual returns or effective tax rate. For more detailed information, see the
statement of additional information or consult your tax adviser.
- -------------------------------------------------------------------------------
PAGE 14
<PAGE>
GENERAL INFORMATION
- --------------------------------------------------------------------------------
HOW TO CONTACT NUVEEN
GENERAL INFORMATION
If you would like general information about Nuveen Mutual Funds or any other
Nuveen product, call (800) 621-7227 between 7:30 a.m. and 7:00 p.m. Central
time.
PURCHASES, REDEMPTIONS AND OTHER TRANSACTIONS
If you are calling to purchase or redeem shares, request an exchange or conduct
other account transactions, call (800) 621-7227 between 7:30 a.m. and 7:00 p.m.
Central time. If you are sending a written request to Nuveen, you should mail
your request to the following address:
Nuveen Mutual Funds
c/o Shareholder Services Inc.
P.O. Box 5330
Denver, CO 80217-5330
When purchasing fund shares by mail, please be sure to include a check made out
to the name of the Fund and mark clearly on your check which class of shares
you are purchasing. If you do not specify which class of shares you are
purchasing, Nuveen will assume you are buying Class A shares if you are opening
a new account; if you are adding to an existing account, Nuveen will assume you
wish to buy more shares of the class you already own.
- --------------------------------------------------------------------------------
FUND SERVICE PROVIDERS
INVESTMENT ADVISER
Nuveen Advisory Corp. ("Nuveen Advisory") serves as the investment adviser to
the funds and in this capacity is responsible for the selection and on-going
monitoring of the municipal bonds in each fund's investment portfolio. Nuveen
Advisory serves as investment adviser to investment portfolios with more than
$35 billion in municipal assets under management. The activities of Nuveen
Advisory, which also include managing the funds' business affairs and providing
certain clerical, bookkeeping and other administrative services, are overseen
by the funds' Board of Trustees. Established in 1976, Nuveen Advisory is a
wholly-owned subsidiary of John Nuveen & Co. Incorporated, which itself is
approximately 78% owned by the St. Paul Companies, Inc. Effective January 1,
1997, The John Nuveen Company acquired Flagship Resources Inc., and as part of
that acquisition, Flagship Financial, the adviser to the Flagship Funds, was
merged with Nuveen Advisory.
For providing these services, Nuveen Advisory is paid an annual management fee
according to the following schedule:
MANAGEMENT FEES
<TABLE>
<CAPTION>
AVERAGE DAILY MANAGEMENT
NET ASSET VALUE FEE
- --------------------------------------
<S> <C>
For the first $125 million 0.5500%
For the next $125 million 0.5375%
For the next $250 million 0.5250%
For the next $500 million 0.5125%
For the next $1 billion 0.5000%
For assets over $2 billion 0.4750%
</TABLE>
For more information about fees and expenses, see the fund operating expense
tables in the Fund Summaries.
PORTFOLIO MANAGERS
Overall investment management strategy and operating policies for the funds are
set by the Investment Policy Committee of Nuveen Advisory. The Investment
Policy Committee is comprised of the principal executive officers and portfolio
managers of Nuveen Advisory and meets regularly to review economic conditions,
the outlook for the financial markets in general and the status of the munic-
ipal markets in particular. Day-to-day operation of each fund and the execution
of its specific investment strategies is the responsibility of the designated
portfolio manager described below.
Stephen S. Peterson is an Assistant Vice President of Nuveen Advisory and the
portfolio manager for the Massachusetts Fund and the Massachusetts Insured
Fund. Mr. Peterson has managed the funds since May 1993 and joined Nuveen Advi-
sory in October 1991.
THE DISTRIBUTOR
John Nuveen and Co. Incorporated serves as the selling agent and distributor of
the funds' shares. In this capacity, Nuveen manages the offering of the funds'
shares and is responsible for all sales and promotional activities. In order to
reimburse Nuveen for its costs in connection with these activities, including
compensation paid to authorized dealers, each fund has adopted a distribution
and service plan under Rule 12b-1 of the Investment Company Act of 1940.
The plan authorizes each fund to pay Nuveen an annual 0.20% service fee on the
average daily net assets of Class A, B and C shares outstanding and
- --------------------------------------------------------------------------------
PAGE 15
<PAGE>
annual distribution fees of 0.75% and 0.55%, respectively, on the average
daily net assets of Class B and C shares outstanding. In order to help compen-
sate Nuveen for the sales commission paid to financial advisers at the time of
sale on sales of Class B and Class C shares, Nuveen retains the first year's
service fee on sales of Class B shares and all Class B distribution fees; and
retains the first year's service and distribution fees on sales of Class C
shares. Otherwise, Nuveen pays these fees to the broker of the record. The
statement of additional information contains a detailed description of the
plan and its provisions.
TRANSFER AGENT
Each fund has appointed a transfer agent which is responsible for distributing
dividend payments and providing certain bookkeeping, data processing and other
administrative services in connection with the maintenance of shareholder
accounts. Shareholder Services, Inc., P.O. Box 5330, Denver, CO 80217-5330,
currently serves as transfer agent for each fund.
- -------------------------------------------------------------------------------
HOW THE FUNDS REPORT
PERFORMANCE
Each fund may quote its yield and total return in reports to shareholders,
sales literature and advertisements. The funds may also compare their invest-
ment results to various passive indices or other mutual funds with similar
investment objectives. Comparative performance information may include data
from Lipper Analytical Services, Inc., Morningstar, Inc. and other industry
publications. See the statement of additional information for a more detailed
discussion.
- -------------------------------------------------------------------------------
HOW FUND SHARES ARE PRICED
The share price for each class of fund shares, also called its net asset value
(NAV), is calculated every business day as of the close of regular trading on
the New York Stock Exchange (normally 4 p.m. Eastern time). The net asset
value for a class of fund shares is computed by calculating the total value of
the class' portion of the fund's portfolio investments and other assets,
subtracting any liabilities or other debts, and dividing by the total number
of its shares outstanding.
The prices of municipal bonds in each fund's investment portfolio are provided
by a pricing service approved and supervised by the fund's Board of Trustees.
When price quotes are not readily available (which is usually the case for
municipal securities), the pricing service establishes fair market value based
on yields or prices of municipal bonds of comparable quality, type of issue,
coupon, maturity and rating, indications of value from securities dealers and
general market conditions.
- -------------------------------------------------------------------------------
ORGANIZATION
The Trust is an open-end investment company under the Investment Company Act
of 1940, consisting of multiple funds. The shares of each fund are divided
into classes. Each class of shares represents an interest in the same port-
folio of investments and the shares of each class have equal rights as to
voting, redemption, dividends and liquidation. However, each class bears
different sales charges and service fees. Class B shares convert to Class A
shares after 8 years. Class C shares purchased before February 1, 1997 convert
to Class A shares six years after purchase, but only if you request conver-
sion. You must submit your request to SSI no later than the last business day
of the 71st month following the month in which you purchased your shares.
The funds are not required to and do not intend to hold annual meetings.
Shareholders owning ten percent or more of a fund's outstanding shares may
call a special meeting for any purpose, including to elect or remove trustees
or to change fundamental policies.
- -------------------------------------------------------------------------------
PAGE 16
<PAGE>
APPENDIX
- -------------------------------------------------------------------------------
SPECIAL STATE CONSIDERATIONS
Because the funds primarily purchase municipal bonds from Massachusetts, each
fund also bears investment risk from economic, political or regulatory changes
that could adversely affect municipal bond issuers in that state and therefore
the value of the fund's investment portfolio. The following discussion of
special state considerations was obtained from official offering statements of
these issuers and has not been independently verified by the funds. The
discussion includes general state tax information related to an investment in
fund shares. Because tax laws are complex and often change, you should consult
your tax adviser about the state tax consequences of a specific fund invest-
ment. See the statement of additional information for further information.
MASSACHUSETTS
Massachusetts is experiencing an economic recovery based largely on growth in
the services, trade, finance, insurance, real estate and construction indus-
tries. Nonetheless, the state's economic growth is expected to lag behind the
rest of the nation until the year 2000 due to restructuring in the computer,
defense and health care sectors of the state's economy.
The state's fiscal 1996 revenues were approximately $17.3 billion against
expenditures of $16.9 billion. The fiscal 1997 budget approved by the governor
on June 30, 1996, provides for approximately $17.452 billion in expenditures
against an estimated $17.296 billion in revenues. In September 1996, Massachu-
setts' unemployment rate was 4.2%. In 1994, personal income in Massachusetts
was $25,609 compared to the national average of $21,699. The state's uninsured
general obligation bonds are rated A1 by Moody's and A+ by Standard and
Poor's.
Tax Treatment:
The funds' regular monthly dividends will not be subject to Massachusetts
personal income taxes to the extent they are paid out of income earned on
Massachusetts municipal bonds or U.S. government securities. You will be
subject to Massachusetts personal income taxes, however, to the extent the
funds distribute any taxable income, or if you sell or exchange fund shares
and realize a capital gain on the transaction.
The treatment of corporate shareholders of the funds differs from that
described above. Corporate shareholders should refer to the statement of addi-
tional information for more detailed information and are urged to consult
their tax adviser.
- -------------------------------------------------------------------------------
PAGE 17
<PAGE>
Nuveen Family of Mutual Funds
Nuveen's family of funds offers a variety of funds designed to help
you reach your financial goals. The funds below are grouped by
investment objectives.
GROWTH AND INCOME FUNDS
Growth and Income Stock Fund
Balanced Stock and Bond Fund
Balanced Municipal and Stock Fund
MUNICIPAL BOND FUNDS
National Funds/1/
State Funds
Alabama Michigan
Arizona Missouri
California/2/ New Jersey/3/
Colorado New Mexico
Connecticut New York/2/
Florida/3/ North Carolina
Georgia Ohio
Kansas Pennsylvania
Kentucky/4/ South Carolina
Louisiana Tennessee
Maryland Virginia
Massachusetts/2/ Wisconsin
Notes
1. Long-term, insured long-term, intermediate-term and limited-term
portfolios.
2. Long-term and insured long-term portfolios.
3. Long-term and intermediate-term portfolios.
4. Long-term and limited-term portfolios.
NUVEEN
John Nuveen & Co. Incorporated
333 West Wacker Drive
Chicago, IL 60606-1286
(800) 621-7227
VPR-MS4
<PAGE>
FEBRUARY 1, 1997
NUVEEN FLAGSHIP MULTISTATE TRUST II
NUVEEN FLAGSHIP NEW YORK MUNICIPAL BOND FUND
NUVEEN NEW YORK INSURED MUNICIPAL BOND FUND
NUVEEN FLAGSHIP NEW JERSEY MUNICIPAL BOND FUND
NUVEEN FLAGSHIP NEW JERSEY INTERMEDIATE MUNICIPAL BOND FUND
NUVEEN CALIFORNIA MUNICIPAL BOND FUND
NUVEEN CALIFORNIA INSURED MUNICIPAL BOND FUND
NUVEEN FLAGSHIP CALIFORNIA INTERMEDIATE MUNICIPAL BOND FUND
NUVEEN FLAGSHIP CONNECTICUT MUNICIPAL BOND FUND
NUVEEN MASSACHUSETTS MUNICIPAL BOND FUND
NUVEEN MASSACHUSETTS INSURED 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 Prospectus of
the Nuveen Flagship Multistate Trust II dated February 1, 1997. The Prospectus
may be obtained without charge from certain securities representatives, banks,
and other financial institutions that have entered into sales agreements with
John Nuveen & Co. Incorporated, or from the Funds, by mailing a written request
to the Funds, c/o John Nuveen & Co. Incorporated, 333 West Wacker Drive,
Chicago, Illinois 60606 or by calling (800) 414-7447.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Policies and Investment Portfolio............................... S-2
Management................................................................. S-30
Investment Adviser and Investment Management Agreement..................... S-37
Portfolio Transactions..................................................... S-38
Net Asset Value............................................................ S-39
Tax Matters................................................................ S-39
Performance Information.................................................... S-45
Additional Information on the Purchase and Redemption of Fund Shares....... S-53
Distribution and Service Plan.............................................. S-57
Independent Public Accountants and Custodian............................... S-58
Financial Statements....................................................... S-58
Appendix A--Ratings of Investments......................................... A-1
Appendix B--Description of Hedging Techniques.............................. B-1
</TABLE>
The audited financial statements for each Fund's most recent fiscal year
appear in the Funds' Annual Reports and the unaudited financial statements for
the most recent semi-annual period for each Fund appear in the Funds' Semi-
Annual Reports; each is included herein by reference. The Semi-Annual Reports
accompany this Statement of Additional Information.
<PAGE>
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 described in the Prospectus. Municipal Obligations are
municipal bonds that pay interest that is exempt from regular federal
income taxes.
(2) Invest more than 5% of its total assets in securities of any one
issuer, except this limitation shall not apply to securities of the United
States Government, and to the investment of 25% of such Fund's assets. This
limitation shall apply only to the New York Municipal Bond Fund, the New
York Insured Municipal Bond Fund, the California Municipal Bond Fund, and
the California Insured Municipal Bond Fund.
(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 (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.
(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 or sale 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 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.
(13) 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, each Fund, as a non-fundamental policy, may not invest more than
15% of its net assets in "illiquid" securities, including repurchase agreements
maturing in more than seven days.
For the purpose of applying the limitations set forth in paragraph (2) 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
S-2
<PAGE>
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 the Fund's assets that may be
invested in securities insured by any single insurer.
The foregoing restrictions and limitations, as well as a Fund's 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 Nuveen Flagship Multistate Trust II (the "Trust") is an open-end
management series investment company organized as a Massachusetts business
trust on July 1, 1996. Each of the Funds is an open-end management investment
company organized as a series of the Nuveen Flagship Multistate Trust II. The
Trust is an open-end management series company under SEC Rule 18f-2. Each Fund
is a separate series issuing its own shares. The Trust currently has ten
series: the Nuveen Flagship New York Municipal Bond Fund (formerly the Nuveen
New York Tax-Free Value Fund, a series of the Nuveen Tax-Free Bond Fund, Inc.);
the Nuveen New York Insured Municipal Bond Fund (formerly the Nuveen New York
Insured Tax-Free Value Fund, a series of the Nuveen Insured Tax-Free Bond Fund,
Inc.); the Nuveen Flagship New Jersey Municipal Bond Fund (formerly the Nuveen
New Jersey Tax-Free Value Fund, a series of the Nuveen Multistate Tax-Free
Trust); the Nuveen Flagship New Jersey Intermediate Municipal Bond Fund
(formerly the Flagship New Jersey Intermediate Tax Exempt Fund, as a series of
the Flagship Tax Exempt Funds Trust); the Nuveen California Municipal Bond Fund
(formerly the Nuveen California Tax-Free Value Fund, a series of the Nuveen
California Tax-Free Fund, Inc.); the Nuveen California Insured Municipal Bond
Fund (formerly the Nuveen California Insured Tax-Free Value Fund, a series of
the Nuveen California Tax-Free Fund, Inc.); the Nuveen Flagship California
Intermediate Municipal Bond Fund (formerly the Flagship California Intermediate
Tax Exempt Fund, a series of the Flagship Tax Exempt Funds Trust); the Nuveen
Flagship Connecticut Municipal Bond Fund (formerly the Flagship Connecticut
Double Tax Exempt Fund, a series of the Flagship Tax Exempt Funds Trust); the
Nuveen Massachusetts Municipal Bond Fund (formerly the Nuveen Massachusetts
Tax-Free Value Fund, a series of the Nuveen Tax-Free Bond Fund, Inc.); and the
Nuveen Massachusetts Insured Municipal Bond Fund (formerly the Nuveen
Massachusetts Insured Tax-Free Value Fund, a series of the Nuveen Insured Tax-
Free Bond Fund, Inc.). The Nuveen Flagship California Intermediate Municipal
Bond Fund has issued no shares to date. 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 Fund affected by such matter.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of a trust may, under
certain circumstances, be held personally liable as partners for its
obligations. However, the Declaration of Trust contains an express disclaimer
of shareholder liability for acts or obligations of the Trust and requires that
notice of this disclaimer be given in each agreement, obligation or instrument
entered into or executed by the Trust or the Trustees. The Declaration of Trust
further provides for indemnification out of the assets and property of the
Trust for all loss and expense of any shareholder personally liable for the
obligations of the Trust. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is limited to circumstances in which
both inadequate insurance existed and the Trust itself were unable to meet its
obligations. The Trust believes the likelihood of these circumstances is
remote.
PORTFOLIO SECURITIES
As described in the Prospectus, each of the Funds invests substantially all
of its assets (at least 80%) in a portfolio of Municipal Obligations free from
regular federal and state income tax in each Fund's respective state, which
generally will be Municipal Obligations 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.
S-3
<PAGE>
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, except that the 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. See Appendix A for more information about
ratings by Moody's, S&P, and Fitch.
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. A 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 normally 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. 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.
INSURANCE
Each insured Municipal Obligation held by the Nuveen New York Insured
Municipal Bond Fund, the Nuveen California Insured Municipal Bond Fund, and the
Nuveen Massachusetts Insured Municipal Bond Fund (the "Funds") will either be
(1) covered by an insurance policy applicable to a specific security and
obtained by the issuer of the security or a third party at the time of original
issuance ("Original Issue Insurance"), (2) covered by an insurance policy
applicable to a specific security and obtained by the Fund or a third party
subsequent to the time of original issuance ("Secondary Market Insurance"), or
(3) covered by a master municipal insurance policy purchased by the Funds
("Portfolio Insurance"). The Funds currently maintain a policy of Portfolio
Insurance with MBIA Insurance Corporation, AMBAC Indemnity Corporation,
Financial Security Assurance, Inc., and Financial Guaranty Insurance Company,
and may in the future obtain other policies of Portfolio Insurance, depending
on the availability of such policies on terms favorable to the Fund. However,
the Funds may determine not to obtain such policies and to emphasize
investments in Municipal Obligations insured under Original Issue Insurance or
Secondary Market Insurance. In any event, the Funds will only obtain policies
of Portfolio Insurance issued by insurers whose claims-paying ability is rated
Aaa by Moody's Investors Service, Inc. ("Moody's") or AAA by Standard & Poor's
Corporation ("S&P"). The Funds currently intend to obtain insurance polices
only from mono-line insurers specializing in insuring municipal debt. Municipal
Obligations covered by Original Issue Insurance or Secondary Market Insurance
are themselves typically assigned a rating of Aaa or AAA, as the case may be,
by virtue of the Aaa or AAA claims-paying ability of the insurer and would
generally be assigned a lower rating if the ratings were based primarily upon
the credit characteristics of the issuer without regard to the insurance
feature. By way or contrast, the ratings, if any, assigned to Municipal
Obligations insured under Portfolio Insurance will be based primarily upon the
credit characteristics of the issuers without regard to the insurance feature,
and will generally carry a rating that is below Aaa or AAA. While in the
portfolio of a Fund, however, a Municipal Obligation backed by Portfolio
Insurance will effectively be of the same quality as a Municipal Obligation
issued by an issuer of comparable credit characteristics that is backed by
Original Issue Insurance or Secondary Market Insurance.
The Funds' policy of investing in Municipal Obligations insured by insurers
whose claims-paying ability is rated Aaa or AAA will apply only at the time of
the purchase of a security, and a Fund will not be required to dispose of
securities in the event Moody's or S&P, as the case may be, downgrades its
assessment of the claims-paying ability of a particular insurer or the credit
characteristics of a particular issuer. In this connection, it should be noted
that in the event Moody's or S&P or both should down grade its assessment of
the claims-paying ability of a particular insurer, it could also be expected to
downgrade the ratings assigned to Municipal Obligations insured under Original
Issue Insurance or Secondary Market Insurance issued by such insurer, and
Municipal Obligations insured under Portfolio Insurance issued by such insurer
would also be of reduced quality in the portfolio of the Fund. Moody's and S&P
continually assess the claims-paying ability of insurers and the credit
characteristics of issuers, and there can be no assurance that they will not
downgrade their assessments subsequent to the time a Fund purchases securities.
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In addition to insured Municipal Obligations, a Fund may invest in Municipal
Obligations that are entitled to the benefit of an escrow or trust account
which contains securities issued or guaranteed by the U.S. Government or U.S.
Government agencies, backed by the full faith and credit of the United States,
and sufficient in amount to ensure the payment of interest and principal on the
original interest payment and maturity dates ("collateralized obligations").
These collateralized obligations generally will not be insured and will
include, but are not limited to, Municipal Obligations that have been (1)
advance refunded where the proceeds of the refunding have been used to purchase
U.S. Government or U.S. Government agency securities that are placed in escrow
and whose interest or maturing principal payments, or both, are sufficient to
cover the remaining scheduled debt service on the Municipal Obligations, and
(2) issued under state or local housing finance programs which use the issuance
proceeds to fund mortgages that are then exchanged for U.S. Government or U.S.
Government agency securities and deposited with a trustee as security for the
Municipal Obligations. These collateralized obligations are normally regarded
as having the credit characteristics of the underlying U.S. Government or U.S.
Government agency securities. Collateralized obligations will not constitute
more than 20% of a Fund's assets.
Each insured Municipal Obligation in which a Fund invests will be covered by
Original Issue Insurance, Secondary Market Insurance or Portfolio Insurance.
There is no limitation on the percentage of a Fund's assets that may be
invested in Municipal Obligations insured by any given insurer.
Original Issue Insurance. Original Issue Insurance is purchased with respect
to a particular issue of Municipal Obligations by the issuer thereof or a third
party in conjunction with the original issuance of such Municipal Obligations.
