<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OR ABOUT MAY 27, 1998
REGISTRATION NOS. 333-
811-07755
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-14
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
Pre-Effective Amendment
No. [ ]
Post-Effective Amendment
No. [ ]
NUVEEN FLAGSHIP MULTISTATE TRUST II
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
333 West Wacker Drive
Chicago, Illinois 60606
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (312) 917-7700
Copy to:
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GIFFORD R. ZIMMERMAN DAVID A. STURMS
JOHN NUVEEN & CO. INCORPORATED VEDDER, PRICE, KAUFMAN & KAMMHOLZ
333 WEST WACKER DRIVE 222 NORTH LASALLE STREET
CHICAGO, ILLINOIS 60606 CHICAGO, ILLINOIS 60601
(NAME AND ADDRESS OF AGENT FOR SERVICE)
</TABLE>
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
this Registration Statement becomes effective.
----------------
It is proposed that this filing will become effective on June 26, 1998
pursuant to Rule 488.
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<PAGE> 2
NUVEEN FLAGSHIP MULTISTATE TRUST II
CROSS-REFERENCE SHEET
(AS REQUIRED BY RULE 481(A))
PART A INFORMATION REQUIRED IN THE PROSPECTUS/PROXY STATEMENT
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FORM N-14
ITEM NO. PROSPECTUS/PROXY
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Item 1. Beginning of Registration Statement and
Outside Front Cover Page of
Prospectus/Proxy Statement.............. Outside front cover page of Prospectus/Proxy
Statement
Item 2. Beginning and Outside Back Cover Page of
Prospectus/Proxy Statement.............. Outside back cover page of Prospectus/Proxy Statement
Item 3. Fee Table, Synopsis Information and Risk
Factors................................. Summary; Risk Factors
Item 4. Information about the Transaction....... Summary; The Proposed Reorganization
Item 5. Information about the Registrant........ Outside front cover page of Prospectus/Proxy
Statement; Summary; The Proposed Reorganization;
Other Information; Exhibit A; Prospectus and
Statement of Additional Information of the New Jersey
Fund (incorporated by reference)
Item 6. Information about the Company Being
Acquired................................ Outside front cover page of Prospectus/Proxy
Statement; Summary; Exhibit A; Prospectus and
Statement of Additional Information of the New Jersey
Intermediate Fund (incorporated by reference)
Item 7. Voting Information...................... Other Information; Voting Information and
Requirements
Item 8. Interest of Certain Persons and
Experts................................. Summary; The Proposed Reorganization
Item 9. Additional Information Required for
Reoffering by Persons Deemed to be
Underwriters............................ Not applicable
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PART B INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
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Item 10. Cover Page.............................. Cover Page
Item 11. Table of Contents....................... Table of Contents
Item 12. Additional Information about the
Registrant.............................. Additional Information about the New Jersey Fund;
Incorporation of Documents by Reference
Item 13. Additional Information about the Company
Being Acquired.......................... Additional Information about the New Jersey
Intermediate Fund; Incorporation of Documents by
Reference
Item 14. Financial Statements.................... Financial Statements; Incorporation of Documents by
Reference
</TABLE>
PART C OTHER INFORMATION
Items 15-17. Information required to be included in Part C is set forth under
the appropriate item, so numbered, in Part C of this Registration
Statement.
- ---------------
* References are to captions within the part of the registration statement to
which the particular item relates except as otherwise indicated.
<PAGE> 3
IMPORTANT INFORMATION FOR
NUVEEN FLAGSHIP NEW JERSEY INTERMEDIATE MUNICIPAL BOND
Your Nuveen Flagship Fund will host a Special Meeting of Shareholders on
Thursday, August 13, 1998, at our headquarters in Chicago, Illinois. The purpose
is to vote on an important proposal affecting your fund.
The first few pages of this booklet summarize Nuveen's proposal and explain the
proxy process -- including how to cast your votes. Before you vote, please read
the full text of the proxy statement for a complete understanding of the
proposal.
Q. WHAT ARE SHAREHOLDERS BEING ASKED TO VOTE ON AT THE UPCOMING SPECIAL
SHAREHOLDER MEETING ON AUGUST 13?
A. The Board of Trustees for the Nuveen Flagship New Jersey Intermediate
Municipal Bond Fund (the "New Jersey Intermediate Fund") has called a Special
Shareholder Meeting for August 13, 1998 at which you will be asked to vote on
a reorganization (the "Reorganization") of your fund into the Nuveen Flagship
New Jersey Municipal Bond Fund (the "New Jersey Fund").
Q. ARE THERE ANY DIFFERENCES BETWEEN THE FUNDS?
A. The New Jersey Fund is substantially the same as the New Jersey Intermediate
Fund in its philosophy, investment objectives and policies and day-to-day
portfolio management except that the New Jersey Intermediate Fund maintains a
weighted average portfolio maturity between 5 and 10 years while the New
Jersey Fund maintains a weighted average portfolio maturity between 15 and 30
years. In evaluating the Reorganization, the New Jersey Intermediate Fund
shareholders should consider the impact of investing in a long-term municipal
bond fund.
Q. WHAT ADVANTAGES WILL THIS PRODUCE FOR FUND SHAREHOLDERS?
A. We expect the proposed Reorganization to (i) lower gross operating expenses
as a percentage of net assets due to the New Jersey Fund's larger net assets
and greater economies of scale; (ii) improve portfolio diversification; (iii)
lower portfolio transaction costs; and (iv) retain the exemption of dividends
from the New Jersey state personal income tax. The Board believes that these
potential benefits, together with the potentially higher distributions from
the New Jersey Fund, should offset the risks associated with investments in a
long term bond fund.
Q. HAS THE FUND'S BOARD OF TRUSTEES APPROVED THE PROPOSAL?
A. The Board of Trustees of the New Jersey Intermediate Fund unanimously agreed
that this Reorganization is in your best interests and recommends that you
vote in favor of it.
Q. WHAT IS THE TIMETABLE FOR THE REORGANIZATION?
A. Effective May 8, 1998, the New Jersey Intermediate Fund was closed to new
investors; existing investors, however, may continue to make additional
purchases and reinvest dividends. If approved by shareholders on August 13,
1998, the Reorganization is expected to take effect on August 21, 1998.
Q. WILL I RECEIVE NEW SHARES IN EXCHANGE FOR MY CURRENT SHARES?
A. Yes. Upon approval and completion of the Reorganization, shareholders of the
New Jersey Intermediate Fund will exchange their shares for shares of the New
Jersey Fund based upon a specified exchange ratio determined by the ratio of
the respective net asset values of the funds. You will receive New Jersey
Fund shares whose aggregate value at the time of issuance will equal the
aggregate value of your New Jersey Intermediate Fund shares on that date.
<PAGE> 4
Q. IF I OWN SHARES IN CERTIFICATE FORM, WILL I NEED TO EXCHANGE THEM FOR
CERTIFICATES OF MY NEW FUND?
A. Certificates for New Jersey Fund shares will not be issued automatically as
part of the Reorganization, although we will send you certificates upon
request. If you currently own New Jersey Intermediate Fund shares in
certificate form, you will need to return these certificates to Nuveen in
order to receive new certificates for your New Jersey Fund shares.
If you prefer, however, you may exchange your certificates for book entry
shares. These shares are held in a convenient computerized system that
enables shareholders to receive a complete and accurate record of their
holdings without having to worry about the safekeeping of certificates or the
expense involved with replacing a lost or stolen certificate. Just complete
the appropriate section of the Letter of Transmittal requesting book entry
shares. Regardless of the way you choose to hold your shares after the
Reorganization, certificates should be returned to the fund's transfer agent
by certified mail as soon as possible.
Q. WILL I HAVE TO PAY ANY FEES OR EXPENSES IN CONNECTION WITH THE
REORGANIZATION?
A. No. All of the funds' expenses associated with the Reorganization will be
borne by the New Jersey Intermediate Fund. However, since Nuveen currently
reimburses any additional operating expenses for the New Jersey Intermediate
Fund, Nuveen will effectively bear the full cost of the Reorganization.
Q. HOW DO MANAGEMENT FEES AND OTHER FUND OPERATING EXPENSES COMPARE BETWEEN THE
TWO FUNDS?
A. Upon approval and completion of the proposed Reorganization, New Jersey
Intermediate Fund shareholders will benefit from lower gross fund operating
expenses (before expense waivers/reimbursements) as a percentage of net
assets, reflecting the larger net assets and greater economies of scale of
the New Jersey Fund. Net fund operating expenses (after expense
waivers/reimbursements) of the New Jersey Fund are also lower than those of
the New Jersey Intermediate Fund as a percentage of net assets. For both the
New Jersey Fund and the New Jersey Intermediate Fund, Nuveen has agreed to
voluntarily waive some or all of its fees or reimburse certain expenses. The
waivers/reimbursements for the New Jersey Fund are subject to change in the
future and there can be no assurance that Nuveen will continue the
waivers/reimbursements for the New Jersey Intermediate Fund if the
Reorganization is not approved.
Q. WILL THIS REORGANIZATION CREATE A TAXABLE EVENT FOR ME?
A. The Reorganization is intended to be done on a tax-free basis for federal
income tax purposes. Therefore, you will recognize no gain or loss for
federal income tax purposes as a result of the Reorganization. In addition,
the tax basis and holding period of the New Jersey Fund shares you receive
will be the same as the tax basis and holding period of your New Jersey
Intermediate Fund shares.
Q. CAN I EXCHANGE OR REDEEM MY NEW JERSEY INTERMEDIATE FUND SHARES BEFORE THE
REORGANIZATION TAKES PLACE?
A. Upon approval of the Reorganization, you may exchange your New Jersey
Intermediate Fund shares for shares of any other Nuveen Mutual Fund, or
redeem your shares, at any time. If you choose to do so, your request will be
treated as a normal exchange or redemption of shares (subject to any
applicable deferred sales charge) and will be a taxable transaction for
federal income tax purposes.
Q. HOW DO I VOTE MY SHARES?
A. You can vote your shares by completing and signing the enclosed proxy
card(s), and mailing them in the enclosed postage-paid envelope. If you need
any assistance, or have any questions regarding the proposals or how to vote
your shares, please call your financial adviser or Nuveen at (800) 621-7227
weekdays from 7:00 a.m. to 7:00 p.m. Central time.
Q. WILL NUVEEN CONTACT ME?
A. You may receive a call to verify that you received your proxy materials and
to answer any questions you may have about the proposal.
<PAGE> 5
NUVEEN LOGO
June 29, 1998
DEAR NUVEEN FUND SHAREHOLDER:
Enclosed is a proxy asking you to vote on the reorganization of your Fund into
the Nuveen Flagship New Jersey Municipal Bond Fund, a mutual fund that pursues a
similar investment objective. Subject to shareholder approval, you would become
a shareholder of the New Jersey Fund.
The enclosed Prospectus/Proxy Statement contains information you will need to
make an informed decision. For your convenience, we also have provided a brief
question and answer section, which we hope you will find useful as you review
your materials before voting. For more detailed information about the
reorganization, please refer to the Prospectus/Proxy Statement.
The proposal has been approved by the Trustees for your Fund, who recommend you
vote "FOR" the proposal. Please give this matter your prompt attention. We will
need to receive your proxy card before the shareholder meeting scheduled for
August 13, 1998. YOUR IMMEDIATE RESPONSE WILL HELP SAVE ON THE COSTS OF
ADDITIONAL SOLICITATIONS. We look forward to your participation, and we thank
you for your continued confidence in Nuveen.
PLEASE SIGN AND RETURN YOUR PROXY CARD IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
Sincerely,
Timothy R. Schwertfeger
Timothy R. Schwertfeger
Chairman of the Board
<PAGE> 6
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NOTICE OF SPECIAL MEETING 333 West Wacker Drive
OF SHAREHOLDERS Chicago, Illinois
AUGUST 13, 1998 60606
(800) 414-7447
</TABLE>
June 29, 1998
NUVEEN FLAGSHIP NEW JERSEY INTERMEDIATE MUNICIPAL BOND FUND
Notice is hereby given that a Joint Special Meeting of shareholders of the
Nuveen Flagship New Jersey Intermediate Municipal Bond Fund (the "New Jersey
Intermediate Fund" or a "Fund"), a series of the Nuveen Flagship Multistate
Trust II (the "Multistate Trust" or the "Trust"), a Massachusetts business
trust, will be held in the 31st floor conference room of John Nuveen & Co.
Incorporated, 333 West Wacker Drive, in Chicago on Thursday, August 13, 1998 at
10:00 a.m., Central Time (the "Special Meeting"), for the following purposes:
1. To approve an Agreement and Plan of Reorganization pursuant to which
the New Jersey Intermediate Fund would (i) transfer all of its assets
to the Nuveen Flagship New Jersey Municipal Bond Fund (the "New
Jersey Fund") in exchange solely for Class A, C and R shares of
beneficial interest of the New Jersey Fund and the New Jersey Fund's
assumption of the liabilities of the New Jersey Intermediate Fund,
(ii) distribute such shares of the New Jersey Fund to the holders of
shares of the New Jersey Intermediate Fund and (iii) be liquidated,
dissolved and terminated as a series of the Multistate Trust in
accordance with the Trust's Declaration of Trust.
2. To ratify the selection of Arthur Andersen LLP as independent
auditors for the fiscal year ending February 28, 1999.
3. To transact such other business as may properly come before the
Special Meeting.
Shareholders of record as of the close of business on June 16, 1998 are entitled
to notice of and to vote at the Special Meeting or any adjournment thereof.
IN ORDER TO AVOID DELAY AND ADDITIONAL EXPENSE, AND TO ASSURE THAT YOUR SHARES
ARE REPRESENTED, IF YOU DO NOT EXPECT TO BE PRESENT IN PERSON AT THE SPECIAL
MEETING, YOU ARE REQUESTED TO FILL IN, SIGN AND MAIL THE ENCLOSED PROXY AS
PROMPTLY AS POSSIBLE. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES.
Gifford R. Zimmerman
Vice President and Secretary
<PAGE> 7
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PROSPECTUS/
PROXY STATEMENT
</TABLE>
NUVEEN FLAGSHIP NEW JERSEY MUNICIPAL BOND FUND
RELATING TO THE ACQUISITION OF ASSETS AND LIABILITIES OF
NUVEEN FLAGSHIP NEW JERSEY INTERMEDIATE MUNICIPAL BOND FUND
This Prospectus/Proxy Statement is being furnished to shareholders of the Nuveen
Flagship New Jersey Intermediate Municipal Bond Fund (the "New Jersey
Intermediate Fund" or a "Fund"), a series of the Nuveen Flagship Multistate
Trust II (the "Multistate Trust" or the "Trust"), a Massachusetts business
trust, and relates to the special meeting of shareholders of the New Jersey
Intermediate Fund to be held in the 31st floor conference room of John Nuveen &
Co., Incorporated, 333 West Wacker Drive, in Chicago on Thursday, August 13,
1998 at 10:00 a.m., Central Time and at any and all adjournments thereof (the
"Special Meeting"). Shareholders of record as of the close of business on June
16, 1998 are entitled to vote at the Special Meeting or any adjournment thereof.
The primary purpose of the Special Meeting is to approve or disapprove the
proposed reorganization of the New Jersey Intermediate Fund into the Nuveen
Flagship New Jersey Municipal Bond Fund (the "New Jersey Fund," which may also
sometimes be referred to as a "Fund") (the "Reorganization"). The Reorganization
would result in shareholders of the New Jersey Intermediate Fund in effect
exchanging their Class A, C and R shares of the New Jersey Intermediate Fund for
corresponding Class A, C and R shares of the New Jersey Fund. The purpose of the
Reorganization is to permit the shareholders of the New Jersey Intermediate Fund
to (i) achieve certain economies of scale from the New Jersey Fund's larger net
asset size and the potentially lower operating expenses associated therewith,
and (ii) obtain greater portfolio diversity and potentially lower portfolio
transaction costs.
The New Jersey Fund is also a series of the Multistate Trust. The investment
objective of the New Jersey Fund is to provide 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 can be no
assurance that the New Jersey Fund will achieve its investment objective. The
address, principal executive office and telephone number of the Funds is 333
West Wacker Drive, Chicago, Illinois 60606, (312) 917-7700 or (800) 621-7227.
The enclosed proxy and this Prospectus/Proxy Statement are first being sent to
shareholders of the New Jersey Intermediate Fund on or about June 29, 1998.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE REGULATORS, NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE REGULATORS PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS/PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------------
This Prospectus/Proxy Statement sets forth concisely the information
shareholders of the New Jersey Intermediate Fund should know before voting on
the Reorganization (in effect, investing in Class A, C or R shares of the New
Jersey Fund) and constitutes an offering of Class A, C or R shares of beneficial
interest, par value $.01 per share, of the New Jersey Fund only. Please read it
carefully and retain it for future reference. A Statement of Additional
Information dated , 1998, relating to this Prospectus/Proxy
Statement (the "Reorganization SAI") has been filed with the Securities and
Exchange Commission (the "SEC") and is incorporated herein by reference. A
Prospectus (the "Funds' Prospectus") and Statement of Additional Information
containing additional information about the New Jersey Fund and the New Jersey
Intermediate Fund, each dated June 30, 1997, have been filed with the SEC and
are incorporated herein by reference. A copy of the Funds' Prospectus
accompanies this Prospectus/Proxy Statement. Copies of the foregoing may be
obtained without charge by calling or writing the Funds at the telephone number
or address shown above. If you wish to request the Reorganization SAI, please
ask for the "Reorganization SAI." IN ADDITION, THE FUNDS WILL FURNISH, WITHOUT
CHARGE, A COPY OF ITS MOST RECENT ANNUAL REPORT AND SUBSEQUENT SEMI-ANNUAL
REPORT TO A SHAREHOLDER UPON REQUEST. ANY SUCH REQUEST SHOULD BE DIRECTED TO THE
RESPECTIVE FUND BY CALLING (800) 621-7227 OR BY WRITING THE RESPECTIVE FUND AT
333 WEST WACKER DRIVE, CHICAGO, ILLINOIS 60606.
------------------------
No person has been authorized to give any information or make any representation
not contained in this Prospectus/Proxy Statement and, if so given or made, such
information or representation must not be relied upon as having been authorized.
This Prospectus/Proxy Statement does not constitute an offer to sell or a
solicitation of an offer to buy any securities in any jurisdiction in which, or
to any person to whom, it is unlawful to make such offer or solicitation.
------------------------
The Multistate Trust is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, and the Investment Company Act of
1940, as amended (the "1940 Act"), and in accordance therewith files reports and
other information with the SEC. Such reports, other information and proxy
statements filed by the Multistate Trust can be inspected and copied at the
public reference facilities maintained by the SEC at 450 Fifth Street, N.W.,
Washington, D.C.
<PAGE> 8
20549, and at its Regional Office at 500 West Madison Street, Chicago, Illinois.
Copies of such material can also be obtained from the SEC's Public Reference
Branch, Office of Consumer Affairs and Information Services, Washington, D.C.
20549, at prescribed rates. In addition, the SEC maintains a Web site
(http://www.sec.gov) that contains reports, other information and proxy
statements filed by the Trusts, such information is filed electronically with
the SEC through the SEC's Electronic Data Gathering, Analysis and Retrieval
system (EDGAR).
THE DATE OF THIS PROSPECTUS/PROXY STATEMENT IS , 1998.
<PAGE> 9
PROSPECTUS/
PROXY STATEMENT
NUVEEN FLAGSHIP NEW JERSEY MUNICIPAL BOND FUND
RELATING TO THE ACQUISITION OF ASSETS AND LIABILITIES OF
NUVEEN FLAGSHIP NEW JERSEY INTERMEDIATE MUNICIPAL BOND FUND
TABLE OF CONTENTS
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PAGE
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PROPOSAL 1: THE PROPOSED REORGANIZATION...... 1
A. SUMMARY................................... 1
The Reorganization....................... 1
Reasons for the Proposed
Reorganization......................... 1
Comparison of the New Jersey Fund with
the New Jersey Intermediate Fund....... 2
B. RISK FACTORS.............................. 9
Similarity of Risks...................... 9
Differences in Risks..................... 9
C. THE PROPOSED REORGANIZATION............... 10
Terms of the Agreement................... 10
Description of Securities to be Issued... 11
Continuation of Shareholder Accounts and
Plans; Share Certificates.............. 11
Certain Federal Income Tax
Consequences........................... 11
Expenses................................. 12
Legal Matters............................ 12
Financial Statements..................... 12
</TABLE>
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PAGE
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D. RECOMMENDATION OF THE BOARD............... 13
PROPOSAL 2: SELECTION OF INDEPENDENT
AUDITORS................................... 13
OTHER INFORMATION............................ 13
A. SHAREHOLDERS OF THE INTERMEDIATE FUND
AND THE NEW JERSEY INTERMEDIATE
FUND................................ 13
B. SHAREHOLDER PROPOSALS................. 13
VOTING INFORMATION AND REQUIREMENTS.......... 14
EXHIBITS
Management's Discussion of New Jersey
Fund and New Jersey Intermediate Fund
Performance............................ Exhibit A
Financial Highlights..................... Exhibit B
</TABLE>
<PAGE> 10
PROPOSAL 1. THE PROPOSED REORGANIZATION
A. SUMMARY
The following is a summary of, and is qualified by reference to, the more
complete information contained in this Prospectus/ Proxy Statement and the
information attached hereto or incorporated herein by reference (including the
Agreement and Plan of Reorganization). As discussed more fully below and
elsewhere in this Prospectus/Proxy Statement, the Board of Trustees of the
Multistate Trust (the "Board") believes the proposed Reorganization (as defined
herein) is in the best interests of shareholders of the New Jersey Intermediate
Fund and would not result in dilution of shareholders' interest. As a result of
the Reorganization, shareholders of the New Jersey Intermediate Fund would
acquire an interest in the New Jersey Fund.
Shareholders should read the entire Prospectus/Proxy Statement carefully
together with the Funds' Prospectus incorporated herein by reference and
accompanying this Prospectus/Proxy Statement. This Prospectus/Proxy Statement
constitutes an offering of Class A, C and R shares of the New Jersey Fund only.
THE REORGANIZATION
This Prospectus/Proxy Statement is being furnished to shareholders of the New
Jersey Intermediate Fund in connection with the proposed combination of the Fund
with and into the New Jersey Fund pursuant to the terms and conditions of the
Agreement and Plan of Reorganization dated April 25, 1998 between the New Jersey
Intermediate Fund and the New Jersey Fund (the "Agreement"). The Agreement
provides that the New Jersey Intermediate Fund would (i) transfer all of its
assets to the New Jersey Fund in exchange solely for Class A, C and R shares of
the New Jersey Fund and the New Jersey Fund's assumption of the liabilities of
the New Jersey Intermediate Fund, (ii) distribute to each shareholder of the New
Jersey Intermediate Fund shares of the respective class of shares of the New
Jersey Fund equal in value to their existing shares of the Fund as a
distribution in liquidation of the Fund and (iii) be liquidated, dissolved and
terminated as a series of the Multistate Trust in accordance with the Trust's
Declaration of Trust promptly following the Closing (as defined herein) (the
"Reorganization").
The Board of Trustees of the Multistate Trust has determined that the
Reorganization is in the best interests of the New Jersey Intermediate Fund and
that the interests of existing shareholders of the New Jersey Intermediate Fund
will not be diluted as a result of the Reorganization. The Board of the
Multistate Trust unanimously approved the Reorganization and the Agreement on
April 25, 1998.
The New Jersey Intermediate Fund will pay all of the Funds' costs associated
with the Reorganization. However, since the investment adviser currently waives
and/or reimburses certain operating expenses for the New Jersey Intermediate
Fund, Nuveen Advisory Corp. (the "Adviser") will effectively bear the full cost
of the Reorganization.
The Board is asking shareholders of the New Jersey Intermediate Fund to approve
the Reorganization at the Special Meeting to be held on August 13, 1998. If
shareholders of the New Jersey Intermediate Fund approve the Reorganization, it
is expected that the Closing of the Reorganization will be after the close of
business on August 21, 1998, but it may be at a different time as described
herein.
THE BOARD RECOMMENDS THAT YOU VOTE "FOR" THE REORGANIZATION. FOR THE NEW JERSEY
INTERMEDIATE FUND, APPROVAL OF THE REORGANIZATION REQUIRES THE FAVORABLE VOTE OF
THE HOLDERS OF A MAJORITY OF THE OUTSTANDING SHARES ENTITLED TO VOTE. SEE
"VOTING INFORMATION AND REQUIREMENTS" BELOW.
REASONS FOR THE PROPOSED REORGANIZATION
The Board believes that the proposed Reorganization would be in the best
interests of the New Jersey Intermediate Fund because it would permit the
shareholders of the Fund to (i) achieve certain economies of scale from the New
Jersey Fund's larger net asset size and the potentially lower operating expenses
associated therewith, and (ii) obtain greater portfolio diversity and
potentially lower portfolio transaction costs.
In determining whether to recommend approval of the Reorganization to
shareholders of the New Jersey Intermediate Fund, the Board considered a number
of factors, including, but not limited to: (i) the expenses and advisory fees
applicable to the New Jersey Intermediate Fund and the New Jersey Fund before
the Reorganization and the estimated expense ratios of the New Jersey Fund after
the Reorganization; (ii) the investment performance of the New Jersey
Intermediate Fund compared to the New Jersey Fund; (iii) the terms and
conditions of the Agreement and whether the Reorganization would result in
dilution of the New Jersey Intermediate Fund's shareholder interests; (iv) the
economies of scale potentially realized through the combination of the Funds;
(v) the compatibility of the Funds' investment objectives; (vi) the
compatibility of the Funds' service features available to shareholders,
including the retention of applicable holding periods and exchange privileges;
(vii) the costs estimated to be incurred by the respective Funds as a result of
the Reorganization; (viii) the future growth prospects of the New Jersey
Intermediate Fund; and (ix) the anticipated federal income tax consequences of
the Reorganization; and (x) the similarities in state tax treatment of the New
Jersey Intermediate Fund distributions compared with the New Jersey Fund.
In this regard, the Board reviewed information provided by the Adviser relating
to the anticipated impact on the shareholders of the New Jersey Intermediate
Fund as a result of the Reorganization. The Board considered the probability
that the
1
<PAGE> 11
increase in asset levels of the combined fund after the Reorganization would
result in the following potential benefits for shareholders of the New Jersey
Intermediate Fund, although there can, of course, be no assurances in this
regard:
A. Achievement of Economies of Scale and Reduced Per Share Expenses. Combining
the net assets of the New Jersey Intermediate Fund with the assets of the New
Jersey Fund should lead to reduced total operating expenses for shareholders
of the New Jersey Intermediate Fund, respectively, on a per share basis, by
allowing fixed and relatively fixed costs, such as accounting, legal and
printing expenses, to be spread over a larger asset base. Any reductions in
expenses on a per share basis should, in turn, increase portfolio net income
available for distributions to shareholders of the New Jersey Intermediate
Fund. For both the New Jersey Fund and the New Jersey Intermediate Fund, the
Adviser has agreed to voluntarily waive some or all of its fees or reimburse
certain expenses. The waivers/reimbursements for the New Jersey Fund are
subject to change in the future and there can be no assurance that the
Adviser will continue the waivers/reimbursements for the New Jersey
Intermediate Fund if the Reorganization is not approved.
B. Benefits to the Portfolio Management Process. The larger net asset size of
the New Jersey Fund generally permits it to purchase larger individual
portfolio investments that may result in reduced transaction costs or more
favorable pricing and provide the opportunity for greater portfolio
diversity. A larger more diverse fund may also be able to produce a more
stable and consistent dividend rate than a smaller, less diverse fund.
Based upon these and other factors, the Board unanimously determined that the
Reorganization is in the best interests of the New Jersey Intermediate Fund.
COMPARISON OF THE NEW JERSEY FUND WITH THE NEW JERSEY INTERMEDIATE FUND
INVESTMENT OBJECTIVES. The New Jersey Fund and the New Jersey Intermediate Fund
have similar investment objectives. The investment objective of the Funds is to
provide 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. Both Funds seek income exempt from the New Jersey gross income tax.
INVESTMENT POLICIES. The New Jersey Fund and the New Jersey Intermediate Fund
have similar investment policies. The Funds invest substantially all of their
assets (at least 80%) in municipal bonds that pay interest that is exempt for
regular federal, state, and in some cases, local income taxes. Both Funds
purchase only quality municipal bonds that either are 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 Adviser, except that the
Funds may not invest more than 20% of their net assets in unrated bonds. Bond
ratings are furnished by Standard & Poor's Corporation ("S&P") and Moody's
Investor Services ("Moody's"). According to published guidelines, securities
rated BBB by S&P are regarded by S&P as having an adequate capacity to pay
interest and repay principal. Whereas such securities normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely, in the opinion of S&P, to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher rated
categories. According to published guidelines, securities rated Baa by Moody's
are considered by Moody's as medium grade obligations. Such securities are, in
the opinion of Moody's, neither highly protected nor poorly secured. Interest
payments and principal security appear to Moody's to be adequate for the present
but certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. In the opinion of Moody's they lack
outstanding investment characteristics and in fact have speculative
characteristics as well.
In addition, the New Jersey Intermediate Fund and the New Jersey Fund have the
same policies with respect to diversification. Both Funds are non-diversified
funds. A non-diversified fund may invest a higher percentage of its assets in
relatively fewer issuers than a diversified fund.
The primary difference between the Funds is that the New Jersey Intermediate
Fund is an intermediate-term fund that under normal market conditions maintains
an overall weighted average portfolio maturity of 5 to 10 years while the New
Jersey Fund is a long-term fund that under normal market conditions maintains a
weighted average portfolio maturing of 15 to 30 years. The Board, however,
believes that the benefits to the New Jersey Intermediate Fund's shareholders,
including potentially lower operating costs and potentially higher
distributions, should offset any increased risks of investing in longer term
bonds. In evaluating the Reorganization, the New Jersey Intermediate Fund
shareholders should consider the impact of investing in a long-term fund. For a
description of the risks involved in investing in a long-term fund, please see
the section below entitled "Differences in Risks."
2
<PAGE> 12
Credit Quality. A comparison of the credit qualities of the respective
portfolios of the New Jersey Fund and the New Jersey Intermediate Fund, as of
April 30, 1998, is set forth in the table below.
<TABLE>
<CAPTION>
PORTFOLIO CREDIT QUALITY
- -------------------------------------------------------------------------------------------------------------------
NEW JERSEY
CREDIT RATING NEW JERSEY FUND INTERMEDIATE FUND PRO FORMA(1)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aaa/AAA 49.20% 41.35% 48.38%
Aa/AA 9.72% 21.87% 10.99%
A/A 14.71% 11.73% 14.40%
Baa/BBB 10.17% 20.18% 11.22%
Unrated 11.95% 4.87% 11.21%
Below Investment Grade 4.25% -- 3.80%
--------------- ----------------- ----------------
TOTAL 100.00% 100.00% 100.00%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Reflects the effect of the New Jersey Intermediate Fund Reorganization.
As of April 30, 1998, the New Jersey Intermediate Fund and New Jersey Fund were
invested in similarly-rated securities. Generally, on April 30, 1998, the
average portfolio credit quality was AA/Aa for both the New Jersey Intermediate
Fund and the New Jersey Fund.
Maturity and Duration. A comparison of the maturity and duration of the
respective portfolios of the New Jersey Fund and the New Jersey Intermediate
Fund as of April 30, 1998, is set forth in the table below.
<TABLE>
<CAPTION>
PORTFOLIO MATURITY INFORMATION
- -------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
FUND MATURITY EFFECTIVE MATURITY MODIFIED DURATION
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
New Jersey 15.42 9.35 6.46
New Jersey Intermediate 8.02 7.22 5.65
Pro-Forma(1) 14.65 9.13 6.38
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Reflects the effect of the New Jersey Intermediate Fund Reorganization.
Funds with longer average maturities and duration will generally be subject to
greater interest rate risk.
Performance Information. A comparison of the total returns for the New Jersey
Fund and the New Jersey Intermediate Fund for the periods ending April 30, 1998
is set forth in the table below.
<TABLE>
<CAPTION>
TOTAL RETURNS(1)
- -----------------------------------------------------------------------------------------------------------------------------
ANNUALIZED TOTAL RETURNS
CUMULATIVE ---------------------------------------------
FUND CLASS INCEPTION DATE YTD RETURN 1 YEAR 3 YEAR 5 YEAR INCEPTION
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
New Jersey A 9/6/94 (3.62)% 3.71% 5.63% 5.23% 6.25%
C 9/6/94 (0.69) 7.64 6.47 5.42 6.25
R 7/26/91 0.64 8.53 7.40 6.41 7.26
New Jersey Intermediate A 9/16/92 (2.73) 3.83 5.04 4.91 5.69
C 2/1/97 (0.92) 6.43 5.77 5.19 5.90
R 2/1/97 0.32 7.24 6.24 5.62 6.33
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------
(1) Class R share returns are actual for New Jersey and Class A share returns
are actual for New Jersey Intermediate. Class A and C share returns for New
Jersey and Class C and R share returns for New Jersey Intermediate are
actual for the period since class inception; returns prior to class
inception are Class R share returns for New Jersey and Class A share returns
for New Jersey Intermediate, adjusted for differences in sales charges and
expenses, which are primarily differences in distribution and service fees.
Class A shares have a 4.2% maximum up front sales charge for New Jersey and
3.00% for New Jersey Intermediate which are reflected in the return figures.
Class C shares have a 1% CDSC for redemptions within one year which is
reflected in the year-to-date return figures. Total returns assume
reinvestment of all dividends and distributions.
3
<PAGE> 13
The following table is a comparison of the yields of the respective portfolios
of the New Jersey Fund and the New Jersey Intermediate Fund as of April 30,
1998.
<TABLE>
<CAPTION>
SEC YIELD AND DISTRIBUTION INFORMATION(1)
- ---------------------------------------------------------------------------------------------------------------------------
SEC 30-DAY YIELD
--------------------------------------
DISTRIBUTION AFTER-TAX BEFORE WAIVERS/ AFTER WAIVERS/
FUND CLASS YIELD DISTRIBUTION YIELD REIMBURSEMENTS REIMBURSEMENTS
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
New Jersey A 4.94% 4.94% 4.16% 4.52%
C 4.65 4.65 3.79 4.17
R 5.38 5.38 4.55 4.93
New Jersey Intermediate A 4.67 4.67 3.17 3.78
C 4.28 4.28 2.71 3.34
R 5.04 5.04 3.47 4.09
Pro-Forma A 4.94 4.94 4.08 4.48
C 4.65 4.65 3.71 4.13
R 5.38 5.38 4.46 4.89
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Class A shares have a 4.2% maximum up-front sales charge for New Jersey and
a 3.0% maximum up-front sales charge for New Jersey Intermediate which are
reflected in the yield and distribution figures. Class C and R shares yield and
distribution figures are calculated on net asset value.
The total returns, yields and distribution rates are not necessarily indicative
of future results. The performance of an investment company is the result of
conditions in the securities markets, portfolio management and operating
expenses. Although information such as that shown above is useful in reviewing a
fund's performance and in providing some basis for comparison with other
investment alternatives, it should not be used for comparison with other
investments using different reinvestment assumptions or time periods. In the
absence of expense reimbursements for the New Jersey Fund and the New Jersey
Intermediate Fund, the Funds' total returns and yields would have been reduced.
Management's discussion of the New Jersey and New Jersey Intermediate Funds'
performance as of February 28, 1998 is attached hereto as Exhibit A.
Investment Adviser. The New Jersey Fund and the New Jersey Intermediate Fund are
managed by the Adviser. The Adviser is a wholly owned subsidiary of John Nuveen
& Co. Incorporated ("Nuveen"), the Funds' principal underwriter. In 1961, Nuveen
began sponsoring the Nuveen Tax-Exempt Unit Trust and since that time has issued
more than $37 billion in taxable and 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 $36 billion in securities under management
as of the date of the Prospectus/Proxy Statement. Over 1,000,000 individuals
have invested to date in Nuveen's funds and trusts. Founded in 1898, 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. The Adviser's principal office is located at 333 West
Wacker Drive, Chicago, Illinois 60606.
Advisory and Other Fees. The contractual advisory fees and total operating
expenses of the New Jersey Fund are the same as those of the New Jersey
Intermediate Fund. Pursuant to an investment management agreement between the
Adviser and the Multistate Trust, the New Jersey Fund and the New Jersey
Intermediate Fund pay the Adviser an annual management fee at the rates set
forth below:
<TABLE>
<CAPTION>
- ---------------------------------------------------
AVERAGE DAILY NET ASSET VALUE MANAGEMENT FEE
- ---------------------------------------------------
<S> <C>
For the first $125 million .5500 of 1%
For the next $125 million .5375 of 1%
For the next $250 million .5250 of 1%
For the next $500 million .5125 of 1%
For the next $1 billion .5000 of 1%
For assets over $2 billion .4750 of 1%
- ---------------------------------------------------
</TABLE>
For the fiscal year ended February 28, 1998 the New Jersey Fund paid the Adviser
$116,781, (after expense reimbursement) and would have paid $442,250 (assuming
no expense reimbursement). For the fiscal year ended February 28, 1998 the New
Jersey Intermediate Fund paid the Adviser $0 (after expense reimbursement) and
would have paid $43,869 (assuming no expense reimbursement). For a complete
description of the advisory services provided to the Funds, see the New Jersey
Fund and the New Jersey Intermediate Fund Summaries in the Funds' Prospectus and
the sections of the Funds' Prospectus and Statement of Additional Information
entitled "Fund Service Providers -- Investment Adviser" and "Investment Adviser
and Investment Management Agreement," respectively.
The advisory fees and other operating expenses of the New Jersey Intermediate
Fund are currently less than those of the New Jersey Fund but only because of
voluntary expense waivers or reimbursements from the Adviser. There can be no
assurance that such waivers or reimbursements will continue for the New Jersey
Intermediate Fund if the Reorganization is
4
<PAGE> 14
not completed. There also can be no assurance that the waivers or reimbursements
will continue for the New Jersey Fund if the Reorganization is completed.
The New Jersey Fund and the New Jersey Intermediate Fund have adopted
substantially the same distribution and service plans (the "Distribution and
Service Plans") pursuant to Rule 12b-1 under the 1940 Act. The Distribution and
Service Plans authorize 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. The plans
also authorize each Fund to pay Nuveen an annual 0.75% distribution fee on the
average daily net assets of Class B shares outstanding. The plans also authorize
each Fund to pay Nuveen an annual 0.55% distribution fee on the average daily
net assets of Class C shares outstanding. In order to help compensate Nuveen for
the sales commissions 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 Class C shares, Nuveen
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
distributor of the New Jersey Intermediate Fund's shares and the New Jersey
Fund's shares is Nuveen. For a complete description of these arrangements with
respect to the New Jersey Fund, see the sections of the New Jersey Fund and the
Funds' Prospectuses and Statements of Additional Information entitled "Fund
Service Providers -- The Distributor" and "Distribution and Service Plan,"
respectively.
The tables below set forth (i) the fees and expenses paid by the New Jersey Fund
and the New Jersey Intermediate Fund during the one-year period ended February
28, 1998 (on an annualized basis) and (ii) pro forma expenses for the combined
fund for Class A, C and R shares.
EXPENSE COMPARISON TABLE
CLASS A SHARES
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
NEW JERSEY
NEW JERSEY INTERMEDIATE
FUND FUND PRO FORMA(1)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchase of a Share (as a
percentage of Offering Price) 4.20%(3) 3.00%(3) 4.20%(3)
Contingent Deferred Sales Charge (CDSC) (as a percentage of
the lower of the original purchase price or redemption
proceeds) --(3) --(3) --(3)
ANNUAL FUND OPERATING EXPENSES (as a percentage of average
net assets)
Management Fees .55% .55% .55%
Rule 12b-1 Fees .20% .20% .20%
Other Expenses .26% .79% .25%
----- ----- -----
Total Fund Operating Expenses (before waivers and
reimbursements) 1.01% 1.54% 1.00%
Total Fund Operating Expenses (after waivers and
reimbursements) .60% .64% .55%
EXPENSE EXAMPLE OF TOTAL OPERATING EXPENSES ASSUMING
REDEMPTION AT THE END OF THE PERIOD (2)
One Year $ 48 $ 36 $ 47
Three Years $ 60 $ 50 $ 59
Five Years $ 74 $ 65 $ 71
Ten Years $114 $107 $108
- -----------------------------------------------------------------------------------------------------------
</TABLE>
Notes to Expense Comparison Table
(1) The Pro Forma column reflects expenses estimated to be paid on new shares
purchased from the combined fund subsequent to the Reorganization and
reflects the effect of the New Jersey Intermediate Fund Reorganization.
(2) Expense examples reflect what an investor would pay on a $1,000 investment,
assuming a 5% annual return and reinvestment of all dividends, based on
total fund operating expenses after waivers and reimbursements.
(3) 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.
5
<PAGE> 15
EXPENSE COMPARISON TABLE
CLASS C SHARES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
NEW JERSEY
NEW JERSEY INTERMEDIATE
FUND FUND PRO FORMA (1)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchase of a Share (as a
percentage of Offering Price) -- -- --
Contingent Deferred Sales Charge (CDSC) (as a percentage of
the lower of the original purchase price or redemption
proceeds) 1%(3) 1%(3) 1%(3)
ANNUAL FUND OPERATING EXPENSES (as a percentage of average
net assets)
Management Fees .55% .55% .55%
Rule 12b-1 Fees .75% .75% .75%
Other Expenses .26% .73% .25%
---------- ------------ -------------
Total Fund Operating Expenses (before waivers and
reimbursements) 1.56% 2.03% 1.55%
Total Fund Operating Expenses (after waivers and
reimbursements) 1.16% 1.19% 1.10%
EXPENSE EXAMPLE OF TOTAL OPERATING EXPENSES ASSUMING
REDEMPTION AT THE END OF THE PERIOD (2)
One Year $ 12 $ 12 $ 11
Three Years $ 37 $ 38 $ 35
Five Years $ 64 $ 65 $ 61
Ten Years $141 $144 $134
- --------------------------------------------------------------------------------------------------------
</TABLE>
Notes to Expense Comparison Table
(1) The Pro Forma column reflects expenses estimated to be paid on new shares
purchased from the combined fund subsequent to the Reorganization and
reflects the effect of the New Jersey Intermediate Fund Reorganization.
(2) Expense examples reflect what an investor would pay on a $1,000 investment,
assuming a 5% annual return and reinvestment of all dividends and
distributions, based on total fund operating expenses after waivers and
reimbursements.
(3) Imposed only on redemptions within 12 months of purchase.
EXPENSE COMPARISON TABLE
CLASS R SHARES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
NEW JERSEY
NEW JERSEY INTERMEDIATE
FUND FUND PRO FORMA (1)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchase of a Share (as a
percentage of Offering Price) -- -- --
Contingent Deferred Sales Charge (as a percentage of the
lower of the original purchase price or redemption
proceeds) -- -- --
ANNUAL FUND OPERATING EXPENSES (as a percentage of average
net assets)
Management Fees .55% .55% .55%
Rule 12b-1 Fees -- -- --
Other Expenses .26% .78% .25%
---------- ------------ -------------
Total Fund Operating Expenses (before waivers and
reimbursements) .81% 1.33% .80%
Total Fund Operating Expenses (after waivers and
reimbursements) .40% .46% .35%
EXPENSE EXAMPLE OF TOTAL OPERATING EXPENSES ASSUMING
REDEMPTION AT THE END OF THE PERIOD (2)
One Year $ 4 $ 5 $ 4
Three Years $13 $15 $11
Five Years $22 $26 $20
Ten Years $51 $58 $44
- --------------------------------------------------------------------------------------------------------
</TABLE>
Notes to Expense Comparison Table
(1) The Pro Forma column reflects expenses estimated to be paid on new shares
purchased from the combined fund subsequent to the Reorganization and
reflects the effect of the New Jersey Intermediate Fund Reorganization.
(2) Expense examples reflect what an investor would pay on a $1,000 investment,
assuming a 5% annual return and reinvestment of all dividends and
distributions, based on total fund operating expenses after waivers and
reimbursements.
Distribution, Purchase, Valuation, Redemption and Exchange of Shares. The New
Jersey Fund offers four classes of shares and the New Jersey Intermediate Fund
offers three classes of shares. The Class A shares of the New Jersey Fund and
the New Jersey Intermediate Fund are subject to an initial sales charge and a
0.20% annual service fee. The following Class A sales charges and commissions
apply to the New Jersey Fund and the New Jersey Intermediate Fund.
6
<PAGE> 16
NEW JERSEY
CLASS A SALES CHARGES AND COMMISSIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AUTHORIZED
DEALER
SALES CHARGE COMMISSION
---------------------------------- --------------
AS % OF PUBLIC AS % OF YOUR AS % OF PUBLIC
PURCHASE AMOUNT OFFERING PRICE NET 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>
NEW JERSEY INTERMEDIATE
CLASS A SALES CHARGES AND COMMISSIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AUTHORIZED
DEALER
SALES CHARGE COMMISSION
---------------------------------- --------------
AS % OF PUBLIC AS % OF YOUR AS % OF PUBLIC
PURCHASE AMOUNT OFFERING PRICE NET 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
calculated on the lower of your purchase price or redemption proceeds.
The initial sales charge applicable to Class A shares of the New Jersey Fund
will be waived for Class A shares acquired in the Reorganization. Any subsequent
purchases of Class A shares of the New Jersey Fund after the Reorganization will
be subject to the initial sales charge, excluding Class A shares purchased
through the dividend reinvestment plan.
The Class B shares of the New Jersey Fund do not incur a sales charge when they
are purchased, but generally are subject to a .20% annual service fee and a .75%
annual distribution fee. Class B shares are also subject to a contingent
deferred sales charge ("CDSC") if redeemed within six years after purchase. The
CDSC is calculated on the lower of the purchase price or redemption proceeds.
<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>
Class B shares of the New Jersey Fund convert automatically to Class A shares
eight years after purchase. Class B shares will convert only if the New Jersey
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.
The Class C shares of the New Jersey Fund and the New Jersey Intermediate Fund
do not incur a sales charge when purchased, but are subject to a .20% annual
service fee and a .55% annual distribution fee. Class C shares are also subject
to a CDSC of 1.00% if redeemed within the first year after purchase.
Class R shares of the New Jersey Fund and the New Jersey Intermediate Fund have
no sales charges or ongoing fees. For a complete description of the Class A, C
and R shares, see the sections of the Funds' Prospectus and Statement of
Additional Information entitled "Investing in the Funds -- How to Select a
Purchase Option" and "Additional Information on the Purchase and Redemption of
Fund Shares," respectively.
No contingent deferred sales charge will be imposed on Class C shares of the New
Jersey Intermediate Fund in connection with the Reorganization. The holding
period and conversion period for Class C shares of the New Jersey Fund received
in connection with the Reorganization will be measured from the earlier of the
time (i) the holder purchased such shares from the New Jersey Intermediate Fund
or (ii) the holder purchased such shares from any other Nuveen national or state
fund and subsequently exchanged them for shares of the New Jersey Intermediate
Fund.
Shares of the New Jersey Fund and the New Jersey Intermediate Fund may be
purchased through a financial adviser, by check, by electronic transfer, and by
exchange from certain other open-end mutual funds distributed by Nuveen. For a
complete description regarding purchase of shares and exchange of shares of the
New Jersey Fund and the New Jersey
7
<PAGE> 17
Intermediate Fund, see the sections of the Funds' Prospectus and Statement of
Additional Information entitled "Investing in the Funds" and "Additional
Information on the Purchase and Redemption of Fund Shares," respectively.
Shares of the New Jersey Fund and the New Jersey Intermediate Fund properly
presented for redemption may be redeemed or exchanged at the next determined net
asset value per share (subject to any applicable deferred sales charge). Shares
of either the New Jersey Fund or the New Jersey Intermediate Fund may be
redeemed or exchanged through a financial adviser by mail or by special
redemption privileges (telephone exchange, telephone redemption, by check or by
electronic transfer). If any shares of the New Jersey Fund or the New Jersey
Intermediate Fund were purchased less than 15 days prior to your request, the
Funds do not mail the redemption proceeds until the check for the purchase has
cleared, which can take up to 15 days. In addition, the New Jersey Fund and the
New Jersey Intermediate 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 New Jersey Fund and the
New Jersey Intermediate Fund Statements of Additional Information. In order to
limit excessive exchange activity and in other circumstances where the Adviser
believes doing so would be in the best interests of a Fund, the New Jersey Fund
and the New Jersey Intermediate Fund reserve the right to revise or terminate
the exchange privilege, limit the amount or number of exchanges, or reject any
exchange. Shareholders are notified in the event this happens to the extent
required by law.
No further purchases of the shares of the New Jersey Intermediate Fund may be
made after the date on which the shareholders of the New Jersey Intermediate
Fund approve the Reorganization, and the stock transfer books of the New Jersey
Intermediate Fund will be permanently closed as of the date of Closing. Only
redemption requests and transfer instructions received in proper form by the
close of business on the day prior to the date of Closing will be fulfilled by
the New Jersey Intermediate Fund. Redemption requests or transfer instructions
received by the New Jersey Intermediate Fund after that date will be treated by
the Fund as requests for the redemption or instructions for transfer of the
shares of the New Jersey Fund credited to the accounts of the shareholders of
the New Jersey Intermediate Fund. Redemption requests or transfer instructions
received by the New Jersey Intermediate Fund after the close of business on the
day prior to the date of Closing will be forwarded to the New Jersey Fund. For a
complete description of the redemption arrangements for the Funds, see the
sections of the New Jersey Fund and Funds' Prospectuses entitled "Investing in
the Funds -- How to Sell Fund Shares."
Capitalization. The following table sets forth the capitalization of the New
Jersey Fund and the New Jersey Intermediate Fund as of February 28, 1998, and
the pro forma capitalization of the combined fund as if the Reorganization had
occurred on that date. These numbers may differ at the time of Closing.
