<PAGE>
NUVEEN
Municipal
Bond Funds
May 31, 1997
Annual Report
Dependable, tax-free income
to help you keep more of
what you earn.
Louisiana
[PHOTO APPEARS HERE]
<PAGE>
Contents
1 Dear Shareholder
3 Answering Your Questions
6 Louisiana Overview
9 Financial Section
29 Shareholder Meeting Report
32 Shareholder Information
33 Fund Information
<PAGE>
[PHOTO OF TIMOTHY R. SCHWERTFEGER APPEARS HERE]
Timothy R. Schwertfeger
Dear Shareholder
It's a pleasure to report to you on the performance of the Nuveen Flagship
Louisiana Municipal Bond Fund. Over the past year, the fund posted sizable
gains. For the fiscal year ended May 31, 1997, the value of your investment rose
9.37% for Class A shares if you chose to reinvest your tax-free income
dividends.
Over this 12-month period, the total return performance for the fund (with
income reinvested) outpaced the 8.28% increase produced by the Lehman Brothers
Municipal Bond Index, which is used to represent the broad municipal bond market
on an unmanaged basis.
In addition to substantial total returns, shareholders continue to enjoy very
attractive current yields generated by a portfolio of quality bonds, which
provide excellent income for investors. As of May 31, 1997, shareholders were
receiving tax-free yields on net asset value of 5.10% for Class A shares. To
match this yield, investors in the 34% combined federal and state income tax
bracket would have had to earn at least 7.73% on taxable alternatives.
These results were produced against a backdrop of continued economic expansion
and the lowest unemployment rates in almost two decades, a combination that in
the past has foreshadowed an increase in inflation. In March, the Federal
Reserve made a pre-emptive strike by raising short-term interest rates by 0.25%,
but then maintained the status quo at its May and July meetings. Overall market
returns continue to be good, but fear of inflation has hampered the performance
of municipals and led to increased volatility in both the equity and bond
markets.
1
<PAGE>
"In addition to substantial total returns, shareholders continue to enjoy very
attractive current yields generated by a portfolio of quality bonds."
During this time, bonds have often been the bellwether for the direction of
stocks. Whenever inflation talk is at its most rampant, the stock market has
kept an eye on the bond market for its response before reacting.
In the first six months of the year, the markets also focused on fiscal issues,
including the federal budget accord and discussion of plans to reduce taxes and
eliminate the deficit. The economy appeared to be moderating, corporate earnings
reports continued to exhibit strength, and interest rates fell in the second
quarter. All of this was positive news. The net effect is that the markets are
better off now than at the beginning of the year, but the volatility experienced
in getting there has been significant.
Recently, the need for diversification and a renewed emphasis on asset
allocation -- as well as attractive yields -- have sparked increased interest in
tax-free investments. The current level of the stock market reminds investors to
re-allocate profits to other segments of the market in order to limit risk.
Nuveen municipal bond funds provide an excellent lower-risk alternative, and
their current yields make them very attractive.
On behalf of everyone at Nuveen, I thank you for your confidence in us and our
family of investments. You can continue to depend on us for high-quality
investments that withstand the test of time. We look forward to reporting to you
again in six months.
Sincerely,
/s/ Timothy R. Schwertfeger
Timothy R. Schwertfeger
Chairman of the Board
July 15, 1997
2
<PAGE>
[PHOTO OF TED NEILD APPEARS HERE]
Ted Neild, head of Nuveen's Dayton-based portfolio management team, talks about
the municipal bond market and offers insights into factors that affected fund
performance over the past year.
Answering Your Questions
What are the investment objectives of the fund?
The fund aims to provide investors with a high level of tax-free income while
preserving capital by investing in a diversified portfolio of high-quality
municipal bonds. To that end, we attempt to maximize the fund's after-
tax total return by generating high tax-free income and minimizing the
distribution of taxable capital gains when possible.
What is your strategy for meeting these objectives?
To meet this fund's objectives of income and enhanced value, our portfolio
management strategy relies on conservative value investing principles, sound
research and credit surveillance activities, and senior management involvement.
At Nuveen, value investing means taking a fundamental approach to finding bonds
that offer the best balance of high potential return with low risk regardless of
the direction of interest rates. This approach focuses on the characteristics of
individual bonds, such as sector, geographic region, structure and intrinsic
credit quality, rather than on the general economic environment. The idea behind
this philosophy is that we, as investment managers, can control the selection
process, but not the direction of the economy as a whole.
What key economic factors affected the fund's performance during the year?
The U.S. economy continued to grow, exhibiting low unemployment, increased
manufacturing and construction activity, and lack of price pressure at the
consumer and producer levels. The fund had the added advantage of
3
<PAGE>
"At Nuveen, value investing means taking a fundamental approach to finding bonds
that offer the best balance of high potential return with low risk regardless of
the direction of interest rates."
operating in a healthy supply environment, where securities were available as
needed.
Given this market environment, how did the fund perform?
The Louisiana Municipal Bond fund performed well over the past year, rewarding
investors with a total return on net asset value for the year of 9.37% for Class
A shares, including price changes and reinvested dividends. Additionally, the
fund was ranked number one among 13 Louisiana municipal bond funds for the one-
year period by Lipper Analytical Services, a nationally recognized
performance measurement service.
What strategies did you employ to add value?
As the spread between yields on higher and lower quality bonds continued to
narrow during the year, we were able to enhance the credit quality of the fund
without sacrificing yield. We also focused on purchasing bonds with strong call
protection, which resulted in healthy appreciation for the fund as interest
rates generally fell over the period.
What is the current status of Louisiana's municipal market?
The supply of Louisiana bonds has been tight over the past year. Issuance is
down 23.5%, from a volume of $1.2 billion in the first half of 1996 to $891
million in the first half of 1997. Municipal financial operations in the state
have stabilized somewhat in recent years, with debt levels moderating. The
declining debt levels are partly due to the retirement of bonds once issued by
the Louisiana Recovery District to compensate for deficits experienced in the
1980s. Louisiana's healthcare market continues to be rather volatile. The
increased presence of managed care programs and strong for-profit healthcare
providers have squeezed reimbursement levels, particularly in the New Orleans
metro area. In addition, proposed reductions in federal Medicaid funds threaten
to leave the state with greatly increased payment obligations.
4
<PAGE>
What is the current outlook for the municipal market as a whole?
As we make our way through the seventh year of the current economic expansion,
some observers believe that a fundamental shift may have occurred in our
economy. Based on past experience and months of reports of economic growth,
especially employment statistics, the markets have long been anticipating an
increase in inflation. However, even with almost full employment, we have not
seen the expected rise in hourly wages that would be considered inflationary.
This change in the traditional economic cause-and-effect relationship has been
variously attributed to the globalization of the economy and consequent
competitive pressures, to increased use of technology, and to corporations'
recent ability to downsize as necessary. Although structural changes in the
economy appear to have suspended the relationship between faster growth and
higher inflation, the risk remains that inflation may reassert itself if
capacity constraints are reached and resources are stretched too thin.
Talk of Fed tightening will continue. If the Fed does act to increase rates, it
will be perceived as a move against inflation. If the Fed does not tighten, it
will be seen as an indication that the economy is doing well.
Nonetheless, for the remainder of 1997, the municipal market should continue to
offer the attractive yields and tax advantages that make it a good alternative
if and when a correction in the stock market occurs. While money continues to
flow into equity mutual funds, investors are also beginning to evaluate the
effect of the huge run-up in stock prices on their asset allocation, and many
are rebalancing their portfolios by shifting some assets into bonds.
5
<PAGE>
Louisiana
Overview
- ---------------------------------------------------
- ---------------------------------------------------
Credit Quality
- ---------------------------------------------------
[PIE CHART APPEARS HERE]
BBB/NR 20%
A 11%
AA 9%
AAA/Pre-refunded 60%
- ---------------------------------------------------
- ---------------------------------------------------
Diversification
- ---------------------------------------------------
[PIE CHART APPEARS HERE]
Hospitals 26%
Escrowed Bonds 9%
Other 4%
Tax Revenue 7%
Housing Facilities 9%
General Obligations 17%
Pollution Control 22%
Lease Rental 3%
Education 3%
- ---------------------------------------------------
<TABLE>
<CAPTION>
Fund Highlights
===============================================================================
Share Class A B C R
<S> <C> <C> <C> <C>
Inception Date 9/89 2/97 2/94 2/97
- -------------------------------------------------------------------------------
Net Asset Value (NAV) $11.10 $11.09 $11.09 $ 11.09
===============================================================================
Total Net Assets ($000) $84,593
- -------------------------------------------------------------------------------
Average Weighted Maturity (years) 22.15
- -------------------------------------------------------------------------------
Duration (years) 8.69
===============================================================================
Annualized Total Return/1/
- --------------------------------------------------------------------------------
Share Class A(NAV) A(Offer) B C R
<S> <C> <C> <C> <C> <C>
1-Year 9.37% 4.78% 8.61% 8.78% 9.33%
- --------------------------------------------------------------------------------
5-Year 7.57% 6.65% 6.96% 6.97% 7.56%
- --------------------------------------------------------------------------------
Since Inception 8.34% 7.74% 7.73% 7.73% 8.33%
================================================================================
Tax-Free Yields
================================================================================
Share Class A(NAV) A(Offer) B C R
<S> <C> <C> <C> <C> <C>
Dist Rate 5.30% 5.07% 4.56% 4.74% 5.50%
- --------------------------------------------------------------------------------
SEC 30-Day Yld 5.10% 4.88% 4.36% 4.55% 5.71%
- --------------------------------------------------------------------------------
Taxable Equiv Yld/2/ 7.73% 7.39% 6.61% 6.89% 8.65%
================================================================================
</TABLE>
1 Returns of the oldest share class of a fund are actual. Returns for other
classes are actual for the period since inception and prior to class
inception are the returns for the fund's oldest class, adjusted for
differences in sales charges and expenses. Class A shares have an initial
sales charge, while Class B, C and R shares have no initial sales charge.
Class B shares have a CDSC that declines from 5% to 0% after 6 years. Class C
shares have a 1% CDSC for redemptions within one year. Returns do not reflect
imposition of the CDSC. Giving effect to the CDSC applicable to Class B
shares, the 1-year, 5-year, and since inception total returns above would be
4.61%, 6.80%, and 7.73%, respectively.
2 Based on SEC yield and a combined federal and state income tax rate of 34%.
Represents the yield on a taxable investment necessary to equal the yield of
the Nuveen fund on an after-tax basis.
6
<PAGE>
Nuveen Flagship Louisiana Municipal Bond Fund
May 31, 1997 Annual Report
* The Index Comparison shows change in value of a $10,000 investment in the 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.
Index Comparison*
[LINE CHART APPEARS HERE]
<TABLE>
<CAPTION>
Nuveen Flagship Nuveen Flagship
Lehman Brothers Louisiana Municipal Bond Louisiana Municipal Bond
Municipal Bond Index Fund (NAV) Fund (Offer)
<S> <C> <C>
September 1989 10,000 10,000 9,580
May 1990 10,323.9 10,179.5 9,751.96
May 1991 11,509.7 11,533.5 11,049.1
May 1992 12,604.7 12,659.9 12,128.2
May 1993 14,199.2 14,467.5 13,859.8
May 1994 14,505.1 14,652.4 14,037
May 1995 15,470.2 15,632.7 14,976.1
May 1996 16,700 16,848.7 16,141
May 1997 18,230.5 18,547.8 17,768.8
</TABLE>
Lehman Brothers Municipal Bond Index $18,230
Nuveen Flagship Louisiana Municipal Bond Fund (NAV) $18,548
Nuveen Flagship Louisiana Municipal Bond Fund (Offer) $17,769
Past performance is not predictive of future performance.
Dividend History (A Shares)
[BAR CHART APPEARS HERE]
<TABLE>
<CAPTION>
<S> <C> <C>
June 1996 0.0482 Capital Gain
July 1996 0.0498
August 1996 0.0498
September 1996 0.0482
October 1996 0.0498
November 1996 0.0482
December 1996 0.0498
January 1997 0.04994 0.0025
February 1997 0.049
March 1997 0.049
April 1997 0.049
May 1997 0.049
</TABLE>
Capital Gain
7
<PAGE>
Financial Section
Contents
10 Portfolio of Investments
16 Statement of Net Assets
17 Statement of Operations
18 Statement of Changes in Net Assets
19 Notes to Financial Statements
26 Financial Highlights
28 Independent Auditors' Report
9
<PAGE>
Portfolio of Investments
Nuveen Flagship Louisiana
<TABLE>
<CAPTION>
Principal Optional Call Market
Amount Description Provisions* Ratings** Value
- --------------------------------------------------------------------------------------------------------------------
Education -- 2.6%
<S> <C> <C> <C> <C>
$ 750,000 Louisiana Public Facilities Authority, 10/99 at 102 A+ $ 807,923
Revenue Refunding, Loyola University Project,
89 Issue A, 7.250%, 10/01/09
380,000 Louisiana Public Facilities Authority 4/02 at 102 A+ 416,875
Revenue Refunding, College and University,
Loyola University, 6.750%, 4/01/10
1,000,000 Louisiana, Public Facilities Authority, Revenue, 12/07 at 102 AAA 986,290
Tulane University of Louisiana,
5.600%, 12/15/27 (WI)
- --------------------------------------------------------------------------------------------------------------------
Escrowed to Maturity -- 4.7%
775,000 Louisiana, Public Facilities Authority, Hospital 4/02 at 102 AAA 914,136
Revenue Refunding, Southern Baptist Hospital Inc.
Project, 8.000%, 5/15/12
10,000,000 Louisiana, Public Facilities Authority, Revenue, No Opt. Call AAA 2,786,400
Series B, 0.000%, 12/01/19
250,000 Shreveport, Louisiana, Home Mortgage Authority, No Opt. Call Aaa 276,075
Single Family Mortgage, Revenue, Series A,
6.750%, 9/01/10
- --------------------------------------------------------------------------------------------------------------------
Health Care -- 4.4%
3,000,000 Louisiana, Housing Finance Agency, Mortgage 9/05 at 103 AAA 3,237,030
Revenue, St. Dominic Assisted Care,
6.950%, 9/01/36
500,000 Louisiana, Public Facilities Authority, Revenue, 1/05 at 102 AAA 522,180
Mary Bird Perkins Cancer Center, 6.200%, 1/01/19
- --------------------------------------------------------------------------------------------------------------------
Hospital -- 21.1%
1,125,000 Louisiana, Public Facilities Authority, Hospital 10/02 at 102 A3 1,278,473
Revenue, Woman's Hospital Foundation Project,
7.250%, 10/01/22
Louisiana, Public Facilities Authority, Hospital
Revenue Refunding, Lafayette General Medical
Center Project:
1,000,000 6.400%, 10/01/12 10/02 at 102 AAA 1,065,830
2,000,000 6.500%, 10/01/22 10/02 at 102 AAA 2,153,440
2,750,000 Louisiana, Public Facilities Authority, Hospital 7/07 at 101 AAA 2,625,398
Revenue Refunding, Woman's Hospital
Foundation Project, 5.375%, 10/01/22 (WI)
</TABLE>
10
<PAGE>
Nuveen Municipal Bond Fund
May 31, 1997 Annual Report
<TABLE>
<CAPTION>
Principal Optional Call Market
Amount Description Provisions* Ratings** Value
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Hospitals -- continued
$1,325,000 Louisiana, Public Facilities Authority, Revenue 5/02 at 102 AAA $1,422,056
Refunding, Series B, Alton Ochsner Medical
Foundation Project, 6.500%, 5/15/22
3,400,000 Louisiana, Public Facilities Authority, Revenue No Opt. Call AA 3,174,308
Refunding, Health Facilities, Sister's Mercy,
Series A, 5.000%, 6/01/19
2,500,000 Louisiana, Public Facilities Authority, Revenue, 11/04 at 102 AAA 2,667,525
General Health Inc. Project, 6.375%, 11/01/24
2,180,000 St. Tammany Parish, Louisiana, Hospital Service 10/04 at 102 AAA 2,293,883
District Number 2, Hospital Revenue, Slidell
Memorial Hospital and Medical Center,
Refunding, 6.250%, 10/01/14
1,135,000 Tangipahoa Parish, Louisiana, Hospital Service 2/04 at 102 AAA 1,186,200
District Number 1, Hospital Revenue Refunding,
6.250%, 2/01/24
- --------------------------------------------------------------------------------------------------------------------
Housing/ Multi Family -- 4.6%
750,000 Lake Charles, Louisiana, Non-Profit Housing 8/97 at 100 AAA 764,625
Development Corporation, Mortgage Revenue
Refunding, Chateau Project, Series A,
7.875%, 2/15/25
1,740,000 Louisiana, Housing Finance Agency, Mortgage 1/04 at 101 AAA 1,839,859
Revenue, Villa Maria Retirement Center Project,
7.100%, 1/20/35
735,000 Louisiana, Public Facilities Authority, Revenue, 6/03 at 103 AAA 788,354
Walmsley Housing Corporation, Series A,
7.500%, 6/01/21
500,000 Louisiana, Public Facilities Authority, Revenue, 11/01 at 102 AA 533,560
Multifamily Housing, National Housing
Corporation, 7.750%, 11/01/16
- --------------------------------------------------------------------------------------------------------------------
Housing/ Single Family -- 4.5%
1,260,000 East Baton Rouge, Louisiana, Mortgage Finance 8/00 at 102 Aaa 1,326,087
Authority, Single Family Mortgage Purchase,
Mortgage Backed Securities Program, Series A,
7.875%, 8/01/23
345,000 Louisiana, Housing Finance Agency, Single Family 6/05 at 102 Aaa 354,443
Mortgage Revenue, Series A, Issue 2,
6.550%, 12/01/26
</TABLE>
11
<PAGE>
Portfolio of Investments
Nuveen Flagship Louisiana -- continued
<TABLE>
<CAPTION>
Principal Optional Call Market
Amount Description Provisions* Ratings** Value
- ---------------------------------------------------------------------------------------------------------------------
Housing/Single Family -- continued
<S> <C> <C> <C> <C>
$ 580,000 New Orleans, Louisiana, Home Mortgage 1/00 at 102 Aaa $ 605,276
Authority, Single Family Mortgage Revenue,
Series C, Issue 1, 7.750%, 12/01/22
1,000,000 New Orleans, Louisiana, Home Mortgage Authority, 12/06 at 102 Aaa 993,000
Single Family Mortgage, Revenue, Series A,
6.100%, 12/01/29
281,573 St. Bernard Parish, Louisiana, Home Mortgage No Opt. Call A1 305,306
Authority, Single Family Mortgage, Revenue
Refunding, Series A, 8.000%, 3/25/12
192,004 St. Mary, Louisiana, Public Tollroad Financing No Opt. Call Aaa 209,561
Authority, Single Family Mortgage, Revenue
Refunding, Series A, 7.625%, 3/25/12
- ---------------------------------------------------------------------------------------------------------------------
Industrial Development and Pollution Control -- 21.8%
1,000,000 De Soto Parish, Louisiana, Environmental Improvement, 6/05 at 102 A-- 1,045,890
Revenue Refunding, International Paper Company
Project, Series B, 6.550%, 4/01/19
1,000,000 Lake Charles, Louisiana, Harbor and Terminal District, 12/02 at 102 BBB 1,064,410
Port Facilities, Revenue Refunding, Occidental
Petroleum Corporation, 7.200%, 12/01/20
3,000,000 Lake Charles, Louisiana, Harbor and Terminal District, 8/02 at 103 Baa2 3,407,010
Port Facilities, Revenue Refunding, Trunkline LNG
Company Project, 7.750%, 8/15/22
1,000,000 Louisiana, State Offshore Terminal Authority, 9/00 at 102 A 1,089,510
Deepwater Port, Revenue Refunding, Loop Inc.,
First Stage, Series E, 7.600%, 9/01/10
500,000 Louisiana, State Offshore Terminal Authority, 9/01 at 102 A 549,825
Deepwater Port, Revenue Refunding, Loop Inc.,
First Stage, Series B, 7.200%, 9/01/08
3,000,000 Natchitoches Parish, Louisiana, Solid Waste Disposal, 12/03 at 102 A-- 3,011,940
Revenue, Williamette Industries Project,
5.875%, 12/01/23
2,500,000 St. Bernard Parish, Louisiana, Exempt Facility, 11/06 at 102 AA 2,513,275
Revenue, Mobil Oil Corporation Project, 5.900%,
11/01/26
1,000,000 Saint Charles Parish, Louisiana, Environmental 11/02 at 102 BBB 1,007,260
Improvement, Revenue, Louisiana Power and Light
Company Project, Series A, 6.200%, 5/01/23
1,000,000 Saint Charles Parish, Louisiana, Environmental 11/00 at 102 BBB-- 1,010,220
Improvement, Revenue, Louisiana Power and Light
Company Project, 6.375%, 11/01/25
</TABLE>
12
<PAGE>
Nuveen Municipal Bond Fund
May 31, 1997 Annual Report
<TABLE>
<CAPTION>
Principal Optional Call Market
Amount Description Provisions* Ratings** Value
- --------------------------------------------------------------------------------------------------------------------
Industrial Development and Pollution Control -- continued
<S> <C> <C> <C> <C>
$ 500,000 Saint Charles Parish, Louisiana, Pollution Control, 12/99 at 103 Baa3 $ 546,145
Revenue, Louisiana Power and Light, 2nd Issue,
8.000%, 12/01/14
1,500,000 Saint Charles Parish, Louisiana, Pollution Control, 11/02 at 102 BBB 1,595,895
Revenue, Union Carbide Project,
7.350%, 11/01/22
1,500,000 St. Charles Parish, Louisiana, Solid Waste 12/02 at 102 BBB 1,574,340
Disposal, Revenue, Louisiana Power and Light
Company Project, Series A, 7.000%, 12/01/22
- --------------------------------------------------------------------------------------------------------------------
Municipal Appropriation Obligations -- 2.9%
685,000 Louisiana, Public Facilities Authority, Revenue 8/99 at 101 1/2 AAA 735,697
Refunding, Jefferson Parish Eastbank Project,
7.700%, 8/01/10
1,500,000 Office Facilities Corporation, A Louisiana 12/01 at 103 BBB+ 1,680,750
Non-Profit Corporation, Capital Facilities,
7.750%, 12/01/10
- --------------------------------------------------------------------------------------------------------------------
Municipal Revenue/Other -- 2.6%
2,000,000 New Orleans, Louisiana, Audubon Park Commission, 4/02 at 102 N/R 2,189,820
Aquarium Revenue, Series A,
8.000%, 4/01/12
- --------------------------------------------------------------------------------------------------------------------
Municipal Revenue/Utility -- 0.3%
250,000 Puerto Rico, Electric Power Authority, Power 7/05 at 100 BBB+ 232,720
Revenue (Formerly Puerto Rico
Commonwealth Water Resource Authority
Power), Refunding, Series Z, 5.250%, 7/01/21
- --------------------------------------------------------------------------------------------------------------------
Municipal Revenue/Water and Sewer -- 1.9%
1,500,000 Louisiana, Public Facilities Authority, Revenue, 2/03 at 101 AA-- 1,599,630
Baton Rouge Water Works Company Project,
6.400%, 2/01/10
- --------------------------------------------------------------------------------------------------------------------
Non-State General Obligations -- 15.5%
1,500,000 New Orleans, Louisiana, Public Improvement, 11/05 at 100 AAA 1,524,270
5.900%, 11/01/25
New Orleans, Louisiana, Refunding:
2,000,000 0.000%, 9/01/10 No Opt. Call AAA 969,400
5,785,000 0.000%, 9/01/16 No Opt. Call AAA 1,945,900
</TABLE>
13
<PAGE>
Portfolio of Investments
Nuveen Flagship Louisiana -- continued
<TABLE>
<CAPTION>
Principal Optional Call Market
Amount Description Provisions* Ratings** Value
- --------------------------------------------------------------------------------------------------------------------
Non-State General Obligations -- continued
Orleans Parish, Louisiana, Parishwide
School District:
<S> <C> <C> <C> <C>
$ 1,000,000 5.000%, 9/01/14 9/06 at 100 AAA $ 945,190
3,000,000 5.000%, 9/01/20 3/06 at 100 AAA 2,765,460
13,875,000 Orleans Parish, Louisiana, School Board, Refunding, No Opt. Call AAA 4,974,881
0.000%, 2/01/15
- --------------------------------------------------------------------------------------------------------------------
Pre-refunded -- 3.8%***
500,000 Louisiana, Public Facilities Authority, Revenue 6/99 at 102 Aaa 538,535
Refunding, Sisters of Mercy, Series B,
7.375%, 6/01/19
1,000,000 Louisiana State General Obligation, Series 1990,
7.125%, 9/01/10 9/00 at 102 Aaa 1,097,260
1,400,000 Ouachita Parish, Louisiana, Hospital Service District 7/01 at 102 A 1,569,778
Number 1, Revenue, Glenwood Regional Medical
Center, 7.500%, 7/01/21
- --------------------------------------------------------------------------------------------------------------------
Special Tax Revenue -- 7.1%
1,250,000 East Baton Rouge Parish, Louisiana, Sales and Use 2/03 at 101 1/2 AAA 1,125,863
Tax, Series A, 4.900%, 2/01/18
1,000,000 Jefferson, Louisiana, Sales Tax District, Special 12/02 at 100 AAA 1,091,560
Sales Tax, Revenue, Series B, 6.750%, 12/01/06
1,530,000 Lafayette Parish, Louisiana, School Board, Sales Tax, 4/04 at 101 AAA 1,419,715
Revenue, 4.875%, 4/01/13
750,000 Puerto Rico Commonwealth, Highway and 7/16 at 100 A 729,428
Transportation Authority, Highway Revenue,
Series Y, 5.500%, 7/01/36
1,500,000 Saint John Baptist Parish, Louisiana, Sales Tax 12/99 at 103 Baa 1,624,635
District, Refunding, Series 1989, 7.800%, 12/01/14
- --------------------------------------------------------------------------------------------------------------------
State/Territorial General Obligations -- 0.9%
250,000 Guam Government, Series A, 5.400%, 11/15/18 11/03 at 102 BBB 230,468
500,000 Louisiana, Refunding, Series B, 5.625%, 8/01/13 No Opt. Call AAA 512,260
- --------------------------------------------------------------------------------------------------------------------
$101,728,577 Total Investments -- (cost $78,026,816) -- 98.7% 83,453,033
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
Nuveen Municipal Bond Fund
May 31, 1997 Annual Report
<TABLE>
<CAPTION>
Principal Optional Call Market
Amount Description Provisions* Ratings** Value
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Temporary Investments in Short-Term Municipal Securities --2.6%
$1,500,000 Louisiana Offshore Terminal Authority, Deepwater VMIG-1 $ 1,500,000
Port, Refunding Revenue Bonds (Loop Inc. Project),
1st Stage, Series A, Variable Rate Demand Bonds,
4.050%, 9/01/08+
700,000 Louisiana Offshore Terminal Authority, Deepwater VMIG-1 700,000
Port, Refunding Revenue Bonds (Loop Inc. Project),
ACES, Variable Rate Demand Bonds,
4.000%, 9/01/06+
- --------------------------------------------------------------------------------------------------------------------
$2,200,000 Total Temporary Investments -- 2.6% 2,200,000
- --------------------------------------------------------------------------------------------------------------------
Other Assets Less Liabilities -- (1.3)% (1,060,140)
-------------------------------------------------------------------------------------------
Net Assets -- 100% $84,592,893
===========================================================================================
* Optional Call Provisions (not covered by the report of independent auditors): 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 auditors): Using the higher of Standard & Poor's
or Moody's rating.
*** Pre-refunded 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. Pre-
refunded 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 of the Notes to Financial Statements).
+ The security has a maturity of more than one year, but has variable rate and demand features which
qualify it as a short-term security. The rate disclosed is that currently in effect. This rate
changes periodically based on market conditions or a specified market index.
</TABLE>
15 See accompanying notes to financial statements.
<PAGE>
Statement of Net Assets
May 31, 1997
<TABLE>
<CAPTION>
Nuveen Flagship
Louisiana
- --------------------------------------------------------------------------------
Assets
<S> <C>
Investments in municipal securities, at market value (note 1) $83,453,033
Temporary investments in short-term municipal securities,
at amortized cost, which approximates market value (note 1) 2,200,000
Cash 714,688
Receivables:
Interest 1,287,054
Shares sold 122,340
Investments sold 1,068,244
Other assets 2,645
- --------------------------------------------------------------------------------
Total assets 88,848,004
- --------------------------------------------------------------------------------
Liabilities
Payables:
Investments purchased 3,599,686
Shares redeemed 195,019
Accrued expenses:
Management fees (note 6) 22,165
12b-1 distribution and service fees (notes 1 and 6) 18,293
Other 51,584
Dividends payable 368,364
- --------------------------------------------------------------------------------
Total liabilities 4,255,111
- --------------------------------------------------------------------------------
Net assets (note 7) $84,592,893
- --------------------------------------------------------------------------------
Class A Shares (note 1)
Net assets $76,030,144
Shares outstanding 6,852,550
Net asset value and redemption price per share $11.10
Offering price per share (net asset value per share plus
maximum sales charge of 4.20% of offering price) $11.59
- --------------------------------------------------------------------------------
Class B Shares (note 1)
Net assets $ 917,279
Shares outstanding 82,702
Net asset value, offering and redemption price per share $11.09
- --------------------------------------------------------------------------------
Class C Shares (note 1)
Net assets $ 7,645,370
Shares outstanding 689,484
Net asset value, offering and redemption price per share $11.09
- --------------------------------------------------------------------------------
Class R Shares (note 1)
Net assets $ 100
Shares outstanding 9
Net asset value, offering and redemption price per share $11.09
- --------------------------------------------------------------------------------
</TABLE>
16 See accompanying notes to financial statements.
<PAGE>
Statement of Operations Nuveen Municipal Bond Fund
Year ended May 31, 1997 May 31, 1997 Annual Report
<TABLE>
<CAPTION>
Nuveen Flagship
Louisiana*
- -------------------------------------------------------------------------------
Investment Income
<S> <C>
Tax-exempt interest income (note 1) $ 4,982,169
- -------------------------------------------------------------------------------
Expenses
Management fees (note 6) 417,159
12b-1 service fees -- Class A (notes 1 and 6) 247,898
12b-1 distribution and service fees -- Class B (notes 1 and 6) 1,569
12b-1 distribution and service fees -- Class C (notes 1 and 6) 54,724
Shareholders' servicing agent fees and expenses 51,097
Custodian's fees and expenses 59,142
Trustees' fees and expenses (note 6) 2,229
Professional fees 16,851
Shareholders' reports -- printing and mailing expenses 6,017
Federal and state registration fees 5,502
Other expenses 3,851
- -------------------------------------------------------------------------------
Total expenses before reimbursement 866,039
Expense reimbursement (note 6) (193,709)
- -------------------------------------------------------------------------------
Net expenses 672,330
- -------------------------------------------------------------------------------
Net investment income 4,309,839
- -------------------------------------------------------------------------------
Realized and Unrealized Gain from Investments
Net realized gain from investment transactions (notes 1 and 4) 185,297
Net change in unrealized appreciation or depreciation of investments 2,691,765
- -------------------------------------------------------------------------------
Net gain from investments 2,877,062
- -------------------------------------------------------------------------------
Net increase in net assets from operations $ 7,186,901
- -------------------------------------------------------------------------------
</TABLE>
* Information represents eight months of Flagship Louisiana and four months of
Nuveen Flagship Louisiana (see note 1 of the Notes to Financial Statements).
17 See accompanying notes to financial statements.
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Nuveen Flagship Flagship
Louisiana* Louisiana
----------------------------------------
Year ended 5/31/97 Year ended 5/31/96
- ---------------------------------------------------------------------------------------------------------------------------
Operations
<S> <C> <C>
Net investment income $ 4,309,839 $ 4,015,375
Net realized gain from investment transactions
(notes 1 and 4) 185,297 13,525
Net change in unrealized appreciation or depreciation
of investments 2,691,765 (761,714)
- ---------------------------------------------------------------------------------------------------------------------------
Net increase in net assets from operations 7,186,901 3,267,186
- ---------------------------------------------------------------------------------------------------------------------------
Distributions to Shareholders (note 1)
From undistributed net investment income:
Class A (4,001,489) (3,818,526)
Class B (7,151) N/A
Class C (300,999) (224,197)
Class R (1) N/A
From accumulated net realized gains from
investment transactions:
Class A (16,962) -
Class B - N/A
Class C (1,376) -
Class R - N/A
- ---------------------------------------------------------------------------------------------------------------------------
Decrease in net assets from distributions to shareholders (4,327,978) (4,042,723)
- ---------------------------------------------------------------------------------------------------------------------------
Fund Share Transactions (note 2)
Net proceeds from sale of shares 12,680,296 13,860,830
Net proceeds from shares issued to shareholders
due to reinvestment of distributions 2,019,609 2,198,857
- ---------------------------------------------------------------------------------------------------------------------------
14,699,905 16,059,687
- ---------------------------------------------------------------------------------------------------------------------------
Cost of shares redeemed (10,629,223) (8,986,764)
- ---------------------------------------------------------------------------------------------------------------------------
Net increase in net assets
from Fund share transactions 4,070,682 7,072,923
- ---------------------------------------------------------------------------------------------------------------------------
Net increase in net assets 6,929,605 6,297,386
Net assets at the beginning of year 77,663,288 71,365,902
- ---------------------------------------------------------------------------------------------------------------------------
Net assets at the end of year $ 84,592,893 $77,663,288
- ---------------------------------------------------------------------------------------------------------------------------
Balance of undistributed net investment income at end of year $ 199 $ -
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Information represents eight months of Flagship Louisiana and four months
of Nuveen Flagship Louisiana (see note 1 of the Notes to Financial
Statements).