Under such insurance, the insurer unconditionally guarantees to the holder of
the Municipal Obligation the timely payment of principal and interest on such
obligation when and as such payments shall become due but shall not be paid by
the issuer, except that in the event of any acceleration of the due date of the
principal by reason of mandatory or
optional redemption (other than acceleration by reason of a mandatory sinking
fund payment), default or otherwise, the payments guaranteed may be made in
such amounts and at such times as payments of principal would have been due had
there not been such acceleration. The insurer is responsible for such payments
less any amounts received by the holder from any trustee for the Municipal
Obligation issuers or from any other source. Original Issue Insurance does not
guarantee payment on an accelerated basis, the payment of any redemption
premium (except with respect to certain premium payments in the case of certain
small issue industrial development and pollution control Municipal
Obligations), the value of the shares of the Fund, the market value of
Municipal Obligations, or payments of any tender purchase price upon the tender
of the Municipal Obligations. Original Issue Insurance also does not insure
against nonpayment of principal of or interest on Municipal Obligations
resulting from the insolvency, negligence or any other act or omission of the
trustee or other paying agent for such obligations.
In the event that interest on or principal of a Municipal Obligation covered
by insurance is due for payment but is unpaid by the issuer thereof, the
applicable insurer will make payments to its fiscal agent (the "Fiscal Agent")
equal to such unpaid amounts of principal and interest not later than one
business day after the insurer has been notified that such nonpayment has
occurred (but not earlier than the date such payment is due). The Fiscal Agent
will disburse to the Fund the amount of principal and interest which is then
due for payment but is unpaid upon receipt by the Fiscal Agent of (i) evidence
of the Fund's right to receive payment of such principal and interest and (ii)
evidence, including any appropriate instruments of assignment, that all of the
rights to payment of such principal or interest then due for payment shall
thereupon vest in the insurer. Upon payment by the insurer of any principal or
interest payments with respect to any Municipal Obligations, the insurer shall
succeed to the rights of a Fund with respect to such payment.
Original Issue Insurance remains in effect as long as the Municipal
Obligations covered thereby remain outstanding and the insurer remains in
business, regardless of whether a Fund ultimately disposes of such Municipal
Obligations. Consequently, Original Issue Insurance may be considered to
represent an element of market value with respect to the Municipal Obligations
so insured, but the exact effect, if any, of this insurance on such market
value cannot be estimated.
Secondary Market Insurance. Subsequent to the time of original issuance of a
Municipal Obligation, a Fund or a third party may, upon the payment of a single
premium, purchase insurance on such Municipal Obligation. Secondary Market
Insurance generally provides the same type of coverage as is provided by
Original Issue Insurance and remains in effect as long as the Municipal
Obligation covered thereby remain outstanding, the holder of such Municipal
Obligation does not voluntarily relinquish the Secondary Market Insurance and
the insurer remains in business, regardless of whether the Fund ultimately
disposes of such Municipal Obligation.
One of the purposes of acquiring Secondary Market Insurance with respect to a
particular Municipal Obligation would be to enable a Fund to enhance the value
of such Municipal Obligation. A Fund, for example, might seek to purchase a
particular Municipal Obligation and obtain Secondary Market Insurance with
respect thereto if, in the opinion of Nuveen Advisory, the market value of such
Municipal Obligation, as insured, would exceed the current value of the
Municipal Obligation without insurance plus the cost of the Secondary Market
Insurance. Similarly, if a Fund owns but wishes to sell a Municipal Obligation
that is then covered by Portfolio Insurance, the Fund might seek to obtain
Secondary Market Insurance with respect thereto if, in the opinion of Nuveen
Advisory, the net proceeds of a sale by the Fund of such obligation, as
insured, would exceed the current value of such obligation plus the cost of the
Secondary Market Insurance.
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Portfolio Insurance. Portfolio Insurance guarantees the payment of principal
and interest on specified eligible Municipal Obligations purchased by a Fund.
Except as described below, Portfolio Insurance generally provides the same type
of coverage as is provided by Original Issue Insurance or Secondary Market
Insurance. Municipal Obligations insured under one Portfolio Insurance policy
would generally not be insured under any other policy purchased by a Fund. A
Municipal Obligation is eligible for coverage under a policy if it meets
certain requirements of the insurer. Portfolio Insurance is intended to reduce
financial risk, but the cost thereof and compliance with investment
restrictions imposed under the policy will reduce the yield to shareholders of
a Fund.
If a Municipal Obligation is already covered by Original Issue Insurance or
Secondary Market Insurance, then such Municipal Obligation is not required to
be additionally insured under any policy of Portfolio Insurance that a Fund may
purchase. All premiums respecting Municipal Obligations covered by Original
Issue Insurance or Secondary Market Insurance are paid in advance by the issuer
or other party obtaining the insurance.
Portfolio Insurance policies are effective only as to Municipal Obligations
owned by and held by a Fund, and do not cover Municipal Obligations for which
the contract for purchase fails. A "when-issued" Municipal Obligation will be
covered under a Portfolio Insurance policy upon the settlement date of the
issue of such "when-issued" Municipal Obligation. In determining whether to
insure Municipal Obligations held by a Fund, an insurer will apply its own
standards, which correspond generally to the standards it has established for
determining the insurability of new issues of Municipal Obligations. See
"Original Issue Insurance" above.
Each Portfolio Insurance policy will be noncancellable and will remain in
effect so long as a Fund is in existence, the Municipal Obligations covered by
the policy continue to be held by the Fund, and the Fund pays the premiums for
the policy. Each insurer will generally reserve the right at any time upon 90
days' written notice to a Fund to refuse to insure any additional securities
purchased by the Fund after the effective date of such notice. The Board of
Trustees will
generally reserve the right to terminate each policy upon seven days' written
notice to an insurer if it determines that the cost of such policy is not
reasonable in relation to the value of the insurance to the Fund.
Each Portfolio Insurance policy will terminate as to any Municipal Obligation
that has been redeemed from or sold by a Fund on the date of such redemption or
the settlement date of such sale, and an insurer shall not have any liability
thereafter under a policy as to any such Municipal Obligation, except that if
the date of such redemption or the settlement date of such sale occurs after a
record date and before the related payment date with respect to any such
Municipal Obligation, the policy will terminate as to such Municipal Obligation
on the business day immediately following such payment date. Each policy will
terminate as to all Municipal Obligations covered thereby on the date on which
the last of the covered Municipal Obligations mature, are redeemed or are sold
by a Fund.
One or more policies of Portfolio Insurance may provide a Fund, pursuant to
an irrevocable commitment of the insurer, with the option to exercise the right
to obtain permanent insurance ("Permanent Insurance") with respect to a
Municipal Obligation that is to be sold by the Fund. The Fund would exercise
the right to obtain Permanent Insurance upon payment of a single, predetermined
insurance premium payable from the proceeds of the sale of such Municipal
Obligation. It is expected that the Fund will exercise the right to obtain
Permanent Insurance for a Municipal Obligation only if, in the opinion of
Nuveen Advisory, upon such exercise the net proceeds from the sale by the Fund
of such obligation, as insured, would exceed the proceeds from the sale of such
obligation without insurance.
The Permanent Insurance premium with respect to each such obligation is
determined based upon the insurability of each such obligation as of the date
of purchase by the Fund and will not be increased or decreased for any change
in the creditworthiness of such obligation unless such obligation is in default
as to payment or principal or interest, or both. In such event, the Permanent
Insurance premium shall be subject to an increase predetermined at the date of
purchase by the Fund.
Each Fund generally intends to retain any insured securities covered by
Portfolio Insurance that are in default or in significant risk of default and
to place a value on the insurance, which ordinarily will be the difference
between the market value of the defaulted security and the market value of
similar securities of minimum investment grade (i.e., rated BBB) that are not
in default. In certain circumstances, however, Nuveen Advisory may determine
that an alternative value for the insurance, such as the difference between the
market value of the defaulted security and either its par value or the market
value of securities of a similar nature that are not in default or in
significant risk of default, is more appropriate. To the extent that the Fund
holds such defaulted securities, it may be limited in its ability to manage its
investment portfolio and to purchase other Municipal Obligations. Except as
described above with respect to securities covered by Portfolio Insurance that
are in default or subject to significant risk of default, the Funds will not
place any value on the insurance in valuing the Municipal Obligations that it
holds.
Because each Portfolio Insurance policy will terminate as to Municipal
Obligations sold by a Fund on the date of sale, in which event the insurer will
be liable only for those payments of principal and interest that are then due
and owing (unless Permanent Insurance is obtained by the Fund), the provision
for this insurance will not enhance the marketability of securities held by a
Fund, whether or not the securities are in default or in significant risk of
default. On the other hand, since Original Issue Insurance and Secondary Market
Insurance generally will remain in effect as long as Municipal Obligations
covered thereby are outstanding, such insurance may enhance the marketability
of such securities, even when such securities are in default or in significant
risk of default, but the exact effect, if any, on marketability
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cannot be estimated. Accordingly, the Funds may determine to retain or,
alternatively, to sell Municipal Obligations covered by Original Issue
Insurance or Secondary Market Insurance that are in default or in significant
risk of default.
Premiums for a Portfolio Insurance policy are paid monthly, and are adjusted
for purchases and sales of Municipal Obligations covered by the policy during
the month. The yield on a Fund is reduced to the extent of the insurance
premiums it pays. Depending upon the characteristics of the Municipal
Obligations held by a Fund, the annual premium rate for policies of Portfolio
Insurance is estimated to range from .15% to .30% of the value of the Municipal
Obligations covered under the policy. Because the majority of the Municipal
Obligations in the Funds were not covered by policies of Portfolio Insurance
during the year ended February 29, 1996, premium expenses as a percentage of
the value of Municipal Obligations held by the Funds for such period were .00%.
Set forth below is information about the various municipal bond insurers with
whom the Funds currently maintain policies of Portfolio Insurance.
AMBAC INDEMNITY CORPORATION ("AMBAC INDEMNITY")
AMBAC Indemnity is a Wisconsin-domiciled stock insurance corporation
regulated by the Office of the Commissioner of Insurance of the State of
Wisconsin and licensed to do business in 50 states, the District of Columbia,
the Territory of Guam and the Commonwealth of Puerto Rico, with admitted assets
of approximately $2,440,000,000 (unaudited) and statutory capital of
approximately $1,387,000,000 (unaudited) as of March 31, 1996. Statutory
capital consists of AMBAC Indemnity's policyholders' surplus and statutory
contingency reserve. AMBAC Indemnity is a wholly-owned subsidiary of AMBAC,
Inc., a 100% publicly-held company. Moody's , S&P and Fitch Investors Service,
L.P., each have assigned a triple-A claims-paying ability rating to AMBAC
Indemnity.
AMBAC Indemnity has obtained a ruling from the Internal Revenue Service to
the effect that the insuring of an obligation by AMBAC Indemnity will not
affect the treatment for federal income tax purposes of interest on such
obligation and that insurance proceeds representing maturing interest paid by
AMBAC Indemnity under policy provisions substantially identical to those
contained in its municipal bond insurance policy shall be treated for federal
income tax purposes in the same manner as if such payments were made by the
issuer of the bonds.
Copies of AMBAC Indemnity's financial statements prepared in accordance with
statutory accounting standards are available from AMBAC Indemnity. The address
of AMBAC Indemnity's administrative offices and its telephone number are One
State Street Plaza, 17th Floor, New York, New York 10004 and (212) 668-0340.
FINANCIAL SECURITY ASSURANCE INC. ("FINANCIAL SECURITY")
Financial Security is a monoline insurance company incorporated under the
laws of the State of New York. Financial Security is licensed to engage in the
financial guaranty insurance business in all 50 states, the District of
Columbia and Puerto Rico.
Financial Security is a wholly owned subsidiary of Financial Security
Assurance Holdings Ltd. ("Holdings"), a New York Stock Exchange listed company.
Major shareholders of Holdings include Fund American Enterprise Holdings, Inc.,
U.S. West Capital Corporation and the Tokio Marine and Fire Insurance Co., Ltd.
No shareholder is obligated to pay any debts of or any claims against Financial
Security. Financial Security is domiciled in the State of New York and is
subject to regulation by the State of New York Insurance Department. As of
March 31, 1996, the total policyholders' surplus and contingency reserves and
the total unearned premium reserve, respectively, of Financial Security and its
consolidated subsidiaries were, in accordance with statutory accounting
principles, approximately $650,052,000 (unaudited) and $387,239,000
(unaudited), the total shareholders' equity and the total unearned premium
reserve, respectively, of Financial Security and its consolidated subsidiaries
were, in accordance with generally accepted accounting principles,
approximately $779,177,000 (unaudited) and $340,226,000 (unaudited). Copies of
Financial Security's financial statements may be obtained by writing to
Financial Security at 350 Park Avenue, New York, New York 10022, Attention:
Communications Department. Financial Security's telephone number is (212) 826-
0100.
MBIA INSURANCE CORPORATION ("MBIA")
MBIA, formerly known as Municipal Bond Investors Assurance Corporation, is
the principal operating subsidiary of MBIA Inc., a New York Stock Exchange
listed company. MBIA Inc. is not obligated to pay the debts of or claims
against MBIA. MBIA is a limited liability corporation rather than a several
liability association. MBIA is domiciled in the State of New York and licensed
to do business to all 50 states, the District of Columbia, the Commonwealth of
Puerto Rico, the Commonwealth of the Northern Mariana Islands, the Virgin
Islands of the United States and the Territory of Guam.
As of December 31, 1994, MBIA had admitted assets of $3.4 billion (audited),
total liabilities of $2.3 billion (audited), and total capital and surplus of
$1.1 billion (audited) determined in accordance with statutory accounting
practices prescribed or permitted by insurance regulatory authorities. As of
December 31, 1995, MBIA had admitted assets of $3.8 billion (audited), total
liabilities of $2.5 billion (audited), and total capital and surplus of $1.3
billion (audited), determined in accordance with statutory accounting practices
prescribed or permitted by insurance regulatory authorities. Copies of MBIA's
year end financial statements prepared in accordance with statutory accounting
practices are available from MBIA. The address of MBIA is 113 King Street,
Armonk, New York 10504.
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MBIA's policy unconditionally and irrevocably guarantees to the Nuveen
Insured Municipal Bond Fund the full and complete payment required to be made
by or on behalf of the issuer to the applicable paying agent or its successor
of an amount equal to (i) the principal of (either at the stated maturity or by
advancement of maturity pursuant to a mandatory sinking fund payment) and
interest on, the Municipal Obligations as such payments shall become due but
shall not be so paid (except that in the event of any acceleration of the due
date of such principal by reason of mandatory or optional redemption or
acceleration resulting from default or otherwise, other than any advancement of
maturity pursuant to a mandatory sinking fund payment, the payments guaranteed
by MBIA's policy shall be made in such amounts and at such times as such
payments of principal would have been due had there not been any such
acceleration) and (ii) the reimbursement of any such payment which is
subsequently recovered from the Fund pursuant to a final judgment by a court of
competent jurisdiction that such payment constitutes an avoidable preference to
the Fund within the meaning of any applicable bankruptcy law (a "Preference").
MBIA's policy does not insure against loss of any prepayment premium which
may at any time be payable with respect to any Municipal Obligation. MBIA's
policy does not, under any circumstance, insure against loss relating to: (i)
optional or mandatory redemptions (other than mandatory sinking fund
redemptions); (ii) any payments to be made on an accelerated basis; (iii)
payments of the purchase price of Municipal Obligations upon tender thereof; or
(iv) any Preference relating to (i) through (iii) above. MBIA's policy also
does not insure against nonpayment of principal of or interest on the Municipal
Obligations resulting from the insolvency, negligence or any other act or
omission of any paying agent for the Municipal Obligations.
With respect to small issue industrial development bonds and pollution
control revenue bonds covered by the policy, MBIA guarantees the full and
complete payments required to be made by or on behalf of an issuer of such
bonds if there occurs pursuant to the terms of the bonds an event which results
in the loss of the tax-exempt status of interest on such
bonds, including principal, interest or premium payments payable thereon, if
any, as and when required to be made by or on behalf of the issuer pursuant to
the terms of such bonds.
When MBIA receives from the paying agent or the Fund, (1) telephonic or
telegraphic notice (subsequently confirmed in writing by registered or
certified mail), or (2) written notice by registered or certified mail, that a
required payment of any insured amount which is then due has not been made,
MBIA on the due date of such payment or within one business day after receipt
of notice of such nonpayment, whichever is later, will make a deposit of funds,
in an account with State Street Bank and Trust Company, N.A., in New York, New
York, or its successor, sufficient for the payment of any such insured amounts
which are then due. Upon presentment and surrender of such Municipal
Obligations or presentment of such other proof of ownership of the Municipal
Obligations, together with any appropriate instruments of assignment to
evidence the assignment of the insured amounts due on the Municipal Obligations
as are paid by MBIA, and appropriate instruments to effect the appointment of
MBIA as agent for the Fund in any legal proceeding related to payment of
insured amounts on Municipal Obligations, such instruments being in a form
satisfactory to State Street Bank and Trust Company, N.A., State Street Bank
and Trust Company, N.A. shall disburse to the Fund or the paying agent payment
of the insured amounts due on such Municipal Obligations, less any amount held
by the paying agent for the payment of such insured amounts and legally
available therefor.
FINANCIAL GUARANTY INSURANCE COMPANY ("FINANCIAL GUARANTY")
The Portfolio Insurance Policy is non-cancellable except for failure to pay
the premium. The premium rate for each purchase of a security covered by the
Portfolio Insurance Policy is fixed for the life of the Insured Bond. The
insurance premiums are payable monthly by the Fund and are adjusted for
purchases, sales and payments prior to maturity of Insured Bonds during the
month. In the event of a sale of any Insured Bond by the Fund or payment
thereof prior to maturity, the Portfolio Insurance policy terminates as to such
Insured Bond.
Under the provisions of the Portfolio Insurance Policy, Financial Guaranty
unconditionally and irrevocably agrees to pay to State Street Bank and Trust
Company, or its successor, as its agent (the "Fiscal Agent"), that portion of
the principal of and interest on the Insured Bonds which shall become due for
payment but shall be unpaid by reason of nonpayment by the issuer of the
Insured Bonds. The term "due for payment" means, when referring to the
principal of an Insured Bond, its stated maturity date or the date on which it
shall have been called for mandatory sinking fund redemption and does not refer
to any earlier date on which payment is due by reason of call for redemption
(other than by mandatory sinking fund redemption), acceleration or other
advancement of maturity and means, when referring to interest on an Insured
Bond, the stated date for payment of interest. In addition, the Portfolio
Insurance Policy covers nonpayment by the issuer that results from any payment
of principal or interest made by such issuer on the Insured Bond to the Fund
which has been recovered from the Fund or its shareholders pursuant to the
United States Bankruptcy Code by a trustee in bankruptcy in accordance with a
final, nonappealable order of a court having competent jurisdiction.
Financial Guaranty will make such payments to the Fiscal Agent on the date
such principal or interest becomes due for payment or on the business day next
following the day on which Financial Guaranty shall have received notice of
nonpayment, whichever is later. The Fiscal Agent will disburse the Trustee the
face amount of principal and interest which is then due for payment but is
unpaid by reason of nonpayment by the issuer, but only upon receipt by the
Fiscal Agent of (i) evidence of the Trustee's right to receive payment of the
principal or interest due for payment and (ii) evidence, including any
appropriate instruments of assignment, that all of the rights to payment of
such principal or
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interest due for payment thereupon shall vest in Financial Guaranty. Upon such
disbursement, Financial Guaranty shall become the owner of the Insured Bond,
appurtenant coupon or right to payment of principal or interest on such Insured
Bond and shall be fully subrogated to all of the Trustee's rights thereunder,
including the right to payment, thereof.
In determining whether to insure municipal securities held in the Fund,
Financial Guaranty will apply its own standards which are not necessarily the
same as the criteria used in regard to the selection of securities by the Fund.
Certain of the municipal securities insured under the Portfolio Insurance
Policy may also be insured under an insurance policy obtained by the issuer of
such municipal securities. The premium for any insurance policy or policies
obtained by an issuer or Insured Bonds has been paid in advance by such issuer
and any such policy or policies are non-cancellable and will continue in force
so long as the Insured Bonds so insured are outstanding. Financial Guaranty has
also agreed, if requested by the Funds on or before the fifth day preceding the
1st day of any month, to insure to maturity Insured Bonds sold by the Trustee
during the month immediately following such request of the Funds. The premium
for any such insurance to maturity provided by Financial Guaranty is paid by
the Fund and any such insurance is non-cancellable and will continue in force
so long as the Bonds so insured are outstanding.
Financial Guaranty is a wholly-owned subsidiary of FGIC Corporation (the
"Corporation"), a Delaware holding company. The Corporation is a subsidiary of
General Electric Capital Corporation. Financial Guaranty is a monoline
financial guaranty insurer domiciled in the State of New York and subject to
regulation by the State of New York Insurance Department. As of March 31, 1996,
the total capital and surplus of Financial Guaranty was approximately
$1,032,675,000. Financial Guaranty prepares financial statements on the basis
of both statutory accounting principles and generally accepted accounting
principles. Copies of such financial statements may be obtained by writing to
Financial Guaranty at 115 Broadway, New York, New York 10006, Attention:
Communications Department (telephone number:
(212) 312-3000) or to the New York State Insurance Department at 160 West
Broadway, 18th Floor, New York, New York 10013, Attention: Property Companies
Bureau (telephone number: (212) 602-0389).