CAPITALIZATION TABLE AS OF FEBRUARY 28, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
NEW JERSEY NEW JERSEY
FUND INTERMEDIATE FUND Pro Forma(1)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSETS
Class A shares $35,781,610 $ 9,369,439 $45,106,408
Class B shares 2,981,475 -- 2,981,475
Class C shares 5,733,240 980,413 6,708,982
Class R shares 44,817,466 198,402 45,014,922
----------- ----------- -----------
Total $89,313,791 $10,548,254 $99,811,787
=========== =========== ===========
NET ASSET VALUE PER SHARE
Class A shares $ 10.61 $ 10.50 $ 10.61
Class B shares 10.61 -- 10.61
Class C shares 10.59 10.52 10.59
Class R shares 10.62 10.51 10.62
SHARES OUTSTANDING
Class A shares 3,372,763 892,572 4,251,632
Class B shares 280,980 -- 280,980
Class C shares 541,173 93,182 633,311
Class R shares 4,220,367 18,885 4,238,960
----------- ----------- -----------
Total 8,415,283 1,004,639 9,404,883
=========== =========== ===========
SHARES AUTHORIZED
Class A shares Unlimited Unlimited Unlimited
Class B shares Unlimited Unlimited Unlimited
Class C shares Unlimited Unlimited Unlimited
Class R shares Unlimited Unlimited Unlimited
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The pro forma figures reflect the effect of the New Jersey Intermediate Fund
Reorganization.
8
<PAGE> 18
B. RISK FACTORS
SIMILARITY OF RISKS
The investment objectives of the New Jersey Fund and the New Jersey Intermediate
Fund are substantially the same. The investment policies of the Funds are
substantially the same insofar as they may purchase only quality municipal bonds
that are either rated investment grade (AAA/Aaa to BBB/Baa) by independent
rating agencies at the time of purchase or are non-rated but judged to be
investment grade by the Adviser. If suitable municipal bonds from a specific
state are not available at attractive prices and yields, the Funds 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 also
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 may only purchase leases where the issuer has a strong incentive to
continue making appropriations until maturity. The New Jersey Fund and the New
Jersey Intermediate Fund also engage in certain common investment practices such
as the purchase and sale of securities on a "when-issued" and "delayed delivery"
basis. In addition, the Funds may periodically engage in hedging transactions as
described in the sections of the New Jersey Fund and New Jersey Intermediate
Fund Statements of Additional Information entitled "Investment Policies and
Investment Portfolio -- Hedging and Other Defensive Actions." To the extent that
the investment objectives and investment policies and practices are
substantially the same, the risks associated with an investment in the Funds are
substantially the same.
Both Funds are non-diversified funds. Non-diversified funds generally are more
susceptible to economic, political or regulatory events that adversely affect an
issuer in which such fund invests than a diversified fund. A diversified fund,
however, is less likely to benefit from economic, political or regulatory events
that beneficially affect issuers in which it invests because it generally
invests a smaller percentage of its assets in each issuer in which it invests.
The Funds invest at least 80% of their total assets in New Jersey municipal
securities. A fund, such as the Funds, that concentrates its investments in
issuers located in any one state generally is more susceptible to economic,
political or regulatory events that adversely affect the state in which such
company has concentrated its investments than a fund that does not concentrate
its investments in any one state. For a general description of the risks
involved in investing in New Jersey municipal bonds, see the sections of the
Funds' Statement and Additional Information entitled "Investment Policies and
Portfolio -- Factors Pertaining to New Jersey."
The New Jersey Fund and the New Jersey Intermediate Fund may also invest a
substantial portion of their assets in securities that are subject to the
alternative minimum tax. As with the New Jersey Intermediate Fund, the New
Jersey Fund may not be a suitable investment for shareholders subject to the
federal alternative minimum tax.
Investment in either the New Jersey Fund or the New Jersey Intermediate Fund may
not be appropriate for all investors. The Funds are not intended to be a
complete investment program, and investors should consider their long-term
investment goals and financial needs when making an investment decision with
respect to the Funds. An investment in either Fund is intended to be a long-term
investment and should not be used as a trading vehicle.
DIFFERENCES IN RISKS
The New Jersey Fund and the New Jersey Intermediate Fund engage in some
dissimilar investment practices. To the extent that the investment practices of
the Funds differ, the risks associated with an investment in the New Jersey Fund
are different from the risks associated with an investment in the New Jersey
Intermediate Fund. An investment in the New Jersey Fund may not be appropriate
for all New Jersey Intermediate Fund's shareholders. For a complete description
of the risks of an investment in the New Jersey Fund or the New Jersey
Intermediate Fund, see the sections in the Funds' Prospectus or the Funds'
Prospectus entitled "Fund Strategies."
Maturity and Duration. The New Jersey Intermediate Fund is an intermediate-term
fund and normally maintains a weighted average portfolio maturity of 5 to 10
years. The New Jersey Fund is a long-term fund and normally maintain a weighted
average portfolio maturity of 15 to 30 years. Both dollar-weighted average
maturity and duration reflect the sensitivity of a Fund to interest rate
fluctuations, whereby a Fund with a longer maturity and duration reacts more
strongly to interest rate changes than a Fund with a shorter maturity and
duration. The average dollar-weighted maturity of a Fund is the dollar-weighted
average of the stated maturities of all debt instruments held by the Fund.
Duration is the weighted present value of principal and interest payments
expressed in years and may more accurately measure a Fund's sensitivity to
incremental changes in interest rates than average maturity. For example, a Fund
with a duration of 5.0 years should have half the interest rate sensitivity of a
Fund with a duration of 10.0 years, because the Fund with the shorter duration
will receive payments (and can reinvest at prevailing interest rates) twice as
quickly. For a comparison of the Funds' average portfolio maturity and duration,
including pro-forma figures, see "Comparison of the New Jersey Fund with the New
Jersey Intermediate Fund -- Maturity and Duration" above.
9
<PAGE> 19
C. THE PROPOSED REORGANIZATION
The material features of the Agreement are summarized below. This summary does
not purport to be complete and is subject in all respects to the provisions of,
and is qualified in its entirety by reference to, the Agreement attached as
Appendix A to the Reorganization SAI, a copy of which may be obtained without
charge by calling the Funds at (800) 621-7227 and asking for the "Reorganization
SAI."
TERMS OF THE AGREEMENT
Pursuant to the Agreement, the New Jersey Fund series of the Multistate Trust
would acquire all of the assets and the liabilities of the New Jersey
Intermediate Fund series of the Multistate Trust on the date of the Closing in
consideration for Class A, C and R shares of the New Jersey Fund.
Subject to the New Jersey Intermediate Fund's shareholders approving the
Reorganization, the closing (the "Closing") will occur within 15 business days
after the later of the receipt of all necessary regulatory approvals and the
final adjournment of the Special Meeting or such later date as soon as
practicable thereafter as the New Jersey Fund and the New Jersey Intermediate
Fund may mutually agree.
On the date of the Closing, the New Jersey Intermediate Fund will transfer to
the New Jersey Fund all of its assets and liabilities. The New Jersey Fund will
in turn transfer to the New Jersey Intermediate Fund a number of its Class A, C
and R shares equal in value to the value of the net assets of the Fund,
transferred to the New Jersey Fund as of the date of the Closing, as determined
in accordance with the valuation method described in the New Jersey Fund's then
current prospectus. In order to minimize any potential for undesirable federal
income and excise tax consequences in connection with the Reorganization, the
New Jersey Fund and the New Jersey Intermediate Fund may individually distribute
on or before the Closing all or substantially all of their respective
undistributed net investment income (including net capital gains) as of such
date.
The New Jersey Intermediate Fund will distribute in complete liquidation the
Class A, C and R shares of the New Jersey Fund to the shareholders of the
respective class of the Fund promptly after the Closing and then will be
liquidated, dissolved and terminated as a series of the Multistate Trust in
accordance with the Trust's Declaration of Trust.
The New Jersey Intermediate Fund has made certain standard representations and
warranties to the New Jersey Fund regarding its capitalization, status and
conduct of business.
Unless waived in accordance with the Agreement, the obligations of the parties
to the Agreement are conditioned upon, among other things:
A. the approval of the Reorganization by shareholders of the New Jersey
Intermediate Fund;
B. the absence of any rule, regulation, order, injunction or proceeding
preventing or seeking to prevent the consummation of the transactions
contemplated by the Agreement;
C. the receipt of all necessary approvals, registrations and exemptions
under federal and state laws;
D. the truth in all material respects as of the Closing of the
representations and warranties of the parties and performance and
compliance in all material respects with the parties' agreements,
obligations and covenants required by the Agreement;
E. the effectiveness under applicable law of the registration statement
of the New Jersey Fund of which this Prospectus/Proxy Statement
forms a part and the absence of any stop orders under the Securities
Act of 1933, as amended, pertaining thereto; and
F. the receipt of opinions of counsel relating to, among other things,
the tax-free nature of the Reorganization for federal income tax
purposes.
The Agreement may be terminated or amended with respect to a Reorganization by
the mutual consent of the parties either before or after approval thereof by the
shareholders of the New Jersey Intermediate Fund, provided that no such
amendment after such approval shall be made if it would have a material adverse
affect on the interests of the Fund's shareholders. The Agreement also may be
terminated by the non-breaching party if there has been a material
misrepresentation, material breach of any representation or warranty, material
breach of contract or failure of any condition to Closing.
The Board recommends that you vote to approve the Reorganization, as it believes
the Reorganization is in the best interests of the New Jersey Intermediate Fund
and that the interests of existing shareholders will not be diluted as a result
of consummation of the proposed Reorganization.
10
<PAGE> 20
DESCRIPTION OF SECURITIES TO BE ISSUED
Shares of Beneficial Interest. Beneficial interests in the New Jersey Fund being
offered hereby are represented by transferable Class A, C and R shares, par
value $0.01 per share. The Declaration of Trust of the Municipal Trust permits
the trustees, as they deem necessary or desirable, to create one or more
separate investment portfolios and to issue a separate series of shares for each
portfolio and, subject to compliance with the 1940 Act, to further subdivide the
shares of a series into one or more classes of shares for such portfolio.
Voting Rights of Shareholders. Holders of shares of the New Jersey Fund are
entitled to one vote per share on matters as to which they are entitled to vote;
however, separate votes generally are taken by each series on matters affecting
an individual series.
The New Jersey Fund operates as a series of the Multistate Trust, an open-end
management investment company registered with the SEC under the 1940 Act. In
addition to the specific voting rights described above, shareholders of the New
Jersey Fund are entitled, under current law, to vote with respect to certain
other matters, including changes in fundamental investment policies and
restrictions and the ratification of the selection of independent auditors.
Moreover, under the 1940 Act, shareholders owning not less than 10% of the
outstanding shares of the Multistate Trust may request that the respective board
of trustees call a shareholders' meeting for the purpose of voting upon the
removal of trustee(s).
CONTINUATION OF SHAREHOLDER ACCOUNTS AND PLANS; SHARE CERTIFICATES
If the Reorganization is approved, the New Jersey Fund will establish an account
for each New Jersey Intermediate Fund's shareholder containing the appropriate
number of shares of the New Jersey Fund. The shareholder services and
shareholder programs of the New Jersey Fund and the New Jersey Intermediate Fund
are substantially identical. Shareholders of the New Jersey Intermediate Fund
who are accumulating shares of the New Jersey Intermediate Fund under the
dividend reinvestment plan, or who are receiving payment under the systematic
withdrawal plan with respect to shares of the New Jersey Intermediate Fund, will
retain the same rights and privileges after the Reorganization in connection
with the New Jersey Fund Class A, C or R shares received in the Reorganization
through substantially identical plans maintained by the New Jersey Fund. Chase
Manhattan Bank, custodian for the New Jersey Intermediate Fund, serves as the
custodian for the assets of the New Jersey Fund.
Upon approval of the Reorganization shareholders of the New Jersey Intermediate
Fund who currently own shares in certificate form are asked to surrender these
shares to the New Jersey Intermediate Fund's transfer agent, Chase Global Fund
Services, P.O. Box, 5186 Bowling Green Station NY, NY 10275. New Jersey
Intermediate Fund shareholders must submit a written request to Chase in order
to receive certificates for their New Jersey Fund shares. No certificates for
New Jersey Fund shares will be issued as part of the Reorganization except upon
request.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the material federal income tax
consequences of the Reorganization to shareholders of the New Jersey
Intermediate Fund and shareholders of the New Jersey Fund. The discussion set
forth below is for general information only and may not apply to a holder
subject to special treatment under the Internal Revenue Code of 1986, as amended
(the "Code"), such as a holder that is a bank, an insurance company, a dealer in
securities, a tax-exempt organization, a foreign person or that acquired its
Class A, C and R shares of the New Jersey Intermediate Fund pursuant to the
exercise of employee stock options or otherwise as compensation. It is based
upon the Code, legislative history, Treasury regulations, judicial authorities,
published positions of the Internal Revenue Service (the "Service") and other
relevant authorities, all as in effect on the date hereof and all of which are
subject to change or different interpretations (possibly on a retroactive
basis). This summary is limited to shareholders who hold their New Jersey
Intermediate Fund shares as capital assets. No advance rulings have been or will
be sought from the Service regarding any matter discussed in this
Prospectus/Proxy Statement. Accordingly, no assurances can be given that the
Service could not successfully challenge the intended federal income tax
treatment described below. Shareholders should consult their own tax advisers to
determine the specific federal income tax consequences of all transactions
relating to the Reorganization, as well as the effects of state, local and
foreign tax laws and possible changes to the tax laws.
The Reorganization is intended to qualify as a "reorganization" within the
meaning of Section 368(a)(1) of the Code. It is a condition to the Closing of
the Reorganization that the Multistate Trust and the Fund receive an opinion
from Vedder, Price, Kaufman & Kammholz ("Vedder Price") substantially to the
effect that for federal income tax purposes:
A. The acquisition by the New Jersey Fund of the assets of the New
Jersey Intermediate Fund in exchange solely for Class A, C and R
shares of the New Jersey Fund and the assumption by the New Jersey
Fund of the liabilities of the New Jersey Intermediate Fund will
qualify as tax-free reorganization within the meaning of Section
368(a)(1)(c) of the Code.
B. No gain or loss will be recognized by the New Jersey Intermediate
Fund or the New Jersey Fund upon the transfer to the New Jersey Fund
of the assets of the New Jersey Intermediate Fund in exchange solely
for
11
<PAGE> 21
the Class A, C and R shares of the New Jersey Fund and the assumption by the New
Jersey Fund of the liabilities of the New Jersey Intermediate Fund.
C. The New Jersey Fund's basis in the New Jersey Intermediate Fund's
assets received in the Reorganization will equal the basis of such
assets in the hands of the New Jersey Intermediate Fund immediately
prior to the transfer, and the New Jersey Fund's holding period of
such assets will, in each instance, include the period during which
the assets were held by the New Jersey Intermediate Fund.
D. No gain or loss will be recognized by the shareholders of the New
Jersey Intermediate Fund upon the exchange of their shares of the New
Jersey Intermediate Fund for the Class A, C and R shares of the New
Jersey Fund.
E. The aggregate tax basis in the Class A, C and R shares of the New
Jersey Fund received by the shareholders of the New Jersey
Intermediate Fund will be the same as the aggregate tax basis of the
shares of the New Jersey Intermediate Fund surrendered in exchange
therefor.
F. The holding period of the Class A, C and R shares of the New Jersey
Fund received by the shareholders of the New Jersey Intermediate
Fund will include the holding period of the shares of the New Jersey
Intermediate Fund surrendered in exchange therefor provided such
surrendered shares of the New Jersey Intermediate Fund are held as
capital assets by such shareholder.
In rendering its opinions, Vedder Price will rely upon certain representations
of the management of the New Jersey Fund and the New Jersey Intermediate Fund
and assume that the Reorganization will be consummated as described in the
Agreement and that redemptions of shares of the New Jersey Intermediate Fund
occurring prior to the Closing and post-Closing redemption of shares of the New
Jersey Fund that are received in the Reorganization will consist solely of
redemptions in the ordinary course of business.
The New Jersey Fund intends to be taxed under the rules applicable to regulated
investment companies as defined in Section 851 of the Code, which are the same
rules currently applicable to the New Jersey Intermediate Fund and its
shareholders.
EXPENSES
Because the benefits of the Reorganization is anticipated to accrue primarily to
shareholders of the New Jersey Intermediate Fund, the New Jersey Intermediate
Fund will pay all of the costs associated with the Reorganization. However,
since the Adviser currently waives and/or reimburses certain operating expenses
for the New Jersey Intermediate Fund (which the Adviser intends to do at least
through the date of the Closing), the Adviser will effectively bear the full
costs of the Reorganization. Management of the New Jersey Intermediate Fund
estimates that expenses for the Reorganization will equal approximately $50,000.
In addition, separate from the Reorganization, the New Jersey Intermediate Fund
will write-off the remaining unamortized organizational expenses of
approximately $17,300 which will be reimbursed by the Adviser, in its capacity
as the investment adviser of the New Jersey Intermediate Fund.
The Board of the Multistate Trust has determined that the foregoing arrangement
with respect to expenses is fair and reasonable.
As noted above, shareholders of the New Jersey Intermediate Fund may redeem
their shares or exchange their shares for shares of certain other open-end
mutual funds distributed by Nuveen at any time prior to the closing of the
Reorganization. See "Distribution, Purchase, Valuation, Redemption and Exchange
of Shares" above. Redemptions and exchanges of shares generally are taxable
transactions for federal income tax purposes, unless your account is not subject
to taxation, such as an individual retirement account or other tax-qualified
retirement plan. Shareholders should consult with their own tax advisers
regarding potential transactions.
LEGAL MATTERS
Certain legal matters concerning the federal income tax consequences of the
Reorganization and issuance of Class A, C and R shares of the New Jersey Fund
will be passed on by Vedder, Price, Kaufman & Kammholz, 222 North LaSalle
Street, Chicago, Illinois 60601.
FINANCIAL STATEMENTS
The unaudited updated Financial Highlights for the New Jersey Fund and the New
Jersey Intermediate Fund are attached hereto as Exhibit B.
In addition, incorporated by reference in their respective entireties are (i)
for the New Jersey Fund, and the New Jersey Intermediate Fund, the audited
financial statements for the fiscal year ended February 28, 1998, attached as
Exhibit C to the
12
<PAGE> 22
Reorganization SAI and (ii) the pro-forma financial statements as of February
28, 1998 attached as Exhibit D to the Reorganization SAI.
D. RECOMMENDATION OF THE BOARD
The Board of the Multistate Trust has unanimously approved the Agreement and has
determined that participation in the Reorganization is in the best interests of
the New Jersey Intermediate Fund. THE BOARD RECOMMENDS VOTING "FOR" THE PROPOSED
REORGANIZATION.
PROPOSAL 2. SELECTION OF INDEPENDENT AUDITORS
The members of the Board who are not "interested persons" of the Multistate
Trust have unanimously selected Arthur Andersen LLP, independent public
accountants, as independent auditors, to audit the books and records of the New
Jersey Intermediate Fund for the fiscal year ending February 28, 1999. The
selection of Arthur Andersen LLP as independent auditors of the New Jersey
Intermediate Fund is being submitted to the shareholders for ratification, which
requires the affirmative vote of a majority of the shares of the Fund present
and entitled to vote on the matter. A representative of Arthur Andersen LLP is
expected to be present at the Special Meeting and will be available to respond
to any appropriate questions raised at the Special Meeting and to a make a
statement if he or she wishes.
THE BOARD OF TRUSTEES UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE
RATIFICATION OF THE SELECTION OF INDEPENDENT AUDITORS.
OTHER INFORMATION
A. SHAREHOLDERS OF THE INTERMEDIATE FUND AND THE NEW JERSEY INTERMEDIATE FUND
At the close of business on June 16, 1998, there were Class A shares,
Class B shares, Class C shares and Class R shares,
respectively, of the New Jersey Fund. As of such date, the trustees and officers
of the New Jersey Fund as a group own less than 1% of the shares of the New
Jersey Fund. The following table sets forth the percentage of each person who,
as of June 16, 1998, owns of record, or is known by the Multistate Trust to own
of record or beneficially own 5% or more of any class of shares of the New
Jersey Fund.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
CLASS NAME AND ADDRESS OF OWNER PERCENTAGE OF OWNERSHIP
- ------------------------------------------------------------------------------------------------
<C> <S> <C>
A
B
C
R
</TABLE>
At the close of business on June 16, 1998, the record date with respect to the
Special Meeting, there were Class A shares, Class C shares and
Class R shares, respectively, of the New Jersey Intermediate Fund. As of
such date, the trustees and officers of the New Jersey Intermediate Fund as a
group own less than 1% of the outstanding shares of the New Jersey Intermediate
Fund. The following table sets forth the percentage of each person who, as of
June 16, 1998, owns of record, or is known by the Multistate Trust to own of
record or beneficially own 5% or more of any class of shares of the New Jersey
Intermediate Fund.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
CLASS NAME AND ADDRESS OF OWNER PERCENTAGE OF OWNERSHIP
- ------------------------------------------------------------------------------------------------
<C> <S> <C>
A
C
R
</TABLE>
B. SHAREHOLDER PROPOSALS
As a general matter, the New Jersey Fund does not intend to hold future regular
annual or special meetings of its shareholders unless required by the 1940 Act.
In the event the Reorganization is not consummated, the New Jersey Intermediate
Fund does not intend to hold future regular annual or special meetings of its
shareholders unless required by the 1940 Act. Any shareholder who wishes to
submit proposals for consideration at a meeting of shareholders of the New
Jersey Fund or the New Jersey Intermediate Fund should send such proposal to the
respective Fund at 333 West Wacker Drive, Chicago, Illinois 60606. To be
considered for presentation at a shareholders' meeting rules promulgated by the
SEC require that, among other things, a shareholder's proposal must be received
at the offices of the Fund a reasonable time before a solicitation is made.
Timely submission of a proposal does not necessarily mean that such proposal
will be included.
13
<PAGE> 23
VOTING INFORMATION AND REQUIREMENTS
Holders of shares of the New Jersey Intermediate Fund are entitled to one vote
per share on matters as to which they are entitled to vote. The New Jersey
Intermediate Fund does not utilize cumulative voting.
Each valid proxy given by a shareholder of the New Jersey Intermediate Fund will
be voted by the persons named in the proxy in accordance with the instructions
marked thereon and as the persons named in the proxy may determine on such other
business as may come before the Special Meeting on which shareholders are
entitled to vote. If no designation is made, the proxy will be voted by the
persons named in the proxy as recommended by the Board "FOR" approval of the
Reorganization and "FOR" the selection of independent auditors. Abstentions and
broker non-votes (i.e. shares held by brokers or nominees, typically in "street
name," as to which (i) instructions have not been received from beneficial
owners or persons entitled to vote and (ii) the broker or nominee does not have
discretionary voting power on a particular matter) do not count as votes "FOR"
the proposals and are treated as votes "AGAINST." Thirty percent of the
outstanding shares of the Fund entitled to vote on the proposals must be present
in person or by proxy to have a quorum to conduct business at the Special
Meeting. Abstentions and broker non-votes will be deemed present for quorum
purposes.
Shareholders who execute proxies may revoke them at any time before they are
voted by filing with the New Jersey Intermediate Fund a written notice of
revocation, by delivering a duly executed proxy bearing a later date, or by
attending the Special Meeting and voting in person. The giving of a proxy will
not affect your right to vote in person if you attend the Special Meeting and
wish to do so.
It is not anticipated that any action will be asked of the shareholders of the
New Jersey Intermediate Fund other than as indicated above, but if other matters
are properly brought before the Special Meeting, it is intended that the persons
named in the proxy will vote in accordance with their judgment.
APPROVAL OF THE REORGANIZATION WILL REQUIRE THE FAVORABLE VOTE OF THE HOLDERS OF
A MAJORITY OF THE OUTSTANDING SHARES OF THE NEW JERSEY INTERMEDIATE FUND
ENTITLED TO VOTE.
In the event that sufficient votes in favor of a proposal are not received by
the scheduled time of the Special Meeting, the persons named in the proxy may
propose and vote in favor of one or more adjournments of the Special Meeting to
permit further solicitation of proxies. If sufficient shares were present to
constitute a quorum, but insufficient votes had been cast in favor of a proposal
to approve it, proxies would be voted in favor of adjournment only if the Board
determined that adjournment and additional solicitation was reasonable and in
the best interest of the shareholders of the New Jersey Intermediate Fund,
taking into account the nature of the proposal, the percentage of the votes
actually cast, the percentage of negative votes, the nature of any further
solicitation that might be made and the information provided to shareholders
about the reasons for additional solicitation. Any such adjournment will require
the affirmative vote of the holders of a majority of the outstanding shares
voted at the session of the Special Meeting to be adjourned.
Proxies of shareholders of the New Jersey Intermediate Fund are solicited by the
Board. In order to obtain the necessary quorum at the Special Meeting,
additional solicitation may be made by mail, telephone, telegraph or personal
interview by representatives of the Adviser or Nuveen, or by dealers or their
representatives. In addition, such solicitation servicing may also be provided
by D. F. King, at a cost estimated to be approximately $2,000, plus reasonable
expenses.
June 29, 1998
PLEASE SIGN AND RETURN YOUR PROXY PROMPTLY.
YOUR VOTE IS IMPORTANT AND YOUR PARTICIPATION
IN THE AFFAIRS OF YOUR FUND DOES MAKE A DIFFERENCE.
14
<PAGE> 24
EXHIBIT A
February 28, 1998
MANAGEMENT'S DISCUSSION OF NEW JERSEY FUND AND
NEW JERSEY INTERMEDIATE FUND PERFORMANCE
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER
Over the past 12 months, the Nuveen Flagship New Jersey Municipal Bond Funds
performed well, rewarding investors with attractive tax-free income and strong
total returns. For the fiscal year ended February 28, 1998, the New Jersey
long-term fund's Class A shares posted a total return on net asset value of
9.06%, outpacing its Lipper peer group average of 8.41%. The New Jersey
intermediate-term fund also performed well, generating a total return on net
asset value for Class A shares of 7.00%, surpassing its Lipper peer group
average of 6.75%.
Although the funds experienced modest dividend reductions during the period,
they continue to provide competitive after-tax yields. As of February 28, 1998,
the long-term fund's Class A shares were generating a yield on net asset value
of 4.89%, which is equivalent to an after-tax yield of 7.57% for investors in
the 35.4% combined federal and state income tax bracket. Class A shares of the
intermediate-term fund were providing a yield on net asset value of 3.96%,
equaling an after-tax yield of 6.13% for investors in the 35.4% combined federal
and state tax bracket.
THE YEAR IN REVIEW
Over the past year, the bond market enjoyed a period of solid performance, as
the benign inflationary environment provided the ideal backdrop for fixed-income
investments, including municipal issues. A shrinking federal deficit and the
inactivity of the Federal Reserve, which has been on hold since its last
interest rate increase in March 1997, also contributed to the positive
environment for bonds.
Between the end of February 1997 and February 1998, the yield on 30-year
Treasury bonds dropped from 6.80% to 5.92%, and the municipal market followed
suit, as the yield on the Bond Buyer 40 declined from 5.76% to 5.24%. The
relatively tight spread between tax-free municipal bond yields and taxable
Treasury bond yields, combined with municipals' comparatively low volatility and
dependable tax-free income, continue to make these investments an attractive
opportunity.
A-1
<PAGE> 25
February 28, 1998
MEETING INVESTOR NEEDS
The generally stable income stream and attractive returns detailed on the
following pages demonstrate that the Nuveen Flagship New Jersey Municipal Bond
Funds have continued to successfully pursue their investment objectives. In
today's market environment, many investors are seeking conservatively managed
investments that enable them to strike the proper balance between risk and
reward in their portfolios. With their focus on consistent, above-market
performance and moderated risk, Nuveen funds can be ideal for investors who want
to build and sustain long-term financial security.
BUILDING BETTER PORTFOLIOS
As you review the performance of your fund and discuss the results with your
financial adviser, we hope that you continue to think of Nuveen when seeking
quality investment solutions. Your adviser can introduce you to a variety of
other Nuveen products and services designed to round out your portfolio of core
investments. This includes the new Nuveen Rittenhouse Growth Fund, a blue chip
equity mutual fund that provides a tax-efficient approach to building and
sustaining wealth. We encourage you to talk to your financial adviser about our
additional products and services to determine those that can best complement
your current Nuveen investments.
On behalf of everyone at Nuveen, I thank you for your continued confidence in us
and our family of investments.
Timothy R. Schwertfeger
Timothy R. Schwertfeger
Chairman of the Board
April 15, 1998
A-2
<PAGE> 26
February 28, 1998
Nuveen Flagship New Jersey Municipal Bond Funds
Portfolio Manager Roundtable
RICK HUBER AND STEVE PETERSON, PORTFOLIO MANAGERS OF THE NEW JERSEY MUNICIPAL
BOND FUNDS, REVIEW THE PAST YEAR IN THE NEW JERSEY MUNICIPAL MARKET AND TALK
ABOUT FUND PERFORMANCE AND OPPORTUNITIES TO FIND VALUE.
CAN YOU DESCRIBE THE MUNICIPAL
MARKET OVER THE PAST YEAR
AND HOW THE FUNDS PERFORMED
IN THIS ENVIRONMENT?
Over the past 12 months, we have enjoyed a bull market in fixed-income
investments, including municipal bonds. New issue and refunding activity took
off, totaling $220 billion nationally in 1997 - the third largest volume ever.
Although municipal supply was relatively heavy on a national level, demand
continued to outstrip the limited supply of New Jersey municipal bonds. With the
high state tax and great deal of investor interest given the high levels of per
capita wealth in the state, New Jersey municipal bonds are commanding relatively
high prices and supply continues to be limited.
This strong market contributed to the solid total return performance of the
funds, as many of the bonds in the portfolios appreciated in value. The annual
total return on net asset value for Class A shares of the New Jersey long-term
fund was 9.06%, which is equivalent to an after-tax total return of 12.10% for
investors in the 35.4% combined federal and state income tax bracket. The
intermediate-term fund generated an attractive total return of 7.00%, which is
equivalent to an after-tax total return of 9.74% for investors in the same tax
bracket.
Both funds were well-ranked by Lipper Analytical Services based on their strong
total returns. The long-term fund was ranked in the top quartile of long-term
New Jersey municipal bond funds for the one-year period (13th out of 57 funds).
The intermediate-term fund was ranked in the top third (25 out of 79 funds) of
its peer group, the Lipper Other State Intermediate Municipal Bond Fund
category, for the one-year period, and was ranked number one out of 30 funds for
the five-year period.
The funds also provided very competitive yields. The intermediate fund in
particular provided a very attractive yield given its shorter-term structure.
With a yield on net asset value of 3.96% for Class A shares (as of February 28,
1998), it provides income that is quite competitive with longer-term funds but
carries lower risk. Given its shorter average maturity and duration (compared
with long-term funds), the intermediate fund should be less susceptible to
interest rate fluctuations.
HOW HAS NEW JERSEY'S ECONOMY
PERFORMED DURING THE PAST
12 MONTHS?
New Jersey's high credit ratings for general obligation debt recognize the
state's diverse economic base and strong financial management. With corporate
restructurings and downsizings slowing, unemployment figures appear to have
stabilized.
Stronger-than-anticipated corporate business and personal income tax receipts
have enabled reserves to build. This larger financial cushion
A-3
<PAGE> 27
February 28, 1998
should help ease the state's burden in funding the $250 million court-mandated
increase in education spending. In addition, the state has set aside funds with
the purpose of keeping solid waste authorities from defaulting on debt service
payments, although the money has not yet been allocated.
A final decision on deregulation of electric utilities in the state is expected
later this year. A phase-in of competition in this arena could begin as early as
October 1998. In the wake of health care deregulation, a number of health care
providers have begun the process of mergers and affiliations that has been
common in other parts of the country.
HOW DID YOU ADD VALUE IN THE CURRENT MARKET?
One of our main goals during the year was to improve the call protection of the
funds, which was a very successful strategy. Only about 10 percent of the
long-term fund's bonds are callable by their issuers in the next three years,
which should help limit the future income volatility of the fund and ensure a
more stable dividend. With most of the bonds in the intermediate-term fund in
the 5-15 year maturity range, none are callable in the next three years, helping
ensure a stable dividend. Another key strategy over the past year was to
increase the yield of the funds. We have been able to accomplish this through
bond "swaps" -- selling a bond and purchasing a very similar bond with a higher
yield. Nuveen's renowned research department helps us find higher-yielding bonds
that we feel are undervalued by the market and that have the potential for price
appreciation.
WHAT ARE YOUR KEY STRATEGIES FOR THE FUTURE?
A significant amount of the new bond issuance over the past year was in the
health care sector, which explains both funds' relatively heavy weightings in
that area. We plan to diversify into other sectors in the coming year, with a
particular eye toward general obligation and housing bonds. Both of those
sectors presently offer attractive quality bonds at favorable yields, and as the
state's economy continues to improve, we foresee the potential for price
appreciation of the bonds in those areas.
In addition, we will continue to look for bonds that we feel have the potential
to be pre-refunded by their issuers. In an advance refunding, a bond issue is
essentially repaid early and becomes secured by U. S. government or agency
securities until it can be called by the issuer. When bonds in the funds are
pre-refunded and become backed by Treasury bonds, the credit quality and
stability of the funds can improve significantly.
A-4
<PAGE> 28
February 28, 1998
Nuveen Flagship New Jersey Municipal Bond Fund
Performance Overview
As of February 28, 1998
12-MONTH DIVIDENDS (CLASS A SHARES)
[12-MONTH DIVIDENDS BAR GRAPH]
TOP 5 SECTORS
Tax Obligation (General) 13%
................................................................................
U.S. Guaranteed 13%
................................................................................
Health Care 11%
................................................................................
Utilities 10%
................................................................................
Transportation 10%
- --------------------------------------------------------------------------------
1 Class R share returns are actual. Class A, B and C share returns are actual
for the period since class inception; returns prior to class inception are
Class R share returns adjusted for differences in sales charges and expenses,
which are primarily differences in distribution and service fees. Class A
shares have a 4.2% maximum sales charge. Class B shares have a CDSC that
begins at 5% for redemptions during the first year after purchase and declines
periodically to 0% over the following five years, which is not reflected in
the return figures. Class B shares automatically convert to Class A shares
eight years after purchase. Class C shares have a 1% CDSC for redemptions
within one year which is not reflected in the one-year total return.
2 Based on SEC yield and a combined federal and state income tax rate of 35.4%.
Represents the yield on a taxable investment necessary to equal the yield of
the Nuveen fund on an after-tax basis.
3 The Index Comparison shows the change in value of a $10,000 investment in the
Class A shares of the Nuveen fund compared with the Lehman Brothers
Municipal Bond Index. The Lehman Municipal Bond Index is comprised of a broad
range of investment-grade municipal bonds, and does not reflect any initial or
ongoing expenses. The Nuveen fund return depicted in the chart reflects the
initial maximum sales charge applicable to A shares (4.20%) and all ongoing
fund expenses. For periods prior to inception of Class A shares, performance
reflects Class R share performance adjusted for differences in expenses, which
are primarily differences in distribution and service fees.
PORTFOLIO STATISTICS
<TABLE>
<CAPTION>
--------------------------------------------------------------------
SHARE CLASS A B C R
<S> <C> <C> <C> <C>
Inception Date 9/94 2/97 9/94 12/91
....................................................................
Net Asset Value $10.61 $10.61 $10.59 $10.62
....................................................................
Fund Net Assets ($000) $89,314
....................................................................
Average Weighted Maturity (Years) 16.92
....................................................................
Average Weighted Duration (Years) 5.79
--------------------------------------------------------------------
</TABLE>
ANNUALIZED TOTAL RETURN(1)
<TABLE>
<CAPTION>
---------------------------------------------------------------
SHARE CLASS A(NAV) A(OFFER) B C R
<S> <C> <C> <C> <C> <C>
1-Year 9.06% 4.47% 8.25% 8.40% 9.29%
...............................................................
5-Year 6.23% 5.32% 5.50% 5.50% 6.50%
...............................................................
Since Inception 7.28% 6.51% 6.54% 6.53% 7.55%
---------------------------------------------------------------
</TABLE>
TAX-FREE YIELDS
<TABLE>
<CAPTION>
---------------------------------------------------------------
SHARE CLASS A(NAV) A(OFFER) B C R
<S> <C> <C> <C> <C> <C>
Distribution Rate 5.09% 4.87% 4.35% 4.59% 5.31%
...............................................................
SEC 30-Day Yield 4.89% 4.68% 4.14% 4.34% 5.09%
...............................................................
Taxable Equivalent
Yield(2) 7.57% 7.24% 6.41% 6.72% 7.88%
---------------------------------------------------------------
</TABLE>
INDEX COMPARISON(3)
[INDEX COMPARISON LINE GRAPH]
A-5
<PAGE> 29
February 28, 1998
Nuveen Flagship New Jersey
Intermediate Municipal Bond Fund
Performance Overview
As of February 28, 1998
12-MONTH DIVIDENDS (CLASS A SHARES)
[12-MONTH DIVIDENDS BAR GRAPH]
TOP 5 SECTORS
Tax Obligation (Limited) 24%
................................................................................
Health Care 21%
................................................................................
Tax Obligation (General) 18%
................................................................................
Industrial Development 14%
................................................................................
Education and Civic Organizations 7%
- --------------------------------------------------------------------------------
1 Class A share returns are actual. Class C and R share returns are actual for
the period since class inception; returns prior to class inception are Class A
share returns adjusted for differences in sales charges and expenses, which
are primarily differences in distribution and service fees. Class A shares
have a 3.0% maximum sales charge. Class C shares have a 1% CDSC for
redemptions within one year which is not reflected in the one-year total
return.
2 Based on SEC yield and a combined federal and state income tax rate of 35.4%.
Represents the yield on a taxable investment necessary to equal the yield of
the Nuveen fund on an after-tax basis.
3 The Index Comparison shows the change in value of a $10,000 investment in
Class A shares of the Nuveen fund compared with the Lehman Brothers
7-Year and 10-Year Municipal Bond Indexes. In the past, the fund's
performance was compared against the Lehman 10- Year Municipal Bond Index.
Beginning this year, we will compare the fund's performance with the Lehman
7-Year Municipal Bond Index because that index better corresponds to the
fund's investment policies, which require that the fund maintain a weighted
average portfolio maturity of 5-10 years. The Lehman Municipal Bond Indexes
are comprised of a broad range of investment-grade municipal bonds, and do
not reflect any initial or ongoing expenses. The Nuveen fund return depicted
in the chart reflects the initial maximum sales charge applicable to A shares
(3.0%) and all ongoing fund expenses.
PORTFOLIO STATISTICS
<TABLE>
<CAPTION>
-------------------------------------------------------------------
SHARE CLASS A C R
<S> <C> <C> <C>
Inception Date 9/92 3/97 3/97
...................................................................
Net Asset Value $10.50 $10.52 $10.51
...................................................................
Fund Net Assets ($000) $10,548
...................................................................
Average Weighted Maturity (Years) 7.38
...................................................................
Average Weighted Duration (Years) 5.12
-------------------------------------------------------------------
</TABLE>
ANNUALIZED TOTAL RETURN(1)
<TABLE>
<CAPTION>
---------------------------------------------------------------
SHARE CLASS A(NAV) A(OFFER) C R
<S> <C> <C> <C> <C>
1-Year 7.00% 3.78% 6.63% 7.34%
...............................................................
5-Year 5.53% 4.89% 5.17% 5.60%
...............................................................
Since Inception 6.58% 5.99% 6.21% 6.65%
---------------------------------------------------------------
</TABLE>
TAX-FREE YIELDS
<TABLE>
<CAPTION>
---------------------------------------------------------------
SHARE CLASS A(NAV) A(OFFER) C R
<S> <C> <C> <C> <C>
Distribution Rate 4.74% 4.60% 4.22% 4.97%
...............................................................
SEC 30-Day Yield 3.96% 3.84% 3.39% 4.17%
...............................................................
Taxable Equivalent Yield(2) 6.13% 5.94% 5.25% 6.46%
---------------------------------------------------------------
</TABLE>
INDEX COMPARISON(3)
[INDEX COMPARISON LINE GRAPH]
A-6
<PAGE> 30
EXHIBIT B
FINANCIAL HIGHLIGHTS
Selected data for a share outstanding throughout each period is as follows:
<TABLE>
<CAPTION>
CLASS (INCEPTION DATE) OPERATING PERFORMANCE LESS DISTRIBUTIONS
--------------------------- --------------------------
NET REALIZED DIVIDENDS TOTAL
NUVEEN FLAGSHIP NEW NET ASSET AND UNREALIZED FROM TAX- RETURN
JERSEY VALUE NET GAIN (LOSS) EXEMPT NET DISTRIBUTIONS NET ASSET ON NET
YEAR ENDED BEGINNING INVESTMENT FROM INVESTMENT FROM CAPITAL VALUE END ASSET
FEBRUARY 28/29, OF PERIOD INCOME(A) INVESTMENTS INCOME GAINS OF PERIOD VALUE(B)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS A (9/94)**
1998 $10.26 $.55 $ .36 $(.56) $ -- $10.61 9.06%
1997(c) 10.22 .05 .04 (.05) -- 10.26 .85
1997(d) 10.40 .48 (.15) (.51) -- 10.22 3.31
1996(d) 9.73 .51 .69 (.53) -- 10.40 12.63
1995(e) 10.03 .21 (.21) (.21) (.09) 9.73 .02
CLASS B (2/97)
1998 10.26 .48 .35 (.48) -- 10.61 8.25
1997(c) 10.22 .05 .03 (.04) -- 10.26 .78
CLASS C (9/94)**
1998 10.25 .50 .34 (.50) -- 10.59 8.40
1997(c) 10.20 .04 .05 (.04) -- 10.25 .90
1997(d) 10.38 .41 (.16) (.43) -- 10.20 2.53
1996(d) 9.71 .44 .68 (.45) -- 10.38 11.80
1995(e) 9.77 .16 (.05) (.17) -- 9.71 1.16
CLASS R (12/91)**
1998 10.27 .58 .35 (.58) -- 10.62 9.29
1997(c) 10.23 .05 .04 (.05) -- 10.27 .86
1997(d) 10.41 .49 (.14) (.53) -- 10.23 3.55
1996(d) 9.74 .55 .68 (.56) -- 10.41 12.88
1995(d) 10.71 .52 (.88) (.52) (.09) 9.74 (3.27)
1994(d) 9.96 .51 .81 (.51) (.06) 10.71 13.60
1993(d) 9.53 .45 .42 (.44) -- 9.96 9.36
1992(e) 9.53 -- -- -- -- 9.53 --
<CAPTION>
CLASS (INCEPTION DATE) RATIOS/SUPPLEMENTAL DATA
--------------------------------------------------------------------------------------------------
RATIO OF RATIO OF NET RATIO OF NET
NUVEEN FLAGSHIP NEW NET ASSETS EXPENSES TO INVESTMENT INCOME RATIO OF EXPENSES INVESTMENT
JERSEY END OF AVERAGE NET TO AVERAGE NET TO AVERAGE NET INCOME TO AVERAGE PORTFOLIO
YEAR ENDED PERIOD (IN ASSETS BEFORE ASSETS BEFORE ASSETS AFTER NET ASSETS AFTER TURNOVER
FEBRUARY 28/29, THOUSANDS) REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT(A) REIMBURSEMENT(A) RATE
- ------------------------ --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A (9/94)**
1998 $35,782 1.01% 4.92% .60% 5.33% 16%
1997(c) 27,879 1.01* 5.43* .55* 5.89* --
1997(d) 17,072 1.13 4.85 1.00 4.98 10
1996(d) 10,661 1.25 4.85 1.00 5.10 39
1995(e) 2,741 1.31* 5.03* 1.00* 5.34* 32
CLASS B (2/97)
1998 2,981 1.77 4.16 1.36 4.57 16
1997(c) 74 1.77* 5.71* 1.27* 6.21* --
CLASS C (9/94)**
1998 5,733 1.56 4.37 1.16 4.77 16
1997(c) 2,712 1.56* 4.89* 1.10* 5.35* --
1997(d) 2,611 1.88 4.09 1.75 4.22 10
1996(d) 1,065 1.96 4.16 1.75 4.37 39
1995(e) 464 2.00* 4.37* 1.75* 4.62* 32
CLASS R (12/91)**
1998 44,817 .81 5.12 .40 5.53 16
1997(c) 42,651 .81* 5.63* .35* 6.09* --
1997(d) 42,905 .89 5.10 .75 5.24 10
1996(d) 43,304 .98 5.20 .75 5.43 39
1995(d) 39,582 .89 5.18 .75 5.32 32
1994(d) 36,462 .98 4.61 .75 4.84 52
1993(d) 16,208 1.43* 4.28* .75* 4.96* 9
1992(e) 15 -- -- -- -- --
</TABLE>
- ---------------
* Annualized.
** Information included prior to the one month ended February
28, 1997, reflects the financial highlights of Nuveen New
Jersey.
(a) After waiver of certain management fees or reimbursement of
expenses, if any, by Nuveen Advisory.
(b) Total returns are calculated on net asset value without any
sales charge and are not annualized.
(c) For the one month ended February 28.
(d) For the fiscal year ended January 31.
(e) From commencement of class operations as noted through
January 31.
B-1
<PAGE> 31
FINANCIAL HIGHLIGHTS -- CONTINUED
Selected data for a share outstanding throughout each period is as follows:
<TABLE>
<CAPTION>
OPERATING PERFORMANCE LESS DISTRIBUTIONS
--------------------------- --------------------------
CLASS (INCEPTION DATE) NET REALIZED DIVIDENDS TOTAL
NUVEEN FLAGSHIP NET ASSET AND UNREALIZED FROM TAX- RETURN
NEW JERSEY INTERMEDIATE VALUE NET GAIN (LOSS) EXEMPT NET DISTRIBUTIONS NET ASSET ON NET
YEAR ENDED BEGINNING INVESTMENT FROM INVESTMENT FROM CAPITAL VALUE END ASSET
FEBRUARY 28/29, OF PERIOD INCOME(A) INVESTMENTS INCOME GAINS OF PERIOD VALUE(B)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Class A (9/92)**
1998 $10.30 $.50 $ .20 $(.50) $ -- $10.50 7.00%
1997(c) 10.14 .38 .16 (.38) -- 10.30 5.41
1996(d) 10.25 .51 (.11) (.51) -- 10.14 3.89
1995(d) 10.04 .50 .22 (.51) -- 10.25 7.42
1994(d) 10.15 .53 (.10) (.52) (.02)*** 10.04 4.27
1993(e) 9.70 .34 .45 (.34) -- 10.15 11.07*
CLASS C (3/97)
1998(f) 10.28 .45 .24 (.45) -- 10.52 6.84
CLASS R(3/97)
1998(f) 10.28 .52 .24 (.53) -- 10.51 7.55
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
--------------------------------------------------------------------------------------------------
CLASS (INCEPTION DATE) RATIO OF RATIO OF NET RATIO OF NET
NUVEEN FLAGSHIP NET ASSETS EXPENSES TO INVESTMENT INCOME RATIO OF EXPENSES INVESTMENT
NEW JERSEY INTERMEDIATE END OF AVERAGE NET TO AVERAGE NET TO AVERAGE NET INCOME TO AVERAGE PORTFOLIO
YEAR ENDED PERIOD (IN ASSETS BEFORE ASSETS BEFORE ASSETS AFTER NET ASSETS AFTER TURNOVER
FEBRUARY 28/29, THOUSANDS) REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT(A) REIMBURSEMENT(A) RATE
- ------------------------ --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A (9/92)**
1998 $9,369 1.54% 3.93% .64% 4.83% 9%
1997(c) 7,011 1.93* 3.69* .68* 4.94* 11
1996(d) 8,318 1.71 3.79 .60 4.90 17
1995(d) 9,217 1.81 3.92 .69 5.04 35
1994(d) 9,321 1.81 3.45 .16 5.10 27
1993(e) 5,649 2.70* 2.54* .40* 4.84* 29
CLASS C (3/97)
1998(f) 980 2.03* 3.45* 1.19* 4.29* 9
CLASS R(3/97)
1998(f) 198 1.33* 4.12* .46* 4.99* 9
</TABLE>
- ---------------
* Annualized.
** Information included prior to the nine months ended February 28, 1997,
reflects the financial highlights of Flagship New Jersey Intermediate.
*** The amount shown reflects a distribution in excess of capital gains.
(a) After waiver of certain management fees or reimbursement of expenses, if
applicable, by Nuveen Advisory or its predecessor Flagship Financial.
(b) Total returns are calculated on net asset value without any sales charge
and are not annualized except where noted.
(c) For the nine months ended February 28.
(d) For the fiscal year ended May 31.
(e) From commencement of operations as noted through May 31.
(f) From commencement of class operations as noted.
B-2
<PAGE> 32
SUPPLEMENT DATED MAY 4, 1998 TO THE
PROSPECTUS DATED JUNE 30, 1997
------------------
NUVEEN FLAGSHIP MULTISTATE TRUST II
NUVEEN FLAGSHIP NEW JERSEY INTERMEDIATE MUNICIPAL BOND FUND
------------------
The Trustees of the Nuveen Flagship Multistate Trust II have approved a tax-free
reorganization of the Nuveen Flagship New Jersey Intermediate Municipal Bond
Fund (the "Fund"), as described below. The Fund is closed to new investors
effective May 8, 1998. On and after May 8, 1998 only shareholders with existing
accounts may continue to make additional purchases and to reinvest dividends
into existing accounts.
Under the terms of the reorganization, the Fund will transfer all of its assets
and liabilities to the Nuveen Flagship New Jersey Municipal Bond Fund (the
"Acquiring Fund"), another series of Nuveen Flagship Multistate Trust II, in a
tax-free exchange for an equal value of shares of the Acquiring Fund. The
Acquiring Fund is a municipal bond fund whose investment objective is to provide
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. Unlike the Fund, which is an intermediate-term fund that normally
maintains weighted average portfolio maturity of 5 to 10 years, the Acquiring
Fund is a long-term fund that normally maintains a weighted average portfolio
maturity of 15 to 30 years. As with any mutual fund, there is no assurance that
the Acquiring Fund will meet its investment objective. The reorganization is
subject to certain regulatory approvals and the approval of the Fund's
shareholders. A meeting of shareholders has been called for August 13, 1998.
Further information regarding the proposed reorganization and the shareholder
meeting will be contained in a proxy statement that is scheduled to be mailed in
June, 1998.
<PAGE> 33
NUVEEN MUNICIPAL BOND FUNDS
JUNE 30, 1997
PROSPECTUS
DEPENDABLE, TAX-FREE INCOME
TO HELP YOU KEEP MORE OF
WHAT YOU EARN.