N/A -- Flagship Louisiana was not authorized to issue Class B or Class R Shares.
18 See accompanying notes to financial statements.
<PAGE>
Notes to Financial Statements
Nuveen Municipal Bond Fund
May 31, 1997 Annual Report
1. General Information and Significant Accounting Policies
The Nuveen Flagship Multistate Trust III (the "Trust") is an open-end investment
company registered under the Investment Company Act of 1940, as amended. The
Trust comprises Nuveen Flagship Louisiana Municipal Bond Fund (the "Fund"),
among others. The Trust was organized as a Massachusetts business trust on July
1, 1996.
The John Nuveen Company, parent of John Nuveen & Co. Incorporated and Nuveen
Advisory Corp., respectively, the distributor ("Distributor") and investment
advisor ("Adviser") of the Fund, 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, Flagship Louisiana Double Tax
Exempt Fund ("Flagship Louisiana") was reorganized into the Trust and renamed
Nuveen Flagship Louisiana Municipal Bond Fund ("Nuveen Flagship Louisiana").
The Fund seeks to provide high tax-free income and preservation of capital
through investments in a diversified portfolio of quality municipal bonds.
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements in accordance with generally
accepted accounting principles.
Securities Valuation
The prices of municipal bonds in the 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 Fund has 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 May
31, 1997, the Fund had when-issued purchase commitments of $3,599,686.
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.
19
<PAGE>
Notes to Financial Statements -- continued
Dividends and Distributions to Shareholders
Tax-exempt net investment income is declared as a dividend monthly and payment
is made or reinvestment is credited to shareholder accounts on the first
business day after month-end. Net realized capital gains and/or market discount
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 carryovers. Prior to the
reorganization, tax-exempt net investment income for Flagship Louisiana was
declared as a dividend daily and payment was made on the last business day of
each month.
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
The Fund is a separate taxpayer for federal income tax purposes. The Fund
intends to comply with the requirements of the Internal Revenue Code applicable
to regulated investment companies and to distribute all of its tax-exempt net
investment income, in addition to any significant amounts of net realized
capital gains and/or market discount from investment transactions. The Fund
currently considers significant net realized capital gains and/or market
discount as amounts in excess of $.001 per share. Furthermore, the Fund intends
to satisfy conditions which will enable interest from municipal securities,
which is exempt from regular federal and Louisiana state income taxes, to retain
such tax-exempt status when distributed to the shareholders of the Fund. All
income dividends paid during the fiscal year ended May 31, 1997, have been
designated Exempt Interest Dividends. Net realized capital gains and market
discount distributions are subject to federal taxation.
Flexible Sales Charge Program
The Fund offers Class A, B, C and R Shares. Class B and R Shares were first
offered for sale on February 1, 1997. Class A Shares are sold with a sales
charge and incur an annual 12b-1 service fee. 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 contingent deferred sales charge
("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 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 18 months 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.
20
<PAGE>
Nuveen Municipal Bond Fund
May 31, 1997 Annual Report
Derivative Financial Instruments
The Fund may invest in certain derivative financial instruments including
futures, forward, swap, and option contracts, and other financial instruments
with similar characteristics. Although the Fund is authorized to invest in such
financial instruments, and may do so in the future, it did not make any such
investments during the fiscal year ended May 31, 1997.
Expense Allocation
Expenses of the Fund 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.
21
<PAGE>
Notes to Financial Statements -- continued
2. Fund Shares
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
Nuveen Flagship Flagship
Louisiana* Louisiana
---------------------------------------------------
Year ended Year ended
5/31/97 5/31/96
----------------------------------------------------
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------
Shares sold:
Class A 822,022 $ 9,004,313 997,208 $10,830,874
Class B 82,598 911,240 N/A N/A
Class C 252,430 2,764,643 277,655 3,029,956
Class R 9 100 N/A N/A
Shares issued to shareholders due to
reinvestment of distributions:
Class A 168,536 1,844,320 187,827 2,038,551
Class B 104 1,144 N/A N/A
Class C 15,928 174,145 14,749 160,306
Class R - - N/A N/A
- -------------------------------------------------------------------------------------------
1,341,627 14,699,905 1,477,439 16,059,687
- -------------------------------------------------------------------------------------------
Shares redeemed:
Class A (861,984) (9,454,331) (768,321) (8,319,610)
Class B - - N/A N/A
Class C (107,483) (1,174,892) (61,998) (667,154)
Class R - - N/A N/A
- -------------------------------------------------------------------------------------------
(969,467) (10,629,223) (830,319) (8,986,764)
- -------------------------------------------------------------------------------------------
Net increase 372,160 $ 4,070,682 647,120 $ 7,072,923
===========================================================================================
</TABLE>
* Information represents eight months of Flagship Louisiana and
four months of Nuveen Flagship Louisiana (see note 1).
N/A -- Flagship Louisiana was not authorized to issue Class B or Class R Shares.
22
<PAGE>
Nuveen Municipal Bond Fund
May 31, 1997 Annual Report
3. Distributions to Shareholders
On June 9, 1997, the Fund declared a dividend distribution from its tax-exempt
net investment income which was paid on July 1, 1997, to shareholders of record
on June 9, 1997, as follows:
Nuveen Flagship
Louisiana
- --------------------------------------------------------------------------------
Dividend per share:
Class A $.0490
Class B .0420
Class C .0440
Class R .0510
- --------------------------------------------------------------------------------
4. Securities Transactions
Purchases and sales (including maturities) of investments in municipal
securities and temporary municipal investments for the fiscal year ended May 31,
1997, were as follows:
Nuveen Flagship
Louisiana*
- --------------------------------------------------------------------------------
Purchases
Investments in municipal securities $22,343,118
Temporary municipal investments 5,000,000
Sales
Investments in municipal securities 19,687,946
Temporary municipal investments 2,800,000
- --------------------------------------------------------------------------------
* Information represents eight months of Flagship Louisiana and four months of
Nuveen Flagship Louisiana (see note 1).
At May 31, 1997, the identified cost of investments owned for federal income tax
purposes was the same as the cost for financial reporting purposes for the Fund.
5. Unrealized Appreciation (Depreciation)
At May 31, 1997, net unrealized appreciation aggregated $5,426,217, of which
$5,451,416 related to appreciated securities and $25,199 related to depreciated
securities.
23
<PAGE>
Notes to Financial Statements -- continued
6. Management Fee and Other Transactions with Affiliates
Under the Trust's investment management agreement with the Adviser, the 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 the Fund as follows:
<TABLE>
<CAPTION>
Average daily net asset value Management fee
- -----------------------------------------------------------------
<S> <C>
For the first $125 million .5500 of 1%
For the next $125 million .5375 of 1
For the next $250 million .5250 of 1
For the next $500 million .5125 of 1
For the next $1 billion .5000 of 1
For net assets over $2 billion .4750 of 1
- -----------------------------------------------------------------
</TABLE>
Prior to the reorganization (see note 1) Flagship Louisiana paid a management
fee of .5% of 1%. The management fee compensates the Adviser for overall
investment advisory and administrative services, and general office facilities.
The Trust pays no compensation directly to its Trustees who are affiliated with
the Adviser or to its officers, all of whom receive remuneration for their
services to the Trust from the Adviser.
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 May 31, 1997, the Distributor and its predecessor
(Flagship Funds Inc., a wholly-owned subsidiary of Flagship Resources Inc.)
collected gross sales charges on purchases of Class A Shares of approximately
$296,600 of which approximately $233,800 were paid out as concessions to
authorized dealers. The Distributor and its predecessor also received 12b-1
service fees on Class A Shares, approximately one-half of which was paid to
compensate authorized dealers for providing services to shareholders relating to
their investments.
During the fiscal year ended May 31, 1997, the Distributor and its predecessor
compensated authorized dealers directly with approximately $73,500 in commission
advances at the time of purchase. To compensate for commissions advanced to
authorized dealers, all 12b-1 service fees collected on Class B Shares during
the first year following a purchase, all 12b-1 distribution fees collected on
Class B Shares, and all 12b-1 service and distribution fees on Class C Shares
during the first year following a purchase are retained by the Distributor. The
remaining 12b-1 fees charged to the Fund were paid to compensate authorized
dealers for providing services to shareholders relating to their investments.
The Distributor and its predecessor also collected and retained approximately
$2,300 of CDSC on share redemptions during the fiscal year ended May 31, 1997.
24
<PAGE>
Nuveen Municipal Bond Fund
May 31, 1997 Annual Report
7. Composition of Net Assets
At May 31, 1997, the Fund had an unlimited number of $.01 par value shares
authorized. Net assets consisted of:
<TABLE>
<CAPTION>
Nuveen Flagship
Louisiana
- -------------------------------------------------------------------------------
<S> <C>
Capital paid-in $79,046,809
Balance of undistributed net investment income 199
Accumulated net realized gain from investment transactions 119,668
Net unrealized appreciation of investments 5,426,217
- -------------------------------------------------------------------------------
Net assets $84,592,893
===============================================================================
</TABLE>
25
<PAGE>
Financial Highlights
Selected data for a share outstanding throughout each period is as follows:
<TABLE>
<CAPTION>
Class (Inception date) Operating performance Less distributions
--------------------- ------------------
Net
NUVEEN FLAGSHIP LOUISIANA++ Net realized and Dividends Net Total
asset unrealized from tax- asset return
value Net gain (loss) exempt net Distributions value on net
Year ending beginning investment from investment from capital end of asset
May 31, of period income (b) investments income gains period value (a)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Class A (9/89)
1997 $10.71 $.59 $ .39 $(.59) $ - $11.10 9.37%
1996 10.80 .59 (.08) (.60) - 10.71 4.77
1995 10.48 .60 .32 (.60) - 10.80 9.20
1994 10.93 .61 (.40) (.62) (.04)+++ 10.48 1.77
1993 10.30 .64 .67 (.63) (.05) 10.93 13.12
1992 10.02 .65 .35 (.65) (.07) 10.30 10.35
1991 9.63 .66 .40 (.67) - 10.02 11.47
1990(c) 9.58 .44 .04 (.43) - 9.63 6.52+
Class B (2/97)
1997(c) 11.10 .16 - (.17) - 11.09 1.44
Class C (2/94)
1997 10.70 .53 .39 (.53) - 11.09 8.78
1996 10.80 .53 (.09) (.54) - 10.70 4.12
1995 10.48 .54 .32 (.54) - 10.80 8.59
1994(c) 11.29 .16 (.81) (.16) - 10.48 (17.21)+
Class R (2/97)
1997(c) 11.17 .15 (.08) (.15) - 11.09 .67
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Annualized.
++ Information included prior to the year ending May 31, 1997,
reflects the financial highlights of Flagship Louisiana.
+++ Amount shown includes a distribution in excess of capital gains
of $.01 per share.
(a) Total returns are calculated on net asset value without any
sales charge.
(b) After waiver of certain management fees and reimbursement of
expenses, if applicable, by Nuveen Advisory or its predecessor
Flagship Financial.
(c) From commencement of class operations as noted.
26
<PAGE>
Nuveen Municipal Bond Fund
May 31, 1997 Annual Report
<TABLE>
<CAPTION>
Ratios/Supplemental data
- ---------------------------------------------------------------------------------
Ratio Ratio
of net of net
Ratio of investment Ratio of investment
expenses income to expenses income to
to average average to average average
net assets net assets net assets net assets
Net assets before before after after Portfolio
end of period reimburse- reimburse- reimburse- reimburse- turnover
(in thousands) ment ment ment (b) ment (b) rate
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$76,030 1.03% 5.14% .79% 5.38% 25%
72,005 1.09 5.17 .80 5.46 26
68,145 1.18 5.45 .83 5.80 44
66,281 1.12 5.10 .66 5.56 22
54,483 1.16 5.40 .61 5.95 29
38,873 1.22 5.70 .49 6.43 43
27,762 1.17 6.00 .38 6.79 57
16,678 1.48+ 5.36+ .44+ 6.40+ 32
917 1.65+ 4.50+ 1.46+ 4.69+ 25
7,645 1.57 4.59 1.33 4.83 25
5,658 1.64 4.58 1.35 4.87 26
3,220 1.73 4.85 1.37 5.21 44
1,501 1.68+ 4.34+ 1.23+ 4.79+ 22
- .08+ 5.27+ .04+ 5.31+ 25
- ---------------------------------------------------------------------------------
</TABLE>
27
<PAGE>
Independent Auditors' Report
To the Board of Trustees and Shareholders of
Nuveen Flagship Louisiana Municipal Bond Fund:
We have audited the accompanying statement of net assets of Nuveen Flagship
Louisiana Municipal Bond Fund, including the portfolio of investments, as of May
31, 1997, the related statement of operations for the period then ended and the
statement of changes in net assets, and the financial highlights for each of the
periods presented. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 1997, by correspondence with the Fund's custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of the Nuveen Flagship
Louisiana Municipal Bond Fund at May 31, 1997, the results of its operations,
the changes in its net assets and the financial highlights for the respective
stated periods, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dayton, Ohio
July 11, 1997
28
<PAGE>
Shareholder Meeting Report
Flagship Louisiana
<TABLE>
<CAPTION>
A Shares C Shares
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Advisory Agreement For 4,985,536 367,428
Against 129,299 3,015
Abstain 63,405 2,761
-----------------------------------------------
Total 5,178,240 373,204
- --------------------------------------------------------------------------------
Broker Non Votes 308,578 -
- --------------------------------------------------------------------------------
Reorganization For 3,700,235 185,346
Against 50,069 1,678
Abstain 70,185 915
-----------------------------------------------
Total 3,820,489 187,939
- --------------------------------------------------------------------------------
Broker Non Votes 1,666,329 185,265
- --------------------------------------------------------------------------------
Investment Objective For 3,618,432 186,025
Against 198,386 1,914
Abstain 3,670 -
-----------------------------------------------
Total 3,820,488 187,939
- --------------------------------------------------------------------------------
Broker Non Votes 1,666,330 185,265
- --------------------------------------------------------------------------------
Investment Assets For 3,624,685 186,025
Against 194,228 1,914
Abstain 1,575 -
-----------------------------------------------
Total 3,820,488 187,939
- --------------------------------------------------------------------------------
Broker Non Votes 1,666,330 185,265
- --------------------------------------------------------------------------------
Type Of Securities For 3,626,846 186,025
Against 192,067 1,914
Abstain 1,575 -
-----------------------------------------------
Total 3,820,488 187,939
- --------------------------------------------------------------------------------
Broker Non Votes 1,666,330 185,265
- --------------------------------------------------------------------------------
Borrowing For 3,623,949 183,189
Against 194,965 4,750
Abstain 1,575 -
-----------------------------------------------
Total 3,820,489 187,939
- --------------------------------------------------------------------------------
Broker Non Votes 1,666,329 185,265
- --------------------------------------------------------------------------------
Pledges For 3,626,846 186,025
Against 192,067 1,914
Abstain 1,575 -
-----------------------------------------------
Total 3,820,488 187,939
- --------------------------------------------------------------------------------
Broker Non Votes 1,666,330 185,265
- --------------------------------------------------------------------------------
Senior Securities For 3,622,988 186,025
Against 194,228 1,914
Abstain 3,272 -
-----------------------------------------------
Total 3,820,488 187,939
- --------------------------------------------------------------------------------
Broker Non Votes 1,666,330 185,265
-----------------------------------------------
</TABLE>
29
<PAGE>
Shareholder Meeting Report
Flagship Louisiana -- continued
<TABLE>
<CAPTION>
A Shares C Shares
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Underwriting For 3,624,251 186,025
Against 192,567 1,914
Abstain 3,670 -
-----------------------------------------------
Total 3,820,488 187,939
- --------------------------------------------------------------------------------
Broker Non Votes 1,666,330 185,265
- --------------------------------------------------------------------------------
Real Estate For 3,622,590 186,025
Against 194,228 1,914
Abstain 3,670 -
-----------------------------------------------
Total 3,820,488 187,939
- --------------------------------------------------------------------------------
Broker Non Votes 1,666,330 185,265
- --------------------------------------------------------------------------------
Commodities For 3,621,854 186,025
Against 194,965 1,914
Abstain 3,670 -
-----------------------------------------------
Total 3,820,489 187,939
- --------------------------------------------------------------------------------
Broker Non Votes 1,666,329 185,265
- --------------------------------------------------------------------------------
Loans For 3,624,015 183,189
Against 192,804 4,750
Abstain 3,670 -
-----------------------------------------------
Total 3,820,489 187,939
- --------------------------------------------------------------------------------
Broker Non Votes 1,666,329 185,265
- --------------------------------------------------------------------------------
Short Sales/Margin Purchases For 3,624,251 186,025
Against 192,567 1,914
Abstain 3,670 -
-----------------------------------------------
Total 3,820,488 187,939
- --------------------------------------------------------------------------------
Broker Non Votes 1,666,330 185,265
- --------------------------------------------------------------------------------
Put and Call Options For 3,621,854 186,025
Against 194,965 1,914
Abstain 3,670 -
-----------------------------------------------
Total 3,820,489 187,939
- --------------------------------------------------------------------------------
Broker Non Votes 1,666,329 185,265
- --------------------------------------------------------------------------------
Industry Concentration For 3,624,015 186,025
Against 192,804 1,914
Abstain 3,670 -
-----------------------------------------------
Total 3,820,489 187,939
- --------------------------------------------------------------------------------
Broker Non Votes 1,666,329 185,265
- --------------------------------------------------------------------------------
Affiliate Purchases For 3,624,015 186,025
Against 192,804 1,914
Abstain 3,670 -
-----------------------------------------------
Total 3,820,489 187,939
- --------------------------------------------------------------------------------
Broker Non Votes 1,666,329 185,265
-----------------------------------------------
</TABLE>
30
<PAGE>
Nuveen Municipal Bond Fund
May 31, 1997 Annual Report
<TABLE>
<CAPTION>
A Shares C Shares
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment Companies For 3,618,932 186,025
Against 197,886 1,914
Abstain 3,670 -
-----------------------------------------------
Total 3,820,488 187,939
- --------------------------------------------------------------------------------
Broker Non Votes 1,666,330 185,265
- --------------------------------------------------------------------------------
Div vs. Non-Div For 3,601,125 186,025
Against 116,304 999
Abstain 103,060 915
-----------------------------------------------
Total 3,820,489 187,939
- --------------------------------------------------------------------------------
Broker Non Votes 1,666,329 185,265
- --------------------------------------------------------------------------------
12b-1 Fees For 4,782,853 367,428
Against 268,732 3,015
Abstain 126,656 2,761
-----------------------------------------------
Total 5,178,241 373,204
- --------------------------------------------------------------------------------
Broker Non Votes 308,577 -
- --------------------------------------------------------------------------------
Directors
- --------------------------------------------------------------------------------
Bremner For 5,389,707 373,204
Withhold 97,111 -
-----------------------------------------------
Total 5,486,818 373,204
- --------------------------------------------------------------------------------
Brown For 5,389,707 373,204
Withhold 97,111 -
-----------------------------------------------
Total 5,486,818 373,204
- --------------------------------------------------------------------------------
Dean For 5,389,707 373,204
Withhold 97,111 -
-----------------------------------------------
Total 5,486,818 373,204
- --------------------------------------------------------------------------------
Impellizzeri For 5,389,707 373,204
Withhold 97,111 -
-----------------------------------------------
Total 5,486,818 373,204
- --------------------------------------------------------------------------------
Rosenheim For 5,389,707 373,204
Withhold 97,111 -
-----------------------------------------------
Total 5,486,818 373,204
- --------------------------------------------------------------------------------
Sawers For 5,389,707 373,204
Withhold 97,111 -
-----------------------------------------------
Total 5,486,818 373,204
- --------------------------------------------------------------------------------
Schneider For 5,389,707 373,204
Withhold 97,111 -
-----------------------------------------------
Total 5,486,818 373,204
- --------------------------------------------------------------------------------
Schwertfeger For 5,389,707 373,204
Withhold 97,111 -
- --------------------------------------------------------------------------------
Total 5,486,818 373,204
-----------------------------------------------
</TABLE>
31
<PAGE>
Shareholder Information
Nuveen Family of Mutual Funds
Nuveen offers a variety of funds designed to help you reach your financial
goals.
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
Insured
Intermediate-Term
Limited-Term
State Funds
Alabama Michigan
Arizona Missouri
California New Jersey
Colorado New Mexico
Connecticut New York
Florida North Carolina
Georgia Ohio
Kansas Pennsylvania
Kentucky South Carolina
Louisiana Tennessee
Maryland Virginia
Massachusetts Wisconsin
To purchase additional shares of your Nuveen Municipal Bond Fund, contact your
financial adviser. If you would like to add to your current investment on a
monthly or semi-annual basis, you can sign up for Nuveen's systematic investing
program, which allows you to invest a fixed dollar amount every month
automatically.
You can also invest automatically through dividend reinvestment. By reinvesting
your fund's dividends back into the fund, you gain the added growth potential of
long-term compounding.
For more information on any of these service options call your adviser, or
Nuveen at (800) 621-7227.
32
<PAGE>
Fund Information
Board of Directors
Robert P. Bremner
Lawrence H. Brown
Anthony T. Dean
Anne E. Impellizzeri
Peter R. Sawers
William J. Schneider
Timothy R. Schwertfeger
Judith M. Stockdale
Fund Manager
Nuveen Advisory Corp.
333 West Wacker Drive
Chicago, IL 60606
Custodian
The Chase Manhattan Bank
4 New York Plaza
New York, NY 10004-2413
Transfer Agent,
Shareholder Services and
Dividend Disbursing Agent
Boston Financial
Nuveen Investor Services
P.O. Box 8509
Boston, MA 02266-8509
(800) 225-8530
Legal Counsel
Fried, Frank, Harris, Shriver
& Jacobson
Washington, D.C.
Independent Auditors
Deloitte & Touche LLP
Dayton, Ohio
33
<PAGE>
[PHOTO OF JOHN NUVEEN, SR. APPEARS HERE]
John Nuveen, Sr.
NUVEEN
John Nuveen & Co. Incorporated
333 West Wacker Drive
Chicago, IL 60606-1286
(800) 621-7227
www.nuveen.com
Serving Investors
for Generations
Since our founding in 1898, John Nuveen & Co. has been synonymous with
investments that withstand the test of time. Today, we offer a broad range of
investments designed for mature investors whose portfolios are the principal
source of their ongoing financial security. More than 1.3 million investors have
trusted Nuveen to help them maintain the lifestyle they currently enjoy.
A value investing approach -- purchasing securities of strong companies and
communities that represent good long-term value -- is the cornerstone of
Nuveen's investment philosophy. It is a careful, long-term strategy that offers
the potential for attractive returns with moderated risk. Successful value
investing begins with in-depth research and a discerning eye for marketplace
opportunity. Nuveen's team of investment professionals is backed by the
discipline, resources and expertise of almost a century of investment
experience, including one of the most recognized research departments in the
industry.
To meet the unique circumstances and financial planning needs of mature
investors, Nuveen offers a wide array of equity and fixed-income mutual funds,
unit trusts, exchange-traded funds, individual managed account services, and
cash management products, including many that generate tax-free income.
To find out more about how Nuveen investment products and services can help you
preserve your financial security, talk with your financial adviser, or call us
at (800) 621-7227 for more information, including a prospectus where applicable.
Please read that information carefully before you invest.
VAN-LA 5-97
<PAGE>
NUVEEN
Municipal
Bond Funds
May 31, 1997
Annual Report
Dependable, tax-free income
to help you keep more of
what you earn.
Alabama
[PHOTO APPEARS HERE]
<PAGE>
Contents
1 Dear Shareholder
3 Answering Your Questions
6 Alabama Overview
9 Financial Section
27 Shareholder Meeting Report
31 Shareholder Information
32 Fund Information
<PAGE>
[Photo of Timothy R. Schwertfeger Appears Here]
Timothy R. Schwertfeger
Dear Shareholder
It's a pleasure to report to you on the performance of the Nuveen Flagship
Alabama Municipal Bond Fund. Over the past year, the fund posted sizable gains.
For the fiscal year ended May 31, 1997, the value of your investment rose 9.22%
for Class A shares, if you chose to reinvest your tax-free income dividends.
Over this 12-month period, the total return performance for the fund (with
income reinvested) outpaced the 8.28% increase produced by the Lehman Brothers
Municipal Bond Index, which is used to represent the broad municipal bond market
on an unmanaged basis.
In addition to substantial total returns, shareholders continue to enjoy very
attractive current yields generated by a portfolio of quality bonds, which
provide excellent income for investors. As of May 31, 1997, shareholders were
receiving tax-free yields on net asset value of 5.07% for Class A shares. To
match this yield, investors in the 33.5% combined federal and state income tax
bracket would have had to earn at least 7.62% on taxable alternatives.
These results were produced against a backdrop of continued economic expansion
and the lowest unemployment rates in almost two decades, a combination that in
the past has foreshadowed an increase in inflation. In March, the Federal
Reserve made a pre-emptive strike by raising short-term interest rates by 0.25%,
but then maintained the status quo at its May and July meetings. Overall market
returns continue to be good, but fear of inflation has hampered the performance
of municipals and led to
1
<PAGE>
"In addition to substantial total returns, shareholders continue to enjoy very
attractive current yields generated by a portfolio of quality bonds."
increased volatility in both the equity and bond markets. During this time,
bonds have often been the bellwether for the direction of stocks. Whenever
inflation talk is at its most rampant, the stock market has kept an eye on the
bond market for its response before reacting.
In the first six months of the year, the markets also focused on fiscal issues,
including the federal budget accord and discussion of plans to reduce taxes and
eliminate the deficit. The economy appeared to be moderating, corporate earnings
reports continued to exhibit strength, and interest rates fell in the second
quarter. All of this was positive news. The net effect is that the markets are
better off now than at the beginning of the year, but the volatility experienced
in getting there has been significant.
Recently, the need for diversification and a renewed emphasis on asset
allocation -- as well as attractive yields -- have sparked increased interest in
tax-free investments. The current level of the stock market reminds investors to
re-allocate profits to other segments of the market in order to limit risk.
Nuveen municipal bond funds provide an excellent lower-risk alternative, and
their current yields make them very attractive.
On behalf of everyone at Nuveen, I thank you for your confidence in us and our
family of investments. You can continue to depend on us for high-quality
investments that withstand the test of time. We look forward to reporting to you
again in six months.
Sincerely,
/s/ Timothy R. Schwertfeger
Timothy R. Schwertfeger
Chairman of the Board
July 15, 1997
2
<PAGE>
Answering Your Questions
[Photo of Ted Neild appears here]
Ted Neild, head of Nuveen's Dayton-based portfolio management team, talks about
the municipal bond market and offers insights into factors that affected fund
performance over the past year.
What are the investment objectives of the fund?
The fund aims to provide investors with a high level of tax-free income while
preserving capital by investing in a diversified portfolio of high-quality
municipal bonds. To that end, we attempt to maximize the fund's after-tax total
return by generating high tax-free income and minimizing the distribution of
taxable capital gains when possible.
What is your strategy for meeting these objectives?
To meet this fund's objectives of income and enhanced value, our portfolio
management strategy relies on conservative value investing principles, sound
research and credit surveillance activities, and senior management involvement.
At Nuveen, value investing means taking a fundamental approach to finding bonds
that offer the best balance of high potential return with low risk regardless of
the direction of interest rates. This approach focuses on the characteristics of
individual bonds, such as sector, geographic region, structure and intrinsic
credit quality, rather than on the general economic environment. The idea behind
this philosophy is that we, as investment managers, can control the selection
process, but not the direction of the economy as a whole.
What key economic factors affected the fund's performance during the year?
The U.S. economy continued to grow, exhibiting low unemployment, increased
manufacturing and construction activity, and lack of price pressure at the
consumer and producer levels.
3
<PAGE>
"At Nuveen, value investing means taking a fundamental approach to finding bonds
that offer the best balance of high potential return with low risk regardless of
the direction of interest rates."
Given this market environment, how did the fund perform?
The Alabama Municipal Bond Fund performed well over the past year, rewarding
investors with a total return on net asset value for the year of 9.22% for Class
A shares, including price changes and reinvested dividends. Additionally, the
fund was ranked number one among eight Alabama municipal bond funds for the one-
year period by Lipper Analytical Services, a nationally recognized performance
measurement service. Steady demand, coupled with tight supply, caused munis to
outperform Treasury securities over the 12 month period.
What strategies did you employ to add value?
The fund maintained its average call protection at just over eight years. Where
possible, we strive to extend the call protection to increase the upward price
potential of callable municipal bonds during market rallies--such as the rally
of the last 12 months. The duration, a measure of the fund's volatility, was
reduced somewhat during the year from 9.6 years to 8.16 years to reduce slightly
the interest rate risk of the fund after the market's strong performance.
What is the current status of Alabama municipal market?
Alabama's municipal market performed well in 1996. A limited amount of issuance
added to previously tight supply levels caused heavy demand for Alabama bonds.
An economy once heavily reliant on agriculture is now increasingly dependent on
manufacturing and service-related industries. Increases in infrastructures
issuance are expected for the upkeep of one of the nation's largest inland river
systems and busiest ports. State municipal bond issuance was down 8.1% to $1.18
billion in the first six months of 1997.
4
<PAGE>
What is the current outlook for the municipal market as a whole?
As we make our way through the seventh year of the current economic expansion,
some observers believe that a fundamental shift may have occurred in our
economy. Based on past experience and months of reports of economic growth,
especially employment statistics, the markets have long been anticipating an
increase in inflation. However, even with almost full employment, we have not
seen the expected rise in hourly wages that would be considered inflationary.
This change in the traditional economic cause-and-effect relationship has been
variously attributed to the globalization of the economy and consequent
competitive pressures, to increased use of technology, and to corporations'
recent ability to downsize as necessary. Although structural changes in the
economy appear to have suspended the relationship between faster growth and
higher inflation, the risk remains that inflation may reassert itself if
capacity constraints are reached and resources are stretched too thin.
Talk of Fed tightening will continue. If the Fed does act to increase rates, it
will be perceived as a move against inflation. If the Fed does not tighten, it
will be seen as an indication that the economy is doing well.
Nonetheless, for the remainder of 1997, the municipal market will continue to
offer the attractive yields and tax advantages that make it a good alternative
if and when a correction in the stock market occurs. While money continues to
flow into equity mutual funds, investors are also beginning to evaluate the
effect of the huge run-up in stock prices on their asset allocation, and many
are rebalancing their portfolios by shifting some assets into bonds.
5
<PAGE>
Alabama
Overview
Credit Quality
[PIE CHART APPEARS HERE]
BBB/NR 5%
A 14%
AA 11%
AAA 70%
Diversification
[PIE CHART APPEARS HERE]
Hospitals 10%
Pollution Control 7%
Escrowed Bonds 7%
Utilities 8%
Water & Sewer 23%
Transportation 6%
Other 4%
Educational Facilities 19%
General Obligations 16%
<TABLE>
<CAPTION>
Fund Highlights
===============================================================================
<S> <C> <C> <C> <C>
Share Class A B C R
Inception Date 4/94 2/97 2/97 2/97
- -------------------------------------------------------------------------------
Net Asset Value (NAV) $10.12 $10.14 $10.14 $10.13
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Total Net Assets ($000) $5,242
- -------------------------------------------------------------------------------
Average Weighted Maturity (years) 20.38
- -------------------------------------------------------------------------------
Duration (years) 8.39
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Annualized Total Return/1/
===============================================================================
<S> <C> <C> <C> <C> <C>
Share Class A(NAV) A(Offer) B C R
1-Year 9.22% 4.63% 8.79% 9.00% 9.38%
- -------------------------------------------------------------------------------
Since Inception 7.29% 5.83% 6.74% 6.95% 7.34%
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Tax-Free Yields
===============================================================================
<S> <C> <C> <C> <C> <C>
Share Class A(NAV) A(Offer) B C R
Dist Rate 5.24% 5.02% 4.49% 4.69% 5.44%
- -------------------------------------------------------------------------------
SEC 30-Day Yld 5.07% 4.86% 4.16% 4.45% 5.31%
- -------------------------------------------------------------------------------
Taxable Equiv Yld/2/ 7.62% 7.31% 6.26% 6.69% 7.98%
- -------------------------------------------------------------------------------
</TABLE>
/1/ Returns of the oldest share class of a fund are actual. Returns for other
classes are actual for the period since inception and prior to class
inception are the returns for the fund's oldest class, adjusted for
differences in sales charges and expenses. Class A shares have an initial
sales charge, while Class B, C and R shares have no initial sales charge.