The policies of insurance obtained by the Fund from Financial Guaranty and
the negotiations in respect thereof represent the only relationship between
Financial Guaranty and the Fund. Otherwise neither Financial Guaranty nor its
parent, FGIC Corporation, or any affiliate thereof has any significant
relationship, direct or indirect, with the Fund or the Board of Trustees of the
Fund.
The above municipal bond insurers have insurance claims-paying ability
ratings of AAA from S&P and Aaa from Moody's. Financial Guaranty also has an
insurance claims-paying ability rating of AAA from Fitch.
An S&P insurance claims-paying ability rating is an assessment of an
operating insurance company's financial capacity to meet obligations under an
insurance policy in accordance with its terms. An insurer with an insurance
claims-paying ability rating of AAA has the highest rating assigned by S&P.
Capacity to honor insurance contracts is adjudged by S&P to be extremely strong
and highly likely to remain so over a long period of time. A Moody's insurance
claims-paying ability rating is an opinion of the ability of an insurance
company to repay punctually senior policyholder obligations and claims. An
insurer with an insurance claims-paying ability rating of Aaa is adjudged by
Moody's to be of the best quality. In the opinion of Moody's, the policy
obligations of an insurance company with an insurance claims-paying ability
rating of Aaa carry the smallest degree of credit risk and, while the financial
strength of these companies is likely to change, such changes as can be
visualized are most unlikely to impair the company's fundamentally strong
position.
An insurance claims-paying ability rating by S&P or Moody's does not
constitute an opinion on any specific contract in that such an opinion can only
be rendered upon the review of the specific insurance contract. Furthermore, an
insurance claims-paying ability rating does not take into account deductibles,
surrender or cancellation penalties or the timeliness of payment, nor does it
address the ability of a company to meet nonpolicy obligations (i.e., debt
contracts).
The assignment of ratings by S&P or Moody's to debt issues that are fully or
partially supported by insurance policies, contracts or guarantees is a
separate process form the determination of claims-paying ability ratings. The
likelihood of a timely flow of funds from the insurer to the trustee for the
bondholders is a key element in the rating determination for such debt issues.
S&P's and Moody's ratings are not recommendations to buy, sell or hold the
Municipal Obligations insured by policies issued by AMBAC Indemnity, Financial
Security, MBIA or Financial Guaranty and such ratings may be subject to
revision or withdrawal at any time by the rating agencies. Any downward
revision or withdrawal of either or both ratings may have an adverse effect on
the market price of the Municipal Obligations insured by policies issued by
AMBAC Indemnity, Financial Security, MBIA or Financial Guaranty.
S&P's ratings of AMBAC Indemnity, Financial Security, MBIA and Financial
Guaranty should be evaluated independent of Moody's ratings. Any further
explanation as to the significance of the ratings may be obtained only from the
applicable rating agency. See Appendix A for more information about ratings by
Moody's, S&P, and Fitch.
PORTFOLIO TRADING AND TURNOVER
The Funds will make changes in their investment portfolio from time to time
in order to take advantage of opportunities in the municipal market and to
limit exposure to market risk. The Funds may also engage to a limited
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extent in short-term trading consistent with their 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. Each 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,
the annual portfolio turnover rate for each of the Funds 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.
The portfolio turnover rates for the Funds, for the fiscal year-end of the Fund
as a series of its predecessor entity (described above), as indicated, were:
<TABLE>
<CAPTION>
FISCAL
YEAR
1995 1996
---- ----
<S> <C> <C>
Nuveen Flagship New York Municipal Bond Fund (2/28/29)........ 29% 47%
Nuveen New York Insured Municipal Bond Fund (2/28/29)......... 11% 17%
Nuveen Flagship New Jersey Municipal Bond Fund (1/31)......... 32% 39%
Nuveen Flagship New Jersey Intermediate Municipal Bond Fund
(5/31)....................................................... 35% 17%
Nuveen California Municipal Bond Fund (2/28/29)............... 32% 36%
Nuveen California Insured Municipal Bond Fund (2/28/29)....... 25% 38%
Nuveen Flagship Connecticut Municipal Bond Fund (5/31)........ 25% 24%
Nuveen Massachusetts Municipal Bond Fund (2/28/29)............ 17% 6%
Nuveen Massachusetts Insured Municipal Bond Fund (2/28/29).... 10% 1%
</TABLE>
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
Funds 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. The Funds 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 the Funds reserve 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. The Funds commonly engage 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 invest substantially all of its assets (at
least 80%) in municipal bonds that are exempt from federal and state tax in
that state ("Municipal Obligations"), generally Municipal Obligations issued in
its respective state. 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. 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.
FACTORS PERTAINING TO NEW YORK
Except to the extent the New York Municipal Bond Fund and the New York
Insured Municipal Bond Fund (the "New York Funds") invest in temporary
investments, the New York Funds will invest substantially all of their assets
in New York Municipal Obligations. The New York Funds are 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
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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.
State Economy Remains Sluggish: The State's economy has been slow to recover
from the 1989-92 recession and continues to lag behind the nation and other
urban, industrial states. Over the last three full years, 1993-95, total New
York State job growth has averaged only 0.6% annually compared to 2.6% yearly
job growth for the nation. In 1995 the State ranked 49th among all states for
job growth. Unemployment for the first half of 1996 stood at 6.3% within New
York State versus 5.5% national unemployment for the same period. New York's
employment picture has been marked by job reductions in commercial banking,
defense-related manufacturing, and government. Despite modest improvements in
tourism, media, financial services, and real estate, the state as a whole has
regained, as of mid-1996, only 40% of the 517,000 jobs lost during the
recession. Although average household income levels continue to be higher in
the State than the national average, New York's personal income growth has been
two-thirds the national pace, with total personal income growing on average
3.8% per year in New York compared to 5.8% annually nationwide. There is
concern that income growth has been concentrated among high earners, masking
declines of low earners, and that a widening income gap carries the potential
to undermine overall consumer spending and aggravate social service
expenditures. 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's budget was enacted by the Legislature on
July 13, 1996, more than three months after the start of the fiscal year. Prior
to the adaptation of the budget, the Legislature enacted appropriations for
disbursements considered to be necessary for State operations and other
purposes, including necessary appropriations for state-supported debt service.
The State Financial Plan for the 1996-97 fiscal year was formulated on July 25,
1996 and is based on the State's budget as enacted as well as actual results
for the first quarter of the fiscal year. Each State Financial Plan is updated
in July (if a budget is in place), October, and January.
The October update to the 1996-97 Financial Plan projects a GAAP-basis
General Fund operating surplus of $93 million (0.3% revenues). Total revenues
in the General Fund are projected at $32.50 billion, consisting of $29.39
billion in tax revenues and $3.11 billion in miscellaneous revenues. Personal
income tax is expected to reach $16.83 billion, or 52% of total tax revenue,
with robust growth fueled in part by financial sector bonus payments.
Although revisions to the 1996-97 State Financial Plan contained in the
October update are favorable, the State faces certain risks which could
potentially cost the State up to one-half billion dollars (1.5% revenues). The
Division of Budget believes these risks are balanced by reserves in the 1996-97
State Financial Plan, however, there can be no assurances that these reserves
will fully offset litigation or other risks to the State. The greatest risks
relate to the economy and tax collections, which could produce either favorable
or unfavorable results during the year. Additional risks come from the
potential impact of certain litigation now pending against the State.
The 1996-97 State Financial Plan includes actions that will provide non-
recurring resources and savings totalling approximately $1.3 billion. These
include the use of $481 million in surplus funds available from MMIA, $134
million in savings from a refinancing of certain pension obligations, $88
million in projected savings from bond refundings, and $36 million in surplus
fund transfers. The balance is composed of $314 million in resources carried
forward from the States 1995-96 fiscal year and various other actions,
including that portion of the proposed tax amnesty program that is projected to
be non-recurring.
Future Budget Projections: The State closed projected budget gaps of $5.0
billion and $3.9 billion for its 1995-96 and 1996-97 fiscal years,
respectively. The 1997-98 gap was projected at $1.4 billion base on the
Governor's proposed
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budget of December 1995. As a result of changes made in the enacted budget, the
gap is now expected by the State Division of Budget to be larger. However, the
gap is not expected to be as large as those in the prior two fiscal years.
The out-year projection will be impacted by a variety of factors. Enacted tax
reductions, which reduced receipts in the 1996-97 fiscal year by an incremental
$2.4 billion, are projected to reduce receipts in the 1997-98 fiscal year by an
additional increment of $2.1 billion. The use of up to $1.3 billion of non-
recurring resources in 1996-97, and the annualized costs of certain programs
increases in the 1996-97 annualized budget, will both add additional pressure
in closing the 1997-98 gap.
Impact of Welfare Reform: On August 22, 1996, the President signed into law
the Personal Responsibility and Work Opportunity Reconciliation Act of 1996.
This federal legislation fundamentally changed the programmatic and fiscal
responsibilities for administration of welfare programs at the federal, state,
and local levels. The new law abolishes the federal Aid to Families with
Dependent Children (AFDC), and creates a new Temporary Assistance to Needy
Families program (TANF) funded with federal block grant to states. The new law
also imposes a five-year durational limit on TANF recipients, requires that
virtually all recipients be engaged in work or community service activities
within two years of receiving benefits, and limits assistance provided to
certain immigrants and other classes of individuals. States are required to
meet these federally mandated job participation rates, or that fail to conform
with certain other federal standards, face potential sanctions in the form of a
reduced federal block grant.
The State expects that funding levels provided under the TANF block grant
initially will be higher than currently anticipated in the State's financial
plan. Spending close to $8 billion on welfare in the 1996-97 fiscal year, the
State has among the most generous programs in the nation, and the only one
mandated by a State Constitution (Article XVII). The Governor has previously
noted that the current state program is unsustainable in its current form, and
in November 1996 submitted a reform proposal for the State Legislature to
consider. The net fiscal impact of any changes to the State's welfare programs
that are necessary to conform with federal law will be dependent upon such
factors as the ability of the State to avoid any federal fiscal penalties, the
level of additional resources required to comply with any new State and/or
federal requirements, and the division of non-federal welfare costs between the
State and its localities.
Indebtedness. As of March 31, 1996, the total amount of long-term State
general obligation debt authorized but unissued stood at $1.5 billion. As of
the same date, the State had approximately $4.8 billion in general obligation
bonds, including $294 million in commercial paper outstanding.
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, 1996, 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, 1996, there were $19.6 billion of such other financing
arrangements outstanding and additional financings of this nature by public
authorities.
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 $75 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).
The New York City economy has continued to grow slowly in 1996 greatly aided
by a record Wall Street performance. The surge in profits, capital gains, and
year end bonuses is likely to continue to fuel growth in the City's economy and
economically sensitive taxes into fiscal year 1997. Although employment growth
citywide has improved in recent months, the City has yet to completely regain
the numbers of jobs lost during the City's 1989-1992 recession. After a
substantial decline in the early 1990's, the City's real estate market has
begun to rebound, as exhibited by declining Class A vacancy rates and rising
asking rents. This combined with an acute shortage of rental housing in
Manhattan has led to numerous new construction and renovation projects. Total
reported crimes are at their lowest levels
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since the 1960's. Hotel occupancy rates are near record highs, topping 80% in
August 1996. As income growth has outpaced national levels in Manhattan, the
more populous outer boroughs have seen their income levels drop in relation to
regional and national levels. As a result, the City has become increasingly
reliant upon a highly taxed base of wealth to support a myriad of social
services for an increasingly poor majority of residents, further straining City
resources and flexibility.
Fiscal Year 1997 and the 1997-2000 Financial Plan. The November revision to
the City's Financial Plan was greatly aided by an additional $450 million in
additional tax revenues, mainly resulting from increased earnings on Wall
Street, allowing the City to reduce risks that appeared in the budget, scale
back anticipated budget cuts, and fund a new $70 million textbook initiative
for the public schools. After instructing his Agency heads in August to produce
current year expenditure cuts totalling $500 million, the Mayor only needs
further cuts of $179 million to achieve a projected balance.
Despite the recent improvement, the City faces significant out-year budget
gaps. The City projects expenditures to increase five times faster than
revenues and budget gaps to more than double between Fiscal 1998 and Fiscal
2000. The City's budget gap is projected to rise from $1.2 billion in Fiscal
1998 (4% revenues), to $2.1 billion in Fiscal 1999 and $3.0 billion in Fiscal
2000. The gaps are driven primarily by expenditures for new labor agreements as
well as medical and debt service costs. As well, enacted and proposed tax cuts
account for about $1 billion of the Fiscal 1999 and 2000 gaps. The City
Comptroller and State Comptroller have each warned that the current and out-
year budgets include significant risks, including the renewal of the income tax
surcharge, potential Board of Education overspending, the postponed Port
Authority ground lease payments, and anticipated labor costs savings. In 1997
as in past years, the City relies on one-time resources ($1.2 billion) to help
achieve budgetary balance.
The City is reliant upon the intergovernmental transfers for a substantial
portion of its budget. State categorical grants of $6.2 billion account for 19%
of gross City revenues. Federal categorical grants of $3.96 billion account for
12% of gross City revenues. An extended delay by the State in adopting its
fiscal year budget or in the 1997-98 adoption of the federal budget would
negatively impact upon the City's financial condition and ability to close
budget gaps for fiscal years 1998 and thereafter.
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.
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 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 1998 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
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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.
The City faces limitations on its borrowing capacity after Fiscal 1997 under
the State Constitution that will prevent it from additional general obligation
borrowings, as a late result of the declining real estate values in the City
during the early 1990's. To ensure that the City can meet finance future
capital necessities and improvements, the City has proposed for State approval
the Infrastructure Finance Authority (IFA). The new IFA debt would be secured
with City personal income taxes and would not be subject to the Constitutional
limits. The City has already built the IFA into its Financing Plan, yet risks
remain as to the timing of State approval and what kind of cap, if any, will be
on debt issuance. 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 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.
Fiscal Years 1991 through 1996. The City achieved balanced operating results
in accordance with generally accepted accounting principles for fiscal years
1991 through 1996. 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.
In December 1996, Moody's confirmed its Baa1 rating in connection with a
scheduled December 1996 sale of $625 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 December 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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(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. Although many cities and towns in upstate New York have been
operating under a high level of fiscal stress since the late 1980's, their
fiscal erosion has been in process for over two decades. Factors contributing
to this include: a loss of high-wage manufacturing jobs, including large
military, textile, and industrial component facilities; a dramatic loss of
population; unfunded government mandates; contentious municipal labor issues
and collective bargaining agreements; large elderly populations; high poverty
rates; and tax appeals, compounding the loss to a City's tax base. Struggling
to provide a consistent level of government services from a deflated tax base,
many local governments have become increasingly reliant upon governmental
transfers. 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. In November 1996, Troy MAC issued debt to refinance $55 million
of the City's $72 million in outstanding debt, including certain lease
obligations at the time in default. 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.
FACTORS PERTAINING TO NEW JERSEY
Except to the extent the New Jersey Municipal Bond Fund and the New Jersey
Intermediate Municipal Bond Fund (the "New Jersey Funds") invest in temporary
investments, the New Jersey Funds will invest substantially all of their assets
in New Jersey Municipal Obligations. The New Jersey Funds are therefore
susceptible to political, economic or regulatory factors affecting New Jersey
and governmental bodies within New Jersey. The following information provides
only a brief summary of the complex factors affecting the financial situation
in New Jersey, 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 or contained in
Official Statements for various New Jersey Municipal Obligations. 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 Jersey Obligations
in the Funds or the ability of particular obligors to make timely payments of
debt service on (or relating to) those obligations.
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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. The State's October 1996 unemployment rate has shown slight improvement;
6.1% vs. 4.9% national average.
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 $456.8 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. New Jersey closed its fiscal year 1995
with a surplus of $569 million. It is estimated that the State closed its
fiscal year 1996 with a $607 million surplus.
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
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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 $607
million in surplus, is $300 million more than the 1995 budget. As part of the
Fiscal Year 1996 Budget, the State enacted several additional tax cuts. For the
Gross Income Tax, a 15 percent reduction of personal income tax rates became
effective on January 1, 1996. This cut was in addition to the tax rate
reductions that were implemented during Fiscal Year 1994 and Fiscal Year 1995.
Effective April 1, 1996, yellow pages advertisements will be exempt from the
State's Sales Tax. For the Corporation Business Tax, effective July 1, 1996, a
reduction in the Corporation Business Tax rate from 9.0 percent to 7.5 percent
will apply to those corporations that have an allocated net income of $100,000
or less. Also effective July 1, 1996, corporations' sales will be double
weighted in calculating receipt factors in determining a multistate
corporation's New Jersey State Corporation Business Tax liability.
On July 12, 1994, the New Jersey Supreme Court declared the State's Quality
Education Act of 1990 unconstitutional and gave the Chief Executive and the
Legislature until Fiscal Year 1998 to achieve "substantial equivalence" between
spending on pupils in poor urban districts and spending on their counterparts
in wealthy suburban districts. The New Jersey Supreme Court also said that it
expected the State to address the continuing disparity during the Fiscal Year
1996 and 1997 budgets. The Fiscal Year 1996 Budget provides special needs
districts with $100 million in increased State formula aid. Whether the State
can achieve a balanced budget depends on its ability to enact and implement
expenditure reductions and to collect estimated tax revenues. The fiscal year
1997 budget totaled $15.797 billion, a 1.3% decrease from the fiscal year 1996
budget, and includes an estimated $276 million surplus.
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,
the State's failure to reimburse certain hospitals' charity care costs, 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
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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, and has since maintained both
rating and outlook.
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,
and again on August 18, 1995 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.
FACTORS PERTAINING TO CALIFORNIA
Except to the extent the California Municipal Bond Fund and the California
Insured Municipal Bond Fund (the "California Funds") invest in temporary
investments, the California Funds will invest substantially all of their assets
in California Municipal Obligations. The Funds are therefore susceptible to
political, economic or regulatory factors affecting issuers of California
Municipal Obligations.
These include the possible adverse effects of certain California
constitutional amendments, legislative measures, voter initiatives and other
matters that are described below. The following information provides only a
brief summary of the complex factors affecting the financial situation in
California (the "State") and is derived from sources that are generally
available to investors and is believed to be accurate. No independent
verification has been made of the accuracy or completeness of any of the
following information. It is based in part on information obtained from various
State and local agencies in California or contained in Official Statements for
various California Municipal Obligations.
During the early 1990's, California experienced significant financial
difficulties, which reduced its credit standing, but the State's finances have
improved since 1994. The ratings of certain related debt of other issuers for
which California has an outstanding lease purchase, guarantee or other
contractual obligation (such as for state-insured hospital bonds) are generally
linked directly to California's rating. Should the financial condition of
California deteriorate again, its credit ratings could be further reduced, and
the market value and marketability of all outstanding notes and bonds issued by
California, its public authorities or local governments could be adversely
affected.
ECONOMIC OVERVIEW
California's economy is the largest among the 50 states and one of the
largest in the world. The State's population of more than 32 million represents
over 12% of the total United States population and grew by 27% in the 1980s.
Total personal income in the State, at an estimated $703 billion in 1994,
accounts for almost 13% of all personal income in the nation. Total employment
is over 14 million, the majority of which is in the service, trade and
manufacturing sectors.
From mid-1990 to late 1993, the State suffered a recession with the worst
economic, fiscal and budget conditions since the 1930s. Construction,
manufacturing (especially aerospace), and financial services, among others,
were all severely affected, particularly in Southern California. Job losses
were the worst of any post-war recession. Employment levels stabilized by late
1993 and steady growth has occurred since early 1994. Pre-recession job levels
are expected to be reached in 1996. Unemployment, while remaining higher than
the national average, has come down substantially from its 10% peak in January.
Economic indicators show a steady recovery underway in California since the
start of 1994. However, any delay or reversal of the recovery may create new
shortfalls in State revenues.
CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS
Limitation on Taxes. Certain California Municipal Obligations may be
obligations of issuers which rely in whole or in part, directly or indirectly,
on ad valorem property taxes as a source of revenue. The taxing powers of
California local governments and districts are limited by Article XIIIA of the
California Constitution, enacted by the voters in 1978 and commonly known as
"Proposition 13." Briefly, Article XIIIA limits to 1% of full cash value the
rate of ad valorem property taxes on real property and generally restricts the
reassessment of property to 2% per year, except upon new construction or change
of ownership (subject to a number of exemptions). Taxing entities may, however,
raise ad valorem taxes above the 1% limit to pay debt service on voter-approved
bonded indebtedness.
Under Article XIIIA, the basic 1% ad valorem tax levy is applied against the
assessed value of property as of the owner's date of acquisition (or as of
March 1, 1975, if acquired earlier), subject to certain adjustments. This
system has resulted in widely varying amounts of tax on similarly situated
properties. Several lawsuits have been filed challenging the acquisition-based
assessment system of Proposition 13, and on June 18, 1992 the U.S. Supreme
Court announced a decision upholding Proposition 13.
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Article XIIIA prohibits local governments from raising revenues through ad
valorem property taxes above the 1% limit; it also requires voters of any
governmental unit to give two-thirds approval to levy any "special tax." Court
decisions, however, allowed a non-voter approved levy of "general taxes" which
were not dedicated to a specific use. In response to these decisions, the
voters of the State of 1986 adopted an initiative statute which imposed
significant new limits on the ability of local entities to raise or levy
general taxes, except by receiving majority local voter approval. Significant
elements of this initiative, "Proposition 62," have been overturned in recent
court cases. An initiative proposed to re-enact the provisions of Proposition
62 as a constitutional amendment was defeated by the voters in November 1990,
but such a proposal may be renewed in the future.