[PHOTO]
CONNECTICUT
NEW JERSEY
NEW YORK
<PAGE> 34
INVESTING IN NUVEEN MUTUAL FUNDS
Since our founding in 1898, John Nuveen & Co. has been synonymous with
investments 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
financial 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 quality securities that represent good relative
value -- is the cornerstone of Nuveen's investment philosophy. It is a
disciplined, 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 marketplace opportunity. 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> 35
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
JUNE 30, 1997
PROSPECTUS
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
taxfree 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 circumstances 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 investing.
Please read it carefully and keep it for future reference. You can find more
detailed information about each fund in the statement of additional information
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.
<PAGE> 36
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
OVERVIEW
FUND SUMMARIES AND FINANCIAL HIGHLIGHTS
FUND STRATEGIES
Investment Objective........................ 16
How the Funds Select Investments............ 16
Risk Reduction Strategies................... 17
INVESTING IN THE FUNDS
How to Buy Fund Shares...................... 18
How to Select a Purchase Option............. 19
How to Sell Fund Shares..................... 21
Exchanging Shares........................... 22
Optional Features and Services.............. 23
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DIVIDENDS AND TAXES
How the Funds Pay Dividends................. 24
Taxes and Tax Reporting..................... 24
Taxable Equivalent Yields................... 25
GENERAL INFORMATION
How to Contact Nuveen....................... 25
Fund Service Providers...................... 26
How the Funds Report Performance............ 27
How Fund Shares are Priced.................. 27
Organization................................ 27
APPENDIX
Special State Considerations................ 28
</TABLE>
<PAGE> 37
NUVEEN FLAGSHIP CONNECTICUT MUNICIPAL BOND FUND
PERFORMANCE INFORMATION AS OF 2/28/97
INCEPTION: JULY 13, 1987
NET ASSETS: $217.1 MILLION
TOTAL RETURN (ANNUALIZED)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
CLASS A CLASS A
(OFFER PRICE) (NAV) CLASS B CLASS C CLASS R
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 Year 1.04% 5.47% 4.87% 4.89% 5.46%
5 Years 6.15% 7.06% 6.47% 6.43% 7.06%
Inception 6.91% 7.38% 6.90% 6.77% 7.38%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Class A total returns reflect actual performance for all periods; Classes B, C
and R total returns reflect actual performance for periods since class inception
(see "Financial Highlights" for dates), and Class A performance for periods
prior to class inception, adjusted for the differences in sales charges and (in
the cases of Classes B and C) fees between the classes. Class B total returns
assume an ongoing investment and do not reflect the imposition of the CDSC; your
returns for the 1 year and 5 year periods would be lower if you redeemed at the
end of those periods. 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 for further information.
MATURITY (YEARS)
----------------------------------
Average Maturity 19.5
Average Modified Duration 7.4
----------------------------------
CREDIT QUALITY
[PIE CHART APPEARS HERE]
----------------------------------
NR 3%
BBB 16%
A 20%
AA 17%
AAA 44%
----------------------------------
INDUSTRY DIVERSIFICATION (TOP 5)
[PIE CHART APPEARS HERE]
----------------------------------
Other 21%
General Obligation Bonds 10%
Escrowed Bonds 8%
Housing Facilities 9%
Educational Facilities 18%
Health Care Facilities 34%
----------------------------------
1
<PAGE> 38
EXPENSE INFORMATION AS OF 2/28/97
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 (0.07%) (0.07%) (0.07%) (0.07%)
Total (Net) 0.79% 1.54% 1.34% 0.59%
- --------------------------------------------------------------------------------------------------------
</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 $50 $55 $14 $6
3 Years $66 $81 $42 $19
5 Years $84 $95 $73 $33
10 Years $136 $163 $161 $74
- --------------------------------------------------------------------------------------------------------
</TABLE>
2
<PAGE> 39
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. You may find more information about the fund's performance in its
annual report. For a free copy of the fund's latest annual and/or semi-annual
reports, write to Nuveen or call (800) 621-7227.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
CLASS INVESTMENT OPERATIONS AND DISTRIBUTIONS
(INCEPTION DATE) -----------------------------------------------------------------------------
NET
REALIZED AND
BEGINNING UNREALIZED DIVIDENDS DISTRIBUTIONS ENDING
NET NET GAIN (LOSS) FROM NET FROM NET
YEAR ENDING ASSET INVESTMENT FROM INVESTMENT CAPITAL ASSET
MAY 31, VALUE INCOME(c) INVESTMENTS(a) INCOME GAINS VALUE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A (7/87)
1997(d) $10.230 $.421 $ .279 $(.420) $ -- $10.510
1996 10.380 .570 (.140) (.580) -- 10.230
1995 10.170 .580 .220 (.590) -- 10.380
1994 10.660 .590 (.390) (.600) (.090) 10.170
1993 10.050 .610 .610 (.610) -- 10.660
1992 9.840 .630 .210 (.630) -- 10.050
1991 9.640 .630 .200 (.630) -- 9.840
1990 9.780 .630 (.130) (.630) (.010) 9.640
1989 9.250 .630 .550 (.640) (.010) 9.780
1988(e) 9.580 .540 (.310) (.560) -- 9.250
CLASS B (2/97)
1997(f) 10.530 .037 (.017) (.040) -- 10.510
CLASS C (10/93)
1997(d) 10.220 .378 .269 (.377) -- 10.490
1996 10.360 .520 (.140) (.520) -- 10.220
1995 10.160 .530 .200 (.530) -- 10.360
1994(e) 11.060 .330 (.840) (.330) (.060) 10.160
CLASS R (2/97)
1997(f) 10.550 .013 (.053) -- -- 10.510
- ----------------------------------------------------------------------------------------------------
<CAPTION>
- --------------------- ---------------------------------------------------------
CLASS RATIOS/SUPPLEMENTAL DATA
(INCEPTION DATE) ---------------------------------------------------------
RATIO OF
RATIO OF NET
EXPENSES INVESTMENT
ENDING TO INCOME TO
NET AVERAGE AVERAGE PORTFOLIO
YEAR ENDING TOTAL ASSETS NET NET TURNOVER
MAY 31, RETURN(b) (MILLIONS) ASSETS(c) ASSETS(c) RATE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CLASS A (7/87)
1997(d) 6.96% $209.9 .79%+ 5.41%+ 20%
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% 19%
1990 5.34% 73.0 .60% 6.55% 31%
1989 13.36% 49.0 .70% 6.62% 33%
1988(e) 3.09%+ 25.6 .54%+ 6.54%+ 71%
CLASS B (2/97)
1997(f) .19% 0.1 1.12%+ 7.08%+ 20%
CLASS C (10/93)
1997(d) 6.43% 7.1 1.34%+ 4.88%+ 20%
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%
CLASS R (2/97)
1997(f) (.38)% -- --% 10.97%+ 20%
- --------------------------------------------------------------------------------
</TABLE>
+ Annualized.
++ Information included prior to the period ending April 30, 1997, reflects the
financial highlights of Flagship Intermediate.
(a) Net of any applicable taxes.
(b) Total returns are calculated on net asset value.
(c) After waiver of certain management fees or reimbursement of expenses, if
applicable, by Nuveen Advisory.
(d) For the nine months ending February 28, 1997.
(e) From commencement of class operations as noted.
(f) From commencement of class operations as noted, through February 28, 1997.
Notes:
(1) The Class A 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. See "How to Select a Purchase Option."
(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%. 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 represent past or
future expenses; actual expenses may be higher or lower.
3
<PAGE> 40
NUVEEN FLAGSHIP NEW JERSEY MUNICIPAL BOND FUND
PERFORMANCE INFORMATION AS OF 2/28/97
INCEPTION: DECEMBER 13, 1991
NET ASSETS: $73.3 MILLION
TOTAL RETURN (ANNUALIZED)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
CLASS A CLASS A
(OFFER PRICE) (NAV) CLASS B CLASS C CLASS R
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 Year 0.45% 4.85% 4.11% 4.18% 5.09%
5 Years 6.02% 6.93% 6.20% 6.19% 7.21%
Inception 6.02% 6.93% 6.20% 6.19% 7.21%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Class R total returns reflect actual performance for all periods; Classes A, B
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 (in
the case of Class C) fees between the classes. Class B total returns assume an
ongoing investment and do not reflect the imposition of the CDSC; your returns
for the 1 year and 5 year periods would be lower if you redeemed at the end of
those periods. 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 for further information.
MATURITY (YEARS)
----------------------------------
Average Maturity 17.0
Average Modified Duration 6.4
----------------------------------
CREDIT QUALITY
[PIE CHART APPEARS HERE]
----------------------------------
BBB 15%
NR 11%
BB 4%
AA 9%
AAA 43%
A 18%
----------------------------------
INDUSTRY DIVERSIFICATION (TOP 5)
[PIE CHART APPEARS HERE]
----------------------------------
Transportation 10%
Other 35%
Housing Facilities 14%
Health Care Facilities 15%
Escrowed 10%
Government Obligations 16%
----------------------------------
4
<PAGE> 41
EXPENSE INFORMATION AS OF 2/28/97
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 (0.45%) (0.45%) (0.45%) (0.45%)
Total (Net) 0.66% 1.41% 1.21% 0.46%
- ---------------------------------------------------------------------------------------------------------------
</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 $ 48 $ 54 $ 12 $ 5
3 Years $ 62 $ 77 $ 38 $15
5 Years $ 77 $ 89 $ 67 $26
10 Years $121 $149 $147 $58
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE> 42
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. You may find more information about the fund's performance in its
annual report. For a free copy of the fund's latest annual and/or semi-annual
reports, write to Nuveen or call (800) 621-7227. Information for the years
beginning prior to February 1, 1997 reflects the financial highlights of the
Nuveen New Jersey Tax-Free Value Fund.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
CLASS INVESTMENT OPERATIONS AND DISTRIBUTIONS
(INCEPTION DATE) -----------------------------------------------------------------------------
NET
REALIZED AND
BEGINNING UNREALIZED DIVIDENDS DISTRIBUTIONS ENDING
NET NET GAIN (LOSS) FROM NET FROM NET
YEAR ENDING ASSET INVESTMENT FROM INVESTMENT CAPITAL ASSET
JANUARY 31, VALUE INCOME(c) INVESTMENTS(a) INCOME GAINS VALUE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A (9/94)
1997(d) $10.220 $.046 $ .041 $(.047) $ -- $10.260
1997 10.400 .478 (.148) (.510) -- 10.220
1996 9.730 .519 .685 (.534) -- 10.400
1995(e) 10.030 .205 (.209) (.210) (.086) 9.730
CLASS B (2/97)
1997(d) 10.220 .049 .031 (.040) -- 10.260
CLASS C (9/94)
1997(d) 10.200 .042 .050 (.042) -- 10.250
1997 10.380 .410 (.158) (.432) -- 10.200
1996 9.710 .443 .683 (.456) -- 10.380
1995(e) 9.770 .159 (.050) (.169) -- 9.710
CLASS R (12/91)
1997(d) 10.230 .048 .040 (.048) -- 10.270
1997 10.410 .491 (.137) (.534) -- 10.230
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
RATIO OF NET
EXPENSES INVESTMENT
ENDING TO INCOME TO
NET AVERAGE AVERAGE PORTFOLIO
YEAR ENDING TOTAL ASSETS NET NET TURNOVER
JANUARY 31, RETURN(b) (MILLIONS) ASSETS(c) ASSETS(c) RATE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CLASS A (9/94)
1997(d) .85 % $27.9 .55%+ 5.89%+ --%
1997 3.31 % 17.1 1.00% 4.98% 10%
1996 12.63 % 10.7 1.00% 5.10% 39%
1995(e) .02 % 2.7 1.00% 5.34%+ 32%
CLASS B (2/97)
1997(d) .78 % 0.7 1.27% 6.21% --%
CLASS C (9/94)
1997(d) .90 % 2.7 1.10%+ 5.35%+ --%
1997 2.53 % 2.6 1.75% 4.22% 10%
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) .86 % 42.7 .35%+ 6.09%+ --%
1997 3.55 % 42.9 .75% 5.24% 10%
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.
(c) After waiver of certain management fees or reimbursement of expenses, if
applicable, by Nuveen Advisory.
(d) For the one month ending February 28, 1997.
(e) From commencement of class operations.
Notes:
(1) The Class A 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. See "How to Select a Purchase Option."
(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%. 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 has undertaken, 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 represent past or
future expenses; actual expenses may be higher or lower.
6
<PAGE> 43
NUVEEN FLAGSHIP NEW JERSEY INTERMEDIATE MUNICIPAL BOND FUND
PERFORMANCE INFORMATION AS OF 2/28/97
INCEPTION: SEPTEMBER 16, 1992
NET ASSETS: $7.0 MILLION
TOTAL RETURN (ANNUALIZED)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
CLASS A CLASS A
(OFFER PRICE) (NAV) CLASS C CLASS R
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 Year -0.79% 3.56% 3.21% 3.56%
Inception 5.47% 6.49% 6.11% 6.49%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Class A total returns reflect actual performance for all periods; Classes C and
R total returns reflect Class A 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 for further information.
MATURITY (YEARS)
----------------------------------
Average Maturity 7.5
Average Modified Duration 5.5
----------------------------------
CREDIT QUALITY
[PIE CHART APPEARS HERE]
----------------------------------
BBB 24%
A 11%
NR 5%
BB 2%
AAA 40%
AA 18%
----------------------------------
INDUSTRY DIVERSIFICATION (TOP 5)
[PIE CHART APPEARS HERE]
----------------------------------
General Obligations 29%
Educational Facilities 11%
Pollution Control 15%
Water and Sewer 5%
Other 24%
Health Care Facilities 16%
----------------------------------
7
<PAGE> 44
EXPENSE INFORMATION AS OF 2/28/97
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 (1.06%) (1.06%) (1.06%)
Total (Net) 0.69% 1.24% 0.49%
- ------------------------------------------------------------------------------------------------------------
</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 $ 37 $ 13 $ 5
3 Years $ 51 $ 39 $16
5 Years $ 67 $ 68 $27
10 Years $113 $150 $62
- ------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 45
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. You may find more information about the fund's performance in its
annual report. For a free copy of the fund's latest annual and/or semi-annual
reports, write to Nuveen or call (800) 621-7227.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
CLASS INVESTMENT OPERATIONS AND DISTRIBUTIONS
(INCEPTION DATE) -----------------------------------------------------------------------------
NET
REALIZED AND
BEGINNING UNREALIZED DIVIDENDS DISTRIBUTIONS ENDING
NET NET GAIN (LOSS) FROM NET FROM NET
YEAR ENDING ASSET INVESTMENT FROM INVESTMENT CAPITAL ASSET
MAY 31, VALUE INCOME(c) INVESTMENTS(a) INCOME GAINS VALUE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A (9/92)
1997(d) $10.140 $.378 $ .162 .380) $ -- $10.300
1996 10.250 .510 (.110) (.510) -- 10.140
1995 10.040 .500 .220 (.510) -- 10.250
1994 10.150 .530 (.100) (.520) (.020)(f) 10.040
1993(e) 9.700 .340 .450 (.340) -- 10.150
- ----------------------------------------------------------------------------------------------------
<CAPTION>
- --------------------- ---------------------------------------------------------
CLASS RATIOS/SUPPLEMENTAL DATA
(INCEPTION DATE) ---------------------------------------------------------
RATIO OF
RATIO OF NET
EXPENSES INVESTMENT
ENDING TO INCOME TO
NET AVERAGE AVERAGE PORTFOLIO
YEAR ENDING TOTAL ASSETS NET NET TURNOVER
MAY 31, RETURN(b) (MILLIONS) ASSETS(c) ASSETS(c) RATE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CLASS A (9/92)
1997(d) 5.41% $ 7.0 .68%+ 4.94%+ 11%
1996 3.89% 8.3 .60% 4.90% 17%
1995 7.42% 9.2 .69% 5.04% 35%
1994 4.27% 9.3 .16% 5.10% 27%
1993(e) 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.
(c) After waiver of certain management fees or reimbursement of expenses, if
applicable, by Nuveen Advisory.
(d) For the nine months ending February 28, 1997.
(e) From commencement of Class operations as noted.
(f) The amounts shown reflect distributions in excess of capital gains.
Notes:
(1) The Class A 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. See "How to Select a Purchase Option."
(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. 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 Providers -- 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.
9
<PAGE> 46
NUVEEN FLAGSHIP NEW YORK MUNICIPAL BOND FUND
PERFORMANCE INFORMATION AS OF 2/28/97
INCEPTION: DECEMBER 22, 1986
NET ASSETS: $228.4 MILLION
TOTAL RETURN (ANNUALIZED)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
CLASS A CLASS A
(OFFER PRICE) (NAV) CLASS B CLASS C CLASS R
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 Year 0.67% 5.08% 4.27% 4.31% 5.26%
5 Years 6.40% 7.32% 6.62% 6.65% 7.63%
10 Years 6.53% 6.99% 6.43% 6.26% 7.28%
Inception 6.86% 7.31% 6.76% 6.58% 7.61%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Class R total returns reflect actual performance for all periods; Classes A, B
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 assume an ongoing investment and do
not reflect the imposition of the CDSC; your returns for the 1 year and 5 year
periods would be lower if you redeemed at the end of those periods. 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 for further information.
MATURITY (YEARS)
----------------------------------
Average Maturity 21.1
Average Modified Duration 7.5
----------------------------------
CREDIT QUALITY
[PIE CHART APPEARS HERE]
----------------------------------
NR 1%
BBB 45%
BB 1%
A 12%
AA 12%
AAA 29%
----------------------------------
INDUSTRY DIVERSIFICATION (TOP 5)
[PIE CHART APPEARS HERE]
----------------------------------
Housing Facilities 20%
Educational Facilities 16%
General Obligations 12%
Other 21%
Escrowed Bonds 11%
Lease Rental 20%
----------------------------------
10
<PAGE> 47
EXPENSE INFORMATION AS OF 2/28/97
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 (0.08%) (0.08%) (0.08%) (0.08%)
Total (Net) 0.81% 1.56% 1.36% 0.61%
- ---------------------------------------------------------------------------------------------------------------
</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 $ 50 $ 54 $ 14 $ 6
3 Years $ 67 $ 74 $ 43 $20
5 Years $ 85 $ 84 $ 74 $34
10 Years $138 $131 $164 $76
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 48
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. You may find more information about the fund's performance in its
annual report. For a free copy of the fund's latest annual and/or semi-annual
reports, write to Nuveen or call (800) 621-7227. Information for the years
beginning prior to February 1, 1997 reflects the financial highlights of the
Nuveen New York Tax-Free Value Fund.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
CLASS INVESTMENT OPERATIONS AND DISTRIBUTIONS
(INCEPTION DATE) -----------------------------------------------------------------------------
NET
REALIZED AND
BEGINNING UNREALIZED DIVIDENDS DISTRIBUTIONS ENDING
NET NET GAIN (LOSS) FROM NET FROM NET
YEAR ENDING ASSET INVESTMENT FROM INVESTMENT CAPITAL ASSET
FEBRUARY 28/29, VALUE INCOME(c) INVESTMENTS(a) INCOME GAINS VALUE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A (9/94)
1997 $10.610 $.588 $(.069) $(.556) $(.043) $10.530
1996 10.120 .555 .487 (.552) -- 10.610
1995(d) 10.230 .277 (.067) (.273) (.047) 10.120
CLASS B (2/97)
1997(d) 10.480 .049 .042 (.041) -- 10.530
CLASS C (9/94)
1997 10.640 .554 (.111) (.480) (.043) 10.560
1996 10.110 .478 .528 (.476) -- 10.640
1995(d) 10.110 .231 .038 (.222) (.047) 10.110
CLASS R (12/86)
1997 10.640 .586 (.047) (.586) (.043) 10.550
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
RATIO OF NET
EXPENSES INVESTMENT
ENDING TO INCOME TO
NET AVERAGE AVERAGE PORTFOLIO
YEAR ENDING TOTAL ASSETS NET NET TURNOVER
FEBRUARY 28/29, RETURN(b) (MILLIONS) ASSETS(c) ASSETS(c) RATE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CLASS A (9/94)
1997 5.08% $71.7 .89% 5.45% 37%
1996 10.52% 15.7 .99% 5.31% 47%
1995(d) 2.21% 3.2 1.00%+ 5.87%+ 29%
CLASS B (2/97)
1997(d) .87% 0.1 1.44%+ 6.07%+ 37%
CLASS C (9/94)
1997 4.31% 4.0 1.57% 4.80% 37%
1996 10.13% .6 1.73% 4.55% 47%
1995(d) 2.80% 0.1 1.75%+ 5.16%+ 29%
CLASS R (12/86)
1997 5.26% 152.6 .69% 5.57% 37%
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.
(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.
Notes:
(1) The Class A 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. See "How to Select a Purchase Option."
(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%. 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 has undertaken, 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 represent past or
future expenses; actual expenses may be higher or lower.
12
<PAGE> 49
NUVEEN NEW YORK INSURED MUNICIPAL BOND FUND
PERFORMANCE INFORMATION AS OF 2/28/97
INCEPTION: DECEMBER 22, 1986
NET ASSETS: $358.5 MILLION
TOTAL RETURN (ANNUALIZED)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
CLASS A CLASS A
(OFFER PRICE) (NAV) CLASS B CLASS C CLASS R
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 Year -0.35% 4.02% 3.17% 3.06% 4.15%
5 Years 6.03% 6.95% 6.19% 6.17% 7.21%
10 Years 6.19% 6.65% 6.06% 5.87% 6.91%
Inception 6.46% 6.90% 6.33% 6.11% 7.17%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Class R total returns reflect actual performance for all periods; Classes A, B
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 assume an ongoing investment and do
not reflect the imposition of the CDSC; your returns for the 1 year and 5 year
periods would be lower if you redeemed at the end of those periods. 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 for further information.
MATURITY (YEARS)
----------------------------------
Average Maturity 21.3
Average Modified Duration 7.0
----------------------------------
CREDIT QUALITY
[PIE CHART APPEARS HERE]
----------------------------------
Escrowed 17%
Insured 83%
----------------------------------
INDUSTRY DIVERSIFICATION (TOP 5)
[PIE CHART APPEARS HERE]
----------------------------------
Housing Facilities 20%
General Obligations 16%
Transportation 10%
Educational Facilities 10%
Escrowed Bonds 17%
Other 27%
----------------------------------
13
<PAGE> 50
EXPENSE INFORMATION AS OF 2/28/97
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 0.14% 0.14% 0.14% 0.14%
- ---------------------------------------------------------------------------------------------------------------
Total (Gross) 0.88% 1.63% 1.43% 0.68%
Waivers/Reimbursements -- -- -- --
- ---------------------------------------------------------------------------------------------------------------
Total (Net) 0.88% 1.63% 1.43% 0.68%
- ---------------------------------------------------------------------------------------------------------------
</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 $ 83 $ 45 $22
5 Years $ 89 $100 $ 78 $38
10 Years $146 $173 $171 $85
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 51
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. You may find more information about the fund's performance in its
annual report. For a free copy of the fund's latest annual and/or semi-annual
reports, write to Nuveen or call (800) 621-7227.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
CLASS INVESTMENT OPERATIONS AND DISTRIBUTIONS
(INCEPTION DATE) -----------------------------------------------------------------------------
NET
REALIZED AND
BEGINNING UNREALIZED DIVIDENDS DISTRIBUTIONS ENDING
NET NET GAIN (LOSS) FROM NET FROM NET
YEAR ENDING ASSET INVESTMENT FROM INVESTMENT CAPITAL ASSET
FEBRUARY 28/29, VALUE INCOME(c) INVESTMENTS(a) INCOME GAINS VALUE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A (9/94)
1997 $10.610 $.549 $(.139) $(.520) $ -- $10.500
1996 10.150 .521 .492 (.524) (.029)(e) 10.610
1995(d) 10.160 .253 .037 (.260) (.040) 10.150
CLASS B (2/97)
1997(d) 10.530 .027 (.020) (.037) -- 10.500
CLASS C (9/94)
1997 10.610 .472 (.159) (.443) -- 10.480
1996 10.120 .442 .524 (.447) (.029)(e) 10.610
1995(d) 10.030 .207 .133 (.210) (.040) 10.120
CLASS R (12/86)
1997 10.610 .550 (.127) (.543) -- 10.490
1996 10.150 .548 .495 (.554) (.029)(e) 10.610
1995 10.630 .555 (.440) (.555) (.040) 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
RATIO OF NET
EXPENSES INVESTMENT
ENDING TO INCOME TO
NET AVERAGE AVERAGE PORTFOLIO
YEAR ENDING TOTAL ASSETS NET NET TURNOVER
FEBRUARY 28/29, RETURN(b) (MILLIONS) ASSETS(c) ASSETS(c) RATE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CLASS A (9/94)
1997 4.02% $ 36.0 .92% 5.04% 29%
1996 10.19% 24.7 .93% 4.97% 17%
1995(d) 3.01% 7.3 1.05%+ 5.41%+ 11%
CLASS B (2/97)
1997(d) .07% 1.3 1.64%+ 5.17%+ 29%
CLASS C (9/94)
1997 3.06% 2.0 1.67% 4.28% 29%
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 4.15% 319.2 .68% 5.28% 29%
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.
(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) 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) The Class A 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. See "How to Select a Purchase Option."
(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%. 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.
15
<PAGE> 52
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 development
and pollution control projects. General obligation bonds are backed by the full
faith and credit, or taxing authority, of the issuer and may be repaid from any
revenue source; revenue bonds may be repaid only from the revenues of a specific
facility or source.
The 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 purchase only 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 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
16
<PAGE> 53
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. 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
Strategies" below for further information.
INSURANCE
The New York Insured Fund primarily purchases insured municipal bonds. 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 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 that 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
investment 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 or 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 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
(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 regulatory
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 municipal 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.
17
<PAGE> 54
The funds limit your investment risk generally by restricting the types and
maturities of municipal bonds they purchase, and by diversifying their
investment portfolios across different industry sectors. The funds should be
considered long-term investments and may not be suitable for investors with
shortterm 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
diversification. 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 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 strategies
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 Strategies"
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 per fund share class and make additional
investments at any time with as little as $50. Reinvestment of Nuveen unit trust
distributions have no purchase minimums. Purchases through sponsors of fee-based
programs meeting certain criteria, as described in the statement of additional
information, may be eligible for lower 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 investment
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.
18
<PAGE> 55
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
refer 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 financial
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
SALES CHARGE DEALER COMMISSION
----------------------------------------------- ---------------------
AS % OF AS % OF AS % OF
PURCHASE AMOUNT PUBLIC OFFERING PRICE YOUR NET INVESTMENT PUBLIC 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>
19
<PAGE> 56
The following Class A sales charges and commissions apply to the New Jersey
Intermediate Fund:
CLASS A SALES CHARGES AND COMMISSIONS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
AUTHORIZED
SALES CHARGE DEALER COMMISSION
---------------------------------------------- -------------------------
AS % OF AS % OF AS % OF
PURCHASE AMOUNT PUBLIC OFFERING PRICE YOUR NET INVESTMENT PUBLIC OFFERING PRICE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <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 calculated 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
connection with sales meetings, seminars, prospecting seminars and other events
at which Nuveen presents its products and services. Under certain circumstances,
Nuveen may also make ongoing payments to authorized dealers to facilitate the
marketing and administration of new and existing shareholder accounts, including
payments for advertising 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
- - Rights of Accumulation
- - Letter of Intent
- - Group Purchase
Sales Charge Waivers
- - Nuveen Unit Trust Reinvestment
- - 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
descriptions of these programs. Further information on these programs is also
available through your financial adviser or by calling (800) 621-7227. Your
financial 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
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. The New Jersey Intermediate
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.
20
<PAGE> 57
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, but 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 qualify to
purchase Class A shares without a sales charge, under certain of the programs
described under "Other Sales Charge Discounts" above. See the statement of
additional information for more details. 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. See "Fund Direct --
Electronic Funds Transfer" below.
Nuveen, the transfer agent or the fund 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;
21
<PAGE> 58
- - 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.
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
involuntary 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 determining
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
management, 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.
22
<PAGE> 59
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 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.
THE POWER OF SYSTEMATIC INVESTING
[CHART APPEARS HERE]
[PLOT POINTS TO COME]
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, semi-annually or 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 or Account Update
Form to participate in the fund's systematic withdrawal plan.
You should not establish systematic withdrawals if you intend to make concurrent
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, you may reinvest all or part of your redemption
proceeds in shares of the same class up to one year later without incurring any
applicable sales charges, and your prior holding period will be reinstated. You
may exercise this privilege only once per redemption request.
If you paid a CDSC, your CDSC will be refunded and your holding period
reinstated. 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
application or the Account Update Form. If you need additional copies of these
forms, or would like assistance completing them, 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.
23
<PAGE> 60
In addition, if you have established electronic funds transfer privileges on
your account, you may request that redemption proceeds of $1,000 or more be sent
by Federal Reserve wire directly into your bank account. While you will
generally receive your redemption proceeds more quickly than a regular telephone
redemption via Fund Direct, the fund may charge you a fee for this expedited
service.
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 of the same share class 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 the same share class 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 dividend
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
dividend, 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.
24
<PAGE> 61
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
dividends, 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.
If you are subject to the alternative minimum tax, a portion of your regular
monthly dividends may be taxable.
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
TAX-FREE YIELD
<TABLE>
<CAPTION>
TAX RATE 4.00% 4.50% 5.00% 5.50% 6.00%
- ------------------------------------------------
<S> <C> <C> <C> <C> <C>
28.0% 5.56% 6.25% 6.94% 7.64% 8.33%
31.0% 5.80% 6.52% 7.25% 7.97% 8.70%
36.0% 6.25% 7.03% 7.81% 8.59% 9.37%
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
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,
25
<PAGE> 62
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 funds' Board of Trustees
oversees the activities of Nuveen Advisory, which also include managing the
funds' business affairs and providing certain clerical, bookkeeping and other
administrative services. 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 NET ASSET VALUE MANAGEMENT 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 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 Flagship 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
information contains a detailed description of the plan and its provisions.
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<PAGE> 63
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 the New York and New Jersey Funds. Boston
Financial Data Services, 225 Franklin Street, Boston, MA 02106, currently serves
as transfer agent for the Connecticut 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 investment
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. You
may find more information about each fund's performance in its annual report.
Call Nuveen at (800) 621-7227 for a free copy.
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.
Class C shares purchased before February 1, 1997 convert to Class 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.
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.
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<PAGE> 64
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 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 investment.
See the statement of additional information for further information.
CONNECTICUT
Connecticut is in the midst of a slow economic recovery from a recession that
began in 1989 and ended in late 1992. Almost 40% of the state's recessionary
employment loss has been recovered. Connecticut ranks first among the states in
per capita personal income. Governor Rowland's recommended budget for fiscal
year 1998 anticipates significant income tax changes aimed at increasing overall
disposable income and encouraging economic expansion in the state. Moderate, but
steady economic growth is expected over the next four years.
While Connecticut ranks first among the states in per capita personal income
($31,776), the state's ratio of tax-supported debt to personal income is highest
in the nation. Large debt levels are expected to limit the state's financial
flexibility. The state's general obligation bonds are rated Aa3 by Moody's and
AA- by S&P.
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 possessions. The portion
of the Connecticut Fund's monthly dividends that is attributable 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 realized 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.
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 overbuilt 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
1997. The State's 1996 unemployment rate was 6.2% and average personal income
was $28,782. New York City's 1996 unemployment rate was 8.8%. New York State
general obligation bonds are rated A2 by Moody's and A- by Standard & Poor's;
New York City general obligation 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
approximately $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.
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<PAGE> 65
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 obligations
of U.S. territories and possessions. The portion of the New York Funds' monthly
dividends that is attributable to income earned on other obligations 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. New Jersey ranks second among the states in
per capita personal income which was $31,053 in 1996. The national recession,
however, adversely affected the State's employment rate. Improvement has been
slow but steady.
The 1996 fiscal year audited general fund revenues were $17.8 billion against
expenditures of $16.4 billion. The general fund surplus totaled $441 million in
fiscal year 1996. The state's jobless rate is now the lowest it has been since
August 1990. New 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.
29
<PAGE> 66
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
Long-term
Intermediate-term
Limited-term
STATE FUNDS
Alabama
Arizona
California(1)
Colorado
Connecticut
Florida(2)
Georgia
Kansas
Kentucky(3)
Louisiana
Maryland
Massachusetts(1)
Michigan
Missouri
New Jersey(2)
New Mexico
New York(1)
North Carolina
Ohio
Pennsylvania
South Carolina
Tennessee
Virginia
Wisconsin
(1) Long-term and insured long-term portfolios.
(2) Long-term and intermediate-term portfolios.
(3) Long-term and limited-term portfolios.
Nuveen Family of Municipal Bond Funds
[MAP OF UNITED STATES APPEARS HERE]
NUVEEN
John Nuveen & Co. Incorporated
333 West Wacker Drive
Chicago, IL 60606-1286
(800) 621-7227
www.nuveen.com
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<PAGE> 67
NUVEEN FLAGSHIP NEW JERSEY MUNICIPAL BOND FUND
Relating to the Acquisition of Assets and Liabilities of
Nuveen Flagship New Jersey Intermediate Municipal Bond Fund
DATED: , 1998
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information provides information about the
Nuveen Flagship New Jersey Municipal Bond Fund (the "New Jersey Fund" or a
"Fund"), a series of the Nuveen Flagship Multistate Trust II, an open-end
investment company organized as a Massachusetts business trust ("Multistate
Trust"), in addition to information contained in the Prospectus/Proxy Statement
of the New Jersey Fund, dated , 1998, which also serves as the proxy
statement of the Nuveen Flagship New Jersey Intermediate Municipal Bond Fund
(the "New Jersey Intermediate Fund" or a "Fund"), a series of the Multistate
Trust, in connection with the issuance of Class A, C and R shares of the New
Jersey Fund to shareholders of the New Jersey Intermediate Fund. This Statement
of Additional Information is not a prospectus. It should be read in conjunction
with the Prospectus/Proxy Statement, into which it has been incorporated by
reference and which may be obtained by contacting the Funds located at 333 West
Wacker Drive, Chicago, Illinois 60606 (telephone No. (312) 917-7700 or (800)
414-7447).
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Proposed Reorganization of the New Jersey Intermediate
Fund...................................................... 1
Additional Information About the New Jersey and New Jersey
Intermediate Funds........................................ 1
Financial Statements........................................ 1
Plan and Agreement of Reorganization........................ Exhibit A
Statement of Additional Information for the New Jersey and
New Jersey Intermediate Funds............................. Exhibit B
Financial Statements for the New Jersey Fund and New Jersey
Intermediate Fund......................................... Exhibit C
Financial Statements for the ProForma Fund.................. Exhibit D
</TABLE>
The Funds will provide, without charge, upon the written or oral request of
any person to whom this Statement of Additional Information is delivered, a copy
of any and all documents that have been incorporated by reference in the
registration statement of which this Statement of Additional Information is a
part.
PROPOSED REORGANIZATION OF THE NEW JERSEY INTERMEDIATE FUND
The shareholders of the New Jersey Intermediate Fund are being asked to
approve an acquisition of all of the assets of the New Jersey Intermediate Fund
solely in exchange for Class A, C and R shares of the New Jersey Fund and the
New Jersey Fund's assumption of the liabilities of the New Jersey Intermediate
Fund (the "Reorganization") pursuant to an Agreement and Plan of Reorganization
by and between the New Jersey Fund and the New Jersey Intermediate Fund (the
"Agreement"). A copy of the form of the Agreement is attached hereto as Exhibit
A.
ADDITIONAL INFORMATION ABOUT THE NEW JERSEY AND NEW JERSEY INTERMEDIATE FUNDS
Incorporated herein by reference in its entirety is the Statement of
Additional Information of the New Jersey and New Jersey Intermediate Funds,
dated June 30, 1997, attached as Exhibit B to this Statement of Additional
Information.
FINANCIAL STATEMENTS
Incorporated herein by reference in their respective entireties are the
audited financial statements for the New Jersey and New Jersey Intermediate
Funds for the fiscal year ended February 28, 1998, attached as Exhibit C and
pro-forma financial statements as of February 28, 1998, attached as Exhibit D.
<PAGE> 68
EXHIBIT A
FORM OF
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization (the "Agreement") is made as of
, 1998, by and between the (the "Acquiring Fund") series
of the Trust, a Massachusetts business trust formed under the
laws of the State of Massachusetts (the "Acquiring Fund Trust"), and the
(the "Acquired Fund") series of the Trust
(the "Acquired Fund Trust").
WITNESSETH:
WHEREAS, the Board of Trustees of the Acquiring Fund Trust and the Acquired
Fund Trust, on behalf of the Acquiring Fund and Acquired Fund respectively, have
determined that entering into this Agreement for the Acquiring Fund to acquire
the assets and liabilities of the Acquired Fund is in the best interests of the
shareholders of each respective fund; and
WHEREAS, the parties intend that this transaction qualify as a
reorganization within the meaning of Section 368(a)(1) of the Internal Revenue
Code of 1986, as amended (the "Code");
NOW, THEREFORE, in consideration of the mutual promises contained herein,
and intending to be legally bound hereby, the parties hereto agree as follows:
1. PLAN OF TRANSACTION.
A. Transfer of Assets. Upon satisfaction of the conditions precedent set
forth in Sections 7 and 8 hereof, the Acquired Fund will convey, transfer and
deliver to the Acquiring Fund at the closing, provided for in Section 2 hereof,
all of the existing assets of the Acquired Fund (including accrued interest to
the Closing Date) as more fully set forth on Schedule 1 hereto, and as amended
from time to time prior to the Closing Date (as defined below), free and clear
of all liens, encumbrances and claims whatsoever (the assets so transferred
collectively being referred to as the "Assets").
B. Consideration. In consideration thereof, the Acquiring Fund agrees that
on the Closing Date, defined in Section 2 hereof, the Acquiring Fund will (i)
deliver to the Acquired Fund, full and fractional Class A, Class B, Class C and
Class R shares of beneficial interest of the Acquiring Fund having net asset
values per share in an amount equal to the aggregate dollar value of the Assets
net of any liabilities of the Acquired Fund described in Section 3E hereof (the
"Liabilities") determined pursuant to Section 3A of this Agreement
(collectively, the "Acquiring Fund Shares") and (ii) assume all of the Acquired
Fund's Liabilities. The calculation of full and fractional Class A, Class C and
Class R shares of beneficial interest of the Acquiring Fund to be exchanged
shall be carried out to no less than two (2) decimal places. On the Closing
Date, the Acquiring Fund shall deliver to the Acquired Fund the Acquiring Fund
Shares in the amount determined pursuant to this Section 1B and the Acquired
Fund thereafter shall, in order to effect the distribution of such shares to the
Acquired Fund's shareholders in liquidation of the Acquired Fund and in exchange
for the shareholders' shares of the Acquired Fund, instruct the Acquiring Fund
to register the pro rata interest in the Acquiring Fund Shares (in full and
fractional shares) of each of the holders of record of shares of the Acquired
Fund in accordance with their holdings of either Class A, Class C or Class R
shares and shall provide as part of such instruction a complete and updated list
of such holders (including addresses and taxpayer identification numbers), and
the Acquiring Fund agrees promptly to comply with said instruction. The
Acquiring Fund shall have no obligation to inquire as to the validity, propriety
or correctness of such instruction, but shall assume that such instruction is
valid, proper and correct. All Acquiring Fund Shares delivered to the Acquired
Fund in exchange for such Assets shall be delivered at net asset value without
sales load, commission or other similar fee being imposed.
2. CLOSING OF THE TRANSACTION.
Closing Date. The closing shall occur within [fifteen (15)] business days
after the later of receipt of all necessary regulatory approvals and the final
adjournment of the meeting of shareholders of the Acquired Fund at which this
Agreement will be considered and approved or such later date as soon as
practicable thereafter, as the parties may mutually agree (the "Closing Date").
3. PROCEDURE FOR REORGANIZATION.
A. Valuation. The value of the Assets and Liabilities of the Acquired Fund
to be transferred and assumed, respectively, by the Acquiring Fund shall be
computed as of the Closing Date, in the manner set forth in the most
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<PAGE> 69
recent Prospectus and Statement of Additional Information of the Acquiring Fund
(collectively, the "Acquiring Fund Prospectus"), copies of which have been
delivered to the Acquired Fund.
B. Delivery of Fund Assets. The Assets shall be delivered to The Chase
Manhattan Bank, 4 New York Plaza, New York 10004, as custodian for the Acquiring
Fund (the "Custodian") for the benefit of the Acquiring Fund, duly endorsed in
proper form for transfer in such condition as to constitute a good delivery
thereof, free and clear of all liens, encumbrances and claims whatsoever, in
accordance with the custom of brokers, and shall be accompanied by all necessary
state stock transfer stamps, the cost of which shall be borne by the Acquired
Fund.
C. Failure to Deliver Securities. If the Acquired Fund is unable to make
delivery pursuant to Section 3B hereof to the Custodian of any of the Acquired
Fund's securities for the reason that any of such securities purchased by the
Acquired Fund have not yet been delivered to it by the Acquired Fund's broker or
brokers, then, in lieu of such delivery, the Acquired Fund shall deliver to the
Custodian, with respect to said securities, executed copies of an agreement of
assignment and due bills executed on behalf of said broker or brokers, together
with such other documents as may be required by the Acquiring Fund or Custodian,
including brokers' confirmation slips.
D. Shareholder Accounts. The Acquiring Fund, in order to assist the
Acquired Fund in the distribution of the Acquiring Fund Shares to the Acquired
Fund shareholders after delivery of the Acquiring Fund Shares to the Acquired
Fund, will establish pursuant to the request of the Acquired Fund an open
account with the Acquiring Fund for each shareholder of the Acquired Fund and,
upon request by the Acquired Fund, shall transfer to such account the exact
number of full and fractional Class A, Class C and Class R shares of the
Acquiring Fund then held by the Acquired Fund specified in the instruction
provided pursuant to Section 2 hereof. The Acquiring Fund is not required to
issue certificates representing Acquiring Fund Shares. Upon liquidation or
dissolution of the Acquired Fund, certificates representing shares of beneficial
interest stock of the Acquired Fund shall become null and void.
E. Liabilities. The Liabilities shall include all of Acquired Fund's
liabilities, debts, obligations, and duties of whatever kind or nature, whether
absolute, accrued, contingent, or otherwise, whether or not arising in the
ordinary course of business, whether or not determinable at the Closing Date,
and whether or not specifically referred to in this Agreement.
F. Expenses. In the event that the transactions contemplated herein are
consummated the Acquired Fund agrees to pay (i) for the reasonable outside
expenses of the Acquired Fund and the Acquiring Fund for the transactions
contemplated herein which are solely and directly related to the reorganization;
including, but not by way of limitation, the preparation of the Acquiring Fund
Trust's Registration Statement on Form N-14 (the "Registration Statement") and
the solicitation of the Acquired Fund shareholder proxies; (ii) the Acquired
Fund's and Acquiring Fund's legal counsel's reasonable attorney's fees, which
fees shall be payable pursuant to receipt of an itemized statement; and (iii)
the cost of rendering the tax opinion, more fully referenced in Section 7F
below. In the event that the transactions contemplated herein are not
consummated for any reason, then all reasonable outside expenses of the Acquired
Fund and the Acquiring Fund incurred to the date of termination of this
Agreement shall be borne by the Acquired Fund.
G. Liquidation and Dissolution. As soon as practicable after the Closing
Date but in no event later than one year after the Closing Date, the Board of
Trustees of the Acquired Fund Trust and the Acquired Fund shall take all
necessary and proper action to completely liquidate and terminate the Acquired
Fund as a series in accordance with Massachusetts law and the Trust's
Declaration of Trust. Immediately after the Closing Date, the stock transfer
books relating to the Acquired Fund shall be closed and no transfer of shares
shall thereafter be made on such books.
4. ACQUIRED FUND'S REPRESENTATIONS AND WARRANTIES.
The Acquired Fund hereby represents and warrants to the Acquiring Fund,
which representations and warranties are true and correct on the date hereof,
and agrees with the Acquiring Fund that:
A. Organization. The Acquired Fund Trust is a Massachusetts Business Trust
duly formed and in good standing under the laws of the State of Massachusetts
and is duly authorized to transact business in the State of Massachusetts. The
Acquired Fund is a separate series of the Acquired Fund Trust duly designated in
accordance with the applicable provisions of the Acquired Fund Trust's
Declaration of Trust. The Acquired Fund Trust and Acquired Fund are qualified to
do business in all jurisdictions in which they are required to be so qualified,
except jurisdictions in which the failure to so qualify would not have a
material adverse effect on the Acquired Fund Trust or Acquired Fund. The
Acquired Fund has all material federal, state and local authorizations necessary
to own all of
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<PAGE> 70
the properties and assets and to carry on its business as now being conducted,
except authorizations which the failure to so obtain would not have a material
adverse effect on the Acquired Fund.
B. Registration. The Acquired Fund Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act") as an open-end management
company and such registration has not been revoked or rescinded. The Acquired
Fund is a nondiversified series of the Acquired Fund Trust. The Acquired Fund
Trust and the Acquired Fund are in compliance in all material respects with the
1940 Act and the rules and regulations thereunder. All of the outstanding shares
of beneficial interest of the Acquired Fund have been duly authorized and are
validly issued, fully paid and nonassessable and not subject to pre-emptive or
dissenters' rights.
C. Audited Financial Statements. The statement of assets and liabilities
and the portfolio of investments and the related statements of operations and
changes in net assets of the Acquired Fund audited as of and for the fiscal year
ended , true and complete copies of which have been heretofore
furnished to the Acquiring Fund, fairly represent the financial condition and
the results of operations of the Acquired Fund as of and for their respective
dates and periods in conformity with generally accepted accounting principles
applied on a consistent basis during the periods involved.
D. Financial Statements. The Acquired Fund shall furnish to the Acquiring
Fund (i) an unaudited statement of assets and liabilities and the portfolio of
investments and the related statements of operations and changes in net assets
of the Acquired Fund for the period ended ; and (ii) within [five
(5)] business days after the Closing Date, an unaudited statement of assets and
liabilities and the portfolio of investments and the related statements of
operations and changes in net assets as of and for the interim period ending on
the Closing Date; such financial statements will represent fairly the financial
position and portfolio of investments and the results of the Acquired Fund's
operations as of, and for the period ending on, the dates of such statements in
conformity with generally accepted accounting principles applied on a consistent
basis during the periods involved and the results of its operations and changes
in financial position for the periods then ended; and such financial statements
shall be certified by the Treasurer of the Acquired Fund as complying with the
requirements hereof.
E. Contingent Liabilities. There are no contingent Liabilities of the
Acquired Fund not disclosed in the financial statements delivered pursuant to
Sections 4C and 4D which would materially affect the Acquired Fund's financial
condition, and there are no legal, administrative, or other proceedings pending
or, to its knowledge, threatened against the Acquired Fund which would, if
adversely determined, materially affect the Acquired Fund's financial condition.
All Liabilities were incurred by the Acquired Fund in the ordinary course of its
business.
F. Material Agreements. The Acquired Fund is in compliance with all
material agreements, rules, laws, statutes, regulations and administrative
orders affecting its operations or its assets; and except as referred to in the
Acquired Fund's Prospectus and Statement of Additional Information, there are no
material agreements outstanding relating to the Acquired Fund to which the
Acquired Fund is a party.
G. Tax Returns. At the date hereof, all Federal and other material tax
returns and reports of the Acquired Fund required by law to have been filed by
such dates shall have been filed, and all Federal and other taxes shown thereon
shall have been paid so far as due, or provision shall have been made for the
payment thereof, and to the best of the Acquired Fund's knowledge no such return
is currently under audit and no assessment has been asserted with respect to any
such return.
H. Corporate Authority. The Acquired Fund has the necessary power to enter
into this Agreement and to consummate the transactions contemplated herein. The
execution, delivery and performance of this Agreement and the consummation of
the transactions contemplated herein have been duly authorized by the Acquired
Fund's Board of Trustees, and except for obtaining approval of the holders of
the shares of the Acquired Fund, no other corporate acts or proceedings by the
Acquired Fund are necessary to authorize this Agreement and the transactions
contemplated herein. This Agreement has been duly executed and delivered by the
Acquired Fund and constitutes the legal, valid and binding obligation of
Acquired Fund enforceable in accordance with its terms.
I. No Violation; Consents and Approvals. The execution, delivery and
performance of this Agreement by the Acquired Fund does not and will not (i)
violate any provision of the Acquired Fund Trust's Declaration of Trust or the
Designation of Series of the Acquired Fund, (ii) violate any statute, law,
judgment, writ, decree, order, regulation or rule of any court or governmental
authority applicable to the Acquired Fund, (iii) result in a violation or breach
of, or constitute a default under any material contract, indenture, mortgage,
loan agreement, note, lease or other instrument or obligation to which the
Acquired Fund is subject, or (iv) result in the creation or imposition or any
lien, charge or encumbrance upon any property or assets of the Acquired Fund.
Except as set forth in Schedule 2 to this Agreement, (i) no consent, approval,
authorization, order or filing with or notice to any court or governmental
authority or agency is required for the consummation by the Acquired Fund of the
transactions
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contemplated by this Agreement and (ii) no consent of or notice to any third
party or entity is required for the consummation by the Acquired Fund of the
transactions contemplated by this Agreement.
J. Title. The Acquired Fund has good and marketable title to the Assets,
free and clear of all liens, mortgages, pledges, encumbrances, charges, claims
and equities whatsoever, other than a lien for taxes not yet due and payable,
and full right, power and authority to sell, assign, transfer and deliver such
Assets; upon delivery of such Assets, the Acquiring Fund will receive good and
marketable title to such Assets, free and clear of all liens, mortgages,
pledges, encumbrances, charges, claims and equities other than a lien for taxes
not yet due and payable.
K. Prospectus/Proxy Statement. The Registration Statement and the
Prospectus/Proxy Statement contained therein as of the effective date of the
Registration Statement, as amended or as supplemented if it shall have been
amended or supplemented, conforms and will conform as it relates to the Acquired
Fund, in all material respects, to the applicable requirements of the applicable
Federal and state securities laws and the rules and regulations of the SEC
thereunder, and do not and will not include any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, except that no representations or
warranties in this Section 4K apply to statements or omissions made in reliance
upon and in conformity with written information concerning the Acquiring Fund
furnished to the Acquired Fund by the Acquiring Fund.
L. Tax Qualification. The Acquired Fund has qualified as a regulated
investment company within the meaning of Section 851 of the Code for each of its
taxable years; and has satisfied the distribution requirements imposed by
Section 852 of the Code for each of its taxable years.