Class B shares have a CDSC that declines from 5% to 0% after 6 years.
Class C shares have a 1% CDSC for redemptions within one year. Returns do
not reflect imposition of the CDSC. Giving effect to the CDSC applicable
to Class B shares, the 1-year and since inception total returns above
would be 4.79% and 5.91%, respectively.
/2/ Based on SEC yield and a combined federal and state income tax rate of
33.5%. Represents the yield on a taxable investment necessary to equal the
yield of the Nuveen fund on an after-tax basis.
6
<PAGE>
Nuveen Flagship Alabama Municipal Bond Fund
May 31, 1997 Annual Report
* The Index Comparison shows change in value of a $10,000 investment in the 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.
Index Comparison*
[LINE CHART APPEARS HERE]
<TABLE>
<CAPTION>
Lehman Brothers Nuveen Flagship Nuveen Flagship
Municipal Bond Alabama Municipal Alabama Municipal
Index Bond Fund (NAV) Bond Fund (Offer)
<S> <C> <C> <C>
April 1994 10000 10000 9580
May 1994 10085 9989.57 9570.01
May 1995 10756 10616.1 10170.2
May 1996 11611.1 11375.9 10898.2
May 1997 12675.2 12475.1 11951.1
</TABLE>
. Lehman Brothers Municipal Bond Index $12,675
. Nuveen Flagship Alabama Municipal Bond Fund (NAV) $12,469
. Nuveen Flagship Alabama Municipal Bond Fund (Offer) $11,945
Past performance is not predictive of future performance.
Dividend History (A Shares)
[BAR CHART APPEARS HERE]
Dividend History
(A Shares)
June 1996 0.04344
July 1996 0.04489
August 1996 0.04489
September 1996 0.04344
October 1996 0.04489
November 1996 0.04344
December 1996 0.04489
January 1997 0.04501
February 1997 0.0442
March 1997 0.0442
April 1997 0.0442
May 1997 0.0442
7
<PAGE>
Financial Section
Contents
10 Portfolio of Investments
14 Statement of Net Assets
15 Statement of Operations
16 Statement of Changes in Net Assets
17 Notes to Financial Statements
23 Financial Highlights
26 Independent Auditors' Report
9
<PAGE>
Portfolio of Investments
Nuveen Flagship Alabama
<TABLE>
<CAPTION>
Principal Optional Call Market
Amount Description Provisions* Ratings** Value
- ---------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Education -- 18.0%
$ 495,000 Alabama Agricultural and Mechanical University, 11/05 at 102 AAA $ 485,714
Revenue, Formerly Alabama Agricultural and
Mechanical College, 5.500%, 11/01/20
150,000 Birmingham, Southern College, Alabama Private 6/06 at 102 A 151,986
Educational Building Authority, Tuition, 6.000%,
12/01/21
200,000 Troy, Alabama State University Revenue, Troy State 6/07 at 102 AAA 200,822
University, City of Troy Project, 5.650%, 6/01/27(WI)
110,000 University of South Alabama, University Revenue 5/06 at 102 AAA 104,465
Refunding, Tuition, 5.000%, 11/15/15
- ---------------------------------------------------------------------------------------------------------------------------
Health Care -- 1.9%
100,000 Colbert County, Northwest Alabama, Health Care 6/05 at 102 AAA 101,865
Authority, Health Care Facilities Revenue, Helen
Keller Hospital, 5.750%, 6/01/15
- ---------------------------------------------------------------------------------------------------------------------------
Hospitals -- 7.3%
100,000 Birmingham, Carraway, Alabama, Special Care 8/05 at 102 AAA 101,795
Facilities, Financing Authority, Revenue Refunding,
Carraway Methodist Health System, Series A,
5.875%, 8/15/15
25,000 Huntsville, Alabama, Health Care Authority, Health 6/02 at 110 AAA 27,117
Care Facilities Revenue, Series B, 6.500%, 6/01/13
100,000 Lauderdale County and Florence, Alabama, Health 7/06 at 102 AAA 100,442
Care Authority, Revenue Refunding, Eliza Coffee
Memorial Hospital, 5.750%, 7/01/19
75,000 Puerto Rico, Industrial, Tourist, Educational, Medical, 7/05 at 102 AAA 78,944
and Environmental Control Facilities, Financing
Authority, Hospital Revenue, Hospital Auxiliary
Mutual Obligation Group, Series A, 6.250%, 7/01/24
70,000 Puerto Rico, Industrial Tourist Educational Medical 8/05 at 101 AAA 72,154
and Environmental Control Facilities Financing
Authority Hospital Revenue Refunding, Pila Hospital
Project, Series A, 5.875%, 8/01/12
- ---------------------------------------------------------------------------------------------------------------------------
Housing/Single Family -- 2.2%
85,000 Alabama, Housing Finance Authority, Single Family 4/05 at 102 Aaa 87,426
Mortgage Revenue, Collateralized Home Mortgage,
Series A, Issue 2, 6.400%, 10/01/20
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Nuveen Municipal Bond Fund
May 31, 1997 Annual Report
Principal Optional Call Market
Amount Description Provisions* Ratings** Value
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Housing/Single Family -- continued
$ 25,000 Alabama, Housing Finance Authority, Single Family 4/04 at 102 Aaa $ 26,471
Mortgage Revenue, Home Mortgage, Series A,
Issue 1, 6.600%, 4/01/19
- --------------------------------------------------------------------------------------------------------------
Industrial Development and Pollution Control -- 6.9%
100,000 Courtland, Alabama, Industrial Development Board, 9/05 at 102 Baa1 101,496
Solid Waste Disposal Revenue, Champion
International Corporation Project, Series A,
6.500%, 9/01/25
250,000 Tallassee, Alabama, Industrial Development Board 8/06 at 102 A1 258,883
Revenue Refunding, Dow, United Tech Composite,
Series A, 6.100%, 8/01/14
- --------------------------------------------------------------------------------------------------------------
Municipal Revenue/Transportation -- 5.8%
200,000 Alabama, State Docks Department, Docks Facilities 10/06 at 102 AAA 208,700
Revenue, 6.100%, 10/01/13
100,000 Huntsville, Madison County, Alabama, Airport Authority, 1/07 at 102 AAA 95,468
Airport Terminal Revenue, 5.400%, 7/01/19
- --------------------------------------------------------------------------------------------------------------
Municipal Revenue/Utility -- 8.0%
90,000 Huntsville, Alabama, Electric System Revenue, 6.100%, 12/03 at 102 AA 94,745
12/01/10
165,000 Puerto Rico, Electric Power Authority, Power Revenue 7/04 at 102 BBB+ 175,388
(Formerly Puerto Rico, Commonwealth Water Resource
Authority Power), Series T, 6.375%, 7/01/24
150,000 Puerto Rico, Electric Power Authority, Power Revenue No Opt. Call AAA 151,116
(Formerly Puerto Rico, Commonwealth Water Resource
Authority Power), Series Aa, 5.000%, 7/01/07
- --------------------------------------------------------------------------------------------------------------
Municipal Revenue/Water and Sewer -- 22.2%
25,000 Alabama, Water Pollution Control Authority, Revolving 8/05 at 100 AAA 27,255
Fund Loan, Series A, 6.750%, 8/15/17
250,000 Bayou, Louisiana, Batre, Alabama, Utilities Board, 3/07 at 102 AA 250,293
Water and Sewer Revenue Refunding and
Improvement, 5.750%, 3/01/27
375,000 Cherokee County, Alabama, Water Authority Water 4/07 at 102 AAA 377,048
Revenue Refunding, 5.750%, 4/01/22
100,000 Jefferson County, Alabama, Sewer Revenue Refunding, 2/07 at 101 AAA 98,548
Series A, 5.625%, 2/01/22
100,000 Jefferson County, Alabama, Sewer Revenue, Series D, 2/07 at 101 AAA 99,878
5.750%, 2/01/27
</TABLE>
11
<PAGE>
Portfolio of Investments
Nuveen Flagship Alabama -- continued
<TABLE>
<CAPTION>
Principal Optional Call Market
Amount Description Provisions* Ratings** Value
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Municipal Revenue/Water and Sewer -- continued
Mobile, Alabama, Water and Sewer Commrs Water and
Sewer Revenue, Series 95:
$ 80,000 5.000%, 1/01/06 1/05 at 102 AAA $ 80,468
100,000 5.500%, 1/01/10 1/05 at 102 AAA 101,445
125,000 Prichard, Alabama, Waterworks and Sewer Board, 11/04 at 102 AAA 131,026
Water and Sewer Revenue Refunding,
6.125%, 11/15/14
- ---------------------------------------------------------------------------------------------------------------
Non-State General Obligations -- 10.2%
150,000 Birmingham, Alabama, Series A, 4/02 at 102 AA 150,197
5.750%, 4/01/19
180,000 Mobile, Alabama, Capital Improvement, 2/06 at 102 AAA 182,788
5.750%, 2/15/16
200,000 Northport, Alabama, Series A, 5.700%, 3/01/21 3/06 at 102 AAA 201,178
- ---------------------------------------------------------------------------------------------------------------
Pre-refunded -- 7.0%
20,000 Alabama, State Municipal Electric Authority, Power 9/01 at 101 AAA 21,652
Supply Revenue, Series A, 6.500%, 9/01/05
50,000 Puerto Rico, Commonwealth Highway and 7/02 at 101 1/2 AAA 55,366
Transportation, Authority, Highway Revenue,
Series T, 6.625%, 7/01/18
100,000 Puerto Rico, Public Buildings Authority, Guaranteed 7/02 at 101 1/2 AAA 111,857
Public Education and Health Facilities, Series L,
6.875%, 7/01/21
160,000 Puerto Rico, Electric Power Authority, Power Revenue 7/01 at 102 Aaa 177,915
(Formerly Puerto Rico Commonwealth Water
Resource Authority Power), Series P, 7.000%, 7/01/21
- ---------------------------------------------------------------------------------------------------------------
Special Tax Revenue -- 1.0%
50,000 Alabama, State Public School and College Authority, No Opt. Call Aa 53,078
Series A, 6.000%, 8/01/02
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Nuveen Municipal Bond Fund
May 31, 1997 Annual Report
Principal Optional Call Market
Amount Description Provisions* Ratings** Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
State/Territorial General Obligations -- 5.1%
Puerto Rico Commonwealth:
$ 150,000 6.450%, 7/01/17 7/04 at 102 A $ 160,020
100,000 6.500%, 7/01/23 7/04 at 101 A 106,545
- -----------------------------------------------------------------------------------------------------------
$4,905,000 Total Investments -- (cost $4,864,572) -- 95.6% 5,011,554
============-----------------------------------------------------------------------------------------------
Other Assets Less Liabilities -- 4.4% 229,974
-------------------------------------------------------------------------------------------
Net Assets -- 100% $5,241,528
===========================================================================================
</TABLE>
* Optional Call Provisions (not covered by the report of
independent auditors): 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
auditors): Using the higher of Standard and Poor's or
Moody's rating.
(WI) Security purchased on a when-issued basis (see note 1 of
the Notes to Financial Statements).
13 See accompanying notes to financial statements.
<PAGE>
Statement of Net Assets
May 31, 1997
<TABLE>
<CAPTION>
Nuveen Flagship
Alabama
- ------------------------------------------------------------------------------
<S> <C>
Assets
Investments in municipal securities, at market value (note 1) $ 5,011,554
Cash 489,799
Receivables:
Interest 77,834
Shares sold 10
Other assets 6,695
- ------------------------------------------------------------------------------
Total assets 5,585,892
- ------------------------------------------------------------------------------
Liabilities
Payable for investments purchased 297,940
Accrued expenses:
Management fees (note 6) 598
12b-1 distribution and service fees (notes 1 and 6) 1,132
Other 24,707
Dividends payable 19,987
- ------------------------------------------------------------------------------
Total liabilities 344,364
- ------------------------------------------------------------------------------
Net assets (note 7) $ 5,241,528
==============================================================================
Class A Shares (note 1)
Net assets $ 4,445,680
Shares outstanding 439,267
Net asset value and redemption price per share $ 10.12
Offering price per share (net asset value per share plus
maximum sales charge of 4.20% of offering price) $ 10.56
==============================================================================
Class B Shares (note 1)
Net assets $ 590,941
Shares outstanding 58,298
Net asset value, offering and redemption price per share $ 10.14
==============================================================================
Class C Shares (note 1)
Net assets $ 204,807
Shares outstanding 20,200
Net asset value, offering and redemption price per share $ 10.14
==============================================================================
Class R Shares (note 1)
Net assets $ 100
Shares outstanding 10
Net asset value, offering and redemption price per share $ 10.13
==============================================================================
</TABLE>
14 See accompanying notes to financial statements.
<PAGE>
Statement of Operations Nuveen Municipal Bond Fund
Year ended May 31, 1997 May 31, 1997 Annual Report
<TABLE>
<CAPTION>
Nuveen Flagship
Alabama*
- --------------------------------------------------------------------------------
<S> <C>
Investment Income
Tax-exempt interest income (note 1) $212,620
- --------------------------------------------------------------------------------
Expenses
Management fees (note 6) 19,394
12b-1 service fees -- Class A (notes 1 and 6) 12,164
12b-1 distribution and service fees -- Class B (notes 1 and 6) 372
12b-1 distribution and service fees -- Class C (notes 1 and 6) 72
Shareholders' servicing agent fees and expenses 14,252
Custodian's fees and expenses 37,560
Trustees' fees and expenses (note 6) 24
Professional fees 7,667
Shareholders' reports -- printing and mailing expenses 234
Federal and state registration fees 1,194
Organizational expenses (note 1) 20,264
Other expenses 585
- --------------------------------------------------------------------------------
Total expenses before expense reimbursement 113,782
Expense reimbursement (note 6) (98,659)
- --------------------------------------------------------------------------------
Net expenses 15,123
- --------------------------------------------------------------------------------
Net investment income 197,497
- --------------------------------------------------------------------------------
Realized and Unrealized Gain from Investments
Net realized gain from investment transactions (notes 1 and 4) 588
Net change in unrealized appreciation or depreciation of investments 138,286
- --------------------------------------------------------------------------------
Net gain from investments 138,874
- --------------------------------------------------------------------------------
Net increase in net assets from operations $336,371
================================================================================
</TABLE>
* Information represents eight months of Flagship Alabama and four months of
Nuveen Flagship Alabama (see note 1 of Notes to the Financial Statements).
15 See accompanying notes to financial statements.
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Nuveen Flagship Flagship
Alabama* Alabama
---------------------------------------
Year ended 5/31/97 Year ended 5/31/96
- ----------------------------------------------------------------------------
<S> <C> <C>
Operations
Net investment income $ 197,497 $ 134,485
Net realized gain from investment
transactions (notes 1 and 4) 588 519
Net change in unrealized appreciation
or depreciation of investments 138,286 (63,639)
- ----------------------------------------------------------------------------
Net increase in net assets
from operations 336,371 71,365
- ----------------------------------------------------------------------------
Distributions to Shareholders (note 1)
From undistributed net investment income:
Class A (195,673) (134,144)
Class B (2,069) N/A
Class C (212) --
Class R (1) N/A
From accumulated net realized gains
from investment transactions:
Class A -- (1,200)
Class B -- N/A
Class C -- --
Class R -- N/A
- ----------------------------------------------------------------------------
Decrease in net assets from
distributions to shareholders (197,955) (135,344)
- ----------------------------------------------------------------------------
Fund Share Transactions (note 2)
Net proceeds from sale of shares 2,438,658 1,733,573
Net proceeds from shares issued to
shareholders due to reinvestment of
distributions 99,346 55,732
- ----------------------------------------------------------------------------
2,538,004 1,789,305
- ----------------------------------------------------------------------------
Cost of shares redeemed (691,292) (348,493)
- ----------------------------------------------------------------------------
Net increase in net assets from
Fund share transactions 1,846,712 1,440,812
- ----------------------------------------------------------------------------
Net increase in net assets 1,985,128 1,376,833
Net assets at the beginning of year 3,256,400 1,879,567
- ----------------------------------------------------------------------------
Net assets at the end of year $ 5,241,528 $ 3,256,400
- ----------------------------------------------------------------------------
Balance of undistributed net
investment income at end of year $ 57 $ 515
- ----------------------------------------------------------------------------
</TABLE>
* Information represents eight months of Flagship Alabama and four months of
Nuveen Flagship Alabama (see note 1 of the Notes to Financial Statements).
N/A--Flagship Alabama was not authorized to issue Class B or Class R Shares.
See accompanying notes to financial statements.
16
<PAGE>
Notes to Financial Statements
Nuveen Municipal Bond Fund
May 31, 1997 Annual Report
1. General Information and Significant Accounting Policies
The Nuveen Flagship Multistate Trust III (the "Trust") is an open-end investment
company registered under the Investment Company Act of 1940, as amended. The
Trust comprises Nuveen Flagship Alabama Municipal Bond Fund (the "Fund"), among
others. The Trust was organized as a Massachusetts business trust on July 1,
1996.
The John Nuveen Company, parent of John Nuveen & Co. Incorporated and Nuveen
Advisory Corp., respectively, the distributor ("Distributor") and investment
advisor ("Adviser") of the Fund, 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, Flagship Alabama Double Tax
Exempt Fund ("Flagship Alabama") was reorganized into the Trust and renamed
Nuveen Flagship Alabama Municipal Bond Fund ("Nuveen Flagship Alabama").
The Fund seeks to provide high tax-free income and preservation of capital
through investments in a diversified portfolio of quality municipal bonds.
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements in accordance with generally
accepted accounting principles.
Securities Valuation
The prices of municipal bonds in the 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 Fund has 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 May
31, 1997, the Fund had a when-issued purchase commitment of $197,219.
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
as required for federal income tax purposes.
17
<PAGE>
Notes to Financial Statements -- continued
Dividends and Distributions to Shareholders
Tax-exempt net investment income is declared as a dividend monthly and payment
is made or reinvestment is credited to shareholder accounts on the first
business day after month-end. Net realized capital gains and/or market discount
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 carryovers. Prior to the
reorganization, tax-exempt net investment income for Flagship Alabama was
declared as a dividend daily and payment was made on the last business day of
each month.
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
The Fund is a separate taxpayer for federal income tax purposes. The Fund
intends to comply with the requirements of the Internal Revenue Code applicable
to regulated investment companies and to distribute all of its tax-exempt net
investment income, in addition to any significant amounts of net realized
capital gains and/or market discount from investment transactions. The Fund
currently considers significant net realized capital gains and/or market
discount as amounts in excess of $.001 per share. Furthermore, the Fund intends
to satisfy conditions which will enable interest from municipal securities,
which is exempt from regular federal and Alabama state income taxes, to retain
such tax-exempt status when distributed to the shareholders of the Fund. All
income dividends paid during the fiscal year ended May 31, 1997, have been
designated Exempt Interest Dividends. Net realized capital gain and market
discount distributions are subject to federal taxation.
Flexible Sales Charge Program
The Fund offers Class A, B, C and R Shares. Class B, C and R Shares were first
offered for sale on February 1, 1997. Class A Shares are sold with a sales
charge and incur an annual 12b-1 service fee. 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 contingent deferred sales charge
("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 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 18 months 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.
18
<PAGE>
Nuveen Municipal Bond Fund
May 31, 1997 Annual Report
Derivative Financial Instruments
The Fund may invest in certain derivative financial instruments including
futures, forward, swap, and option contracts, and other financial instruments
with similar characteristics. Although the Fund is authorized to invest in such
financial instruments, and may do so in the future, it did not make any such
investments during the fiscal year ended May 31, 1997.
Expense Allocation
Expenses of the Fund 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.
Organizational Expenses
The organizational expenses incurred on behalf of the Fund (approximately
$60,800) will be reimbursed to the Adviser on a straight-line basis over a
period of three years. As of May 31, 1997, $20,264 has been reimbursed. In the
event that the Adviser's current investment in the Trust falls below $100,000
prior to the full reimbursement of the organizational expenses, then it will
forego any further reimbursement.
19
<PAGE>
Notes to Financial Statements -- continued
2. Fund Shares
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
Nuveen Flagship Flagship
Alabama* Alabama
------------------------------------------------------------
Year ended Year ended
5/31/97 5/31/96
-------------------------------------------------------------
Shares Amount Shares Amount
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold:
Class A 165,385 $ 1,650,047 174,099 $ 1,733,573
Class B 58,298 585,381 N/A N/A
Class C 20,200 203,130 -- --
Class R 10 100 N/A N/A
Shares issued to shareholders due to
reinvestment of distributions:
Class A 9,936 99,346 5,583 55,732
Class B -- -- N/A N/A
Class C -- -- -- --
Class R -- -- N/A N/A
- --------------------------------------------------------------------------------------------------------------------------
253,829 2,538,004 179,682 1,789,305
- --------------------------------------------------------------------------------------------------------------------------
Shares redeemed:
Class A (69,498) (691,292) (35,361) (348,493)
Class B -- -- N/A N/A
Class C -- -- -- --
Class R -- -- N/A N/A
- --------------------------------------------------------------------------------------------------------------------------
(69,498) (691,292) (35,361) (348,493)
- --------------------------------------------------------------------------------------------------------------------------
Net increase 184,331 $ 1,846,712 144,321 $ 1,440,812
==========================================================================================================================
</TABLE>
* Information represents eight months of Flagship Alabama and four months of
Nuveen Flagship Alabama (see note1).
N/A - Flagship Alabama was not authorized to issue Class B or Class R Shares.
3. Distributions to Shareholders
On June 9, 1997, the Fund declared a dividend distribution from its tax-exempt
net investment income which was paid on July 1, 1997, to shareholders of record
on June 9, 1997, as follows:
<TABLE>
<CAPTION>
Nuveen Flagship
Alabama
- ------------------------------------------------------------------------------
<S> <C>
Dividend per share:
Class A $.0440
Class B .0380
Class C .0395
Class R .0460
==============================================================================
</TABLE>
20
<PAGE>
Nuveen Municipal Bond Fund
May 31, 1997 Annual Report
4. Securities Transactions
Purchases and sales (including maturities) of investments in municipal
securities for the fiscal year ended May 31, 1997 (eight months of Flagship
Alabama and four months of Nuveen Flagship Alabama -- see note 1), aggregated
$4,354,191 and $2,674,332, respectively.
At May 31, 1997, the identified cost of investments owned for federal income tax
purposes was the same as the cost for financial reporting purposes for the Fund.
At May 31, 1997, the Fund had an unused capital loss carryforward of $11,473
available for federal income tax purposes to be applied against future capital
gains, if any. If not applied, the carryover will expire in the year 2005.
5. Unrealized Appreciation (Depreciation)
At May 31, 1997, net unrealized appreciation aggregated $146,982, all of which
related to appreciated securities.
6. Management Fee and Other Transactions with Affiliates
Under the Trust's investment management agreement with the Adviser, the 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 the Fund as follows:
<TABLE>
<CAPTION>
Average daily net asset value Management fee
- -----------------------------------------------------------------------------
<S> <C>
For the first $125 million .5500 of 1%
For the next $125 million .5375 of 1
For the next $250 million .5250 of 1
For the next $500 million .5125 of 1
For the next $1 billion .5000 of 1
For net assets over $2 billion .4750 of 1
=============================================================================
</TABLE>
Prior to the reorganization (see note 1) Flagship Alabama paid a management fee
of .5 of 1%. The management fee compensates the Adviser for overall investment
advisory and administrative services, and general office facilities. The Trust
pays no compensation directly to its Trustees who are affiliated with the
Adviser or to its officers, all of whom receive remuneration for their services
to the Trust from the Adviser.
The Adviser may voluntarily reimburse expenses from time to time, which may be
terminated at any time at its discretion.
21
<PAGE>
Notes to Financial Statements -- continued
During the fiscal year ended May 31, 1997, the Distributor and its predecessor
(Flagship Funds Inc., a wholly-owned subsidiary of Flagship Resources Inc.)
collected gross sales charges on purchases of Class A Shares of approximately
$51,400 of which approximately $44,500 were paid out as concessions to
authorized dealers. The distributor and its predecessor also received 12b-1
service fees on Class A Shares, approximately one-half of which was paid to
compensate authorized dealers for providing services to shareholders relating to
their investments.
During the fiscal year ended May 31, 1997, the Distributor and its predecessor
compensated authorized dealers directly with approximately $25,600 in commission
advances at the time of purchase. To compensate for commissions advanced to
authorized dealers, all 12b-1 service fees collected on Class B Shares during
the first year following a purchase, all 12b-1 distribution fees collected on
Class B Shares, and all 12b-1 service and distribution fees on Class C Shares
during the first year following a purchase are retained by the Distributor. The
remaining 12b-1 fees charged to the Fund were paid to compensate authorized
dealers for providing services to shareholders relating to their investments.
7. Composition of Net Assets
At May 31, 1997, the Fund had an unlimited number of $.01 par value shares
authorized. Net assets consisted of:
<TABLE>
<CAPTION>
Nuveen Flagship
Alabama
- -------------------------------------------------------------------------------
<S> <C>
Capital paid-in $5,108,666
Balance of undistributed net investment income 57
Accumulated net realized gain (loss) from investment transactions (14,177)
Net unrealized appreciation of investments 146,982
- -------------------------------------------------------------------------------
Net assets $5,241,528
===============================================================================
</TABLE>
22
<PAGE>
Financial Highlights
23
<PAGE>
Financial Highlights
Selected data for a share outstanding throughout each period is as
follows:
<TABLE>
<CAPTION>
Class (Inception date) Operating performance Less distributions
-------------------------- ----------------------------
Net
NUVEEN FLAGSHIP ALABAMA ++ Net realized and Distributions Net Total
asset unrealized from tax- asset return
value Net gain (loss) exempt net Distributions value on net
Year ending beginning investment from investment from capital end of asset
May 31, of period income(b) investments income gains period value(a)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Class A (4/94)
1997 $ 9.77 $.53 $ .35 $(.53) $ - $10.12 9.22%
1996 9.94 .53 (.17) (.53) - 9.77 3.72
1995 9.66 .52 .28 (.52) - 9.94 8.77
1994(c) 9.58 .03 .09 (.04) - 9.66 9.34+
Class B (2/97)
1997(c) 10.16 .11 (.02) (.11) - 10.14 .94
Class C (2/97)
1997(c) 10.16 .12 (.02) (.12) - 10.14 .99
Class R (2/97)
1997(c) 10.16 .16 (.05) (.14) - 10.13 1.08
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Annualized.
++ Information included prior to the year ending May 31, 1997,
reflects the financial highlights of Flagship Alabama.
(a) Total returns are calculated on net asset value without any
sales charge.
(b) After waiver of certain management fees or reimbursement of
expenses, if applicable, by Nuveen Advisory or its predecessor
Flagship Financial.
(c) From commencement of class operations as noted.
24
<PAGE>
Nuveen Municipal Bond Fund
May 31, 1997 Annual Report
<TABLE>
<CAPTION>
Ratios/Supplemental data
- -----------------------------------------------------------------------------------------------
Ratio Ratio
of net of net
Ratio of investment Ratio of investment
expenses income to expenses income to
to average average to average average
net assets net assets net assets net assets
Net assets before before after after Portfolio
end of period reimburse- reimburse- reimburse- reimburse- turnover
(in thousands) ment ment ment(b) ment(b) rate
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 4,446 3.04% 2.65% .40% 5.29% 72%
3,256 3.19 2.53 .48 5.24 42
1,880 7.61 (1.98) .16 5.47 120
357 34.92+ (32.50)+ -- 2.42+ --
591 2.79+ 2.18+ .71+ 4.26+ 72
205 2.62+ 2.35+ .40+ 4.57+ 72
-- .91+ 5.26+ -- 6.17+ 72
- -----------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
Independent Auditors' Report
To the Board of Trustees and Shareholders of
Nuveen Flagship Alabama Municipal Bond Fund:
We have audited the accompanying statement of net assets of Nuveen Flagship
Alabama Municipal Bond Fund, including the portfolio of investments, as of May
31, 1997, the related statement of operations for the period then ended and the
statement of changes in net assets, and the financial highlights for each of the
periods presented. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 1997, by correspondence with the Fund's custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of the Nuveen Flagship
Alabama Municipal Bond Fund at May 31, 1997, the results of its operations, the
changes in its net assets and the financial highlights for the respective stated
periods, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dayton, Ohio
July 11, 1997
26
<PAGE>
Shareholder Meeting Report
Flagship Alabama
<TABLE>
<CAPTION>
A Shares
- --------------------------------------------------------------------------------
<S> <C> <C>
Advisory Agreement For 256,854
Against --
Abstain 4,414
------------------------------------------------
Total 261,268
================================================================================
Broker Non Votes 56,056
================================================================================
Reorganization For 190,551
Against --
Abstain 1,840
------------------------------------------------
Total 192,391
================================================================================
Broker Non Votes 124,933
================================================================================
Investment Objective For 186,211
Against 6,180
Abstain --
------------------------------------------------
Total 192,391
================================================================================
Broker Non Votes 124,933
================================================================================
Investment Assets For 186,211
Against 6,180
Abstain --
------------------------------------------------
Total 192,391
================================================================================
Broker Non Votes 124,933
================================================================================
Type of Securities For 186,211
Against 6,180
Abstain --
------------------------------------------------
Total 192,391
================================================================================
Broker Non Votes 124,933
================================================================================
Borrowing For 186,211
Against 6,180
Abstain --
------------------------------------------------
Total 192,391
================================================================================
Broker Non Votes 124,933
================================================================================
Pledges For 186,211
Against 6,180
Abstain --
------------------------------------------------
Total 192,391
================================================================================
Broker Non Votes 124,933
================================================================================
Senior Securities For 186,211
Against 6,180
Abstain --
------------------------------------------------
Total 192,391
================================================================================
Broker Non Votes 124,933
------------------------------------------------
</TABLE>
27
<PAGE>
Shareholder Meeting Report
Flagship Alabama--continued
<TABLE>
<CAPTION>
A Shares
- -------------------------------------------------------------------------------
<S> <C> <C>
Underwriting For 186,211
Against 6,180
Abstain --
-----------------------------------------------
Total 192,391
===============================================================================
Broker Non Votes 124,933
===============================================================================
Real Estate For 186,211
Against 6,180
Abstain --
-----------------------------------------------
Total 192,391
===============================================================================
Broker Non Votes 124,933
===============================================================================
Commodities For 186,211
Against 6,180
Abstain --
-----------------------------------------------
Total 192,391
===============================================================================
Broker Non Votes 124,933
===============================================================================
Loans For 186,211
Against 6,180
Abstain --
-----------------------------------------------
Total 192,391
===============================================================================
Broker Non Votes 124,933
===============================================================================
Short Sales/Margin Purchases For 181,395
Against 6,180
Abstain 4,816
-----------------------------------------------
Total 192,391
===============================================================================
Broker Non Votes 124,933
===============================================================================
Put and Call Options For 186,211
Against 6,180
Abstain --
-----------------------------------------------
Total 192,391
===============================================================================
Broker Non Votes 124,933
===============================================================================
Industry Concentration For 186,211
Against 6,180
Abstain --
-----------------------------------------------
Total 192,391
===============================================================================
Broker Non Votes 124,933
===============================================================================
Affiliate Purchases For 186,211
Against 6,180
Abstain --
-----------------------------------------------
Total 192,391
===============================================================================
Broker Non Votes 124,933
-----------------------------------------------
</TABLE>
28
<PAGE>
Nuveen Municipal Bond Fund
May 31, 1997 Annual Report
<TABLE>
<CAPTION>
A Shares
- --------------------------------------------------------------------------------
<S> <C> <C>
Investment Companies For 186,211
Against 6,180
Abstain -
----------------------------------------------
Total 192,391
- --------------------------------------------------------------------------------
Broker Non Votes 124,933
- --------------------------------------------------------------------------------
12b-1 Fees For 254,992
Against 3,137
Abstain 3,139
----------------------------------------------
Total 261,268
- --------------------------------------------------------------------------------
Broker Non Votes 56,056
----------------------------------------------
</TABLE>
29
<PAGE>
Shareholder Meeting Report
Flagship Alabama--continued
<TABLE>
<CAPTION>
Directors A Shares
========================================================================
<S> <C> <C>
Bremner For 314,185
Withhold 3,139
------------------------------------------------
Total 317,324
========================================================================
Brown For 314,185
Withhold 3,139
------------------------------------------------
Total 317,324
========================================================================
Dean For 314,185
Withhold 3,139
------------------------------------------------
Total 317,324
========================================================================
Impellizzeri For 314,185
Withhold 3,139
------------------------------------------------
Total 317,324
========================================================================
Rosenheim For 314,185
Withhold 3,139
------------------------------------------------
Total 317,324
========================================================================
Sawers For 314,185
Withhold 3,139
------------------------------------------------
Total 317,324
========================================================================
Schneider For 314,185
Withhold 3,139
------------------------------------------------
Total 317,324
========================================================================
Schwertfeger For 314,185
Withhold 3,139
------------------------------------------------
Total 317,324
</TABLE>
30
<PAGE>
Nuveen Family of Mutual Funds
Nuveen offers a variety of funds designed to help you reach your financial
goals.