On November 5, 1996, California voters approved Proposition 218 which added
Articles XIIIC and XIIID to the California Constitution, imposing certain vote
requirements and other limitations on the imposition of new or increased and in
some cases existing taxes, assessments and property-related fees and charges.
Proposition 218 also extends the initiative power to include the reduction or
repeal of any local taxes, assessments, fees and charges. This extension of the
initiative power is not limited to taxes imposed on or after the effective date
of Proposition 218, and could result in the retroactive repeal or reduction in
any existing taxes, assessments, fees or charges. If such a repeal or reduction
occurs in a particular California entity, the financial condition of that
entity may be adversely impacted and rating downgrades and/or defaults may
result. Additionally, the voter approval requirement reduces the financial
flexibility of local governments to deal with fiscal problems by limiting the
ability to increase taxes, assessments, fees or charges. In some cases, this
loss of flexibility may, and in fact has, been cited as the reason for rating
downgrades. No assurances can be given that California entities will be able to
raise taxes to meet future spending requirements. In addition, at this time it
is not clear exactly how Proposition 218 will be interpreted by a court.
Appropriations Limits. The State and its local governments are subject to an
annual "appropriations limit" imposed by Article XIIIB of the California
Constitution, enacted by the voters in 1979 and significantly amended by
Propositions 98 and 111 in 1988 and 1990, respectively. Article XIIIB prohibits
the State or any covered local government from spending "appropriations subject
to limitation" in excess of the appropriations limit imposed. "Appropriations
subject to limitation" are authorizations to spend "proceeds of taxes," which
consist of tax revenues and certain other funds, including proceeds from
regulatory licenses, user charges or other fees, to the extent that such
proceeds exceed the cost of providing the product or service, but "proceeds of
taxes" exclude most State subventions to local governments. No limit is imposed
on appropriations of funds which are not "proceeds of taxes," such as
reasonable user charges or fees, and certain other non-tax funds, including
bond proceeds.
Among the expenditures not included in the Article XIIIB appropriations limit
are (1) the debt service cost of bonds issued or authorized prior to January 1,
1979, or subsequently authorized by the voters, (2) appropriations arising from
certain emergencies declared by the Governor, (3) appropriations for certain
capital outlay projects, (4) appropriations by the State of post-1989 increases
in gasoline taxes and vehicle weight fees, and (5) appropriations made in
certain cases of emergency.
The appropriations limit for each year is adjusted annually to reflect
changes in cost of living and population, and any transfers of service
responsibilities between government units. The definitions for such adjustments
were liberalized in 1990 to follow more closely growth in the State's economy.
"Excess" revenues are measured over a two year cycle. Local governments must
return any excess to taxpayers by rate reductions. The State must refund 50% of
any excess, with the other 50% paid to schools and community colleges. With
more liberal annual adjustment factors since 1988, and depressed revenues since
1990 because of the recession, few governments are currently operating near
their spending limits, but this condition may change over time. Local
governments may by voter approval exceed their spending limits for up to four
years. During fiscal year 1986-87, State receipts from proceeds of taxes
exceeded its appropriations limit by $1.1 billion, which was returned to
taxpayers. Since that year, appropriations subject to limitation have been
under the State limit. State appropriations were $6.5 billion under the limit
for fiscal year 1995-96.
A 1986 initiative statute, called "Proposition 62," imposed additional limits
on local governments by requiring either majority or 2/3 voter approval for any
increases in "general taxes" or "special taxes," respectively (other than
property taxes, which are unchangeable). Court decisions had struck down most
of Proposition 62 and many local governments, especially cities, had enacted or
raised local "general taxes" without voter approval. In September, 1995, the
California Supreme Court overruled the prior cases, and upheld the
constitutionality of Proposition 62. Many aspects of this decision remain
unclear (such as its impact on charter (home rule) cities, and whether it will
have retroactive effect), but its future effect will be to further limit the
fiscal flexibility of many local governments.
Because of the complex nature of Articles XIIIA and XIIIB of the California
Constitution, the ambiguities and possible inconsistencies in their terms, and
the impossibility of predicting future appropriations or changes in population
and cost of living, and the probability of continuing legal challenges, it is
not currently possible to determine fully the impact of Article XIIIA or
Article XIIIB on California Municipal Obligations or on the ability of the
State or local governments to pay debt service on such California Municipal
Obligations. It is not possible, at the present time, to predict the outcome of
any pending litigation with respect to the ultimate scope, impact or
constitutionality of either Article XIIIA or Article XIIIB, or the impact of
any such determinations upon State agencies or local governments, or
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upon their ability to pay debt service on their obligations. Future initiatives
or legislative changes in laws or the California Constitution may also affect
the ability of the State or local issuers to repay their obligations.
OBLIGATIONS OF THE STATE OF CALIFORNIA
Under the California Constitution, debt service on outstanding general
obligation bonds is the second charge to the General Fund after support of the
public school system and public institutions of higher education. Total
outstanding general obligation bonds and lease purchase debt of California
increased from $9.4 billion at June 30, 1987 to $23.8 billion at February 1,
1996. In FY 1994-95, debt service on general obligation bonds and lease
purchase debt was approximately 5.3% of General Fund revenues.
RECENT FINANCIAL RESULTS
The principal sources of General Fund revenues in 1994-1995 were the
California personal income tax (43% of total revenues), the sales tax (34%),
bank and corporation taxes (13%), and the gross premium tax on insurance (3%).
The State maintains a Special Fund for Economic Uncertainties (the "Economic
Uncertainties Fund"), derived from General Fund revenues, as a reserve to meet
cash needs of the General Fund, but which is required to be replenished as soon
as sufficient revenues are available. Year-end balances in the Economic
Uncertainties Fund are included for financial reporting purposes in the General
Fund balance. In most recent years, the State has budgeted to maintain the
Economic Uncertainties Fund at around 3% of General Fund expenditures but
essentially no reserve was budgeted from 1992-93, to 1995-96 because revenues
had been reduced by the recession and an accumulated budget deficit had to be
paid.
General. Throughout the 1980's, State spending increased rapidly as the State
population and economy also grew rapidly, including increased spending for many
assistance programs to local governments, which were constrained by Proposition
13 and other laws. The largest State program is assistance to local public
school districts. In 1988, an initiative (Proposition 98) was enacted which
(subject to suspension by a two-thirds vote of the Legislature and the
Governor) guarantees local school districts and community college districts a
minimum share of State General Fund revenues (currently about 35%).
Since the start of the 1990-91 fiscal year, the State has faced adverse
economic, fiscal, and budget conditions. The economic recession seriously
affected State tax revenues. It also caused increased expenditures for health
and welfare programs. The State is also facing a structural imbalance in its
budget with the largest programs supported by the General Fund (education,
health, welfare and corrections) growing at rates significantly higher than the
growth rates for the principal revenue sources of the General Fund. These
structural concerns will be exacerbated in coming years by the expected need to
substantially increase capital and operating funds for corrections as a result
of a "Three Strikes" law enacted in 1994.
Recent Budgets. As a result of these factors, among others, from the late
1980's until 1992-93, the State had a period of nearly chronic budget
imbalance, with expenditures exceeding revenues in four out of six years, and
the State accumulated and sustained a budget deficit in the budget reserve, the
SFEU approaching $2.8 billion at its peak at June 30, 1993. Starting in the
1990-91 Fiscal Year and for each year thereafter, each budget required
multibillion dollar actions to bring projected revenues and expenditures into
balance and to close large "budget gaps" which were identified. The Legislature
and Governor eventually agreed on a number of different steps to produce Budget
Acts in the years 1991-92 to 1995-96, including:
. significant cuts in health and welfare program expenditures;
. transfers of program responsibilities and some funding sources from the
State to local governments, coupled with some reduction in mandates on
local government;
. transfer of about $3.6 billion in annual local property tax revenues from
cities, counties, redevelopment agencies and some other districts to
local school districts, thereby reducing state funding for schools;
. reduction in growth of support for higher education programs, coupled
with increases in student fees;
. revenue increases (particularly in the 1992-93 Fiscal Year budget), most
of which were for a short duration;
. increased reliance on aid from the federal government to offset the costs
of incarcerating, educating and providing health and welfare services to
undocumented aliens (although these efforts have produced much less
federal aid than the State Administration had requested); and
. various one-time adjustment and accounting changes.
Despite these budget actions, the effects of the recession led to large
unanticipated deficits in the SFEU, as compared to projected positive balances.
By the start of the 1993-94 Fiscal Year, the accumulated deficit was so large
(almost $2.8 billion) that is was impractical to budget to retire it in one
year, so a two-year program was implemented, using the issuance of revenue
anticipation warrants to carry a portion of the deficit over the end of the
fiscal year. When the economy failed to recover sufficiently in 1993-94, a
second two-year plan was implemented in 1994-95, to carry the final retirement
of the deficit into 1995-96.
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The combination of stringent budget actions cutting State expenditures, and
the turnaround of the economy by late 1993, finally led to the restoration of
positive financial results. While General Fund revenues and expenditures were
essentially equals in FY 1992-93 (following two years of excess expenditures
over revenues), the General Fund had positive operating results in FY 1993-94,
1994-95, and 1995-96 which have reduced the accumulated budget deficit to about
$70 million as of June 30, 1996.
A consequence of the accumulated budget deficits in the early 1990's together
with other factors such as disbursement of funds to local school districts
"borrowed" from future fiscal years and hence not shown in the annual budget,
was to significantly reduce the State's cash resources available to pay its
ongoing obligations. When the Legislature and the Governor failed to adopt a
budget for the 1992-93 Fiscal Year by July 1, 1992, which would have allowed
the State to carry out its normal annual cash flow borrowing to replenish its
cash reserves, the State Controller was forced to issue approximately $3.8
billion of registered warrants ("IOUs") over a 2-month period to pay a variety
of obligations representing prior years' or continuing appropriations, and
mandates from court orders.
The State's cash condition became so serious that from late spring 1992 until
1995, the State had to rely on issuance of short term notes which matured in a
subsequent fiscal year to finance its ongoing deficit, and pay current
obligations. With the repayment of the last of these deficit notes in April,
1996, the State does not plan to rely further on external borrowing across
fiscal years, but will continue its normal cash flow borrowings during a fiscal
year.
Current Budget. For the first time in four years, the State entered the 1995-
96 fiscal year with strengthening revenues based on an improving economy. The
major feature of the Governor's proposed Budget, a 15% phased cut in personal
income and business taxes, was rejected by the Legislature.
The 1995-96 Budget Act was signed by the Governor on August 3, 1995, 34 days
after the start of the fiscal year. The Budget Act projected General Fund
revenues and transfers of $44.1 billion, a 3.5 percent increase from prior
years. Expenditures were budgeted at $43.4 billion, a 4 percent increase. A
principal feature of the 1995-96 Budget Act, in addition to those noted above
was the first significant increase in per-pupil funding for public schools and
community colleges in four years.
In its regular budget update in May, 1996, the Department of Finance
indicated that, with the strengthening economy, State General Fund revenues for
1995-96 would be about $46.1 billion, some $2 billion higher than originally
estimated. Because of mandated spending for public schools, the failure to
receive expected federal aid for illegal immigrants, and the failure of
Congress to enact welfare reform which the Administration had expected would
reduce State costs, expenditures for 1995-96 were also increased, to about
$45.4 billion. As a result, the Department estimated that the accumulated
budget deficit would be reduced to about $70 million as of June 30, 1996.
As a result of the improved revenues, that State's cash position has
substantially recovered. Only $2 billion of cash flow borrowing was needed
during 1995-96, and only about $3 billion is projected for 1996-97, with no
external borrowing over the end of the fiscal year.
The Governor's proposed budget for 1996-97 projects $47.1 billion of revenues
and transfers, and $46.5 billion of expenditures, resulting in a budget reserve
at June 30, 1997 of about $500 million. A number of issues related to the 1996-
97 budget still have to be resolved, including the Governor's tax reduction
proposals, and his proposals for further health and welfare cuts.
BOND RATING
State general obligation bonds are currently rated A1 by Moody's and A+ by
S&P. Both of these ratings have been reduced in several stages from AAA levels
which the State held until late 1991.
There can be no assurance that such ratings will be maintained in the future.
It should be noted that the creditworthiness of obligations issued by local
California issuers may be unrelated to the creditworthiness of obligations
issued by the State of California, and that there is no obligation on the part
of the State to make payment on such local obligations in the event of default.
LEGAL PROCEEDINGS
The State is involved in certain legal proceedings (described in the State's
recent financial statements) that, if decided against the State, may require
the State to make significant future expenditures or may substantially impair
revenues. Trial courts have recently entered tentative decisions or injunctions
which would overturn several parts of the State's recent budget compromises.
The matters covered by these lawsuits include a deferral of payments by
California to the Public Employees Retirement System, reductions in welfare
payments and the use of certain cigarette tax funds for health costs. All of
these cases are subject to further proceedings and appeals, and if California
eventually loses, the final remedies may not have to be implemented in one
year.
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OBLIGATIONS OF OTHER ISSUERS
OTHER ISSUERS OF CALIFORNIA MUNICIPAL OBLIGATIONS
There are a number of State agencies, instrumentalities and political
subdivisions of the State that issue Municipal Obligations, some of which may
be conduit revenue obligations payable from payments from private borrowers.
These entities are subject to various economic risks and uncertainties, and the
credit quality of the securities issued by them may vary considerably from the
credit quality of obligations backed by the full faith and credit of the State.
State Assistance. Property tax revenues received by local governments
declined more than 50% following passage of Proposition 13. Subsequently, the
California Legislature enacted measures to provide for the redistribution of
the State's General Fund surplus to local agencies, the reallocation of certain
State revenues to local agencies and the assumption of certain governmental
functions by the State to assist municipal issuers to raise revenues. Total
local assistance from the State's General Fund was budgeted at approximately
75% of General Fund expenditures in recent years, including the effect of
implementing reductions in certain aid programs. To reduce State General Fund
support for school districts, the 1992-93 and 1993-94 Budget Acts caused local
governments to transfer $3.9 billion of property tax revenues to school
districts, representing loss of the post-Proposition 13 "bailout" aid. Local
governments have in return received greater revenues and greater flexibility to
operate health and welfare programs. To the extent the State should be
constrained by its Article XIIIB appropriations limit, or its obligation to
conform to Proposition 98, or other fiscal considerations, the absolute level,
or the rate of growth, of State assistance to local governments may continue to
be reduced. Any such reductions in State aid could compound the serious fiscal
constraints already experienced by many local governments, particularly
counties. At least one rural county (Butte) publicly announced that it might
enter bankruptcy proceedings in August 1990, although such plans were put off
after the Governor approved legislation to provide additional funds for the
county. Other counties have also indicated that their budgetary condition is
extremely grave. Los Angeles County, the largest in the State, faced a nominal
$1.2 billion gap in its 1995-96 budget, half of which was in the County health
care system. The gaps were closed only with significant cuts in services and
personnel, particularly in the health care system, federal aid, and transfer of
some funds from other local governments to the County pursuant to special
legislation. The County's debt was downgraded by Moody's and S&P in the summer
of 1995. Orange County, just emerged from Federal Bankruptcy Court protection
in June 1996, has significantly reduced county services and personnel, and
faces strict financial conditions following large investment fund losses in
1994 which resulted in bankruptcy.
Assessment Bonds. California Municipal Obligations which are assessment bonds
may be adversely affected by a general decline in real estate values or a
slowdown in real estate sales activity. In many cases, such bonds are secured
by land which is undeveloped at the time of issuance but anticipated to be
developed within a few years after issuance. In the event of such reduction or
slowdown, such development may not occur or may be delayed, thereby increasing
the risk of a default on the bonds. Because the special assessments or taxes
securing these bonds are not the personal liability of the owners of the
property assessed, the lien on the property is the only security for the bonds.
Moreover, in most cases the issuer of these bonds is not required to make
payments on the bonds in the event of delinquency in the payment of assessments
or taxes, except from amounts, if any, in a reserve fund established for the
bonds.
California Long Term Lease Obligations. Certain California long-term lease
obligations, though typically payable from the general fund of the
municipality, are subject to "abatement" in the event the facility being leased
is unavailable for beneficial use and occupancy by the municipality during the
term of the lease. Abatement is not a default, and there may be no remedies
available to the holders of the certificates evidencing the lease obligation in
the event abatement occurs. The most common cases of abatement are failure to
complete construction of the facility before the end of the period during which
lease payments have been capitalized and uninsured casualty losses to the
facility (e.g., due to earthquake). In the event abatement occurs with respect
to a lease obligation, lease payments may be interrupted (if all available
insurance proceeds and reserves are exhausted) and the certificates may not be
paid when due.
Several years ago the Richmond Unified School District (the "District")
entered into a lease transaction in which certain existing properties of the
District were sold and leased back in order to obtain funds to cover operating
deficits. Following a fiscal crisis in which the District's finances were taken
over by a State receiver (including a brief period under bankruptcy court
protection), the District failed to make rental payments on this lease,
resulting in a lawsuit by the Trustee for the Certificate of Participation
holders, in which the State was named defendant (on the grounds that it
controlled the District's finances). One of the defenses raised in answer to
this lawsuit was the invalidity of the original lease transaction. The trial
court has upheld the validity of the District's lease, and the case has been
settled. Any judgment in any future case against the position asserted by the
Trustee in the Richmond case may have adverse implications for lease
transactions of a similar nature by other California entities.
OTHER CONSIDERATIONS
The repayment of industrial development securities secured by real property
may be affected by California laws limiting foreclosure rights of creditors.
Securities backed by healthcare and hospital revenues may be affected by
changes in State regulations, governing cost reimbursements to health care
providers under Medi-Cal (the State's Medicaid program), including risks
related to the policy of awarding exclusive contracts to certain hospitals.
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Limitations on ad valorem property taxes may particularly affect "tax
allocation" bonds issued by California redevelopment agencies. Such bonds are
secured solely by the increase in assessed valuation of a redevelopment project
area after the start of redevelopment activity. In the event that assessed
values in the redevelopment project decline (e.g., because of a major natural
disaster such as an earthquake), the tax increment revenue may be insufficient
to make principal and interest payments on these bonds. Both Moody's and S&P
suspended ratings on California tax allocation bonds after the enactment of
Articles XIIIA and XIIIB, and only resumed such ratings on a selective basis.
Proposition 87, approved by California voters in 1988, requires that all
revenues produced by a tax rate increase go directly to the taxing entity which
increased such tax rate to repay that entity's general obligation indebtedness.
As a result, redevelopment agencies (which, typically, are the issuers of tax
allocation securities) no longer receive an increase in tax increment when
taxes on property in the project area are increased to repay voter-approved
bonded indebtedness.
The effect of these various constitutional and statutory changes upon the
ability of California municipal securities issuers to pay interest and
principal on their obligations remains unclear. Furthermore, other measures
affecting the taxing or spending authority of California or its political
subdivisions may be approved or enacted in the future. Legislation has been or
may be introduced which would modify existing taxes or other revenue-raising
measures or which either would further limit or, alternatively, would increase
the abilities of State and local governments to impose new taxes or increase
existing taxes. It is not possible, at present, to predict the extent to which
any such legislation will be enacted. Nor is it possible, at present, to
determine the impact of any such legislation on California Municipal
Obligations in which the Fund may invest, future allocations of State revenues
to local governments or the abilities of State or local governments to pay the
interest on, or repay the principal of, such California Municipal Obligations.
Substantially all of California is within an active geologic region subject
to major seismic activity. Northern California in 1989 and Southern California
in 1994 experienced major earthquakes causing billions of dollars in damages.
The federal government provided more than $13 billion in aid for both
earthquakes, and neither event is expected to have any long-term negative
economic impact. Any California Municipal Obligation in the Fund could be
affected by an interruption of revenues because of damaged facilities, or,
consequently, income tax deductions for casualty losses or property tax
assessment reductions. Compensatory financial assistance could be constrained
by the inability of (i) an issuer to have obtained earthquake insurance
coverage at reasonable rates; (ii) an insurer to perform on its contracts of
insurance in the event of widespread losses; or (iii) the federal or State
government to appropriate sufficient funds within their respective budget
limitations.
FACTORS PERTAINING TO CONNECTICUT
Except to the extent the Connecticut Municipal Bond Fund (the "Connecticut
Fund") invests in temporary investments, the Connecticut Fund will invest
substantially all of its net assets in Connecticut Municipal Obligations. The
Connecticut Fund is therefore susceptible to political, economic or regulatory
factors affecting issuers of Connecticut Municipal Obligations. The following
briefly summarizes the current financial situation of the State of Connecticut
(the "State"). It is derived from sources that are generally available to
investors and is based in part on information obtained from various agencies in
sources that are generally available to investors and is based in part on
information obtained from various agencies in Connecticut. 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 Connecticut Obligations in the Fund or
the ability of particular obligors to make timely payments of debt service on
(or relating to) those obligations.
Connecticut's economy, historically based on the insurance, defense
manufacturing, finance and real estate industries, is slowly recovering from
one of the most severe recessions in the country, which was due in part to
reductions in defense spending and the downsizing of the forgoing industries.
The construction, trade and service industries are expected to lead the state's
economic recovery. Connecticut is the highest income state in the nation.