M. Fair Market Value. The fair market value on a going concern basis of the
Assets will equal or exceed the Liabilities to be assumed by the Acquiring Fund
and those to which the Assets are subject.
5. THE ACQUIRING FUND'S REPRESENTATIONS AND WARRANTIES.
The Acquiring Fund hereby represents and warrants to the Acquired Fund,
which representations and warranties are true and correct on the date hereof,
and agrees with the Acquired Fund that:
A. Organization. The Acquiring Fund Trust is a Massachusetts Business Trust
duly formed and in good standing under the laws of the State of Massachusetts
and is duly authorized to transact business in the State of Massachusetts. The
Acquiring Fund is a separate series of the Acquiring Fund Trust duly designated
in accordance with the applicable provisions of the Acquiring Fund Trust's
Declaration of Trust. The Acquiring Fund Trust and Acquiring Fund are qualified
to do business in all jurisdictions in which they are required to be so
qualified, except jurisdictions in which the failure to so qualify would not
have a material adverse effect on either the Acquiring Fund Trust or Acquiring
Fund. The Acquiring Fund has all material federal, state and local
authorizations necessary to own all of the properties and assets and to carry on
its business and the business thereof as now being conducted, except
authorizations which the failure to so obtain would not have a material adverse
effect on the Acquiring Fund.
B. Registration. The Acquiring Fund Trust is registered under the 1940 Act
as an open-end management company and such registration has not been revoked or
rescinded. The Acquiring Fund is a [nondiversified/ diversified] series of the
Acquiring Fund Trust. The Acquiring Fund Trust and the Acquiring Fund are in
compliance in all material respects with the 1940 Act and the rules and
regulations thereunder. All of the outstanding shares of beneficial interest of
the Acquiring Fund have been duly authorized and are validly issued, fully paid
and non-assessable and not subject to pre-emptive dissenters rights.
C. Audited Financial Statements. The statement of assets and liabilities
and the portfolio of investments and the related statements of operations and
changes in net assets of the Acquiring Fund audited as of and for the fiscal
year ended , true and complete copies of which have been heretofore
furnished to the Acquired Fund fairly represent the financial condition and the
results of operations of the Acquiring Fund as of and for their respective dates
and periods in conformity with generally accepted accounting principles applied
on a consistent basis during the periods involved.
D. Financial Statements. The Acquiring Fund shall furnish to the Acquired
Fund (i) an unaudited statement of assets and liabilities and the portfolio of
investments and the related statements of operations and changes in net assets
of the Acquiring Fund for the period ended and (ii) within
[five (5)] business days after the Closing Date, an unaudited statement of
assets and liabilities and the portfolio of investments and the related
statements of operations and changes in net assets as of and for the interim
period ending on the Closing Date; such financial statements will represent
fairly the financial position and portfolio of investments and the results of
its operations as of, and for the period ending on, the dates of such statements
in conformity with generally accepted
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accounting principles applied on a consistent basis during the periods involved
and the results of its operations and changes in financial position for the
periods then ended; and such financial statements shall be certified by the
Treasurer of the Acquiring Fund as complying with the requirements hereof.
E. Contingent Liabilities. There are no contingent liabilities of the
Acquiring Fund not disclosed in the financial statements delivered pursuant to
Sections 5C and 5D which would materially affect the Acquiring Fund's financial
condition, and there are no legal, administrative, or other proceedings pending
or, to its knowledge, threatened against the Acquiring Fund which would, if
adversely determined, materially affect the Acquiring Fund's financial
condition.
F. Material Agreements. The Acquiring Fund is in compliance with all
material agreements, rules, laws, statutes, regulations and administrative
orders affecting its operations or its assets; and except as referred to in the
Acquiring Fund Prospectus and Statement of Additional Information there are no
material agreements outstanding relating to the Acquiring Fund to which the
Acquiring Fund is a party.
G. Tax Returns. At the date hereof, all Federal and other material tax
returns and reports of the Acquiring Fund required by law to have been filed by
such dates shall have been filed, and all Federal and other taxes shall have
been paid so far as due, or provision shall have been made for the payment
thereof, and to the best of the Acquiring Fund's knowledge no such return is
currently under audit and no assessment has been asserted with respect to any
such return.
H. Corporate Authority. The Acquiring Fund has the necessary power to enter
into this Agreement and to consummate the transactions contemplated herein. The
execution, delivery and performance of this Agreement and the consummation of
the transactions contemplated herein have been duly authorized by the Acquiring
Fund's Board of Trustees, no other corporate acts or proceedings by the
Acquiring Fund are necessary to authorize this Agreement and the transactions
contemplated herein. This Agreement has been duly executed and delivered by the
Acquiring Fund and constitutes a valid and binding obligation of the Acquiring
Fund enforceable in accordance with its terms.
I. No Violation; Consents and Approvals. The execution, delivery and
performance of this Agreement by the Acquiring Fund does not and will not (i)
violate any provision of the Acquiring Fund Trust's Declaration of Trust or the
Designation of Series of the Acquiring Fund, (ii) violate any statute, law,
judgment, writ, decree, order, regulation or rule of any court or governmental
authority applicable to the Acquiring Fund or (iii) result in a violation or
breach of, or constitute a default under, any material contract, indenture,
mortgage, loan agreement, note, lease or other instrument or obligation to which
the Acquiring Fund is subject, or (iv) result in the creation or imposition or
any lien, charge or encumbrance upon any property or assets of the Acquiring
Fund. Except as set forth in Schedule 3 to this Agreement, (i) no consent,
approval, authorization, order or filing with or notice to any court or
governmental authority or agency is required for the consummation by the
Acquiring Fund of the transactions contemplated by this Agreement and (ii) no
consent of or notice to any third party or entity is required for the
consummation by the Acquiring Fund of the transactions contemplated by this
Agreement.
J. Absence of Proceedings. There are no legal, administrative or other
proceedings pending or, to its knowledge, threatened against the Acquiring Fund
which would materially affect its financial condition.
K. Shares of the Acquiring Fund: Registration. The Acquiring Fund Shares to
be issued pursuant to Section 1 hereof will be duly registered under the
Securities Act and all applicable state securities laws.
L. Shares of the Acquiring Fund: Authorization. The shares of beneficial
interest of the Acquiring Fund to be issued pursuant to Section 1 hereof have
been duly authorized and, when issued in accordance with this Agreement, will be
validly issued and fully paid and non-assessable by the Acquiring Fund Trust and
conform in all material respects to the description thereof contained in the
Acquiring Fund's Prospectus furnished to the Acquired Fund.
M. Registration Statement. The Registration Statement and the
Prospectus/Proxy Statement contained therein as of the effective date of the
Registration Statement, and at all times subsequent thereto up to and including
the Closing Date, as amended or as supplemented if they shall have been amended
or supplemented, conforms and will conform as it relates to the Acquiring Fund,
in all material respects, to the applicable requirements of the applicable
Federal securities laws and the rules and regulations of the SEC thereunder, and
do not and will not include any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, except that no representations or warranties in this Section 5M
apply to statements or omissions made
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in reliance upon and in conformity with written information concerning the
Acquired Fund furnished to the Acquiring Fund by the Acquired Fund.
N. Tax Qualification. The Acquiring Fund has qualified as a regulated
investment company within the meaning of Section 851 of the Code for each of its
taxable years; and has satisfied the distribution requirements imposed by
Section 852 of the Code for each of its taxable years.
6. COVENANTS.
During the period from the date of this Agreement and continuing until the
Closing Date the Acquired Fund and Acquiring Fund (except as expressly
contemplated or permitted by this Agreement) agree as follows:
A. Other Actions. The Acquired Fund and Acquiring Fund shall operate only
in the ordinary course of business consistent with prior practice. No party
shall take any action that would, or reasonably would be expected to, result in
any of its representations and warranties set forth in this Agreement being or
becoming untrue in any material respect.
B. Government Filings; Consents. The Acquired Fund and Acquiring Fund shall
file all reports required to be filed by the Acquired Fund and Acquiring Fund
with the SEC between the date of this Agreement and the Closing Date and shall
deliver to the other party copies of all such reports promptly after the same
are filed. Except where prohibited by applicable statutes and regulations, each
party shall promptly provide the other (or its counsel) with copies of all other
filings made by such party with any state, local or federal government agency or
entity in connection with this Agreement or the transactions contemplated
hereby. Each of the Acquired Fund and the Acquiring Fund shall use all
reasonable efforts to obtain all consents, approvals, and authorizations
required in connection with the consummation of the transactions contemplated by
this Agreement and to make all necessary filings with the Secretary of State of
the State of Massachusetts.
C. Preparation of the Registration Statement and the Prospectus/Proxy
Statement. In connection with the Registration Statement and the
Prospectus/Proxy Statement, each party hereto will cooperate with the other and
furnish to the other the information relating to the Acquired Fund or Acquiring
Fund, as the case may be, required by the Securities Act or the Exchange Act and
the rules and regulations thereunder, as the case may be, to be set forth in the
Registration Statement or the Prospectus/Proxy Statement, as the case may be.
The Acquired Fund shall promptly prepare and provide the Prospectus/Proxy
Statement to the Acquiring Fund and the Acquiring Fund shall promptly prepare
and file with the SEC the Registration Statement, in which the Prospectus/Proxy
Statement will be included as a prospectus. In connection with the Registration
Statement, insofar as it relates to the Acquired Fund and its affiliated
persons, the Acquiring Fund shall only include such information as is approved
by the Acquired Fund for use in the Registration Statement. The Acquiring Fund
shall not amend or supplement any such information regarding the Acquired Fund
and such affiliates without the prior written consent of the Acquired Fund which
consent shall not be unreasonably withheld or delayed. The Acquiring Fund shall
promptly notify and provide the Acquired Fund with copies of all amendments or
supplements filed with respect to the Registration Statement. The Acquiring Fund
shall use all reasonable efforts to have the Registration Statement declared
effective under the Securities Act as promptly as practicable after such filing.
The Acquiring Fund shall also take any action (other than qualifying to do
business in any jurisdiction in which it is now not so qualified) required to be
taken under any applicable state securities laws in connection with the issuance
of the Acquiring Fund's shares of beneficial interest in the transactions
contemplated by this Agreement, and the Acquired Fund shall furnish all
information concerning the Acquired Fund and the holders of the Acquired Fund's
shares of beneficial interest as may be reasonably requested in connection with
any such action.
D. Access to Information. During the period prior to the Closing Date, the
Acquired Fund shall make available to the Acquiring Fund a copy of each report,
schedule, registration statement and other document (the "Documents") filed or
received by it during such period pursuant to the requirements of Federal or
state securities laws (other than Documents which such party is not permitted to
disclose under applicable law). During the period prior to the Closing Date, the
Acquiring Fund shall make available to the Acquired Fund each Document
pertaining to the transactions contemplated hereby filed or received by it
during such period pursuant to Federal or state securities laws (other than
Documents which such party is not permitted to disclose under applicable law).
E. Shareholders Meeting. The Acquired Fund shall call a meeting of the
Acquired Fund shareholders to be held as promptly as practicable for the purpose
of voting upon the approval of this Agreement and the transactions contemplated
herein, and shall furnish a copy of the Prospectus/Proxy Statement and form of
proxy to each shareholder of the Acquired Fund as of the record date for such
meeting of shareholders. The Board shall
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recommend to the Acquired Fund shareholders approval of this Agreement and the
transactions contemplated herein, subject to fiduciary obligations under
applicable law.
F. Coordination of Portfolios. The Acquired Fund and Acquiring Fund
covenant and agree to coordinate the respective portfolios of the Acquired Fund
and Acquiring Fund from the date of the Agreement up to and including the
Closing Date in order that at Closing, when the Assets are added to the
Acquiring Fund's portfolio, the resulting portfolio will meet the Acquiring
Fund's investment objective, policies and restrictions, as set forth in the
Acquiring Fund's Prospectus, a copy of which has been delivered to the Acquired
Fund.
G. Distribution of the Shares. At Closing the Acquired Fund covenants that
it shall cause to be distributed the Acquiring Fund Shares in the proper pro
rata amount for the benefit of Acquired Fund's shareholders and such that the
Acquired Fund shall not continue to hold amounts of said shares so as to cause a
violation of Section 12(d)(1) of the 1940 Act. The Acquired Fund covenants
further that, pursuant to Section 3G, it shall liquidate and dissolve as
promptly as practicable after the Closing Date. The Acquired Fund covenants to
use all reasonable efforts to cooperate with the Acquiring Fund and the
Acquiring Fund's transfer agent in the distribution of said shares.
H. Brokers or Finders. Except as disclosed in writing to the other party
prior to the date hereof, each of the Acquired Fund and the Acquiring Fund
represents that no agent, broker, investment banker, financial advisor or other
firm or person is or will be entitled to any broker's or finder's fee or any
other commission or similar fee in connection with any of the transactions
contemplated by this Agreement, and each party shall hold the other harmless
from and against any all claims, liabilities or obligations with respect to any
such fees, commissions or expenses asserted by any person to be due or payable
in connection with any of the transactions contemplated by this Agreement on the
basis of any act or statement alleged to have been made by such first party or
its affiliate.
I. Additional Agreements. In case at any time after the Closing Date any
further action is necessary or desirable in order to carry out the purposes of
this Agreement the appropriate party or parties to this Agreement shall take all
such necessary action.
J. Public Announcements. For a period of time from the date of this
Agreement to the Closing Date, the Acquired Fund and the Acquiring Fund will
consult with each other before issuing any press releases or otherwise making
any public statements with respect to this Agreement or the transactions
contemplated herein and shall not issue any press release or make any public
statement prior to such consultation, except as may be required by law or the
rules of any national securities exchange on which such party's securities are
traded.
K. Tax Status of Reorganization. The intention of the parties is that the
transaction will qualify as a reorganization within the meaning of Section
368(a) of the Code. Neither the Acquired Fund Trust, the Acquiring Fund Trust,
the Acquiring Fund nor the Acquired Fund shall take any action, or cause any
action to be taken (including, without limitation, the filing of any tax return)
that is inconsistent with such treatment or results in the failure of the
transaction to qualify as a reorganization within meaning of Section 368(a) of
the Code. At or prior to the Closing Date, the Acquired Fund Trust, the
Acquiring Fund Trust, the Acquiring Fund and the Acquired Fund will take such
action, or cause such action to be taken, as is reasonably necessary to enable
Vedder, Price, Kaufman & Kammholz, counsel to the Acquired Fund, to render the
tax opinion contemplated herein.
L. Declaration of Dividend. At or immediately prior to the Closing Date,
the Acquired Fund may declare and pay to its stockholders a dividend or other
distribution in an amount large enough so that it will have distributed
substantially all (and in any event not less than 98%) of its investment company
taxable income (computed without regard to any deduction for dividends paid) and
realized net capital gain, if any, for the current taxable year through the
Closing Date.
7. CONDITIONS TO OBLIGATIONS OF THE ACQUIRED FUND.
The obligations of the Acquired Fund hereunder with respect to the
consummation of the Reorganization are subject to the satisfaction, or written
waiver by the Acquired Fund, of the following conditions:
A. Shareholder Approval. This Agreement and the transactions contemplated
herein shall have been approved by the affirmative vote of the holders of at
least a majority of the outstanding shares of beneficial interest in the
Acquired Fund.
B. Representations, Warranties and Agreements. Each of the representations
and warranties of the Acquiring Fund contained herein shall be true in all
material respects as of the Closing Date, and as of the Closing Date there shall
have been no material adverse change in the financial condition, results of
operations, business properties or assets of the Acquiring Fund, and the
Acquired Fund shall have received a certificate of an authorized officer of the
Acquiring Fund satisfactory in form and substance to the Acquired Fund so
stating. The Acquiring Fund shall have
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performed and complied in all material respects with all agreements, obligations
and covenants required by this Agreement to be so performed or complied with by
it on or prior to the Closing Date.
C. Registration Statement Effective. The Registration Statement shall have
become effective and no stop orders under the Securities Act pertaining thereto
shall have been issued.
D. Regulatory Approval. All necessary approvals, registrations, and
exemptions under federal and state securities laws shall have been obtained.
E. No Injunctions or Restraints; Illegality. No temporary restraining
order, preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition (an "Injunction")
preventing the consummation of the transactions contemplated by this Agreement
shall be in effect, nor shall any proceeding by any state, local or federal
government agency or entity asking any of the foregoing be pending. There shall
not be any action taken or any statute, rule, regulation or order enacted,
entered, enforced or deemed applicable to the transactions contemplated by this
Agreement, which makes the consummation of the transactions contemplated by this
Agreement illegal or which has a material adverse effect on business operations
of the Acquiring Fund.
F. Tax Opinion. The Acquired Fund shall have obtained an opinion from
Vedder, Price, Kaufman & Kammholz, counsel for the Acquired Fund, dated as of
the Closing Date, addressed to the Acquiring Fund Trust, Acquired Fund Trust,
Acquired Fund and Acquiring Fund, that the consummation of the transactions set
forth in this Agreement comply with the requirements of a reorganization as
described in Section 368(a) of the Code, substantially in the form attached as
Annex A.
G. Opinion of Counsel. The Acquired Fund shall have received the opinion of
Vedder, Price, Kaufman & Kammholz, counsel for the Acquiring Fund Trust and
Acquiring Fund, dated as of the Closing Date, addressed to the Acquired Fund
substantially in the form and to the effect that: (i) the Acquiring Fund Trust
is duly formed and in good standing as a business trust under the laws of the
State of Massachusetts; (ii) the Board of Trustees of the Acquiring Fund Trust
has duly designated the Acquiring Fund as a series of the Acquiring Fund Trust
pursuant to the terms of the Declaration of Trust of the Acquiring Fund Trust;
(iii) the Acquiring Fund Trust is registered as an open-end management company
under the 1940 Act; (iv) this Agreement and the reorganization provided for
herein and the execution of this Agreement have been duly authorized and
approved by all requisite action of the Acquiring Fund Trust and this Agreement
has been duly executed and delivered by the Acquiring Fund Trust on behalf of
the Acquiring Fund and (assuming the Agreement is a valid and binding obligation
of the other parties thereto) is a valid and binding obligation of the Acquiring
Fund; except as such enforceability may be limited by bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium or similar law affecting
creditors' rights generally, or by general principals of equity (regardless of
whether enforcement is sought in a proceeding at equity at law); (v) neither the
execution or delivery by the Acquiring Fund Trust on behalf of the Acquiring
Fund of this Agreement nor the consummation by the Acquiring Fund Trust or
Acquiring Fund of the transactions contemplated thereby contravene the Acquiring
Fund Trust's Declaration of Trust, or, to the best of their knowledge, violate
any provision of any statute or any published regulation or any judgment or
order disclosed to it by the Acquiring Fund Trust as being applicable to the
Acquiring Fund Trust or the Acquiring Fund; (vi) to the best of their knowledge
based solely on the certificate of an appropriate officer of the Acquiring Fund
attached hereto, there is no pending or threatened litigation which would have
the effect of prohibiting any material business practice or the acquisition of
any material property or the conduct of any material business of the Acquiring
Fund or might have a material adverse effect on the value of any assets of the
Acquiring Fund; (vii) the Acquiring Fund's Shares have been duly authorized and
upon issuance thereof in accordance with this Agreement will, subject to certain
matters regarding the liability of a shareholder of a Massachusetts business
trust, be validly issued, fully paid and nonassessable; (viii) except as to
financial statements and schedules and other financial and statistical data
included or incorporated by reference therein and subject to usual and customary
qualifications with respect to Rule 10b-5 type opinions, as of the effective
date of the Registration Statement filed pursuant to the Agreement, the portions
thereof pertaining to the Acquiring Fund comply as to form in all material
respects with the requirements of the Securities Act, the Securities Exchange
Act and the 1940 Act and the rules and regulations of the SEC thereunder and no
facts have come to counsel's attention which would cause them to believe that as
of the effectiveness of the portions of the Registration Statement applicable to
the Acquiring Fund, the Registration Statement contained any untrue statement of
a material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading, and (ix) to
the best of their knowledge and information and subject to the qualifications
set forth below, the execution and delivery by the Acquiring Fund Trust on
behalf of the Acquiring Fund of the Agreement and the consummation of the
transactions therein contemplated do not require, under the laws of the States
of Massachusetts and Illinois or the federal laws of the United States, the
consent, approval,
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authorization, registration, qualification or order of, or filing with, any
court or governmental agency or body (except such as have been obtained).
Counsel need express no opinion, however, as to any such consent, approval,
authorization, registration, qualification, order or filing (a) which may be
required as a result of the involvement of other parties to the Agreement in the
transactions contemplated by the Agreement because of their legal or regulatory
status or because of any other facts specifically pertaining to them; (b) the
absence of which does not deprive the Acquired Fund of any material benefit
under the Agreement; or (c) which can be readily obtained without significant
delay or expense to the Acquired Fund, without loss to the Acquired Fund of any
material benefit under the Agreement and without any material adverse effect on
the Acquired Fund during the period such consent, approval, authorization,
registration, qualification or order was obtained. The foregoing opinion relates
only to consents, approvals, authorizations, registrations, qualifications,
orders or filings under (a) laws which are specifically referred to in this
opinion, (b) laws of the States of Massachusetts and Illinois and the federal
laws of the United States which, in counsel's experience, are normally
applicable to transactions of the type provided for in the Agreement and (c)
court orders and judgments disclosed to counsel by the Acquiring Fund Trust on
behalf of the Acquiring Fund in connection with the opinion. In addition,
although counsel need not specifically have considered the possible
applicability to the Acquiring Fund Trust or the Acquiring Fund of any other
laws, orders or judgments, nothing has come to their attention in connection
with their representation of the Acquiring Fund Trust and the Acquiring Fund in
this transaction that has caused them to conclude that any other consent,
approval, authorization, registration, qualification, order or filing is
required. In giving the opinions set forth above, counsel may state that it is
relying on certificates of officers of the Acquiring Fund with regard to matters
of fact and certain certificates and written statements of government officers
with respect to the good standing of the Acquiring Fund and on the opinion of
Bingham Dana LLP as to matters of Massachusetts law.
H. Officer Certificates. The Acquired Fund shall have received a
certificate of an authorized officer of the Acquiring Fund, dated as of the
Closing Date, certifying that (i) the representations and warranties set forth
in Section 5 are true and correct on the Closing Date, together with certified
copies of the resolutions adopted by the Board of Trustees shall be furnished to
the Acquired Fund and that (ii) from the date hereof through the Closing Date,
there shall not have been any change in the business, results of operations,
assets or financial condition or the manner of conducting the business of the
Acquiring Fund, other than changes in the ordinary course of its business, which
has had a material adverse effect on such business, results of operations,
assets or financial condition.
8. CONDITIONS TO OBLIGATIONS OF ACQUIRING FUND.
The obligations of the Acquiring Fund hereunder with respect to the
consummation of the Reorganization are subject to the satisfaction, or written
waiver by the Acquiring Fund of the following conditions:
A. Shareholder Approval. This Agreement and the transactions contemplated
herein shall have been approved by the affirmative vote of the holders of at
least a majority of the outstanding shares of beneficial interest of the
Acquired Fund.
B. Representations, Warranties and Agreements. Each of the representations
and warranties of the Acquired Fund contained herein shall be true in all
material respects as of the Closing Date, and as of the Closing Date there shall
have been no material adverse change in the financial condition, results of
operations, business, properties or assets of the Acquired Fund, and the
Acquiring Fund shall have received a certificate of an authorized officer of the
Acquired Fund satisfactory in form and substance to the Acquiring Fund so
stating. The Acquired Fund shall have performed and complied in all material
respects with all agreements, obligations and covenants required by this
Agreement to be so performed or complied with by them on or prior to the Closing
Date.
C. Registration Statement Effective. The Registration Statement shall have
become effective and no stop orders under the Securities Act pertaining thereto
shall have been issued.
D. Regulatory Approval. All necessary approvals, registrations, and
exemptions under federal and state securities laws shall have been obtained.
E. No Injunctions or Restraints: Illegality. No Injunction preventing the
consummation of the transactions contemplated by this Agreement shall be in
effect, nor shall any proceeding by any state, local or federal government
agency or entity seeking any of the foregoing be pending. There shall not be any
action taken, or any statute, rule, regulation or order enacted, entered,
enforced or deemed applicable to the transactions contemplated by this
Agreement, which makes the consummation of the transactions contemplated by this
Agreement illegal.
F. Tax Opinion. The Acquiring Fund shall have obtained an opinion from
Vedder, Price, Kaufman & Kammholz, counsel for the Acquired Fund, dated as of
the Closing Date, addressed to the Acquiring Fund Trust, Acquired Fund Trust,
Acquired Fund and Acquiring Fund, that the consummation of the transactions set
forth in
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this Agreement comply with the requirements of a reorganization as described in
Section 368(a) of the Code substantially in the form attached as Annex A.
G. Opinion of Counsel. The Acquiring Fund shall have received the opinion
of Vedder, Price, Kaufman & Kammholz, counsel for the Acquired Fund Trust and
the Acquired Fund, dated as of the Closing Date, addressed to the Acquiring
Fund, substantially in the form and to the effect that: (i) the Acquired Fund
Trust is duly formed and existing as a trust under the laws of the State of
Massachusetts; (ii) the Board of Trustees of the Acquired Fund Trust has duly
designated the Acquired Fund as a series of the Acquired Fund Trust pursuant to
the terms of the Declaration of Trust of the Acquired Fund Trust; (iii) the
Acquired Fund Trust is registered as an open-end management company under the
1940 Act; (iv) this Agreement and the reorganization provided for herein and the
execution of this Agreement have been duly authorized by all requisite action of
the Acquired Fund Trust and this Agreement has been duly executed and delivered
by the Acquired Fund Trust on behalf of the Acquired Fund and (assuming the
Agreement is a valid and binding obligation of the other parties thereto) is a
valid and binding obligation of the Acquired Fund, except as such enforceability
may be limited by bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium or similar law affecting creditors' rights generally, or by general
principals of equity (regardless of whether enforcement is sought in a
proceeding at equity or law); (v) neither the execution or delivery by the
Acquired Fund Trust on behalf of the Acquired Fund of this Agreement nor the
consummation by the Acquired Fund Trust or Acquired Fund of the transactions
contemplated thereby contravene the Acquired Fund Trust's Declaration of Trust
or, to their knowledge, violate any provision of any statute, or any published
regulation or any judgment or order disclosed to them by the Acquired Fund Trust
as being applicable to the Acquired Fund Trust or Acquired Fund; (vi) to their
knowledge based solely on the certificate of an appropriate officer of the
Acquired Fund attached thereto, there is no pending, or threatened litigation
involving the Acquired Fund except as disclosed therein; (vii) except as to
financial statements and schedules and other financial and statistical data
included or incorporated by reference therein and subject to usual and customary
qualifications with respect to Rule 10b-5 type opinions, as of the effective
date of the Registration Statement filed pursuant to the Agreement, the portions
thereof pertaining to the Acquired Fund comply as to form in all material
respects with their requirements of the Securities Act, the Securities Exchange
Act and the 1940 Act and the rules and regulations of the SEC thereunder and no
facts have come to counsel's attention which cause them to believe that as of
the effectiveness of the portions of the Registration Statement applicable to
the Acquired Fund, the Registration Statement contained any untrue statement of
a material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading; and (viii)
to their knowledge and subject to the qualifications set forth below, the
execution and delivery by the Acquired Fund Trust on behalf of the Acquired Fund
of the Agreement and the consummation of the transactions therein contemplated
do not require, under the laws of the States of Massachusetts or Illinois, or
the federal laws of the United States, the consent, approval, authorization,
registration, qualification or order of, or filing with, any court or
governmental agency or body (except such as have been obtained under the
Securities Act, the 1940 Act or the rules and regulations thereunder.) Counsel
need express no opinion, however, as to any such consent, approval,
authorization, registration, qualification, order or filing (a) which may be
required as a result of the involvement of other parties to the Agreement in the
transactions contemplated by the Agreement because of their legal or regulatory
status or because of any other facts specifically pertaining to them; (b) the
absence of which does not deprive the Acquiring Fund of any material benefit
under such agreements; or (c) which can be readily obtained without significant
delay or expense to the Acquiring Fund, without loss to the Acquiring Fund of
any material benefit under the Agreement and without any material adverse effect
on them during the period such consent, approval authorization, registration,
qualification or order was obtained. The foregoing opinion relates only to
consents, approvals, authorizations, registrations, qualifications, orders or
filings under (a) laws which are specifically referred to in the opinion, (b)
laws of the States of Massachusetts or Illinois and the federal laws of the
United States which, in our experience, are normally applicable to transactions
of the type provided for in the Agreement and (c) court orders and judgments
disclosed to counsel by the Acquired Fund in connection with the opinion. In
addition, although counsel need not specifically considered the possible
applicability to the Acquired Fund of any other laws, orders or judgments,
nothing has come to their attention in connection with their representation of
the Acquired Fund in this transaction that has caused them to conclude that any
other consent, approval, authorization, registration, qualification, order or
filing is required. In giving the opinion set forth above, counsel may state
that it is relying on certificates of officers of the Acquired Fund with regard
to matters of fact and certain certificates and written statutes of government
officers with respect to the good standing of the Acquired Fund and on the
opinion of Bingham Dana LLP as to matters of Massachusetts law.
H. Shareholder List. The Acquired Fund shall have delivered to the
Acquiring Fund an updated list of all shareholders of the Acquired Fund, as
reported by the Acquired Fund's transfer agent, as of [one (1)] business day
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prior to the Closing Date with each shareholder's respective holdings in the
Acquired Fund, taxpayer identification numbers, Form W9 and last known address.
I. Officer Certificates. The Acquiring Fund shall have received a
certificate of an authorized officer of the Acquired Fund, dated as of the
Closing Date, certifying that (i) the representations and warranties set forth
in Section 4 are true and correct on the Closing Date, together with certified
copies of the resolutions adopted by the Board of Trustees and shareholders and
that (ii) from the date of this Agreement through the Closing Date, there shall
not have been:
(1) any change in the business, results of operations, assets, or
financial condition or the manner of conducting the business of the
Acquired Fund, other than changes in the ordinary course of its business,
or any pending or threatened litigation, which has had or may have a
material adverse effect on such business, results of operations, assets or
financial condition;
(2) issued any option to purchase or other right to acquire shares of
the Acquired Fund granted by the Acquired Fund to any person other than
subscriptions to purchase shares at net asset value in accordance with
terms in the Prospectus for the Acquired Fund;
(3) any entering into, amendment or termination of any contract or
agreement by Acquired Fund, except as otherwise contemplated by this
Agreement;
(4) any indebtedness incurred, other than in the ordinary course of
business, by the Acquired Fund for borrowed money or any commitment to
borrow money entered into by the Acquired Fund;
(5) any amendment of the Acquired Fund Trust's Declaration of Trust or
Designation of Series of the Acquired Fund; or
(6) any grant or imposition of any lien, claim, charge or encumbrance
(other than encumbrances arising in the ordinary course of business with
respect to covered options) upon any asset of the Acquired Fund other than
a lien for taxes not yet due and payable.
9. AMENDMENT, WAIVER AND TERMINATION.
A. The parties hereto may, by agreement in writing authorized by the Board,
amend this Agreement at any time before or after approval thereof by the
shareholders of the Acquired Fund; provided, however, that after receipt of
Acquired Fund shareholder approval, no amendment shall be made by the parties
hereto which substantially changes the terms of Sections 1, 2 and 3 hereof
without obtaining Acquired Fund's shareholder approval thereof.
B. At any time prior to the Closing Date, either of the parties may by
written instrument signed by it (i) waive any inaccuracies in the
representations and warranties made to it contained herein and (ii) waive
compliance with any of the covenants or conditions made for its benefit
contained herein. No delay on the part of either party in exercising any right,
power or privilege hereunder shall operate as a waiver thereof, nor shall any
waiver on the part of any party of any such right, power or privilege, or any
single or partial exercise of any such right, power or privilege, preclude any
further exercise thereof or the exercise of any other such right, power or
privilege.
C. This Agreement may be terminated, and the transactions contemplated
herein may be abandoned at any time prior to the Closing Date:
(1) by the mutual consents of the Board of the Acquiring Fund Trust
and Acquired Fund Trust on behalf of the Acquired Fund and Acquiring Fund,
respectively;
(2) by the Acquired Fund, if the Acquiring Fund breaches in any
material respect any of its representations, warranties, covenants or
agreements contained in this Agreement and fails to cure promptly such
breach after receipt of notice thereof;
(3) by the Acquiring Fund, if the Acquired Fund breaches in any
material respect any of its representations, warranties, covenants or
agreements contained in this Agreement and fails to cure promptly such
breach after receipt of notice thereof;
(4) by either the Acquired Fund or Acquiring Fund, if the Closing has
not occurred on or prior to [December 31, 1998] (provided that the rights
to terminate this Agreement pursuant to this subsection (C)(iv) shall not
be available to any party whose failure to fulfill any of its obligations
under this Agreement has been the cause of or resulted in the failure of
the Closing to occur on or before such date);
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<PAGE> 79
10. REMEDIES.
In the event of termination of this Agreement by either or both of the
Acquired Fund and Acquiring Fund pursuant to Section 9C, written notice thereof
shall forthwith be given by the terminating party to the other party hereto, and
this Agreement shall therefore terminate and become void and have no effect, and
the transactions contemplated herein and thereby shall be abandoned, without
further action by the parties hereto. However, this Section 10 shall not limit
the remedies available for a breach of this Agreement prior to its termination.
11. SURVIVAL.
The provisions set forth in Sections 10 and 16 hereof shall survive the
termination of this Agreement for any cause whatsoever. The representations and
warranties included or provided for herein, or in the Schedules or other
instruments delivered or to be delivered pursuant hereto shall not survive the
Closing Date.
12. NOTICES.
All notices hereunder shall be sufficiently given for all purposes
hereunder if in writing and delivered personally or sent by registered mail or
certified mail, postage prepaid. Notice to the Acquired Fund shall be addressed
to the Acquired Fund c/o Nuveen Advisory Corp., 333 West Wacker Drive, Chicago,
Illinois 60606, Attention: General Counsel, or at such other address as the
Acquired Fund may designate by written notice to the Acquiring Fund. Notice to
the Acquiring Fund shall be addressed to the Acquiring Fund c/o Nuveen Advisory
Corp., 333 West Wacker Drive, Chicago, Illinois, 60606, Attention: General
Counsel, or at such other address and to the attention of such other person as
the Acquiring Fund may designate by written notice to the Acquired Fund. Any
notice shall be deemed to have been served or given as of the date such notice
is delivered personally or mailed.
13. SUCCESSORS AND ASSIGNS.
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their successors and assigns. This Agreement shall not be
assigned by any party without the prior written consent of the other party
hereto.
14. BOOKS AND RECORDS.
The Acquired Fund and the Acquiring Fund agree that copies of the books and
records of the Acquired Fund relating to the Assets including, but not limited
to all files, records, written materials; e.g., closing transcripts,
surveillance files and credit reports shall be delivered by the Acquired Fund to
the Acquiring Fund at the Closing Date. In addition to, and without limiting the
foregoing, the Acquired Fund and the Acquiring Fund agree to take such action as
may be necessary in order that the Acquiring Fund shall have reasonable access
to such other books and records as may be reasonably requested, all for three
years after the Closing Date and for the last three tax years ending[,
, 1995, , 1996 and , 1997]; namely, general
ledger, journal entries, voucher registers; distribution journal; payroll
register, monthly balance owing report; income tax returns; tax depreciation
schedules; and investment tax credit basis schedules.
15. GENERAL.
This Agreement supersedes all prior agreements between the parties (written
or oral), is intended as a complete and exclusive statement of the terms of the
Agreement between the parties and may not be amended, modified or changed or
terminated orally. This Agreement may be executed in one or more counterparts,
all of which shall be considered one and the same agreement, and shall become
effective when one or more counterparts have been executed by the Acquired Fund
and Acquiring Fund and delivered to each of the parties hereto. The headings
contained in this Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement. This Agreement is
for the sole benefit of the parties thereto, and nothing in this Agreement,
expressed or implied, is intended to confer upon any other person any rights or
remedies under or by reason of this Agreement. This Agreement shall be governed
by and construed in accordance with the laws of the State of Illinois without
regard to principles of conflicts or choice of law.
16. LIMITATION OF LIABILITY.
Consistent with the Acquiring Fund Trust's and the Acquired Fund Trust's
Declarations of Trust, notice is hereby given and the parties hereto acknowledge
and agree that this instrument is executed on behalf of the Trustees of each
Trust on behalf of the Acquiring Fund and the Acquired Fund, respectively, as
Trustees and not individually
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<PAGE> 80
and that the obligations of this instrument are not binding upon any of the
Trustees or shareholders of the Acquiring Fund Trust, Acquired Fund Trust,
Acquiring Fund or Acquired Fund individually but binding only upon the assets
and property of the Acquiring Fund or the Acquired Fund as the case may be.
IN WITNESS WHEREOF, the parties have hereunto caused this Agreement to be
executed and delivered by their duly authorized officers as of the day and year
first written above.
ACQUIRING FUND TRUST, on behalf of
ACQUIRING FUND
By:
-----------------------------------------
Title:
-----------------------------------------
Attest:
- -------------------------------------------------
Title:
- --------------------------------------------------
ACQUIRED FUND TRUST, on behalf of
ACQUIRED FUND
By:
-----------------------------------------
Title:
-----------------------------------------
Attest:
- -------------------------------------------------
Title:
- --------------------------------------------------
A-13
<PAGE> 81
EXHIBIT B
JUNE 30, 1997
NUVEEN FLAGSHIP MULTISTATE TRUST II
Nuveen California Municipal Bond Fund
Nuveen California Insured Municipal Bond Fund
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 Massachusetts Municipal Bond Fund
Nuveen Massachusetts Insured Municipal Bond Fund
Nuveen New York 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 June 30, 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) 621-7227.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Investment Policies and Investment Portfolio................ B-2
Management.................................................. B-36
Investment Adviser and Investment Management Agreement...... B-41
Portfolio Transactions...................................... B-43
Net Asset Value............................................. B-43
Tax Matters................................................. B-44
Performance Information..................................... B-50
Additional Information on the Purchase and Redemption of
Fund Shares............................................... B-56
Distribution and Service Plan............................... B-61
Independent Public Accountants and Custodian................ B-63
Financial Statements........................................ B-63
Appendix A -- Ratings of Investments........................ AA-1
Appendix B -- Description of Hedging Techniques............. BB-1
</TABLE>
The audited financial statements for each Fund's most recent fiscal year
appear in the Funds' Annual Reports. The Annual Reports accompany this Statement
of Additional Information.
<PAGE> 82
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
short-term securities, as described in the Prospectus. Municipal
Obligations are municipal bonds that pay interest that is exempt from
regular federal, state and, in some cases, local 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
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<PAGE> 83
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
nongovernmental user, such as an industrial corporation or a privately owned or
operated hospital, if the security is backed only by the assets and revenues of
the non-governmental user, then such non-governmental user would be deemed to be
the sole issuer. Where a security is also backed by the enforceable obligation
of a superior or unrelated governmental entity or other entity (other than a
bond insurer), it shall also be included in the computation of securities owned
that are issued by such governmental or other entity.
Where a security is guaranteed by a governmental entity or some other
facility, such as a bank guarantee or letter of credit, such a guarantee or
letter of credit would be considered a separate security and would be treated as
an issue of such government, other entity or bank. Where a security is insured
by bond insurance, it shall not be considered a security issued or guaranteed by
the insurer; instead the issuer of such security will be determined in
accordance with the principles set forth above. The foregoing restrictions do
not limit the percentage of 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 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 also been organized as
a series of the Trust, but 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
B-3
<PAGE> 84
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, state and, in some cases, local 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.
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
B-4
<PAGE> 85
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.
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.
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<PAGE> 86
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.
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
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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 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 28, 1997, premium expenses as a percentage of the
value of Municipal Obligations held by the Funds for such period were .00%.
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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 $2,642,000,000 (unaudited) and statutory capital of
approximately $1,509,000,000 (unaudited) as of March 31, 1997. 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.,
US 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, 1997, 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 $691,321,000 (unaudited) and $417,390,000 (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
$824,939,000 (unaudited) and $361,589,000 (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")
The Insurer 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 the Insurer. The Insurer is domiciled in the State of New York
and licensed to do business in and subject to regulation under the laws of 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. The Insurer has two European branches, one in
the Republic of France and the other in the Kingdom of Spain. New York has laws
prescribing minimum capital requirements, limiting classes and concentrations of
investments and requiring the approval of policy rates and forms. State laws
also regulate the amount of both the aggregate and individual risks that may be
insured, the payment of dividends by the Insurer, changes in control and
transactions among affiliates. Additionally, the Insurer is required to maintain
contingency reserves on its liabilities in certain amounts and for certain
periods of time.
As of December 31, 1996 the Insurer had admitted assets of $4.4 billion
(audited), total liabilities of $3.0 billion (audited), and total capital and
surplus of $1.4 billion (audited) determined in accordance with statutory
accounting practices prescribed or permitted by insurance regulatory
authorities. As of March 31, 1997, the Insurer had admitted assets of $4.5
billion (unaudited), total liabilities of $3.0 billion (unaudited), and total
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capital and surplus of $1.5 billion (unaudited) determined in accordance with
statutory accounting practices prescribed or permitted by insurance regulatory
authorities.
Furthermore, copies of the Insurer's year end financial statements prepared
in accordance with statutory accounting practices are available without charge
from the Insurer. A copy of the Annual Report on Form 10-K of MBIA Inc. is
available from the Insurer or the Securities and Exchange Commission. The
address of the Insurer is 113 King Street, Armonk, New York 10504. The telephone
number of the Insurer is (914) 273-4545.
The Insurer'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 the Insurer'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").
The Insurer's policy does not insure against loss of any prepayment premium
which may at any time be payable with respect to any Municipal Obligation. The
Insurer'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. The Insurer'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, the Insurer 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 the Insurer 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, the
Insurer 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 the Insurer, and appropriate instruments to effect the appointment of the
Insurer 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
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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 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, 1997, the total
capital and surplus of Financial Guaranty was approximately $1,123,724,061.
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
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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 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 1996 fiscal year-end of
the Fund as a series of its predecessor entity (described above), and for the
1997 fiscal year-end, as indicated, were:
<TABLE>
<CAPTION>
FISCAL YEAR
------------
1996 1997
---- ----
<S> <C> <C>
Nuveen Flagship New York Municipal Bond Fund................ 47% 37%
Nuveen New York Insured Municipal Bond Fund................. 17% 29%
Nuveen Flagship New Jersey Municipal Bond Fund.............. 39% 10%*
Nuveen Flagship New Jersey Intermediate Municipal Bond
Fund...................................................... 17% 11%
Nuveen California Municipal Bond Fund....................... 36% 74%
Nuveen California Insured Municipal Bond Fund............... 38% 51%
Nuveen Flagship Connecticut Municipal Bond Fund............. 24% 20%
Nuveen Massachusetts Municipal Bond Fund.................... 6% 10%
Nuveen Massachusetts Insured Municipal Bond Fund............ 1% 10%
</TABLE>
- ---------------
* For the fiscal year ended January 31, 1997. For the period February 1 to
February 28, 1997, the portfolio turnover rate was 0%.
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
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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 taxexempt. 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
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
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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
nonrecurring 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
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 nonrecurring 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
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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 A2
on June 6, 1997, and S&P's rating stood at A- with a positive outlook, on June
6, 1997, an improvement from S&P's stable outlook from February 1994 through
April 1993 and negative outlook prior to April 1993. Moody's revised the rating
on the State from A to A2 on February 10, 1997. 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 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.
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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 outyear 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
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contemplates capital spending of $14.1 billion, which will be financed through
issuance of general obligation bonds, Water Authority Revenue Bonds and Covered
Organization obligations, and will be used primarily to reconstruct and
rehabilitate the City's infrastructure and physical assets and to make capital
investments. The City's financing program assumes the receipt of approximately
$1 billion from the sale of City's sewer and water systems. However, the City
Comptroller has obtained a court order blocking such sale, which the City is
appealing. In the event such appeal is unsuccessful the City would be required
to reduce capital spending during the next four years or find additional sources
of funds in such amount. A significant portion of such bond financing is used to
reimburse the City's general fund for capital expenditures already incurred. In
addition, the City issues revenue and tax anticipation notes to finance its
seasonal working capital requirements. The terms and success of projected public
sales of City general obligation bonds and notes will be subject to prevailing
market conditions at the time of the sale, and no assurance can be given that
the credit markets will absorb the projected amounts of public bond and note
sales. In addition, future developments concerning the City and public
discussion of such developments, the City's future financial needs and other
issues may affect the market for outstanding City general obligation bonds and
notes. If the City were unable to sell its general obligation bonds and notes,
it would be prevented from meeting its planned operating and capital
expenditures.
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 and the State
has approved the Transitional Finance Authority (TFA). The new TFA debt will be
secured with City personal income taxes and will not be subject to the
Constitutional limits. The City has already built the TFA into its Financing
Plan. The inability to finance capital improvements would have increased the
City's budget gaps in later years or required 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 May 1997, Moody's confirmed its Baa1 rating in connection with a
scheduled May 1997 sale of $750 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 May 1997.
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"
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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.
(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
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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.
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 1,094 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 1995 the State ranked second among
the states in per capita personal income ($29,848).
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.
Improvement has been slow but steady. New Jersey's unemployment rate dropped to
5.2% in April 1997 versus the natural average of 4.9%. The state's jobless rate
is now the lowest it has been since August 1990.
Going forward, moderate growth is expected to continue through fiscal year
1998. Corporate restructuring will continue in such fields as chemicals,
telecommunications and financial services. Meanwhile, because of the state's
high technology labor resources, its economy stands to benefit from emerging
information-based fields.
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. General
obligation debt must be approved by voter referendum and is used primarily to
finance various environmental, transportation, correctional and institutional
projects. As of June 30, 1996, the state's outstanding general obligation debt
totaled $3.7 billion. The debt service obligation for such outstanding
indebtedness is $450 million for fiscal year 1997.
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New Jersey's Budget and Appropriation System. The State operates on a
fiscal year beginning July 1 and ending June 30. The State closed recent fiscal
years with surpluses in the general fund (the fund into which all State revenues
not otherwise restricted by statute are deposited and from which appropriations
are made) of $761 million in 1992, $937 million in 1993, $926 million in 1994,
$569 million in 1995, and $442 million in 1996. It is estimated that fiscal year
1997 will end with a surplus of $300 million.
In order to provide additional revenues to balance future budgets, to
redistribute school aid and to contain real property taxes, on June 27, 1990,
and July 12, 1990, Governor Florio signed into law legislation which was
estimated to raise approximately $2.8 billion in additional taxes (consisting of
$1.5 billion in sales and use taxes and $1.3 billion in income taxes), the
biggest tax hike in New Jersey history. There can be no assurance that receipts
and collections of such taxes will meet such estimates.
The first part of the tax hike took effect on July 1, 1990, with the
increase in the State's sales and use tax rate from 6.0% to 7.0% and the
elimination of exemptions for certain products and services not previously
subject to the tax, such as telephone calls, disposable paper products (which
has since been reinstated), soaps and detergents, janitorial services, alcoholic
beverages and cigarettes. At the time of enactment, it was projected that these
taxes would raise approximately $1.5 billion in additional revenue. Projections
and estimates of receipts from sales and use taxes, however, have been subject
to variance in recent fiscal years.
The second part of the tax hike took effect on January 1, 1991, in the form
of an increased state income tax on individuals. At the time of enactment, it
was projected that this increase would raise approximately $1.3 billion in
additional income taxes to fund a new school aid formula, a new homestead rebate
program and state assumption of welfare and social services costs. Projections
and estimates of receipts from income taxes, however, have also been subject to
variance in recent fiscal years. Under the legislation, income tax rates
increased from their previous range of 2.0% to 3.5% to a new range of 2.0% to
7.0%, with the higher rates applying to married couples with incomes exceeding
$70,000 who file joint returns, and to individuals filing single returns with
incomes of more than $35,000.
The Florio administration had contended that the income tax package would
help reduce local property tax increases by providing more state aid to
municipalities. Under the income tax legislation the State assumed approximately
$289.0 million in social services costs that previously were paid by counties
and municipalities and funded by property taxes. In addition, under the new
formula for funding school aid, an extra $1.1 billion was proposed to be sent by
the State to school districts beginning in 1991, thus reducing the need for
property tax increases to support education programs.
Effective July 1, 1992, the State's sales and use tax rate decreased from
7% to 6%. Effective January 1, 1994, an across-the-board 5% reduction in the
income tax rates was enacted and effective January 1, 1995, further reductions
ranging from 1% up to 10% in income tax rates took effect.
On June 30, 1996, Governor Whitman signed the New Jersey Legislature's
$15.7 billion budget for fiscal year 1997. The balanced budget included $276
million in surplus funds. 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. 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. As part of
the fiscal year 1997 budget, the State has enacted several policies that will
affect the State's Gross Income Tax and Corporate Business Tax.
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. In May 1997, Governor Whitman's most recent school
funding plan (entitled the Comprehensive Educational Financing Act of 1996)
failed to meet the State's constitutional mandates. The State Supreme Court
ordered New Jersey to spend an extra $246.2 million on 28 poor school districts.
The State's fiscal year 1998 $16.3 billion proposed budget had a structural
imbalance in excess of $500 million prior to the legislative approval of
Governor Whitman's $2.7 billion pension bond issue. Approval was won in early
June 1997. The administration plans to use the proceeds from a $2.7 billion
pension obligation bond issue in addition to a portion of the pension system's
market-based surplus (approximately $600 million) to offset the State's pension
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contributions in fiscal year 1997 and fiscal year 1998 and eliminate the State's
pension system deficit. Eliminating the pension system's deficit will enable the
administration to reduce this year's scheduled pension payment to $97 million
from $687 million, and provide the State with approximately $590 million to
balance the State budget and cover the $246 million that the State Supreme Court
ordered the State to raise for urban schools.
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 whether the State economy would recover
quickly enough to meet lawmakers' revenue projections. It also remained
concerned about the recent federal ruling leaving in doubt how much the State
was due in retroactive Medicaid reimbursements and a ruling by a federal judge,
now on appeal, of the State's method for paying for uninsured hospital patients.
However, on July 27, 1994, S&P announced that it was changing the State's
outlook from negative to stable due to a brightening of the State's prospects as
a result of Governor Whitman's effort to trim spending and cut taxes, coupled
with an improving economy. S&P reaffirmed its AA+ rating at the same time. On
July 1, 1996, S&P reaffirmed the State's long-term ratings.