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
Insured
Intermediate-Term
Limited-Term
State Funds
Alabama Michigan
Arizona Missouri
California New Jersey
Colorado New Mexico
Connecticut New York
Florida North Carolina
Georgia Ohio
Kansas Pennsylvania
Kentucky South Carolina
Louisiana Tennessee
Maryland Virginia
Massachusetts Wisconsin
Shareholder Information
To purchase additional shares of your Nuveen Municipal Bond Fund, contact your
financial adviser. If you would like to add to your current investment on a
monthly or semi-annual basis, you can sign up for Nuveen's systematic investing
program, which allows you to invest a fixed dollar amount every month
automatically.
You can also invest automatically through dividend reinvestment. By reinvesting
your fund's dividends back into the fund, you gain the added growth potential of
long-term compounding.
For more information on any of these service options call your adviser, or
Nuveen at (800) 621-7227.
31
<PAGE>
Fund Information
Board of Directors
Robert P. Bremner
Lawrence H. Brown
Anthony T. Dean
Anne E. Impellizzeri
Peter R. Sawers
William J. Schneider
Timothy R. Schwertfeger
Judith M. Stockdale
Fund Manager
Nuveen Advisory Corp.
333 West Wacker Drive
Chicago, IL 60606
Custodian
The Chase Manhattan Bank
4 New York Plaza
New York, NY 10004-2413
Transfer Agent,
Shareholder Services and
Dividend Disbursing Agent
Boston Financial
Nuveen Investor Services
P.O. Box 8509
Boston, MA 02266-8509
(800) 225-8530
Legal Counsel
Fried, Frank, Harris, Shriver
& Jacobson
Washington, D.C.
Independent Auditors
Deloitte & Touche LLP
Dayton, Ohio
32
<PAGE>
Serving Investors
for Generations
[PHOTO OF JOHN NUVEEN, SR. APPEARS HERE]
John Nuveen, Sr.
NUVEEN
John Nuveen & Co. Incorporated
333 West Wacker Drive
Chicago, IL 60606-1286
(800) 621-7227
www.nuveen.com
Since our founding in 1898, John Nuveen & Co. has been synonymous with
investments that withstand the test of time. Today, we offer a broad range of
investments designed for mature investors whose portfolios are the principal
source of their ongoing financial security. More than 1.3 million investors have
trusted Nuveen to help them maintain the lifestyle they currently enjoy.
A value investing approach -- purchasing securities of strong companies and
communities that represent good long-term value -- is the cornerstone of
Nuveen's investment philosophy. It is a careful, long-term strategy that offers
the potential for attractive returns with moderated risk. Successful value
investing begins with in-depth research and a discerning eye for marketplace
opportunity. Nuveen's team of investment professionals is backed by the
discipline, resources and expertise of almost a century of investment
experience, including one of the most recognized research departments in the
industry.
To meet the unique circumstances and financial planning needs of mature
investors, Nuveen offers a wide array of equity and fixed-income mutual funds,
unit trusts, exchange-traded funds, individual managed account services, and
cash management products, including many that generate tax-free income.
To find out more about how Nuveen investment products and services can help you
preserve your financial security, talk with your financial adviser, or call us
at (800) 621-7227 for more information, including a prospectus where applicable.
Please read that information carefully before you invest.
<PAGE>
NUVEEN
MUNICIPAL
BONDS FUNDS
MAY 31, 1997
- -------------------------------
ANNUAL REPORT
- -------------------------------
DEPENDABLE, TAX-FREE INCOME
TO HELP YOU KEEP MORE OF
WHAT YOU EARN.
GEORGIA
[PHOTO APPEARS HERE]
<PAGE>
CONTENTS
1 Dear Shareholder
3 Answering Your Questions
6 Georgia Overview
9 Financial Section
29 Shareholder Meeting Report
32 Shareholder Information
33 Fund Information
<PAGE>
[PHOTO OF TIMOTHY R. SCHWERTFEGER APPEARS HERE]
DEAR SHAREHOLDER
It's a pleasure to report to you on the performance of the Nuveen Flagship
Georgia Municipal Bond Fund. Over the past year, the fund posted sizable gains.
For the fiscal year ended May 31, 1997, the value of your investment rose 9.39%
for Class A shares, if you chose to reinvest your tax-free income dividends.
Over this 12-month period, the total return performance for the fund (with
income reinvested) outpaced the 8.28% increase produced by the Lehman Brothers
Municipal Bond Index, which is used to represent the broad municipal bond market
on an unmanaged basis.
In addition to substantial total returns, shareholders continue to enjoy very
attractive current yields generated by a portfolio of quality bonds, which
provide excellent income for investors. As of May 31, 1997, shareholders were
receiving tax-free yields on net asset value of 5.20% for Class A shares. To
match this yield, investors in the 35% combined federal and state income tax
bracket would have had to earn at least 8.00% on taxable alternatives.
These results were produced against a backdrop of continued economic expansion
and the lowest unemployment rates in almost two decades, a combination that in
the past has foreshadowed an increase in inflation. In March, the Federal
Reserve made a pre-emptive strike by raising short-term interest rates by 0.25%,
but then maintained the status quo at its May and July meetings. Overall market
returns continue to be good, but fear of inflation has hampered the performance
of municipals and led to
____
1
<PAGE>
"IN ADDITION TO SUBSTANTIAL TOTAL RETURNS, SHAREHOLDERS CONTINUE TO ENJOY VERY
ATTRACTIVE CURRENT YIELDS GENERATED BY A PORTFOLIO OF QUALITY BONDS."
increased volatility in both the equity and bond markets. During this time,
bonds have often been the bellwether for the direction of stocks. Whenever
inflation talk is at its most rampant, the stock market has kept an eye on the
bond market for its response before reacting.
In the first six months of the year, the markets also focused on fiscal issues,
including the federal budget accord and discussion of plans to reduce taxes and
eliminate the deficit. The economy appeared to be moderating, corporate earnings
reports continued to exhibit strength, and interest rates fell in the second
quarter. All of this was positive news. The net effect is that the markets are
better off now than at the beginning of the year, but the volatility experienced
in getting there has been significant.
Recently, the need for diversification and a renewed emphasis on asset
allocation -- as well as attractive yields -- have sparked increased interest in
tax-free investments. The current level of the stock market reminds investors to
re-allocate profits to other segments of the market in order to limit risk.
Nuveen municipal bond funds provide an excellent lower-risk alternative, and
their current yields make them very attractive.
On behalf of everyone at Nuveen, I thank you for your confidence in us and our
family of investments. You can continue to depend on us for high-quality
investments that withstand the test of time. We look forward to reporting to you
again in six months.
Sincerely,
/s/ Timothy R. Schwertfeger
- -------------------------------
TIMOTHY R. SCHWERTFEGER
Chairman of the Board
July 15, 1997
____
2
<PAGE>
[PHOTO OF TED NEILD APPEARS HERE]
TED NEILD, HEAD OF NUVEEN'S DAYTON-BASED PORTFOLIO MANAGEMENT TEAM, TALKS ABOUT
THE MUNICIPAL BOND MARKET AND OFFERS INSIGHTS INTO FACTORS THAT AFFECTED FUND
PERFORMANCE OVER THE PAST YEAR.
ANSWERING YOUR QUESTIONS
WHAT ARE THE HAT ARE THE INVESTMENT OBJECTIVES OF THE FUND?
The fund aims to provide investors with a high level of tax-free income while
preserving capital by investing in a diversified portfolio of high-quality
municipal bonds. To that end, we attempt to maximize the funds after-tax total
return by generating high tax-free income and minimizing the distribution of
taxable capital gains when possible.
WHAT IS YOUR STRATEGY FOR MEETING THESE OBJECTIVES?
To meet this fund's objectives of income and enhanced value, our portfolio
management strategy relies on conservative value investing principles, sound
research and credit surveillance activities, and senior management involvement.
At Nuveen, value investing means taking a fundamental approach to finding bonds
that offer the best balance of high potential return with low risk regardless of
the direction of interest rates. This approach focuses on the characteristics of
individual bonds, such as sector, geographic region, structure and intrinsic
credit quality, rather than on the general economic environment. The idea behind
this philosophy is that we, as investment managers, can control the selection
process, but not the direction of the economy as a whole.
WHAT KEY ECONOMIC FACTORS AFFECTED THE FUND'S PERFORMANCE DURING THE YEAR?
The U.S. economy continued to grow, exhibiting low unemployment, increased
manufacturing and construction activity, and lack of price pressure at the
consumer and producer levels.
____
3
<PAGE>
"AT NUVEEN, VALUE INVESTING MEANS TAKING A FUNDAMENTAL APPROACH TO FINDING BONDS
THAT OFFER THE BEST BALANCE OF HIGH POTENTIAL RETURN WITH LOW RISK REGARDLESS OF
THE DIRECTION OF INTEREST RATES."
GIVEN THIS MARKET ENVIRONMENT, HOW DID THE FUND PERFORM?
The Georgia Municipal Bond Fund performed well over the past year, rewarding
investors with a total return on net asset value for the year of 9.39% for Class
A shares, including price changes and reinvested dividends. Additionally, the
fund was ranked NUMBER ONE among 30 Georgia municipal bond funds for the one-
year period by Lipper Analytical Services, a nationally recognized performance
measurement service. Steady demand, coupled with tight supply, caused munis to
outperform Treasury securities over the 12-month period.
WHAT STRATEGIES DID YOU EMPLOY TO ADD VALUE?
During periods of rising interest rates -- like we experienced during the first
quarter of 1997 -- the fund swapped out of bonds held at a loss and into similar
bonds trading at discounts in the secondary market. This provided reduced
capital gains on the fund and furthered the fund's objective of providing
superior after-tax total return. We also sold high-coupon, pre-refunded
securities at a gain and reinvested the proceeds in longer maturity bonds,
allowing us to align the fund with the original maturity profile in the
prospectus. Without this recycling process, the distribution yield would be at
risk as higher coupon bonds are called away from the portfolio.
WHAT IS THE CURRENT STATUS OF GEORGIA'S MUNICIPAL MARKET?
As one of the nation's fastest growing states in terms of population, Georgia
has benefited from steady economic and employment growth. Unemployment is
expected to remain low over the next few years. The combination of the low cost
of municipal bond insurance, the generally high ratings of many of the states
municipal issuers, and this years low issuance has created a market with below-
average activity and tight credit spreads.
"At Nuveen, value investing mean's taking a fundamental appraoch to finding
bonds that offer the best balance of high potential return with low risk
regardless of the direction of interest rates."
____
4
<PAGE>
WHAT IS THE CURRENT OUTLOOK FOR THE MUNICIPAL MARKET AS A WHOLE?
As we make our way through the seventh year of the current economic expansion,
some observers believe that a fundamental shift may have occurred in our
economy. Based on past experience and months of reports of economic growth,
especially employment statistics, the markets have long been anticipating an
increase in inflation. However, even with almost full employment, we have not
seen the expected rise in hourly wages that would be considered inflationary.
This change in the traditional economic cause-and-effect relationship has been
variously attributed to the globalization of the economy and consequent
competitive pressures, to increased use of technology, and to corporations'
recent ability to downsize as necessary. Although structural changes in the
economy appear to have suspended the relationship between faster growth and
higher inflation, the risk remains that inflation may reassert itself if
capacity constraints are reached and resources are stretched too thin.
Talk of Fed tightening will continue. If the Fed does act to increase rates, it
will be perceived as a move against inflation. If the Fed does not tighten, it
will be seen as an indication that the economy is doing well.
Nonetheless, for the remainder of 1997, the municipal market will continue to
offer the attractive yields and tax advantages that make it a good alternative
if and when a correction in the stock market occurs. While money continues to
flow into equity mutual funds, investors are also beginning to evaluate the
effect of the huge run-up in stock prices on their asset allocation, and many
are rebalancing their portfolios by shifting some assets into bonds.
____
5
<PAGE>
GEORGIA OVERVIEW
Credit Quality
[PIE CHART APPEARS HERE]
AAA/Pre-refunded 53%
BBB/NR 12%
A 19%
AA 16%
Diversification
[PIE CHART APPEARS HERE]
Water & Sewer 5%
Escrowed Bonds 14%
Hospitals 14%
Other 4%
Tax Revenue 12%
General Obligations 9%
Utilities 8%
Housing Facilities 29%
Pollution Control 5%
<TABLE>
<CAPTION>
FUND HIGHLIGHTS
- ----------------------------------------------------------------
<S> <C> <C> <C> <C>
Share Class A B C R
Inception Date 3/86 2/97 1/94 2/97
- ----------------------------------------------------------------
Net Asset Value (NAV) $10.57 $10.57 $ 10.55 $10.57
- ----------------------------------------------------------------
- ----------------------------------------------------------------
Total Net Assets ($000) $123,457
- ----------------------------------------------------------------
Average Weighted Maturity (years) 22.6
- ----------------------------------------------------------------
Duration (years) 9.36
- ----------------------------------------------------------------
<CAPTION>
ANNUALIZED TOTAL RETURN/1/
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Share Class A(NAV) A(Offer) B C R
1-Year 9.39% 4.79% 8.73% 8.80% 9.46%
5-Year 6.62% 5.71% 6.03% 6.00% 6.64%
10-Year 7.85% 7.39% 7.38% 7.24% 7.86%
- ----------------------------------------------------------------------------
<CAPTION>
TAX-FREE YIELDS
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Share Class A(NAV) A(Offer) B C R
Dist Rate 5.35% 5.12% 4.60% 4.80% 5.55%
SEC 30-Day Yld 5.20% 4.98% 4.45% 4.65% 5.41%
Taxable Equiv Yld2 8.00% 7.66% 6.85% 7.15% 8.32%
</TABLE>
1 Returns of the oldest share class of a fund are actual. Returns for other
classes are actual for the period since inception and prior to class inception
are the returns for the fund's oldest class, adjusted for differences in sales
charges and expenses. Class A shares have an initial sales charge, while Class
B, C and R shares have no initial sales charge. Class B shares have a CDSC
that declines from 5% to 0% after 6 years. Class C shares have a 1% CDSC for
redemptions within one year. Returns do not reflect imposition of the CDSC.
Giving effect to the CDSC applicable to Class B shares, the 1-year, 5-year,
and 10-year total returns above would be 4.73%, 5.87%, and 7.38%,
respectively.
2 Based on SEC yield and a combined federal and state income tax rate of 35%.
Represents the yield on a taxable investment necessary to equal the yield of
the Nuveen fund on an after-tax basis.
____
6
<PAGE>
Nuveen Flagship Georgia Municipal Bond Fund
May 31, 1997 Annual Report
* The Index Comparison shows change in value of a $10,000 investment in the 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.
Index Comparison*
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Lehman Brothers Nuveen Flagship Georgia Nuveen Flagship Georgia
Municipal Bond Index Municipal Bond Fund (NAV) Municipal Bond Fund (Offer)
<S> <C> <C> <C>
10,000 10,000 9,580 MAY 1987
10,898.1 10,861 10,404.8 MAY 1988
12,150.6 12,356.7 11,837.8 MAY 1989
13,039.7 12,919.1 12,376.5 MAY 1990
14,353.9 14,197.9 13,601.6 MAY 1991
15,764.1 15,448.3 14,799.5 MAY 1992
17,650 17,122 16,402.9 MAY 1993
18,085.8 17,434.6 16,702.4 MAY 1994
19,732.8 18,883.6 18,090.5 MAY 1995
20,634.7 19,459.6 18,642.3 MAY 1996
22,534.8 21,285.9 20,391.9 MAY 1997
</TABLE>
.Lehman Brothers Municipal Bond Index $22,535
.Nuveen Flagship Georgia Municipal Bond Fund (NAV) $21,286
.Nuveen Flagship Georgia Municipal Bond Fund (Offer) $20,392
Past performance is not predictive of future preformance.
Dividend History (A Shares)
[BAR CHART APPEARS HERE]
<TABLE>
<CAPTION>
1996 1997
<S> <C> <C> <C>
JUNE 0.04631 JANUARY 0.04799
JULY 0.04786 FEBRUARY 0.0471
AUGUST 0.04786 MARCH 0.0471
SEPTEMBER 0.04631 APRIL 0.0471
OCTOBER 0.04786 MAY 0.0471
NOVEMBER 0.04631
DECEMBER 0.04786
</TABLE>
____
7
<PAGE>
FINANCIAL SECTION
CONTENTS
10 Portfolio of Investments
17 Statement of Net Assets
18 Statement of Operations
19 Statement of Changes in Net Assets
20 Notes to Financial Statements
25 Financial Highlights
28 Independent Auditors' Report
____
9
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS
NUVEEN FLAGSHIP GEORGIA
PRINCIPAL OPTIONAL CALL MARKET
AMOUNT DESCRIPTION PROVISIONS* RATINGS** VALUE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
EDUCATION - 1.3%
$ 1,000,000 Private Colleges and Univs Facilities Authority, Georgia, No Opt. Call AAA $ 1,125,420
Revenue, Mercer University Project,
6.500%, 11/01/15
500,000 Private Colleges and Univs Authority, Georgia, 6/04 at 102 AAA 529,135
Revenue Refunding, Spelman College Project,
6.200%, 6/01/14
- --------------------------------------------------------------------------------------------------------------------------------
ESCROWED TO MATURITY - 6.5%
505,000 Cherokee County, Georgia, Water and Sewer 8/05 at 100 AAA 681,280
Authority, Revenue, 9.750%, 8/01/09
4,765,000 Colquitt County, Georgia, Development Authority, No Opt. Call Aaa 952,428
Revenue, Series C, 0.000%, 12/01/21
10,275,000 Colquitt County, Georgia, Development Authority, No Opt. Call Aaa 2,053,767
Revenue, Series A, First Mortgage,
RMK12/15/92, 0.000%, 12/01/21
2,100,000 Richmond County, Georgia, Development Authority, No Opt. Call Aaa 419,748
Revenue, Series C, 0.000%, 12/01/21
19,890,000 Richmond County, Georgia, Development Authority, No Opt. Call Aaa 3,975,613
Revenue, First Mortgage, Series A,
0.000%, 12/01/21
- --------------------------------------------------------------------------------------------------------------------------------
HOSPITALs - 13.5%
500,000 Cherokee County, Georgia, Hospital Authority, 12/00 at 102 AAA 544,405
Revenue Certificates, Series 1990,
7.250%, 12/01/15
1,000,000 Clarke County, Georgia, Hospital Authority, Revenue 1/07 at 100 AAA 907,700
Refunding Certificates, Athens Regional Medical
Project, 5.000%, 1/01/27
1,000,000 Coffee County, Georgia, Hospital Authority, Revenue 12/06 at 102 N/R 988,580
Anticipation Certificates, Coffee Regional Medical,
Series A, 6.750%, 12/01/16
Dalton, Georgia, Development Authority, Revenue
Certificates, Hamilton Health Care System:
2,000,000 5.250%, 8/15/26 2/07 at 102 AAA 1,895,600
2,000,000 5.500%, 8/15/26 No Opt. Call AAA 1,989,740
Fulco, Georgia, Hospital Authority, Revenue
Anticipation Certificates, Georgia Baptist
Health Care, Series A:
3,000,000 6.250%, 9/01/13 9/02 at 102 Baa1 3,045,180
2,600,000 6.375%, 9/01/22 9/02 at 102 Baa1 2,650,388
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
_____
10
<PAGE>
Nuveen Municipal Bond Fund
May 31, 1997 Annual Report
<TABLE>
<CAPTION>
PRINCIPAL OPTIONAL CALL MARKET
AMOUNT DESCRIPTION PROVISIONS* RATINGS** VALUE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
HOSPITALS - CONTINUED
$ 2,250,000 Fulco, Georgia, Hospital Authority, Revenue Refunding, 9/02 at 102 Baa1 $ 2,293,605
Anticipation Certificates, Georgia Baptist Health,
Series B, 6.375%, 9/01/22
1,000,000 Gainesville & Hall County, Georgia, Hospital Authority, 10/05 at 102 AAA 1,023,490
Revenue Refunding, Anticipation Certificates,
Northeast Georgia Healthcare Project,
6.000%, 10/01/20
1,250,000 Ware County, Georgia, Hospital Authority, Revenue 3/02 at 102 AAA 1,344,988
Anticipation Certificates, Series A,
6.625%, 3/01/15
- --------------------------------------------------------------------------------------------------------------------------------
HOUSING/MULTI FAMILY - 14.5%
1,840,000 Augusta, Georgia, Housing Authority, Mortgage 5/05 at 102 Aa 1,892,679
Revenue Refunding, River Glen Apartments,
Series A, 6.500%, 5/01/27
755,000 Clayton County, Georgia, Housing Authority, 12/05 at 102 AAA 749,730
Multifamily Housing Revenue, Advantages Of
Atlanta Apartments Projects, 5.700%, 12/01/16
1,000,000 De Kalb County, Georgia, Housing Authority, 1/05 at 102 AAA 1,057,450
Multi-Family Housing Revenue, The Lakes At
Indian Creek Project, 7.150%, 1/01/25
3,470,000 De Kalb County, Georgia, Housing Authority, 1/06 at 102 A 3,560,532
Multi-Family Housing Revenue, Regency
Woods I & II Project, Senior, Series A,
6.500%, 1/01/26
4,000,000 Fulton County, Georgia, Housing Authority, 7/06 at 102 A 4,032,920
Multi-Family Housing Revenue, Concorde Place
Apartments Project, Series A, 6.375%, 1/01/27
4,715,000 Lawrenceville, Georgia, Housing Authority, 6/07 at 102 AAA 4,760,783
Multi-Family Revenue, Knollwood Park Apartments
Project, 6.250%, 12/01/29
1,300,000 Macon, Georgia, Housing Authority, Mortgage 10/04 at 102 Aaa 1,340,287
Revenue Refunding, The Vistas, Series A,
6.450%, 4/01/26
500,000 Summerville, Georgia, Housing Corporation, 12/98 at 100 N/R 523,595
First Lien Revenue, 8.000%, 12/01/10
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
____
11
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OPTIONAL CALL MARKET
AMOUNT DESCRIPTION PROVISIONS* RATINGS** VALUE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
HOUSING/SINGLE FAMILY - 13.6%
Fulton County, Georgia Housing Authority, Single
Family, Revenue, Series A:
$ 355,000 6.550%, 3/01/18 3/05 at 102 AAA $ 362,906
120,000 6.600%, 3/01/28 3/05 at 102 AAA 122,842
Fulton County, Georgia, Housing Authority, Single
Family, Revenue Refunding, Mortgage, Mortgage
BKD Secs, A:
1,290,000 6.125%, 9/01/18 9/06 at 102 AAA 1,302,913
2,000,000 6.200%, 9/01/27 9/06 at 102 AAA 2,022,380
Georgia, State Housing and Finance Authority Revenue,
Refunding, Single Family Mortgage, Series A:
1,215,000 6.500%, 12/01/17 12/04 at 102 AA+ 1,251,681
750,000 6.600%, 12/01/23 12/04 at 102 AA+ 775,155
1,000,000 Georgia, State Housing and Finance Authority, 3/05 at 102 AA+ 1,024,640
Revenue, Single Family Mortgage, Subseries A-2,
6.400%, 12/01/05
2,500,000 Georgia, State Housing and Finance Authority, 6/05 at 102 AA+ 2,579,525
Revenue, Single Family Mortgage, Series B,
Subseries B-2, 6.550%, 12/01/27
4,000,000 Georgia, State Housing and Finance Authority, 6/06 at 102 AA+ 4,120,720
Revenue, Single Family Mortgage, Series A,
Subseries A-2, 6.450%, 12/01/27
310,000 Georgia, State Residential Finance Authority, Home 12/99 at 103 AA+ 325,990
Ownership Mortgage, Senior, Series D,
Subseries D-3, 7.800%, 6/01/21
350,000 Georgia, State Residential Finance Authority, Home 12/00 at 103 AA+ 368,498
Ownership Mortgage, Series A,
Subseries A-2, 7.750%, 6/01/18
1,615,000 Georgia, State Residential Finance Authority, Home 12/01 at 103 AA+ 1,691,874
Ownership Mortgage, Series A, 7.250%, 12/01/21
750,000 Georgia, State Residential Finance Authority, 12/98 at 103 AA+ 787,095
Single Family, Insured Mortgage, FHA Insured
Virginia Guaranteed, Series B, Subseries B-1,
8.000%, 12/01/16
- --------------------------------------------------------------------------------------------------------------------------------
INDUSTRIAL DEVELOPMENT POLLUTION CONTROL - 5.1%
1,000,000 Cartersville, Georgia, Development Authority, 5/02 at 102 A+ 1,075,900
Revenue, Water and Wastewater Facilities,
Anheuser, 6.750%, 2/01/12
</TABLE>
____
12
<PAGE>
Nuveen Municipal Bond Fund
May 31, 1997 Annual Report
<TABLE>
<CAPTION>
PRINCIPAL OPTIONAL CALL MARKET
AMOUNT DESCRIPTION PROVISIONS* RATINGS** VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INDUSTRIAL DEVELOPMENT POLLUTION CONTROL - CONTINUED
$ 2,000,000 Cartersville, Georgia, Development Authority, 5/07 at 101 A+ $ 2,031,540
Revenue Refunding, Sewer Facilities,
Anheuser-Busch, 6.125%, 5/01/27
1,000,000 Savannah, Georgia, Economic Development No Opt. Call A1 1,049,780
Authority, Pollution Control, Revenue Refunding,
Union Camp Corporation Project, 6.150%, 3/01/17
500,000 Wayne County, Georgia, Development Authority, 7/00 at 102 BBB+ 535,865
Solid Waste Disposal, Revenue, Itt Rayonier
Inc. Project, 8.000%, 7/01/15
1,000,000 Wayne County, Georgia, Development Authority, 5/03 at 102 BBB+ 1,035,780
Pollution Control, Revenue Refunding, Itt Rayonier
Inc. Project, 6.100%, 11/01/07
500,000 White County, Georgia, Development Authority, 6/02 at 102 BBB+ 526,780
Industrial Development, Revenue Refunding,
Springs Industries, Inc., 6.850%, 6/01/10
- -----------------------------------------------------------------------------------------------------------------------------------
MUNICIPAL APPROPRIATION OBLIGATIONS - 1.6%
1,750,000 Butts County, Georgia, Certificates of 12/04 at 102 AAA 1,936,515
Participation, 6.750%, 12/01/14
- -----------------------------------------------------------------------------------------------------------------------------------
MUNICIPAL REVENUE/TRANSPORTATION - 0.8%
1,000,000 Atlanta, Georgia, Airport Facilities, Revenue, 1/07 at 101 AAA 997,670
Refunding, 5.250%, 1/01/10
- -----------------------------------------------------------------------------------------------------------------------------------
MUNICIPAL REVENUE/UTILITY - 8.2%
1,800,000 Appling County, Georgia, Development Authority, 1/04 at 101 AAA 1,998,396
Pollution Control, Revenue, Oglethorpe Power
Corporation Hatch Project, 7.150%, 1/01/21
1,500,000 Georgia Municipal Electric Authority, Power, 1/15 at 100 A 1,624,950
Revenue, General, Series B, 6.375%, 1/01/16
1,000,000 Georgia Municipal Electric Authority, Power, 1/10 at 100 AAA 1,014,500
Revenue Refunding, Series Z, Fsa, CRS,
5.500%, 1/01/12
Monroe County, Georgia, Development Authority,
Pollution Control Revenue, Oglethorpe, Power,
Scherer, Series A, Refunding:
500,000 6.750%, 1/01/10 No Opt. Call A 563,490
1,000,000 6.800%, 1/01/12 No Opt. Call A 1,129,180
</TABLE>
____
13
<PAGE>
PORTFOLIO OF INVESTMENTS
NUVEEN FLAGSHIP GEORGIA - CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL OPTIONAL CALL MARKET
AMOUNT DESCRIPTION PROVISIONS* RATINGS** VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL REVENUE/UTILITY - CONTINUED
$ 1,250,000 Puerto Rico, Electric Power Authority, Power Revenue, 7/04 at 100 BBB+ $ 1,204,850
Formerly Puerto Rico Commonwealth, Water
Resource Authority, Power, Series T,
5.500%, 7/01/20
1,000,000 Puerto Rico, Electric Power Authority, Power Revenue, 7/05 at 100 BBB+ 930,880
Formerly Puerto Rico Commonwealth Water
Resource Authority, Power, Refunding, Series Z,
5.250%, 7/01/21
1,500,000 Puerto Rico, Electric Power Authority, Power Revenue, No Opt. Call AAA 504,420
Formerly Puerto Rico Commonwealth Water
Resource Authority, Power, Capital Appreciation,
Refunding, Series N, Mbia, Ibc, 0.000%, 7/01/17
3,000,000 Puerto Rico, Electric Power Authority, Power Revenue, No Opt. Call AAA 1,008,840
Formerly Puerto Rico Commonwealth Water
Resource Authority, Power, Capital Apprec,
Series O, Mbia, Ibc, 0.000%, 7/01/17
170,000 Puerto Rico, Electric Power Authority, Power Revenue, 7/05 at 100 AAA 167,244
Formerly Puerto Rico Commonwealth Water
Resource Authority, Power, Series X, Mbia, Ibc,
5.500%, 7/01/25
- -----------------------------------------------------------------------------------------------------------------------------------
MUNICIPAL REVENUE/WATER AND SEWER - 5.0%
1,000,000 Atlanta, Georgia, Solid Waste Management Authority, 12/06 at 100 AA 960,720
Revenue, Landfill Closure Project, 5.250%, 12/01/21
Brunswick, Georgia, Water and Sewer, Revenue
Refunding and Improvement:
500,000 6.000%, 10/01/11 No Opt. Call AAA 538,190
400,000 6.100%, 10/01/19 No Opt. Call AAA 431,420
2,000,000 Cherokee County, Georgia, Water and Sewer Authority, No Opt. Call AAA 2,001,220
Revenue Refunding and Improvement,
5.500%, 8/01/23
1,000,000 Conyers, Georgia, Water and Sewer, Revenue, 7/04 at 102 AAA 1,119,940
Series A, 6.600%, 7/01/15
1,000,000 Milledgeville, Georgia, Water and Sewer, Revenue No Opt. Call AAA 1,072,430
Refunding, 6.000%, 12/01/16
- -----------------------------------------------------------------------------------------------------------------------------------
NON-STATE GENERAL OBLIGATIONS - 8.2%
1,215,000 Clayton County, Georgia, Solid Waste Management 2/02 at 102 AA 1,293,793
Authority, Revenue, Series A, 6.500%, 2/01/12
</TABLE>
____
14
<PAGE>
Nuveen Municipal Bond Fund
May 31, 1997 Annual Report
<TABLE>
<CAPTION>
PRINCIPAL OPTIONAL CALL MARKET
AMOUNT DESCRIPTION PROVISIONS* RATINGS** VALUE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NON-STATE GENERAL OBLIGATIONS - CONTINUED
$ 800,000 Downtown Marietta Development Authority, Georgia 1/02 at 102 AAA $ 868,888
Revenue, Cobb County Lease, 6.600%, 1/01/19
1,000,000 Downtown Smyrna Development Authority, Georgia 2/05 at 102 AAA 1,095,350
Revenue, 6.600%, 2/01/17
Peach County, Georgia, School District:
1,015,000 6.300%, 2/01/14 2/05 at 102 AAA 1,092,922
3,810,000 6.400%, 2/01/19 2/05 at 102 AAA 4,074,452
1,500,000 Washington County, Georgia, School District, 1/05 at 102 AAA 1,673,580
6.875%, 1/01/14
- --------------------------------------------------------------------------------------------------------------------------------
PRE-REFUNDED - 7.7%***
750,000 Burke County, Georgia, Development Authority 7/97 at 102 A 767,858
Pollution Control, Revenue, Georgia Power
Company, Plant Vogtle Project, 8.375%, 7/01/17
Chatham County, Georgia, Hospital Authority,
Revenue, Memorial Medical Center Inc., Series A:
100,000 7.000%, 1/01/10 1/01 at 102 AAA 109,702
1,130,000 7.000%, 1/01/21 1/01 at 102 AAA 1,239,633
500,000 Colquitt County, Georgia, Hospital Authority, Revenue 3/02 at 102 AAA 553,850
Certificates, Colquitt Regional Medical Center,
6.700%, 3/01/12
500,000 Dade County, Georgia, Water and Sewer Authority, 7/99 at 102 AAA 541,870
Water and Sewer Revenue Refunding,
7.600%, 7/01/15
500,000 Gainesville, Georgia, Water and Sewer Revenue 11/00 at 102 AAA 552,115
Refunding, Series B, 7.200%, 11/15/10
1,855,000 Marietta, Georgia, Development Authority, Revenue, 12/99 at 102 AAA 2,017,127
Life College Inc. Project, 7.250%, 12/01/19
1,200,000 Metropolitan Atlanta Rapid Transit Authority, Georgia 7/99 at 102 AAA 1,291,008
Sales Tax Revenue, Series L, 7.200%, 7/01/20
1,650,000 Metropolitan Atlanta Rapid Transit Authority, Georgia 7/04 at 102 AAA 1,882,221
Sales Tax Revenue, Second Indenture, Series A,
6.900%, 7/01/20
500,000 Ware County, Georgia, Hospital Authority, Revenue, 3/00 at 102 AAA 543,035
Anticipation Certificates, 7.125%, 3/01/15
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
____
15
<PAGE>
PORTFOLIO OF INVESTMENTS
NUVEEN FLAGSHIP GEORGIA - CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL OPTIONAL CALL MARKET
AMOUNT DESCRIPTION PROVISIONS* RATINGS** VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SPECIAL TAX REVENUE -12.0%
$ 570,000 Burke County, Georgia, Development Authority, 2/01 at 102 A $ 614,819
Industrial Development Revenue, Georgia Safe
Corporation Project, 7.500%, 2/01/11
1,150,000 Burke County, Georgia, Economic Development 12/02 at 102 A 1,235,100
Authority, Industrial Development Revenue, Ritz
Industrial Transformers, 7.250%, 12/01/11
3,000,000 Cobb-Marietta, Georgia, Coliseum and Exhibit Hall 10/19 at 100 AAA 3,056,250
Authority, Revenue, Refunding, 5.625%, 10/01/26
2,765,000 Metropolitan Atlanta Rapid Transit Authority, Georgia No Opt. Call AA- 3,034,588
Sales Tax, Revenue Refunding, Series N,
6.250%, 7/01/18
500,000 Metropolitan Atlanta Rapid Transit Authority, Georgia No Opt. Call AAA 549,710
Sales Tax, Revenue Refunding, Series P,
6.250%, 7/01/20
6,000,000 Puerto Rico Commonwealth Highway and 7/16 at 100 A 5,835,420
Transportation Authority, Highway Revenue,
Series Y, 5.500%, 7/01/36
550,000 Puerto Rico Commonwealth Infrastructure Financing 7/98 at 102 BBB+ 581,762
Authority, Special, Series A, 7.750%, 7/01/08
- -------------------------------------------------------------------------------------------------------------------------------
STATE/TERRITORIAL GENERAL OBLIGATIONS - 0.9%
100,000 Puerto Rico Commonwealth, Refunding, 7/05 at 101 AAA 97,971
5.375%, 7/01/22
450,000 Puerto Rico Commonwealth, MBIA, Ibc, 7/04 at 101 1/2 AAA 483,907
6.450%, 7/01/17
475,000 Puerto Rico Public Buildings Authority Guaranteed 7/03 at 101 1/2 A 474,705
Public Education and Health Facilities, Refunding,
Series M, 5.750%, 7/01/15
- -------------------------------------------------------------------------------------------------------------------------------
$ 150,425,000 Total Investments - (cost $115,758,671) - 98.9% 122,097,398
- -------------------------------------------------------------------------------------------------------------------------------
Other Assets Less Liabilities - 1.1% 1,359,352
------------------------------------------------------------------------------------------------------
Net Assets - 100% $123,456,750
======================================================================================================
</TABLE>
* Optional Call Provisions (not covered by the
report of independent auditors): 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
auditors): Using the higher of Standard and Poor's
or Moody's rating.