While the state's per capita personal income levels are 135% of the national
average, the state's ratio of tax-supported debt to personal income is among
the highest in the nation. These high debts are expected to limit the state's
financial flexibility. The state's general obligation bonds are rated Aa by
Moody's and AA- by Standard and Poor's.
FACTORS PERTAINING TO MASSACHUSETTS
Except to the extent the Massachusetts Municipal Bond Fund and the
Massachusetts Insured Municipal Bond Fund (the "Massachusetts Funds") invest in
temporary investments, the Massachusetts Funds will invest substantially all of
their net assets in Massachusetts Municipal Obligations. The Massachusetts
Funds are 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
government finances generally, will not adversely affect the market value of
Massachusetts
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Obligations in the Funds or the ability of particular obligors to make timely
payments of debt service on (or relating to) those obligations.
1997 FISCAL YEAR BUDGET
The fiscal 1997 budget approved by the Governor on June 30, 1996, provides
for approximately $17.452 billion in fiscal 1997 expenditures. The Executive
Office for Administration and Finance estimates fiscal 1997 total revenues to
be approximately $17.296 billion, including approximately $12.197 billion in
tax revenues which represents an increase of approximately $146 million or 1.2%
over estimated fiscal 1996 tax collections. The tax revenue estimate reflects
adjustments for certain tax reductions, a change in the way the Commonwealth
calculates the tax liability for certain mutual fund companies, and an increase
in the cigarette tax.
The recent enactment of federal welfare reform legislation is not expected to
have a material effect on the Commonwealth's finances in fiscal 1997. The
Executive Office for Administration and Finance is currently evaluating the
impact of the legislation on the Commonwealth's spending for public assistance
programs.
On August 8, 1996, the Governor approved legislation changing the
apportionment formula for the business corporations tax payable by certain
mutual fund service corporations. Effective January 1, 1997, the legislation
changes the computation of the sales factor. The new law requires the affected
corporations to increase their numbers of employees by 5% per year for five
years, subject to certain conditions. The Department of Revenue estimates that
the changes will result in a revenue reduction of approximately $10 million in
fiscal 1997 and approximately $39 million to $53 million on an annualized
basis, starting in fiscal 1998.
On July 24, 1996, the Legislature overrode the Governor's veto of legislation
imposing a tax increase on certain tobacco products. The Department of Revenue
estimates that these changes will result in approximately $74 million in
additional tax revenue for fiscal 1997, approximately $80 million to $90
million in additional revenue in 1998, and between $73 million and $83 million
by fiscal 2000.
The Department of Revenue's fiscal 1997 tax revenue forecasts have been
adjusted for the $150 million personal income tax reduction mandated by the
fiscal 1996 supplemental appropriations bill approved on July 30, 1996.
1996 Fiscal Year. Preliminary figures for fiscal 1996 indicate that tax
collections totaled approximately $12.051 billion, approximately $886.1
million, or 7.9%, greater than tax collections for fiscal 1995. The Department
of Revenue believes that the strong tax revenue growth in fiscal 1996 was due
partly to one-time factors that may not recur in fiscal 1997.
The Governor approved the final fiscal 1996 appropriations bills on July 30,
1996, and August 10, 1996. Fiscal 1996 spending is currently estimated at
approximately $16.930 billion, with revenues totaling approximately $17.281
billion. These assumptions would result in a fiscal 1996 year-end transfer to
the Commonwealth Stabilization Fund of approximately $95.4 million, bringing
its balance to approximately $543 million, the maximum allowed under state law.
The bill approved on July 30, 1996 mandates a personal income tax reduction of
$150 million to be funded by a fiscal 1996 transfer from the General Fund to
the Tax Reduction Fund and to be implemented by a temporary increase in the
amount of the personal exemption allowable for the 1996 taxable year.
As of June 30, 1996, the Commonwealth had a cash position of approximately
$889 million, not including the Stabilization Fund. This compares to a
projected position of $645.5 million. The fiscal 1996 year-end cash position
reflected approximately $161.7 million in advance payments for fiscal 1997
expenses and approximately $110 million in capital expenditures for which the
Commonwealth has not yet issued bonds or notes to reimburse itself.
On November 1, 1995, the Governor released a proposal to reorganize state
government, and on January 23, 1996, he filed implementing legislation
constituting eight bills. Two of the eight reorganization bills became law in
March; the other six bills were disapproved by the legislature. Pursuant to the
two bills and the fiscal 1997 budget, effective July 1, 1996, the number of
Executive Offices was reduced from eleven to six. Offices eliminated include
the Executive Office of Communities and Development (which became the
Department of Housing and Community Development), the Executive Office of
Economic Affairs (which became the Department of Economic Development, with
certain functions transferred to a new Department of Labor and Workforce
Development), the Executive Office of Labor (which became the Department of
Labor and Workforce Development), and the Executive Office of Education, and a
hundred various state boards and commissions were abolished.
On November 28, 1995, the Governor approved a modified version of the
legislation he had filed in September to change the apportionment formula used
for the business corporations tax on certain firms. The new formula will become
effective for certain federal defense contractors on January 1, 1996, and will
be phased in over five years for manufacturing firms generally. The Department
of Revenues estimates that the legislation will reduce revenues by $44 million
in fiscal 1996 and by $90 million in fiscal 1997. If the new formula were fully
effective for all covered businesses, it is estimated that the annual revenue
reduction would be $100 million to $150 million.
On January 23, 1996, the Governor filed legislation that would reduce the
personal income tax rate over two years. The Executive Office for
Administration and Finance estimates that this cut would reduce base tax
revenues by
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approximately $133 million in fiscal 1997, an additional $265 million in fiscal
1998 and a further $132 million in fiscal 1999, at which time the tax reduction
would be fully implemented.
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. Fiscal 1995 tax revenue 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 $556 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 $137 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"),
subject to federal approval of certain waivers. On August 4, 1995, the federal
government granted a waiver of federal regulations for the Commonwealth's
proposed changes to its AFDC program. However, the federal government imposed
additional conditions upon the proposed two-year limit on the availability of
AFDC benefits for able-bodied adults. On September 23, 1995, the Governor
accepted the federal waiver (except for the provision regarding no time limit
on benefits), and on November 1, 1995, the changes to the AFDC program were
implemented. Fiscal 1996 budget appropriations were expected to be sufficient
to cover program costs.
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 exclude 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. 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 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.
In June, 1993, the Legislature adopted and the Governor signed into law
comprehensive education reform legislation. The legislation established a
fiscal 1993 state spending base of approximately $1.288 billion for local
education purposes and required annual increases in state expenditures for such
purposes above that base, subject to appropriation, estimated to be
approximately $175 million in fiscal 1994, approximately $396 million in fiscal
1995, approximately $625 million in fiscal 1996 and approximately $867 million
in fiscal 1997, with additional annual increases anticipated in later years.
The fiscal 1994, 1995, and 1996 budgets have fully funded the requirements
imposed by 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.
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 ended with an excess of
revenues and other sources over expenditure and other uses of $312.3 million
and with positive fund balances of $549.4 million.
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
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exceeded the national unemployment rate. For example, during 1991, the
Massachusetts unemployment rate averaged 9.0% while the average United States
unemployment rate was 6.7%. Since 1993, the average monthly unemployment rate
has declined steadily and has been at or below the national average. The
Massachusetts unemployment rate in September 1996 was 4.2%, as compared with
the United States unemployment rate of 5.2% for the same period. 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 1993, 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 October, 1993, when the rating declined to A+. S&P last
affirmed the Commonwealth's rating at A+ on September 16, 1996.
Moody's currently rates the Commonwealth's uninsured general obligation bonds
at A1 and its notes at MIG-1. From 1989 through 1992, the Commonwealth had
experienced a steady decline in its rating by Moody's. In May 1989, Moody's
lowered its rating on the Commonwealth's notes from MIG-1 to MIG-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. In
September 1992, Moody's raised the Commonwealth's rating to A. A further
increase to A1 was given in November 1994. The Commonwealth's A1 rating was
last affirmed September 17, 1996.
There can be no assurance that these ratings will continue.
In recent years, certain public bodies and municipalities in the Commonwealth
have faced serious financial difficulties which have affected the credit
standing and borrowing abilities of the 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 in the Fund. Should there
be during the term of the Fund a financial crisis relating to public bodies or
municipalities in the Commonwealth, the market value and marketability of all
outstanding bonds issued by certain public authorities or municipalities 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 July 1, 1996 was approximately $10.012 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 July 1, 1996, including guaranteed bond
was approximately $13.619 billion.
Debt Service. During the 1980s, capital expenditures were increased
substantially, which accounts for a significant rise in debt service since
1989. 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 $898.0 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 $1.231 billion,
respectively, and are projected to be approximately $1.199 billion for fiscal
1996. The amounts represented do not include debt service on notes issued to
finance certain Medicaid-related liabilities, certain debt service contract
assistance payment to Massachusetts Bay Transportation Authority ($205.5
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).
This law may be amended or repealed by the legislature. The percentage of total
appropriations expended from the budgeted operating funds for debt service
(excluding debt service on Fiscal Recovery Bonds) was 5.6%, 5.9% and 5.4%, for
fiscal 1994, fiscal 1995 and fiscal 1996, respectively.
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
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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 1996, 1997 and 1998 are
estimates to be increased to approximately $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
$3.562 billion in current dollars, with approximately $840 billion to be spent
on or after December 31, 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 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 situated persons, it
would substantially increase the annual cost to the Commonwealth. 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.
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. Spaulding has signed
interrogatories indicating that it believes that the property is worth more
than $60 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 Commissioner of Revenue v. BayBank Middlesex, the Commonwealth
appealed an Appellate Tax Board ruling that granted abatements to 12
Massachusetts banks for tax years 1984 to 1990. The Appellate Tax Board
decision held that the measure of bank excise tax did not include certain
income from tax exempt obligations. On January 24, 1996, the Supreme Judicial
Court affirmed the Appellate Tax Board's decision. The potential liability is
approximately $55 million, including similarly situated banks and tax years
after 1990. Approximately $70 million in taxes and interest are at issue in
several other cases are pending.
A variety of other civil suits pending against the Commonwealth may also
affect its future liabilities. These include challenges to the Commonwealth's
allocation of school aid under Section 9C of Chapter 29 of the General Laws. 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 Revenues that certain deductions from the net worth measure of
the Massachusetts corporate excise tax violate the Commerce Clause of the
United States Constitution. On April 30, 1996, the Supreme Judicial Court
entered a partial final judgment implementing its decision for tax years ending
prior to January 1, 1995. The Department of Revenue estimates that tax revenues
in the amount of $40 million to $55 million may be abated as a result of the
partial final judgment. On May 13, 1996, the Court entered an order for
judgment and memorandum concerning relief for tax years ending on or after
January 1, 1996. The Department of Revenue is estimating the fiscal impact of
that ruling.
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.
S-27
<PAGE>
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
legislation passed by an initiative petition established a state tax revenue
growth limit for each fiscal year. Any excess in state tax revenue collections
over the prescribed limit is to be applied as a proportional credit against the
personal income tax liability of all taxpayers in the Commonwealth. The
legislation passed by the October 1986 legislation established a state tax
revenue growth limit for each fiscal year using a different measure. Tax
revenues in fiscal 1991 through fiscal 1995 were lower than the limit set by
the limitations and the Executive Office for Administration and Finance
currently estimates that same tax revenues in fiscal 1996 will not teach the
limit imposed by either of these statutes.
In November 1980, voters approved Proposition 2 1/2, a statewide limitation
initiative, to constrain levels of property taxation and to limit the certain
charges and fees imposed on cities and towns. Under the terms of Proposition 2
1/2, the increase in the property tax levy is limited to the lesser of: 1) 2.5%
over the previous year's levy plus any growth in the tax base attributable to
certain new construction and 2) 2.5% of the full and fair cash value of the
real estate and personal property therein. Proposition 2 1/2 does permit
communities, with voter approval, to assess taxes in excess of its levy limit
for certain reasons, including payment of specified debt service costs.
Legislation has also been enacted providing for certain local option taxes. A
voter initiative petition approved at the statewide general election in
November, 1990 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 to cities and towns. Local Aid
payments expressly remain subject to annual appropriation, and fiscal 1992,
fiscal 1993, fiscal 1994 and fiscal 1995 appropriations for Local Aid did not
meet, and fiscal 1996 appropriations for Local Aid do not meet, the levels set
forth in the initiative law.
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
original $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. The
marital deduction had been 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 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.
HEDGING AND OTHER DEFENSIVE ACTIONS
Each Fund may periodically engage in hedging transactions. Hedging is a term
used for various methods of seeking to preserve portfolio capital value of
offsetting price changes in one investment through making another investment
whose price should tend to move in the opposite direction. It may be desirable
and possible in various market environments to partially hedge the portfolio
against fluctuations in market value due to interest rate fluctuations by
investment in financial futures and index futures as well as related put and
call options on such instruments. Both parties entering into an index or
financial futures contract are required to post an initial deposit of 1% to 5%
of the total contract price. Typically, option holders enter into offsetting
closing transactions to enable settlement in cash rather than take delivery of
the position in the future of the underlying security. Each Fund will only sell
covered futures contracts, which means that the Fund segregates assets equal to
the amount of the obligations.
These transactions present certain risks. In particular, the imperfect
correlation between price movements in the futures contract and price movements
in the securities being hedged creates the possibility that losses on the hedge
by a Fund may be greater than gains in the value of the securities in such
series, portfolio. In addition, futures and options markets may not be liquid
in all circumstances. As a result, in volatile markets, a 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 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 B to this
Statement of Additional Information.
Each Fund reserves the right 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
S-28
<PAGE>
assets in obligations issued or guaranteed by the U.S. Government and its
agencies or instrumentalities, including up to 5% in adequately collateralized
repurchase agreements relating thereto. Interest on each instrument is taxable
for Federal income tax purposes and would reduce the amount of tax-free
interest payable to shareholders.
TEMPORARY INVESTMENTS
The Prospectus discusses briefly the ability of the Funds to invest a portion
of their assets in federally tax-exempt or taxable "temporary investments."
Temporary investments will not exceed 20% of a 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, S&P, or Fitch and mature within one year from the
date of purchase or carry a variable or floating rate of interest. See Appendix
A for more information about ratings by Moody's, S&P, and Fitch.
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 the Fund may invest in such other types of notes to the
extent permitted under its investment objective, policies and limitations. Such
notes may be issued for different purposes and may be secured differently from
those mentioned above.
The Funds may also invest in the following taxable temporary investments:
U.S. Government Direct Obligations are issued by the United States
Treasury and include bills, notes and bonds.
--Treasury bills are issued with maturities of up to one year. They are
issued in bearer form, are sold on a discount basis and are payable at
par value at maturity.
--Treasury notes are longer-term interest bearing obligations with
original maturities of one to seven years.
--Treasury bonds are longer-term interest-bearing obligations with
original maturities from five to thirty years.
U.S. Government Agencies Securities--Certain federal agencies have been
established as instrumentalities of the United States Government to supervise
and finance certain types of activities. These agencies include, but are not
limited to, the Bank for Cooperatives, Federal Land Banks, Federal Intermediate
Credit Banks, Federal Home Loan Banks, Federal
S-29
<PAGE>
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 Fund 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 a Fund might incur a loss if the value of the
collateral declines, and might incur disposition costs or experience delays in
connection with liquidating the collateral. In addition, if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization upon the collateral by a Fund 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. Each of the Funds will not invest more than 10% of its assets
in repurchase agreements maturing in more than seven days.
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 eight
trustees, two of whom are "interested persons" (as the term "interested
persons" is defined in the Investment Company Act of 1940) and six 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 OFFICES PRINCIPAL OCCUPATIONS
NAME AND ADDRESS AGE WITH TRUST DURING PAST FIVE YEARS
- ---------------- --- ----------- ----------------------
<S> <C> <C> <C>
Timothy R. 47 Chairman and Chairman since July 1, 1996 of The John Nuveen
Schwertfeger* Trustee Company, John Nuveen & Co. Incorporated, Nuveen
333 West Wacker Advisory Corp. and Nuveen Institutional Advisory
Drive Corp.; prior thereto Executive Vice President and
Chicago, IL 60606 Director of The John Nuveen Company (since March
1992), John Nuveen & Co. Incorporated, Nuveen
Advisory Corp. (since October 1992) and Nuveen
Institutional Advisory Corp. (since October 1992).
Anthony T. Dean* 51 President and President since July 1, 1996 of The John Nuveen
333 West Wacker Drive Trustee Company, John Nuveen & Co. Incorporated, Nuveen
Chicago, IL 60606 Advisory Corp. and Nuveen Institutional Advisory
Corp.; prior thereto, Executive Vice President and
Director of The John Nuveen Company (since March
1992), John Nuveen & Co. Incorporated, Nuveen
Advisory Corp. (since October 1992) and Nuveen
Institutional Advisory Corp. (since October 1992).
</TABLE>
S-30
<PAGE>
<TABLE>
<CAPTION>
POSITIONS
AND OFFICES PRINCIPAL OCCUPATIONS
NAME AND ADDRESS AGE WITH TRUST DURING PAST FIVE YEARS
- ---------------- --- ----------- ----------------------
<S> <C> <C> <C>
Robert P. Bremner 56 Trustee Private Investor and Management Consultant.
3725 Huntington Street, N.W.
Washington, D.C. 20015
Lawrence H. Brown 62 Trustee Retired (August 1989) as Senior Vice President of
201 Michigan Avenue The Northern Trust Company.
Highwood, IL 60040
Anne E. Impellizzeri 64 Trustee President and Chief Executive Officer of Blanton-
3 West 29th Street Peale Institute (since December 1990).
New York, NY 10001
Margaret K. Rosenheim 70 Trustee Helen Ross Professor of Social Welfare Policy,
969 East 60th Street School of Social Service Administration,
Chicago, IL 60637 University of Chicago.
Peter R. Sawers 63 Trustee Adjunct Professor of Business and Economics,
22 The Landmark University of Dubuque, Iowa; Adjunct Professor,
Northfield, IL 60093 Lake Forest Graduate School of Management, Lake
Forest, Illinois (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
4000 Miller-Valentine Ct. President, Miller-Valentine Realty, Inc.
P.O. Box 744
Dayton, OH 45401
Bruce P. Bedford 56 Executive Vice Executive Vice President of John Nuveen & Co.
333 West Wacker Drive President Incorporated, Nuveen Advisory Corp. and Nuveen
Chicago, IL 60606 Institutional Advisory Corp. (since January 1997),
Chairman and CEO of Flagship Resources Inc. and
Flagship Financial Inc. and the Flagship funds
(since January 1986).
Michael S. Davern 39 Vice President Vice President of Nuveen Advisory Corp. (since
One South Main Street January 1997); Vice President and Portfolio
Dayton, OH 45402 Manager (since September 1991) of Flagship
Financial.
William M. Fitzgerald 32 Vice President Vice President of Nuveen Advisory Corp. (since
333 West Wacker Drive December 1995); Assistant Vice President of Nuveen
Chicago, IL 60606 Advisory Corp. (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 41 Vice President Vice President of Nuveen Advisory Corp.
333 West Wacker Drive
Chicago, IL 60606
Richard A. Huber 33 Vice President Vice President of Nuveen Advisory Corp. (since
3450 Cassandra Drive January 1997); Vice President and Portfolio
Tipp City, OH 45371 Manager (since August 1985) of Flagship Financial.
Steven J. Krupa 39 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
</TABLE>
S-31
<PAGE>
<TABLE>
<CAPTION>
POSITIONS
AND OFFICES PRINCIPAL OCCUPATIONS
NAME AND ADDRESS AGE WITH TRUST DURING PAST FIVE YEARS
- ---------------- --- ----------- ----------------------
<S> <C> <C> <C>
Larry W. 45 Vice President Vice President (since September 1992), and
Martin Assistant Secretary and Assistant General Counsel
333 West of John Nuveen & Co. Incorporated; Vice President
Wacker (since May 1993) and Assistant Secretary of Nuveen
Drive Advisory Corp.; Vice President (since May 1993)
Chicago, IL and Assistant Secretary (since January 1992) of
60606 Nuveen Institutional Advisory Corp.; Assistant
Secretary of The John Nuveen Company (since
February 1993).
Edward F. 31 Vice President Vice President (since September 1996), previously
Neild, IV Assistant Vice President (since December 1993) of
One South Nuveen Advisory Corp., portfolio manager prior
Main Street thereto (since January 1992); Vice President
Dayton, OH (since September 1996), previously Assistant Vice
45402 President (since May 1995) of Nuveen Institutional
Advisory Corp., portfolio manager prior thereto
(since January 1992).
Walter K. 48 Vice President Vice President of Nuveen Advisory Corp. (since
Parker January 1997); Vice President and Portfolio
One South Manager (since July 1994) of Flagship Financial;
Main Street Portfolio Manager and CIO Trust Investor (between
Dayton, OH 1983 and June 1994) for PNC Bank.
45402
O. Walter 57 Vice President Vice President and Controller of the John Nuveen
Renfftlen Company (since March 1992), John Nuveen & Co.
333 West Incorporated, Nuveen Advisory Corp. and Nuveen
Wacker Institutional Advisory Corp.
Drive
Chicago, IL
60606
Thomas C. 45 Vice President Vice President of Nuveen Advisory Corp. and Nuveen
Spalding, Institutional Advisory Corp.; Chartered Financial
Jr. Analyst.
333 West
Wacker
Drive
Chicago, IL
60606
H. William 62 Vice President Vice President and Treasurer of the John Nuveen
Stabenow Company (since March 1992), John Nuveen & Co.