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. On May 1,
1996, Moody's reaffirmed the State's long-term ratings.
The State's recently approved pension obligation issuance has met with
skepticism from both rating agencies.
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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 34 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 $810 billion in 1996,
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 were
reached in 1996). Unemployment, while remaining higher than the national
average, has come down substantially from its 10% peak. 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.
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, 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
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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.
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.
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 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.
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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 1995-96, debt service on general obligation bonds and lease purchase
debt was approximately 5.0% of General Fund revenues.
RECENT FINANCIAL RESULTS
The principal sources of General Fund revenues in 1995-1996 were the
California personal income tax (45% of total revenues), the sales tax (34%),
bank and corporation taxes (13%), and the gross premium tax on insurance (2%).
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. However, projections for 1996-1997 estimate a balance of $312 million will
be maintained in the Economic Uncertainties Fund.
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
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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.
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. The economy in California has steadily improved in recent
years evidenced by the upward revisions to revenue forecasts by the Department
of Finance. In the Governor's May Revision of the 1996-1997 Budget, State
revenues are projected to be $49.4 billion, a 6.6% increase. Expenditures are
projected to be $49.2 billion, an 8.0% increase. The modest surplus would
increase the budgetary reserve to $312 million.
As a result of the improved revenues, the State's cash position has
substantially improved. Only $3 billion of cash flow borrowing was needed during
1996-1997, and about $3 billion is projected for 1997-1998, with no external
borrowing over the end of the fiscal year.
The Governor's proposed budget for 1997-1998 projects $52 billion in
revenues and transfers, and $51.7 billion of expenditures, resulting in a
budgetary reserve at June 30, 1998 of about $580 million. A number of issues
related to the 1997-1998 budget still have to be resolved, including additional
school funding and the Governor's proposals for future 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
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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.
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 foregoing industries. Statistics
show that Connecticut has
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recovered from almost 40% of its recessionary employment loss with small
business fueling much of the growth in the services, wholesale, and retail trade
industries. Casinos are expected to continue to draw tourists and contribute to
the state's slow but steady economic growth over the next four years. While
Connecticut ranks first among the states in per capita personal income
($31,776), the state's ratio of tax-supported debt to personal income is highest
in the nation. Large debt levels are expected to limit the state's financial
flexibility.
A $21.1 billion two-year budget plan won legislature approval in early June
1997. The budget totals $10.5 billion in the first year and $10.5 billion in the
second, for a total increase of 3.7% over current spending. The 1997-99 plan
limits growth in spending to 2% in the first budget year and 1.7% in the second.
The result would allow the state to trim taxes by $394 million, including $153
million in income tax cuts. A 6 cent-per-gallon cut in the gas tax was also
adopted. The state's general obligation bonds are rated Aa3 by Moody's and AA-
by S&P.
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 Obligations in the Funds or the ability of particular obligors to
make timely payments of debt service on (or relating to) those obligations.
1998 FISCAL YEAR BUDGET
The 1998 Fiscal Year budget is currently being discussed by the Senate and
House of the Commonwealth. In his 1998 Fiscal Year budget proposal, Governor
Weld recommended approximately $18.224 billion in expenditures, which represents
a $520 million, or 2.9%, increase over anticipated Fiscal Year 1997 spending.
Most of the increase in spending supports education reform and initiatives
designed to aid cities and towns. The Governor's budget proposal estimates
fiscal 1998 total tax and non-tax revenues to be approximately $17.998 billion.
The tax revenue projects ($12.667 billion) represents an increase of
approximately 2.9% over Fiscal Year 1997 projected tax revenues and includes the
revenue impact of tax reductions recommended by the Governor. Nontax revenues
are projected to be $5.331 billion, a 3.5% increase over Fiscal Year 1997. Tax
reductions recommended include phasing out a telecommunications sales tax over
five years, eliminating the net investment income tax on life insurance
companies located in Massachusetts, and lowering the tax on certain unearned
income.
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.
The President of the United States has recommended Governor Weld for the
position of the U.S. Ambassador to Mexico. Confirmation hearings have not yet
begun. If the Governor were to assume the position, Lieutenant Governor Paul
Cellucci would become acting Governor.
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
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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
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.
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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
nontax 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 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
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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.
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Certain Liabilities. Among the material future liabilities of the
Commonwealth are significant unfunded general liabilities of its retirement
systems and a program to fund such liabilities; a program whereby, starting in
1978, the Commonwealth began assuming full financial responsibility for all
costs of the administration of justice within the Commonwealth; continuing
demands to raise aggregate aid to cities, towns, schools and other districts and
transit authorities above current levels; and Medicaid expenditures which have
increased each year since the program was initiated. The Commonwealth has signed
consent decrees to continue improving mental health care and programs for the
mentally retarded in order to meet federal standards, including those governing
receipt of federal reimbursements under various programs, and the parties in
those cases have worked cooperatively to resolve the disputed issues.
As a result of comprehensive legislation approved in January, 1988, the
Commonwealth is required, beginning in fiscal 1989 to fund future pension
liabilities currently and to amortize the Commonwealth's unfunded liabilities
over 40 years. The funding schedule must provide for annual payments in each of
the ten years ending fiscal 1998 which are at least equal to the total estimated
pay-as-you-go pension costs in each year. As a result of this requirement, the
funding requirements for fiscal 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.
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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.
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
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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 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.
B-33
<PAGE> 114
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 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
B-34
<PAGE> 115
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.
B-35
<PAGE> 116
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 PRINCIPAL OCCUPATIONS
NAME AND ADDRESS AGE OFFICES WITH TRUST DURING PAST FIVE YEARS
---------------- --- ------------------ ----------------------
<S> <C> <C> <C>
Timothy R. Schwertfeger*....... 48 Chairman and Trustee Chairman since July 1, 1996 of The John Company, John Nuveen
333 West Wacker Drive & Co. Incorporated, Nuveen Advisory Corp. and Nuveen
Chicago, IL 60606 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).
Anthony T. Dean*............... 52 President and Trustee President since July 1, 1996 of The John Nuveen Company,
333 West Wacker Drive John Nuveen & Co. Incorporated, Nuveen Advisory Corp. and
Chicago, IL 60606 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).
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 The
201 Michigan Avenue Northern Trust Company.
Highwood, IL 60040
Anne E. Impellizzeri........... 64 Trustee President and Chief Executive Officer of Blanton-Peale
3 West 29th Street Institute of Religion and Health.
New York, NY 10001
Margaret K. Rosenheim.......... 70 Trustee Helen Ross Professor of Social Welfare Policy, School of
969 East 60th Street Social Service Administration, University of Chicago.
Chicago, IL 60637
Peter R. Sawers................ 64 Trustee Adjunct Professor of Business and Economics, University of
22 The Landmark Dubuque, Iowa; Adjunct Professor, Lake Forest Graduate
Northfield, IL 60093 School of Management, Lake Forest, Illinois; Chartered
Financial Analyst; Certified Management Consultant.
William J. Schneider........... 52 Trustee Senior Partner, Miller-Valentine Partners, Vice President,
4000 Miller-Valentine Ct. Miller- Valentine Realty, Inc.
P.O. Box 744
Dayton, OH 45401
Bruce P. Bedford............... 57 Executive Vice Executive Vice President of John Nuveen & Co. Incorporated,
333 West Wacker Drive President Nuveen Advisory Corp. and Nuveen Institutional Advisory
Chicago, IL 60606 Corp. (since January 1997); prior thereto, 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 January
One South Main Street 1997); prior thereto, Vice President and Portfolio Manager
Dayton, OH 45402 (since September 1991) of Flagship Financial.
William M. Fitzgerald.......... 33 Vice President Vice President of Nuveen Advisory Corp. (since December
333 West Wacker Drive 1995); Assistant Vice President of Nuveen Advisory Corp.
Chicago, IL 60606 (from September 1992 to December 1995), prior thereto
Assistant Portfolio Manager of Nuveen Advisory Corp. (from
June 1988 to September 1992).
Kathleen M. Flanagan........... 50 Vice President Vice President of John Nuveen & Co. Incorporated, Vice
333 West Wacker Drive President of Nuveen Advisory Corp. and Nuveen Institutional
Chicago, IL 60606 Advisory Corp. (since June 1996).
J. Thomas Futrell.............. 41 Vice President Vice President of Nuveen Advisory Corp.
333 West Wacker Drive
Chicago, IL 60606
Richard A. Huber............... 34 Vice President Vice President of Nuveen Advisory Corp. (since January
One South Main Street 1997); prior thereto, Vice President and Portfolio Manager
Dayton, OH 45402 (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
</TABLE>
B-36
<PAGE> 117
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND ADDRESS AGE OFFICES WITH TRUST DURING PAST FIVE YEARS
---------------- --- ------------------ ----------------------
<S> <C> <C> <C>
Anna R. Kucinskis.............. 51 Vice President Vice President of John Nuveen & Co. Incorporated.
333 West Wacker Drive
Chicago, IL 60606
Larry W. Martin................ 45 Vice President and Vice President (since September 1992), and Assistant
333 West Wacker Drive Assistant Secretary Secretary and Assistant General Counsel of John Nuveen & Co.
Chicago, IL 60606 Incorporated; Vice President (since May 1993) and Assistant
Secretary of Nuveen Advisory Corp.; Vice President (since
May 1993) and Assistant Secretary of Nuveen Institutional
Advisory Corp.; Assistant Secretary of The John Nuveen
Company (since February 1993).
Edward F. Neild, IV............ 31 Vice President Vice President (since September 1996), previously Assistant
One South Main Street Vice President (since December 1993) of Nuveen Advisory
Dayton, OH 45402 Corp., portfolio manager prior thereto (since January 1992);
Vice President (since September 1996), previously Assistant
Vice President (since May 1995) of Nuveen Institutional
Advisory Corp., portfolio manager prior thereto.
Walter K. Parker............... 48 Vice President Vice President of Nuveen Advisory Corp. (since January
One South Main Street 1997); prior thereto, Vice President and Portfolio Manager
Dayton, OH 45402 (since July 1994) of Flagship Financial; Portfolio Manager
and CIO Trust Investor (between 1983 and June 1994) for PNC
Bank.
O. Walter Renfftlen............ 57 Vice President and Vice President and Controller of the John Nuveen Company,
333 West Wacker Drive Controller John Nuveen & Co. Incorporated, Nuveen Advisory Corp. and
Chicago, IL 60606 Nuveen Institutional Advisory Corp.
Thomas C. Spalding, Jr......... 45 Vice President Vice President of Nuveen Advisory Corp. and Nuveen
333 West Wacker Drive Institutional Advisory Corp.; Chartered Financial Analyst.
Chicago, IL 60606
H. William Stabenow............ 62 Vice President and Vice President and Treasurer of the John Nuveen Company,
333 West Wacker Drive Treasurer John Nuveen & Co. Incorporated, Nuveen Advisory Corp. and
Chicago, IL 60606 Nuveen Institutional Advisory Corp.
Jan E. Terbrueggen............. 41 Vice President Vice President of Nuveen Advisory Corp. (since January
One South Main Street 1997); prior thereto, Vice President and Portfolio Manager
Dayton, OH 45402 of Flagship Financial.
Gifford R. Zimmerman........... 40 Vice President and Vice President (since September 1992), Assistant Secretary
333 West Wacker Drive Assistant Secretary and Assistant General Counsel of John Nuveen & Co.
Chicago, IL 60606 Incorporated; Vice President (since May 1993) and Assistant
Secretary of Nuveen Advisory Corp.; Vice President (since
May 1993) and Assistant Secretary of 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 42 other Nuveen open-end funds and 52 Nuveen closed-end funds advised by
Nuveen Advisory Corp.
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 fiscal year ended February 28, 1997. The Trust has no retirement or pension
plans. The officers and trustees affiliated with Nuveen serve without any
compensation from the Trust.
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION TOTAL COMPENSATION
FROM THE FROM TRUST
SERIES AND FUND COMPLEX
NAME OF TRUSTEE OF THIS TRUST PAID TO TRUSTEES
--------------- -------------- -------------------
<S> <C> <C>
Robert P. Bremner........................................... $ 880(1) $12,250(1)
Lawrence H. Brown........................................... $3,497 $59,000
Anne E. Impellizzeri........................................ $3,497 $59,000
Margaret K. Rosenheim....................................... $4,388(2) $66,815(3)
Peter R. Sawers............................................. $3,497 $59,000
William S. Schneider........................................ $ 952(1) $13,250(1)
</TABLE>
- ---------------
(1) Received as a trustee of the Flagship Funds, for the period June 1, 1996 to
January 1, 1997.
(2) Includes $337 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.
B-37
<PAGE> 118
The following table sets forth the percentage ownership of each person,
who, as of June 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 OF
NAME OF FUND AND CLASS NAME AND ADDRESS OF OWNER OWNERSHIP
---------------------- ------------------------- -------------
<S> <C> <C>
Nuveen New York Insured Municipal Bond Fund
Class A Shares................................ BHC Securities Inc. 15.30
FAO 70015729
Attn: Mutual Funds
One Commerce Square
2005 Market Street
Suite 1200
Philadelphia, PA 19103N
Nuveen New York Insured Municipal Bond Fund
Class C Shares................................ Donaldson Lufkin Jenrette 16.77
Securities Corporation Inc.
PO Box 2052
Jersey City, NJ 07303-9998
PaineWebber for the Benefit of 10.55
Morgan F Kelly
Rose Moran-Kelly JT TEN
19 Honeyhollow Road
Queensbury, NV 12804-9117
Prudential Securities FBO 8.11
Laurie D Wax Ttee, Irrevocable
Trust of 1995 UA JTD 05/02/95,
FBO Laurie D Wax
Via Di Monteronald, 14 6N
Ruth Preston & Sara P. Costello & 7.96
Patricia N. Kohl
JT TEN WROS NOT TC
2 Middleton Rd.
Greenport, NY 11944-1115
Debra Arizzi 7.90
9725 92nd St
Ozone Park, NY 11416-2214
Nuveen New York Insured Municipal Bond Fund
Class R Shares................................ BHC Securities Inc. 23.96
FAO 70001770
Attn: Mutual Funds
One Commerce Square
2005 Market Street
Suite 1200
Philadelphia, PA 19103
Nuveen Flagship New Jersey Municipal Bond Fund
Class A Shares................................ Merrill Lynch, Pierce, Fenner & Smith 13.93
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
Class C Shares................................ William G. Osborne 20.12
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 Bond Fund
Class A Shares................................ Merrill Lynch, Pierce, Fenner & Smith 22.65
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
Class C Shares................................ NFSC FEBO # OFP-002135 18.87
Michele Chiapella
103 Northwood Commons
Chico, CA 95926
</TABLE>
B-38
<PAGE> 119
<TABLE>
<CAPTION>
PERCENTAGE OF
NAME OF FUND AND CLASS NAME AND ADDRESS OF OWNER OWNERSHIP
---------------------- ------------------------- -------------
<S> <C> <C>
Thomas K. Larson & Melanie P. Larson 9.83
JT TEN WROS NOT TC
142 Via Novella
Aptos, CA 95003-5841
Paul R. Hoeber 9.62
611 Bay St. Apt. 4
San Francisco, CA 94133-1619
Charlotte H. Feo Tr 9.50
UA DEC 06 79
Charlotte H. Feo Family Trust
530 Galleon Way
Seal Beach, CA 90740-5939
John C. MacGregor-Scott Tr 9.24
UA JUN 22 87
MacGregor-Scott Rev Fam Trust
720 W Camino Real Ave.
Arcadia, CA 91007-7839
David Neil Daniels & Judy Curry Daniels Trs 5.05
UA JAN 13 94
Daniels Revocable Trust
305 Tioga Ct
Palo Alto, CA 94306-4543
Nuveen California Municipal Bond Fund
Class A Shares................................ J. Andrew Kitzman & Hazel Lloyd Kitzman COTR 9.62
UA JUL 02 82
Kitzman Family Trust
10558 Grandview Dr., #4063
La Mesa, CA 91941-6905
Nuveen California Municipal Bond Fund
Class R Shares................................ Smith Barney Shearson 5.16
00119601999
388 Greenwich Street
New York, NY 10013
Nuveen California Insured Municipal Bond Fund
Class A Shares................................ John Hancock Clearing Corp 5.29
1 World Financial Center
200 Liberty St.
New York, NY 10281-1003
Nuveen California Insured Municipal Bonds Funds
Class C Shares................................ NFSC FEBO #042-626996 30.08
Fleming Trust
William E. Fleming
U/A 04/20/93
7057 Blackhawk Rd P.O. Box 908
Forest Hill, CA 95631
Mildred H. Hachtowski TR 9.99
UA Sep 14 95
Hachtowski Family Trust
3045 Rita Ct
Napa, CA 94558-3317
BA Investment Services Inc. 7.54
FBO 406912971
189 Berry St.
3rd Floor #2640
San Francisco CA 94104
Prudential Securities FBO 5.60
Alan R Josefsberg &
Vickie Josefsberg Jt Ten
2700 N. Cahuenga Blvd. East
Unit 1301
Hollywood, CA 90068-2139
Nuveen Flagship Connecticut Municipal Bond Fund
Class A Shares................................ Merrill Lynch, Pierce, Fenner & Smith 25.48
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
Class B Shares................................ John H. Germain TR. 33.97
Isabel Germain Trust
U/A DTD 10-16-95
96 Four Mile Rd.
West Hartford, CT 06107-2703
PaineWebber FBO 23.39
Josephine F. Smith
57 Arnold Way
West Hartford, CT 06119-1207
</TABLE>
B-39
<PAGE> 120
<TABLE>
<CAPTION>
PERCENTAGE OF
NAME OF FUND AND CLASS NAME AND ADDRESS OF OWNER OWNERSHIP
---------------------- ------------------------- -------------
<S> <C> <C>
US Clearing Corp. 12.40
FBO 952-13798-L9
26 Broadway
New York, NY 10004-1798
Sidney Fagan & Lois Fagan JT Ten 8.75
856 East Broadway
Milford, CT 06460-6217
Smith Barney Inc. 8.20
00136200806
388 Greenwich Street
New York, NY 10013-2375
Nuveen Flagship Connecticut Municipal Bond Fund
Class C Shares................................ Merrill Lynch, Pierce, Fenner & Smith 35.18
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
Class R Shares................................ Smith Barney Inc. 99.85
00138430250
388 Greenwich Street
New York, NY 10013-2375
Nuveen Massachusetts Municipal Bond Fund
Class A Shares................................ NFSC FEBO #006-166235 9.18
Richard J. and Joy S. Gilbert TR
Joanne G. Arnold TTEE
c/o Richard J. Gilbert
20 Winchester Drive
Lexington, MA 02173
Donaldson Lufkin Jenrette 6.00
Securities Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303-9998
Smith Barney Inc. 5.77
00162105158
388 Greenwich Street
New York, New York 10013
Nuveen Massachusetts Municipal Bond Fund
Class C Shares................................ Hudson L. Matson 26.86
39 Griggs Rd.
Sutton, MA 01590-1015
Richard Doucette 6.55
363 Farrwood Dr.
Bradford, MA 01835-8400
Wheat First FBO A/C 2591-6003
Jane W. Curran 5.96
4 Lawler Dr.
Easthampton, MA 01027-9715
Mary H. Melville 5.72
4 Paul Revere Rd.
Worcester MA 01609-1210
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
Emily Pelczarski Cust 5.31
FBO Brian Pelczarski
Unif Trans Min Act MA
8 Coram St
Taunton, MA 02780-2512
Emily Pelczarski Cust 5.26
FBO Laurie Pelczarski
Unif Trans Min Act MA
8 Coram St
Taunton, MA 02780-2512
Irene J. Majko 5.22
134 Brook St
Wellesley, MA 02181-6630
Nuveen Massachusetts Insured Municipal Bond Fund
Class A Shares................................ Gerald W. Mahoney & Elaine Mahoney Tr 8.20
UA 10/05/94
Mahoney Rev. Trust
162 Oakland St.
Fall River, MA 02720-6114
</TABLE>
B-40
<PAGE> 121
<TABLE>
<CAPTION>
PERCENTAGE OF
NAME OF FUND AND CLASS NAME AND ADDRESS OF OWNER OWNERSHIP
---------------------- ------------------------- -------------
<S> <C> <C>
Nuveen Massachusetts Insured Municipal Bond Fund
Class C Shares................................ Raymond James & Assoc Inc. 16.57
for Elite Acct # 50099466
FAO George A. D'Auteuil Sr. &
Pauline T. D'Auteuil JT/WROS
9 Church St.
Millbury, MA 01527-3134
Ruth Biller 16.26
51 Oak Rd.
Canton, MA 02021-2625
John Sullivan 14.60
6 Margaret St.
Boston, MA 02113-2523
Rose E. Frisch 14.25
3 Hillside Pl.
Cambridge, MA 02140-3617
PaineWebber for the Benefit of 5.97
John J. Brodbine TTEE
Ralph L. Cunningham Trust
DTD 4/27/89
27 School St
Boston, MA 02108-4303
Magdalene S. Kapuscienski & 5.21
Gene S. Kapuscienski
JT TEN WROS NOT TC
15 D Country Club Lane
Milford, MA 01757
Nuveen Massachusetts Insured Municipal Bond Fund
Class R Shares................................ NFSC FEBO # 006-133914 5.10
Robert L. Varney
Janet N. Varney
9 Almira Rd
South Yarmouth, MA 02664
</TABLE>
INVESTMENT ADVISER AND INVESTMENT MANAGEMENT AGREEMENT
Nuveen Advisory Corp. acts as investment adviser for and manages the
investment and reinvestment of the assets of each of the Funds. Nuveen Advisory
also administers the Trust's business affairs, provides office facilities and
equipment and certain clerical, bookkeeping and administrative services, and
permits any of its officers or employees to serve without compensation as
trustees or officers of the Trust if elected to such positions. See "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>
MANAGEMENT
AVERAGE DAILY NET ASSET VALUE FEE 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) for the year ended July 31, 1997 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.
B-41
<PAGE> 122
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
------------------------------------ ------------------------------------
1/31/95 1/31/96 2/28/97* 1/31/95 1/31/96 2/28/97*
------- ------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
New Jersey Municipal Bond Fund................. $156,717 $152,929 $249,860 $ 54,105 $115,121 $105,204
</TABLE>
- ---------------
* For the thirteen month period ended February 28, 1997.
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
REIMBURSEMENT PAID TO NUVEEN EXPENSE REIMBURSEMENTS
ADVISORY FOR THE YEAR ENDED FOR THE YEAR ENDED
------------------------------------------ ---------------------------------
2/28/95 2/29/96 2/28/97 2/28/95 2/29/96 2/28/97
---------- ---------- ---------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
New York Municipal Bond Fund................ $ 786,847 $ 852,809 $ 921,217 $4,556 $29,700 $40,876
New York Insured Municipal Bond Fund........ 1,921,472 1,940,010 1,932,218 1,767 0 --
California Municipal Bond Fund.............. 1,123,360 1,199,571 1,249,684 3,483 3,302 --
California Insured Municipal Bond Fund...... 1,073,336 1,156,993 1,205,656 2,697 1,695 --
Massachusetts Municipal Bond Fund........... 370,394 366,859 430,684 17,319 59,879 13,780
Massachusetts Insured Municipal Bond Fund... 302,241 346,952 356,539 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, and beginning on 2/1/97, to
Nuveen Advisory, as follows:
<TABLE>
<CAPTION>
MANAGEMENT FEES NET OF EXPENSE FEE WAIVERS AND
REIMBURSEMENT PAID TO FLAGSHIP EXPENSE REIMBURSEMENTS
FINANCIAL FOR THE YEAR ENDED FOR THE YEAR ENDED
------------------------------------ ------------------------------------
5/31/95 5/31/96 2/28/97* 5/31/95 5/31/96 2/28/97*
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
New Jersey Intermediate Municipal Bond Fund.... $ 0 $ 0 $ 0 $ 45,333 $101,996 $ 71,304
Connecticut Municipal Bond Fund................ 396,094 421,811 440,411 615,631 636,447 367,429
</TABLE>
- ---------------
* For the nine month period ended February 28, 1997.
In addition to the management fee of Nuveen Advisory, each Fund pays all
other costs and expenses of its operations and a portion of the Trust's general
administrative expenses allocated in proportion to the net assets of each Fund.
Nuveen Advisory is a wholly owned subsidiary of John Nuveen & Co.
Incorporated ("Nuveen"), the Funds' principal underwriter. 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 $36 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. Founded in 1898, 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.
B-42
<PAGE> 123
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.
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.
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<PAGE> 124
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
longterm 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.
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."
B-44
<PAGE> 125
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
taxexempt 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 longterm
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 option to acquire securities that are substantially
identical to
B-45
<PAGE> 126
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.
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,
B-46
<PAGE> 127
reference should be made to the pertinent Code sections and Treasury
Regulations. The Code and Treasury Regulations are subject to change by
legislative or administrative action, and any such change may be retroactive
with respect to Fund transactions. Shareholders are advised to consult their own
tax advisers for more detailed information concerning the federal taxation of
the Funds and the income tax consequences to their shareholders.
STATE TAX MATTERS
The discussion of tax treatment is based on the assumptions that the Funds
will qualify under Subchapter M of the Code as regulated investment companies
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. All other
distributions, including distributions attributable to interest on obligations
of the United States or its instrumentalities and 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.
B-47
<PAGE> 128
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 they have a sufficient
nexus with New Jersey. If they are subject to either tax, the New Jersey Funds
do not expect to pay a material amount of either tax.
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 state 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 they have a sufficient nexus with California. If they are
subject to the California corporate income tax, the California Funds do 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.
B-48
<PAGE> 129
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. All other distributions,
including distributions attributable to interest on obligations of the United
States or instrumentalities and 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 corporate 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.
B-49
<PAGE> 130
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.
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.
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 for the 30-day period ending on February 28, 1997.
<TABLE>
<CAPTION>
COMBINED
FEDERAL TAXABLE
AND STATE EQUIVALENT
AS OF FEBRUARY 28, 1997 YIELD TAX RATE* YIELD
----------------------- ----- --------- ----------
<S> <C> <C> <C>
New Jersey Municipal Bond Fund
Class A Shares............................................ 4.61% 43.5% 8.16%
Class B Shares............................................ N/A 43.5% N/A
Class C Shares............................................ 4.07% 43.5% 7.20%
Class R Shares............................................ 5.08% 43.5% 8.99%
New York Municipal Bond Fund**
Class A Shares............................................ 4.41% 43.5% 7.81%
Class B Shares............................................ N/A 43.5% N/A
Class C Shares............................................ 3.86% 43.5% 6.83%
Class R Shares............................................ 4.86% 43.5% 8.60%
New York Insured Municipal Bond Fund**
Class A Shares............................................ 4.19% 43.5% 7.42%
Class B Shares............................................ N/A 43.5% N/A
Class C Shares............................................ 3.80% 43.5% 6.73%
Class R Shares............................................ 4.58% 43.5% 8.11%
California Municipal Bond Fund
Class A Shares............................................ 4.35% 45.0% 7.91%
Class B Shares............................................ N/A 45.0% N/A
Class C Shares............................................ 3.97% 45.0% 7.22%
Class R Shares............................................ 4.74% 45.0% 8.62%
</TABLE>
B-50
<PAGE> 131
<TABLE>
<CAPTION>
COMBINED
FEDERAL TAXABLE
AND STATE EQUIVALENT
AS OF FEBRUARY 28, 1997 YIELD TAX RATE* YIELD
----------------------- ----- --------- ----------
<S> <C> <C> <C>
California Insured Municipal Bond Fund
Class A Shares............................................ 4.26% 45.0% 7.75%
Class B Shares............................................ N/A 45.0% N/A
Class C Shares............................................ 3.88% 45.0% 7.05%
Class R Shares............................................ 4.65% 45.0% 8.45%
Massachusetts Municipal Bond Fund
Class A Shares............................................ 4.33% 47.0% 8.17%
Class B Shares............................................ N/A 47.0% N/A
Class C Shares............................................ 3.96% 47.0% 7.47%
Class R Shares............................................ 4.73% 47.0% 8.92%
Massachusetts Insured Municipal Bond Fund
Class A Shares............................................ 3.99% 47.0% 7.53%
Class B Shares............................................ N/A 47.0% N/A
Class C Shares............................................ 3.60% 47.0% 6.79%
Class R Shares............................................ 4.37% 47.0% 8.25%
New Jersey Intermediate Municipal Bond Fund
Class A Shares............................................ 4.33% 43.5% 7.66%
Class C Shares............................................ N/A 43.5% N/A
Class R Shares............................................ N/A 43.5% N/A
Connecticut Municipal Bond Fund
Class A Shares............................................ 4.61% 42.5% 8.02%
Class B Shares............................................ N/A 42.5% N/A
Class C Shares............................................ 4.27% 42.5% 7.43%
Class R Shares............................................ N/A 42.5% 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.
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>
FEBRUARY 28, 1997
DISTRIBUTION RATES
----------------------------------------
CLASS A CLASS B CLASS C CLASS R
------- ------- ------- -------
<S> <C> <C> <C> <C>
New Jersey Municipal Bond Fund.............................. 5.21% 4.69% 4.89% 5.64%
New York Municipal Bond Fund................................ 5.16% 4.64% 4.84% 5.58%
New York Insured Municipal Bond Fund........................ 4.76% 4.23% 4.41% 5.15%
California Municipal Bond Fund.............................. 4.95% N/A 4.59% 5.37%
California Insured Municipal Bond Fund...................... 4.83% N/A 4.46% 5.22%
Massachusetts Municipal Bond Fund........................... 4.94% N/A 4.64% 5.35%
Massachusetts Insured Municipal Bond Fund................... 4.82% N/A 4.46% 5.20%
New Jersey Intermediate Bond Fund........................... 4.76% N/A N/A N/A
Connecticut Municipal Bond Fund............................. 5.09% 4.57% 4.78% N/A
</TABLE>
B-51
<PAGE> 132
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, 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.
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 York Municipal Bond Fund, the
New York Insured Municipal Bond Fund, the Massachusetts Municipal Bond Fund, the
Massachusetts Insured Municipal Bond Fund, 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
B-52
<PAGE> 133
ten-year periods ended February 28, 1997 and for the period from inception
through February 28, 1997, respectively, were as follows:
<TABLE>
<CAPTION>
ANNUAL TOTAL RETURN
--------------------------------------------------------------------------------
FROM INCEPTION
ONE YEAR ENDED FIVE YEARS ENDED TEN YEARS ENDED THROUGH
FEBRUARY 28, 1997 FEBRUARY 28, 1997 FEBRUARY 28, 1997 FEBRUARY 28, 1997
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
New York Municipal Bond Fund
Class A Shares............................. 0.67% 6.40% 6.53% 6.86%
Class B Shares............................. 0.30% 6.47% 6.43% 6.76%
Class C Shares............................. 4.31% 6.65% 6.26% 6.58%
Class R Shares............................. 5.26% 7.63% 7.28% 7.61%
New York Insured Municipal Bond Fund
Class A Shares............................. -0.35% 6.03% 6.19% 6.46%
Class B Shares............................. -0.79% 6.03% 6.06% 6.33%
Class C Shares............................. 3.06% 6.17% 5.87% 6.11%
Class R Shares............................. 4.15% 7.21% 6.91% 7.17%
Massachusetts Municipal Bond Fund
Class A Shares............................. 0.33% 6.11% 5.97% 5.95%
Class B Shares............................. 0.04% 6.07% 5.81% 5.79%
Class C Shares............................. 3.09% 6.18% 5.60% 5.58%
Class R Shares............................. 4.99% 7.24% 6.66% 6.64%
Massachusetts Insured Municipal Bond Fund
Class A Shares............................. -0.35% 5.81% 6.15% 6.10%
Class B Shares............................. -0.78% 5.82% 6.01% 5.96%
Class C Shares............................. 3.17% 5.95% 5.82% 5.76%
Class R Shares............................. 4.16% 6.99% 6.87% 6.82%
California Municipal Bond Fund
Class A Shares............................. 0.87% 5.80% 6.12% 6.79%
Class B Shares............................. 0.67% 5.89% 6.02% 6.66%
Class C Shares............................. 4.53% 6.00% 5.83% 6.46%
Class R Shares............................. 5.67% 7.06% 6.88% 7.52%
California Insured Municipal Bond Fund
Class A Shares............................. 0.18% 6.03% 6.19% 6.64%
Class B Shares............................. -0.16% 6.01% 6.03% 6.51%
Class C Shares............................. 3.99% 6.14% 5.84% 6.27%
Class R Shares............................. 4.81% 7.18% 6.89% 7.33%
</TABLE>
The annual total return figures for the New Jersey Municipal Bond Fund, the
New Jersey Intermediate Bond Fund, and the Connecticut Municipal Bond Fund,
including the effect of the maximum sales charge for Class A Shares, 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 (as applicable) ended
February 28, 1997, and for the period since inception through February 28, 1997,
respectively, were as follows:
<TABLE>
<CAPTION>
ANNUAL TOTAL RETURN
---------------------------------------------------------
ONE YEAR FIVE YEARS FROM INCEPTION
ENDED ENDED THROUGH
FEBRUARY 28, 1997 FEBRUARY 28, 1997 FEBRUARY 28, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
New Jersey Municipal Bond Fund
Class A Shares............................................ 0.45% 6.02% 6.02%
Class B Shares............................................ 0.12% 6.04% 6.04%
Class C Shares............................................ 4.18% 6.19% 6.19%
Class R Shares............................................ 5.09% 7.21% 7.21%
New Jersey Intermediate Municipal Bond Fund
Class A Shares............................................ -0.79% N/A 5.47%
Class C Shares............................................ 3.21% N/A 6.11%
Class R Shares............................................ 3.56% N/A 6.49%
Connecticut Municipal Bond Fund
Class A Shares............................................ 1.04% 6.15% 6.91%
Class B Shares............................................ 0.88% 6.32% 6.90%
Class C Shares............................................ 4.89% 6.43% 6.77%
Class R Shares............................................ 5.46% 7.06% 7.38%
</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
B-53
<PAGE> 134
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 York Municipal Bond Fund,
the New York Insured Municipal Bond Fund, the Massachusetts Municipal Bond Fund,
the Massachusetts Insured Municipal Bond Fund, 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 February 28,
1997, and for the period since inception February 28, 1997, 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 ENDED FIVE YEARS ENDED TEN YEARS ENDED FROM INCEPTION
FEBRUARY 28, 1997 FEBRUARY 28, 1997 FEBRUARY 28, 1997 FEBRUARY 28, 1997
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
New York Municipal Bond Fund
Class A Shares.................................. 0.67% 36.38% 88.24% 96.65%
Class B Shares.................................. 0.30% 36.81% 86.41% 94.76%
Class C Shares.................................. 4.31% 38.00% 83.46% 91.30%
Class R Shares.................................. 5.26% 44.45% 101.88% 111.03%
New York Insured Municipal Bond Fund
Class A Shares.................................. -0.35% 34.03% 82.39% 89.12%
Class B Shares.................................. -0.79% 34.04% 80.13% 86.93%
Class C Shares.................................. 3.06% 34.87% 76.83% 83.02%
Class R Shares.................................. 4.15% 41.60% 95.13% 102.46%
Massachusetts Municipal Bond Fund
Class A Shares.................................. 0.33% 34.54% 78.50% 80.22%
Class B Shares.................................. 0.04% 34.24% 75.88% 77.34%
Class C Shares.................................. 3.90% 34.94% 72.50% 73.84%
Class R Shares.................................. 4.99% 41.80% 90.57% 92.53%
Massachusetts Insured Municipal Bond Fund
Class A Shares.................................. -0.35% 32.62% 81.58% 82.83%
Class B Shares.................................. -0.78% 32.71% 79.30% 80.29%
Class C Shares.................................. 3.17% 33.47% 76.08% 76.96%
Class R Shares.................................. 4.16% 40.20% 94.40% 95.86%
California Municipal Bond Fund
Class A Shares.................................. 0.87% 32.58% 81.17% 101.55%
Class B Shares.................................. 0.67% 33.13% 79.40% 98.94%
Class C Shares.................................. 4.53% 33.83% 76.16% 95.01%
Class R Shares.................................. 5.67% 40.61% 94.52% 116.76%
California Insured Municipal Bond Fund
Class A Shares.................................. 0.18% 34.04% 82.30% 98.57%
Class B Shares.................................. -0.16% 33.89% 79.64% 95.98%
Class C Shares.................................. 3.99% 34.68% 76.45% 91.25%
Class R Shares.................................. 4.81% 41.44% 94.78% 112.51%
</TABLE>
The cumulative total return figures for the New Jersey Municipal Bond Fund,
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 February 28, 1997, and for the period since
inception through February 28, 1997, respectively,
B-54
<PAGE> 135
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 INCEPTION
ONE YEAR ENDED FIVE YEARS ENDED THROUGH
FEBRUARY 28, 1997 FEBRUARY 28, 1997 FEBRUARY 28, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
New Jersey Municipal Bond Fund
Class A Shares............................................ 0.45% 33.92% 33.92%
Class B Shares............................................ 0.12% 34.07% 34.07%
Class C Shares............................................ 4.18% 35.00% 35.00%
Class R Shares............................................ 5.09% 41.61% 41.61%
New Jersey Intermediate Municipal Bond Fund
Class A Shares............................................ -0.79% N/A 26.74%
Class C Shares............................................ 3.21% N/A 30.23%
Class R Shares............................................ 3.56% N/A 32.30%
Connecticut Municipal Bond Fund
Class A Shares............................................ 1.04% 34.75% 90.26%
Class B Shares............................................ 0.88% 35.84% 90.10%
Class C Shares............................................ 4.89% 36.59% 88.01%
Class R Shares............................................ 5.46% 40.65% 98.60%
</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 February 28, 1997 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
B-55
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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 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.
The minimum initial investment is $3,000 per fund share class, and may be
lower for accounts opened through fee-based programs for which the program
sponsor has established a single master account with the fund's transfer agent
and performs all sub-accounting services related to that account.
REDUCTION OR ELIMINATION OF UP-FRONT SALES CHARGE ON CLASS A SHARES AND CLASS R
SHARE PURCHASE ELIGIBILITY
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
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<PAGE> 137
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.
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, the
minimum monthly investment in Class A Shares of any particular Fund or portfolio
for all participants in the program combined is $3,000; and the minimum initial
investment in Class A shares of any particular Fund or portfolio for each
participant in the program 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.
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<PAGE> 138
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 or their
immediate family members;
- 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 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, parents, children, grandparents,
grandchildren, parents-in-law, sons- and daughters-in-law, siblings, a sibling's
spouse, and a spouse's siblings); or (3) all purchases made through a group
purchase program as described above.
Class R Share Purchase Eligibility. Class R Shares are available for
purchases of $1 million or more and for purchases using dividends and capital
gains distributions on Class R Shares. Class R Shares also are available for 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;
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- officers and directors of bank holding companies that make Fund shares
available directly or through subsidiaries or bank affiliates, or their
immediate family members;
- 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.
In addition, purchasers of Nuveen unit investment trusts may reinvest their
distributions from such unit investment trusts in Class R Shares, if, before
September 6, 1994, such purchasers had elected to reinvest distributions in
Nuveen Fund shares (before June 13, 1995 for Nuveen Municipal Bond Fund shares).
Shareholders may exchange their Class R Shares of any Nuveen Fund into Class R
Shares of any other Nuveen Fund.
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 will redeem shares held for the
longest period, 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. You may not
exchange Class B Shares for shares of a 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 12% of the original
investment amount. If a Fund waives or reduces the CDSC, such waiver or
reduction would be
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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.
In addition to the types of compensation to dealers to promote sales of
fund shares that are described in the prospectus, Nuveen may from time to time
make additional reallowances only to certain authorized dealers who sell or are
expected to sell certain minimum amounts of shares of the Nuveen mutual funds
during specified time periods.
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.
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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
FEBRUARY 28, 1997* JANUARY 31, 1996 JANUARY 31, 1995
------------------------- ------------------------- -------------------------
AMOUNT OF AMOUNT AMOUNT OF AMOUNT AMOUNT OF AMOUNT
UNDERWRITING RETAINED UNDERWRITING RETAINED UNDERWRITING RETAINED
COMMISSIONS BY NUVEEN COMMISSIONS BY NUVEEN COMMISSIONS BY NUVEEN
------------ --------- ------------ --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
New Jersey Fund.......................... 206 19 241 16 255 35
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
FEBRUARY 28, 1997 FEBRUARY 29, 1996 FEBRUARY 28, 1995
------------------------- ------------------------- -------------------------
AMOUNT OF AMOUNT AMOUNT OF AMOUNT AMOUNT OF AMOUNT
UNDERWRITING RETAINED UNDERWRITING RETAINED UNDERWRITING RETAINED
COMMISSIONS BY NUVEEN COMMISSIONS BY NUVEEN COMMISSIONS BY NUVEEN
------------ --------- ------------ --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
New York Fund............................ 244 24 272 33 428 64
New York Insured Fund.................... 394 49 450 71 850 126
California Fund.......................... 209 31 221 33 370 60
California Insured Fund.................. 338 52 357 56 517 93
Massachusetts Fund....................... 99 9 96 12 170 20
Massachusetts Insured Fund............... 79 11 113 14 147 24
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
FEBRUARY 28, 1997** MAY 31, 1996 MAY 31, 1995
------------------------- ------------------------- -------------------------
AMOUNT OF AMOUNT AMOUNT OF AMOUNT AMOUNT OF AMOUNT
UNDERWRITING RETAINED UNDERWRITING RETAINED UNDERWRITING RETAINED
COMMISSIONS BY NUVEEN COMMISSIONS BY NUVEEN COMMISSIONS BY NUVEEN
------------ --------- ------------ --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
New Jersey Intermediate Fund............. 6 1 19 4 31 6
Connecticut Fund......................... 127 18 349 47 447 60
</TABLE>
- ---------------
* For the thirteen month period ended February 28, 1997.
** For the nine month period ended February 28, 1997.
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.
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For the fiscal year ended February 28, 1997, 100% of service fees and
distribution fees were paid out as compensation to Authorized Dealers. Prior to
February 1, 1997, 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. Thereafter, the service fee for the Class A and Class C
Shares was .20% and the distribution fee for the Class C Shares was .55%. For
the period from June 1, 1996 to January 31, 1997, 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 .20% for the Class A Shares and .75% for
the Class C Shares; thereafter, the fees were the same as the aforementioned
Funds.
<TABLE>
<CAPTION>
COMPENSATION PAID TO
AUTHORIZED DEALERS FOR
END OF FISCAL 1997
----------------------
<S> <C>
New York Municipal Bond Fund
Class A................................................... $ 54,119
Class B................................................... $ 34
Class C................................................... $ 8,973
New York Insured Municipal Bond Fund
Class A................................................... $ 73,862
Class B................................................... $ 494
Class C................................................... $ 19,878
New Jersey Municipal Bond Fund*
Class A................................................... $ 39,563
Class B................................................... $ 15
Class C................................................... $ 20,820
New Jersey Intermediate Municipal Bond Fund**
Class A................................................... $ 11,368
Class C................................................... --
California Municipal Bond Fund
Class A................................................... $ 40,524
Class B................................................... N/A
Class C................................................... $ 7,416
California Insured Municipal Bond Fund
Class A................................................... $ 54,387
Class B................................................... N/A
Class C................................................... $ 11,151
Connecticut Municipal Bond Fund**
Class A................................................... $586,511
Class B................................................... $ 16
Class C................................................... $ 49,392
Massachusetts Municipal Bond Fund
Class A................................................... $ 13,857
Class B................................................... N/A
Class C................................................... $ 7,619
Massachusetts Insured Municipal Bond Fund
Class A................................................... $ 15,491
Class B................................................... N/A
Class C................................................... $ 8,380
</TABLE>
- ---------------
* For the thirteen month period ended February 28, 1997.
** For the nine month period ended February 28, 1997.
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
B-62
<PAGE> 143
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. Prior to February 1,
1997, Deloitte & Touche LLP was the auditor for the Connecticut Fund and the New
Jersey Intermediate Fund.
The custodian of the Funds' assets is The Chase Manhattan Bank, 4 New York
Plaza, New York 10004. 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; each is included herein by reference. The
Annual Reports accompany this Statement of Additional Information.
B-63
<PAGE> 144
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.
AA-1
<PAGE> 145
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 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.
BB-1
<PAGE> 146
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.