*** Pre-refunded 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. Pre-
refunded securities are normally considered to be
equivalent to AAA rated securities.
N/R - Investment is not rated.
____
16
<PAGE>
STATEMENT OF NET ASSETS Nuveen Municipal Bond Fund
May 31, 1997 May 31, 1997 Annual Report
<TABLE>
<CAPTION>
NUVEEN FLAGSHIP
GEORGIA
- --------------------------------------------------------------------------------
<S> <C>
ASSETS
Investments in municipal securities, at market value (note 1) $ 122,097,398
Cash 388,954
Receivables:
Interest 2,562,322
Shares sold 186,736
Investments sold 50,000
Other assets 27,963
- --------------------------------------------------------------------------------
Total assets 125,313,373
- --------------------------------------------------------------------------------
LIABILITIES
Payables:
Investments purchased 989,610
Shares redeemed 206,840
Accrued expenses:
Management fees (note 6) 43,078
Other 69,550
Dividends payable 547,545
- --------------------------------------------------------------------------------
Total liabilities 1,856,623
- --------------------------------------------------------------------------------
Net assets (note 7) $ 123,456,750
================================================================================
CLASS A SHARES (NOTE 1)
Net assets $ 111,518,477
Shares outstanding 10,551,439
Net asset value and redemption price per share $ 10.57
Offering price per share (net asset value per share plus
maximum sales charge of 4.20% of offering price) $ 11.03
================================================================================
CLASS B SHARES (NOTE 1)
Net assets $ 113,275
Shares outstanding $ 10,720
Net asset value, offering and redemption price per share $ 10.57
================================================================================
CLASS C SHARES (NOTE 1)
Net assets $ 11,802,566
Shares outstanding 1,119,142
Net asset value, offering and redemption price per share $ 10.55
================================================================================
CLASS R SHARES (NOTE 1)
Net assets $ 22,432
Shares outstanding 2,122
Net asset value, offering and redemption price per share $ 10.57
================================================================================
</TABLE>
See accompanying notes to financial statements.
____
17
<PAGE>
STATEMENT OF OPERATIONS
YEAR ENDED MAY 31, 1997
<TABLE>
<CAPTION>
NUVEEN FLAGSHIP
GEORGIA*
- --------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
Tax-exempt interest income (note 1) $ 7,487,788
- --------------------------------------------------------------------------------
EXPENSES
Management fees (note 6) 622,281
12b-1 service fees - Class A (notes 1 and 6) 366,712
12b-1 distribution and service fees - Class B (notes 1 and 6) 173
12b-1 distribution and service fees - Class C (notes 1 and 6) 92,494
Shareholders' servicing agent fees and expenses 79,289
Custodian's fees and expenses 79,954
Trustees' fees and expenses (note 6) 3,223
Professional fees 17,554
Shareholders' reports - printing and mailing expenses 11,692
Federal and state registration fees 3,610
Other expenses 5,532
- --------------------------------------------------------------------------------
Total expenses before reimbursement 1,282,514
Expense reimbursement (note 6) (283,341)
- --------------------------------------------------------------------------------
Net expenses 999,173
- --------------------------------------------------------------------------------
Net investment income 6,488,615
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN FROM INVESTMENTS
Net realized gain from investment transactions (notes 1 and 4) 816,979
Net change in unrealized appreciation or depreciation of
investments 3,379,145
- --------------------------------------------------------------------------------
Net gain from investments 4,196,124
- --------------------------------------------------------------------------------
Net increase in net assets from operations $ 10,684,739
================================================================================
</TABLE>
* Information represents eight months of Flagship Georgia and four months of
Nuveen Flagship Georgia (see note 1 of the Notes to Financial Statements).
See accompanying notes to financial statements.
____
18
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS Nuveen Municipal Bond Fund
May 31, 1997 Annual Report
<TABLE>
<CAPTION>
NUVEEN FLAGSHIP
GEORGIA* GEORGIA
---------------------------------------
YEAR ENDED 5/31/97 YEAR ENDED 5/31/96
- --------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS
Net investment income $ 6,488,615 $ 6,536,598
Net realized gain from investment
transactions (notes 1 and 4) 816,979 600,909
Net change in unrealized appreciation or
depreciation of investments 3,379,145 (3,544,803)
- --------------------------------------------------------------------------------
Net increase in net assets from operations 10,684,739 3,592,704
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1)
From undistributed net investment income:
Class A (5,973,872) (6,196,741)
Class B (779) N/A
Class C (513,629) (392,640)
Class R (289) N/A
- --------------------------------------------------------------------------------
Decrease in net assets from distributions to
shareholders (6,488,569) (6,589,381)
- --------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 2)
Net proceeds from sale of shares 18,042,463 14,972,667
Net proceeds from shares issued to
shareholders due to reinvestment
of distributions 3,251,554 3,853,135
- --------------------------------------------------------------------------------
21,294,017 18,825,802
- --------------------------------------------------------------------------------
Cost of shares redeemed (19,327,898) (18,861,782)
- --------------------------------------------------------------------------------
Net increase (decrease) in net assets
from Fund share transactions 1,966,119 (35,980)
- --------------------------------------------------------------------------------
Net increase (decrease) in net assets 6,162,289 (3,032,657)
Net assets at the beginning of year 117,294,461 120,327,118
- --------------------------------------------------------------------------------
Net assets at the end of year $123,456,750 $117,294,461
- --------------------------------------------------------------------------------
Balance of undistributed net investment
income at end of year $ 46 $ --
- --------------------------------------------------------------------------------
</TABLE>
* Information represents eight months of Flagship Georgia and four months of
Nuveen Flagship Georgia (see note 1 of the Notes to Financial Statements).
N/A - Flagship Georgia was not authorized to issue Class B or Class R Shares.
See accompanying notes to financial statements.
____
19
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. GENERAL INFORMATION AND SIGNIFICANT ACCOUNTING POLICIES
The Nuveen Flagship Multistate Trust III (the "Trust") is an open-end investment
company registered under the Investment Company Act of 1940, as amended. The
Trust comprises Nuveen Flagship Georgia Municipal Bond Fund (the "Fund"), among
others. The Trust was organized as a Massachusetts business trust on July 1,
1996.
The John Nuveen Company, parent of John Nuveen & Co. Incorporated and Nuveen
Advisory Corp., respectively, the distributor ("Distributor") and investment
advisor ("Adviser") of the Fund, 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, Flagship Georgia Double Tax
Exempt Fund ("Flagship Georgia") was reorganized into the Trust and renamed
Nuveen Flagship Georgia Municipal Bond Fund ("Nuveen Flagship Georgia").
The Fund seeks to provide high tax-free income and preservation of capital
through investments in a diversified portfolio of quality municipal bonds.
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements in accordance with generally
accepted accounting principles.
Securities Valuation
The prices of municipal bonds in the 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 Fund has 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 May
31, 1997, the Fund had no such 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.
____
20
<PAGE>
Nuveen Municipal Bond Fund
May 31, 1997 Annual Report
Dividends and Distributions to Shareholders
Tax-exempt net investment income is declared as a dividend monthly and payment
is made or reinvestment is credited to shareholder accounts on the first
business day after month-end. Net realized capital gains and/or market discount
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 carryovers. Prior to the
reorganization, tax-exempt net investment income for Flagship Georgia was
declared as a dividend daily and payment was made on the last business day of
each month.
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
The Fund is a separate taxpayer for federal income tax purposes. The Fund
intends to comply with the requirements of the Internal Revenue Code applicable
to regulated investment companies and to distribute all of its tax-exempt net
investment income, in addition to any significant amounts of net realized
capital gains and/or market discount from investment transactions. The Fund
currently considers significant net realized capital gains and/or market
discount as amounts in excess of $.001 per share. Furthermore, the Fund intends
to satisfy conditions which will enable interest from municipal securities,
which is exempt from regular federal and Georgia state income taxes, to retain
such tax-exempt status when distributed to the shareholders of the Fund. All
income dividends paid during the fiscal year ended May 31, 1997, have been
designated Exempt Interest Dividends. Net realized capital gains and market
discount distributions are subject to federal taxation.
Flexible Sales Charge Program
The Fund offers Class A, B, C and R Shares. Class B and R Shares were first
offered for sale on February 1, 1997. Class A Shares are sold with a sales
charge and incur an annual 12b-1 service fee. 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 contingent deferred sales charge
("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 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 18 months 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.
____
21
<PAGE>
NOTES TO FINANCIAL STATEMENTS-CONTINUED
Derivative Financial Instruments
The Fund may invest in certain derivative financial instruments including
futures, forward, swap, and option contracts, and other financial instruments
with similar characteristics. Although the Fund is authorized to invest in such
financial instruments, and may do so in the future, it did not make any such
investments during the fiscal year ended May 31, 1997.
Expense Allocation
Expenses of the Fund 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.
2. FUND SHARES
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
NUVEEN FLAGSHIP FLAGSHIP
GEORGIA* GEORGIA
----------------------------------------------------------------
YEAR ENDED YEAR ENDED
5/31/97 5/31/96
----------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold:
Class A 1,320,552 $ 13,778,494 1,076,625 $ 11,247,191
Class B 10,720 112,660 N/A N/A
Class C 393,868 4,129,100 355,608 3,725,476
Class R 2,104 22,209 N/A N/A
Shares issued to shareholders due to
reinvestment of distributions:
Class A 287,354 2,992,929 343,594 3,593,871
Class B -- -- N/A N/A
Class C 24,846 258,440 24,841 259,264
Class R 18 185 N/A N/A
- ---------------------------------------------------------------------------------------------------------
2,039,462 21,294,017 1,800,668 18,825,802
- ---------------------------------------------------------------------------------------------------------
Shares redeemed:
Class A (1,627,331) (16,977,352) (1,686,034) (17,598,671)
Class B -- -- N/A N/A
Class C (225,854) (2,350,546) (122,108) (1,263,111)
Class R -- -- N/A N/A
- ---------------------------------------------------------------------------------------------------------
(1,853,185) (19,327,898) (1,808,142) (18,861,782)
- ---------------------------------------------------------------------------------------------------------
Net increase (decrease) 186,277 $ 1,966,119 (7,474) $ (35,980)
- ---------------------------------------------------------------------------------------------------------
</TABLE>
* Information represents eight months of Flagship Georgia and four months of
Nuveen Flagship Georgia (see note1).
N/A- Flagship Georgia was not authorized to issue Class B or Class R Shares.
____
22
<PAGE>
Nuveen Municipal Bond Fund
May 31, 1997 Annual Report
3.DISTRIBUTIONS TO SHAREHOLDERS
On June 9, 1997, the Fund declared a dividend distribution from its tax-exempt
net investment income which was paid on July 1, 1997, to shareholders of record
on June 9, 1997, as follows:
<TABLE>
<CAPTION>
NUVEEN FLAGSHIP
GEORGIA
- --------------------------------------------------------------------------------
<S> <C>
Dividend per share:
Class A $.0470
Class B .0405
Class C .0420
Class R .0490
================================================================================
</TABLE>
4. SECURITIES TRANSACTIONS
Purchases and sales (including maturities) of investments in municipal
securities and temporary municipal investments for the fiscal year ended May 31,
1997, were as follows:
<TABLE>
<CAPTION>
NUVEEN FLAGSHIP
GEORGIA*
- --------------------------------------------------------------------------------
<S> <C>
PURCHASES
Investments in municipal securities $48,893,968
Temporary municipal investments 5,500,000
SALES
Investments in municipal securities 6,954,834
Temporary municipal investments 5,500,000
================================================================================
</TABLE>
* Information represents eight months of Flagship Georgia and four months of
Nuveen Flagship Georgia (see note 1).
At May 31, 1997, the identified cost of investments owned for federal income tax
purposes was the same as the cost for financial reporting purposes for the Fund.
At May 31, 1997, the Fund had unused capital loss carryforwards of $2,608,045
available for federal income tax purposes to be applied against future capital
gains, if any. If not applied, $704,617 of the carryover will expire in the year
2001, $1,400,169 will expire in the year 2002 and $503,259 will expire in the
year 2003.
5. UNREALIZED APPRECIATION (DEPRECIATION)
At May 31, 1997, net unrealized appreciation aggregated $6,338,727 of which
$6,343,997 related to appreciated securities and $5,270 related to depreciated
securities.
6. MANAGEMENT FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Under the Trust's investment management agreement with the Adviser, the 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 the Fund as follows:
____
23
<PAGE>
NOTES TO FINANCIAL STATEMENTS-CONTINUED
<TABLE>
<CAPTION>
AVERAGE DAILY NET ASSET VALUE MANAGEMENT FEE
- --------------------------------------------------------------------------------
<S> <C>
For the first $125 million .5500 of 1%
For the next $125 million .5375 of 1%
For the next $250 million .5250 of 1%
For the next $500 million .5125 of 1%
For the next $1 billion .5000 of 1%
For net assets over $2 billion .4750 of 1%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Prior to the reorganization (see note 1) Flagship Georgia paid a management fee
of .5 of 1%. The management fee compensates the Adviser for overall investment
advisory and administrative services, and general office facilities. The Trust
pays no compensation directly to its Trustees who are affiliated with the
Adviser or to its officers, all of whom receive remuneration for their services
to the Trust from the Adviser.
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 May 31, 1997, the Distributor and its predecessor
(Flagship Funds Inc., a wholly-owned subsidiary of Flagship Resources Inc.)
collected gross sales charges on purchases of Class A Shares of approximately
$342,600, of which approximately $293,900 were paid out as concessions to
authorized dealers. The Distributor and its predecessor also received 12b-1
service fees on Class A Shares, approximately one-half of which was paid to
compensate authorized dealers for providing services to shareholders relating to
their investments.
During the fiscal year ended May 31, 1997, the Distributor and its predecessor
compensated authorized dealers directly with approximately $69,700 in commission
advances at the time of purchase. To compensate for commissions advanced to
authorized dealers, all 12b-1 service fees collected on Class B Shares during
the first year following a purchase, all 12b-1 distribution fees collected on
Class B Shares, and all 12b-1 service and distribution fees on Class C Shares
during the first year following a purchase are retained by the Distributor. The
remaining 12b-1 fees charged to the Fund were paid to compensate authorized
dealers for providing services to shareholders relating to their investments.
The Distributor and its predecessor also collected and retained approximately
$3,200 of CDSC on share redemptions during the fiscal year ended May 31, 1997.
7. COMPOSITION OF NET ASSETS
At May 31, 1997, the Fund had an unlimited number of $.01 par value shares
authorized. Net assets consisted of:
<TABLE>
<CAPTION>
NUVEEN FLAGSHIP
GEORGIA
- --------------------------------------------------------------------------------
<S> <C>
Capital paid-in $119,726,022
Balance of undistributed net investment income 46
Accumulated net realized gain (loss)
from investment transactions (2,608,045)
Net unrealized appreciation of investments 6,338,727
- --------------------------------------------------------------------------------
Net assets $123,456,750
================================================================================
</TABLE>
____
24
<PAGE>
FINANCIAL HIGHLIGHTS
____
25
<PAGE>
FINANCIAL HIGHLIGHTS
Selected data for a share outstanding throughout each period is as
follows:
<TABLE>
<CAPTION>
CLASS (INCEPTION DATE) OPERATING PERFORMANCE LESS DISTRIBUTIONS
---------------------------- -----------------------------
NET
NUVEEN FLAGSHIP GEORGIA NET REALIZED AND DIVIDENDS NET TOTAL
ASSET UNREALIZED FROM TAX- ASSET RETURN
VALUE NET GAIN (LOSS) EXEMPT NET DISTRIBUTIONS VALUE ON NET
YEAR ENDING BEGINNING INVESTMENT FROM INVESTMENT FROM CAPITAL END OF ASSET
MAY 31, OF PERIOD INCOME (B) INVESTMENTS INCOME GAINS PERIOD VALUE (A)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS A (3/86)
1997 $10.20 $.57 $ .37 $(.57) $ -- $10.57 9.39%
1996 10.46 .57 (.25) (.58) -- 10.20 3.05
1995 10.23 .58 .23 (.58) -- 10.46 8.31
1994 10.62 .59 (.39) (.59) -- 10.23 1.83
1993 10.16 .62 .45 (.61) -- 10.62 10.84
1992 9.95 .63 .21 (.63) -- 10.16 8.81
1991 9.67 .64 .28 (.64) -- 9.95 9.90
1990 9.88 .65 (.22) (.64) -- 9.67 4.55
1989 9.30 .65 .59 (.66) -- 9.88 13.77
1988 9.19 .66 .11 (.66) -- 9.30 8.61
CLASS B (2/97)
1997(c) 10.66 .14 (.11) (.12) -- 10.57 .31
CLASS C (1/94)
1997 10.18 .51 .37 (.51) -- 10.55 8.80
1996 10.44 .51 (.25) (.52) -- 10.18 2.48
1995 10.21 .52 .23 (.52) -- 10.44 7.72
1994(c) 10.91 .19 (.69) (.20) -- 10.21 (10.96)+
CLASS R (2/97)
1997(c) 10.65 .18 (.06) (.20) -- 10.57 1.11
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Annualized.
++ Information included prior to the year ending May 31, 1997,
reflects the financial highlights of Flagship Georgia.
(a) Total returns are calculated on net asset value without any
sales charge.
(b) After waiver of certain management fees or reimbursement of
expenses, if applicable, by Nuveen Advisory or its predecessor
Flagship Financial.
(c) From commencement of class operations as noted.
____
26
<PAGE>
Nuveen Municipal Bond Fund
May 31, 1997 Annual Report
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------------------------------------------------
RATIO RATIO
OF NET OF NET
RATIO OF INVESTMENT RATIO OF INVESTMENT
EXPENSES IN COME TO EXPENSES INCOME TO
TO AVERAGE AVERAGE TO AVERAGE AVERAGE
NET ASSETS NET ASSETS NET ASSETS NET ASSETS
NET ASSETS BEFORE BEFORE AFTER AFTER PORTFOLIO
END OF PERIOD REIMBURSE- REIMBURSE- REIMBURSE- REIMBURSE- TURNOVER
(IN THOUSANDS) MENT MENT MENT (B) MENT (B) RATE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$111,518 1.02% 5.20% .78% 5.44% 39%
107,862 1.08 5.18 .80 5.46 59
113,354 1.09 5.53 .83 5.79 40
123,068 1.06 5.11 .70 5.47 39
101,196 1.08 5.42 .62 5.88 30
70,650 1.14 5.74 .57 6.31 21
44,829 1.22 6.10 .72 6.60 24
36,034 1.23 6.23 .84 6.62 34
35,637 1.21 6.49 .96 6.74 23
29,701 1.18 6.87 .91 7.14 46
113 1.63+ 4.49+ 1.32+ 4.80+ 39
11,803 1.56 4.63 1.32 4.87 39
9,433 1.63 4.61 1.34 4.90 59
6,973 1.64 4.92 1.38 5.18 40
4,348 1.60+ 4.22+ 1.27+ 4.55+ 39
22 .68+ 5.41+ .38+ 5.71+ 39
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
____
27
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF
NUVEEN FLAGSHIP GEORGIA MUNICIPAL BOND FUND:
We have audited the accompanying statement of net assets of Nuveen Flagship
Georgia Municipal Bond Fund, including the portfolio of investments, as of May
31, 1997, the related statement of operations for the period then ended and the
statement of changes in net assets, and the financial highlights for each of
the periods presented. These financial statements and financial highlights are
the responsibility of the Fund's management. Our responsibility is to express
an opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 1997, by correspondence with the Fund's custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of the Nuveen Flagship
Georgia Municipal Bond Fund at May 31, 1997, the results of its operations, the
changes in its net assets and the financial highlights for the respective stated
periods, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dayton, Ohio
July 11, 1997
____
28
<PAGE>
SHAREHOLDER MEETING REPORT
FLAGSHIP GEORGIA
<TABLE>
<CAPTION>
A SHARES C SHARES
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
ADVISORY AGREEMENT For 8,274,496 795,047
Against 255,231 5,079
Abstain 139,357 38,938
-----------------------------------------------
Total 8,669,084 839,064
- ----------------------------------------------------------------------------
Broker Non Votes 129,460 30,572
- ----------------------------------------------------------------------------
REORGANIZATION For 5,411,178 489,766
Against 191,350 10,329
Abstain 110,415 29,861
-----------------------------------------------
Total 5,712,943 529,956
- ----------------------------------------------------------------------------
Broker Non Votes 3,085,601 339,680
- ----------------------------------------------------------------------------
INVESTMENT OBJECTIVE For 5,431,040 495,083
Against 326,838 27,879
Abstain 15,253 6,993
-----------------------------------------------
Total 5,773,131 529,955
- ----------------------------------------------------------------------------
Broker Non Votes 3,025,413 339,681
- ----------------------------------------------------------------------------
INVESTMENT ASSETS For 5,437,551 495,083
Against 320,715 27,879
Abstain 14,864 6,993
-----------------------------------------------
Total 5,773,130 529,955
- ----------------------------------------------------------------------------
Broker Non Votes 3,025,414 339,681
- ----------------------------------------------------------------------------
TYPE OF SECURITIES For 5,433,282 495,083
Against 322,672 27,879
Abstain 17,176 6,993
-----------------------------------------------
Total 5,773,130 529,955
- ----------------------------------------------------------------------------
Broker Non Votes 3,025,414 339,681
- ----------------------------------------------------------------------------
BORROWING For 5,429,414 493,229
Against 326,540 27,879
Abstain 17,176 8,847
-----------------------------------------------
Total 5,773,130 529,955
- ----------------------------------------------------------------------------
Broker Non Votes 3,025,414 339,681
- ----------------------------------------------------------------------------
PLEDGES For 5,434,230 495,083
Against 322,997 27,879
Abstain 15,903 6,993
-----------------------------------------------
Total 5,773,130 529,955
- ----------------------------------------------------------------------------
Broker Non Votes 3,025,414 339,681
- ----------------------------------------------------------------------------
SENIOR SECURITIES For 5,435,879 493,229
Against 321,331 27,879
Abstain 15,920 8,847
-----------------------------------------------
Total 5,773,130 529,955
- ----------------------------------------------------------------------------
Broker Non Votes 3,025,414 339,681
- ----------------------------------------------------------------------------
UNDERWRITING For 5,427,113 495,083
Against 337,685 27,879
Abstain 8,332 6,993
-----------------------------------------------
Total 5,773,130 529,955
- ----------------------------------------------------------------------------
Broker Non Votes 3,025,414 339,681
-----------------------------------------------
</TABLE>
____
29
<PAGE>
SHAREHOLDER MEETING REPORT
FLAGSHIP GEORGIA-CONTINUED
<TABLE>
<CAPTION>
A SHARES C SHARES
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
REAL ESTATE For 5,415,396 495,083
Against 341,814 27,879
Abstain 15,920 6,993
-----------------------------------------------
Total 5,773,130 529,955
- ----------------------------------------------------------------------------
Broker Non Votes 3,025,414 339,681
- ----------------------------------------------------------------------------
COMMODITIES For 5,415,714 495,083
Against 343,606 27,879
Abstain 13,810 6,993
-----------------------------------------------
Total 5,773,130 529,955
- ----------------------------------------------------------------------------
Broker Non Votes 3,025,414 339,681
- ----------------------------------------------------------------------------
LOANS For 5,416,396 495,083
Against 337,710 27,879
Abstain 19,024 6,993
-----------------------------------------------
Total 5,773,130 529,955
- ----------------------------------------------------------------------------
Broker Non Votes 3,025,414 339,681
- ----------------------------------------------------------------------------
SHORT SALES/MARGIN For 5,415,002 495,083
PURCHASES
Against 341,395 27,879
Abstain 16,733 6,993
-----------------------------------------------
Total 5,773,130 529,955
- ----------------------------------------------------------------------------
Broker Non Votes 3,025,414 339,681
- ----------------------------------------------------------------------------
PUT AND CALL OPTIONS For 5,411,051 495,083
Against 346,014 27,879
Abstain 16,066 6,993
-----------------------------------------------
Total 5,773,131 529,955
- ----------------------------------------------------------------------------
Broker Non Votes 3,025,413 339,681
- ----------------------------------------------------------------------------
INDUSTRY CONCENTRATION For 5,431,817 495,083
Against 324,688 27,879
Abstain 16,625 6,993
-----------------------------------------------
Total 5,773,130 529,955
Broker Non Votes 3,025,414 339,681
AFFILIATE PURCHASES For 5,433,755 495,083
Against 324,403 27,879
Abstain 14,972 6,993
-----------------------------------------------
Total 5,773,130 529,955
- ----------------------------------------------------------------------------
Broker Non Votes 3,025,414 339,681
- ----------------------------------------------------------------------------
INVESTMENT COMPANIES For 5,432,986 494,085
Against 324,116 28,877
Abstain 16,028 6,993
-----------------------------------------------
Total 5,773,130 529,955
- ----------------------------------------------------------------------------
Broker Non Votes 3,025,414 339,681
- ----------------------------------------------------------------------------
DIV VS. NON-DIV For 5,283,651 488,970
Against 292,880 11,678
Abstain 197,407 29,308
-----------------------------------------------
Total 5,773,938 529,956
- ----------------------------------------------------------------------------
Broker Non Votes 3,027,606 339,680
- ----------------------------------------------------------------------------
12B-1 FEES For 8,099,794 760,735
Against 301,855 39,390
Abstain 267,435 38,938
-----------------------------------------------
Total 8,669,084 839,063
- ----------------------------------------------------------------------------
Broker Non Votes 129,460 30,573
-----------------------------------------------
</TABLE>
____
30
<PAGE>
Nuveen Municipal Bond Fund
May 31, 1997 Annual Report
<TABLE>
<CAPTION>
A SHARES C SHARES
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
DIRECTORS
- ----------------------------------------------------------------------------
Bremner For 8,609,958 824,735
Withhold 188,586 44,901
-----------------------------------------------
Total 8,798,544 869,636
- ----------------------------------------------------------------------------
Brown For 8,609,958 824,735
Withhold 188,586 44,901
-----------------------------------------------
Total 8,798,544 869,636
- ----------------------------------------------------------------------------
Dean For 8,609,958 824,735
Withhold 188,586 44,901
-----------------------------------------------
Total 8,798,544 869,636
- ----------------------------------------------------------------------------
Impellizzeri For 8,609,958 824,735
Withhold 188,586 44,901
-----------------------------------------------
Total 8,798,544 869,636
- ----------------------------------------------------------------------------
Rosenheim For 8,609,958 824,735
Withhold 188,586 44,901
-----------------------------------------------
Total 8,798,544 869,636
- ----------------------------------------------------------------------------
Sawers For 8,609,958 824,735
Withhold 188,586 44,901
-----------------------------------------------
Total 8,798,544 869,636
- ----------------------------------------------------------------------------
Schneider For 8,609,958 824,735
Withhold 188,586 44,901
-----------------------------------------------
Total 8,798,544 869,636
- ----------------------------------------------------------------------------
Schwertfeger For 8,609,958 824,735
Withhold 188,586 44,901
-----------------------------------------------
Total 8,798,544 869,636
-----------------------------------------------
</TABLE>
____
31
<PAGE>
NUVEEN FAMILY OF MUTUAL FUNDS
Nuveen offers a variety of funds designed
to help you reach your financial goals.
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
Insured
Intermediate-Term
Limited-Term
STATE FUNDS
Alabama Michigan
Arizona Missouri
California New Jersey
Colorado New Mexico
Connecticut New York
Florida North Carolina
Georgia Ohio
Kansas Pennsylvania
Kentucky South Carolina
Louisiana Tennessee
Maryland Virginia
Massachusetts Wisconsin
SHAREHOLDER INFORMATION
To purchase additional shares of your Nuveen Municipal Bond Fund, contact your
financial adviser. If you would like to add to your current investment on a
monthly or semi-annual basis, you can sign up for Nuveen's systematic investing
program, which allows you to invest a fixed dollar amount every month
automatically.
You can also invest automatically through dividend reinvestment. By reinvesting
your fund's dividends back into the fund, you gain the added growth potential of
long-term compounding.
For more information on any of these service options call your adviser, or
Nuveen at (800) 621-7227.