333 West Incorporated, Nuveen Advisory Corp. and Nuveen
Wacker Institutional Advisory Corp, (since January 1992).
Drive
Chicago, IL
60606
Jan E. 41 Vice President Vice President of Nuveen Advisory Corp. (since
Terbrueggen January 1997); Vice President and Portfolio
One South Manager (since January 1992) of Flagship
Main Street Financial.
Dayton, OH
45402
Gifford R. 40 Vice President Vice President (since September 1992), Assistant
Zimmerman and Assistant Secretary and Assistant General Counsel of John
333 West Secretary Nuveen & Co. Incorporated; Vice President (since
Wacker May 1993) and Assistant Secretary of Nuveen
Drive Advisory Corp.; Vice President (since May 1993)
Chicago, IL and Assistant Secretary (since January 1992) of
60606 Nuveen Institutional Advisory Corp.
</TABLE>
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 trustees of the Trust are also directors or trustees, as the case may be,
of 33 other Nuveen open-end funds advised by Nuveen Advisory Corp. Mr. Dean,
Mr. Schwertfeger, Mr. Brown, Ms. Impellizzeri, Ms. Rosenheim and Mr. Sawers
also are directors or trustees of 52 Nuveen closed-end funds.
The following table sets forth compensation paid by the Trust to each of the
trustees of the Trust and the total compensation paid to each trustee during
the calendar year 1996. 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
AGGREGATE COMPENSATION
COMPENSATION FROM TRUST AND
FROM THE SERIES FUND COMPLEX
NAME OF TRUSTEE OF THIS TRUST PAID TO TRUSTEES
--------------- --------------- ----------------
<S> <C> <C>
Robert P. Bremner........................ $1,448(1) $20,500(1)
Lawrence H. Brown........................ $3,375 $58,500
Anne E. Impellizzeri..................... $3,375 $58,500
Margaret K. Rosenheim.................... $4,255(2) $66,315(3)
Peter R. Sawers.......................... $3,375 $58,500
William S. Schneider..................... $1,518(1) $21,500(1)
</TABLE>
S-32
<PAGE>
- --------
(1) As a trustee of the Flagship Funds, for the 12 month period ended May 31,
1996.
(2) Includes $333 in interest accrued on deferred compensation from prior
years.
(3) Includes $1,565 in interest accrued on deferred compensation from prior
years.
Each trustee who is not affiliated with Nuveen or Nuveen Advisory receives a
fee. The Trust requires no employees other than its officers, all of whom are
compensated by Nuveen.
The officers and directors of each Fund, in the aggregate, own less than 1%
of the shares of the Fund.
The following table sets forth the percentage ownership of each person, who,
as of January 3, 1997, owns of record, or is known by Registrant to own of
record or beneficially 5% or more of any class of a Fund's shares.
<TABLE>
<CAPTION>
PERCENTAGE
NAME OF FUND AND CLASS NAME AND ADDRESS OF OWNER OF OWNERSHIP
- ---------------------- ------------------------- ------------
<S> <C> <C>
Nuveen Flagship New York Municipal
Bond Fund Merrill Lynch, Pierce, Fenner & 33.01%
Class A Shares................... Smith for the sole benefit of
its customers
Attn Fund Administration
4800 Deer Lake Dr. E FL 3
Jacksonville FL 32246-6484
Nuveen Flagship New York Municipal
Bond Fund Merrill Lynch, Pierce, Fenner & 46.56
Class C Shares................... Smith for the sole benefit of
its customers
Attn Fund Administration
4800 Deer Lake Dr. E FL 3
Jacksonville FL 32246-6484
Prudential Securities Inc. FBO 7.83
Ms Hanifa Omerhodzic
170 Windom Ave
Orchard Park NY 14127-1518
Nuveen Flagship New York Municipal
Bond Fund BHC Securities Inc. 8.34
Class R Shares................... FAO 70001464
Attn: Mutual Funds
One Commerce Square
2005 Market Street
Suite 1200
Philadelphia, PA 19103
Nuveen New York Insured Municipal
Bond Fund BHC Securities Inc. 14.87
Class A Shares................... FAO 70015729
Attn: Mutual Funds
One Commerce Square
2005 Market Street
Suite 1200
Philadelphia, PA 19103N
FSC FEBO # OSN-710261 7.44
Beverly S. Greenberg
150 E. 69th St. Apt. 15B
New York, NY 10021
Nuveen New York Insured Municipal
Bond Fund Arlene Krasnoff 11.47
Class C Shares................... 21707 82nd Ave.
Queens Village, NY 11427-1103
Ruth Preston & 8.68
Sara P. Costello &
Patricia N. Kohl
JT TEN WROS NOT TC
2 Middleton Rd.
Greenport, NY 11944-1115
</TABLE>
S-33
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE
NAME OF FUND AND CLASS NAME AND ADDRESS OF OWNER OF OWNERSHIP
- ---------------------- ------------------------- ------------
<S> <C> <C>
Donaldson Lufkin Jenrette 7.53%
Securities Corporation Inc.
PO Box 2052
Jersey City, NJ 07303-9998
Harriette Rosenbloom 5.83
3777 Independence Ave.
Bronx, NY 10463-1409
Nuveen New York Insured
Municipal Bond Fund BHC Securities Inc. 22.64
Class R Shares............ FAO 70001770
Attn: Mutual Funds
One Commerce Square
2005 Market Street
Suite 1200
Philadelphia, PA 19103
Nuveen Flagship New Jersey
Municipal Bond Fund Merrill Lynch, Pierce, Fenner & Smith 13.93
Class A Shares............ for the sole benefit of its customers
Attn Fund Administration
4800 Deer Lake Dr E FL 3
Jacksonville, FL 32246-6484
Nuveen Flagship New Jersey
Municipal Bond Fund William G. Osborne 20.12
Class C Shares............ % Aurachem Corp.
South 3R & Somerset St.
PO Box 471
Harrison, NJ 07029-0471
Alvin H. Frankel Agent for 7.32
Louise I. Grill
U/POA DTD Jun 17 94
601 Haddon Ave
Collingswood, NJ 08108-3703
Donaldson Lufkin Jenrette 5.33
Securities Corporation Inc
PO Box 2052
Jersey City, NJ 07303-9998
Nuveen Flagship New Jersey
Intermediate Municipal Merrill Lynch, Pierce, Fenner & Smith 22.65
Bond Fund Class A Shares.. for the sole benefit of its customers
Attn Fund Administration
4800 Deer Lake Dr E FL 3
Jacksonville, FL 32246-6484
Nuveen California Municipal
Bond Fund NFSC FEBO # OFP-002135 19.56
Class C Shares............ Michele Chiapella
103 Northwood Commons
Chico, CA 95926
Paul R. Hoeber 19.53
611 Bay St. Apt. 4
San Francisco, CA 94133-1619
Elizabeth Pazdra 12.73
3829 State Highway 49
Placerville, CA 95667-6301
John C. MacGregor-Scott Tr 6.19
UA JUN 22 87
MacGregor-Scott Rev Fam Trust
720 W Camino Real Ave.
Arcadia, CA 91007-7839
</TABLE>
S-34
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE
NAME OF FUND AND CLASS NAME AND ADDRESS OF OWNER OF OWNERSHIP
- ---------------------- ------------------------- ------------
<S> <C> <C>
David Neil Daniels & 5.23%
Judy Curry Daniels Trs
UA JAN 13 94
Daniels Revocable Trust
305 Tioga Ct
Palo Alto, CA 94306-4543
Nuveen California Municipal
Bond Fund Smith Barney Shearson 5.08
Class R Shares............ 00119601999
388 Greenwich Street
New York, NY 10013
Nuveen California Insured 5.63
Municipal Bond Fund Smith Barney Shearson Inc
Class A Shares............ 00152919411
388 Greenwich Street
New York, NY 10013
Nuveen Flagship Connecticut
Municipal Bond Fund Merrill Lynch, Pierce, Fenner & Smith 26.46
Class A Shares............ for the sole benefit of its customers
Attn; Fund Administration
4800 Deer Lake Dr E FL 3
Jacksonville, FL 32246-6484
Nuveen Flagship Connecticut
Municipal Bond Fund Merrill Lynch, Pierce, Fenner & Smith 38.38
Class C Shares............ for the sole benefit of its customers
Attn: Fund Administration
4800 Deer Lake Dr E Fl 3
Jacksonville, FL 32246-6484
Nuveen Massachusetts
Municipal Bond Fund NFSC FEBO #OC8-412740 6.31
Class A Shares............ Barbara Polverari
PO Box 30
W Springfield, MA 01090
Smith Barney Inc. 6.04
00162105158
388 Greenwich Street
New York, New York 10013
Montgomery Securities 5.18
752-08450-12
Attn: Mutual Funds - 4th Floor
600 Montgomery Street
San Francisco, CA 94111
Nuveen Massachusetts
Municipal Bond Fund Hudson L. Matson 15.43
Class C Shares............ 39 Griggs Rd.
Sutton, MA 01590-1015
Swastika Sengupta 9.20
23 Loumar Dr. # 2
Pittsfield, MA 01201-5932
Mary H. Melville 9.19
4 Paul Revere Rd.
Worcester MA 01609-1210
Loren Robbins 7.00
51 Main St.
N. Chelmsford, MA 01863-1628
Anthony Macolini 5.75
17 Nossdale Rd.
Jamaica Plain, MA 02130-3022
</TABLE>
S-35
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE
NAME OF FUND AND CLASS NAME AND ADDRESS OF OWNER OF OWNERSHIP
- ---------------------- ------------------------- ------------
<S> <C> <C>
Charles G. Allen, Jr. Tr. 5.34%
UA MAR 05 54
UW Flora A. Generess
FBO Charles G. Allen Jr. Et al
221 James St. #65
Barre, MA 01005-8805
Nuveen Massachusetts Insured
Municipal Bond Fund NFSC FEBO # DKR-016039 6.44
Class A Shares.................. Allen Wrightington
Mary Ann Wrightington
93 Micajah Pond
Plymouth, MA 02360
Gerald W. Mahoney &
Elaine Mahoney Tr 5.72
UA 10/05/94
Mahoney Rev. Trust
162 Oakland St.
Fall River, MA 02720-6114
Nuveen Massachusetts Insured
Municipal Bond Fund Edward D. Jones and Co. FAO 12.73
Class C Shares.................. George A. Dauteuil &
Pauline Dauteuil
EDJ# 258-03788-1-4
P.O. Box 2500
Maryland Heights, MD 63043-8500
Ruth Biller
51 Oak Rd. 12.54
Canton, MA 02021-2625
Rose E. Frisch
3 Hillside Pl. 11.54
Cambridge, MA 02140-3617
Daniel M. Flynn &
Kathleen F. Flynn 11.28
JT TEN WROS NOT TC
232 North Rd.
Hampden, MA 01036-9659
John Sullivan
6 Margaret St. 11.26
Boston, MA 02113-2523
Theodora C. Roy 5.95
148 Mountain Rd.
Holyoke MA 01040-9523
Magdalene S. Kapuscienski &
Gene S. Kapuscienski 5.01
JT TEN WROS NOT TC
15 D Country Club Lane
Milford, MA 01757
</TABLE>
S-36
<PAGE>
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 "Fund
Service Providers" in the Prospectus.
Pursuant to an investment management agreement between Nuveen Advisory and
the Trust, each of the Funds has agreed to pay an annual management fee at the
rates set forth below:
<TABLE>
<CAPTION>
AVERAGE DAILY NET ASSET VALUE FEE 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 assets over $2 billion....................................... .4750 of 1%
</TABLE>
Nuveen Advisory has agreed to waive all or a portion of its management fee or
reimburse certain expenses of the California, California Insured,
Massachusetts, Massachusetts Insured, New York and New York Insured Municipal
Bond Funds 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) in any fiscal year from
exceeding .75 (.975 for insured Funds) of 1% of average daily net asset value
of any class of shares of those Funds.
Nuveen Advisory has voluntarily agreed to waive some or all of its fees or
reimburse expenses to prevent total operating expenses (not counting
distribution and service fees) from exceeding 0.75% of average daily net assets
of the New Jersey Fund. For the New Jersey, New Jersey Intermediate,
Connecticut, and New York Funds, Nuveen Advisory has committed through at least
1998 to continue Flagship's general dividend-setting practices.
For the last three fiscal years, the New Jersey Municipal Bond Fund paid net
management fees to Nuveen Advisory as follows:
<TABLE>
<CAPTION>
MANAGEMENT FEES NET OF EXPENSE FEE WAIVERS AND EXPENSE
REIMBURSEMENT PAID TO NUVEEN REIMBURSEMENTS
ADVISORY FOR THE YEAR ENDED FOR THE YEAR ENDED
-------------------------------- -----------------------
1/31/94 1/31/95 1/31/96 1/31/94 1/31/95 1/31/96
---------- ---------- ---------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
New Jersey Municipal
Bond Fund.............. $ 85,065 156,717 152,929 61,303 54,105 115,121
</TABLE>
For the last three fiscal years, the New York Municipal Bond Fund, the New
York Insured Municipal Bond Fund, the California Municipal Bond Fund, the
California Insured Municipal Bond Fund, the Massachusetts Municipal Bond Fund,
and the Massachusetts Insured Municipal Bond Fund paid net management fees to
Nuveen Advisory as follows:
<TABLE>
<CAPTION>
MANAGEMENT FEES NET OF EXPENSE FEE WAIVERS AND EXPENSE
REIMBURSEMENT PAID TO NUVEEN REIMBURSEMENTS
ADVISORY FOR THE YEAR ENDED FOR 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>
New York Municipal Bond
Fund................... $ 688,156 786,847 852,809 34,007 4,556 29,700
New York Insured
Municipal Bond Fund.... $1,968,122 1,921,472 1,940,010 0 1,767 0
California Municipal
Bond Fund.............. $1,130,541 1,123,360 1,199,571 0 3,483 3,302
California Insured
Municipal Bond Fund.... $1,053,393 1,073,336 1,156,993 0 2,697 1,695
Massachusetts Municipal
Bond Fund.............. $ 320,135 370,394 366,859 37,413 17,319 59,879
Massachusetts Insured
Municipal Bond Fund.... $ 295,357 302,241 346,952 0 1,148 788
</TABLE>
For the last three fiscal years, the New Jersey Intermediate Municipal Bond
Fund and the Connecticut Municipal Bond Fund paid net management fees to
Flagship Financial, predecessor to Nuveen Advisory as follows:
<TABLE>
<CAPTION>
MANAGEMENT FEES NET OF
EXPENSE REIMBURSEMENT
PAID TO FLAGSHIP FEE WAIVERS AND EXPENSE
FINANCIAL FOR THE YEAR REIMBURSEMENTS
ENDED FOR THE YEAR ENDED
------------------------ -----------------------
5/31/94 5/31/95 5/31/96 5/31/94 5/31/95 5/31/96
-------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
New Jersey Intermediate
Municipal Bond Fund.......... $ 0 0 0 40,542 45,333 101,996
Connecticut Municipal Bond
Fund......................... $255,441 396,094 421,811 768,360 615,631 636,447
</TABLE>
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.
S-37
<PAGE>
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 one of the
largest research departments in the investment banking community devoted 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
$35 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.
Effective January 1, 1997, The John Nuveen Company acquired Flagship Resources
Inc., and as part of that acquisition, Flagship Financial, the adviser to the
Flagship Funds, was merged with Nuveen Advisory.
Nuveen Advisory's portfolio managers call upon the resources of Nuveen's
Research Department. The Nuveen Research Department reviews more than $100
billion in municipal 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 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.
S-38
<PAGE>
NET ASSET VALUE
As stated in the Prospectus, the net asset value of the shares of the Funds
will be determined separately for each class of those Funds' shares by The
Chase Manhattan Bank, the Funds' 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 the Funds, each Fund's custodian utilizes
the valuations of portfolio securities furnished by a pricing service approved
by the trustees. Securities for which quotations are not readily available
(which constitute a majority of the securities held by the 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, counsel to the Trust.
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 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.
S-39
<PAGE>
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 "Investment Policies and Investment Portfolio; Portfolio
Securities."
Distributions by a 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.
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 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.
If a Fund engages in hedging transactions involving financial futures and
options, these transactions will be subject to special tax rules, the effect of
which may be to accelerate income to 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 a 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 a Fund, 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 a 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 charge 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 charge pursuant to the reinvestment or exchange privilege.
Any disregarded portion of such charge 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
S-40
<PAGE>
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, a 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 a Fund.
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 a 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 Fund and its 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.
S-41
<PAGE>
STATE TAX MATTERS
The discussion of tax treatment is based on the assumptions that the Funds
will qualify under Subchapter M of the Code as regulated investment companies
and as qualified investment funds under applicable state law, that they will
satisfy the conditions which will cause distributions to qualify as exempt-
interest dividends to shareholders when distributed as intended, and that each
Fund will distribute all interest and dividends it receives to its
shareholders. Unless otherwise noted, shareholders in each Fund will not be
subject to state income taxation on distributions that are attributable to
interest earned on the municipal obligations issued by that state or its
subdivisions, or on obligations of the United States. Shareholders generally
will be required to include capital gain distributions in their income for
state tax purposes. The tax discussion summarizes general state tax laws which
are currently in effect and are subject to change by legislative or
administrative action; any such changes may be retroactive with respect to the
applicable Fund's transactions. Investors should consult a tax adviser for more
detailed information about state taxes to which they may be subject.
NEW YORK
The following is a general, abbreviated summary of certain provisions of the
applicable New York tax law as presently in effect as it directly governs the
taxation of resident individual, corporate, and unincorporated business
shareholders of the New York Funds. This summary does not address the taxation
of other shareholders nor does it discuss any local taxes, other than New York
City taxes, that may be applicable. These provisions are subject to change by
legislative or administrative action, and any such change may be retroactive
with respect to New York Fund transactions.
The following is based on the assumptions that the New York Funds will
qualify under Subchapter M of the Code as regulated investment companies, that
they will satisfy the conditions which will cause New York Funds' distributions
to qualify as exempt-interest dividends to shareholders, and that they will
distribute all interest and dividends they receive to the New York Funds'
shareholders.
The New York Funds will be subject to the New York State corporate franchise
tax and the New York City general corporation tax only if they have a
sufficient nexus with New York State or New York City. If they are subject to
such taxes, they do not expect to pay a material amount of either tax.
Distributions by the New York Funds that are attributable to interest on any
obligation of New York and its political subdivisions or to interest on
obligations of U.S. territories and possessions that are exempt from state
taxation under federal law will not be subject to the New York State personal
income tax or the New York City personal income or unincorporated business
taxes. Distributions by the New York Funds that are attributable to interest on
obligations of the United States or its instrumentalities ("Federal
Obligations") will be exempt from the New York State personal income tax or the
New York City personal income tax only if, at the close of each quarter of its
taxable year, at least 50% of the value of the Funds' total assets consists of
Federal Obligations. The New York Funds do not expect to meet this requirement,
however, and such distributions will be subject to tax. Under the current
administrative practice of the New York City Department of Finance,
distributions that are attributable to interest on Federal Obligations will be
exempt from the New York City unincorporated business tax. All other
distributions, including distributions attributable to capital gains, will be
subject to the New York State personal income tax and the New York City
personal income and unincorporated business taxes.
All distributions from the New York Funds, regardless of source, will
increase the taxable base of shareholders subject to the New York State
franchise tax or the New York City general corporation tax.
Gain from the sale, exchange, or other disposition of shares of the New York
Funds will be subject to the New York State personal income and franchise taxes
and the New York City personal income, unincorporated business, and general
corporation taxes.
Shares of the New York Funds may be subject to the New York State estate tax
if owned by a New York decedent at the time of death.
NEW JERSEY
The following is a general, abbreviated summary of certain provisions of the
applicable New Jersey tax law as presently in effect as it directly governs the
taxation of resident individual and corporate shareholders of the New Jersey
Funds. This summary does not address the taxation of other shareholders nor
does it discuss any local taxes that may be applicable. These provisions are
subject to change by legislative or administrative action, and any such change
may be retroactive with respect to transactions of the New Jersey Funds.
The following is based on the assumptions that the New Jersey Funds will
qualify under Subchapter M of the Code as regulated investment companies and
under New Jersey law as qualified investment funds, that they will satisfy the
conditions which will cause New Jersey Funds' distributions to qualify as
exempt-interest dividends to shareholders, and that they will distribute all
interest and dividends they receive to the New Jersey Funds' shareholders.
The New Jersey Funds will be subject to the New Jersey corporation business
tax or the New Jersey corporation income tax only if it has a sufficient nexus
with New Jersey. If it is subject to either tax, it does not expect to pay a
material amount of either tax.
S-42
<PAGE>
Distributions by the New Jersey Funds that are attributable to interest or
gains on any obligation of New Jersey or its political subdivisions or to
interest or gains on obligations of the United States, its territories,
possessions, or instrumentalities that are exempt from state taxation under
federal law will not be subject to the New Jersey gross income tax. All other
distributions will be subject to the New Jersey gross income tax.
All distributions from the New Jersey Funds, regardless of source, will
increase the taxable base of shareholders subject to the New Jersey corporation
business tax or the New Jersey corporation income tax.
Gain on the sale, exchange, or other disposition of shares of the New Jersey
Funds will not be subject to the New Jersey gross income tax. Conversely,
losses from such transactions may not be used to offset New Jersey taxable
gains. Gains from such transactions will be subject to the New Jersey
corporation income tax.
Shares of the New Jersey Funds may be subject to the New Jersey inheritance
tax or the New Jersey estate tax if owned by a New Jersey decedent at the time
of death.