BB-2
<PAGE> 147
EXHIBIT C
FINANCIAL STATEMENTS FOR THE NEW JERSEY FUND AND
THE NEW JERSEY INTERMEDIATE FUND
PORTFOLIO OF INVESTMENTS
NUVEEN FLAGSHIP NEW JERSEY
FEBRUARY 28, 1998
<TABLE>
<CAPTION>
PRINCIPAL OPT. CALL MARKET
AMOUNT DESCRIPTION PROVISIONS* RATINGS** VALUE
- -------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CAPITAL GOODS--7.4%
$ 5,955,000 New Jersey Economic Development Authority, Economic
Development Bonds (Bridgewater Resources Inc. Project),
1994 Series A, 8.375%, 11/01/04 (Alternative Minimum
Tax)...................................................... No Opt. Call N/R $ 6,428,661
180,000 New Jersey Economic Development Authority, Economic Growth
Bonds, Composite Issue, 1992 Second Series A3, 6.550%,
12/01/07 (Alternative Minimum Tax)........................ 12/02 at Aa3 195,242
101 1/2
- -------------------------------------------------------------------------------------------------------------------
EDUCATION AND CIVIC ORGANIZATIONS--3.9%
1,000,000 New Jersey Development Authority, Economic Development
Bonds, (Yeshiva K'Tana of Passaic-1992 Project), 8.000%,
9/15/18................................................... No Opt. Call N/R 1,261,130
925,000 New Jersey Educational Facilities Authority, Trenton State
College Issue, Revenue Bonds, Series 1976 D, 6.750%,
7/01/08................................................... 7/98 at 100 A+ 927,054
835,000 New Jersey Educational Facilities Authority, Princeton
University Revenue Bonds, 1994 Series A, 5.875%,
7/01/11................................................... 7/04 at 100 Aaa 903,203
410,000 New Jersey Educational Facilities Authority, Revenue
Refunding Bonds, (Monmouth College), Series 1993-A,
5.625%, 7/01/13........................................... 7/03 at 102 Baa 411,726
- -------------------------------------------------------------------------------------------------------------------
FOREST AND PAPER PRODUCTS--0.3%
250,000 New Jersey Economic Development Authority, Solid Waste
Disposal Facility Revenue Bonds (Garden State Paper
Company, Inc. Project), Series 1992, 7.125%, 4/01/22
(Alternative Minimum Tax)................................. 4/02 at 102 Aa2 276,658
- -------------------------------------------------------------------------------------------------------------------
HEALTH CARE--10.9%
945,000 New Jersey Health Care Facilities Financing Authority
(Intercare Health Systems Inc.--JFK Medical Center),
Series 1988, 7.625%, 7/01/18.............................. 7/98 at 102 A+ 975,060
935,000 New Jersey Economic Development Authority, Economic Growth
Lease Revenue Bonds, Remarketed 1992 Second Series B,
5.300%, 12/01/07 (Alternative Minimum Tax)................ 12/03 at 102 Aa3 981,918
300,000 New Jersey Economic Development Authority, Revenue Bonds
(RWJ Health Care Corp. at Hamilton, Obligated Group
Project), Series 1994, 6.250%, 7/01/14.................... 7/04 at 102 Aaa 330,570
700,000 New Jersey Health Care Facilities Financing Authority,
Revenue Bonds, Community Medical Center/Kensington Manor
Care Center Issue, Series E, 7.000%, 7/01/20.............. 7/00 at 102 Aaa 753,361
400,000 New Jersey Health Care Facilities Financing Authority,
Refunding Revenue Bonds, Atlantic City Medical Center
Issue, Series C, 6.800%, 7/01/05.......................... 7/02 at 102 A- 443,508
700,000 New Jersey Health Care Facilities Financing Authority,
Revenue Bonds, Palisades Medical Center, Obligated Group
Issue, Series 1992, 7.500%, 7/01/06....................... 7/02 at 102 Ba1 752,612
250,000 New Jersey Health Care Facilities Financing Authority,
Revenue Bonds, Monmouth Medical Center Issue, Series C,
6.250%, 7/01/16........................................... 7/04 at 102 Aaa 275,475
200,000 New Jersey Health Care Facilities Financing Authority,
Revenue Bonds, Newark Beth Israel Medical Center Issue,
Series 1994, 6.000%, 7/01/16.............................. 7/04 at 102 Aaa 215,140
250,000 New Jersey Health Care Facilities Financing Authority,
Refunding Revenue Bonds, Irvington General Hospital Issue
(FHA Insured Mortgage), Series 1994, 6.375%, 8/01/15...... 8/04 at 102 AAA 276,213
1,200,000 New Jersey Health Care Facilities Financing Authority,
Revenue and Refunding Bonds, Holy Name Hospital Issue,
Series 1997, 5.250%, 7/01/20.............................. 7/07 at 102 AAA 1,202,964
1,000,000 New Jersey Health Care Facilities Financing Authority,
Revenue and Refunding Bonds, AHS Hospital Corporation
Issue, Series 1997 A Bonds, 5.000%, 7/01/27............... 7/07 at 102 Aaa 974,400
175,000 New Jersey Health Care Facilities Financing Authority,
Bayonne Hospital Obligated Group, Revenue Bonds, Series
1994, 6.250%, 7/01/12..................................... 7/04 at 102 Aaa 193,855
1,000,000 Camden County Improvement Authority, Health System Revenue
Bonds (Catholic Health East), Series 1998-A, 5.000%,
11/15/28 (WI)............................................. 5/08 at 102 Aaa 969,410
1,000,000 Puerto Rico Industrial, Tourist, Educational, Medical and
Environmental Control Facilities Financing Authority,
Hospital Revenue Bonds, 1995 Series A (Hospital Auxilio
Mutuo Obligated Group Project), 6.250%, 7/01/16........... 1/05 at 102 Aaa 1,109,270
250,000 Pollution Control Financing Authority of Union County (New
Jersey), Pollution Control Revenue Refunding Bonds,
American Cyanamid Company Issue, Series 1994, 5.800%,
9/01/09................................................... No Opt. Call A3 278,355
- -------------------------------------------------------------------------------------------------------------------
HOUSING/MULTIFAMILY--9.0%
1,750,000 New Jersey Housing Finance Agency, Special Pledge Revenue
Obligations, 1975 Series One, 9.000%, 11/01/18............ 11/98 at 102 A1 1,794,013
1,500,000 New Jersey Housing Mortgage Finance Agency, Multi-Family
Housing Revenue Bonds, 1996 Series A, 6.200%, 11/01/18
(Alternative Minimum Tax)................................. 5/06 at 102 Aaa 1,608,675
2,000,000 New Jersey Housing and Mortgage Finance Agency, Multi-Family
Housing Revenue Bonds, 1995 Series A, 6.000%, 11/01/14.... 5/05 at 102 Aaa 2,127,440
</TABLE>
C-1
<PAGE> 148
PORTFOLIO OF INVESTMENTS -- CONTINUED
NUVEEN FLAGSHIP NEW JERSEY
FEBRUARY 28, 1998
<TABLE>
<CAPTION>
PRINCIPAL OPT. CALL MARKET
AMOUNT DESCRIPTION PROVISIONS* RATINGS** VALUE
- -------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
HOUSING/MULTIFAMILY--CONTINUED
$ 700,000 New Jersey Housing and Mortgage Finance Agency, Housing
Revenue Bonds, 1992 Series A, 6.950%, 11/01/13............ 5/02 at 102 A+ $ 756,147
500,000 New Jersey Housing and Mortgage Finance Agency, Housing
Revenue Refunding Bonds, 1992 Series One, 6.600%,
11/01/14.................................................. 11/02 at 102 A+ 540,460
235,000 Hoboken Housing Finance Corporation, Multifamily Mortgage
Revenue Bonds (Project Uplift-FHA Section 8), 1995-A
Refunding, 6.250%, 2/01/24................................ No Opt. Call AA+ 241,004
400,000 The Hudson County Improvement Authority, Multifamily Housing
Revenue Bonds, Series 1992 A (Conduit Financing--Observer
Park Project), 6.900%, 6/01/22 (Alternative Minimum
Tax)...................................................... 6/04 at 100 AAA 429,060
500,000 North Bergen Housing Development Corporation (North Bergen,
New Jersey), Mortgage Revenue Bonds, Series 1978 (FHA
Insured Mortgage Loan--Section 8 Assisted Project),
7.400%, 9/01/20........................................... 9/09 at 100 N/R 513,105
- -------------------------------------------------------------------------------------------------------------------
HOUSING/SINGLE FAMILY--6.9%
New Jersey Housing and Mortgage Financing Agency, Home Buyer
Revenue Bonds, 1994 Series K:
250,000 6.300%, 10/01/16 (Alternative Minimum Tax)................ 7/04 at 102 Aaa 264,933
400,000 6.375%, 10/01/26 (Alternative Minimum Tax)................ 7/04 at 102 Aaa 423,408
4,000,000 New Jersey Housing and Mortgage Finance Agency, Home Buyer
Revenue Bonds, 1997 Series U, 5.700%, 10/01/14
(Alternative Minimum Tax)................................. 10/07 at 101 1/2 Aaa 4,182,960
1,175,000 Virgin Islands Housing Finance Authority, Single Family
Mortgage Revenue Refunding Bonds (GNMA Mortgage-Backed
Securities Program), 1995 Series A, 6.450%, 3/01/16
(Alternative Minimum Tax)................................. 3/05 at 102 AAA 1,250,893
- -------------------------------------------------------------------------------------------------------------------
INDUSTRIAL/OTHER--2.1%
1,135,000 New Jersey Economic Development Authority, Economic Growth
Bond, Composite Issue--1992 Second Series H, 5.300%,
12/01/07 (Alternative Minimum Tax)........................ 12/03 at 102 Aa3 1,195,745
625,000 New Jersey Economic Development Authority, Insured Revenue
Bonds (Educational Testing Service Issue), Series 1995B,
6.125%, 5/15/15........................................... 5/05 at 102 Aaa 685,725
- -------------------------------------------------------------------------------------------------------------------
TAX OBLIGATION/GENERAL--12.8%
1,000,000 State of New Jersey, General Obligation Bonds, Series D,
5.800%, 2/15/07........................................... No Opt. Call Aa1 1,109,040
200,000 The City of Atlantic, In the County of Atlantic, New Jersey,
General Obligation General Improvement Bonds, Series 1994,
5.650%, 8/15/04........................................... No Opt. Call A- 212,662
100,000 County of Atlantic, New Jersey, General Improvement Bonds,
6.000%, 1/01/07........................................... 1/04 at 101 Aaa 109,097
250,000 City of East Orange, In the County of Essex, New Jersey,
Fiscal Year Adjustment Bonds (Qualified Under the
Municipal Qualified Bond Act P.L. 1976, c. 38, as
Amended), 8.400%, 8/01/06................................. No Opt. Call Aaa 320,218
500,000 The Board of Education of The Township of Hillsborough, in
the County of Somerset, State of New Jersey, General
Obligation School Purpose Bonds, Series 1992, 5.875%,
8/01/11................................................... No Opt. Call AA 561,445
2,645,000 Middletown Township Board of Education, General Obligation
Bonds, Series 1997, School Board Reserve Act, 5.800%,
8/01/21................................................... 8/07 at 100 Aaa 2,794,469
50,000 The Monmouth County Improvement Authority (Monmouth County,
New Jersey), Revenue Bonds, Series 1992 (Howell Township
Board of Education Project), 6.450%, 7/01/08.............. 7/02 at 102 AA+ 55,415
165,000 Parsippany-Troy Hills Township, General Obligation, Capital
Appreciation Bonds, Series 1992, 0.000%, 4/01/07.......... No Opt. Call Aa 111,066
2,000,000 Commonwealth of Puerto Rico, Public Improvement Bonds of
1995 (General Obligation Bonds), 5.750%, 7/01/24.......... 7/05 at 101 1/2 Aaa 2,124,680
550,000 Commonwealth of Puerto Rico, Public Improvement Bonds of
1996 (General Obligation Bonds), 5.400%, 7/01/25.......... 7/06 at 101 1/2 A 559,999
2,000,000 Commonwealth of Puerto Rico, Public Improvement Refunding
Bonds of 1997 (General Obligation Bonds), 5.375%,
7/01/21................................................... 7/07 at 101 1/2 Aaa 2,055,480
1,100,000 Sparta Township School District, General Obligation Bonds
(Unlimited Tax), 5.800%, 9/01/18.......................... 9/06 at 100 Aaa 1,166,330
250,000 The City of Union, In the County of Hudson, State of New
Jersey, General Obligation School Purpose Bonds, Series
1992, 6.375%, 11/01/10.................................... No Opt. Call Aaa 292,908
- -------------------------------------------------------------------------------------------------------------------
TAX OBLIGATION/LIMITED--9.4%
300,000 New Jersey Economic Development Authority, State Contract
Economic Recovery Bonds, Series 1992-A, 6.000%, 3/15/21... 9/02 at 102 Aaa 324,771
650,000 New Jersey Economic Development Authority, Market Transition
Facility Senior Lien Revenue Bonds, Series 1994A, 5.875%,
7/01/11................................................... 7/04 at 102 Aaa 705,413
250,000 New Jersey Sports and Exposition Authority, Convention
Center Luxury Tax Bonds, 1992 Series A, 6.250%, 7/01/20... 7/02 at 102 Aaa 273,480
150,000 The County of Bergen Utility Authority, Water Pollution
Control System Revenue Bonds, Series 1992-B, 6.000%,
12/15/13.................................................. 12/02 at 102 Aaa 163,388
C-2
</TABLE>
<PAGE> 149
PORTFOLIO OF INVESTMENTS -- CONTINUED
NUVEEN FLAGSHIP NEW JERSEY
FEBRUARY 28, 1998
<TABLE>
<CAPTION>
PRINCIPAL OPT. CALL MARKET
AMOUNT DESCRIPTION PROVISIONS* RATINGS** VALUE
- -------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
TAX OBLIGATION/LIMITED--CONTINUED
$ 250,000 The Camden County Municipal Utilities Authority (Camden
County, New Jersey), County Agreement Sewer Revenue
Refunding Bonds, 1996 Series, 5.125%, 7/15/17............. 7/06 at 102 Aaa $ 250,263
The Essex County Improvement Authority (Essex County, New
Jersey), City of Newark General Obligation Lease Revenue
Bonds, Series 1994:
300,000 6.350%, 4/01/07........................................... 4/04 at 102 Baa1 325,476
450,000 6.600%, 4/01/14........................................... 4/04 at 102 Baa1 491,324
500,000 The Essex County Improvement Authority (Essex County, New
Jersey), County Guaranteed Pooled Revenue Bonds, Series
1992A, 6.500%, 12/01/12................................... 12/02 at 102 Baa1 537,960
1,460,000 The Board of Education of the Borough of Little Ferry,
Bergen County, New Jersey, Certificates of Participation,
6.300%, 1/15/08........................................... No Opt. Call N/R 1,540,052
1,000,000 The State of New Jersey, as Lessee, and The Mercer County
Improvement Authority, as Lessor, Relating to the Richard
J. Hughes Justice Complex, 6.050%, 1/01/13................ No Opt. Call Aa 1,001,320
2,350,000 The Ocean County Utilities Authority (New Jersey),
Wastewater Revenue Bonds, Refunding Series 1987, 5.000%,
1/01/14................................................... 5/98 at 100 Aaa 2,349,812
170,000 Puerto Rico Aqueduct and Sewer Authority, Refunding Bonds,
Series 1995, Guaranteed by the Commonwealth of Puerto
Rico, 5.000%, 7/01/15..................................... 7/06 at 101 1/2 A 167,278
225,000 Puerto Rico Commonwealth Highway Authority, Highway Revenue
Bonds, Series 1990-Q, 6.000%, 7/01/20..................... 7/00 at 100 A 233,530
- -------------------------------------------------------------------------------------------------------------------
TRANSPORTATION--9.4%
1,750,000 New Jersey Turnpike Authority, Turnpike Revenue Bonds,
Series 1991 C, 6.500%, 1/01/08............................ No Opt. Call Baa1 2,013,743
1,415,000 The Delaware River and Bay Authority, Revenue Bonds, Series
1993, 5.000%, 1/01/17..................................... 1/04 at 102 Aaa 1,389,502
100,000 Parking Authority of the City of Hoboken, County of Hudson,
New Jersey, Parking General Revenue Refunding Bonds,
Series 1992A, 6.625%, 3/01/09............................. 3/02 at 102 Baa1 107,140
125,000 The Port Authority of New York and New Jersey, Consolidated
Bonds, Ninety-Sixth Series, 6.600%, 10/01/23 (Alternative
Minimum Tax).............................................. 10/04 at 101 Aaa 138,125
200,000 The Port Authority of New York and New Jersey, Consolidated
Bonds, One Hundredth Series, 5.750%, 12/15/20............. 6/05 at 101 AA- 210,960
200,000 The Port Authority of New York and New Jersey, Consolidated
Bonds, Ninety-Fifth Series, 5.875%, 7/15/09 (Alternative
Minimum Tax).............................................. 7/04 at 101 AA- 215,222
4,100,000 The Port Authority of New York and New Jersey Special
Project Bonds, Series B, JFK International Air Terminal
LLC Project, 5.750%, 12/01/25 (Alternative Minimum Tax)... 12/07 at 100 Aaa 4,318,694
- -------------------------------------------------------------------------------------------------------------------
U.S. GUARANTEED--12.7%
200,000 New Jersey Economic Development Authority, Lease Rental
Bonds, 1992 Series (Liberty State Park Project), 6.800%,
3/15/22 (Pre-refunded to 3/15/02)......................... 3/02 at 102 Aaa 223,438
1,780,000 New Jersey Health Care Facilities Financing Authority,
Revenue Bonds, Hackensack Hospital Issue, Series A,
8.750%, 7/01/09........................................... No Opt. Call Aaa 2,144,740
2,065,000 New Jersey Health Care Facilities Financing Authority,
Revenue Bonds, Series 1990-E (Kennedy Memorial Hospital),
8.375%, 7/01/10 (Pre-refunded to 7/01/01)................. 7/01 at 102 A1*** 2,371,714
3,000,000 New Jersey Health Care Facilities Financing Authority,
Revenue Bonds, Newton Memorial Hospital Issue, Series A,
7.500%, 7/01/19 (Pre-refunded to 7/01/99)................. 7/99 at 102 A-*** 3,201,570
25,000 New Jersey Health Care Facilities Financing Authority,
Bayonne Hospital Obligated Group, Revenue Bonds, Series
1994, 6.250%, 7/01/12 (Pre-refunded to 7/01/04)........... 7/04 at 102 Aaa 28,099
290,000 New Jersey Turnpike Authority, Turnpike Revenue Bonds, 1984
Series, 10.375%, 1/01/03.................................. No Opt. Call AAA 340,559
100,000 The Essex County Improvement Authority (Essex County, New
Jersey), General Obligation Lease Revenue Bonds, Series
1994 (County Jail and Youth House Projects), 6.900%,
12/01/14 (Pre-refunded to 12/01/04)....................... 12/04 at 102 Aaa 116,947
300,000 The Township of North Bergen (Hudson County, New Jersey),
Fiscal Year Adjustment General Obligation Bonds, Series
1992, 6.500%, 8/15/12 (Pre-refunded to 8/15/02)........... 8/02 at 102 Aaa 334,311
60,000 Puerto Rico Highway and Transportation Authority, Highway
Revenue Bonds (Series T), 6.625%, 7/01/18 (Pre-refunded to
7/01/02).................................................. 7/02 at AAA 66,889
101 1/2
1,875,000 Puerto Rico Electric Power Authority, Power Revenue Bonds,
Series P, 7.000%, 7/01/21 (Pre-refunded to 7/01/01)....... 7/01 at 102 Aaa 2,082,488
100,000 University of Medicine and Dentistry of New Jersey, Series
E, 6.500%, 12/01/18 (Pre-refunded to 12/01/01)............ 12/01 at 102 AA-*** 110,162
300,000 The Wanaque Borough Sewerage Authority (Passaic County, New
Jersey), Sewer Revenue Bonds (Series 1992), 7.000%,
12/01/21 (Pre-refunded to 12/01/02)....................... 12/02 at 102 Baa1*** 341,574
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
C-3
<PAGE> 150
PORTFOLIO OF INVESTMENTS -- CONTINUED
NUVEEN FLAGSHIP NEW JERSEY
FEBRUARY 28, 1998
<TABLE>
<CAPTION>
PRINCIPAL OPT. CALL MARKET
AMOUNT DESCRIPTION PROVISIONS* RATINGS** VALUE
- -------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
UTILITIES--9.9%
$ 1,000,000 Pollution Control Financing Authority of Camden County
(Camden County, New Jersey), Solid Waste Disposal and
Resource Recovery System Revenue Bonds, Series 1991 C,
7.125%, 12/01/01 (Alternative Minimum Tax)................ No Opt. Call B2 $ 1,006,340
2,645,000 Pollution Control Financing Authority of Camden County
(Camden County, New Jersey), Solid Waste Disposal and
Resource Recovery System Revenue Bonds, Series 1991 D,
7.250%, 12/01/10.......................................... 12/01 at 102 B2 2,690,626
790,000 Puerto Rico Electric Power Authority, Power Revenue Bonds,
Series P, 7.000%, 7/01/07................................. No Opt. Call Baa1 936,924
200,000 Puerto Rico Electric Power Authority, Power Revenue Bonds,
Series R, 6.250%, 7/01/17................................. 7/02 at Baa1 215,390
101 1/2
Puerto Rico Electric Power Authority, Power Revenue Bonds,
Series T:
2,000,000 5.500%, 7/01/20........................................... 7/04 at 100 Baa1 2,035,160
250,000 6.375%, 7/01/24........................................... 7/04 at 102 Baa1 277,904
1,500,000 Puerto Rico Electric Power Authority, Power Revenue
Refunding Bonds, Series Z, 5.250%, 7/01/21................ 7/05 at 100 Baa1 1,493,894
195,000 The Union County Utilities Authority (New Jersey), Solid
Waste System Revenue Bonds, 1991 Series A, 7.100%, 6/15/06
(Alternative Minimum Tax)................................. 6/02 at 102 BB 195,980
- -------------------------------------------------------------------------------------------------------------------
WATER AND SEWER--1.2%
100,000 New Jersey Economic Development Authority, Water Facilities
Revenue Refunding Bonds (New Jersey American Water Company
Inc. Project), Series 1993, 5.500%, 6/01/23 (Alternative
Minimum Tax).............................................. 6/03 at 102 Aaa 102,150
150,000 New Jersey Economic Development Authority, Water Facilities
Revenue Refunding Bonds (Hackensack Water Company
Project-1994 Series B), 5.900%, 3/01/24 (Alternative
Minimum Tax).............................................. 3/04 at 102 Aaa 160,454
200,000 New Jersey Wastewater Treatment Trust, Wastewater Treatment
Bonds, Series 1994A, 6.500%, 4/01/14...................... 4/04 at 102 Aa 223,243
250,000 The Hoboken-Union City-Weehawken Sewerage Authority (New
Jersey), Sewer Revenue Bonds (Refunding Series 1992),
6.200%, 8/01/19........................................... 8/02 at 102 Aaa 273,310
200,000 North Jersey District Water Supply Commission of the State
of New Jersey, Wanaque South Project, Revenue Refunding
Bonds, Series 1993, 6.000%, 7/01/21....................... 7/03 at 102 Aaa 216,653
75,000 The Wanaque Valley Regional Sewerage Authority (Passaic
County, New Jersey), Sewer Revenue Bonds (1993 Series A),
6.125%, 9/01/22........................................... 9/03 at 102 Baa 78,226
- -------------------------------------------------------------------------------------------------------------------
$80,435,000 Total Investments--(cost $80,464,531)--95.9%................ 85,648,360
=========== -----------------------------------------------------------------------------------------------------
TEMPORARY INVESTMENTS IN SHORT-TERM MUNICIPAL
SECURITIES--3.5%
$ 800,000 New Jersey Economic Development Authority, Industrial
Development, Variable Rate Demand Bonds, 3.300%,
4/01/19+.................................................. A-1 800,000
800,000 Port Authority of New York and New Jersey, Versatile
Structure Obligations, Series 6, 3.550%, 12/01/17+
(Alternative Minimum Tax)................................. VMIG-1 800,000
1,500,000 Union County Industrial Pollution Control Financing
Authority, Pollution Control Revenue Refunding, Exxon
Project, Series 1989, Variable Rate Demand Bonds, 3.200%,
10/01/24+................................................. A-1+ 1,500,000
- -------------------------------------------------------------------------------------------------------------------
$ 3,100,000 Total Temporary Investments--3.5% 3,100,000
=========== -----------------------------------------------------------------------------------------------------
Other Assets Less Liabilities--0.6% 565,431
-----------------------------------------------------------------------------------------------------
Net Assets--100% $89,313,791
=====================================================================================================
</TABLE>
* Optional Call Provisions (not covered by the report of independent
public accountants): Dates (month and year) and prices of the earliest
optional call or redemption. There may be other call provisions at
varying prices at later dates.
** Ratings (not covered by the report of independent public accountants):
Using the higher of Standard & Poor's or Moody's rating.
*** Securities are backed by an escrow or trust containing sufficient U.S.
government or U.S. government agency securities, which ensures the
timely payment of principal and interest. Securities are normally
considered to be equivalent to AAA rated securities.
N/R -- Investment is not rated.
(WI) Security purchased on a when-issued basis (see note 1).
+ The security has a maturity of more than one year, but has variable
rate and demand features which qualify it as a short-term security. The
rate disclosed is that currently in effect. This rate changes
periodically based on market conditions or a specified market index.
See accompanying notes to financial statements.
C-4
<PAGE> 151
PORTFOLIO OF INVESTMENTS
NUVEEN FLAGSHIP NEW JERSEY INTERMEDIATE
FEBRUARY 28, 1998
<TABLE>
<CAPTION>
PRINCIPAL OPT. CALL MARKET
AMOUNT DESCRIPTION PROVISIONS* RATINGS** VALUE
- ------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CONSUMER CYCLICAL--2.0%
$ 200,000 New Jersey Economic Development Authority, Economic
Development Refunding Bonds (Burlington Coat Factory
Warehouse of New Jersey, Inc. -- 1995 Project), 5.400%,
9/01/03................................................... No Opt. Call Aa3 $ 211,144
- ------------------------------------------------------------------------------------------------------------------
EDUCATION AND CIVIC ORGANIZATIONS--6.5%
140,000 New Jersey Educational Facilities Authority, Seton Hall
University Project Revenue Bonds, 1991 Series, Project D,
6.600%, 7/01/02........................................... 7/01 at 102 A- 150,731
330,000 New Jersey Higher Educational Facilities Authority, Higher
Educational Facilities Revenue Bonds, Saint Peter's
College Issue 1992 Series B, 6.000%, 7/01/99.............. No Opt. Call BBB+ 339,210
100,000 New Jersey Educational Facilities Authority, Stevens
Institute of Technology Issue Revenue Bonds, 1992 Series
A, 6.400%, 7/01/03........................................ 7/02 at 102 A- 109,720
85,000 Higher Education Assistance Authority (State of New Jersey),
Student Loan Revenue Bonds, 1992, Series A, Loan Program,
6.000%, 1/01/06........................................... 7/02 at 102 A+ 89,236
- ------------------------------------------------------------------------------------------------------------------
HEALTH CARE--20.2%
200,000 New Jersey Health Care Facilities Financing Authority,
Revenue Bonds, Newark Beth Israel Medical Center Issue,
Series 1994, 5.800%, 7/01/07.............................. 7/04 at 102 AAA 218,540
100,000 New Jersey Health Care Facilities Financing Authority,
Revenue Bonds, West Jersey Health System, Series 1992,
6.000%, 7/01/07........................................... 7/02 at 102 AAA 108,660
250,000 New Jersey Health Care Facilities Financing Authority,
Revenue Bonds, Monmouth Medical Center Issue, Series C,
5.700%, 7/01/02........................................... No Opt. Call AAA 266,370
250,000 New Jersey Health Care Facilities Financing Authority,
Revenue Bonds, Dover General Hospital and Medical Center
Issue, Series 1994, 5.900%, 7/01/05....................... 7/04 at 102 AAA 275,443
New Jersey Health Care Facilities Financing Authority,
Revenue and Refunding Bonds, Capital Health System Obligated
Group, Series 1997:
500,000 4.600%, 7/01/03........................................... No Opt. Call A- 503,385
485,000 5.125%, 7/01/12........................................... 7/08 at 101 A- 479,631
250,000 New Jersey Health Care Facilities Financing Authority,
Bayonne Hospital Obligated Group, Revenue Bonds, Series
1994, 6.400%, 7/01/07..................................... 7/04 at 102 AAA 280,563
- ------------------------------------------------------------------------------------------------------------------
INDUSTRIAL/OTHER--13.5%
250,000 New Jersey Economic Development Authority, District Heating
and Cooling Revenue Bonds (Trigen-Trenton Project), 1993
Series B, 6.100%, 12/01/04................................ 12/03 at 102 BBB- 269,375
150,000 New Jersey Economic Development Authority, Electric Energy
Facility Revenue Bonds (Vineland Cogeneration Limited
Partnership Project) Series 1992, 6.750%, 6/01/99......... No Opt. Call N/R 153,084
470,000 New Jersey Economic Development Authority, Economic Growth
Bonds Composite Issue, 1992 Series A Through Series Z,
5.800%, 6/01/01........................................... 6/99 at 102 Aa3 488,325
480,000 New Jersey Economic Development Authority, Insured Revenue
Bonds (Educational Testing Service Issue), Series 1995B,
5.500%, 5/15/05........................................... No Opt. Call AAA 512,309
- ------------------------------------------------------------------------------------------------------------------
TAX OBLIGATION/GENERAL--17.3%
100,000 The Board of Education of the City of Atlantic, Atlantic
County, New Jersey, School Bonds, Series 1992, 6.000%,
12/01/06.................................................. 12/02 at 102 AAA 109,852
100,000 County of Camden, New Jersey, General Obligation Refunding
Bonds, Series 1992, 5.500%, 6/01/02....................... No Opt. Call AAA 105,656
275,000 Government of Guam, General Obligation Bonds, Series 1993A,
4.900%, 11/15/04.......................................... 11/03 at 102 BBB 279,067
200,000 Government of Guam, General Obligation Bonds, Series 1993A,
5.150%, 11/15/07.......................................... 11/03 at 102 BBB 205,104
400,000 Jersey City General Obligation, 6.500%, 2/15/02............. No Opt. Call AA 435,420
100,000 The Monmouth County Improvement Authority (Monmouth County,
New Jersey), Revenue Bonds, Series 1992 (Howell Township
Board of Education Project), 6.000%, 7/01/03.............. 7/02 at 102 AA+ 109,057
100,000 Township of Montclair in the County of Essex, New Jersey,
General Obligation Bonds, School Bonds, 5.800%, 3/01/06... 3/00 at 101 1/2 AAA 104,237
200,000 State of New Jersey, General Obligation Refunding Bonds
(Series D), 0.000%, 2/15/03............................... No Opt. Call AA+ 162,696
185,000 The Board of Education of the City of Perth Amboy in the
County of Middlesex, New Jersey, School Bonds, 6.200%,
8/01/04................................................... No Opt. Call AAA 205,317
100,000 The Township of Woodbridge in the County of Middlesex, State
of New Jersey, Fiscal Year Adjustment Bonds, Series 1992,
6.150%, 8/15/06........................................... 8/02 at 102 A1 109,226
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
C-5
<PAGE> 152
PORTFOLIO OF INVESTMENTS -- CONTINUED
NUVEEN FLAGSHIP NEW JERSEY INTERMEDIATE
FEBRUARY 28, 1998
<TABLE>
<CAPTION>
PRINCIPAL OPT. CALL MARKET
AMOUNT DESCRIPTION PROVISIONS* RATINGS** VALUE
- ------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
TAX OBLIGATION/LIMITED--23.1%
$ 250,000 The City of Atlantic, New Jersey Municipal Utilities
Authority, Water System, Revenue Refunding Bonds, Series
1993, 5.650%, 5/01/07..................................... 5/02 at 102 A- $ 262,998
320,000 The Essex County Improvement Authority (Essex County, New
Jersey), City of Newark General Obligation Lease Revenue
Bonds, Series 1994, 6.350%, 4/01/07....................... 4/04 at 102 BBB+ 347,174
250,000 Mercer County Improvement Authority, Solid Waste, 0.000%,
4/01/04................................................... No Opt. Call Aa 193,478
300,000 Middlesex County Utilities Authority (in the County of
Middlesex, New Jersey), Sewer Revenue Refunding Bonds,
Series 1997A, 5.000%, 12/01/12............................ 12/07 at 101 AAA 303,708
550,000 Monmouth County Improvement Authority, Governmental Loan
Revenue Bonds, Series 1993, 5.000%, 12/01/11.............. 12/08 at 101 AAA 560,252
300,000 New Jersey Economic Development Authority, Market Transition
Facility Senior Lien Revenue Bonds, Series 1994A, 7.000%,
7/01/04................................................... No Opt. Call AAA 344,001
100,000 New Jersey Sports and Exposition Authority, Convention
Center Luxury Tax Bonds, 1992 Series A, 6.000%, 7/01/07... 7/02 at 102 AAA 108,660
300,000 The Ocean County Utilities Authority (New Jersey),
Wastewater Revenue Bonds, Refunding Series 1997, 5.000%,
1/01/09................................................... 1/07 at 102 Aa2 310,917
- ------------------------------------------------------------------------------------------------------------------
TRANSPORTATION--6.3%
330,000 Parking Authority of the City of Hoboken, County of Hudson,
New Jersey, Parking General Revenue Refunding Bonds,
Series 1992A, 5.850%, 3/01/00............................. No Opt. Call Baa1 341,458
200,000 The Port Authority of New York and New Jersey Consolidated
Bonds, Ninety-Fifty Series, 5.500%, 7/15/05............... 7/04 at 101 AA- 214,324
100,000 South Jersey Transportation Authority, Transportation System
Revenue Bonds, 1992 Series B (Tax Exempt), 5.900%,
11/01/06.................................................. 11/02 at 102 AAA 108,347
- ------------------------------------------------------------------------------------------------------------------
UTILITIES--5.8%
300,000 The Port Authority of New York and New Jersey, Special
Project Bonds, Series 4, KIAC Partners Project, 7.000%,
10/01/07.................................................. No Opt. Call N/R 341,634
250,000 Puerto Rico Electric Power Authority, Power Revenue
Refunding Bonds, Series Q, 5.900%, 7/01/01................ No Opt. Call BBB+ 264,515
- ------------------------------------------------------------------------------------------------------------------
WATER AND SEWER--1.0%
100,000 North Jersey District Water Supply Commission of the State
of New Jersey, Wanaque South Project, Revenue Refunding
Bonds, Series 1993, 5.700%, 7/01/05....................... 7/03 at 102 AAA 108,458
- ------------------------------------------------------------------------------------------------------------------
$9,650,000 Total Investments--(cost $9,578,879)--95.7%................. 10,091,282
========== -----------------------------------------------------------------------------------------------------
Other Assets Less Liabilities--4.3%......................... 456,972
-----------------------------------------------------------------------------------------------------
Net Assets--100%............................................ $10,548,254
=====================================================================================================
</TABLE>
* Optional Call Provisions (not covered by the report of independent
public accountants): Dates (month and year) and prices of the earliest
optional call or redemption. There may be other call provisions at
varying prices at later dates.
** Ratings (not covered by the report of independent public accountants):
Using the higher of Standard & Poor's or Moody's rating.
N/R -- Investment is not rated.
See accompanying notes to financial statements.
C-6
<PAGE> 153
STATEMENT OF NET ASSETS
FEBRUARY 28, 1998
<TABLE>
<CAPTION>
NUVEEN FLAGSHIP
NUVEEN FLAGSHIP NEW JERSEY
NEW JERSEY INTERMEDIATE
--------------- ---------------
<S> <C> <C>
ASSETS
Investments in municipal securities, at market value (note
1)........................................................ $85,648,360 $10,091,282
Temporary investments in short-term municipal securities, at
amortized cost, which approximates market value (note
1)........................................................ 3,100,000 --
Cash........................................................ 98,018 376,660
Receivables:
Fund manager (note 6).................................. 2,355 1,528
Interest............................................... 1,260,234 127,630
Shares sold............................................ 711,636 --
Other assets................................................ 1,293 412
----------- -----------
Total assets...................................... 90,821,896 10,597,512
----------- -----------
LIABILITIES
Payables:
Investments purchased.................................. 982,789 --
Shares redeemed........................................ 277,692 --
Accrued expenses:
12b-1 distribution and service fees (notes 1 and 6).... 10,164 1,691
Other.................................................. 523 28,331
Dividends payable........................................... 236,937 19,236
----------- -----------
Total liabilities................................. 1,508,105 49,258
----------- -----------
Net assets (note 7)......................................... $89,313,791 $10,548,254
=========== ===========
CLASS A SHARES (note 1)
Net assets.................................................. $35,781,610 $ 9,369,439
Shares outstanding.......................................... 3,372,763 892,572
Net asset value and redemption price per share.............. $ 10.61 $ 10.50
Offering price per share (net asset value per share plus
maximum sales charge of 4.20% and 3.00%, respectively, of
offering price)........................................... $ 11.08 $ 10.82
=========== ===========
CLASS B SHARES (note 1)
Net assets.................................................. $ 2,981,475 $ N/A
Shares outstanding.......................................... 280,980 N/A
Net asset value, offering and redemption price per share.... $ 10.61 $ N/A
=========== ===========
CLASS C SHARES (note 1)
Net assets.................................................. $ 5,733,240 $ 980,413
Shares outstanding.......................................... 541,173 93,182
Net asset value, offering and redemption price per share.... $ 10.59 $ 10.52
=========== ===========
CLASS R SHARES (note 1)
Net assets.................................................. $44,817,466 $ 198,402
Shares outstanding.......................................... 4,220,367 18,885
Net asset value, offering and redemption price per share.... $ 10.62 $ 10.51
=========== ===========
</TABLE>
- ---------------
N/A -- Nuveen Flagship New Jersey Intermediate is not authorized to issue Class
B Shares.
See accompanying notes to financial statements.
C-7
<PAGE> 154
STATEMENT OF OPERATIONS
YEAR ENDED FEBRUARY 28, 1998
<TABLE>
<CAPTION>
NUVEEN
NUVEEN FLAGSHIP
FLAGSHIP NEW JERSEY
NEW JERSEY INTERMEDIATE
---------- ------------
<S> <C> <C>
INVESTMENT INCOME
Tax-exempt interest income (note 1)......................... $4,767,676 $ 436,628
---------- ----------
EXPENSES
Management fees (note 6)............................... 442,250 43,869
12b-1 service fees -- Class A (notes 1 and 6).......... 62,042 15,264
12b-1 distribution and service fees -- Class B (notes 1
and 6)................................................ 13,006 N/A
12b-1 distribution and service fees -- Class C (notes 1
and 6)................................................ 32,738 1,522
Shareholders' servicing agent fees and expenses........ 80,512 5,130
Custodian's fees and expenses.......................... 51,842 27,967
Trustees' fees and expenses (note 6)................... 2,071 869
Professional fees...................................... 21,995 14,813
Shareholders' reports -- printing and mailing
expenses.............................................. 39,028 5,315
Federal and state registration fees.................... 6,302 843
Organizational expenses (note 1)....................... -- 6,856
Other expenses......................................... 5,160 823
---------- ----------
Total expenses before expense reimbursement....... 756,946 123,271
Expense reimbursement (note 6)......................... (325,469) (71,152)
---------- ----------
Net expenses...................................... 431,477 52,119
---------- ----------
Net investment income........................ 4,336,199 384,509
---------- ----------
REALIZED AND UNREALIZED GAIN (LOSS) FROM INVESTMENTS
Net realized gain (loss) from investment transactions (notes
1 and 4).................................................. (222,985) 3,620
Net change in unrealized appreciation or depreciation of
investments............................................... 2,933,349 150,409
---------- ----------
Net gain from investments......................... 2,710,364 154,029
---------- ----------
Net increase in net assets from operations.................. $7,046,563 $ 538,538
========== ==========
</TABLE>
- ---------------
N/A -- Nuveen Flagship New Jersey Intermediate is not authorized to issue Class
B Shares.
See accompanying notes to financial statements.
C-8
<PAGE> 155
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
NUVEEN FLAGSHIP NUVEEN
NEW JERSEY NEW JERSEY*
------------------------------ -----------
YEAR ENDED ONE MONTH ENDED YEAR ENDED
2/28/98 2/28/97 1/31/97
----------- --------------- -----------
<S> <C> <C> <C>
OPERATIONS
Net investment income.................................... $ 4,336,199 $ 337,937 $ 3,029,152
Net realized gain (loss) from investment transactions
(notes 1 and 4)........................................ (222,985) -- (98,679)
Net change in unrealized appreciation or depreciation of
investments............................................ 2,933,349 328,719 (891,352)
----------- ----------- -----------
Net increase in net assets from operations.......... 7,046,563 666,656 2,039,121
----------- ----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS (note 1)
From undistributed net investment income:
Class A............................................. (1,643,900) (125,569) (704,372)
Class B............................................. (60,466) (49) N/A
Class C............................................. (207,627) (10,843) (82,289)
Class R............................................. (2,422,933) (200,899) (2,250,619)
----------- ----------- -----------
Decrease in net assets from distributions to
shareholders................................. (4,334,926) (337,360) (3,037,280)
----------- ----------- -----------
FUND SHARE TRANSACTIONS (note 2)
Net proceeds from shares issued in the reorganization of
Nuveen New Jersey (note 1)............................. -- 62,588,085 --
Net proceeds from shares issued in the reorganization of
Flagship New Jersey (note 1)........................... -- 10,797,401 --
Net proceeds from sale of shares......................... 20,831,468 859,670 14,264,870
Net proceeds from shares issued to shareholders due to
reinvestment of distributions.......................... 2,802,902 -- 2,264,231
----------- ----------- -----------
23,634,370 74,245,156 16,529,101
----------- ----------- -----------
Cost of shares redeemed.................................. (10,348,638) (1,308,030) (7,972,757)
----------- ----------- -----------
Net increase (decrease) in net assets from Fund
share transactions................................ 13,285,732 72,937,126 8,556,344
----------- ----------- -----------
Net increase (decrease) in net assets.......... 15,997,369 73,266,422 7,558,185
Net assets at the beginning of year...................... 73,316,422 50,000 55,029,900
----------- ----------- -----------
Net assets at the end of year............................ $89,313,791 $73,316,422 $62,588,085
=========== =========== ===========
Balance of undistributed net investment income at end of
year................................................... $ 1,850 $ 577 $ --
=========== =========== ===========
</TABLE>
- ---------------
* Nuveen New Jersey was reorganized into Nuveen Flagship New Jersey and
ceased to exist after the close of business on January 31, 1997 (see
note 1).
N/A -- Nuveen New Jersey was not authorized to issue Class B Shares.
See accompanying notes to financial statements.
C-9
<PAGE> 156
STATEMENT OF CHANGES IN NET ASSETS -- CONTINUED
<TABLE>
<CAPTION>
FLAGSHIP
NUVEEN FLAGSHIP NEW JERSEY
NEW JERSEY INTERMEDIATE INTERMEDIATE
-------------------------------- ------------
YEAR ENDED NINE MONTHS ENDED YEAR ENDED
2/28/98 2/28/97* 5/31/96
----------- ----------------- ------------
<S> <C> <C> <C>
OPERATIONS
Net investment income.................................. $ 384,509 $ 280,866 $ 447,320
Net realized gain (loss) from investment transactions
(notes 1 and 4)...................................... 3,620 35,472 12,478
Net change in unrealized appreciation or depreciation
of investments....................................... 150,409 90,246 (98,145)
----------- ----------- -----------
Net increase in net assets from operations............. 538,538 406,584 361,653
----------- ----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS (note 1)
From undistributed net investment income:
Class A........................................... (369,157) (282,787) (446,648)
Class B........................................... N/A N/A N/A
Class C........................................... (8,122) -- N/A
Class R........................................... (7,005) -- N/A
----------- ----------- -----------
Decrease in net assets from distributions to
shareholders............................... (384,284) (282,787) (446,648)
----------- ----------- -----------
FUND SHARE TRANSACTIONS (note 2)
Net proceeds from sale of shares....................... 4,229,931 300,959 1,086,130
Net proceeds from shares issued to shareholders due to
reinvestment of distributions........................ 229,957 174,134 265,262
----------- ----------- -----------
4,459,888 475,093 1,351,392
----------- ----------- -----------
Cost of shares redeemed................................ (1,076,806) (1,905,553) (2,165,321)
----------- ----------- -----------
Net increase (decrease) in net assets from Fund
share transactions.............................. 3,383,082 (1,430,460) (813,929)
----------- ----------- -----------
Net increase (decrease) in net assets........ 3,537,336 (1,306,663) (898,924)
Net assets at the beginning of year.................... 7,010,918 8,317,581 9,216,505
----------- ----------- -----------
Net assets at the end of year.......................... $10,548,254 $ 7,010,918 $ 8,317,581
----------- ----------- -----------
Balance of undistributed net investment income at end
of year.............................................. $ 258 $ 33 $ 1,954
=========== =========== ===========
</TABLE>
- ---------------
* Information represents eight months of Flagship New Jersey
Intermediate and one month of Nuveen Flagship New Jersey Intermediate
(see note 1).
N/A -- Nuveen Flagship New Jersey Intermediate is not authorized to issue Class
B Shares and prior to February 1, 1997, its predecessor (see note 1) did
not issue Class C Shares and was not authorized to issue Class R Shares.
See accompanying notes to financial statements.
C-10
<PAGE> 157
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 1998
1. GENERAL INFORMATION AND SIGNIFICANT ACCOUNTING POLICIES
The Nuveen Flagship Multistate Trust II (the "Trust") is an open-end
investment company registered under the Investment Company Act of 1940, as
amended. The Trust comprises the Nuveen Flagship New Jersey Municipal Bond Fund
and the Nuveen Flagship New Jersey Intermediate Municipal Bond Fund (the
"Funds"), among others. The Trust was organized as a Massachusetts business
trust on July 1, 1996.
The John Nuveen Company ("Nuveen"), parent of John Nuveen & Co.
Incorporated and Nuveen Advisory Corp., respectively, the distributor
("Distributor") and investment advisor ("Adviser") of the Funds, entered into an
agreement under which Nuveen acquired Flagship Resources Inc. and after the
close of business on January 31, 1997, consolidated their respective mutual fund
businesses. This agreement was approved at a meeting by the shareholders of the
Flagship Funds in December 1996.
After the close of business on January 31, 1997, Nuveen New Jersey Tax-Free
Value Fund ("Nuveen New Jersey") and Flagship New Jersey Double Tax Exempt Fund
("Flagship New Jersey") reorganized into Nuveen Flagship New Jersey Municipal
Bond Fund ("Nuveen Flagship New Jersey"). Flagship New Jersey Intermediate Tax
Exempt Fund ("Flagship New Jersey Intermediate") was reorganized into the Trust
and renamed Nuveen Flagship New Jersey Intermediate Municipal Bond Fund ("Nuveen
Flagship New Jersey Intermediate"). Prior to these reorganizations, Nuveen New
Jersey was a series of the Nuveen Multistate Tax-Free Trust while Flagship New
Jersey and Flagship New Jersey Intermediate were each a sub-trust of the
Flagship Tax Exempt Funds Trust. Nuveen New Jersey had a January 31 fiscal year
end and Flagship New Jersey had a May 31 fiscal year end prior to being
reorganized into Nuveen Flagship New Jersey which has a February 28 fiscal year
end. Flagship New Jersey Intermediate had a May 31 fiscal year end prior to
being reorganized into the Trust and now has a February 28 fiscal year end.
Each Fund seeks to provide high tax-free income and preservation of capital
through investments in diversified portfolios of quality municipal bonds.
The following is a summary of significant accounting policies followed by
the Funds in the preparation of their financial statements in accordance with
generally accepted accounting principles.
Securities Valuation
The prices of municipal bonds in each Fund's investment portfolio are
provided by a pricing service approved 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. Temporary investments in securities that have variable rate
and demand features qualifying them as short-term securities are valued at
amortized cost, which approximates market value.
Securities Transactions
Securities transactions are recorded on a trade date basis. Realized gains
and losses from such transactions are determined on the specific identification
method. Securities purchased or sold on a when-issued or delayed delivery basis
may have extended settlement periods. Any securities so purchased are subject to
market fluctuation during this period. The Funds have instructed the custodian
to segregate assets in a separate account with a current value at least equal to
the amount of the when-issued and delayed delivery purchase commitments. At
February 28, 1998, Nuveen Flagship New Jersey had an outstanding when-issued
purchase commitment of $982,789. Nuveen Flagship New Jersey Intermediate had no
such outstanding purchase commitments.
Interest Income
Interest income is determined on the basis of interest accrued, adjusted
for amortization of premiums and accretion of discounts on long-term debt
securities when required for federal income tax purposes.
Dividends and Distributions to Shareholders
Tax-exempt net investment income is declared as a dividend monthly and
payment is made or credited to shareholders accounts on the first business day
after month-end. Net realized capital gains and/or market discount
C-11
<PAGE> 158
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
FEBRUARY 28, 1998
from investment transactions, if any, are distributed to shareholders not less
frequently than annually. Furthermore, capital gains are distributed only to the
extent they exceed available capital loss carryforwards.
Distributions to shareholders of tax-exempt net investment income, net
realized capital gains and/or market discount are recorded on the ex-dividend
date. The amount and timing of distributions are determined in accordance with
federal income tax regulations, which may differ from generally accepted
accounting principles. Accordingly, temporary over-distributions as a result of
these differences may occur and will be classified as either distributions in
excess of net investment income, distributions in excess of net realized gains
and/or distributions in excess of net ordinary taxable income from investment
transactions, where applicable.
Income Taxes
Each Fund is a separate taxpayer for federal income tax purposes. Each Fund
intends to comply with the requirements of the Internal Revenue Code applicable
to regulated investment companies and to distribute all of its tax-exempt net
investment income, in addition to any significant amounts of net realized
capital gains and/or market discount from investment transactions. The Funds
currently consider significant net realized capital gains and/or market discount
as amounts in excess of $.001 per share. Furthermore, each Fund intends to
satisfy conditions which will enable interest from municipal securities, which
exempt from regular federal and New Jersey state income taxes, to retain such
tax-exempt status when distributed to the shareholders of the Funds. All income
dividends paid during the fiscal year ended February 28, 1998, have been
designated Exempt Interest Dividends. Net realized capital gains and market
discount distributions are subject to federal taxation.
Flexible Sales Charge Program
Each Fund offers Class A, C and R Shares. Nuveen Flagship New Jersey also
offers Class B Shares. Class A Shares are sold with a sales charge and incur an
annual 12b-1 service fee. Class A Share purchases of $1 million or more are sold
at net asset value without an up-front sales charge but may be subject to a 1%
contingent deferred sales charge ("CDSC") if redeemed within 18 months of
purchase. Class B Shares are sold without a sales charge but incur annual 12b-1
distribution and service fees. An investor purchasing Class B Shares agrees to
pay a CDSC of up to 5% depending upon the length of time the shares are held by
the investor (CDSC is reduced to 0% at the end of six years). Class B Shares
convert to Class A Shares eight years after purchase. Class C Shares are sold
without a sales charge but incur annual 12b-1 distribution and service fees. An
investor purchasing Class C Shares agrees to pay a CDSC of 1% if Class C Shares
are redeemed within one year of purchase. Class R Shares are not subject to any
sales charge or 12b-1 distribution or service fees. Class R Shares are available
for purchases of over $1 million and in other limited circumstances.
Derivative Financial Instruments
The Funds may invest in certain derivative financial instruments including
futures, forward, swap, option contracts, and other financial instruments with
similar characteristics. Although the Funds are authorized to invest in such
financial instruments, and may do so in the future, they did not make any such
investments during the fiscal year ended February 28, 1998.
Expense Allocation
Expenses of the Funds that are not directly attributable to a specific
class of shares are prorated among the classes based on the relative net assets
of each class. Expenses directly attributable to a class of shares, which
presently only includes 12b-1 distribution and service fees, are recorded to the
specific class.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of increases and
decreases in net assets from operations during the reporting period.
C-12
<PAGE> 159
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
FEBRUARY 28, 1998
Organizational Expenses
The organizational expenses incurred on behalf of Nuveen Flagship New Jersey
Intermediate (approximately $32,200) will be reimbursed to the Adviser on a
straight-line basis over a period of three years beginning June 1, 1996. As of
February 28, 1998, $14,876 has been reimbursed.
2. FUND SHARES
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
NUVEEN FLAGSHIP NEW JERSEY NUVEEN NEW JERSEY*
-------------------------------------------------- -----------------------
YEAR ENDED 2/28/98 ONE MONTH ENDED 2/28/97 YEAR ENDED 1/31/97
------------------------ ----------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ------------ --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Shares issued in the
reorganization of Nuveen
New Jersey:
Class A.................. -- $ -- 1,671,230 $17,071,934 -- $ --
Class B.................. -- -- -- -- N/A N/A
Class C.................. -- -- 255,888 2,610,879 -- --
Class R.................. -- -- 4,195,136 42,905,272 -- --
Shares issued in the
reorganization of
Flagship New Jersey:
Class A.................. -- -- 1,056,994 10,797,401 -- --
Class B.................. -- -- -- -- N/A N/A
Class C.................. -- -- -- -- -- --
Class R.................. -- -- -- -- -- --
Shares sold:
Class A.................. 1,075,954 11,229,962 39,089 402,796 798,711 8,132,760
Class B.................. 272,258 2,840,031 6,006 61,899 N/A N/A
Class C.................. 312,192 3,236,991 8,563 88,093 182,286 1,861,710
Class R.................. 338,039 3,524,484 29,727 306,882 418,474 4,270,400
Shares issued to
shareholders due to
reinvestment of
distributions:
Class A.................. 91,399 950,346 -- -- 49,041 499,709
Class B.................. 1,672 17,562 -- -- N/A N/A
Class C.................. 12,365 128,765 -- -- 4,353 44,287
Class R.................. 164,047 1,706,229 -- -- 168,605 1,720,235
--------- ------------ --------- ----------- --------- -----------
2,267,926 23,634,370 7,262,633 74,245,156 1,621,470 16,529,101
--------- ------------ --------- ----------- --------- -----------
Shares redeemed:
Class A.................. (511,590) (5,328,382) (51,537) (530,506) (201,249) (2,042,963)
Class B.................. (180) (1,846) -- -- N/A N/A
Class C.................. (47,998) (501,403) (1,062) (10,935) (33,320) (335,344)
Class R.................. (433,419) (4,517,007) (74,385) (766,589) (550,089) (5,594,450)
--------- ------------ --------- ----------- --------- -----------
(993,187) (10,348,638) (126,984) (1,308,030) (784,658) (7,972,757)
--------- ------------ --------- ----------- --------- -----------
Net increase............... 1,274,739 $ 13,285,732 7,135,649 $72,937,126 836,812 $ 8,556,344
========= ============ ========= =========== ========= ===========
</TABLE>
- ---------------
* Nuveen New Jersey was reorganized into Nuveen Flagship New Jersey and
ceased to exist after the close of business on January 31, 1997 (see
note 1).
N/A -- Nuveen New Jersey was not authorized to issue Class B Shares.