____
32
<PAGE>
FUND INFORMATION
BOARD OF DIRECTORS
Robert P. Bremner
Lawrence H. Brown
Anthony T. Dean
Anne E. Impellizzeri
Peter R. Sawers
William J. Schneider
Timothy R. Schwertfeger
Judith M. Stockdale
FUND MANAGER
Nuveen Advisory Corp.
333 West Wacker Drive
Chicago, IL 60606
CUSTODIAN
The Chase Manhattan Bank
4 New York Plaza
New York, NY 10004-2413
TRANSFER AGENT,
SHAREHOLDER SERVICES AND
DIVIDEND DISBURSING AGENT
Boston Financial
Nuveen Investor Services
P.O. Box 8509
Boston, MA 02266-8509
(800) 225-8530
LEGAL COUNSEL
Fried, Frank, Harris, Shriver
& Jacobson
Washington, D.C.
INDEPENDENT AUDITORS
Deloitte & Touche LLP
Dayton, Ohio
____
33
<PAGE>
SERVING INVESTORS
FOR GENERATIONS
[PHOTO OF JOHN NUVEEN, SR. APPEARS HERE]
NUVEEN
John Nuveen & Co. Incorporated
333 West Wacker Drive
Chicago, Il. 60606-1286
(800) 621-7227
www. nuveen.com
Since our founding in 1898. John Nuveen & Co. has been synonymous with
investments that withstand the test of time. Today, we offer a broad range of
investments designed for mature investors whose portfolios are the principal
source of their ongoing financial security. More than 1.3 million investors have
trusted Nuveen to help them maintain the lifestyle they currently enjoy.
A value investing approach - purchasing securities of strong companies and
communities that represent good long-term value - is the cornerstone of Nuveen's
investment philosophy. It is a careful, long-term strategy that offers the
potential for attractive returns with moderated risk. Successful value investing
begins with in-depth research and a discerning eye for marketplace opportunity.
Nuveen's team of investment professionals is backed by the discipline, resources
and expertise of almost a century of investment experience, including one of the
most recognized research departments in the industry.
To meet the unique circumstances and financial planning needs of mature
investors, Nuveen offers a wide array of equity and fixed-income mutual funds,
unit trusts, exchange-traded funds, individual managed account services, and
cash management products, including many that generate tax-free income.
To find out more about how Nuveen investment products and services can help you
preserve your financial security, talk with your financial adviser, or call us
at (800) 621-7227 for more information, including a prospectus where applicable.
Please read that information carefully before you invest.
<PAGE>
NUVEEN
Municipal
Bond Funds
May 31, 1997
Annual Report [PHOTO APPEARS HERE]
Dependable, tax-free income
to help you keep more of
what you earn.
North
Carolina
<PAGE>
Contents
1 Dear Shareholder
3 Answering Your Questions
6 North Carolina
Overview
9 Financial Section
31 Shareholder Meeting Report
35 Shareholder Information
36 Fund Information
<PAGE>
Dear Shareholder
[PHOTO OF TIMOTHY R. SCHWERTFEGER APPEARS HERE]
TIMOTHY R. SCHWERTFEGER
It's a pleasure to report to you on the performance of the Nuveen Flagship
North Carolina Municipal Bond Fund. Over the past year, the fund posted
sizable gains. For the fiscal year ended May 31, 1997, the value of your
investment rose 7.79% for Class A shares if you chose to reinvest your
tax-free income dividends.
Over this 12-month period, the total return performance for the fund (with
income reinvested) kept close pace with the 8.28% increase produced by the
Lehman Brothers Municipal Bond Index, which is used to represent the broad
municipal bond market on an unmanaged basis.
In addition to substantial total returns, shareholders continue to enjoy very
attractive current yields generated by a portfolio of quality bonds, which
provide excellent income for investors. As of May 31, 1997, shareholders were
receiving tax-free yields on net asset value of 4.71% for Class A shares. To
match this yield, investors in the 36.5% combined federal and state income tax
bracket would have had to earn at least 7.42% on taxable alternatives.
These results were produced against a backdrop of continued economic expansion
and the lowest unemployment rates in almost two decades, a combination that in
the past has foreshadowed an increase in inflation. In March, the Federal
Reserve made a pre-emptive strike by raising short-term interest rates by
0.25%, but then maintained the status quo at its May and July meetings.
Overall market returns continue to be good, but fear of inflation has hampered
the performance of municipals and led to
1
<PAGE>
"In addition to substantial
total returns, shareholders
continue to enjoy very
attractive current yields
generated by a portfolio
of quality bonds."
increased volatility in both the equity and bond markets. During this time,
bonds have often been the bellwether for the direction of stocks. Whenever
inflation talk is at its most rampant, the stock market has kept an eye on the
bond market for its response before reacting.
In the first six months of the year, the markets also focused on fiscal
issues, including the federal budget accord and discussion of plans to reduce
taxes and eliminate the deficit. The economy appeared to be moderating,
corporate earnings reports continued to exhibit strength, and interest rates
fell in the second quarter. All of this was positive news. The net effect is
that the markets are better off now than at the beginning of the year, but the
volatility experienced in getting there has been significant.
Recently, the need for diversification and a renewed emphasis on asset
allocation -- as well as attractive yields -- have sparked increased interest
in tax-free investments. The current level of the stock market reminds
investors to re-allocate profits to other segments of the market in order to
limit risk. Nuveen municipal bond funds provide an excellent lower-risk
alternative, and their current yields make them very attractive.
On behalf of everyone at Nuveen, I thank you for your confidence in us and our
family of investments. You can continue to depend on us for high-quality
investments that withstand the test of time. We look forward to reporting to
you again in six months.
Sincerely,
/s/ Timothy R. Schwertfeger
TIMOTHY R. SCHWERTFEGER
Chairman of the Board
July 15, 1997
2
<PAGE>
Answering Your Questions
[PHOTO OF TED NEILD APPEARS HERE]
Ted Neild, head of Nuveen's Dayton-based
portfolio management team, talks about
the municipal bond market and offers insights
into factors that affected fund performance
over the past year.
WHAT ARE THE INVESTMENT OBJECTIVES OF THE FUND?
The fund aims to provide investors with a high level of tax-free income while
preserving capital by investing in a diversified portfolio of high-quality
municipal bonds. To that end, we attempt to maximize the fund's after-tax
total return by generating high tax-free income and minimizing the
distribution of taxable capital gains when possible.
WHAT IS YOUR STRATEGY FOR MEETING THESE OBJECTIVES?
To meet this fund's objectives of income and enhanced value, our portfolio
management strategy relies on conservative value investing principles, sound
research and credit surveillance activities, and senior management
involvement. At Nuveen, value investing means taking a fundamental approach to
finding bonds that offer the best balance of high potential return with low
risk regardless of the direction of interest rates. This approach focuses on
the characteristics of individual bonds, such as sector, geographic region,
structure and intrinsic credit quality, rather than on the general economic
environment. The idea behind this philosophy is that we, as investment
managers, can control the selection process, but not the direction of the
economy as a whole.
WHAT KEY ECONOMIC FACTORS AFFECTED
THE FUND'S PERFORMANCE DURING THE YEAR?
The U.S. economy continued to grow, exhibiting low unemployment, increased
manufacturing and construction activity, and lack of price pressure at the
consumer and
3
<PAGE>
producer levels. The fund had the added advantage of operating in a healthy
supply environment, where securities were available as needed.
GIVEN THIS MARKET ENVIRONMENT, HOW DID THE FUND PERFORM?
The North Carolina Municipal Bond Fund performed well over the past year,
rewarding investors with a total return on net asset value for the year of
7.79% for Class A shares, including price changes and reinvested dividends.
The fund was ranked in the top third of 35 North Carolina municipal bond funds
for the one-year period by Lipper Analytical Services, a nationally recognized
performance measurement service.
WHAT STRATEGIES DID YOU EMPLOY TO ADD VALUE?
We focused on taking advantage of the strong municipal bond market in North
Carolina to support consistent dividends and extend the average maturity of
the fund. In addition, we took advantage of opportunities to improve the
already-high credit quality of the fund. Increasing demand in the North
Carolina municipal market allows us to purchase high-quality bonds from
diversified investment sectors without affecting the income of the fund.
WHAT IS THE CURRENT STATUS OF NORTH CAROLINA'S
MUNICIPAL MARKET?
In most sectors, the North Carolina municipal market remains healthy. Ample
issuance and consistent demand have kept price levels stable. Overall, credit
quality has been stable to improving, in large part because the state's strong
economy is helping to fill municipal coffers.
The state's municipal market continues to suffer from uncertainty regarding
deregulation in the electric utility sector. However, our diligent research
and credit surveillance helped us to avoid purchasing bonds in those areas. As
a result, your fund has no direct exposure to the joint power agencies in the
state, and is positioned for strong performance over the coming year.
"At Nuveen, value investing
means taking a fundamental
approach to finding bonds
that offer the best balance
of high potential return
with low risk regardless of
the direction of interest
rates."
4
<PAGE>
WHAT IS THE CURRENT OUTLOOK FOR THE MUNICIPAL MARKET
AS A WHOLE?
As we make our way through the seventh year of the current economic expansion,
some observers believe that a fundamental shift may have occurred in our
economy. Based on past experience and months of reports of economic growth,
especially employment statistics, the markets have long been anticipating an
increase in inflation. However, even with almost full employment, we have not
seen the expected rise in hourly wages that would be considered inflationary.
This change in the traditional economic cause-and-effect relationship has been
variously attributed to the globalization of the economy and consequent
competitive pressures, to increased use of technology, and to corporations'
recent ability to downsize as necessary. Although structural changes in the
economy appear to have suspended the relationship between faster growth and
higher inflation, the risk remains that inflation may reassert itself if
capacity constraints are reached and resources are stretched too thin.
Talk of Fed tightening will continue. If the Fed does act to increase rates,
it will be perceived as a move against inflation. If the Fed does not tighten,
it will be seen as an indication that the economy is doing well.
Nonetheless, for the remainder of 1997, the municipal market should continue
to offer the attractive yields and tax advantages that make it a good
alternative if and when a correction in the stock market occurs. While money
continues to flow into equity mutual funds, investors are also beginning to
evaluate the effect of the huge run-up in stock prices on their asset
allocation, and many are rebalancing their portfolios by shifting some assets
into bonds.
5
<PAGE>
North Carolina
Overview
[CREDIT QUALITY PIE CHART APPEARS HERE]
BBB/NR 16%
A 19%
AA 29%
AAA/Pre-refunded 36%
[DIVERSIFICATION PIE CHART APPEARS HERE]
Municipal Appropriations 6%
Hospitals 20%
Water & Sewer 8%
Housing Facilities 9%
Pollution Control 12%
Other 6%
Utility 13%
Education/Student Loans 4%
Escrowed Bonds 16%
Tax Revenue 6%
<TABLE>
<CAPTION>
FUND HIGHLIGHTS
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHARE CLASS A B C R
Inception Date 3/86 2/97 10/93 2/97
- -------------------------------------------------------------------------------------------
Net Asset Value (NAV) $10.28 $10.28 $10.26 $ 10.28
- -------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
<S> <C>
Total Net Assets ($000) $189,336
- -------------------------------------------------------------------------------------------
Average Weighted Maturity (years) 18.65
- -------------------------------------------------------------------------------------------
Average Weighted Duration (years) 7.68
- -------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
ANNUALIZED TOTAL RETURN(1)
- -------------------------------------------------------------------------------------------
SHARE CLASS A(NAV) A(OFFER) B C R
<S> <C> <C> <C> <C> <C>
1-Year 7.79% 3.26% 7.14% 7.20% 7.86%
- -------------------------------------------------------------------------------------------
5-Year 6.31% 5.40% 5.72% 5.69% 6.33%
- -------------------------------------------------------------------------------------------
10-Year 7.85% 7.39% 7.38% 7.24% 7.86%
- -------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
TAX-FREE YIELDS
- -------------------------------------------------------------------------------------------
SHARE CLASS A(NAV) A(OFFER) B C R
<S> <C> <C> <C> <C> <C>
Dist Rate 5.19% 4.98% 4.45% 4.64% 5.39%
- -------------------------------------------------------------------------------------------
SEC 30-Day Yld 4.71% 4.51% 3.96% 4.16% 4.91%
- -------------------------------------------------------------------------------------------
Taxable Equiv Yld(2) 7.42% 7.10% 6.24% 6.55% 7.73%
- -------------------------------------------------------------------------------------------
</TABLE>
(1) Returns of the oldest share class of a fund are actual. Returns for other
classes are actual for the period since inception and prior to class
inception are the returns for the fund's oldest class, adjusted for
differences in sales charges and expenses. Class A shares have an initial
sales charge, while Class B, C and R shares have no initial sales charge.
Class B shares have a CDSC that declines from 5% to 0% after 6 years.
Class C shares have a 1% CDSC for redemptions within one year. Returns
above do not reflect imposition of the CDSC. Giving effect to the CDSC
applicable to Class B shares, the 1-year, 5-year and 10-year total returns
above would be 3.14%, 5.56%, and 7.38%, respectively.
(2) Based on SEC yield and a combined federal and state income tax rate of
36.5%. Represents the yield on a taxable investment necessary to equal the
yield of the Nuveen fund on an after-tax basis.
6
<PAGE>
Nuveen Flagship North Carolina Municipal Bond Fund
May 31, 1997 Annual Report
* The Index Comparison shows change in value of a $10,000 investment in the 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.
Index Comparison*
[INDEX COMPARISON LINE CHART APPEARS BELOW]
<TABLE>
<CAPTION>
Nuveen Flagship Nuveen Flagship
Lehman Brothers North Carolina North Carolina
Municipal Bond Municipal Bond Municipal Bond
Index Fund (NAV) Fund (Offer)
<S> <C> <C> <C>
5/87 10000 10000 9580
5/88 10898.1 10877.1 10420.2
5/89 12150.6 12485 11960.7
5/90 13039.7 13128.7 12577.3
5/91 14353.9 14347.1 13744.5
5/92 15764 15680.7 15022.1
5/93 17650 17507.3 16772
5/94 18085.8 17734.5 16989.6
5/95 19732.8 19056.2 18255.8
5/96 20634.7 19755.4 18925.6
5/97 22534.8 21294 20399.6
</TABLE>
- -- Lehman Brothers Municipal Bond Index $22,535
- -- Nuveen Flagship North Carolina Municipal Bond Fund (NAV) $20,399
- -- Nuveen Flagship North Carolina Municipal Bond Fund (Offer) $21,293
Past performance is not predictive of future performance.
[DIVIDEND HISTORY (A SHARES) BAR CHART APPEARS BELOW]
<TABLE>
<S> <C>
June 1996 0.04377
July 1996 0.04523
August 1996 0.04523
September 1996 0.04377
October 1996 0.04523
November 1996 0.04377
December 1996 0.04523
January 1997 0.04535
February 1997 0.0445
March 1997 0.0445
April 1997 0.0445
May 1997 0.0445
</TABLE>
7
<PAGE>
Financial Section
CONTENTS
10 Portfolio of Investments
18 Statement of Net Assets
19 Statement of Operations
20 Statement of Changes in Net Assets
21 Notes to Financial Statements
27 Financial Highlights
30 Independent Auditors' Report
9
<PAGE>
PORTFOLIO OF INVESTMENTS
NUVEEN FLAGSHIP NORTH CAROLINA
<TABLE>
<CAPTION>
PRINCIPAL OPTIONAL CALL MARKET
AMOUNT DESCRIPTION PROVISIONS* RATINGS** VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
EDUCATION - 3.8%
North Carolina Educational Facilities, Finance Agency
Revenue, High Point College:
$165,000 7.050%, 12/01/05 12/00 at 102 A3 $ 176,281
175,000 7.100%, 12/01/06 12/00 at 102 A3 186,865
4,220,000 North Carolina Educational Facilities, Finance Agency 10/06 at 102 AA+ 4,015,372
Revenue Refunding, Duke University Project,
Series B, 5.000%, 10/01/17
University of North Carolina, Asheville Revenue,
Dormitory and Dining Hall System, Series A:
175,000 7.000%, 6/01/02 6/97 at 102 A 178,894
195,000 7.000%, 6/01/03 6/97 at 102 A 199,339
205,000 7.000%, 6/01/04 6/97 at 102 A 209,561
220,000 7.000%, 6/01/05 6/97 at 102 A 224,728
235,000 7.000%, 6/01/06 6/97 at 102 A 240,036
255,000 7.000%, 6/01/07 6/97 at 102 A 260,447
270,000 7.000%, 6/01/08 6/97 at 102 A 275,743
295,000 7.000%, 6/01/09 6/97 at 102 A 301,248
315,000 7.000%, 6/01/10 6/97 at 102 A 321,662
340,000 7.000%, 6/01/11 6/97 at 102 A 347,171
295,000 University of North Carolina-Chapel Hill, 6/01 at 102 AA+ 321,175
Student Fee Revenue, Student Recreation Center,
7.000%, 6/01/08
- -----------------------------------------------------------------------------------------------------------------
ESCROWED TO MATURITY - 0.9%
995,000 North Carolina Eastern Municipal Power Agency, No Opt. Call Aaa 1,122,599
Power System Revenue Refunding, Series A,
6.500%, 1/01/18
115,000 North Carolina Medical Care Commission, Hospital No Opt. Call AAA 130,787
Revenue, Memorial Mission Hospital Project,
7.625%, 10/01/08
North Carolina Medical Care Commission, Hospital
Revenue, Scotland Memorial Hospital Project:
280,000 8.000%, 10/01/97 No Opt. Call N/R 283,928
190,000 8.100%, 10/01/98 No Opt. Call N/R 199,599
- -----------------------------------------------------------------------------------------------------------------
HOSPITALS - 19.9%
Charlotte, Mecklenberg Hospital Authority, North
Carolina Health Caresys Revenue, Series A:
5,300,000 5.750%, 1/15/21 1/06 at 102 AA 5,322,578
5,500,000 5.875%, 1/15/26 1/06 at 102 AA 5,560,225
</TABLE>
10
<PAGE>
Nuveen Municipal Bond Fund
May 31, 1997 Annual Report
<TABLE>
<CAPTION>
PRINCIPAL OPTIONAL CALL MARKET
AMOUNT DESCRIPTION PROVISIONS* RATINGS** VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
HOSPITALS - CONTINUED
$3,500,000 North Carolina Medical Care Commission, Health 5/07 at 100 AA $3,270,855
Care Facilities Revenue, Carolina Medicorp
Project, 5.250%, 5/01/26
1,000,000 North Carolina Medical Care Commission, 2/02 at 102 Baa3 1,072,680
Hospital Revenue, Annie Penn Memorial
Hospital, 7.500%, 8/15/21
North Carolina Medical Care Commission, Hospital
Revenue, Halifax Memorial Hospital Project:
1,275,000 6.750%, 8/15/14 8/02 at 102 Baa2 1,324,712
1,000,000 6.750%, 8/15/24 8/02 at 102 Baa2 1,036,040
2,200,000 North Carolina Medical Care Commission, Hospital 10/99 at 102 BBB+ 2,316,182
Revenue, Roanoke, Chowan Hospital Project,
7.750%, 10/01/19
600,000 North Carolina Medical Care Commission, Hospital 10/99 at 102 N/R 633,024
Revenue, Transylvania Community Hospital
Project, 8.000%, 10/01/19
3,400,000 North Carolina Medical Care Commission, Hospital 10/00 at 102 BBB 3,706,238
Revenue, Community General Hospital of
Thomasville, 8.100%, 10/01/15
2,500,000 Northern Hospital District, Surry County, North 10/01 at 102 BBB 2,657,850
Carolina, Health Care Facilities Revenue
Refunding, 7.875%, 10/01/21
4,000,000 Pitt County, North Carolina, Revenue Refunding 12/05 at 102 AA- 3,781,520
Pitt County Memorial Hospital, 5.250%, 12/01/21
5,750,000 University of North Carolina-Chapel Hill, University of 2/06 at 102 AA 5,436,338
North Carolina Hospital Revenue,
5.250%, 2/15/26
500,000 Wake County, North Carolina, Hospital Revenue, 10/97 at 102 AAA 515,270
Series 1988, 7.400%, 10/01/16
1,950,000 Wake County, North Carolina, Hospital Revenue, No Opt. Call AAA 934,791
Crossover Refunding System, 0.000%, 10/01/10
- -----------------------------------------------------------------------------------------------------------------
HOUSING/MULTI FAMILY - 0.3%
620,000 North Carolina Housing Finance Agency, Multi- 7/02 at 102 AA 651,781
family Revenue Refunding, Series B,
6.900%, 7/01/24
- -----------------------------------------------------------------------------------------------------------------
HOUSING/SINGLE FAMILY - 8.9%
320,000 North Carolina Housing Finance Agency, Single 9/98 at 102 AA 330,666
Family Revenue, Series E, 8.125%, 9/01/19
</TABLE>
11
<PAGE>
PORTFOLIO OF INVESTMENTS
NUVEEN FLAGSHIP NORTH CAROLINA - CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL OPTIONAL CALL MARKET
AMOUNT DESCRIPTION PROVISIONS* RATINGS** VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
HOUSING/SINGLE FAMILY - CONTINUED
$730,000 North Carolina Housing Finance Agency, Single 3/98 at 102 AA $ 755,484
Family Revenue, Series G, 7.800%, 3/01/21
905,000 North Carolina Housing Finance Agency, Single 3/01 at 102 AA 937,861
Family Revenue, Series O, 7.600%, 3/01/21
2,000,000 North Carolina Housing Finance Agency, Single 9/04 at 102 AA 2,074,960
Family Revenue, Series Y, 6.300%, 9/01/15
1,845,000 North Carolina Housing Finance Agency, Single 9/04 at 102 AA 1,907,324
Family Revenue, Series Y, 6.350%, 3/01/18
1,940,000 North Carolina Housing Finance Agency, Single 9/05 at 102 AA 1,996,182
Family Revenue, Series BB, 6.500%, 9/01/26
3,500,000 North Carolina Housing Finance Agency, Refunding, 3/05 at 102 AA 3,532,725
Single Family, Series DD, 6.200%, 9/01/27
4,360,000 North Carolina Housing Finance Agency, Single 3/06 at 102 AA 4,403,774
Family, Series LL, 6.200%, 3/01/26
805,000 Winston Salem, North Carolina, Single Family 9/00 at 102 A1 837,933
Mortgage Revenue, 8.000%, 9/01/07
- -----------------------------------------------------------------------------------------------------------------
INDUSTRIAL DEVELOPMENT AND POLLUTION CONTROL - 11.8%
1,400,000 Gaston County, North Carolina, Industrial Facilities 11/01 at 103 N/R 1,518,426
and Pollution Control, Financing Authority
Revenue, Industrial Development, Combustion
Engineer, 8.850%, 11/01/15
1,400,000 Haywood County, North Carolina, Industrial Facilities 9/05 at 102 Baa1 1,425,606
and Pollution Control, Financing Authority
Environmental Improvement Revenue, Champion
International Corporation Project, 6.250%, 9/01/25
4,000,000 Haywood County, North Carolina, Industrial Facilities 10/03 at 102 Baa1 3,785,560
and Pollution Control, Fingauth Solid Waste
Disposal Revenue, Champion International
Corporation Project, 5.500%, 10/01/18
3,100,000 Haywood County, North Carolina, Industrial Facilities 3/06 at 102 Baa1 3,125,141
and Pollution Control, Fingauth Solid Waste
Disposal Revenue Refunding, Champion
International Corporation Project, 6.000%, 3/01/20
Martin County, North Carolina, Industrial Facilities
and Pollution Control, Financing Authority Revenue,
Solid Waste Disposal, Weyerhaeuser:
2,000,000 7.250%, 9/01/14 9/01 at 103 A 2,203,040
6,000,000 6.800%, 5/01/24 5/04 at 102 A 6,498,540
2,500,000 6.000%, 11/01/25 11/05 at 102 A 2,527,450
</TABLE>
12
<PAGE>
Nuveen Municipal Bond Fund
May 31, 1997 Annual Report
<TABLE>
<CAPTION>
PRINCIPAL OPTIONAL CALL MARKET
AMOUNT DESCRIPTION PROVISIONS* RATINGS** VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INDUSTRIAL DEVELOPMENT AND POLLUTION CONTROL - CONTINUED
$1,100,000 New Hanover County, North Carolina, Industrial 7/02 at 102 BBB $1,148,026
Facilities and Pollution Control, Financing Authority
Revenue Refunding, Occidental Petro,
6.700%, 7/01/19
- -----------------------------------------------------------------------------------------------------------------
MUNICIPAL APPROPRIATION OBLIGATIONS - 5.7%
500,000 Asheville, North Carolina, Certificates of 2/02 at 102 A1 519,950
Participation, 6.500%, 2/01/08
1,500,000 Buncombe County, North Carolina, Certificates of 12/02 at 102 A1 1,583,280
Participation, 6.625%, 12/01/10
600,000 Durham, North Carolina, Certificates of Participation, 6/05 at 102 AA 615,702
New Durham Corporation, 5.800%, 6/01/15
Harnett County, North Carolina, Certificates of
Participation:
1,000,000 6.200%, 12/01/06 12/04 at 102 AAA 1,097,690
1,750,000 6.200%, 12/01/09 12/04 at 102 AAA 1,901,340
500,000 6.400%, 12/01/14 12/04 at 102 AAA 539,955
Pitt County, North Carolina, Certificates of
Participation, Pitt County Public Facilities, Series A:
1,250,000 5.550%, 4/01/12 4/07 at 102 AAA 1,260,050
1,000,000 5.850%, 4/01/17 4/07 at 102 AAA 1,020,990
715,000 Stokes County, North Carolina, Certificates of 3/01 at 102 AAA 782,010
Participation, 7.000%, 3/01/06
1,410,000 Union County, North Carolina, Certificates of 4/03 at 102 AAA 1,513,621
Participation, 6.375%, 4/01/12
- -----------------------------------------------------------------------------------------------------------------
MUNICIPAL REVENUE/UTILITY - 12.9%
1,000,000 Concord, North Carolina, Utilities System Revenue, 12/05 at 102 AAA 984,150
5.500%, 12/01/19
Fayetteville, North Carolina, Public Works
Commission Revenue Refunding:
2,400,000 4.750%, 3/01/14 3/03 at 100 AAA 2,200,704
1,845,000 5.250%, 3/01/16 3/05 at 102 AAA 1,779,798
1,000,000 5.375%, 3/01/20 3/05 at 102 AAA 970,540
2,000,000 Greenville, North Carolina, Comb Enterprise System 9/04 at 102 A+ 2,056,220
Revenue, 6.000%, 9/01/16
5,300,000 North Carolina, Eastern Municipal Power Agency No Opt. Call AAA 5,627,222
Power System Revenue Refunding, RT Certificates,
6.000%, 1/01/18
</TABLE>
13
<PAGE>
PORTFOLIO OF INVESTMENTS
NUVEEN FLAGSHIP NORTH CAROLINA - CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL OPTIONAL CALL MARKET
AMOUNT DESCRIPTION PROVISIONS* RATINGS** VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL REVENUE/UTILITY - CONTINUED
North Carolina Municipal Power Agency No. 1,
Catawba Electric Revenue Refunding:
$700,000 7.000%, 1/01/16 1/98 at 102 A- $722,183
355,000 7.625%, 1/01/14 1/98 at 102 AAA 368,781
North Carolina Municipal Power Agency No. 1,
Catawba Electric Revenue Refunding:
6,000,000 0.000%, 1/01/09 No Opt. Call AAA 3,232,560
2,000,000 0.000%, 1/01/10 No Opt. Call AAA 1,011,540
3,000,000 Puerto Rico Electric Power Authority, Formerly Puerto No Opt. Call BBB+ 3,211,740
Rico Commonwealth, Water Resource Authority
Power, Series S, 6.125%, 7/01/09
870,000 Shelby, North Carolina, Comb Enterprise System, 5/05 at 102 A 849,903
Revenue Refunding Series A, 5.500%, 5/01/17
1,470,000 Shelby, North Carolina, Comb Enterprise System, 5/05 at 102 A 1,436,043
Revenue Refunding Series B, 5.500%, 5/01/17
- -----------------------------------------------------------------------------------------------------------------
MUNICIPAL REVENUE/WATER AND SEWER - 7.9%
2,000,000 Asheville, North Carolina, Water System Revenue, 8/06 at 102 AAA 2,012,140
5.700%, 8/01/25
1,615,000 Charlotte, North Carolina, Water and Sewer, 4/05 at 102 AAA 1,609,622
5.400%, 4/01/20
Charlotte, North Carolina, Water and Sewer, Series A:
500,000 5.400%, 4/01/19 4/05 at 102 AAA 500,280
1,830,000 5.400%, 4/01/20 4/05 at 102 AAA 1,823,906
3,400,000 Greensboro, North Carolina, Enterprise System 6/05 at 102 AA- 3,310,206
Revenue, Series A, 5.375%, 6/01/19
3,000,000 Union County, North Carolina, Enterprise System 6/06 at 102 AAA 2,980,230
Revenue, 5.500%, 6/01/17
Winston Salem, North Carolina, Water and Sewer
System Revenue, Series B:
750,000 5.600%, 6/01/14 6/05 at 102 AA+ 750,285
1,500,000 5.700%, 6/01/17 6/05 at 102 AA+ 1,508,520
540,760 Woodfin Treatment Facility Inc., North Carolina, No Opt. Call N/R 538,138
Certificates of Participation,
5.500%, 12/01/03
- -----------------------------------------------------------------------------------------------------------------
NON-STATE GENERAL OBLIGATIONS - 2.3%
Currituck County, North Carolina, School Building:
750,000 5.400%, 4/01/14 4/05 at 102 AAA 749,040
800,000 5.400%, 4/01/15 4/05 at 102 AAA 798,032
</TABLE>
14
<PAGE>
Nuveen Municipal Bond Fund
May 31, 1997 Annual Report
<TABLE>
<CAPTION>
PRINCIPAL OPTIONAL CALL MARKET
AMOUNT DESCRIPTION PROVISIONS* RATINGS** VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NON-STATE GENERAL OBLIGATIONS - CONTINUED
New Hanover County, North Carolina,
$650,000 5.300%, 5/01/16 5/07 at 102 Aa $639,529
550,000 5.300%, 5/01/17 5/07 at 102 Aa 540,221
1,600,000 Union County, North Carolina, Series B, 6/05 at 102 AAA 1,573,568
5.200%, 6/01/13
- -----------------------------------------------------------------------------------------------------------------
PRE-REFUNDED - 14.9%***
145,000 Asheville, North Carolina, Housing Development 11/09 at 109 N/R 191,384
Corporation, First Lien Revenue, Asheville
Gardens, 10.500%, 5/01/11
1,900,000 Craven, North Carolina, Regional Medical Authority, 10/00 at 102 AAA 2,093,306
Health Care Facilities Revenue, Insured,
7.200%, 10/01/19
750,000 Cumberland County, North Carolina, Hospital 10/98 at 102 AAA 800,693
Facilities Revenue, Cumberland County Hospital
System Inc., 7.875%, 10/01/14
Durham, North Carolina, Certificates of Participation,
New Durham Corporation:
705,000 7.250%, 9/01/10 9/00 at 102 Aa 776,431
1,000,000 6.750%, 12/01/11 12/01 at 102 Aa3 1,105,210
1,450,000 Greensboro, North Carolina, Certificates of 7/98 at 102 AAA 1,539,770
Participation, Greensboro Center City Corporation,
7.900%, 7/01/09
2,030,000 North Carolina Medical Care Commission, Health 2/99 at 102 A 2,165,015
Care Facilities Revenue, Gaston Health Care
Support Project, 7.250%, 2/15/19
2,055,000 North Carolina Medical Care Commission, Health 10/99 at 102 AAA 2,250,328
Care Facilities Revenue, Stanley Memorial Hospital
Project, 7.800%, 10/01/19
North Carolina Eastern Municipal Power Agency,
Power System Revenue Refunding, Series A:
4,080,000 8.000%, 1/01/21 1/99 at 102 Aaa 4,260,988
690,000 7.500%, 1/01/21 1/99 at 102 Aaa 737,417
500,000 7.625%, 1/01/23 1/98 at 102 Aaa 521,150
500,000 7.250%, 1/01/23 1/99 at 102 Aaa 532,460
240,000 4.500%, 1/01/24 1/22 at 100 Aaa 205,370
7,535,000 North Carolina Housing Finance Agency, Multifamily, 1/99 at 102 AAA 346,083
Series D, 0.000%, 7/01/28
</TABLE>
15
<PAGE>
PORTFOLIO OF INVESTMENTS
NUVEEN FLAGSHIP NORTH CAROLINA - CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL OPTIONAL CALL MARKET
AMOUNT DESCRIPTION PROVISIONS* RATINGS** VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PRE-REFUNDED - CONTINUED
North Carolina Medical Care Commission, Hospital
Revenue, Scotland Memorial Hospital Project:
$200,000 8.150%, 10/01/99 10/98 at 102 N/R $213,934
1,000,000 8.625%, 10/01/11 10/98 at 102 N/R 1,075,720
600,000 North Carolina Municipal Power Agency No. 1, 1/98 at 102 AAA 626,202
Catawba Electric Revenue Refunding,
7.875%, 1/01/19
700,000 Pender County, North Carolina, Certificates of 6/01 at 102 Baa1 795,004
Participation, 7.700%, 6/01/11
1,000,000 Pitt County, North Carolina, Certificates of 4/00 at 102 AAA 1,083,990
Participation, 6.900%, 4/01/08
Puerto Rico Commonwealth, Public Improvement,
Series A:
500,000 7.750%, 7/01/06 7/98 at 102 AAA 530,590
2,000,000 7.750%, 7/01/13 7/98 at 102 AAA 2,122,360
780,000 Puerto Rico Commonwealth, Refunding, 7/98 at 102 A 829,429
8.000%, 7/01/07
Puerto Rico Commonwealth Aqueduct and Sewer
Authority Revenue, Series A:
1,000,000 7.900%, 7/01/07 7/98 at 102 AAA 1,062,690
850,000 7.875%, 7/01/17 7/98 at 102 AAA 903,074
200,000 Puerto Rico Electric Power Authority, Formerly Puerto 7/98 at 102 AAA 212,740
Rico Commonwealth, Water Resource Authority
Power, Series M, 8.000%, 7/01/08
Spindale, North Carolina:
100,000 7.600%, 2/01/07 2/98 at 102 AAA 104,540
100,000 7.600%, 2/01/08 2/98 at 102 AAA 104,540
200,000 7.600%, 2/01/09 2/98 at 102 AAA 209,080
295,000 University of North Carolina-Charlotte, Revenue, 1/98 at 102 N/R 307,195
Refunding, Series K, 7.500%, 1/01/04
Washington County, North Carolina:
200,000 7.600%, 3/01/08 3/98 at 102 AAA 209,682
200,000 7.600%, 3/01/09 3/98 at 102 AAA 209,682
- -----------------------------------------------------------------------------------------------------------------
RESOURCE RECOVERY - 1.8%
Coastal Regional Solid Waste Management
Authority, North Carolina Solid Waste Disposal
System, Revenue Refunding:
1,000,000 6.300%, 6/01/04 6/02 at 102 A 1,068,860
1,000,000 6.500%, 6/01/08 6/02 at 102 A 1,048,890
</TABLE>
16
<PAGE>
Nuveen Municipal Bond Fund
May 31, 1997 Annual Report
<TABLE>
<CAPTION>
PRINCIPAL OPTIONAL CALL MARKET
AMOUNT DESCRIPTION PROVISIONS* RATINGS** VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
RESOURCE RECOVERY - CONTINUED
$1,250,000 Iredell County, North Carolina, Special Obligation, 6/02 at 102 A $1,282,350
Solid Waste System Project, 6.250%, 6/01/12
- -----------------------------------------------------------------------------------------------------------------
SPECIAL TAX REVENUE - 6.3%
Puerto Rico Commonwealth Highway and
Transportation Authority, Highway Revenue, Series Y:
2,300,000 5.500%, 7/01/26 7/06 at 101 1/2 A 2,223,824
5,000,000 5.500%, 7/01/36 7/16 at 100 A 4,862,850
2,450,000 Puerto Rico Commonwealth Infrastructure, Financing 7/98 at 102 BBB+ 2,591,487
Authority Special, Series A, 7.750%, 7/01/08
2,375,000 Winston-Salem, North Carolina, Special Obligation, 4/05 at 102 AA 2,332,463
Solid Waste Management Project, 5.500%, 4/01/16
- -----------------------------------------------------------------------------------------------------------------
STATE/TERRITORIAL GENERAL OBLIGATIONS - 0.6%
220,000 Puerto Rico Commonwealth, 8.000%, 7/01/07 7/98 at 102 A 233,597
1,000,000 Puerto Rico Public Buildings Authority, Revenue No Opt. Call A 986,160
Refunding, Guaranteed, Series L, 5.500%, 7/01/21
- -----------------------------------------------------------------------------------------------------------------
STUDENT LOAN REVENUE BONDS - 0.6%
1,000,000 North Carolina State Education Assistance, 7/05 at 102 A 1,022,010
Authority Revenue, Guaranteed, Student Loan,
Sub Lien, Series A, 6.300%, 7/01/15
- -----------------------------------------------------------------------------------------------------------------
$194,690,760 Total Investments - (cost $178,109,940) - 98.6% 186,622,454
============-----------------------------------------------------------------------------------------------------
Other Assets Less Liabilities - 1.4% 2,713,687
--------------------------------------------------------------------------------------------
Net Assets - 100% $189,336,141
--------------------------------------------------------------------------------------------
</TABLE>
* Optional Call Provisions (not covered by the report
of independent auditors): 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
auditors): Using the higher of Standard and Poor's or
Moody's rating.