Shareholders are advised to consult with their own tax advisers for more
detailed information concerning New Jersey and local tax matters.
CALIFORNIA
The following is a general, abbreviated summary of certain provisions of the
applicable California tax law as presently in effect as it directly governs the
taxation of resident individual and corporate shareholders of the California
Funds. This summary does not address the taxation of other shareholders nor
does it discuss any local taxes that may be applicable. These provisions are
subject to change by legislative or administrative action, and any such change
may be retroactive with respect to transactions of the California Funds.
The following is based on the assumptions that the California Funds will
qualify under Subchapter M of the Code as regulated investment companies, that
they will satisfy the conditions which will cause distributions of the
California Funds to qualify as exempt-interest dividends to shareholders, and
that they will distribute all interest and dividends they receive to the
California Funds' shareholders.
The California Funds will not be subject to the California corporate
franchise tax. The California Funds will be subject to the California corporate
income tax only if it has a sufficient nexus with California. If it is subject
to the California corporate income tax, it does not expect to pay a material
amount of such tax.
Distributions by the California Funds that are attributable to interest on
any obligation of California and its political subdivisions or to interest on
obligations of the United States, its territories, possessions or
instrumentalities that are exempt from state taxation under federal law will
not be subject to the California personal income tax. All other distributions,
including distributions attributable to capital gains, will be subject to the
California personal income tax.
All distributions of California Funds to corporate shareholders, regardless
of source, will be subject to the California corporate franchise tax.
Gain on the sale, exchange, or other disposition of shares of the California
Funds will be subject to the California personal income and corporate franchise
taxes.
Shares of the California Funds may be subject to the California estate tax if
held by a California decedent at the time of death.
Shareholders are advised to consult with their own tax advisers for more
detailed information concerning California tax matters.
CONNECTICUT
The following is a general, abbreviated summary of certain provisions of the
applicable Connecticut tax law as presently in effect as it directly governs
the taxation of resident individual and corporate shareholders of the
Connecticut Fund. This summary does not address the taxation of other
shareholders nor does it discuss any local taxes that may be applicable. These
provisions are subject to change by legislative or administrative action, and
any such change may be retroactive with respect to Connecticut Fund
transactions.
The following is based on the assumptions that the Connecticut Fund will
qualify under Subchapter M of the Code as a regulated investment company, that
it will satisfy the conditions which will cause Connecticut Fund distributions
to qualify as exempt-interest dividends to shareholders, and that it will
distribute all interest and dividends it receives to the Connecticut Fund's
shareholders.
The Connecticut Fund will be subject to the Connecticut corporation business
tax only if it has a sufficient nexus with Connecticut. If it is subject to
that tax, it does not expect to pay a material amount of such tax.
Distributions from the Connecticut Fund that are attributable to interest or
gain on any obligation of Connecticut and its political subdivisions
("Connecticut Obligations") or to interest on obligations of U.S. territories
and possessions that are exempt from state taxation under federal law will not
be subject to the Connecticut personal income tax. Distributions from the
Connecticut Fund that are attributable to interest on obligations of the United
States or its
S-43
<PAGE>
instrumentalities ("Federal Obligations") will be exempt from the Connecticut
personal income tax only if, at the close of each quarter of its taxable year,
the Connecticut Fund holds at least 50% of its gross assets in Federal
Obligations. The Connecticut Fund does not expect to meet this requirement,
however, and such distributions will be subject to tax. All other
distributions, including distributions attributable to capital gain (other than
capital gain on Connecticut Obligations), will be subject to the Connecticut
personal income tax.
All distributions from the Connecticut Fund, regardless of source, will be
subject to the Connecticut corporation business tax, but corporate shareholders
may be permitted a dividends received deduction for a portion of Connecticut
Fund distributions received.
Gain on the sale, exchange, or other disposition of shares of the Connecticut
Fund will be subject to the Connecticut personal income tax and the Connecticut
corporation business tax.
Shares of the Connecticut Fund may be subject to the Connecticut succession
tax, the Connecticut transfer tax, and the Connecticut estate tax if owned by,
or subject to a general power of appointment by, a Connecticut decedent at the
time of death.
Shareholders are advised to consult with their own tax advisers for more
detailed information concerning Connecticut and local tax matters.
MASSACHUSETTS
The following is a general, abbreviated summary of certain provisions of the
applicable Massachusetts tax law as presently in effect as it directly governs
the taxation of resident individual and corporate shareholders of the
Massachusetts Funds. This summary does not address the taxation of other
shareholders nor does it discuss any local taxes that may be applicable. These
provisions are subject to change by legislative or administrative action, and
any such change may be retroactive with respect to the Massachusetts Funds'
transactions.
The following is based on the assumptions that the Massachusetts Funds will
qualify under Subchapter M of the Code as regulated investment companies, that
they will satisfy the conditions which will cause distributions of the
Massachusetts Funds to qualify as exempt-interest dividends to shareholders,
and that they will distribute all interest and dividends they receive to the
Massachusetts Funds' shareholders.
The Massachusetts Funds are not subject to the Massachusetts corporate excise
tax, the Massachusetts franchise tax, or the Massachusetts income tax.
Distributions by the Massachusetts Funds that are attributable to interest on
or gain from the sale or exchange of any obligation of Massachusetts and its
political subdivisions, agencies and instrumentalities or to interest on
obligations of the United States and its territories, possessions or
instrumentalities that are exempt from state taxation under federal law will
not be subject to the Massachusetts personal income tax. All other
distributions will be subject to the Massachusetts personal income tax.
Distributions by the Massachusetts Funds, regardless of source, are subject
to the Massachusetts excise tax.
Gain on the sale, exchange, or other disposition of shares of the
Massachusetts Funds will be subject to the Massachusetts personal income and
corporate excise tax.
Shares of the Massachusetts Funds may be subject to the Massachusetts estate
tax if owned by a Massachusetts decedent at the time of death.
Shareholders are advised to consult with their own tax advisers for more
detailed information concerning Massachusetts state and local tax matters.
S-44
<PAGE>
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:
Yield=2[(a-b +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 front-end 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.
S-45
<PAGE>
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 quoted in the left-hand column. None of the Funds had Class B Shares
outstanding as of the date of this Statement of Additional Information.
<TABLE>
<CAPTION>
AS OF JULY 31, 1996
------------------------------------------
COMBINED FEDERAL TAXABLE
YIELD AND STATE TAX RATE* EQUIVALENT YIELD
----- ------------------- ----------------
<S> <C> <C> <C>
New Jersey Municipal Bond
Fund
Class A Shares............. 4.78% 43.5% 8.46%
Class C Shares............. 4.25% 43.5% 7.52%
Class R Shares............. 5.24% 43.5% 9.27%
<CAPTION>
AS OF AUGUST 31, 1996
------------------------------------------
COMBINED FEDERAL TAXABLE
YIELD AND STATE TAX RATE* EQUIVALENT YIELD
----- ------------------- ----------------
<S> <C> <C> <C>
New York Municipal Bond
Fund**
Class A Shares............. 4.69% 43.5% 8.30%
Class C Shares............. 4.13% 43.5% 7.31%
Class R Shares............. 5.14% 43.5% 9.10%
New York Insured Municipal
Bond Fund**
Class A Shares............. 4.30% 43.5% 7.61%
Class C Shares............. 3.73% 43.5% 6.60%
Class R Shares............. 4.74% 43.5% 8.39%
California Municipal Bond
Fund
Class A Shares............. 4.53% 45.0% 8.24%
Class C Shares............. 3.96% 45.0% 7.20%
Class R Shares............. 4.98% 45.0% 9.05%
California Insured Municipal
Bond Fund
Class A Shares............. 4.45% 45.0% 8.09%
Class C Shares............. 3.88% 45.0% 7.05%
Class R Shares............. 4.90% 45.0% 8.91%
Massachusetts Municipal Bond
Fund
Class A Shares............. 4.42% 47.0% 8.34%
Class C Shares............. 3.85% 47.0% 7.26%
Class R Shares............. 4.87% 47.0% 9.19%
Massachusetts Insured
Municipal Bond Fund
Class A Shares............. 4.03% 47.0% 7.60%
Class C Shares............. 3.45% 47.0% 6.51%
Class R Shares............. 4.47% 47.0% 8.43%
<CAPTION>
AS OF NOVEMBER 30, 1996
------------------------------------------
COMBINED FEDERAL TAXABLE
YIELD AND STATE TAX RATE* EQUIVALENT YIELD
----- ------------------- ----------------
<S> <C> <C> <C>
New Jersey Intermediate
Municipal Bond Fund
Class A Shares............. 4.03% 43.5% 7.13%
Class C Shares............. N/A N/A N/A
Class R Shares............. N/A N/A N/A
Connecticut Municipal Bond
Fund
Class A Shares............. 4.64% 42.5% 8.07%
Class C Shares............. 4.30% 42.5% 7.48%
Class R Shares............. N/A N/A N/A
</TABLE>
- --------
* The combined tax rates used in these tables 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.
S-46
<PAGE>
For additional information concerning taxable equivalent yields, see the
Taxable Equivalent Yields tables in the Prospectus.
The Funds may from time to time in their advertising and sales materials
report a quotation of their 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 differ from yield because a Fund may be paying out more than
it is earning and 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 the period quoted, based on the maximum public
offering price then in effect for the Funds, and assuming the imposition of the
maximum sales charge for Class A Shares of 4.20%, were as follows:
<TABLE>
<CAPTION>
JULY 31, 1996
-----------------------
DISTRIBUTION RATES
-----------------------
CLASS A CLASS C CLASS R
------- ------- -------
<S> <C> <C> <C>
New Jersey Municipal Bond Fund.................... 4.77% 4.22% 5.21%
<CAPTION>
AUGUST 31, 1996
-----------------------
DISTRIBUTION RATES
-----------------------
CLASS A CLASS C CLASS R
------- ------- -------
<S> <C> <C> <C>
New York Municipal Bond Fund...................... 5.10% 4.56% 5.60%
New York Insured Municipal Bond Fund.............. 4.79% 4.24% 5.23%
California Municipal Bond Fund ................... 5.00% 4.46% 5.49%
California Insured Municipal Bond Fund............ 4.82% 4.26% 5.27%
Massachusetts Municipal Bond Fund................. 4.94% 4.44% 5.42%
Massachusetts Insured Municipal Bond Fund......... 4.82% 4.29% 5.27%
<CAPTION>
NOVEMBER 30, 1996
-----------------------
DISTRIBUTION RATES
-----------------------
CLASS A CLASS C CLASS R
------- ------- -------
<S> <C> <C> <C>
New Jersey Intermediate Bond Fund................. 4.65% N/A N/A
Connecticut Municipal Bond Fund................... 4.98% 4.67% N/A
</TABLE>
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.
Total returns for the oldest class of each fund reflect actual performance
for all periods. For other classes existing prior to February 1, 1997, total
returns reflect actual performance for periods since class inception, and the
oldest class's performance for periods prior to inception, adjusted for the
differences in sales charges and fees between the classes. For classes created
on February 1, 1997, total returns reflect the oldest class's performance for
all periods, adjusted for the differences in sales charges and fees between the
classes.
S-47
<PAGE>
The inception dates for each class of the Funds' shares are as follows:
<TABLE>
<CAPTION>
INCEPTION DATES
------------------
<S> <C>
New Jersey Municipal Bond Fund
Class A Shares....................................... September 6, 1994
Class B Shares....................................... February 1, 1997
Class C Shares....................................... September 6, 1994
Class R Shares....................................... July 26, 1991
New York Municipal Bond Fund
Class A Shares....................................... September 6, 1994
Class B Shares....................................... February 1, 1997
Class C Shares....................................... September 6, 1994
Class R Shares....................................... December 10, 1986
New York Insured Municipal Bond Fund
Class A Shares....................................... September 6, 1994
Class B Shares....................................... February 1, 1997
Class C Shares....................................... September 6, 1994
Class R Shares....................................... December 10, 1986
California Municipal Bond Fund
Class A Shares....................................... September 6, 1994
Class B Shares....................................... February 1, 1997
Class C Shares....................................... September 6, 1994
Class R Shares....................................... July 1, 1986
California Insured Municipal Bond Fund
Class A Shares....................................... September 6, 1994
Class B Shares....................................... February 1, 1997
Class C Shares....................................... September 6, 1994
Class R Shares....................................... July 1, 1986
Massachusetts Municipal Bond Fund
Class A Shares....................................... September 6, 1994
Class B Shares....................................... February 1, 1997
Class C Shares....................................... September 6, 1994
Class R Shares....................................... December 10, 1986
Massachusetts Insured Municipal Bond Fund
Class A Shares....................................... September 6, 1994
Class B Shares....................................... February 1, 1997
Class C Shares....................................... September 6, 1994
Class R Shares....................................... December 10, 1986
New Jersey Intermediate Municipal Bond Fund
Class A Shares....................................... September 16, 1992
Class C Shares....................................... February 1, 1997
Class R Shares....................................... February 1, 1997
Connecticut Municipal Bond Fund
Class A Shares....................................... July 13, 1987
Class B Shares....................................... February 1, 1997
Class C Shares....................................... October 4, 1993
Class R Shares....................................... February 1, 1997
</TABLE>
The annual total return figures for the New Jersey Municipal Bond Fund,
including the effect of the maximum sales charge for Class A shares, and
applicable CDSC for Class B Shares, for the one-year period ended July 31, 1996
and for the period from inception through July 31, 1996, respectively, were:
<TABLE>
<CAPTION>
ANNUAL TOTAL RETURN
----------------------------
ONE YEAR FROM INCEPTION
ENDED THROUGH
JULY 31, 1996 JULY 31, 1996
------------- --------------
<S> <C> <C> <C>
New Jersey Municipal Bond Fund
Class A Shares......................... 1.23% 5.79%
Class B Shares......................... 1.01% 5.90%
Class C Shares......................... 4.87% 6.05%
Class R Shares......................... 6.01% 7.10%
</TABLE>
S-48
<PAGE>
The annual total return figures for the New York Municipal Bond Fund, the New
York Insured Municipal Bond Fund, the Massachusetts Municipal Bond Fund, and
the Massachusetts Insured Municipal Bond Fund, including the effect of the
maximum sales charge for Class A shares, and applicable CDSC for Class B
Shares, for the one-year and five-year periods ended August 31, 1996 and for
the period from inception through August 31, 1996, respectively, were as
follows:
<TABLE>
<CAPTION>
ANNUAL TOTAL RETURN
-------------------------------
ONE YEAR FIVE YEARS FROM INCEPTION
ENDED ENDED THROUGH
AUGUST 31, 1996 AUGUST 31, 1996 AUGUST 31, 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
New York Municipal Bond
Fund
Class A Shares........ 1.26% 6.42% 6.72%
Class B Shares........ 0.98% 6.50% 6.61%
Class C Shares........ 5.00% 6.65% 6.53%
Class R Shares........ 5.98% 7.67% 7.50%
New York Insured
Municipal Bond Fund
Class A Shares........ 0.78% 6.17% 6.34%
Class B Shares........ 0.46% 6.21% 6.22%
Class C Shares........ 4.33% 6.35% 6.14%
Class R Shares........ 5.45% 7.37% 7.09%
Massachusetts Municipal
Bond Fund
Class A Shares........ 1.10% 6.32% 5.85%
Class B Shares........ 0.69% 6.27% 5.68%
Class C Shares........ 4.68% 6.40% 5.57%
Class R Shares........ 5.69% 7.44% 6.56%
Massachusetts Insured
Municipal Bond Fund
Class A Shares........ 0.58% 6.00% 6.01%
Class B Shares........ 0.23% 6.02% 5.86%
Class C Shares........ 4.12% 6.11% 5.76%
Class R Shares........ 5.23% 7.19% 6.76%
</TABLE>
The annual total return figures for the California Municipal Bond Fund and
the California Insured Municipal Bond Fund, including the effect of the maximum
sales charge for Class A Shares, and applicable CDSC for Class B Shares, for
the one-year, five-year, and ten-year periods ended August 31, 1996, and for
the period from inception through August 31, 1996, respectively, were as
follows:
<TABLE>
<CAPTION>
ANNUAL TOTAL RETURN
-----------------------------------------------
ONE YEAR FIVE YEARS TEN YEARS FROM INCEPTION
ENDED ENDED ENDED THROUGH
AUGUST 31, 1996 AUGUST 31, 1996 AUGUST 31, 1996 AUGUST 31, 1996
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
California Municipal
Bond Fund
Class A Shares........ 1.80% 5.62% 6.42% 6.63%
Class B Shares........ 1.64% 5.70% 6.27% 6.49%
Class C Shares........ 5.47% 5.79% 6.23% 6.44%
Class R Shares........ 6.65% 6.86% 7.18% 7.38%
California Insured
Municipal Bond Fund
Class A Shares........ 1.73% 6.11% 6.37% 6.52%
Class B Shares........ 1.44% 6.09% 6.22% 6.37%
Class C Shares........ 5.41% 6.12% 6.10% 6.23%
Class R Shares........ 6.45% 7.26% 7.08% 7.22%
</TABLE>
S-49
<PAGE>
The annual total return figures for the New Jersey Intermediate Bond Fund,
including the effect of the maximum sales charge for Class A shares, for the
one-year period ended November 30, 1996 and for the period from inception
through November 30, 1996; and for the Connecticut Municipal Bond Fund,
including the effect of the maximum sales charge for Class A Shares, and
applicable CDSC for Class B Shares, for the one-year and five-year periods
ended November 30, 1996, and for the period since inception through November
30, 1996, respectively, were as follows:
<TABLE>
<CAPTION>
ANNUAL TOTAL RETURN
-----------------------------------------------------
ONE YEAR FIVE YEARS FROM INCEPTION
ENDED ENDED THROUGH
NOVEMBER 30, 1996 NOVEMBER 30, 1996 NOVEMBER 30, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
New Jersey Intermediate
Municipal Bond Fund
Class A Shares........ 1.19% N/A 5.94%
Class C Shares........ 3.96% N/A 6.34%
Class R Shares........ 4.32% N/A 6.72%
Connecticut Municipal
Bond Fund
Class A Shares........ 1.31% 6.50% 7.01%
Class B Shares........ 1.18% 6.68% 7.00%
Class C Shares........ 5.18% 6.80% 6.89%
Class R Shares........ 5.76% 7.42% 7.50%
</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 for the New Jersey Municipal Bond Fund,
including the effect of the maximum sales charge for the Class A Shares, and
applicable CDSC for Class B Shares, for the one-year period ended July 31,
1996, and for the period since inception through July 31, 1996, respectively,
using the performance of the oldest class for periods prior to the inception of
the newer classes, as described above were as follows:
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN
-----------------------
FROM
ONE YEAR INCEPTION
ENDED THROUGH
JULY 31, JULY 31,
1996 1996
-------- ---------
<S> <C> <C>
New Jersey Municipal Bond Fund
Class A Shares............................. 1.23% 28.28%
Class B Shares............................. 1.01% 28.86%
Class C Shares............................. 4.87% 29.66%
Class R Shares............................. 6.01% 35.44%
</TABLE>
S-50
<PAGE>
The cumulative total return figures for the New York Municipal Bond Fund, the
New York Insured Municipal Bond Fund, the Massachusetts Municipal Bond Fund,
and the Massachusetts Insured Municipal Bond Fund, including the effect of the
maximum sales charge for the Class A Shares, and applicable CDSC for Class B
Shares, for the one-year and five-year periods ended August 31, 1996, and for
the period since inception through August 31, 1996, using the performance of
the oldest class for periods prior to the inception of the newer classes, as
described above, respectively, were as follows:
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN
------------------------------------
ONE YEAR FIVE YEARS FROM
ENDED ENDED INCEPTION
AUGUST 31, AUGUST 31, AUGUST 31,
1996 1996 1996
---------- ---------- ----------
<S> <C> <C> <C> <C>
New York Municipal Bond Fund
Class A Shares................... 1.26% 36.50% 87.81%
Class B Shares................... 0.98% 37.02% 85.98%
Class C Shares................... 5.00% 37.99% 84.67%
Class R Shares................... 5.98% 44.72% 101.51%
New York Insured Municipal Bond
Fund
Class A Shares................... 0.78% 34.94% 81.52%
Class B Shares................... 0.46% 35.14% 79.43%
Class C Shares................... 4.33% 36.04% 78.09%
Class R Shares................... 5.45% 42.73% 94.32%
Massachusetts Municipal Bond Fund
Class A Shares................... 1.10% 35.86% 73.54%
Class B Shares................... 0.69% 35.56% 70.81%
Class C Shares................... 4.68% 36.36% 69.04%
Class R Shares................... 5.69% 43.20% 85.17%
Massachusetts Insured Municipal
Bond Fund
Class A Shares................... 0.58% 33.83% 76.11%
Class B Shares................... 0.23% 33.95% 73.66%
Class C Shares................... 4.12% 34.51% 72.12%
Class R Shares................... 5.23% 41.50% 88.45%
</TABLE>
The cumulative total return figures for the California Municipal Bond Fund
and the California Insured Municipal Bond Fund, including the effect of the
maximum sales charge for the Class A Shares and applicable CDSC for Class B
Shares, for the one-year, five-year, and ten-year periods ended August 31,
1996, respectively, and for the period since inception through August 31, 1996
using the performance of the oldest class for periods prior to the inception of
the newer classes, as described above, were as follows:
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN
-------------------------------------------
FROM
ONE YEAR FIVE YEARS TEN YEARS INCEPTION
ENDED ENDED ENDED THROUGH
AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31,
1996 1996 1996 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
California Municipal Bond
Fund
Class A Shares ........... 1.80% 31.44% 86.28% 92.15%
Class B Shares............ 1.64% 31.97% 83.67% 89.47%
Class C Shares............ 5.47% 32.49% 83.05% 88.59%
Class R Shares............ 6.65% 39.39% 100.00% 106.39%
California Insured Municipal
Bond Fund
Class A Shares ........... 1.73% 34.55% 85.46% 90.01%
Class B Shares............ 1.44% 34.44% 82.88% 87.37%
Class C Shares............ 5.41% 34.61% 80.74% 84.95%
Class R Shares............ 6.45% 42.00% 98.18% 103.13%
</TABLE>
S-51
<PAGE>
The cumulative total return figures for the New Jersey Intermediate Municipal
Bond Fund and the Connecticut Municipal Bond Fund, including the effect of the
maximum sales charge for the Class A Shares, and applicable CDSC for Class B
Shares, for the one-year and five-year periods (as applicable) ended November
30, 1996, and for the period since inception through November 30, 1996,
respectively, using the performance of the oldest class for periods prior to
the inception of the newer classes, as described above, were as follows:
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN
--------------------------------------
FROM
ONE YEAR FIVE YEARS INCEPTION
ENDED ENDED THROUGH
NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
1996 1996 1996
------------ ------------ ------------
<S> <C> <C> <C>
New Jersey Intermediate
Municipal Bond Fund
Class A Shares................ 1.19% N/A 27.49%
Class C Shares................ 3.96% N/A 29.50%
Class R Shares................ 4.32% N/A 31.43%
Connecticut Municipal Bond Fund
Class A Shares................ 1.31% 37.04% 88.79%
Class B Shares................ 1.18% 38.19% 88.63%
Class C Shares................ 5.18% 38.92% 86.81%
Class R Shares................ 5.76% 43.05% 97.07%
</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 47.0% maximum combined marginal federal and state tax rate for
1997, the annual taxable equivalent total return for the Massachusetts
Municipal Bond Fund's shares for the five-year period ended August 31, 1996
with respect to the Class R shares was 12.65%.