C-13
<PAGE> 160
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
FEBRUARY 28, 1998
<TABLE>
<CAPTION>
FLAGSHIP NEW
NUVEEN FLAGSHIP NEW JERSEY INTERMEDIATE JERSEY INTERMEDIATE
------------------------------------------------------ -----------------------
YEAR ENDED 2/28/98 NINE MONTHS ENDED 2/28/97* YEAR ENDED 5/31/96
----------------------- --------------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-------- ----------- --------- ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Shares sold:
Class A.................... 294,336 $ 3,066,576 29,384 $ 300,959 105,150 $ 1,086,130
Class B.................... N/A N/A N/A N/A N/A N/A
Class C.................... 92,688 970,924 -- -- N/A N/A
Class R 18,865 192,431 -- -- N/A N/A
Shares issued to shareholders
due to reinvestment of
distributions:
Class A.................... 21,672 224,545 17,041 174,134 25,702 265,262
Class B.................... N/A N/A N/A N/A N/A N/A
Class C.................... 494 5,171 -- -- N/A N/A
Class R.................... 23 241 -- -- N/A N/A
-------- ----------- -------- ----------- -------- -----------
428,078 4,459,888 46,425 475,093 130,852 1,351,392
-------- ----------- -------- ----------- -------- -----------
Shares redeemed:
Class A.................... (104,138) (1,076,777) (185,962) (1,905,553) (209,872) (2,165,321)
Class B.................... N/A N/A N/A N/A N/A N/A
Class C.................... -- -- -- -- N/A N/A
Class R.................... (3) (29) -- -- N/A N/A
-------- ----------- -------- ----------- -------- -----------
(104,141) (1,076,806) (185,962) (1,905,553) (209,872) (2,165,321)
-------- ----------- -------- ----------- -------- -----------
Net increase (decrease)...... 323,937 $ 3,383,082 (139,537) $(1,430,460) (79,020) $ (813,929)
======== =========== ======== =========== ======== ===========
</TABLE>
- ---------------
* Information represents eight months of Flagship New Jersey Intermediate
and one month of Nuveen Flagship New Jersey Intermediate (note 1).
N/A -- Nuveen Flagship New Jersey Intermediate is not authorized to issue Class
B Shares and prior to February 1, 1997, its predecessor (see note 1) did
not issue Class C Shares and was not authorized to issue Class R Shares.
3. DISTRIBUTIONS TO SHAREHOLDERS
On March 9, 1998, the Funds declared dividend distributions from their
tax-exempt net investment income which were paid April 1, 1998, to shareholders
of record on March 9, 1998, as follows:
<TABLE>
<CAPTION>
NUVEEN FLAGSHIP NUVEEN FLAGSHIP
NEW JERSEY NEW JERSEY INTERMEDIATE
--------------- -----------------------
<S> <C> <C>
Dividend per share:
Class A................................................... $.0450 $.0415
Class B................................................... .0385 N/A
Class C................................................... .0405 .0370
Class R................................................... .0470 .0435
</TABLE>
- ---------------
N/A -- Nuveen Flagship New Jersey Intermediate is not authorized to issue Class
B Shares.
C-14
<PAGE> 161
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
FEBRUARY 28, 1998
4. SECURITIES TRANSACTIONS
Purchases and sales (including maturities) of investments in municipal
securities and temporary municipal investments for the fiscal year ended
February 28, 1998, were as follows:
<TABLE>
<CAPTION>
NUVEEN FLAGSHIP NUVEEN FLAGSHIP
NEW JERSEY NEW JERSEY INTERMEDIATE
--------------- -----------------------
<S> <C> <C>
PURCHASES:
Investments in municipal
securities........................................... $23,644,603 $3,463,483
Temporary municipal investments........................ 17,600,000 1,300,000
SALES:
Investments in municipal
securities........................................... 11,686,079 740,694
Temporary municipal investments........................ 16,100,000 1,300,000
=========== ==========
</TABLE>
At February 28, 1998, the identified cost of investments owned for federal
income tax purposes was the same as the cost for financial reporting purposes
for each Fund.
At February 28, 1998, the Funds had unused capital loss carryforwards
available for federal income tax purposes to be applied against future capital
gains, if any. If not applied, the carryforwards will expire as follows:
<TABLE>
<CAPTION>
NUVEEN FLAGSHIP NUVEEN FLAGSHIP
NEW JERSEY NEW JERSEY INTERMEDIATE
--------------- -----------------------
<S> <C> <C>
Expiration year:
2002................................................. $170,409 $ --
2003................................................. 424,626 195,063
2004................................................. 116,050 --
2006................................................. 216,928 --
-------- --------
Total.................................................. $928,013 $195,063
======== ========
</TABLE>
5. UNREALIZED APPRECIATION (DEPRECIATION)
Gross unrealized appreciation and gross unrealized depreciation of
investments at February 28, 1998, were as follows:
<TABLE>
<CAPTION>
NUVEEN FLAGSHIP NUVEEN FLAGSHIP
NEW JERSEY NEW JERSEY INTERMEDIATE
--------------- -----------------------
<S> <C> <C>
Gross unrealized:
Appreciation......................................... $5,354,741 $519,365
Depreciation......................................... (170,912) (6,962)
---------- --------
Net unrealized appreciation............................ $5,183,829 $512,403
========== ========
</TABLE>
6. MANAGEMENT FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Under the Trusts' investment management agreement with the Adviser, each
Fund pays an annual management fee, payable monthly, at the rates set forth
below which are based upon the average daily net asset value of each Fund:
<TABLE>
<CAPTION>
MANAGEMENT
AVERAGE DAILY NET ASSET VALUE FEE
- ------------------------------------------------------------------------
<S> <C>
For the first $125 million.................................. .5500 of 1%
For the next $125 million................................... .5375 of 1
For the next $250 million................................... .5250 of 1
For the next $500 million................................... .5125 of 1
For the next $1 billion..................................... .5000 of 1
For net assets over $2 billion.............................. .4750 of 1
</TABLE>
C-15
<PAGE> 162
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
FEBRUARY 28, 1998
The management fee compensates the Adviser for overall investment advisory
and administrative services, and general office facilities. The Trust pays no
compensation directly to those of its Trustees who are affiliated with the
Adviser or to its officers, all of whom receive remuneration for their services
to the Trust from the Adviser or its affiliates.
The Adviser may voluntarily reimburse expenses from time to time, which may
be terminated at any time at its discretion.
During the fiscal year ended February 28, 1998, the Distributor collected
sales charges on purchases of Class A Shares of approximately $242,400 and
$16,700 for Nuveen Flagship New Jersey and Nuveen Flagship New Jersey
Intermediate, respectively, of which approximately $209,700 and $13,200,
respectively, were paid out as concessions to authorized dealers. The
Distributor also received 12b-1 service fees on Class A Shares, substantially
all of which were paid to compensate authorized dealers for providing services
to shareholders relating to their investments.
During the fiscal year ended February 28, 1998, the Distributor compensated
authorized dealers directly with approximately $154,700 and $31,900 in
commission advances at the time of purchase for Nuveen Flagship New Jersey and
Nuveen Flagship New Jersey Intermediate, respectively. To compensate for
commissions advanced to authorized dealers, all 12b-1 service fees collected on
Class B Shares for Nuveen Flagship New Jersey during the first year following a
purchase, all 12b-1 distribution fees collected on Class B Shares for Nuveen
Flagship New Jersey, and all 12b-1 service and distribution fees on Class C
Shares during the first year following a purchase are retained by the
Distributor. For the fiscal year ended February 28, 1998, the Distributor
retained approximately $36,100 and $1,500 in such 12b-1 fees for Nuveen Flagship
New Jersey and Nuveen Flagship New Jersey Intermediate, respectively. The
remaining 12b-1 fees charged to the Funds were paid to compensate authorized
dealers for providing services to shareholders relating to their investments.
The Distributor also collected and retained approximately $400 of CDSC on share
redemptions for Nuveen Flagship New Jersey during the fiscal year ended February
28, 1998.
7. COMPOSITION OF NET ASSETS
At February 28, 1998, the Funds had an unlimited number of $.01 par value
per shares authorized. Net assets consisted of:
<TABLE>
<CAPTION>
NUVEEN FLAGSHIP NUVEEN FLAGSHIP
NEW JERSEY NEW JERSEY INTERMEDIATE
--------------- -----------------------
<S> <C> <C>
Capital paid-in............................................. $85,067,176 $10,230,656
Balance of undistributed net investment income.............. 1,850 258
Accumulated net realized gain (loss) from investment
transactions.............................................. (939,064) (195,063)
Net unrealized appreciation of investments.................. 5,183,829 512,403
----------- -----------
Net assets.................................................. $89,313,791 $10,548,254
=========== ===========
</TABLE>
C-16
<PAGE> 163
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Trustees and Shareholders of
Nuveen Flagship Multistate Trust II:
We have audited the accompanying statements of net assets of Nuveen
Flagship Multistate Trust II (comprising the Nuveen Flagship New Jersey and New
Jersey Intermediate Funds) (a Massachusetts business trust), including the
portfolios of investments, as of February 28, 1998, and the related statements
of operations for the year then ended, and the statement of changes in net
assets and financial highlights for the periods indicated thereon, except for
the financial statements and financial highlights for the Nuveen Flagship New
Jersey Intermediate Bond Fund for the years ended May 31, 1996 and prior which
were audited by other auditors whose report dated July 3, 1996, expressed an
unqualified opinion on those financial statements and financial highlights.
These financial statements and financial highlights are the responsibility of
the Funds' management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
February 28, 1998, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the net assets of the
respective funds constituting the Nuveen Flagship Multistate Trust II as of
February 28, 1998, the results of their operations for the year then ended and
the changes in their net assets and the financial highlights for the periods
indicated above, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
April 15, 1998
C-17
<PAGE> 164
EXHIBIT D
PRO FORMA FINANCIAL STATEMENTS
PRO FORMA CAPITALIZATION AS OF FEBRUARY 28, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
NEW JERSEY
NEW JERSEY INTERMEDIATE NEW JERSEY
(ACTUAL) (ACTUAL) (AS ADJUSTED)(1)
----------- ------------ ----------------
<S> <C> <C> <C>
Capital paid-in.......................................... $85,067,176 $10,230,656 $95,247,832(2)(5)
Balance of undistributed net investment income........... 1,850 258 1,850(3)
Accumulated net realized gain (loss) from investment
transactions........................................... (939,064) (195,063) (1,134,127)(4)
Net unrealized appreciation or depreciation of
investments............................................ 5,183,829 512,403 5,696,232
----------- ----------- -----------
Net assets............................................. $89,313,791 $10,548,254 $99,811,787
=========== =========== ===========
</TABLE>
- ---------------
(1) The adjusted balances are presented as if the Reorganization was effective
as of February 28, 1998 for information purposes only. The actual Effective
Time of the Reorganization is expected to be August 21, 1998 at which time
the results would be reflective of the actual composition of shareholder's
equity at that date.
(2) Assumes the issuance of 878,869 Class A shares, 92,138 Class C shares and
18,593 Class R shares of New Jersey in exchange for the net assets of
Classes A, C and R of New Jersey Intermediate. These numbers are based on
the net assets of each class of New Jersey Intermediate and the net asset
values of each respective class of New Jersey, as of February 28, 1998,
after adjustment for the distribution and payment of estimated
Reorganization costs referred to in, (3) and (5) below. The issuance of such
number of New Jersey shares would result in the distribution of .9846475
Class A shares, .9887964 Class C shares and .9845332 Class R shares for each
share of each respective class of New Jersey Intermediate upon liquidation
of each respective class of New Jersey Intermediate.
(3) Assumes New Jersey Intermediate distributes all of its undistributed net
investment income to shareholders.
(4) Assumes New Jersey Intermediate carries forward its net realized losses from
investment transactions to New Jersey as permitted under applicable tax
regulations.
(5) Includes the impact of estimated Reorganization costs of $50,000 of New
Jersey Intermediate, none of which are recurring expenses.
D-1
<PAGE> 165
PRO FORMA CONDENSED BALANCE SHEET AS OF FEBRUARY 28, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
NEW JERSEY
NEW JERSEY INTERMEDIATE PRO FORMA NEW JERSEY
(ACTUAL) (ACTUAL) (ADJUSTMENTS) (AS ADJUSTED)(1)
----------- ------------ ------------- ----------------
<S> <C> <C> <C> <C>
Investments in municipal securities, at
market value.............................. $85,648,360 $10,091,282 $ -- $95,739,642
Temporary investments in short-term
municipal securities, at amortized cost... 3,100,000 -- -- 3,100,000
Cash........................................ 98,018 376,660 (50,258)(2) 424,420
Other assets less liabilities............... 467,413 80,312 -- 547,725
----------- ----------- -------- -----------
Net assets.................................. $89,313,791 $10,548,254 $(50,258) $99,811,787
=========== =========== ======== ===========
CLASS A SHARES:
Net Assets.................................. $35,781,610 $ 9,369,439 $(44,641) $45,106,408
=========== =========== ======== ===========
Shares Outstanding.......................... 3,372,763 892,572 (13,703)(3) 4,251,632
=========== =========== ======== ===========
Net asset value and redemption price per
share..................................... $ 10.61 $ 10.50 $ 10.61
=========== =========== ===========
Offering price per share (net asset value
per share plus maximum sales charge of
4.20% and 3.00%, respectively, of offering
price).................................... $ 11.08 $ 10.82 $ 11.08
=========== =========== ===========
CLASS B SHARES:
Net Assets.................................. $ 2,981,475 N/A $ -- $ 2,981,475
=========== =========== ======== ===========
Shares Outstanding.......................... 280,980 N/A -- 280,980
=========== =========== ======== ===========
Net asset value, offering and redemption
price per share........................... $ 10.61 N/A $ 10.61
=========== =========== ===========
CLASS C SHARES:
Net Assets.................................. $ 5,733,240 $ 980,413 (4,671) $ 6,708,982
=========== =========== ======== ===========
Shares Outstanding.......................... 541,173 93,182 (1,044)(3) 633,311
=========== =========== ======== ===========
Net asset value, offering and redemption
price per share........................... $ 10.59 $ 10.52 $ 10.59
=========== =========== ======== ===========
CLASS R SHARES:
Net Assets.................................. $44,817,466 $ 198,402 $ (946) $45,014,922
=========== =========== ======== ===========
Shares Outstanding.......................... 4,220,367 18,885 (292)(3) 4,238,960
=========== =========== ======== ===========
Net asset value and redemption price per
share..................................... $ 10.62 $ 10.51 $ 10.62
=========== =========== ===========
</TABLE>
- ---------------
(1) See note (1) to Pro Forma Capitalization table above as to the Effective
Time of the Reorganization.
(2) Net effect on cash after payment of estimated Reorganization Costs and
distribution of net investment income of New Jersey Intermediate. None of
the Reorganization costs, estimated to be $50,000 all of which is an expense
of New Jersey Intermediate, are recurring expenses.
(3) See note (1) to Pro Forma Capitalization table. Based on the issuance of
878,869 Class A shares, 92,138 Class C shares and 18,593 Class R shares of
New Jersey and the cancellation of all shares of each class of New Jersey
Intermediate.
D-2
<PAGE> 166
PRO FORMA CONDENSED INCOME STATEMENT FOR THE TWELVE MONTHS ENDED FEBRUARY 28,
1998 (UNAUDITED)
<TABLE>
<CAPTION>
NEW JERSEY
NEW JERSEY INTERMEDIATE PRO FORMA NEW JERSEY
(ACTUAL) (ACTUAL) (ADJUSTMENTS) (AS ADJUSTED)
---------- ------------ ------------- ----------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Tax exempt interest income..................... $4,767,676 $436,628 $ -- $5,204,304
---------- -------- -------- ----------
EXPENSES:
Management fees(1)........................ 442,250 43,869 -- 486,119
12b-1 fees(2)............................. 107,786 16,786 -- 124,572
Other expenses............................ 206,910 62,616 (28,558)(3) 240,968
---------- -------- -------- ----------
Total expenses.......................... 756,946 123,271 (28,558) 851,659
Expense waiver/reimbursement from
investment adviser(4)................... (325,469) (71,152) (40,680) (437,301)
---------- -------- -------- ----------
Net expenses............................ 431,477 52,119 (69,238) 414,358
---------- -------- -------- ----------
Net investment income................ 4,336,199 384,509 69,238 4,789,946
---------- -------- -------- ----------
REALIZED AND UNREALIZED GAIN (LOSS) FROM
INVESTMENTS
Net realized gain (loss) from investment
transactions, net of taxes................... (222,985) 3,620 -- (219,365)
Net change in unrealized appreciation or
depreciation of investments.................. 2,933,349 150,409 -- 3,083,758
---------- -------- -------- ----------
Net gain (loss) from investments..... 2,710,364 154,029 -- 2,864,393
---------- -------- -------- ----------
Net increase in net assets from operations..... $7,046,563 $538,538 $ 69,238 $7,654,339
========== ======== ======== ==========
</TABLE>
- ---------------
(1) Reflects a management fee of .55% of net assets for the first $125 million
for each fund presented.
(2) Reflects a 12b-1 service fee of .20% of net assets for Classes A, B and C of
New Jersey and New Jersey (As Adjusted) and Classes A and C of New Jersey
Intermediate. Also reflects a 12b-1 distribution fee of .75% of net assets
for Class B of New Jersey and New Jersey (As Adjusted) and .55% of net
assets for Class C of each fund presented. Class R of either Fund is not
subject to a 12b-1 service or distribution fee.
(3) Represents estimated reduction in operating expenses, including audit,
legal, custodian, transfer agency and report printing. New Jersey (As
Adjusted) would have a much larger asset base than either Fund currently
has. Certain operating expenses would have been reduced had they been
applied to the larger asset base for one Fund, rather than to two smaller
separate Funds.
(4) Reflects an expense waiver/reimbursement of .41% of net assets of New Jersey
and .87% of net assets of New Jersey Intermediate. New Jersey (As Adjusted)
reflects an expense waiver/reimbursement of .45% of net assets.
D-3
<PAGE> 167
PRO FORMA PORTFOLIO OF INVESTMENTS (UNAUDITED)
NEW JERSEY
FEBRUARY 28, 1998
<TABLE>
<CAPTION>
PRINCIPAL OPT. CALL MARKET
AMOUNT DESCRIPTION PROVISIONS* RATINGS** VALUE
- -------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CAPITAL GOODS--6.6%
$ 5,955,000 New Jersey Economic Development Authority, Economic
Development Bonds (Bridgewater Resources Inc. Project),
1994 Series A, 8.375%, 11/01/04 (Alternative Minimum
Tax)...................................................... No Opt. Call N/R $ 6,428,661
180,000 New Jersey Economic Development Authority, Economic Growth
Bonds, Composite Issue, 1992 Second Series A3, 6.550%,
12/01/07 (Alternative Minimum Tax)........................ 12/02 at Aa3 195,242
101 1/2
- -------------------------------------------------------------------------------------------------------------------
CONSUMER CYCLICAL--0.2%
200,000 New Jersey Economic Development Authority, Economic
Development Refunding Bonds (Burlington Coat Factory
Warehouse of New Jersey, Inc.--1995 Project), 5.400%,
9/01/03................................................... No Opt. Call Aa3 211,144
- -------------------------------------------------------------------------------------------------------------------
EDUCATION AND CIVIC ORGANIZATIONS--4.2%
1,000,000 New Jersey Development Authority, Economic Development
Bonds, (Yeshiva K'Tana of Passaic--1992 Project), 8.000%,
9/15/18................................................... No Opt. Call N/R 1,261,130
925,000 New Jersey Educational Facilities Authority, Trenton State
College Issue, Revenue Bonds, Series 1976 D, 6.750%,
7/01/08................................................... 7/98 at 100 A+ 927,054
835,000 New Jersey Educational Facilities Authority, Princeton
University Revenue Bonds, 1994 Series A, 5.875%,
7/01/11................................................... 7/04 at 100 Aaa 903,203
410,000 New Jersey Educational Facilities Authority, Revenue
Refunding Bonds, (Monmouth College), Series 1993-A,
5.625%, 7/01/13........................................... 7/03 at 102 Baa 411,726
140,000 New Jersey Educational Facilities Authority, Seton Hall
University Project Revenue Bonds, 1991 Series, Project D,
6.600, 7/01/02 7/01 at 102 A- 150,731
330,000 New Jersey Higher Educational Facilities Authority, Higher
Educational Facilities Revenue Bonds, Saint Peter's
College Issue 1992 Series B, 6.000%, 7/01/99.............. No Opt. Call BBB+ 339,210
100,000 New Jersey Educational Facilities Authority, Stevens
Institute of Technology Issue Revenue Bonds, 1992 Series
A, 6.400%, 7/01/03........................................ 7/02 at 102 A- 109,720
85,000 Higher Education Assistance Authority (State of New Jersey),
Student Loan Revenue Bonds, 1992, Series A, Loan Program,
6.000%, 1/01/06........................................... 7/02 at 102 A+ 89,236
- -------------------------------------------------------------------------------------------------------------------
FOREST AND PAPER PRODUCTS--0.3%
250,000 New Jersey Economic Development Authority, Solid Waste
Disposal Facility Revenue Bonds (Garden State Paper
Company, Inc. Project), Series 1992, 7.125%, 4/01/22
(Alternative Minimum Tax)................................. 4/02 at 102 Aa2 276,658
- -------------------------------------------------------------------------------------------------------------------
HEALTH CARE--11.9%
945,000 New Jersey Health Care Facilities Financing Authority
(Intercare Health Systems Inc.--JFK Medical Center),
Series 1988, 7.625%, 7/01/18.............................. 7/98 at 102 A+ 975,060
935,000 New Jersey Economic Development Authority, Economic Growth
Lease Revenue Bonds, Remarketed 1992 Second Series B,
5.300%, 12/01/07 (Alternative Minimum Tax)................ 12/03 at 102 Aa3 981,918
300,000 New Jersey Economic Development Authority, Revenue Bonds
(RWJ Health Care Corp. at Hamilton, Obligated Group
Project), Series 1994, 6.250%, 7/01/14.................... 7/04 at 102 Aaa 330,570
700,000 New Jersey Health Care Facilities Financing Authority,
Revenue Bonds, Community Medical Center/Kensington Manor
Care Center Issue, Series E, 7.000%, 7/01/20.............. 7/00 at 102 Aaa 753,361
400,000 New Jersey Health Care Facilities Financing Authority,
Refunding Revenue Bonds, Atlantic City Medical Center
Issue, Series C, 6.800%, 7/01/05.......................... 7/02 at 102 A- 443,508
700,000 New Jersey Health Care Facilities Financing Authority,
Revenue Bonds, Palisades Medical Center, Obligated Group
Issue, Series 1992, 7.500%, 7/01/06....................... 7/02 at 102 Ba1 752,612
New Jersey Health Care Facilities Financing Authority,
Revenue Bonds, Monmouth Medical Center Issue, Series C:
250,000 5.700%, 7/01/02........................................... No Opt. Call AAA 266,370
250,000 6.250%, 7/01/16........................................... 7/04 at 102 Aaa 275,475
New Jersey Health Care Facilities Financing Authority,
Revenue Bonds, Newark Beth Israel Medical Center Issue,
Series 1994:
200,000 5.800%, 7/01/07........................................... 7/04 at 102 AAA 218,540
200,000 6.000%, 7/01/16........................................... 7/04 at 102 Aaa 215,140
100,000 New Jersey Health Care Facilities Financing Authority,
Revenue Bonds, West Jersey Health System, Series 1992,
6.000%, 7/01/07........................................... 7/02 at 102 AAA 108,660
250,000 New Jersey Health Care Facilities Financing Authority,
Refunding Revenue Bonds, Irvington General Hospital Issue
(FHA Insured Mortgage), Series 1994, 6.375%, 8/01/15...... 8/04 at 102 AAA 276,213
1,200,000 New Jersey Health Care Facilities Financing Authority,
Revenue and Refunding Bonds, Holy Name Hospital Issue,
Series 1997, 5.250%, 7/01/20.............................. 7/07 at 102 AAA 1,202,964
250,000 New Jersey Health Care Facilities Financing Authority,
Revenue Bonds, Dover General Hospital and Medical Center
Issue, Series 1994, 5.900%, 7/01/05....................... 7/04 at 102 AAA 275,443
New Jersey Health Care Facilities Financing Authority,
Revenue and Refunding Bonds, Capital Health System Obligated
Group, Series 1997:
500,000 4.600%, 7/01/03........................................... No Opt. Call A- 503,385
485,000 5.125%, 7/01/12........................................... 7/08 at 101 A- 479,631
</TABLE>
D-4
<PAGE> 168
PRO FORMA PORTFOLIO OF INVESTMENTS (UNAUDITED) -- CONTINUED
NEW JERSEY
FEBRUARY 28, 1998
<TABLE>
<CAPTION>
PRINCIPAL OPT. CALL MARKET
AMOUNT DESCRIPTION PROVISIONS* RATINGS** VALUE
- -------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
HEALTH CARE--CONTINUED
New Jersey Health Care Facilities Financing Authority,
Bayonne Hospital Obligated Group, Revenue Bonds, Series
1994:
$ 250,000 6.400%, 7/01/07........................................... 7/04 at 102 AAA $ 280,563
175,000 6.250%, 7/01/12........................................... 7/04 at 102 Aaa 193,855
1,000,000 New Jersey Health Care Facilities Financing Authority,
Revenue and Refunding Bonds, AHS Hospital Corporation
Issue, Series 1997 A Bonds, 5.000%, 7/01/27............... 7/07 at 102 Aaa 974,400
1,000,000 Camden County Improvement Authority, Health System Revenue
Bonds (Catholic Health East), Series 1998-A, 5.000%,
11/15/28 (WI)............................................. 5/08 at 102 Aaa 969,410
1,000,000 Puerto Rico Industrial, Tourist, Educational, Medical and
Environmental Control Facilities Financing Authority,
Hospital Revenue Bonds, 1995 Series A (Hospital Auxilio
Mutuo Obligated Group Project), 6.250%, 7/01/16........... 1/05 at 102 Aaa 1,109,270
250,000 Pollution Control Financing Authority of Union County (New
Jersey), Pollution Control Revenue Refunding Bonds,
American Cyanamid Company Issue, Series 1994, 5.800%,
9/01/09................................................... No Opt. Call A3 278,355
- -------------------------------------------------------------------------------------------------------------------
HOUSING/MULTIFAMILY--8.0%
1,750,000 New Jersey Housing Finance Agency, Special Pledge Revenue
Obligations, 1975 Series One, 9.000%, 11/01/18............ 11/98 at 102 A1 1,794,013
1,500,000 New Jersey Housing Mortgage Finance Agency, Multi-Family
Housing Revenue Bonds, 1996 Series A, 6.200%, 11/01/18
(Alternative Minimum Tax)................................. 5/06 at 102 Aaa 1,608,675
2,000,000 New Jersey Housing and Mortgage Finance Agency, Multi-Family
Housing Revenue Bonds, 1995 Series A, 6.000%, 11/01/14.... 5/05 at 102 Aaa 2,127,440
700,000 New Jersey Housing and Mortgage Finance Agency, Housing
Revenue Bonds, 1992 Series A, 6.950%, 11/01/13............ 5/02 at 102 A+ 756,147
500,000 New Jersey Housing and Mortgage Finance Agency, Housing
Revenue Refunding Bonds, 1992 Series One, 6.600%,
11/01/14.................................................. 11/02 at 102 A+ 540,460
235,000 Hoboken Housing Finance Corporation, Multifamily Mortgage
Revenue Bonds (Project Uplift-FHA Section 8), 1995-A
Refunding, 6.250%, 2/01/24................................ No Opt. Call AA+ 241,004
400,000 The Hudson County Improvement Authority, Multifamily Housing
Revenue Bonds, Series 1992 A (Conduit Financing --
Observer Park Project), 6.900%, 6/01/22 (Alternative
Minimum Tax).............................................. 6/04 at 100 AAA 429,060
500,000 North Bergen Housing Development Corporation (North Bergen,
New Jersey), Mortgage Revenue Bonds, Series 1978 (FHA
Insured Mortgage Loan -- Section 8 Assisted Project),
7.400%, 9/01/20........................................... 9/09 at 100 N/R 513,105
- -------------------------------------------------------------------------------------------------------------------
HOUSING/SINGLE FAMILY--6.1%
New Jersey Housing and Mortgage Financing Agency, Home Buyer
Revenue Bonds, 1994 Series K:
250,000 6.300%, 10/01/16 (Alternative Minimum Tax)................ 7/04 at 102 Aaa 264,933
400,000 6.375%, 10/01/26 (Alternative Minimum Tax)................ 7/04 at 102 Aaa 423,408
4,000,000 New Jersey Housing and Mortgage Finance Agency, Home Buyer
Revenue Bonds, 1997 Series U, 5.700%, 10/01/14
(Alternative Minimum Tax)................................. 10/07 at Aaa 4,182,960
101 1/2
1,175,000 Virgin Islands Housing Finance Authority, Single Family
Mortgage Revenue Refunding Bonds (GNMA Mortgage-Backed
Securities Program), 1995 Series A, 6.450%, 3/01/16
(Alternative Minimum Tax)................................. 3/05 at 102 AAA 1,250,893
- -------------------------------------------------------------------------------------------------------------------
INDUSTRIAL/OTHER--3.3%
1,135,000 New Jersey Economic Development Authority, Economic Growth
Bond, Composite Issue -- 1992 Second Series H, 5.300%,
12/01/07 (Alternative Minimum Tax)........................ 12/03 at 102 Aa3 1,195,745
New Jersey Economic Development Authority, Insured Revenue
Bonds (Educational Testing Service Issue), Series 1995B:
480,000 5.500%, 5/15/05........................................... No Opt. Call AAA 512,309
625,000 6.125%, 5/15/15........................................... 5/05 at 102 Aaa 685,725
250,000 New Jersey Economic Development Authority, District Heating
and Cooling Revenue Bonds (Trigen-Trenton Project), 1993
Series B, 6.100%, 12/01/04................................ 12/03 at 102 BBB- 269,375
150,000 New Jersey Economic Development Authority, Electric Energy
Facility Revenue Bonds (Vineland Cogeneration Limited
Partnership Project) Series 1992, 6.750%, 6/01/99......... No Opt. Call N/R 153,084
470,000 New Jersey Economic Development Authority, Economic Growth
Bonds Composite Issue, 1992 Series A, Through Series Z,
5.800%, 6/01/01........................................... 6/99 at 102 Aa3 488,325
- -------------------------------------------------------------------------------------------------------------------
TAX OBLIGATION/GENERAL--13.3%
1,000,000 State of New Jersey, General Obligation Bonds, Series D,
5.800%, 2/15/07........................................... No Opt. Call Aa1 1,109,040
200,000 The City of Atlantic, in the County of Atlantic, New Jersey,
General Obligation General Improvement Bonds, Series 1994,
5.650%, 8/15/04........................................... No Opt. Call A- 212,662
100,000 County of Atlantic, New Jersey, General Improvement Bonds,
6.000%, 1/01/07........................................... 1/04 at 101 Aaa 109,097
250,000 City of East Orange, in the County of Essex, New Jersey,
Fiscal Year Adjustment Bonds (Qualified Under the
Municipal Qualified Bond Act P.L. 1976, c. 38, as
Amended), 8.400%, 8/01/06................................. No Opt. Call Aaa 320,218
500,000 The Board of Education of The Township of Hillsborough, in
the County of Somerset, State of New Jersey, General
Obligation School Purpose Bonds, Series 1992, 5.875%,
8/01/11................................................... No Opt. Call AA 561,445
2,645,000 Middletown Township Board of Education, General Obligation
Bonds, Series 1997, School Board Reserve Act, 5.800%,
8/01/21................................................... 8/07 at 100 Aaa 2,794,469
D-5
</TABLE>
<PAGE> 169
PRO FORMA PORTFOLIO OF INVESTMENTS (UNAUDITED) -- CONTINUED
NEW JERSEY
FEBRUARY 28, 1998
<TABLE>
<CAPTION>
PRINCIPAL OPT. CALL MARKET
AMOUNT DESCRIPTION PROVISIONS* RATINGS** VALUE
- -------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
TAX OBLIGATION/GENERAL--CONTINUED
The Monmouth County Improvement Authority (Monmouth County,
New Jersey), Revenue Bonds, Series 1992 (Howell Township
Board of Education Project):
$ 50,000 6.450%, 7/01/08........................................... 7/02 at 102 AA+ $ 55,415
100,000 6.000%, 7/01/03........................................... 7/02 at 102 AA+ 109,057
165,000 Parsippany-Troy Hills Township, General Obligation, Capital
Appreciation Bonds, Series 1992, 0.000%, 4/01/07.......... No Opt. Call Aa 111,066
2,000,000 Commonwealth of Puerto Rico, Public Improvement Bonds of
1995 (General Obligation Bonds), 5.750%, 7/01/24.......... 7/05 at Aaa 2,124,680
101 1/2
550,000 Commonwealth of Puerto Rico, Public Improvement Bonds of
1996 (General Obligation Bonds), 5.400%, 7/01/25.......... 7/06 at A 559,999
101 1/2
2,000,000 Commonwealth of Puerto Rico, Public Improvement Refunding
Bonds of 1997 (General Obligation Bonds), 5.375%,
7/01/21................................................... 7/07 at Aaa 2,055,480
101 1/2
1,100,000 Sparta Township School District, General Obligation Bonds
(Unlimited Tax), 5.800%, 9/01/18.......................... 9/06 at 100 Aaa 1,166,330
250,000 The City of Union, in the County of Hudson, State of New
Jersey, General Obligation School Purpose Bonds, Series
1992, 6.375%, 11/01/10.................................... No Opt. Call Aaa 292,908
100,000 The Board of Education of the City of Atlantic, Atlantic
County, New Jersey, School Bonds, Series 1992, 6.000%,
12/01/06.................................................. 12/02 at 102 AAA 109,852
100,000 County of Camden, New Jersey, General Obligation Refunding
Bonds, Series 1992, 5.500%, 6/01/02....................... No Opt. Call AAA 105,656
275,000 Government of Guam, General Obligation Bonds, Series 1993A,
4.900%, 11/15/04.......................................... 11/03 at 102 BBB 279,067
200,000 Government of Guam, General Obligation Bonds, Series 1993A,
5.150%, 11/15/07.......................................... 11/03 at 102 BBB 205,104
400,000 Jersey City General Obligation, 6.500%, 2/15/02............. No Opt. Call AA 435,420
100,000 Township of Montclair in the County of Essex, New Jersey,
General Obligation Bonds, School Bonds, 5.800%, 3/01/06... 3/00 at AAA 104,237
101 1/2
200,000 State of New Jersey, General Obligation Refunding Bonds
(Series D), 0.000%, 2/15/03............................... No Opt. Call AA+ 162,696
185,000 The Board of Education of the City of Perth Amboy in the
County of Middlesex, New Jersey, School Bonds, 6.200%,
8/01/04................................................... No Opt. Call AAA 205,317
100,000 The Township of Woodbridge in the County of Middlesex, State
of New Jersey, Fiscal Year Adjustment Bonds, Series 1992,
6.150%, 8/15/06........................................... 8/02 at 102 A1 109,226
- -------------------------------------------------------------------------------------------------------------------
TAX OBLIGATION/LIMITED--10.8%
300,000 New Jersey Economic Development Authority, State Contract
Economic Recovery Bonds, Series 1992-A, 6.000%, 3/15/21... 9/02 at 102 Aaa 324,771
New Jersey Economic Development Authority, Market Transition
Facility, Senior Lien Revenue Bonds, Series 1994A:
300,000 7.000%, 7/01/04........................................... No Opt. Call AAA 344,001
650,000 5.875%, 7/01/11........................................... 7/04 at 102 Aaa 705,413
New Jersey Sports and Exposition Authority, Convention
Center Luxury Tax Bonds, 1992 Series A, 6.250%, 7/01/20
100,000 6.000%, 7/01/07........................................... 7/02 at 102 AAA 108,660
250,000 6.250%, 7/01/20........................................... 7/02 at 102 Aaa 273,480
150,000 The County of Bergen Utility Authority, Water Pollution
Control System Revenue Bonds, Series 1992-B, 6.000%,
12/15/13.................................................. 12/02 at 102 Aaa 163,388
250,000 The Camden County Municipal Utilities Authority (Camden
County, New Jersey), County Agreement Sewer Revenue
Refunding Bonds, 1996 Series, 5.125%, 7/15/17............. 7/06 at 102 Aaa 250,263
The Essex County Improvement Authority (Essex County, New
Jersey), City of Newark General Obligation Lease Revenue
Bonds, Series 1994:
300,000 6.350%, 4/01/07........................................... 4/04 at 102 Baa1 325,476
450,000 6.600%, 4/01/14........................................... 4/04 at 102 Baa1 491,324
320,000 6.350%, 4/01/07........................................... 4/04 at 102 BBB+ 347,174
500,000 The Essex County Improvement Authority (Essex County, New
Jersey), County Guaranteed Pooled Revenue Bonds, Series
1992A, 6.500%, 12/01/12................................... 12/02 at 102 Baa1 537,960
1,460,000 The Board of Education of the Borough of Little Ferry,
Bergen County, New Jersey, Certificates of Participation,
6.300%, 1/15/08........................................... No Opt. Call N/R 1,540,052
250,000 The City of Atlantic, New Jersey Municipal Utilities
Authority, Water System, Revenue Refunding Bonds, Series
1993, 5.650%, 5/01/07..................................... 5/02 at 102 A- 262,998
250,000 Mercer County Improvement Authority, Solid Waste, 0.000%,
4/01/04................................................... No Opt. Call Aa 193,478
300,000 Middlesex County Utilities Authority (in the County of
Middlesex, New Jersey), Sewer Revenue Refunding Bonds,
Series 1997A, 5.000%, 12/01/12............................ 12/07 at 101 AAA 303,708
550,000 Monmouth County Improvement Authority, Governmental Loan
Revenue Bonds, Series 1993, 5.000%, 12/01/11.............. 12/08 at 101 AAA 560,252
300,000 The Ocean County Utilities Authority (New Jersey),
Wastewater Revenue Bonds, Refunding Series 1997, 5.000%,
1/01/09................................................... 1/07 at 102 Aa2 310,917
1,000,000 The State of New Jersey, as Lessee, and The Mercer County
Improvement Authority, as Lessor, Relating to the Richard
J. Hughes Justice Complex, 6.050%, 1/01/13................ No Opt. Call Aa 1,001,320
2,350,000 The Ocean County Utilities Authority (New Jersey),
Wastewater Revenue Bonds, Refunding Series 1987, 5.000%,
1/01/14................................................... 5/98 at 100 Aaa 2,349,812
</TABLE>
D-6
<PAGE> 170
PRO FORMA PORTFOLIO OF INVESTMENTS (UNAUDITED) -- CONTINUED
NEW JERSEY
FEBRUARY 28, 1998
<TABLE>
<CAPTION>
PRINCIPAL OPT. CALL MARKET
AMOUNT DESCRIPTION PROVISIONS* RATINGS** VALUE
- -------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
TAX OBLIGATIONS/LIMITED--CONTINUED
$ 170,000 Puerto Rico Aqueduct and Sewer Authority, Refunding Bonds,
Series 1995, Guaranteed by the Commonwealth of Puerto
Rico, 5.000%, 7/01/15..................................... 7/06 at A $ 167,278
101 1/2
225,000 Puerto Rico Commonwealth Highway Authority, Highway Revenue
Bonds, Series 1990-Q, 6.000%, 7/01/20..................... 7/00 at 100 A 233,530
- -------------------------------------------------------------------------------------------------------------------
TRANSPORTATION--9.1%
Parking Authority of the City of Hoboken, County of Hudson,
New Jersey, Parking General Revenue Refunding Bonds, Series
1992A, 5.850%, 3/01/00
330,000 5.850%, 3/01/00........................................... No Opt. Call Baa1 341,458
100,000 6.625%, 3/01/09........................................... 3/02 at 102 Baa1 107,140
200,000 The Port Authority of New York and New Jersey Consolidated
Bonds, Ninety-Fifty Series, 5.500%, 7/15/05............... 7/04 at 101 AA- 214,324
100,000 South Jersey Transportation Authority, Transportation System
Revenue Bonds, 1992 Series B (Tax Exempt), 5.900%,
11/01/06.................................................. 11/02 at 102 AAA 108,347
1,750,000 New Jersey Turnpike Authority, Turnpike Revenue Bonds,
Series 1991 C, 6.500%, 1/01/08............................ No Opt. Call Baa1 2,013,743
1,415,000 The Delaware River and Bay Authority, Revenue Bonds, Series
1993, 5.000%, 1/01/17..................................... 1/04 at 102 Aaa 1,389,502
125,000 The Port Authority of New York and New Jersey, Consolidated
Bonds, Ninety-Sixth Series, 6.600%, 10/01/23 (Alternative
Minimum Tax).............................................. 10/04 at 101 Aaa 138,125
200,000 The Port Authority of New York and New Jersey, Consolidated
Bonds, One Hundredth Series, 5.750%, 12/15/20............. 6/05 at 101 AA- 210,960
200,000 The Port Authority of New York and New Jersey, Consolidated
Bonds, Ninety-Fifth Series, 5.875%, 7/15/09 (Alternative
Minimum Tax).............................................. 7/04 at 101 AA- 215,222
4,100,000 The Port Authority of New York and New Jersey Special
Project Bonds, Series 6, JFK International Air Terminal
LLC Project, 5.750%, 12/01/25 (Alternative Minimum Tax)... 12/07 at 100 Aaa 4,318,694
- -------------------------------------------------------------------------------------------------------------------
U.S. GUARANTEED--11.4%
200,000 New Jersey Economic Development Authority, Lease Rental
Bonds, 1992 Series (Liberty State Park Project), 6.800%,
3/15/22 (Pre-refunded to 3/15/02)......................... 3/02 at 102 Aaa 223,438
1,780,000 New Jersey Health Care Facilities Financing Authority,
Revenue Bonds, Hackensack Hospital Issue, Series A,
8.750%, 7/01/09........................................... No Opt. Call Aaa 2,144,740
2,065,000 New Jersey Health Care Facilities Financing Authority,
Revenue Bonds, Series 1990-E (Kennedy Memorial Hospital),
8.375%, 7/01/10 (Pre-refunded to 7/01/01)................. 7/01 at 102 A1*** 2,371,714
3,000,000 New Jersey Health Care Facilities Financing Authority,
Revenue Bonds, Newton Memorial Hospital Issue, Series A,
7.500%, 7/01/19 (Pre-refunded to 7/01/99)................. 7/99 at 102 A-*** 3,201,570
25,000 New Jersey Health Care Facilities Financing Authority,
Bayonne Hospital Obligated Group, Revenue Bonds, Series
1994, 6.250%, 7/01/12 (Pre-refunded to 7/01/04)........... 7/04 at 102 Aaa 28,099
290,000 New Jersey Turnpike Authority, Turnpike Revenue Bonds, 1984
Series, 10.375%, 1/01/03.................................. No Opt. Call AAA 340,559
100,000 The Essex County Improvement Authority (Essex County, New
Jersey), General Obligation Lease Revenue Bonds, Series
1994 (County Jail and Youth House Projects), 6.900%,
12/01/14 (Pre-refunded to 12/01/04)....................... 12/04 at 102 Aaa 116,947
300,000 The Township of North Bergen (Hudson County, New Jersey),
Fiscal Year Adjustment General Obligation Bonds, Series
1992, 6.500%, 8/15/12 (Pre-refunded to 8/15/02)........... 8/02 at 102 Aaa 334,311
60,000 Puerto Rico Highway and Transportation Authority, Highway
Revenue Bonds (Series T), 6.625%, 7/01/18 (Pre-refunded to
7/01/02).................................................. 7/02 at AAA 66,889
101 1/2
1,875,000 Puerto Rico Electric Power Authority, Power Revenue Bonds,
Series P, 7.000%, 7/01/21 (Pre-refunded to 7/01/01)....... 7/01 at 102 Aaa 2,082,488
100,000 University of Medicine and Dentistry of New Jersey, Series
E, 6.500%, 12/01/18 (Pre-refunded to 12/01/01)............ 12/01 at 102 AA-*** 110,162
300,000 The Wanaque Borough Sewerage Authority (Passaic County, New
Jersey), Sewer Revenue Bonds (Series 1992), 7.000%,
12/01/21 (Pre-refunded to 12/01/02)....................... 12/02 at 102 Baa1*** 341,574
- -------------------------------------------------------------------------------------------------------------------
UTILITIES--9.5%
1,000,000 Pollution Control Financing Authority of Camden County
(Camden County, New Jersey), Solid Waste Disposal and
Resource Recovery System Revenue Bonds, Series 1991 C,
7.125%, 12/01/01 (Alternative Minimum Tax)................ No Opt. Call B2 1,006,340
2,645,000 Pollution Control Financing Authority of Camden County
(Camden County, New Jersey), Solid Waste Disposal and
Resource Recovery System Revenue Bonds, Series 1991 D,
7.250%, 12/01/10.......................................... 12/01 at 102 B2 2,690,626
790,000 Puerto Rico Electric Power Authority, Power Revenue Bonds,
Series P, 7.000%, 7/01/07................................. No Opt. Call Baa1 936,924
200,000 Puerto Rico Electric Power Authority, Power Revenue Bonds,
Series R, 6.250%, 7/01/17................................. 7/02 at Baa1 215,390
101 1/2
Puerto Rico Electric Power Authority, Power Revenue Bonds,
Series T:
2,000,000 5.500%, 7/01/20........................................... 7/04 at 100 Baa1 2,035,160
250,000 6.375%, 7/01/24........................................... 7/04 at 102 Baa1 277,904
1,500,000 Puerto Rico Electric Power Authority, Power Revenue
Refunding Bonds, Series Z, 5.250%, 7/01/21................ 7/05 at 100 Baa1 1,493,894
</TABLE>
D-7
<PAGE> 171
PRO FORMA PORTFOLIO OF INVESTMENTS (UNAUDITED) -- CONTINUED
NEW JERSEY
FEBRUARY 28, 1998
<TABLE>
<CAPTION>
PRINCIPAL OPT. CALL MARKET
AMOUNT DESCRIPTION PROVISIONS* RATINGS** VALUE
- -------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
UTILITIES--CONTINUED
$ 195,000 The Union County Utilities Authority (New Jersey), Solid
Waste System Revenue Bonds, 1991 Series A, 7.100%, 6/15/06
(Alternative Minimum Tax)................................. 6/02 at 102 BB $ 195,980
300,000 The Port Authority of New York and New Jersey, Special
Project Bonds, Series 4, KIAC Partners Project, 7.000%,
10/01/07.................................................. No Opt. Call N/R 341,634
250,000 Puerto Rico Electric Power Authority, Power Revenue
Refunding Bonds, Series Q, 5.900%, 7/01/01................ No Opt. Call BBB+ 264,515
- -------------------------------------------------------------------------------------------------------------------
WATER AND SEWER--1.2%
100,000 New Jersey Economic Development Authority, Water Facilities
Revenue Refunding Bonds (New Jersey American Water Company
Inc. Project), Series 1993, 5.500%, 6/01/23 (Alternative
Minimum Tax).............................................. 6/03 at 102 Aaa 102,150
150,000 New Jersey Economic Development Authority, Water Facilities
Revenue Refunding Bonds (Hackensack Water Company
Project-1994 Series B), 5.900%, 3/01/24 (Alternative
Minimum Tax).............................................. 3/04 at 102 Aaa 160,454
200,000 New Jersey Wastewater Treatment Trust, Wastewater Treatment
Bonds, Series 1994A, 6.500%, 4/01/14...................... 4/04 at 102 Aa 223,243
250,000 The Hoboken-Union City-Weehawken Sewerage Authority (New
Jersey), Sewer Revenue Bonds (Refunding Series 1992),
6.200%, 8/01/19........................................... 8/02 at 102 Aaa 273,310
North Jersey District Water Supply Commission of the State
of New Jersey Wanaque South Project, Revenue Refunding
Bonds, Series 1993:
100,000 5.700%, 7/01/05........................................... 7/03 at 102 AAA 108,458
200,000 6.000%, 7/01/21........................................... 7/03 at 102 Aaa 216,653
75,000 The Wanaque Valley Regional Sewerage Authority (Passaic
County, New Jersey), Sewer Revenue Bonds (1993 Series A),
6.125%, 9/01/22........................................... 9/03 at 102 Baa 78,226
- -------------------------------------------------------------------------------------------------------------------
$90,085,000 Total Investments--(cost $90,043,410)--95.9% 95,739,642
=========== -----------------------------------------------------------------------------------------------------
TEMPORARY INVESTMENTS IN SHORT-TERM MUNICIPAL
SECURITIES--3.1%
800,000 New Jersey Economic Development Authority, Industrial
Development, Variable Rate Demand Bonds, 3.300%,
4/01/19+.................................................. A-1 800,000
800,000 Port Authority of New York and New Jersey, Versatile
Structure Obligations, Series B, 3.550%, 12/01/17+
(Alternative Minimum Tax)................................. VMIG-1 800,000
1,500,000 Union County Industrial Pollution Control Financing
Authority, Pollution Control Revenue Refunding, Exxon
Project, Series 1989, Variable Rate Demand Bonds, 3.200%,
10/01/24+................................................. A-1+ 1,500,000
- -------------------------------------------------------------------------------------------------------------------
$ 3,100,000 Total Temporary Investments--3.1% 3,100,000
=========== -----------------------------------------------------------------------------------------------------
Other Assets Less Liabilities--1.0% 1,022,403
-----------------------------------------------------------------------------------------------------
Net Assets--100% $99,862,045
=====================================================================================================
</TABLE>
* Optional Call Provisions (not covered by the report of independent
public accountants): Dates (month and year) and prices of the earliest
optional call or redemption. There may be other call provisions at
varying prices at later dates.
** Ratings (not covered by the report of independent public accountants):
Using the higher of Standard & Poor's or Moody's rating.
*** Securities are backed by an escrow or trust containing sufficient U.S.
government or U.S. government agency securities, which ensures the
timely payment of principal and interest. Securities are normally
considered to be equivalent to AAA rated securities.
N/R -- Investment is not rated.
(WI) Security purchased on a when-issued basis (see note 1).
+ The security has a maturity of more than one year, but has variable
rate and demand features which qualify it as a short-term security. The
rate disclosed is that currently in effect. This rate changes
periodically based on market conditions or a specified market index.
D-8
<PAGE> 172
PART C -- OTHER INFORMATION
ITEM 15. INDEMNIFICATION
Section 4 of Article XII of Registrant's Declaration of Trust provides as
follows:
Subject to the exceptions and limitations contained in this Section 4,
every person who is, or has been, a Trustee, officer, employee or agent of the
Trust, including persons who serve at the request of the Trust as directors,
trustees, officers, employees or agents of another organization in which the
Trust has an interest as a shareholder, creditor or otherwise (hereinafter
referred to as a "Covered Person"), shall be indemnified by the Trust to the
fullest extent permitted by law against liability and against all expenses
reasonably incurred or paid by him in connection with any claim, action, suit,
or proceeding in which he becomes involved as a party or otherwise by virtue of
his being or having been such a Trustee, director, officer, employee or agent
and against amounts paid or incurred by him in settlement thereof.