*** Pre-refunded 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.
Pre-refunded securities are normally considered to be
equivalent to AAA rated securities.
N/R - Investment is not rated.
See accompanying notes to financial statements.
17
<PAGE>
STATEMENT OF NET ASSETS
MAY 31, 1997
<TABLE>
<CAPTION>
NUVEEN FLAGSHIP
NORTH CAROLINA
--------------------------------------------------------------------------------------
<S> <C>
ASSETS
Investments in municipal securities, at market value (note 1) $186,622,454
Cash 115,689
Receivables:
Interest 3,408,006
Shares sold 88,719
Investments sold 312,685
Other assets 9,165
--------------------------------------------------------------------------------------
Total assets 190,556,718
--------------------------------------------------------------------------------------
LIABILITIES
Payable for Shares redeemed 188,808
Accrued expenses:
Management fees (note 6) 84,333
12b-1 distribution and service fees (notes 1 and 6) 35,471
Other 91,719
Dividends payable 820,246
--------------------------------------------------------------------------------------
Total liabilities 1,220,577
--------------------------------------------------------------------------------------
Net assets (note 7) $189,336,141
--------------------------------------------------------------------------------------
CLASS A SHARES (NOTE 1)
Net assets $181,595,175
Shares outstanding 17,670,832
Net asset value and redemption price per share $10.28
Offering price per share (net asset value per share plus
maximum sales charge of 4.20% of offering price) $10.73
--------------------------------------------------------------------------------------
CLASS B SHARES (NOTE 1)
Net assets $271,002
Shares outstanding 26,367
Net asset value, offering and redemption price per share $10.28
--------------------------------------------------------------------------------------
CLASS C SHARES (NOTE 1)
Net assets $7,065,011
Shares outstanding 688,609
Net asset value, offering and redemption price per share $10.26
--------------------------------------------------------------------------------------
CLASS R SHARES (NOTE 1)
Net assets $404,953
Shares outstanding 39,406
Net asset value, offering and redemption price per share $10.28
--------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
18
<PAGE>
STATEMENT OF OPERATIONS Nuveen Municipal Bond Fund
YEAR ENDED MAY 31, 1997 May 31, 1997 Annual Report
<TABLE>
<CAPTION>
NUVEEN FLAGSHIP
NORTH CAROLINA*
---------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
Tax-exempt interest income (note 1) $ 11,932,050
---------------------------------------------------------------------------------------
EXPENSES
Management fees (note 6) 984,707
12b-1 service fees - Class A (notes 1 and 6) 617,970
12b-1 distribution and service fees - Class B (notes 1 and 6) 448
12b-1 distribution and service fees - Class C (notes 1 and 6) 60,676
Shareholders' servicing agent fees and expenses 121,393
Custodian's fees and expenses 102,097
Trustees' fees and expenses (note 6) 4,894
Professional fees 20,778
Shareholders' reports - printing and mailing expenses 19,789
Federal and state registration fees 5,637
Other expenses 8,744
---------------------------------------------------------------------------------------
Total expenses before reimbursement 1,947,133
Expense reimbursement (note 6) (133,892)
---------------------------------------------------------------------------------------
Net expenses 1,813,241
---------------------------------------------------------------------------------------
Net investment income 10,118,809
---------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN FROM INVESTMENTS
Net realized gain from investment transactions (notes 1 and 4) 1,921,251
Net change in unrealized appreciation or depreciation of investments 2,403,810
---------------------------------------------------------------------------------------
Net gain from investments 4,325,061
---------------------------------------------------------------------------------------
Net increase in net assets from operations $ 14,443,870
---------------------------------------------------------------------------------------
</TABLE>
* Information represents eight months of Flagship North Carolina and four
months of Nuveen Flagship North Carolina (see note 1 of the Notes to
Financial Statements).
See accompanying notes to financial statements.
19
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
NUVEEN FLAGSHIP FLAGSHIP
NORTH CAROLINA* NORTH CAROLINA
--------------------------------------
YEAR ENDED 5/31/97 YEAR ENDED 5/31/96
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS
Net investment income $ 10,118,809 $ 10,552,320
Net realized gain from investment transactions
(notes 1 and 4) 1,921,251 2,647,708
Net change in unrealized appreciation or
depreciation of investments 2,403,810 (6,091,694)
- -----------------------------------------------------------------------------------------------
Net increase in net assets from operations 14,443,870 7,108,334
- -----------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1)
From undistributed net investment income:
Class A (9,701,977) (10,307,619)
Class B (1,977) N/A
Class C (326,112) (329,070)
Class R (4,651) N/A
- -----------------------------------------------------------------------------------------------
Decrease in net assets from distributions to
shareholders (10,034,717) (10,636,689)
- -----------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 2)
Net proceeds from sale of shares 13,538,981 16,169,457
Net proceeds from shares issued to shareholders
due to reinvestment of distributions 5,178,488 5,859,549
- -----------------------------------------------------------------------------------------------
18,717,469 22,029,006
- -----------------------------------------------------------------------------------------------
Cost of shares redeemed (25,396,297) (24,794,063)
- -----------------------------------------------------------------------------------------------
Net increase (decrease) in net assets from Fund
share transactions (6,678,828) (2,765,057)
- -----------------------------------------------------------------------------------------------
Net increase (decrease) in net assets (2,269,675) (6,293,412)
Net assets at the beginning of year 191,605,816 197,899,228
- -----------------------------------------------------------------------------------------------
Net assets at the end of year $189,336,141 $191,605,816
- -----------------------------------------------------------------------------------------------
Balance of undistributed net investment income at end of year $ 84,092 $ -
- -----------------------------------------------------------------------------------------------
</TABLE>
* Information represents eight months of Flagship North Carolina and four
months of Nuveen Flagship North Carolina (see note 1 of the Notes to
Financial Statements).
N/A - Flagship North Carolina was not authorized to issue Class B or Class R
Shares.
See accompanying notes to financial statements.
20
<PAGE>
NOTES TO FINANCIAL STATEMENTS Nuveen Municipal Bond Fund
May 31, 1997 Annual Report
1. GENERAL INFORMATION AND SIGNIFICANT ACCOUNTING POLICIES
The Nuveen Flagship Multistate Trust III (the "Trust") is an open-end
investment company registered under the Investment Company Act of 1940, as
amended. The Trust comprises Nuveen Flagship North Carolina Municipal Bond
Fund (the "Fund"), among others. The Trust was organized as a Massachusetts
business trust on July 1, 1996.
The John Nuveen Company, parent of John Nuveen & Co. Incorporated and Nuveen
Advisory Corp., respectively, the distributor ("Distributor") and investment
advisor ("Adviser") of the Fund, 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, Flagship North Carolina
Double Tax Exempt Fund ("Flagship North Carolina") was reorganized into the
Trust and renamed Nuveen Flagship North Carolina Municipal Bond Fund ("Nuveen
Flagship North Carolina").
The Fund seeks to provide high tax-free income and preservation of capital
through investments in a diversified portfolio of quality municipal bonds.
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements in accordance with
generally accepted accounting principles.
Securities Valuation
The prices of municipal bonds in the 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 Fund has 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 May 31, 1997, the Fund had no such 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 as required for federal income tax purposes.
21
<PAGE>
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Dividends and Distributions to Shareholders
Tax-exempt net investment income is declared as a dividend monthly and payment
is made or reinvestment is credited to shareholder accounts on the first
business day after month-end. Net realized capital gains and/or market
discount 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 carryovers. Prior to the
reorganization, tax-exempt net investment income for Flagship North Carolina
was declared as a dividend daily and payment was made on the last business day
of each month.
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
The Fund is a separate taxpayer for federal income tax purposes. The Fund
intends to comply with the requirements of the Internal Revenue Code
applicable to regulated investment companies and to distribute all of its
tax-exempt net investment income, in addition to any significant amounts of
net realized capital gains and/or market discount from investment
transactions. The Fund currently considers significant net realized capital
gains and/or market discount as amounts in excess of $.001 per share.
Furthermore, the Fund intends to satisfy conditions which will enable interest
from municipal securities, which is exempt from regular federal and North
Carolina state income taxes, to retain such tax-exempt status when distributed
to the shareholders of the Fund. All income dividends paid during the fiscal
year ended May 31, 1997, have been designated Exempt Interest Dividends. Net
realized capital gain and market discount distributions are subject to federal
taxation.
Flexible Sales Charge Program
The Fund offers Class A, B, C and R Shares. Class B and R Shares were first
offered for sale on February 1, 1997. Class A Shares are sold with a sales
charge and incur an annual 12b-1 service fee. 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 contingent deferred sales
charge ("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 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 18 months 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.
22
<PAGE>
Nuveen Municipal Bond Fund
May 31, 1997 Annual Report
Derivative Financial Instruments
The Fund may invest in certain derivative financial instruments including
futures, forward, swap, and option contracts, and other financial instruments
with similar characteristics. Although the Fund is authorized to invest in
such financial instruments, and may do so in the future, it did not make any
such investments during the fiscal year ended May 31, 1997.
Expense Allocation
Expenses of the Fund 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.
23
<PAGE>
NOTES TO FINANCIAL STATEMENTS - CONTINUED
2. FUND SHARES
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
Nuveen Flagship Flagship
North Carolina* North Carolina
------------------------------------------------------------------------------------
Year ended Year ended
5/31/97 5/31/96
------------------------------------------------------------------------------------
Shares Amount Shares Amount
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold:
Class A 1,139,324 $ 11,564,705 1,344,285 $ 13,800,240
Class B 26,319 268,174 N/A N/A
Class C 128,427 1,308,314 232,489 2,369,217
Class R 39,185 397,788 N/A N/A
Shares issued to shareholders
due to reinvestment of
distributions:
Class A 489,500 4,984,798 551,768 5,657,437
Class B 48 488 N/A N/A
Class C 18,772 190,950 19,714 202,112
Class R 221 2,252 N/A N/A
- ------------------------------------------------------------------------------------------------------------------
1,841,796 18,717,469 2,148,256 22,029,006
- ------------------------------------------------------------------------------------------------------------------
Shares redeemed:
Class A (2,374,729) (24,226,252) (2,231,686) (22,878,721)
Class B N N N/A N/A
Class C (115,427) (1,170,045) (187,452) (1,915,342)
Class R N N N/A N/A
- ------------------------------------------------------------------------------------------------------------------
(2,490,156) (25,396,297) (2,419,138) (24,794,063)
- ------------------------------------------------------------------------------------------------------------------
Net increase (decrease) (648,360) $ (6,678,828) (270,882) $ (2,765,057)
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
* Information represents eight months of Flagship North Carolina and four
months of Nuveen Flagship North Carolina (see note 1).
N/A - Flagship North Carolina was not authorized to issue Class B or Class R
Shares.
3. DISTRIBUTIONS TO SHAREHOLDERS
On June 9, 1997, the Fund declared a dividend distribution from its tax-exempt
net investment income which was paid on July 1, 1997, to shareholders of
record on June 9, 1997, as follows:
<TABLE>
<CAPTION>
NUVEEN FLAGSHIP
NORTH CAROLINA
- ------------------------------------------------------------------------------
<S> <C>
Dividend per share:
Class A $.0445
Class B .0380
Class C .0395
Class R .0460
- ------------------------------------------------------------------------------
</TABLE>
24
<PAGE>
Nuveen Municipal Bond Fund
May 31, 1997 Annual Report
4. SECURITIES TRANSACTIONS
Purchases and sales (including maturities) of investments in municipal
securities and temporary municipal investments for the fiscal year ended May
31, 1997, were as follows:
<TABLE>
<CAPTION>
NUVEEN FLAGSHIP
NORTH CAROLINA*
- -------------------------------------------------------------
<S> <C>
PURCHASES
Investments in municipal securities $43,621,349
Temporary municipal investments 200,000
SALES
Investments in municipal securities 50,876,543
Temporary municipal investments 200,000
- -------------------------------------------------------------
</TABLE>
* Information represents eight months of Flagship North Carolina and four
months of Nuveen Flagship North Carolina (see note 1).
At May 31, 1997, the identified cost of investments owned for federal income
tax purposes was the same as the cost for financial reporting purposes for the
Fund.
At May 31, 1997, the Fund had an unused capital loss carryforward of
$1,060,262 available for federal income tax purposes to be applied against
future capital gains, if any. If not applied, the carryover will expire in the
year 2003.
5. UNREALIZED APPRECIATION (DEPRECIATION)
At May 31, 1997, net unrealized appreciation aggregated $8,512,514 of which
$8,519,543 related to appreciated securities and $7,029 related to depreciated
securities.
6. MANAGEMENT FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Under the Trust's investment management agreement with the Adviser, the 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 the Fund as follows:
<TABLE>
<CAPTION>
AVERAGE DAILY NET ASSET VALUE MANAGEMENT FEE
- --------------------------------------------------------------
<S> <C>
For the first $125 million .5500 of 1%
For the next $125 million .5375 of 1
For the next $250 million .5250 of 1
For the next $500 million .5125 of 1
For the next $1 billion .5000 of 1
For net assets over $2 billion .4750 of 1
</TABLE>
Prior to the reorganization (see note 1) Flagship North Carolina paid a
management fee of .5 of 1%. The management fee compensates the Adviser for
overall investment advisory and administrative services, and general office
facilities. The Trust pays no compensation directly to its Trustees who are
affiliated with the Adviser or to its officers, all of whom receive
remuneration for their services to the Trust from the Adviser.
25
<PAGE>
NOTES TO FINANCIAL STATEMENTS - CONTINUED
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 May 31, 1997, the Distributor and its predecessor
(Flagship Funds Inc., a wholly-owned subsidiary of Flagship Resources Inc.)
collected gross sales charges on purchases of Class A Shares of approximately
$227,600 of which approximately $197,100 were paid out as concessions to
authorized dealers. The Distributor and its predecessor also received 12b-1
service fees on Class A Shares, approximately one-half of which was paid to
compensate authorized dealers for providing services to shareholders relating
to their investments.
During the fiscal year ended May 31, 1997, the Distributor and its predecessor
compensated authorized dealers directly with approximately $46,500 in
commission advances at the time of purchase. To compensate for commissions
advanced to authorized dealers, all 12b-1 service fees collected on Class B
Shares during the first year following a purchase, all 12b-1 distribution fees
collected on Class B Shares, and all 12b-1 service and distribution fees on
Class C Shares during the first year following a purchase are retained by the
Distributor. The remaining 12b-1 fees charged to the Fund were paid to
compensate authorized dealers for providing services to shareholders relating
to their investments. The Distributor and its predecessor also collected and
retained approximately $2,400 of CDSC on share redemptions during the fiscal
year ended May 31, 1997.
7. COMPOSITION OF NET ASSETS
At May 31, 1997, the Fund had an unlimited number of $.01 par value shares
authorized. Net assets consisted of:
<TABLE>
<CAPTION>
NUVEEN FLAGSHIP
NORTH CAROLINA
- ------------------------------------------------------------------------------
<S> <C>
Capital paid-in $181,799,797
Balance of undistributed net investment income 84,092
Accumulated net realized gain (loss) from investment transactions (1,060,262)
Net unrealized appreciation of investments 8,512,514
- ------------------------------------------------------------------------------
Net assets $189,336,141
==============================================================================
</TABLE>
26
<PAGE>
Financial Highlights
27
<PAGE>
FINANCIAL HIGHLIGHTS
Selected data for a common share outstanding throughout each period is as
follows:
<TABLE>
<CAPTION>
CLASS (INCEPTION DATE) OPERATING PERFORMANCE LESS DISTRIBUTIONS
--------------------------- --------------------------
NET
NUVEEN FLAGSHIP NET REALIZED AND DIVIDENDS NET TOTAL
NORTH CAROLINA++ ASSET UNREALIZED FROM TAX- ASSET RETURN
VALUE NET GAIN (LOSS) EXEMPT NET DISTRIBUTIONS VALUE ON NET
YEAR ENDING BEGINNING INVESTMENT FROM INVESTMENT FROM CAPITAL END OF ASSET
MAY 31, OF PERIOD INCOME (b) INVESTMENTS INCOME GAINS PERIOD VALUE (a)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS A (3/86)
1997 $10.05 $.54 $ .23 $(.54) $ -- $10.28 7.79%
1996 10.23 .55 (.18) (.55) -- 10.05 3.67
1995 10.08 .57 .15 (.57) -- 10.23 7.45
1994 10.51 .57 (.42) (.58) -- 10.08 1.30
1993 9.97 .58 .55 (.59) -- 10.51 11.66
1992 9.70 .60 .27 (.60) -- 9.97 9.30
1991 9.46 .61 .24 (.61) -- 9.70 9.28
1990 9.59 .61 (.13) (.61) -- 9.46 5.16
1989 8.93 .62 .66 (.62) -- 9.59 14.78
1988 8.80 .62 .13 (.62) -- 8.93 8.77
CLASS B (2/97)
1997(c) 10.33 .12 (.06) (.11) -- 10.28 .64
CLASS C (10/93)
1997 10.03 .48 .23 (.48) -- 10.26 7.20
1996 10.22 .49 (.18) (.50) -- 10.03 3.01
1995 10.06 .51 .16 (.51) -- 10.22 6.97
1994(c) 10.84 .32 (.78) (.32) -- 10.06 (6.26)+
Class R (2/97)
1997(c) 10.27 .18 .01 (.18) -- 10.28 1.92
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Annualized.
++ Information included prior to the year ending May 31, 1997, reflects the
financial highlights of Flagship North Carolina.
(a) Total returns are calculated on net asset value without any sales charge.
(b) After waiver of certain management fees or reimbursement of expenses, if
applicable, by Nuveen Advisory or its predecessor Flagship Financial.
(c) From commencement of class operations as noted.
28
<PAGE>
Nuveen Municipal Bond Fund
May 31, 1997 Annual Report
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------------
RATIO RATIO
OF NET OF NET
RATIO OF INVESTMENT RATIO OF INVESTMENT
EXPENSES INCOME TO EXPENSES INCOME TO
TO AVERAGE AVERAGE TO AVERAGE AVERAGE
NET ASSETS NET ASSETS NET ASSETS NET ASSETS
NET ASSETS BEFORE BEFORE AFTER AFTER PORTFOLIO
END OF PERIOD REIMBURSE- REIMBURSE- REIMBURSE- REIMBURSE- TURNOVER
(IN THOUSANDS) MENT MENT MENT (b) MENT (b) RATE
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$181,595 1.00% 5.24% .93% 5.31% 23%
185,016 1.03 5.19 .90 5.32 54
191,850 1.06 5.58 .91 5.73 35
196,087 1.04 5.26 .89 5.41 21
169,944 1.04 5.61 .95 5.70 12
131,488 1.05 6.03 .98 6.10 17
108,917 1.06 6.29 .99 6.36 12
96,348 1.05 6.29 .94 6.40 34
87,539 1.07 6.51 .92 6.66 21
68,077 1.03 6.73 .83 6.93 75
271 1.62+ 4.60+ 1.62+ 4.60+ 23
7,065 1.54 4.70 1.48 4.76 23
6,589 1.58 4.64 1.45 4.77 54
6,049 1.61 4.98 1.46 5.13 35
4,161 1.79+ 4.35+ 1.49+ 4.65+ 21
405 .66+ 5.57+ .66+ 5.57+ 23
- --------------------------------------------------------------------------------------
</TABLE>
29
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF
NUVEEN FLAGSHIP NORTH CAROLINA MUNICIPAL BOND FUND:
We have audited the accompanying statement of net assets of Nuveen Flagship
North Carolina Municipal Bond Fund, including the portfolio of investments, as
of May 31, 1997, the related statement of operations for the period then ended
and the statement of changes in net assets, and the financial highlights for
each of the periods presented. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial
highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements.
Our procedures included confirmation of securities owned as of May 31, 1997,
by correspondence with the Fund's custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of the Nuveen
Flagship North Carolina Municipal Bond Fund at May 31, 1997, the results of
its operations, the changes in its net assets and the financial highlights for
the respective stated periods, in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Dayton, Ohio
July 11, 1997
30
<PAGE>
Shareholder Meeting Report
Flagship North Carolina
<TABLE>
<CAPTION>
A SHARES C SHARES
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
ADVISORY AGREEMENT For 14,080,018 515,639
Against 228,299 2,818
Abstain 224,174 3,340
---------------------------------------------------
Total 14,532,491 521,797
- ----------------------------------------------------------------------------
Broker Non Votes 272,411 39,090
- ----------------------------------------------------------------------------
REORGANIZATION For 10,419,964 258,683
Against 311,974 3,980
Abstain 251,972 2,999
---------------------------------------------------
Total 10,983,910 265,662
- ----------------------------------------------------------------------------
Broker Non Votes 3,820,992 295,225
- ----------------------------------------------------------------------------
INVESTMENT OBJECTIVE For 10,095,077 233,053
Against 701,799 10,493
Abstain 107,107 22,116
---------------------------------------------------
Total 10,903,983 265,662
- ----------------------------------------------------------------------------
Broker Non Votes 3,900,919 295,225
- ----------------------------------------------------------------------------
INVESTMENT ASSETS For 10,125,812 253,686
Against 675,434 10,493
Abstain 102,737 1,483
---------------------------------------------------
Total 10,903,983 265,662
- ----------------------------------------------------------------------------
Broker Non Votes 3,900,919 295,225
- ----------------------------------------------------------------------------
TYPE OF SECURITIES For 10,119,226 233,053
Against 666,365 10,493
Abstain 118,392 22,116
---------------------------------------------------
Total 10,903,983 265,662
- ----------------------------------------------------------------------------
Broker Non Votes 3,900,919 295,225
- ----------------------------------------------------------------------------
BORROWING For 10,125,302 233,053
Against 682,795 10,493
Abstain 95,886 22,116
---------------------------------------------------
Total 10,903,983 265,662
- ----------------------------------------------------------------------------
Broker Non Votes 3,900,919 295,225
- ----------------------------------------------------------------------------
PLEDGES For 10,130,659 233,053
Against 657,982 10,493
Abstain 115,342 22,116
---------------------------------------------------
Total 10,903,983 265,662
- ----------------------------------------------------------------------------
Broker Non Votes 3,900,919 295,225
---------------------------------------------------
</TABLE>
31
<PAGE>
Shareholder Meeting Report
Flagship North Carolina - continued
<TABLE>
<CAPTION>
A SHARES C SHARES
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
SENIOR SECURITIES For 10,086,875 233,053
Against 712,974 10,493
Abstain 104,134 22,116
---------------------------------------------------
Total 10,903,983 265,662
- ----------------------------------------------------------------------------
Broker Non Votes 3,900,919 295,225
- ----------------------------------------------------------------------------
UNDERWRITING For 10,131,500 233,053
Against 691,377 10,493
Abstain 81,106 22,116
---------------------------------------------------
Total 10,903,983 265,662
- ----------------------------------------------------------------------------
Broker Non Votes 3,900,919 295,225
- ----------------------------------------------------------------------------
REAL ESTATE For 10,112,080 233,053
Against 715,127 10,493
Abstain 76,776 22,116
---------------------------------------------------
Total 10,903,983 265,662
- ----------------------------------------------------------------------------
Broker Non Votes 3,900,919 295,225
- ----------------------------------------------------------------------------
COMMODITIES For 10,081,104 233,053
Against 743,754 10,493
Abstain 79,125 22,116
---------------------------------------------------
Total 10,903,983 265,662
- ----------------------------------------------------------------------------
Broker Non Votes 3,900,919 295,225
- ----------------------------------------------------------------------------
LOANS For 10,117,334 233,053
Against 716,105 10,493
Abstain 70,544 22,116
---------------------------------------------------
Total 10,903,983 265,662
- ----------------------------------------------------------------------------
Broker Non Votes 3,900,919 295,225
- ----------------------------------------------------------------------------
SHORT SALES/MARGIN
PURCHASES For 10,077,656 233,053
Against 741,013 10,493
Abstain 85,314 22,116
---------------------------------------------------
Total 10,903,983 265,662
- ----------------------------------------------------------------------------
Broker Non Votes 3,900,919 295,225
- ----------------------------------------------------------------------------
PUT AND CALL OPTIONS For 10,119,510 233,053
Against 690,783 10,493
Abstain 93,690 22,116
---------------------------------------------------
Total 10,903,983 265,662
- ----------------------------------------------------------------------------
Broker Non Votes 3,900,919 295,225
---------------------------------------------------
</TABLE>
32
<PAGE>
Nuveen Municipal Bond Fund
May 31, 1997 Annual Report
<TABLE>
<CAPTION>
A SHARES C SHARES
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Industry Concentration For 10,142,066 233,053
Against 680,021 10,493
Abstain 81,896 22,116
---------------------------------------------------
Total 10,903,983 265,662
- ----------------------------------------------------------------------------
Broker Non Votes 3,900,919 295,225
- ----------------------------------------------------------------------------
Affiliate Purchases For 10,108,150 233,053
Against 692,390 10,493
Abstain 103,443 22,116
---------------------------------------------------
Total 10,903,983 265,662
- ----------------------------------------------------------------------------
Broker Non Votes 3,900,919 295,225
- ----------------------------------------------------------------------------
Investment Companies For 10,107,479 233,053
Against 715,737 10,493
Abstain 80,768 22,116
---------------------------------------------------
Total 10,903,984 265,662
- ----------------------------------------------------------------------------
Broker Non Votes 3,900,918 295,225
- ----------------------------------------------------------------------------
Div vs. Non-Div For 10,247,978 227,391
Against 433,065 4,515
Abstain 312,437 33,756
---------------------------------------------------
Total 10,993,480 265,662
- ----------------------------------------------------------------------------
Broker Non Votes 3,811,422 295,225
- ----------------------------------------------------------------------------
12b-1 Fees For 13,828,813 477,762
Against 386,525 2,818
Abstain 318,307 41,216
---------------------------------------------------
Total 14,533,645 521,796
- ----------------------------------------------------------------------------
Broker Non Votes 271,257 39,091
---------------------------------------------------
</TABLE>
33
<PAGE>
Shareholder Meeting Report
Flagship North Carolina - continued
<TABLE>
<CAPTION>
A SHARES C SHARES
- -----------------------------------------------------
DIRECTORS:
- -----------------------------------------------------
<S> <C> <C> <C>
Bremner For 14,351,417 558,069
Withhold 453,485 2,818
------------------------------------
Total 14,804,902 560,887
- -----------------------------------------------------
Brown For 14,351,417 558,069
Withhold 453,485 2,818
------------------------------------
Total 14,804,902 560,887
- -----------------------------------------------------
Dean For 14,351,417 558,069
Withhold 453,485 2,818
------------------------------------
Total 14,804,902 560,887
- -----------------------------------------------------
Impellizzeri For 14,351,417 558,069
Withhold 453,485 2,818
------------------------------------
Total 14,804,902 560,887
- -----------------------------------------------------
Rosenheim For 14,351,417 558,069
Withhold 453,485 2,818
------------------------------------
Total 14,804,902 560,887
- -----------------------------------------------------
Sawers For 14,351,417 558,069
Withhold 453,485 2,818
------------------------------------
Total 14,804,902 560,887
- -----------------------------------------------------
Schneider For 14,351,417 558,069
Withhold 453,485 2,818
------------------------------------
Total 14,804,902 560,887
- -----------------------------------------------------
Schwertfeger For 14,351,417 558,069
Withhold 453,485 2,818
------------------------------------
Total 14,804,902 560,887
------------------------------------
</TABLE>
34
<PAGE>
Shareholder Information
NUVEEN FAMILY OF MUTUAL FUNDS
Nuveen offers a variety of funds designed to
help you reach your financial goals.