Class A Shares of the Funds are sold at net asset value plus a current
maximum sales charge of 4.20% 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.
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.
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
S-52
<PAGE>
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 calculates municipal bond fund averages based on average
maturity and credit quality. Morningstar rates mutual funds by overall risk-
adjusted performance, investment objectives, and assets. 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.
ADDITIONAL INFORMATION ON THE PURCHASE AND
REDEMPTION OF FUND SHARES
As described in the Prospectus, the Funds provide 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.
REDUCTION OR ELIMINATION OF UP-FRONT SALES CHARGE ON CLASS A SHARES
Rights of Accumulation. You may qualify for a reduced sales charge on a
purchase of Class A Shares of any Fund if the amount of your purchase, when
added to the value that day of all of your prior purchases of shares of any
Fund or of another Nuveen Mutual Fund, or units of a Nuveen unit trust, on
which an up-front sales charge or ongoing distribution fee is imposed, or is
normally imposed, falls within the amounts stated in the Class A Sales Charges
and Commissions table in "How to Select a Purchase Option" in the Prospectus.
You or your financial adviser must notify Nuveen or the Fund's transfer agent
of any cumulative discount whenever you plan to purchase Class A Shares of a
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 of any Fund 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 in the Class A Sales Charges and Commissions table in "How to
Select a Purchase Option" in the Prospectus. 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 the Fund's transfer agent
a written Letter of Intent in a form acceptable to Nuveen. A Letter of Intent
states that you intend, but are not obligated, to purchase over the next 13
months 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 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 Unit Trust or otherwise.
S-53
<PAGE>
By establishing a Letter of Intent, you agree that your first purchase of
Class A Shares of a Fund 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 which 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 the Fund's transfer agent
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 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 any 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
include Fund sales publications in mailings to members and 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 a Fund will be reinvested in additional Class A Shares
of the same 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, which the group
administrator may obtain from the group's financial adviser, by calling Nuveen
toll-free (800) 621-7227.
Reinvestment of Redemption Proceeds from Unaffiliated 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 a Fund 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 on a periodic fee, asset-based fee or no transaction
fee basis through a broker-dealer sponsored mutual fund purchase program;
. clients of investment advisers, financial planners or other financial
intermediaries that charge periodic or asset-based fees for their
services.
Holders of Class C Shares acquired on or before January 31, 1997 can convert
those shares to Class A Shares of the same fund at the shareholder's
affirmative request six years after the date of purchase. Holders of Class C
Shares must submit their request to the transfer agent no later than the last
business day of the 71st month following the month in
S-54
<PAGE>
which they purchased their shares. Holders of Class C Shares purchased after
that date will not have the option to convert those shares to Class A Shares.
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 Funds. You or your
financial adviser must notify Nuveen or the Fund's transfer agent whenever you
make a purchase of Class A Shares of any Fund that you wish to be covered under
these special sales charge waivers.
Class A Shares of any Fund may be issued at net asset value without a sales
charge in connection with the acquisition by a Fund of another investment
company. All purchases under the special sales charge waivers will be subject
to minimum purchase requirements as established by the Funds.
In determining the amount of your purchases of Class A Shares of any Fund
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, their children
and their grandchildren); 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
Funds at any time upon prior written notice to shareholders of the Funds.
For more information about the purchase of Class A Shares or reduced sales
charge programs, or to obtain the required application forms, call Nuveen toll-
free at (800) 621-7227.
REDUCTION OR ELIMINATION OF CONTINGENT DEFERRED SALES CHARGE
Class A Shares are normally redeemed at net asset value, without any
Contingent Deferred Sales Charge ("CDSC"). However, in the case of Class A
Shares purchased at net asset value on or after July 1, 1996 because the
purchase amount exceeded $1 million, where the Authorized Dealer did not waive
the sales commission, a CDSC of 1% is imposed on any redemption within 18
months of purchase. In the case of Class B Shares redeemed within six years of
purchase, a CDSC is imposed, beginning at 5% for redemptions within the first
year, declining to 4% for redemptions within years two and three, and declining
by 1% each year thereafter until disappearing after the sixth year. Class C
Shares are redeemed at net asset value, without any CDSC, except that a CDSC of
1% is imposed upon redemption of Class C Shares that are redeemed within 12
months of purchase.
In determining whether a CDSC is payable, a Fund will first redeem shares not
subject to any charge, or that represent an increase in the value of a Fund
account due to capital appreciation, and then in the reverse order in which the
shares were purchased, unless the shareholder specifies 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 Nuveen money market
fund. The 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 redeemed shares' cost or net asset value
at the time of the redemption and is deducted from the redemption proceeds.
Nuveen receives the amount of any CDSC shareholders pay. If Class A or Class C
shares subject to a CDSC are exchanged for shares of a Nuveen money market
fund, the CDSC would be imposed on the subsequent redemption of those money
market shares, and the period during which the shareholder holds the money
market fund shares would be counted in determining the remaining duration of
the CDSC. The Fund may elect not to so count the period during which the
shareholder held the money market fund shares, in which event the amount of any
applicable CDSC would be reduced in accordance with applicable SEC rules by the
amount of any 12b-1 plan payments to which those money market funds shares may
be subject.
The CDSC may be waived or reduced under the following six special
circumstances: 1) redemptions within one year following the death or
disability, as defined in Section 72(m)(7) of the Internal Revenue Code of
1986, as amended, of a shareholder; 2) in whole or in part for redemptions of
shares by shareholders with accounts in excess of specified breakpoints that
correspond to the breakpoints under which the up-front sales charge on Class A
Shares is reduced pursuant to Rule 22d-1 under the Act; 3) redemptions of
shares purchased under circumstances or by a category of investors for which
Class A Shares could be purchased at net asset value without a sales charge; 4)
in connection with the exercise of a reinstatement privilege whereby the
proceeds of a redemption of a Fund's shares subject to a sales charge are
reinvested in shares of certain Funds within a specified number of days; 5) in
connection with the exercise of a Fund's right to redeem all shares in an
account that does not maintain a certain minimum balance or that the applicable
board has determined may have material adverse consequences to the shareholders
of such Fund; and 6) redemptions made pursuant to a Fund's automatic withdrawal
plan, up to specified amounts. If a Fund waives or reduces the CDSC, such
waiver or reduction would be uniformly applied to all Fund shares in the
particular category. In waiving or reducing a CDSC, the Funds will comply with
the requirements of Rule 22d-1 of the Investment Company Act of 1940, as
amended.
GENERAL MATTERS
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.
S-55
<PAGE>
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.
In addition, you may exchange Class R Shares of any Fund for Class A Shares
of the same Fund without a sales charge if the current net asset value of those
Class R Shares is at least $3,000 or you already own Class A Shares of that
Fund.
Each Fund may suspend the right of redemption, or delay payment to redeeming
shareholders for more than seven days, when the New York Stock Exchange is
closed (not including customary weekend and holiday closings); when trading in
the markets a Fund normally uses is restricted, or the SEC determines that an
emergency exists so that trading of a Fund's portfolio securities or
determination of a Fund's net asset value is not reasonably practical; or the
SEC by order permits the suspension of the right of redemption or the delay in
payment to redeeming shareholders for more than seven days.
Shares will be registered in the name of the investor or the investor's
financial adviser. A change in registration or transfer of shares held in the
name of a financial adviser may only be made by an order in good form from the
financial adviser acting on the investor's behalf. Share certificates will only
be issued upon written request to the Funds' transfer agent. No share
certificates will be issued for fractional shares.
For more information on the procedure for purchasing shares of a Fund 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 the Funds
pursuant to a "best efforts" arrangement as provided by a distribution
agreement with the Nuveen Flagship Multistate Trust II, dated February 1, 1997
("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.
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, (or Flagship Financial, Inc. which Nuveen acquired on
January 1, 1997) 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 BY UNDERWRITING RETAINED BY UNDERWRITING RETAINED BY
COMMISSIONS NUVEEN COMMISSIONS NUVEEN COMMISSIONS NUVEEN
FUND ------------ ----------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
New Jersey Fund......... 241 16 255 35 527 76
<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
COMMISSIONS NUVEEN COMMISSIONS NUVEEN COMMISSIONS NUVEEN
FUND ------------ ----------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
New York Fund........... 272 33 428 64 989 146
New York Insured Fund... 450 71 850 126 3,018 411
California Fund......... 221 33 370 60 949 148
California Insured Fund. 357 56 517 93 1,421 209
Massachusetts Fund...... 96 12 170 20 430 52
Massachusetts Insured
Fund................... 113 14 147 24 435 66
</TABLE>
S-56
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
MAY 31, 1996 MAY 31, 1995 MAY 31, 1994
------------------------ ------------------------ ------------------------
AMOUNT OF AMOUNT AMOUNT OF AMOUNT AMOUNT OF AMOUNT
UNDERWRITING RETAINED BY UNDERWRITING RETAINED BY UNDERWRITING RETAINED BY
COMMISSIONS NUVEEN COMMISSIONS NUVEEN COMMISSIONS NUVEEN
FUND ------------ ----------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
New Jersey Intermediate
Fund................... 19 4 31 6 118 20
Connecticut Fund........ 349 47 447 60 1,033 138
</TABLE>
DISTRIBUTION AND SERVICE PLAN
The Funds have 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.
For the fiscal year ended January 31, 1996 with respect to the New Jersey
Municipal Bond Fund, the fiscal year ended February 29, 1996 with respect to
the New York Municipal Bond Fund and New York Insured Municipal Bond Fund, the
California Municipal Bond Fund, the California Insured Municipal Bond Fund, the
Massachusetts Municipal Bond Fund, and the Massachusetts Insured Municipal Bond
Fund, and the fiscal year ended May 31, 1996 with respect to the New Jersey
Intermediate Bond Fund, and the Connecticut Municipal Bond Fund, 100% of
service fees and distribution fees were paid out as compensation to Authorized
Dealers. For such periods, the service fee for the New York Municipal Bond
Fund, the New York Insured Municipal Bond Fund, the New Jersey Municipal Bond
Fund, the California Municipal Bond Fund, the California Insured Municipal Bond
Fund, the Massachusetts Municipal Bond Fund, and the Massachusetts Insured
Municipal Bond Fund was .25% for both Class A and Class C Shares and the
distribution fee was .75% for Class C Shares. For such periods, the service fee
for the New Jersey Intermediate Fund, and the Connecticut Municipal Bond Fund
Class C Shares was .20% and the distribution fee was .40% for the Class A
Shares and .75% for the Class C Shares.
<TABLE>
<CAPTION>
COMPENSATION PAID TO
AUTHORIZED DEALERS FOR
END OF FISCAL 1996
----------------------
<S> <C>
New York Municipal Bond Fund (2/29/96)
Class A............................................... $ 26,638
Class C............................................... $ 4,101
New York Insured Municipal Bond Fund (2/29/96)
Class A............................................... $ 42,326
Class C............................................... $ 8,893
New Jersey Municipal Bond Fund (1/31/96)
Class A............................................... $ 16,159
Class C............................................... $ 7,121
New Jersey Intermediate Municipal Bond Fund (5/31/96)
Class A............................................... $ 36,470
Class C............................................... N/A
California Municipal Bond Fund (2/29/96)
Class A............................................... $ 19,006
Class C............................................... $ 4,155
</TABLE>
S-57
<PAGE>
<TABLE>
<CAPTION>
COMPENSATION PAID TO
AUTHORIZED DEALERS FOR
END OF FISCAL 1996
----------------------
<S> <C>
California Insured Municipal Bond Fund (2/29/96)
Class A................................................ $ 25,512
Class C................................................ $ 6,916
Connecticut Municipal Bond Fund (5/31/96)
Class A................................................ $818,000
Class C................................................ $ 62,142
Massachusetts Municipal Bond Fund (2/29/96)
Class A................................................ $ 6,732
Class C................................................ $ 2,609
Massachusetts Insured Municipal Bond Fund (2/29/96)
Class A................................................ $ 8,932
Class C................................................ $ 5,438
</TABLE>
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 West Monroe Street,
Chicago Illinois 60603 has been selected as auditors for all of the Funds. In
addition to audit services, the auditors 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 for prior periods set forth under
"Financial Highlights" in the Prospectus have been audited by the auditors as
indicated in their reports with respect thereto, and are included in reliance
upon the authority of that firm in giving that report.
The custodian of the Funds' assets is The Chase Manhattan Bank, 770 Broadway,
New York, New York 10003. The custodian performs custodial, fund accounting,
portfolio accounting, shareholder, and transfer agency services.
FINANCIAL STATEMENTS
The audited financial statements for each Fund's most recent fiscal year
appear in the Fund's Annual Reports and the unaudited financial statements for
the most recent semi-annual period for each fund appear in the Fund's Semi-
Annual Reports; each is included herein by reference. The Annual Reports and
the Semi-annual Reports accompany this Statement of Additional Information.
S-58
<PAGE>
APPENDIX A
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 greater than in Aaa rated
Municipal Obligations. The Aaa and Aa rated Municipal Obligations comprise what
are generally known as "high grade bonds." Municipal Obligations that are rated
A by Moody's possess many favorable investment attributes and are considered
upper medium grade obligations. Factors giving security to principal and
interest of A rated Municipal Obligations are considered adequate, but elements
may be present, which suggest a susceptibility to impairment sometime in the
future. Municipal Obligations rated Baa by Moody's are considered medium grade
obligations (i.e., they are neither highly protected nor poorly secured). Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well. Moody's bond rating symbols may contain numerical
modifiers of a generic rating classification. The modifier 1 indicates that the
bond ranks at the high end of its category; the modifier 2 indicates a mid-
range ranking; and the modifier 3 indicates that the issue ranks in the lower
end of its general rating category.
The four highest ratings of S&P for Municipal Obligations are AAA, AA, A and
BBB. Municipal Obligations rated AAA have a strong capacity to pay principal
and interest. The rating of AA indicates that capacity to pay principal and
interest is very strong and such bonds differ from AAA issues only in small
degree. The category of A describes bonds which have a strong capacity to pay
principal and interest, although such bonds are somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions. The
BBB rating is the lowest "investment grade" security rating by S&P. Municipal
Obligations rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas such bonds normally exhibit adequate protection
parameters, adverse economic conditions are more likely to lead to a weakened
capacity to pay principal and interest for bonds in this category than for
bonds in the A category.
The four highest ratings of Fitch for Municipal Obligations are AAA, AA, A
and BBB. Municipal Obligations rated AAA are considered to be investment grade
and of the highest credit quality. The obligor has an exceptionally strong
ability to pay interest and repay principal, which is unlikely to be affected
by reasonably foreseeable events. 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 a Fund's
portfolio, but Nuveen Advisory will consider such an event in its determination
of whether the Fund should continue to hold such obligation.
A-1
<PAGE>
APPENDIX B
DESCRIPTION OF HEDGING TECHNIQUES
Set forth below is additional information regarding the various Fund's
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 Fund's
existing or anticipated holdings of long-term debt securities. When a Fund
purchases a financial future, it deposits in cash or securities an "initial
margin" of between 1% and 5% of the contract amount. Thereafter, the Fund's
account is either credited or debited on a daily basis in correlation with the
fluctuation in price of the underlying future or other requirements imposed by
the exchange in order to maintain an orderly market. The Fund must make
additional payments to cover debits to its account and has the right to
withdraw credits in excess of the liquidity, the Fund may close out its
position at any time prior to expiration of the financial future by taking an
opposite position. At closing a final determination of debits and credits is
made, additional cash is paid by or to the Fund to settle the final
determination and the Fund realizes a loss or gain depending on whether on a
net basis it made or received such payments.
The sale of financial futures is for the purpose of hedging a Fund's existing
or anticipated holdings of long-term debt securities. For example, if a Fund
owns long-term bonds and interest rates were expected to increase, it might
sell financial futures. If interest rates did increase, the value of long-term
bonds in the Fund's portfolio would decline, but the value of the Fund's
financial futures would be expected to increase at approximately the same rate
thereby keeping the net asset value of the Fund from declining as much as it
otherwise would have.
Among the risks associated with the use of financial futures by the Funds as
a hedging device, perhaps the most significant is the imperfect correlation
between movements in the price of the financial futures and movements in the
price of the debt securities which are the subject of the hedge.
Thus, if the price of the financial future moves less or more than the price
of the securities which are the subject of the hedge, the hedge will not be
fully effective. To compensate for this imperfect correlation, the Fund may
enter into financial futures in a greater dollar amount than the dollar amount
of the securities being hedged if the historical volatility of the prices of
such securities has been greater than the historical volatility of the
financial futures. Conversely, the Fund may enter into fewer financial futures
if the historical volatility of the price of the securities being hedged is
less than the historical volatility of the financial futures.
The market prices of financial futures may also be affected by factors other
than interest rates. One of these factors is the possibility that rapid changes
in the volume of closing transactions, whether due to volatile markets or
movements by speculators, would temporarily distort the normal relationship
between the markets in the financial future and the chosen debt securities. In
these circumstances as well as in periods of rapid and large price movements.
The Fund might find it difficult or impossible to close out a particular
transaction.
Options on Financial Futures. The Funds may also purchase put or call options
on financial futures which are traded on a U.S. Exchange or board of trade and
enter into closing transactions with respect to such options to terminate an
existing position. Currently, options can be purchased with respect to
financial futures on U.S. Treasury Bonds on The Chicago Board of Trade. The
purchase of put options on financial futures is analogous to the purchase of
put options by a Fund on its portfolio securities to hedge against the risk of
rising interest rates. As with options on debt securities, the holder of an
option may terminate his position by selling an option of the same Fund. There
is no guarantee that such closing transactions can be effected.
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
B-1
<PAGE>
which two parties agree to take or make delivery of an amount of cash--rather
than any security--equal to specified dollar amount times the difference
between the index value at the close of the last trading day of the contract
and the price at which the index future was originally written. Thus, an index
future is similar to traditional financial futures except that settlement is
made in cash.
Index Options. The Funds may also purchase put or call options on U.S.
Government or tax-exempt bond index futures and enter into closing transactions
with respect to such options to terminate an existing position. Options on
index futures are similar to options on debt instruments except that an option
on an index future gives the purchaser the right, in return for the premium
paid, to assume a position in an index contract rather than an underlying
security at a specified exercise price at any time during the period of the
option. Upon exercise of the option, the delivery of the futures position by
the writer of the option to the holder of the option will be accompanied by
delivery of the accumulated balance of the writer's futures margin account
which represents the amount by which the market price of the index futures
contract, at exercise, is less than the exercise price of the option on the
index future.
Bond index futures and options transactions would be subject to risks similar
to transactions in financial futures and options thereon as described above. No
series will enter into transactions in index or financial futures or related
options unless and until, in the Adviser's opinion, the market for such
instruments has developed sufficiently.
REPURCHASE AGREEMENTS
A Fund may invest temporarily up to 5% of its assets in repurchase
agreements, which are agreements pursuant to which securities are acquired by
the Fund 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 Fund
is authorized to invest. Repurchase agreements may be characterized as loans
secured by the underlying securities. The Fund 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 Adviser will monitor
the continued creditworthiness of Qualified Institutions, subject to the
oversight of the Fund's 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 Fund 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
Fund's ability to dispose of the underlying securities may be restricted.
Finally, it is possible that the Fund 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 Fund 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 Fund to keep all its assets earning interest while retaining
"overnight" flexibility in pursuit of investments of a longer-term nature.
B-2