No indemnification shall be provided hereunder to a Covered Person:
(a) against any liability to the Trust or its Shareholders by reason
of a final adjudication by the court or other body before which the
proceeding was brought that he engaged in willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the
conduct of his office;
(b) with respect to any matter as to which he shall have been finally
adjudicated not to have acted in good faith in the reasonable belief that
his action was in the best interests of the Trust; or
(c) in the event of a settlement or other disposition not involving a
final adjudication (as provided in paragraph (a) or (b)) and resulting in a
payment by a Covered Person, unless there has been either a determination
that such Covered Person did not engage in willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the
conduct of his office by the court or other body approving the settlement
or other disposition, or a reasonable determination, based on a review of
readily available facts (as opposed to a full trial-type inquiry), that he
did not engage in such conduct:
(i) by a vote of a majority of the Disinterested Trustees acting on
the matter (provided that a majority of the Disinterested Trustees then
in office act on the matter); or
(ii) by written opinion of independent legal counsel.
The rights of indemnification herein provided may be insured against by
policies maintained by the Trust, shall be severable, shall not affect any other
rights to which any Covered Person may now or hereafter be entitled, shall
continue as to a person who has ceased to be such a Covered Person and shall
inure to the benefit of the heirs, executors and administrators of such a
person. Nothing contained herein shall affect any rights to indemnification to
which Trust personnel other than Covered Persons may be entitled by contract or
otherwise under law.
Expenses of preparation and presentation of a defense to any claim, action,
suit or proceeding subject to a claim for indemnification under this Section 4
shall be advanced by the Trust prior to final disposition thereof upon receipt
of an undertaking by or on behalf of the recipient to repay such amount if it is
ultimately determined that he is not entitled to indemnification under this
Section 4, provided that either:
(a) such undertaking is secured by a surety bond or some other
appropriate security or the Trust shall be insured against losses arising
out of any such advances; or
(b) a majority of the Disinterested Trustees acting on the matter
(provided that a majority of the Disinterested Trustees then in office act
on the matter) or independent legal counsel in a written opinion shall
determine, based upon a review of the readily available facts (as opposed
to a full trial-type inquiry), that there is reason to believe that the
recipient ultimately will be found entitled to indemnification.
As used in this Section 4, a "Disinterested Trustee" is one (x) who is not
an Interested Person of the Trust (including anyone, as such Disinterested
Trustee, who has been exempted from being an Interested Person by any rule,
regulation or order of the Commission), and (y) against whom none of such
actions, suits or other proceedings or another action, suit or other proceeding
on the same or similar grounds is then or has been pending.
As used in this Section 4, the words "claim," "action," "suit" or
"proceeding" shall apply to all claims, actions, suits, proceedings (civil,
criminal, administrative or other, including appeals), actual or threatened; and
the words "liability" and "expenses" shall include without limitation,
attorneys' fees, costs, judgments, amounts paid in settlement, fines, penalties
and other liabilities.
C-1
<PAGE> 173
The trustees and officers of the Registrant are covered by an Investment
Trust Errors and Omission policy in the aggregate amount of $20,000,000 (with a
maximum deductible of $500,000) against liability and expenses of claims of
wrongful acts arising out of their position with the Registrant, except for
matters which involved willful acts, bad faith, gross negligence and willful
disregard of duty (i.e., where the insured did not act in good faith for a
purpose he or she reasonably believed to be in the best interest of Registrant
or where he or she shall have had reasonable cause to believe this conduct was
unlawful).
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to the officers, trustees or controlling persons of the
Registrant pursuant to the Declaration of Trust of the Registrant or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by an officer or trustee or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such officer, trustee or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against policy as expressed in the Act and will be
governed by the final adjudication of such issue.
ITEM 16. EXHIBITS
<TABLE>
<C> <S>
1(a). Declaration of Trust of the Registrant.(2)
1(b). Amended and Restated Establishment and Designation of Series
of Shares of Beneficial Interest dated October 11, 1996.(1)
1(c). Certificate for the Establishment and Designation of Classes
dated July 10, 1996.(1)
2. Bylaws of Registrant.(1)
3. Not applicable.
4. Form of Agreement and Plan of Reorganization for Nuveen
Flagship New Jersey Intermediate Municipal Bond Fund and
into Nuveen Flagship New Jersey Municipal Bond Fund.+
5. Specimen certificates of Shares of each Fund.(2)
6. Investment Management Agreement between Registrant and
Nuveen Advisory Corp.(2)
7(a). Distribution Agreement between Registrant and John Nuveen &
Co. Incorporated.(2)
8. Not applicable.
9(a). Custodian Agreement between Registrant and Chase Manhattan
Bank.(2)
9(b). Transfer Agency and Service Agreement between Registrant and
State Street Bank and Trust Company.(2)
9(c). Transfer Agency Agreement between Registrant and Shareholder
Services, Inc.(2)
10(a). Plan of Distribution and Service Pursuant to Rule 12b-1 for
Class A Shares, Class B Shares and Class C Shares of each
Fund.(1)
10(b). Multi-Class Plan Adopted Pursuant to Rule 18f-3.(2)
11(a). Opinion of Vedder, Price, Kaufman & Kammholz.++
11(b). Opinion of Bingham Dana LLP++
12. Tax Opinion of Vedder, Price, Kaufman & Kammholz relating to
the Reorganization.++
13. Not applicable.
14. Consent of Arthur Andersen, Independent Public
Accountants.++
15. Not applicable.
16(a). Power of Attorney of Anthony T. Dean.++
16(b). Power of Attorney of Timothy R. Schwertfeger.++
16(c). Power of Attorney of Robert P. Bremner.++
16(d). Power of Attorney of Lawrence H. Brown.++
16(e). Power of Attorney of Anne E. Impellizzeri.++
16(f). Power of Attorney of Peter R. Sawers.++
16(g). Power of Attorney of William J. Schneider.++
</TABLE>
C-2
<PAGE> 174
<TABLE>
<C> <S>
16(h). Power of Attorney of Judith M. Stockdale.++
17. Form of proxy cards.++
</TABLE>
- ---------------
+ Filed herewith as Exhibit A to the Reorganization Statement of Additional
Information contained herein.
++ Filed herewith.
(1) Incorporated herein by reference to the initial Registrant's Registration
Statement on Form N-1A, File Number 333-14729, filed on October 24, 1996.
(2) Incorporated herein by reference to Pre-Effective Amendment No. 2 to
Registrant's Registration Statement on Form N-1A, File Number 333-14729,
filed on January 13, 1997.
ITEM 17. UNDERTAKINGS
(1) The undersigned registrant agrees that prior to any public re-offering
of the securities registered through the use of a prospectus which is a part of
this registration statement by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c) of the Securities Act, the
re-offering prospectus will contain the information called for by the applicable
registration form for re-offerings by persons who may be deemed underwriters, in
addition to the information called for by the other items of the applicable.
(2) The undersigned registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as a part of an amendment to the
registration statement and will not be used until the amendment is effective,
and that, in determining any liability under the 1933 Act, each post-effective
amendment shall be deemed to be a new registration statement for the securities
offered therein, and the offering of the securities at that time shall be deemed
to be the initial bona fide offering of them.
C-3
<PAGE> 175
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE
INVESTMENT COMPANY ACT OF 1940 THE REGISTRANT CERTIFIES THAT IT MEETS ALL
REQUIREMENTS FOR EFFECTIVENESS OF THIS REGISTRATION STATEMENT ON FORM N-14
PURSUANT TO RULE 488 UNDER THE SECURITIES ACT OF 1933 AND HAS DULY CAUSED THIS
REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO
DULY AUTHORIZED, IN THIS CITY OF CHICAGO AND STATE OF ILLINOIS, ON THE 27TH DAY
OF MAY 1998.
NUVEEN FLAGSHIP MULTISTATE TRUST II
BY /s/ GIFFORD R. ZIMMERMAN
--------------------------------------
GIFFORD R. ZIMMERMAN
VICE PRESIDENT AND SECRETARY
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT ON FORM N-14 HAS BEEN SIGNED BELOW BY THE FOLLOWING
PERSONS IN THE CAPACITIES INDICATED AND ON THE DATE INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ STEPHEN D. FOY Vice President and Controller
- ------------------------------------ (Principal Financial and
Stephen D. Foy Accounting Officer May 27, 1998
TRUSTEES:
Timothy R. Schwertfeger* Chairman of the Board and
Trustee (Principal Executive
Officer)
Anthony T. Dean* President and Trustee
Robert P. Bremner* Trustee
Lawrence H. Brown* Trustee
Anne E. Impellizzeri* Trustee
Peter R. Sawers* Trustee
William J. Schneider* Trustee
Judith M. Stockdale* Trustee
</TABLE>
By
/s/ GIFFORD R.
ZIMMERMAN
--------------------------
Gifford R. Zimmerman
Attorney-in-fact
May 27, 1998
- ---------------
* Original powers of attorney authorizing, among others, Gifford R. Zimmerman to
execute this Registration Statement on Form N-14 for each of the Trustees of
the Registrant have been executed and are filed as Exhibits to this
Registration Statement.
<PAGE> 176
EXHIBIT INDEX
<TABLE>
<C> <S>
1(a). Declaration of Trust of the Registrant.(2)
1(b). Amended and Restated Establishment and Designation of Series
of Shares of Beneficial Interest dated October 11, 1996.(1)
1(c). Certificate for the Establishment and Designation of Classes
dated July 10, 1996.(1)
2. Bylaws of Registrant.(1)
3. Not applicable.
4. Form of Agreement and Plan of Reorganization for Nuveen
Flagship New Jersey Intermediate Flagship and Nuveen
Flagship South Carolina Municipal Bond Fund into Nuveen
Flagship New Jersey Municipal Bond Fund.+
5. Specimen certificates of Shares of each Fund.(2)
6. Investment Management Agreement between Registrant and
Nuveen Advisory Corp.(2)
7(a). Distribution Agreement between Registrant and John Nuveen &
Co. Incorporated.(2)
8. Not applicable.
9(a). Custodian Agreement between Registrant and Chase Manhattan
Bank.(2)
9(b). Transfer Agency and Service Agreement between Registrant and
State Street Bank and Trust Company.(2)
9(c). Transfer Agency Agreement between Registrant and Shareholder
Services, Inc.(2)
10(a). Plan of Distribution and Service Pursuant to Rule 12b-1 for
Class A Shares, Class B Shares and Class C Shares of each
Fund.(2)
10(b). Multi-Class Plan Adopted Pursuant to Rule 18f-3.(2)
11(a). Opinion of Vedder, Price, Kaufman & Kammholz.++
11(b). Opinion of Bingham Dana LLP++
12. Tax Opinion of Vedder, Price, Kaufman & Kammholz relating to
the Reorganization.++
13. Not applicable.
14. Consent of Arthur Andersen, Independent Public
Accountants.++
15. Not applicable.
16(a). Power of Attorney of Anthony T. Dean.++
16(b). Power of Attorney of Timothy R. Schwertfeger.++
16(c). Power of Attorney of Robert P. Bremner.++
16(d). Power of Attorney of Lawrence H. Brown.++
16(e). Power of Attorney of Anne E. Impellizzeri.++
16(f). Power of Attorney of Peter R. Sawers.++
16(g). Power of Attorney of William J. Schneider.++
16(h). Power of Attorney of Judith M. Stockdale.++
17. Form of proxy cards.++
</TABLE>
- ---------------
+ Filed herewith as Exhibit A to the Reorganization Statement of Additional
Information contained herein.
++ Filed herewith.
(1) Incorporated herein by reference to the initial Registrant's Registration
Statement on Form N-1A, File Number 333-14729, filed on October 24, 1996.
(2) Incorporated herein by reference to Pre-Effective Amendment No. 2 to
Registrant's Registration Statement on Form N-1A, File Number 333-14729,
filed on January 13, 1997.
<PAGE> 1
EXHIBIT 11(a)
New Jersey
Vedder, Price, Kaufman & Kammholz
222 North LaSalle Street
Chicago, IL 60601
(312) 609-7500
May 27, 1998
Nuveen Flagship Municipal Trust
333 West Wacker Drive
Chicago, Illinois 60606
Re: NUVEEN FLAGSHIP MULTISTATE TRUST II
REGISTRATION STATEMENT ON FORM N-14
NUVEEN FLAGSHIP NEW JERSEY MUNICIPAL BOND FUND
Ladies and Gentlemen:
We are acting as counsel for Nuveen Flagship Multistate Trust II, a
Massachusetts business trust (the "Trust"), in connection with the Trust's
filing of a registration statement on Form N-14 (the "Registration Statement")
with the Securities and Exchange Commission covering the registration of shares
of beneficial interest, $.01 par value per share, (the "Shares") of the Trust
designated Nuveen Flagship New Jersey Municipal Bond Fund (the "Acquiring
Fund"), pursuant to the proposed reorganization of its series of shares
designated Nuveen Flagship New Jersey Intermediate Municipal Bond Fund (the
"Acquired Fund"), as described in the Registration Statement and pursuant to
that certain Agreement and Plan of Reorganization dated April 25, 1998 by the
Trust on behalf of the Acquiring Fund and the Acquired Fund (the "Agreement").
In that capacity, we have examined such business trust records,
certificates and other documents, and have made such other factual and legal
investigations as we have deemed necessary and appropriate for the purposes of
this opinion. In such examination, we have assumed the genuineness of all
signatures, the authenticity of all documents submitted to us as originals, the
conformity to originals of all documents submitted to us as certified copies or
photocopies and the authenticity of the originals of such latter documents.
Insofar as this opinion pertains to matters governed by the laws of the
Commonwealth of Massachusetts, we are relying, with your consent, upon the
opinion of Bingham Dana LLP dated May 27, 1998, which opinion is satisfactory in
substance and form to us.
Based upon the foregoing, it is our opinion that:
(1) The Trust is a Massachusetts business trust duly organized and
existing under the laws of the Commonwealth of Massachusetts.
<PAGE> 2
Nuveen Flagship Municipal Trust
May 27, 1998
Page 2
(2) The Shares, when issued and sold in accordance with the
Trust's Declaration of Trust, all amendments thereto, and
By-Laws and for the consideration described in the Agreement,
will be legally issued, fully paid and non-assessable, except
that, as set forth in the Registration Statement, shareholders
of the Trust may under certain circumstances be held
personally liable for its obligations.
We hereby consent to the filing of this opinion as Exhibit 11(a) to the
Registration Statement and to the references to us under the caption "Legal
Opinions" in the Joint Proxy Statement - Prospectus contained in the
Registration Statement.
Respectfully submitted,
VEDDER, PRICE, KAUFMAN & KAMMHOLZ
MLW
DAS
<PAGE> 1
EXHIBIT 11(b)
Bingham Dana LLP
150 Federal Street
Boston, MA 02110-1726
May 27, 1998
Vedder, Price, Kaufman & Kammholz
222 North La Salle Street
Chicago, IL 60601-1003
Re: Nuveen Flagship Multistate Trust II/Nuveen Flagship
New Jersey Municipal Bond Fund
Ladies and Gentlemen:
We have acted as special Massachusetts counsel to Nuveen Flagship
Municipal Trust, a Massachusetts business trust (the "Trust"), in connection
with the Trust's Registration Statement on Form N-14 to be filed with the
Securities and Exchange Commission on or about May 26, 1998 (the "Registration
Statement"), with respect to the shares of beneficial interest, par value $.01
per share (the "Shares") of its series Nuveen Flagship New Jersey Municipal
Bond Fund (the "Acquiring Fund") to be issued in exchange for substantially all
of the assets of Nuveen Flagship New Jersey Intermediate Municipal Bond Fund, a
series of the Trust (the "Acquired Fund"), as described in the Registration
Statement. You have requested that we deliver this opinion to you, as special
counsel to the Trust, for use by you in connection with your opinion to the
Trust with respect to the Shares.
In connection with the furnishing of this opinion, we have examined the
following documents:
(a) a certificate of the Secretary of State of the
Commonwealth of Massachusetts as to the existence of the Trust;
(b) a copy, as filed with the Secretary of State of the
Commonwealth of Massachusetts on July 1, 1996, of the Trust's
Declaration of Trust (the "Declaration");
(c) a copy of the Trust's Amended and Restated Establishment
and Designation of Series dated October 9, 1996 (the "Designation of
Series");
(d) a copy of the Trust's Establishment and Designation of
Classes dated July 10, 1996, (the "Designation of Classes");
<PAGE> 2
Vedder, Price, Kaufman & Kammholz
May 27, 1998
Page 2
(e) a certificate executed by an appropriate officer of the
Trust, certifying as to, and attaching copies of, the Trust's
Declaration, Designation of Series, Designation of Classes, By-Laws,
and certain resolutions adopted by the Trustees of the Trust;
(f) a printer's proof dated May 22, 1998 of the
Registration Statement; and
(g) a copy of the Agreement and Plan of Reorganization entered
into by the Trust as of April 25, 1998, on behalf of the Acquiring
Fund, providing for (a) the acquisition by the Acquiring Fund of
substantially all of the assets of the Acquired Funds in exchange for
the Shares and the Acquiring Fund's assumption of substantially all of
the liabilities of the Acquired Funds and (b) the pro rata
distribution of the Shares to the holders of the shares of the
Acquired Funds in liquidation of the Acquired Funds, in the form
included in the printer's proof referred to in paragraph (f) above
(the "Agreement and Plan of Reorganization").
In such examination, we have assumed the genuineness of all signatures,
the conformity to the originals of all of the documents reviewed by us as
copies, including conformed copies, the authenticity and completeness of all
original documents reviewed by us in original or copy form and the legal
competence of each individual executing any document. We have assumed that the
Registration Statement as filed with the Securities and Exchange Commission will
be in substantially the form of the printer's proof referred to in paragraph (f)
above, and that the Agreement and Plan of Reorganization has been duly
completed, executed and delivered by the parties thereto in substantially the
form of the copy referred to in paragraph (g) above.
This opinion is based entirely on our review of the documents listed
above and such investigation of law as we have deemed necessary or appropriate.
We have made no other review or investigation of any kind whatsoever, and we
have assumed, without independent inquiry, the accuracy of the information set
forth in such documents.
This opinion is limited solely to the internal substantive laws of the
Commonwealth of Massachusetts as applied by courts located in such Commonwealth,
to the extent the same may apply to or govern the transactions covered by this
opinion, except that we express no opinion as to any Massachusetts securities
law.
We understand that all of the foregoing assumptions and limitations are
acceptable to you.
Based upon and subject to the foregoing, please be advised that it is
our opinion that:
<PAGE> 3
Vedder, Price, Kaufman & Kammholz
May 27, 1998
Page 3
1. The Trust is duly organized and existing under the Trust's
Declaration of Trust and the laws of the Commonwealth of Massachusetts as a
voluntary association with transferable shares of beneficial interest commonly
referred to as a "Massachusetts business trust."
2. The Shares, when issued and sold in accordance with the Trust's
Declaration and By-Laws and for the consideration described in the Agreement and
Plan of Reorganization, will be legally issued, fully paid and non-assessable,
except that, as set forth in the Registration Statement, shareholders of the
Acquiring Fund may under certain circumstances be held personally liable for its
obligations.
We hereby consent to your reliance on this opinion in connection with
your opinion to the Trust with respect to the Shares, to the reference to our
name in the Registration Statement under the heading "Legal Opinions" and to the
filing of this opinion as an exhibit to the Registration Statement.
Very truly yours,
BINGHAM DANA LLP
<PAGE> 1
EXHIBIT 12
May 27, 1998
<TABLE>
<S> <C>
Nuveen Flagship Multistate Trust II Nuveen Flagship Multistate Trust II
333 West Wacker Drive 333 West Wacker Drive
Chicago, IL 60606 Chicago, IL 60606
Nuveen Flagship New Jersey Intermediate Nuveen Flagship New Jersey
Municipal Bond Fund Municipal Bond Fund
333 West Wacker Drive 333 West Wacker Drive
Chicago, IL 60606 Chicago, IL 60606
</TABLE>
Gentlemen:
You have requested our opinion regarding certain federal income tax
consequences of the proposed reorganization ("Reorganization") of Nuveen
Flagship New Jersey Intermediate Municipal Bond Fund ("Acquired Fund"), a
separate portfolio of Nuveen Flagship Multistate Trust II, a Massachusetts
business trust ("Trust") into Nuveen Flagship New Jersey Municipal Bond Fund
("Acquiring Fund"), also a separate portfolio of the Trust. The Reorganization
contemplates the acquisition by the Acquiring Fund of substantially all the
assets of the Acquired Fund in exchange for voting shares of beneficial interest
("shares") of the Acquiring Fund and the assumption of the Acquired Fund's
liabilities. Thereafter, the shares of the Acquiring Fund will be distributed to
the shareholders of the Acquired Fund and the Acquired Fund will be completely
liquidated and terminated. The foregoing will be accomplished pursuant to an
Agreement and Plan of Reorganization, dated as of April 25, 1998 (the "Plan"),
entered into by the Trust, on behalf of the Acquired Fund and the Acquiring
Fund.
In rendering this opinion, we have reviewed and relied upon statements
made to us by certain of your officers. We have also examined certificates of
such officers and such other agreements, documents, and corporate records that
have been made available to us and such other matters as we have deemed relevant
for purposes of this opinion. In such examination, we have assumed the
genuineness of all signatures, the authenticity of all documents
<PAGE> 2
VEDDER PRICE
Nuveen Flagship Multistate Trust II
Nuveen Flagship New Jersey Municipal Bond Fund
Nuveen Flagship Multistate Trust II
Nuveen Flagship New Jersey Intermediate Municipal Bond Fund
May 27, 1998
Page 2
submitted to us as originals, the conformity to originals of all documents
submitted to us as copies and the authenticity of the originals of such latter
documents.
Our opinion is based, in part, on the assumption that the proposed
Reorganization described herein will occur in accordance with the agreements and
the facts and representations set forth or referred to in this opinion letter,
and that such facts and representations are accurate as of the date hereof and
will be accurate on the effective date of the Reorganization (the "Effective
Time"). As more fully discussed below, we have also assumed in issuing our
opinion that the shareholders of the Acquired Fund do not have any plan or
intention to dispose of a certain number of the Acquiring Fund shares received
by them in the Reorganization. We have undertaken no independent investigation
of the accuracy of the facts, representations and assumptions set forth or
referred to herein.
For the purposes indicated above, and based upon the facts, assumptions
and conditions as set forth herein, and the representations made to us by duly
authorized officers on behalf of the Acquired Fund and the Acquiring Fund in a
letter dated May 27, 1998, it is our opinion that:
1. The acquisition by the Acquiring Fund of substantially all the
assets of the Acquired Fund in exchange solely for Acquiring Fund
voting shares and the assumption by the Acquiring Fund of the Acquired
Fund's liabilities, if any, followed by the distribution by the
Acquired Fund of the Acquiring Fund shares to the shareholders of the
Acquired Fund in exchange for their Acquired Fund shares in complete
liquidation of the Acquired Fund, will constitute a "reorganization"
within the meaning of Section 368(a)(1)(C) of the Internal Revenue Code
of 1986, as amended (the "Code"), and the Acquiring Fund and, the
Acquired Fund will each be "a party to a reorganization" within the
meaning of Section 368(b) of the Code;
2. The Acquired Fund shareholders will recognize no gain or loss
upon the exchange of all of their Acquired Fund shares for Acquiring
Fund shares in complete liquidation of the Acquired Fund (Code Section
354(a)(1));
<PAGE> 3
VEDDER PRICE
Nuveen Flagship Multistate Trust II
Nuveen Flagship New Jersey Municipal Bond Fund
Nuveen Flagship Multistate Trust II
Nuveen Flagship New Jersey Intermediate Municipal Bond Fund
May 27, 1998
Page 3
3. No gain or loss will be recognized by the Acquired Fund upon
the transfer of substantially all its assets to the Acquiring Fund in
exchange solely for Acquiring Fund shares and the assumption by the
Acquiring Fund of the Acquired Fund's liabilities, if any, and with
respect to the subsequent distribution of those Acquiring Fund shares
to the Acquired Fund shareholders in complete liquidation of the
Acquired Fund (Code Section 361);
4. No gain or loss will be recognized by the Acquiring Fund upon
the acquisition of substantially all the Acquired Fund's assets in
exchange solely for Acquiring Fund shares and the assumption of the
Acquired Fund's liabilities, if any (Code Section 1032(a));
5. The basis of the assets acquired by the Acquiring Fund will
be, in each instance, the same as the basis of those assets immediately
before the transfer when such assets were held by the Acquired Fund,
and the holding period of such assets acquired by the Acquiring Fund
will include the holding period thereof when such assets were held by
the Acquired Fund (Code Sections 362(b) and 1223(2));
6. The basis of the Acquiring Fund shares to be received by the
Acquired Fund shareholders upon liquidation of the Acquired Fund will
be, in each instance, the same as the basis of the Acquired Fund shares
surrendered in exchange therefor (Code Section 358(a)(1)); and
7. The holding period of the Acquiring Fund shares to be received
by the Acquired Fund shareholders will include the period during which
the Acquired Fund shares to be surrendered in exchange therefor were
held, provided such Acquired Fund shares were held as capital assets by
those shareholders on the date of the exchange (Code Section 1223(1)).
FACTS
Our opinion is based upon the above referenced representations and the
following facts and assumptions, any alteration of which could adversely affect
our conclusions.
<PAGE> 4
VEDDER PRICE
Nuveen Flagship Multistate Trust II
Nuveen Flagship New Jersey Municipal Bond Fund
Nuveen Flagship Multistate Trust II
Nuveen Flagship New Jersey Intermediate Municipal Bond Fund
May 27, 1998
Page 4
The Acquired Fund has been registered and operated since it commenced
operations as a series of an open-end, management investment company under the
Investment Company Act of 1940, 15 U.S.C. Section 80a, et seq. (the "1940 Act").
The Acquired Fund has qualified and will qualify as a regulated investment
company under Section 851 of the Code for each of its taxable years, and has
distributed and will distribute all or substantially all its income so that it
and its shareholders have been and will be taxed in accordance with Section 852
of the Code.
The Acquiring Fund is registered, has operated, and will continue to
operate as a series of an open-end, management investment company under the 1940
Act. It has qualified as a regulated investment company under Section 851 of the
Code for each of its taxable years and anticipates so qualifying for all future
years, and has distributed and will distribute all or substantially all its
income so that it and its shareholders will be taxed in accordance with Section
852 of the Code.
Upon satisfaction of certain terms and conditions set forth in the Plan
on or before the Effective Time, the following will occur: (a) the Acquiring
Fund will acquire substantially all the assets of the Acquired Fund in exchange
for the Acquiring Fund's assumption of substantially all the liabilities of the
Acquired Fund and the issuance of Acquiring Fund shares to the Acquired Fund;
(b) the Acquiring Fund shares will be distributed to the shareholders of the
Acquired Fund in exchange for their Acquired Fund shares; and (c) the Acquired
Fund will be dissolved and liquidated. The assets of the Acquired Fund to be
acquired by the Acquiring Fund consist primarily of bonds whose interest is
exempt from federal income taxation, cash and other securities held in the
Acquired Fund's portfolio.
As soon as practicable after the Effective Time, the Acquired Fund will
be liquidated and will distribute the newly issued Acquiring Fund shares it
receives pro rata to its shareholders of record in exchange for such
shareholders' interests in the Acquired Fund. The liquidation and distribution
will be accomplished by opening accounts on the books of the Acquiring Fund in
the names of the shareholders of the Acquired Fund (on a class by class basis)
and transferring to those shareholder accounts the pro rata number of Acquiring
Fund shares of each respective class as was previously credited to the Acquired
Fund on the books.
<PAGE> 5
VEDDER PRICE
Nuveen Flagship Multistate Trust II
Nuveen Flagship New Jersey Municipal Bond Fund
Nuveen Flagship Multistate Trust II
Nuveen Flagship New Jersey Intermediate Municipal Bond Fund
May 27, 1998
Page 5
As a result of the Reorganization, every shareholder of the Acquired
Fund will own Acquiring Fund shares that would have an aggregate per share net
asset value immediately after the Effective Time equal to the aggregate per
share net asset value of that shareholder's Acquired Fund shares immediately
prior to the Effective Time. Since the Acquiring Fund shares issued to the
shareholders of the Acquired Fund will be issued at net asset value in exchange
for the net assets of the Acquired Fund having a value equal to the aggregate
per share net asset value of those Acquiring Fund shares so issued, the net
asset value of the Acquiring Fund shares should remain virtually unchanged by
the Reorganization.
The investment objectives of the Acquiring Fund will be substantially
similar to those of the Acquired Fund and the Acquiring Fund will continue the
historic business of the Acquired Fund or use a significant portion of the
Acquired Fund's historic assets in its business.
The management of the Acquired Fund has represented to us that, to the
best of their knowledge, there is no current plan or intention on the part of
any Acquired Fund shareholders to sell, exchange, or otherwise dispose of a
number of Acquiring Fund shares received in the Reorganization that would reduce
the ownership by shareholders of the Acquired Fund to a number of shares of
Acquiring Fund having a value, as of the Effective Time, of less than 50 percent
of all the formerly outstanding shares of the Acquired Fund as of the same time.
In issuing our opinion, we have assumed that there is, in fact, no such plan or
intention. If such assumption were inaccurate, it could adversely affect the
opinions contained herein.
In approving the Reorganization, the Board of Trustees of the Trust
identified certain benefits that are likely to result from combining the funds,
including administrative and operating efficiencies and greater portfolio
diversity. The Board also considered the possible risks and costs of combining
the funds and determined that the Reorganization is likely to provide benefits
to the shareholders of the fund that outweigh the costs incurred.
<PAGE> 6
VEDDER PRICE
Nuveen Flagship Multistate Trust II
Nuveen Flagship New Jersey Municipal Bond Fund
Nuveen Flagship Multistate Trust II
Nuveen Flagship New Jersey Intermediate Municipal Bond Fund
May 27, 1998
Page 6
CONCLUSION
Based on the foregoing, it is our opinion that the acquisition by the
Acquiring Fund, pursuant to the Plan, of substantially all the assets and
liabilities of the Acquired Fund in exchange for voting shares of the Acquiring
Fund will qualify as a reorganization under Code Section 368(a)(1)(C).
Our opinions set forth above with respect to (1) the nonrecognition of
gain or loss to the Acquired Fund and the Acquiring Fund, (2) the basis and
holding period of the assets received by the Acquiring Fund, (3) the
nonrecognition of gain or loss to the Acquired Fund shareholders upon the
receipt of the Acquiring Fund shares, and (4) the basis and holding period of
the Acquiring Fund shares received by the Acquired Fund shareholders, follow as
a matter of law from the opinion that the acquisition under the Plan will
qualify as a reorganization under Code Section 368(a)(1)(C).
The opinions expressed in this letter are based on the Code, the Income
Tax Regulations promulgated by the Treasury Department thereunder and judicial
authority reported as of the date hereof. We have also considered the position
of the Internal Revenue Service (the "Service") reflected in published and
private rulings. Although we are not aware of any pending changes to these
authorities that would alter our opinions, there can be no assurances that
future legislative or administrative changes, court decisions or Service
interpretations will not significantly modify the statements or opinions
expressed herein.
Our opinions are limited to those federal income tax issues
specifically considered herein and are addressed to and are only for the benefit
of the Acquired Fund, the Trust, and the Acquiring Fund. We do not express any
opinion as to any other federal income tax issues, or any state or local law
issues, arising from the transactions contemplated by the Plan. Although the
discussion herein is based upon our best interpretation of existing sources of
law and expresses what we believe a court would properly conclude if presented
with these issues, no assurance can be given that such interpretations would be
followed if they were to become the subject of judicial or administrative
proceedings.
<PAGE> 7
VEDDER PRICE
Nuveen Flagship Multistate Trust II
Nuveen Flagship New Jersey Municipal Bond Fund
Nuveen Flagship Multistate Trust II
Nuveen Flagship New Jersey Intermediate Municipal Bond Fund
May 27, 1998
Page 7
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to the use of our name under the captions "Proposal
No. 1 - The Proposed Reorganization - Certain Federal Income Tax Consequences"
and "Legal Matters" in the Prospectus/Proxy Statement contained in such
Registration Statement. In giving such consent, we do not thereby concede that
we are within the category of persons whose consent is required under Section 7
of the Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission thereunder.
Very truly yours,
VEDDER, PRICE, KAUFMAN & KAMMHOLZ
<PAGE> 1
EXHIBIT 14
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated April 15, 1998, and to all references to our Firm included in or made a
part of this registration statement of Nuveen Flagship Multistate Trust II
(comprising the Nuveen Flagship New Jersey and New Jersey Intermediate
Municipal Bond Funds).
ARTHUR ANDERSEN LLP
Chicago, Illinois
May 21,1998
<PAGE> 1
EXHIBIT 16(a)
NUVEEN FLAGSHIP MUNICIPAL TRUST
NUVEEN FLAGSHIP MULTISTATE TRUST II
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a trustee of the
above-referenced trusts, hereby constitutes and appoints TIMOTHY R.
SCHWERTFEGER, ALAN G. BERKSHIRE, and GIFFORD R. ZIMMERMAN, and each of them
(with full power to each of them to act alone) his true and lawful
attorney-in-fact and agent, for him on his behalf and in his name, place and
stead, in any and all capacities, to sign, execute and affix his seal thereto
and file one or more Registration Statements on Form N-14 under the Securities
Act of 1933, as amended, and the Investment Company Act of 1940, as amended,
including any amendment or amendments thereto, with all exhibits, and any and
all other documents required to be filed with any regulatory authority, federal
or state, relating to the reorganization, without limitation, granting unto
said attorneys, and each of them, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about
the premises in order to effectuate the same as fully to all intents and
purposes as he might or could do if personally present, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned trustee of the above-referenced
organization has hereunto set his hand this 25th day of April, 1998.
/s/ Anthony T. Dean
-------------------
Anthony T. Dean
STATE OF ILLINOIS )
)SS
COUNTY OF COOK )
On this 25th day of April, 1998, personally appeared before me, a Notary Public
in and for said County and State, the person named above who is known to me to
be the person whose name and signature is affixed to the foregoing Power of
Attorney and who acknowledged the same to be his voluntary act and deed for the
intent and purposes therein set forth.
"OFFICIAL SEAL"
Virginia L. Corcoran /s/ Virginia L. Corcoran
Notary Public, State of Illinois ------------------------
My Commission Expires: 10/27/01 Notary Public
<PAGE> 1
EXHIBIT 16(b)
NUVEEN FLAGSHIP MUNICIPAL TRUST
NUVEEN FLAGSHIP MULTISTATE TRUST II
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a trustee of the
above-referenced trusts, hereby constitutes and appoints ANTHONY T. DEAN, ALAN
G. BERKSHIRE, and GIFFORD R. ZIMMERMAN, and each of them (with full power to
each of them to act alone) his true and lawful attorney-in-fact and agent, for
him on his behalf and in his name, place and stead, in any and all capacities,
to sign, execute and affix his seal thereto and file one or more Registration
Statements on Form N-14 under the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended, including any amendment or
amendments thereto, with all exhibits, and any and all other documents required
to be filed with any regulatory authority, federal or state, relating to the
reorganization, without limitation, granting unto said attorneys, and each of
them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises in order to
effectuate the same as fully to all intents and purposes as he might or could
do if personally present, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned trustee of the above-referenced
organization has hereunto set his hand this 25th day of April, 1998.
/s/ Timothy R. Schwertfeger
----------------------------
Timothy R. Schwertfeger
STATE OF ILLINOIS )
)SS
COUNTY OF COOK )
On this 25th day of April, 1998, personally appeared before me, a Notary Public
in and for said County and State, the person named above who is known to me to
be the person whose name and signature is affixed to the foregoing Power of
Attorney and who acknowledged the same to be his voluntary act and deed for the
intent and purposes therein set forth.
"OFFICIAL SEAL"
Virginia L. Corcoran /s/ Virginia L. Corcoran
Notary Public, State of Illinois ------------------------
My Commission Expires: 10/27/01 Notary Public
<PAGE> 1
EXHIBIT 16(c)
NUVEEN FLAGSHIP MUNICIPAL TRUST
NUVEEN FLAGSHIP MULTISTATE TRUST II
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a trustee of the
above-referenced trusts, hereby constitutes and appoints TIMOTHY R.
SCHWERTFEGER, ANTHONY T. DEAN, ALAN G. BERKSHIRE, and GIFFORD R. ZIMMERMAN,
and each of them (with full power to each of them to act alone) his true and
lawful attorney-in-fact and agent, for him on his behalf and in his name, place
and stead, in any and all capacities, to sign, execute and affix his seal
thereto and file one or more Registration Statements on Form N-14 under the
Securities Act of 1933, as amended, and the Investment Company Act of 1940, as
amended, including any amendment or amendments thereto, with all exhibits, and
any and all other documents required to be filed with any regulatory authority,
federal or state, relating to the reorganization, without limitation, granting
unto said attorneys, and each of them, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises in order to effectuate the same as fully to all intents and
purposes as he might or could do if personally present, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned trustee of the above-referenced
organization has hereunto set his hand this 25th day of April, 1998.
/s/ Robert P. Bermner
----------------------------
Robert P. Bermner
STATE OF ILLINOIS )
)SS
COUNTY OF COOK )
On this 25th day of April, 1998, personally appeared before me, a Notary Public
in and for said County and State, the person named above who is known to me to
be the person whose name and signature is affixed to the foregoing Power of
Attorney and who acknowledged the same to be his voluntary act and deed for the
intent and purposes therein set forth.
"OFFICIAL SEAL"
Virginia L. Corcoran /s/ Virginia L. Corcoran
Notary Public, State of Illinois ------------------------
My Commission Expires: 10/27/01 Notary Public
<PAGE> 1
EXHIBIT 16(d)
NUVEEN FLAGSHIP MUNICIPAL TRUST
NUVEEN FLAGSHIP MULTISTATE TRUST II
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a trustee of the
above-referenced trusts, hereby constitutes and appoints TIMOTHY R.
SCHWERTFEGER, ANTHONY T. DEAN, ALAN G. BERKSHIRE, and GIFFORD R. ZIMMERMAN,
and each of them (with full power to each of them to act alone) his true and
lawful attorney-in-fact and agent, for him on his behalf and in his name, place
and stead, in any and all capacities, to sign, execute and affix his seal
thereto and file one or more Registration Statements on Form N-14 under the
Securities Act of 1933, as amended, and the Investment Company Act of 1940, as
amended, including any amendment or amendments thereto, with all exhibits, and
any and all other documents required to be filed with any regulatory authority,
federal or state, relating to the reorganization, without limitation, granting
unto said attorneys, and each of them, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises in order to effectuate the same as fully to all intents and
purposes as he might or could do if personally present, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned trustee of the above-referenced
organization has hereunto set his hand this 25th day of April, 1998.
/s/ Lawrence H. Brown
----------------------------
Lawrence H. Brown
STATE OF ILLINOIS )
)SS
COUNTY OF COOK )
On this 25th day of April, 1998, personally appeared before me, a Notary Public
in and for said County and State, the person named above who is known to me to
be the person whose name and signature is affixed to the foregoing Power of
Attorney and who acknowledged the same to be his voluntary act and deed for the
intent and purposes therein set forth.
"OFFICIAL SEAL"
Virginia L. Corcoran /s/ Virginia L. Corcoran
Notary Public, State of Illinois ------------------------
My Commission Expires: 10/27/01 Notary Public
<PAGE> 1
EXHIBIT 16(e)
NUVEEN FLAGSHIP MUNICIPAL TRUST
NUVEEN FLAGSHIP MULTISTATE TRUST II
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a trustee of the
above-referenced trusts, hereby constitutes and appoints TIMOTHY R.
SCHWERTFEGER, ANTHONY T. DEAN, ALAN G. BERKSHIRE, and GIFFORD R. ZIMMERMAN,
and each of them (with full power to each of them to act alone) his true and
lawful attorney-in-fact and agent, for him on his behalf and in his name, place
and stead, in any and all capacities, to sign, execute and affix his seal
thereto and file one or more Registration Statements on Form N-14 under the
Securities Act of 1933, as amended, and the Investment Company Act of 1940, as
amended, including any amendment or amendments thereto, with all exhibits, and
any and all other documents required to be filed with any regulatory authority,
federal or state, relating to the reorganization, without limitation, granting
unto said attorneys, and each of them, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises in order to effectuate the same as fully to all intents and
purposes as he might or could do if personally present, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned trustee of the above-referenced
organization has hereunto set his hand this 25th day of April, 1998.
/s/ Anne E. Impellizzeri
----------------------------
Anne E. Impellizzeri
STATE OF ILLINOIS )
)SS
COUNTY OF COOK )
On this 25th day of April, 1998, personally appeared before me, a Notary Public
in and for said County and State, the person named above who is known to me to
be the person whose name and signature is affixed to the foregoing Power of
Attorney and who acknowledged the same to be his voluntary act and deed for the
intent and purposes therein set forth.
"OFFICIAL SEAL"
Virginia L. Corcoran /s/ Virginia L. Corcoran
Notary Public, State of Illinois ------------------------
My Commission Expires: 10/27/01 Notary Public
<PAGE> 1
EXHIBIT 16(f)
NUVEEN FLAGSHIP MUNICIPAL TRUST
NUVEEN FLAGSHIP MULTISTATE TRUST II
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a trustee of the
above-referenced trusts, hereby constitutes and appoints TIMOTHY R.
SCHWERTFEGER, ANTHONY T. DEAN, ALAN G. BERKSHIRE, and GIFFORD R. ZIMMERMAN,
and each of them (with full power to each of them to act alone) his true and
lawful attorney-in-fact and agent, for him on his behalf and in his name, place
and stead, in any and all capacities, to sign, execute and affix his seal
thereto and file one or more Registration Statements on Form N-14 under the
Securities Act of 1933, as amended, and the Investment Company Act of 1940, as
amended, including any amendment or amendments thereto, with all exhibits, and
any and all other documents required to be filed with any regulatory authority,
federal or state, relating to the reorganization, without limitation, granting
unto said attorneys, and each of them, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises in order to effectuate the same as fully to all intents and
purposes as he might or could do if personally present, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned trustee of the above-referenced
organization has hereunto set his hand this 25th day of April, 1998.
/s/ Peter R. Sawers
----------------------------
Peter R. Sawers
STATE OF ILLINOIS )
)SS
COUNTY OF COOK )
On this 25th day of April, 1998, personally appeared before me, a Notary Public
in and for said County and State, the person named above who is known to me to
be the person whose name and signature is affixed to the foregoing Power of
Attorney and who acknowledged the same to be his voluntary act and deed for the
intent and purposes therein set forth.
"OFFICIAL SEAL"
Virginia L. Corcoran /s/ Virginia L. Corcoran
Notary Public, State of Illinois ------------------------
My Commission Expires: 10/27/01 Notary Public
<PAGE> 1
EXHIBIT 16(g)
NUVEEN FLAGSHIP MUNICIPAL TRUST
NUVEEN FLAGSHIP MULTISTATE TRUST II
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a trustee of the
above-referenced trusts, hereby constitutes and appoints TIMOTHY R.
SCHWERTFEGER, ANTHONY T. DEAN, ALAN G. BERKSHIRE, and GIFFORD R. ZIMMERMAN,
and each of them (with full power to each of them to act alone) his true and
lawful attorney-in-fact and agent, for him on his behalf and in his name, place
and stead, in any and all capacities, to sign, execute and affix his seal
thereto and file one or more Registration Statements on Form N-14 under the
Securities Act of 1933, as amended, and the Investment Company Act of 1940, as
amended, including any amendment or amendments thereto, with all exhibits, and
any and all other documents required to be filed with any regulatory authority,
federal or state, relating to the reorganization, without limitation, granting
unto said attorneys, and each of them, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises in order to effectuate the same as fully to all intents and
purposes as he might or could do if personally present, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned trustee of the above-referenced
organization has hereunto set his hand this 25th day of April, 1998.
/s/ William J. Schneider
----------------------------
William J. Schneider
STATE OF ILLINOIS )
)SS
COUNTY OF COOK )
On this 25th day of April, 1998, personally appeared before me, a Notary Public
in and for said County and State, the person named above who is known to me to
be the person whose name and signature is affixed to the foregoing Power of
Attorney and who acknowledged the same to be his voluntary act and deed for the
intent and purposes therein set forth.
"OFFICIAL SEAL"
Virginia L. Corcoran /s/ Virginia L. Corcoran
Notary Public, State of Illinois ------------------------
My Commission Expires: 10/27/01 Notary Public
<PAGE> 1
EXHIBIT 16(h)
NUVEEN FLAGSHIP MUNICIPAL TRUST
NUVEEN FLAGSHIP MULTISTATE TRUST II
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a trustee of the
above-referenced trusts, hereby constitutes and appoints TIMOTHY R.
SCHWERTFEGER, ANTHONY T. DEAN, ALAN G. BERKSHIRE, and GIFFORD R. ZIMMERMAN,
and each of them (with full power to each of them to act alone) his true and
lawful attorney-in-fact and agent, for him on his behalf and in his name, place
and stead, in any and all capacities, to sign, execute and affix his seal
thereto and file one or more Registration Statements on Form N-14 under the
Securities Act of 1933, as amended, and the Investment Company Act of 1940, as
amended, including any amendment or amendments thereto, with all exhibits, and
any and all other documents required to be filed with any regulatory authority,
federal or state, relating to the reorganization, without limitation, granting
unto said attorneys, and each of them, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises in order to effectuate the same as fully to all intents and
purposes as he might or could do if personally present, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned trustee of the above-referenced
organization has hereunto set his hand this 25th day of April, 1998.
/s/ Judith M. Stockdale
----------------------------
Judith M. Stockdale
STATE OF ILLINOIS )
)SS
COUNTY OF COOK )
On this 25th day of April, 1998, personally appeared before me, a Notary Public
in and for said County and State, the person named above who is known to me to
be the person whose name and signature is affixed to the foregoing Power of
Attorney and who acknowledged the same to be his voluntary act and deed for the
intent and purposes therein set forth.
"OFFICIAL SEAL"
Virginia L. Corcoran /s/ Virginia L. Corcoran
Notary Public, State of Illinois ------------------------
My Commission Expires: 10/27/01 Notary Public
<PAGE> 1
- Please fold and detach at perforation. Return the Proxy Ballot only. -
PROXY PROXY
PROXY SOLICITED BY THE BOARD OF TRUSTEES
FOR THE SPECIAL MEETING OF SHAREHOLDERS OF THE NUVEEN
FLAGSHIP NEW JERSEY INTERMEDIATE MUNICIPAL BOND FUND TO BE HELD
ON AUGUST 13, 1998
The undersigned hereby appoints Timothy R. Schwertfeger, Anthony T. Dean, Alan
G. Berkshire and Gifford R. Zimmerman and each of them, with full powers of
substitution, Proxies for the undersigned to represent and vote the shares of
the undersigned at the Special Meeting of Shareholders of Nuveen Flagship
New Jersey Intermediate Municipal Bond Fund, a series of the Nuveen Flagship
Multistate Trust II to be held on August 13, 1998, or any adjournment or
adjournments thereof as indicated on the reverse side.
PLEASE BE SURE TO SIGN YOUR PROXY BALLOT ON THE REVERSE SIDE
<PAGE> 2
PROXY SOLICITED BY THE BOARD OF TRUSTEES
FOR THE JOINT SPECIAL MEETING OF SHAREHOLDERS OF THE NUVEEN FLAGSHIP
NEW JERSEY INTERMEDIATE MUNICIPAL BOND FUND
TO BE HELD ON AUGUST 13, 1998
<TABLE>
<CAPTION>
<S><C>
AT THE UPCOMING SPECIAL MEETING, SHAREHOLDERS WILL BE ASKED TO APPROVE A
REORGANIZATION OF NUVEEN FLAGSHIP NEW JERSEY INTERMEDIATE
MUNICIPAL BOND FUND INTO THE NUVEEN FLAGSHIP NEW JERSEY MUNICIPAL BOND FUND
AND OTHER MATTERS IN CONNECTION WITH THE REORGANIZATION. PLEASE REFER TO
THE ACCOMPANYING PROXY STATEMENT/PROSPECTUS AND CAST YOUR VOTE ON THE
PROXY BALLOT.
WHETHER OR NOT YOU PLAN TO JOIN US AT THE MEETING, PLEASE SIGN, DATE AND VOTE
THE PROXY BALLOT AND RETURN IT TO OUR PROXY TABULATOR IN THE ENCLOSED
POSTAGE-PAID ENVELOPE. PLEASE SPECIFY YOUR CHOICE BY MARKING THE APPROPRIATE
BOX ON THE PROXY BALLOT. IF YOU DO NOT MARK ANY BOXES, YOUR PROXY WILL BE
VOTED IN ACCORDANCE WITH THE BOARD OF TRUSTEES' RECOMMENDATIONS.
NOTE: YOUR PROXY IS NOT VALID UNLESS IT IS
SIGNED. Please sign exactly as your name(s)
appears on the Proxy Ballot. If signing for
estates, trusts or corporations, title or capacity
should be stated. If shares are held jointly,
either holder should sign.
PROPOSAL:
1. To approve an Agreement and Plan of Reorganization pursuant to which the Nuveen Flagship New Jersey Intermediate
Municipal Bond Fund (the "New Jersey Intermediate Fund") would (i) transfer all of its assets to the Nuveen Flagship New
Jersey Municipal Bond Fund (the "New Jersey Fund") in exchange solely for Class A, C and R shares of beneficial interest
of the New Jersey Fund and the New Jersey Fund's assumption of the liabilities of the New Jersey Intermediate Fund,
(ii) distribute such shares of the New Jersey Fund to the holders of shares of the New Jersey Intermediate Fund and
(iii) be liquidated, dissolved and terminated as a series of the Multistate Trust in accordance with the Trust's
Declaration of Trust.
2. To ratify the selection of Arthur Andersen LLP as independent auditors for the fiscal year ending February 28, 1999.
3. In their discretion, the Proxies indicated on the reverse side of the Proxy Ballot are authorized to vote upon such
other matters as may properly come before the Special Meeting.
- Please fold and detach at perforation. Return the Proxy Ballot only. -
NUVEEN FLAGSHIP NEW JERSEY INTERMEDIATE MUNICIPAL BOND FUND
PROXY BALLOT
FOR AGAINST ABSTAIN
1. Approval of Agreement and Plan of Reorganization. [ ] [ ] [ ]
2. Ratification of the selection of independent auditors. [ ] [ ] [ ]
3. In their discretion, the Proxies are authorized to
vote on such other business as may come before the
Meeting.
Date:__________________________1998
___________________________________
___________________________________
Signature(s)
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