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
Insured
Intermediate-Term
Limited-Term
STATE FUNDS
Alabama Michigan
Arizona Missouri
California New Jersey
Colorado New Mexico
Connecticut New York
Florida North Carolina
Georgia Ohio
Kansas Pennsylvania
Kentucky South Carolina
Louisiana Tennessee
Maryland Virginia
Massachusetts Wisconsin
To purchase additional shares of your Nuveen Municipal Bond Fund, contact your
financial adviser. If you would like to add to your current investment on a
monthly or semi-annual basis, you can sign up for Nuveen's systematic
investing program, which allows you to invest a fixed dollar amount every
month automatically.
You can also invest automatically through dividend reinvestment. By
reinvesting your fund's dividends back into the fund, you gain the added
growth potential of long-term compounding.
For more information on any of these service options call your adviser, or
Nuveen at (800) 621-7227.
35
<PAGE>
Fund Information
BOARD OF DIRECTORS
Robert P. Bremner
Lawrence H. Brown
Anthony T. Dean
Anne E. Impellizzeri
Peter R. Sawers
William J. Schneider
Timothy R. Schwertfeger
Judith M. Stockdale
FUND MANAGER
Nuveen Advisory Corp.
333 West Wacker Drive
Chicago, IL 60606
CUSTODIAN
The Chase Manhattan Bank
4 New York Plaza
New York, NY 10004-2413
TRANSFER AGENT,
SHAREHOLDER SERVICES AND
DIVIDEND DISBURSING AGENT
Boston Financial
Nuveen Investor Services
P.O. Box 8509
Boston, MA 02266-8509
(800) 225-8530
LEGAL COUNSEL
Fried, Frank, Harris, Shriver
& Jacobson
Washington, D.C.
INDEPENDENT AUDITORS
Deloitte & Touche LLP
Dayton, Ohio
36
<PAGE>
Serving Investors
for Generations
[PHOTO OF JOHN NUVEEN, SR. APPEARS HERE]
John Nuveen, Sr.
Since our founding in 1898, John Nuveen & Co. has been synonymous with
investments that withstand the test of time. Today, we offer a broad range of
investments designed for mature investors whose portfolios are the principal
source of their ongoing financial security. More than 1.3 million investors
have trusted Nuveen to help them maintain the lifestyle they currently enjoy.
A value investing approach - purchasing securities of strong companies and
communities that represent good long-term value - is the cornerstone of
Nuveen's investment philosophy. It is a careful, long-term strategy that
offers the potential for attractive returns with moderated risk. Successful
value investing begins with in-depth research and a discerning eye for
marketplace opportunity. Nuveen's team of investment professionals is backed
by the discipline, resources and expertise of almost a century of investment
experience, including one of the most recognized research departments in the
industry.
To meet the unique circumstances and financial planning needs of mature
investors, Nuveen offers a wide array of equity and fixed-income mutual funds,
unit trusts, exchange-traded funds, individual managed account services, and
cash management products, including many that generate tax-free income.
To find out more about how Nuveen investment products and services can help
you preserve your financial security, talk with your financial adviser, or
call us at (800) 621-7227 for more information, including a prospectus where
applicable. Please read that information carefully before you invest.
NUVEEN
John Nuveen & Co. Incorporated
333 West Wacker Drive
Chicago, IL 60606-1286
(800) 621-7227
www.nuveen.com
<PAGE>
[LOGO OF NUVEEN APPEARS HERE]
Municipal
Bond Funds
May 31, 1997
Annual Report
Dependable, tax-free income
to help you keep more of
what you earn.
South
Carolina
[PHOTO APPEARS HERE]
<PAGE>
Contents
1 Dear Shareholder
3 Answering Your Questions
6 South Carolina Overview
9 Financial Section
27 Shareholder Meeting Report
31 Shareholder Information
32 Fund Information
<PAGE>
Dear Shareholder
[PHOTO OF TIMOTHY R. SCHWERTFEGER APPEARS HERE]
It's a pleasure to report to you on the performance of the Nuveen Flagship South
Carolina Municipal Bond Fund. Over the past year, the fund posted sizable gains.
For the fiscal year ended May 31, 1997, the value of your investment rose 8.28%
for Class A shares if you chose to reinvest your tax-free income dividends.
Over this 12-month period, the total return performance for the fund (with
income reinvested) matched the 8.28% increase produced by the Lehman Brothers
Municipal Bond Index, which is used to represent the broad municipal bond market
on an unmanaged basis.
In addition to substantial total returns, shareholders continue to enjoy very
attractive current yields generated by a portfolio of quality bonds, which
provide excellent income for investors. As of May 31, 1997, shareholders were
receiving tax-free yields on net asset value of 5.37% for Class A shares. To
match this yield, investors in the 36% combined federal and state income tax
bracket would have had to earn at least 8.39% on taxable alternatives.
These results were produced against a backdrop of continued economic expansion
and the lowest unemployment rates in almost two decades, a combination that in
the past has foreshadowed an increase in inflation. In March, the Federal
Reserve made a pre-emptive strike by raising short-term interest rates by 0.25%,
but then maintained the status quo at its May and July meetings. Overall market
returns continue to be good, but fear of inflation has hampered the performance
of municipals and led to
-----
1
<PAGE>
"In addition to substantial total returns, shareholders continue to enjoy very
attractive current yields generated by a portfolio of quality bonds."
increased volatility in both the equity and bond markets.
During this time, bonds have often been the bellwether for the direction of
stocks. Whenever inflation talk is at its most rampant, the stock market has
kept an eye on the bond market for its response before reacting.
In the first six months of the year, the markets also focused on fiscal issues,
including the federal budget accord and discussion of plans to reduce taxes and
eliminate the deficit. The economy appeared to be moderating, corporate earnings
reports continued to exhibit strength, and interest rates fell in the second
quarter. All of this was positive news. The net effect is that the markets are
better off now than at the beginning of the year, but the volatility experienced
in getting there has been significant.
Recently, the need for diversification and a renewed emphasis on asset
allocation -- as well as attractive yields -- have sparked increased interest in
tax-free investments. The current level of the stock market reminds investors to
re-allocate profits to other segments of the market in order to limit risk.
Nuveen municipal bond funds provide an excellent lower-risk alternative, and
their current yields make them very attractive.
On behalf of everyone at Nuveen, I thank you for your confidence in us and our
family of investments. You can continue to depend on us for high-quality
investments that withstand the test of time. We look forward to reporting to you
again in six months.
Sincerely,
/s/Timothy R. Schwertfeger
Timothy R. Schwertfeger
Chairman of the Board
July 15, 1997
-----
2
<PAGE>
[PHOTO OF TED NEILD APPEARS HERE]
Ted Neild, head of Nuveen's Dayton-based portfolio management team, talks about
the municipal bond market and offers insights into factors that affected fund
performance over the past year.
Answering Your Questions
What are the investment objectives of the fund?
The fund aims to provide investors with a high level of tax-free income while
preserving capital by investing in a diversified portfolio of high-quality
municipal bonds. To that end, we attempt to maximize the fund's after-tax total
return by generating high tax-free income and minimizing the distribution of
taxable capital gains when possible.
What is your strategy for meeting these objectives?
To meet this fund's objectives of income and enhanced value, our portfolio
management strategy relies on conservative value investing principles, sound
research and credit surveillance activities, and senior management involvement.
At Nuveen, value investing means taking a fundamental approach to finding bonds
that offer the best balance of high potential return with low risk regardless of
the direction of interest rates. This approach focuses on the characteristics of
individual bonds, such as sector, geographic region, structure and intrinsic
credit quality, rather than on the general economic environment. The idea behind
this philosophy is that we, as investment managers, can control the selection
process, but not the direction of the economy as a whole.
What key economic factors affected the fund's performance during the year?
The U.S. economy continued to grow, exhibiting low unemployment, increased
manufacturing and construction activity, and lack of price pressure at the
consumer and
===
3
<PAGE>
"At Nuveen, value investing means taking a fundamental approach to finding bonds
that offer the best balance of high potential return with low risk regardless of
the direction of interest rates."
producer levels. The fund had the added advantage of operating in a healthy
supply environment, where securities were available as needed.
Given this market environment, how did the fund perform?
The South Carolina Municipal Bond Fund performed well over the past year,
rewarding investors with a total return on net asset value for the year of 8.28%
for Class A shares, including price changes and reinvested dividends. The fund
was ranked third among 15 South Carolina municipal bond funds for the one-year
period by Lipper Analytical Services, a nationally recognized performance
measurement service.
What strategies did you employ to add value?
We focused on taking advantage of the strong municipal bond market in South
Carolina to improve the already-high credit quality of the fund. Strong demand
for bonds in the state has allowed us to purchase quality bonds without
affecting the income of the fund. In addition, we sold some insured lease bonds
in favor of higher-quality bonds in sectors such as utilities, water and sewer
facilities, and schools.
What is the current status of South Carolina's municipal market?
Though still reliant on the textile industry, South Carolina's economy has
diversified into other areas such as trade, services and durable goods
manufacturing. Steady economic gains are expected to continue as local
companies' expansion plans contribute to future growth. Strong retail demand, in
combination with the state's high-quality municipal issuers and this year's low
issuance volume (under $1 billion through the first half of 1997), have kept
South Carolina bonds aggressively priced.
- ----
4
<PAGE>
What is the current outlook for the municipal market as a whole?
As we make our way through the seventh year of the current economic expansion,
some observers believe that a fundamental shift may have occurred in our
economy. Based on past experience and months of reports of economic growth,
especially employment statistics, the markets have long been anticipating an
increase in inflation. However, even with almost full employment, we have not
seen the expected rise in hourly wages that would be considered inflationary.
This change in the traditional economic cause-and-effect relationship has been
variously attributed to the globalization of the economy and consequent
competitive pressures, to increased use of technology, and to corporations'
recent ability to downsize as necessary. Although structural changes in the
economy appear to have suspended the relationship between faster growth and
higher inflation, the risk remains that inflation may reassert itself if
capacity constraints are reached and resources are stretched too thin.
Talk of Fed tightening will continue. If the Fed does act to increase rates, it
will be perceived as a move against inflation. If the Fed does not tighten, it
will be seen as an indication that the economy is doing well.
Nonetheless, for the remainder of 1997, the municipal market should continue to
offer the attractive yields and tax advantages that make it a good alternative
if and when a correction in the stock market occurs. While money continues to
flow into equity mutual funds, investors are also beginning to evaluate the
effect of the huge run-up in stock prices on their asset allocation, and many
are rebalancing their portfolios by shifting some assets into bonds.
- ----
5
<PAGE>
South Carolina
Overview
- --------------------------------------------------------------------------------
Credit Quality
- --------------------------------------------------------------------------------
[PIE CHARTS APPEARS HERE]
AAA 61%
AA 18%
A 14%
BBB/NR 7%
- --------------------------------------------------------------------------------
Diversification
- --------------------------------------------------------------------------------
[PIE CHARTS APPEARS HERE]
Water & Sewer 22%
General Obligations 17%
Education/Student Loans 14%
Municipal Appropriations 12%
Housing Facilities 11%
Hospitals 7%
Utility 7%
Pollution Control 5%
Other 5%
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fund Highlights
- --------------------------------------------------------------------------------
Share Class A B C R
<S> <C> <C> <C> <C>
Inception Date 7/93 2/97 2/97 2/97
................................................................................
Net Asset Value (NAV) $9.53 $ 9.52 $9.52 $ 9.54
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Total Net Assets ($000) $10,235
................................................................................
Average Weighted Maturity (years) 18.98
................................................................................
Average Weighted Duration (years) 8.17
................................................................................
<CAPTION>
Annualized Total Return/1/
- --------------------------------------------------------------------------------
Share Class A(NAV) A(Offer) B C R
<S> <C> <C> <C> <C> <C>
1-Year 8.28% 3.73% 7.52% 7.73% 8.45%
................................................................................
Since Inception 5.19% 4.04% 4.57% 4.78% 5.23%
- --------------------------------------------------------------------------------
<CAPTION>
Tax-Free Yields
- --------------------------------------------------------------------------------
Share Class A(NAV) A(Offer) B C R
<S> <C> <C> <C> <C> <C>
Dist Rate 5.25% 5.03% 4.51% 4.70% 5.45%
................................................................................
SEC 30-Day Yld 5.37% 5.14% 4.62% 4.83% 5.57%
................................................................................
Taxable Equiv Yld/2/ 8.39% 8.03% 7.22% 7.55% 8.70%
- --------------------------------------------------------------------------------
</TABLE>
1 Returns of the oldest share class of a fund are actual. Returns for other
classes are actual for the period since inception and prior to class
inception are the returns for the fund's oldest class, adjusted for
differences in sales charges and expenses. Class A shares have an initial
sales charge, while Class B, C and R shares have no initial sales charge.
Class B shares have a CDSC that declines from 5% to 0% after 6 years. Class C
shares have a 1% CDSC for redemptions within one year. Returns above do not
reflect imposition of the CDSC. Giving effect to the CDSC shares applicable
to Class B shares, the 1-year and life-of-fund total returns above would be
3.52% and 3.89%, respectively.
2 Based on SEC yield and a combined federal and state income tax rate of 36%.
Represents the yield on a taxable investment necessary to equal the yield of
the Nuveen fund on an after-tax basis.
-----
6
<PAGE>
Nuveen Flagship South Carolina Municipal Bond Fund
May 31, 1997 Annual Report
* The Index Comparison shows change in value of a $10,000 investment in the 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.
Index Comparison*
[LINE CHART APPEARS HERE]
<TABLE>
<CAPTION>
Nuveen Flagship Nuveen Flagship
Lehman Brothers South Carolina South Carolina
Municipal Bond Municipal Bond Municipal Bond
Index Fund (NAV) Fund (Offer)
--------------- --------------- ---------------
<S> <C> <C> <C>
July 1993 10,000 10,000 9,580
May 1994 10,065.5 10,013.5 9,592.91
May 1995 10,982.1 10,868.4 10,411.9
May 1996 11,484.1 11,252 10,779,4
May 1997 12,541.6 12,183.5 11,671.8
</TABLE>
<TABLE>
<S> <C>
Lehman Brothers Municipal Bond Index $12,542
Nuveen Flagship South Carolina Municipal Bond Fund (NAV) $12,183
Nuveen Flagship South Carolina Municipal Bond Fund (Offer) $11,672
</TABLE>
Past performance is not predictive of future performance.
Dividend History (A Shares)
[BAR CHART APPEARS HERE]
June 1996 0.04098
July 1996 0.04235
August 1996 0.04235
September 1996 0.04098
October 1996 0.04235
November 1996 0.04098
December 1996 0.04235
January 1997 0.04247
February 1997 0.0417
March 1997 0.0417
April 1997 0.0417
May 1997 0.0417
7
<PAGE>
Financial Section
Contents
10 Portfolio of Investments
14 Statement of Net Assets
15 Statement of Operations
16 Statement of Changes in Net Assets
17 Notes to Financial Statements
23 Financial Highlights
26 Independent Auditors' Report
----
9
<PAGE>
<TABLE>
<CAPTION>
Portfolio of Investments
Nuveen Flagship South Carolina
Principal Optional Call Market
Amount Description Provisions* Ratings** Value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Education -- 9.3%
$ 400,000 Coastal Carolina University, South Carolina, 6/04 at 102 AAA $ 441,880
Revenue Refunding, 6.800%, 6/01/19
250,000 University South Carolina, University, Revenues 6/06 at 101 AAA 255,863
Refunding, 5.600%, 6/01/11
250,000 University South Carolina, University, Revenues, 6/07 at 101 AAA 253,010
5.600%, 6/01/14
- -----------------------------------------------------------------------------------------------------------------------------
Hospitals -- 7.0%
200,000 Greenville Hospital System, South Carolina, No Opt. Call AAA 209,584
Hospital Facilities, Revenue, 6.000%, 5/01/20
250,000 Greenwood County, South Carolina, Hospital, 10/03 at 102 AAA 253,098
Revenue, Self Memorial Hospital,
5.875%, 10/01/17
250,000 South Carolina Jobs, Economic Development 11/05 at 102 AAA 253,113
Authority, Hospital Facilities Revenue, Tuomey
Regional Medical Center, Series A,
5.750%, 11/01/15
- -----------------------------------------------------------------------------------------------------------------------------
Housing/Multi Family -- 5.5%
300,000 South Carolina Regional Housing 7/02 at 102 Aa 309,975
Development Corporation No. 1, Multifamily,
Revenue Refunding, Redwood Village Apartments,
A, 6.625%, 7/01/17
250,000 South Carolina State Housing Finance and 11/05 at 102 AA- 251,635
Development Authority, Multifamily, Revenue
Refunding, Runaway Bay Apartments Project,
6.125%, 12/01/15
- -----------------------------------------------------------------------------------------------------------------------------
Housing/Single Family -- 5.1%
250,000 South Carolina State Housing Authority, 7/04 at 102 AA 260,215
Homeownership Mortgage Purchase, Series A,
6.150%, 7/01/08
250,000 South Carolina State Housing Finance and 5/06 at 102 Aa2 256,315
Development Authority, Mortgage, Revenue,
Series A, 6.350%, 7/01/25
- -----------------------------------------------------------------------------------------------------------------------------
Industrial Development and Pollution Control -- 5.0%
500,000 Darlington County, South Carolina, Industrial 4/06 at 102 A 507,595
Development, Revenue, Sonoco Products Company
Project, 6.000%, 4/01/26
</TABLE>
10
<PAGE>
Nuveen Municipal Bond Fund
May 31, 1997 Annual Report
<TABLE>
<CAPTION>
Principal Optional Call Market
Amount Description Provisions* Ratings** Value
- ------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Municipal Appropriation Obligations -- 11.8%
Berkeley County, South Carolina, School District
Certificates of Participation, Berkeley School
Facilities Group Inc.:
$250,000 6.250%, 2/01/12 2/04 at 102 AAA $ 265,690
250,000 6.300%, 2/01/16 2/04 at 102 AAA 265,125
10,000 Charleston County, South Carolina, Certificates of 6/04 at 102 AAA 11,091
Participation, Series B, 6.875%, 6/01/14
400,000 Chesterfield County, South Carolina, School 7/05 at 102 AAA 414,832
District Certificates of Participation,
Chesterfield School Facilities Inc.,
6.000%, 7/01/15
250,000 Hilton Head Island, South Carolina, Public 3/05 at 102 AAA 254,928
Facilities Corporation Certificates of
Participation, 5.750%, 3/01/14
- ------------------------------------------------------------------------------------------------------------------------------
Municipal Revenue/Utility -- 6.7%
500,000 Camden South Carolina Public Utility, Revenue 3/07 at 102 AAA 489,045
Refunding and Improvement, 5.500%, 3/01/22
185,000 Puerto Rico Electric Power Authority, Power, 7/04 at 02 BBB+ 197,741
Revenue, Formerly Puerto Rico Commonwealth
Water Resource Authority, Power, Series T,
6.125%, 7/01/08
- ------------------------------------------------------------------------------------------------------------------------------
Municipal Revenue/Water and Sewer -- 22.4%
250,000 Columbia, South Carolina, Waterworks and 7/04 at 102 AA 251,115
Sewer System, Revenue Refunding,
5.375%, 2/01/12
250,000 Georgetown County, South Carolina Water and 6/05 at 102 N/R 246,355
Sewer District, Revenue Refunding and
Improvement, 6.500%, 6/01/25
300,000 Greenville, South Carolina, Waterworks, Revenue, 2/07 at 102 Aa1 294,219
5.500%, 2/01/22
250,000 Hilton Head Public Service District No. 1, 8/05 at 102 AAA 250,655
South Carolina Waterworks and Sewer System,
Revenue Refunding and Improvement,
5.500%, 8/01/15
500,000 Spartanburg, South Carolina, Sanitation Sewer 6/07 at 101 AAA 489,465
District, Sewer System, Revenue, Improvement,
5.500%, 6/01/20
500,000 Spartanburg, South Carolina, Waterworks, Revenue, 6/06 at 100 AAA 518,025
6.100%, 6/01/21
</TABLE>
------
11
<PAGE>
Portfolio of Investments
Nuveen Flagship South Carolina -- continued
<TABLE>
<CAPTION>
Principal Optional Call Market
Amount Description Provisions* Ratings** Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Municipal Revenue/Water and Sewer -- continued
$ 250,000 York County, South Carolina, Water & Sewer, 12/03 at 102 N/R $246,333
Revenue, 6.500%, 12/01/25
- ---------------------------------------------------------------------------------------------------------
Non-State General Obligations -- 13.8%
250,000 Anderson County, South Carolina, School 3/05 at 102 AAA 250,148
District No. 004, 5.400%, 3/01/15
365,000 Florence County, South Carolina, School 3/06 at 102 AAA 371,811
District No. 005, Series A, 5.700%, 3/01/17
250,000 Horry County, South Carolina, School District, No Opt. Call AAA 268,978
Series A, 6.750%, 3/01/01
250,000 Lexington County, South Carolina, Public Library 2/03 at 102 Aa2 265,137
System, 6.300%, 2/01/10
250,000 Richland, Lexington, South Carolina, Airport 1/05 at 100 AAA 255,942
District Airport, Revenue, Columbia Metropolitan
Airport, 6.000%, 1/01/15
- ---------------------------------------------------------------------------------------------------------
Pre-refunded -- 2.7%
240,000 Charleston County, South Carolina, Certificates 6/04 at 102 AAA 272,997
of Participation, Series B, 6.875%, 6/01/14
- ---------------------------------------------------------------------------------------------------------
Resource Recovery -- 2.5%
250,000 Charleston County, South Carolina, Solid Waste 1/05 at 102 AAA 259,862
User Fee, Revenue, 6.000%, 1/01/14
- ---------------------------------------------------------------------------------------------------------
State/Territorial General Obligations -- 3.6%
250,000 Puerto Rico Commonwealth, 6.400%, 7/01/11 7/04 at 101 1/2 A 266,734
100,000 Puerto Rico Public Buildings Authority, Revenue No Opt. Call A 98,615
Refunding, Guaranteed, Series L, 5.500%, 7/01/21
</TABLE>
12
<PAGE>
Nuveen Municipal Bond Fund
May 31, 1997 Annual Report
<TABLE>
<CAPTION>
Principal Optional Call Market
Amount Description Provisions* Ratings** Value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Student Loan Revenue Bonds -- 5.0%
$ 500,000 South Carolina State Education Assistance Authority, 9/04 at 101 A $ 515,000
Revenue Refunding, Guaranteed Student Loan,
Sub Lien, 6.300%, 9/01/08
- -----------------------------------------------------------------------------------------------------------------------------------
$10,000,000 Total Investments-(cost $9,847,361) -- 100.4% 10,272,126
- -----------------------------------------------------------------------------------------------------------------------------------
Other Assets Less Liabilities -- (0.4%) (37,479)
------------------------------------------------------------------------------------------------------
Net Assets -- 100% $10,234,647
======================================================================================================
</TABLE>
* Optional Call Provisions (not covered by the report of independent
auditors): 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 auditors): Using the
higher of Standard & Poor's or Moody's rating.
N/R -- Investment is not rated.
See accompanying notes to financial statements.
===
13
<PAGE>
Statement of Net Assets
May 31, 1997
<TABLE>
<CAPTION>
Nuveen Flagship
South Carolina
----------------------------------------------------------------------------------------
<S> <C>
Assets
Investments in municipal securities, at market value (note 1) $10,272,126
Cash 321,487
Interest receivable 209,612
Other assets 3,835
----------------------------------------------------------------------------------------
Total assets 10,807,060
----------------------------------------------------------------------------------------
Liabilities
Payable for Shares redeemed 498,750
Accrued expenses:
Management fees (note 6) 16
12b-1 distribution and service fees (notes 1 and 6) 1,931
Other 26,469
Dividends payable 45,247
----------------------------------------------------------------------------------------
Total liabilities 572,413
----------------------------------------------------------------------------------------
Net assets (note 7) $10,234,647
========================================================================================
Class A Shares (note 1)
Net assets $ 9,629,296
Shares outstanding 1,010,730
Net asset value and redemption price per share $ 9.53
Offering price per share (net asset value per share plus
maximum sales charge of 4.20% of offering price) $ 9.95
========================================================================================
Class B Shares (note 1)
Net assets $ 160,490
Shares outstanding 16,861
Net asset value, offering and redemption price per share $ 9.52
========================================================================================
Class C Shares (note 1)
Net assets $ 419,869
Shares outstanding 44,094
Net asset value, offering and redemption price per share $ 9.52
========================================================================================
Class R Shares (note 1)
Net assets $ 24,992
Shares outstanding 2,621
Net asset value, offering and redemption price per share $ 9.54
========================================================================================
</TABLE>
See accompanying notes to financial statements.
====
14
<PAGE>
Nuveen Municipal Bond Fund
May 31, 1997 Annual Report
Statement of Operations
Year ended May 31, 1997
<TABLE>
<CAPTION>
Nuveen Flagship
South Carolina*
---------------------------------------------------------------------------------------
<S> <C>
Investment Income
Tax-exempt interest income (note 1) $ 634,638
---------------------------------------------------------------------------------------
Expenses
Management fees (note 6) 56,758
12b-1 service fees -- Class A (notes 1 and 6) 36,806
12b-1 distribution and service fees -- Class B (notes 1 and 6) 353
12b-1 distribution and service fees -- Class C (notes 1 and 6) 223
Shareholders' servicing agent fees and expenses 14,590
Custodian's fees and expenses 35,097
Trustees' fees and expenses (note 6) 318
Professional fees 11,861
Shareholders' reports -- printing and mailing expenses 503
Federal and state registration fees 1,682
Organizational expenses (note 1) 11,818
Other expenses 849
---------------------------------------------------------------------------------------
Total expenses before reimbursement 170,858
Expense reimbursement (note 6) (125,003)
---------------------------------------------------------------------------------------
Net expenses 45,855
---------------------------------------------------------------------------------------
Net investment income 588,783
---------------------------------------------------------------------------------------
Realized and Unrealized Gain from Investments
Net realized gain from investment transactions (notes 1 and 4) 12,003
Net change in unrealized appreciation or depreciation of investments 270,459
---------------------------------------------------------------------------------------
Net gain from investments 282,462
---------------------------------------------------------------------------------------
Net increase in net assets from operations $ 871,245
=======================================================================================
</TABLE>
* Information represents eight months of Flagship South Carolina
and four months of Nuveen Flagship South Carolina (see note 1
of the Notes to Financial Statements).
See accompanying notes to financial statements.
===
15
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Nuveen Flagship Flagship
South Carolina* South Carolina
---------------------------------------------------
Year ended 5/31/97 Year ended 5/31/96
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations
Net investment income $ 588,783 $ 475,136
Net realized gain from investment transactions (notes 1 and 4) 12,003 35,339
Net change in unrealized appreciation or depreciation of investments 270,459 (201,666)
- ----------------------------------------------------------------------------------------------------------------------------
Net increase in net assets from operations 871,245 308,809
- ----------------------------------------------------------------------------------------------------------------------------
Distributions to Shareholders (note 1)
From undistributed net investment income:
Class A (583,450) (493,565)
Class B (1,592) N/A
Class C (1,078) --
Class R (340) N/A
- ----------------------------------------------------------------------------------------------------------------------------
Decrease in net assets from distributions to shareholders (586,460) (493,565)
- ----------------------------------------------------------------------------------------------------------------------------
Fund Share Transactions (note 2)
Net proceeds from sale of shares 2,419,482 2,795,355
Net proceeds from shares issued to shareholders due to reinvestment of
distributions 337,619 365,824
- ----------------------------------------------------------------------------------------------------------------------------
2,757,101 3,161,179
- ----------------------------------------------------------------------------------------------------------------------------
Cost of shares redeemed (3,340,985) (1,456,057)
- ----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets from Fund share transactions (583,884) 1,705,122
- ----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets (299,099) 1,520,366
Net assets at the beginning of year 10,533,746 9,013,380
- ----------------------------------------------------------------------------------------------------------------------------
Net assets at the end of year $ 10,234,647 $ 10,533,746
============================================================================================================================
Balance of undistributed net investment income at end of year $ 2,323 $ --
============================================================================================================================
</TABLE>
* Information represents eight months of Flagship South Carolina and four
months of Nuveen Flagship South Carolina (see note 1 of the Notes to
Financial Statements).
N/A - Flagship South Carolina was not authorized to issue Class B or Class R
Shares.
See accompanying notes to financial statements
- ----
16
<PAGE>
Notes to Financial Statements Nuveen Municipal Bond Fund
May 31, 1997 Annual Report
1. General Information and Significant Accounting Policies
The Nuveen Flagship Multistate Trust III (the "Trust") is an open-end investment
company registered under the Investment Company Act of 1940, as amended. The
Trust comprises Nuveen Flagship South Carolina Municipal Bond Fund (the "Fund"),
among others. The Trust was organized as a Massachusetts business trust on July
1, 1996.
The John Nuveen Company, parent of John Nuveen & Co. Incorporated and Nuveen
Advisory Corp., respectively, the distributor ("Distributor") and investment
advisor ("Adviser") of the Fund, 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, Flagship South Carolina Double
Tax Exempt Fund ("Flagship South Carolina") was reorganized into the Trust and
renamed Nuveen Flagship South Carolina Municipal Bond Fund ("Nuveen Flagship
South Carolina").
The Fund seeks to provide high tax-free income and preservation of capital
through investments in a diversified portfolio of quality municipal bonds.
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements in accordance with generally
accepted accounting principles.
Securities Valuation
The prices of municipal bonds in the 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 Fund has 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 May
31, 1997, the Fund had no such purchase commitments.
- -----
17
<PAGE>
Notes to Financial Statements -- continued
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 reinvestment is credited to shareholder accounts on the first
business day after month-end. Net realized capital gains and/or market discount
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 carryovers. Prior to the
reorganization, tax-exempt net investment income for Flagship South Carolina was
declared as a dividend daily and payment was made on the last business day of
each month.
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
The Fund is a separate taxpayer for federal income tax purposes. The Fund
intends to comply with the requirements of the Internal Revenue Code applicable
to regulated investment companies and to distribute all of its tax-exempt net
investment income, in addition to any significant amounts of net realized
capital gains and/or market discount from investment transactions. The Fund
currently considers significant net realized capital gains and/or market
discount as amounts in excess of $.001 per share. Furthermore, the Fund intends
to satisfy conditions which will enable interest from municipal securities,
which is exempt from regular federal and South Carolina state income taxes, to
retain such tax-exempt status when distributed to the shareholders of the Fund.
All income dividends paid during the fiscal year ended May 31, 1997, have been
designated Exempt Interest Dividends. Net realized capital gains and market
discount distributions are subject to federal taxation.
Flexible Sales Charge Program
The Fund offers Class A, B, C and R Shares. Class B, C and R Shares were first
offered for sale on February 1, 1997. Class A Shares are sold with a sales
charge and incur an annual 12b-1 service fee. 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 contingent deferred sales charge
("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 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
- -----
18
<PAGE>
Nuveen Municipal Bond Fund
May 31, 1997 Annual Report
pay a CDSC of 1% if Class C Shares are redeemed within 18 months 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 Fund may invest in certain derivative financial instruments including
futures, forward, swap, and option contracts, and other financial instruments
with similar characteristics. Although the Fund is authorized to invest in such
financial instruments, and may do so in the future, it did not make any such
investments during the fiscal year ended May 31, 1997.
Expense Allocation
Expenses of the Fund 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.
Organizational Expenses
The organizational expenses incurred on behalf of the Fund (approximately
$35,400) will be reimbursed to the Adviser on a straight-line basis over a
period of three years beginning June 1, 1996. As of May 31, 1997, $11,818 has
been reimbursed. In the event that the Adviser's current investment in the Trust
falls below $100,000 prior to the full reimbursement of the organizational
expenses, then it will forego any further reimbursement.
- -----
19
<PAGE>
Notes to Financial Statements -- continued
2. Fund Shares
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
Nuveen Flagship Flagship
South Carolina* South Carolina
- ----------------------------------------------------------------------------------------------------------
Year ended Year ended
5/31/97 5/31/96
--------------------------------------------------------
Shares Amount Shares Amount
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold:
Class A 192,810 $ 1,814,877 296,613 $ 2,795,355
Class B 16,861 160,503 N/A N/A
Class C 44,094 419,098 - -
Class R 2,621 25,004 N/A N/A
Shares issued to shareholders due to
reinvestment of distributions:
Class A 35,809 337,619 38,643 365,824
Class B - - N/A N/A
Class C - - - -
Class R - - N/A N/A
- ----------------------------------------------------------------------------------------------------------
292,195 2,757,101 335,256 3,161,179
- ----------------------------------------------------------------------------------------------------------
Shares redeemed:
Class A (353,491) (3,340,985) (153,132) (1,456,057)
Class B - - N/A N/A
Class C - - - -
Class R - - N/A N/A
- ----------------------------------------------------------------------------------------------------------
(353,491) (3,340,985) (153,132) (1,456,057)
- ----------------------------------------------------------------------------------------------------------
Net increase (decrease) (61,296) $ (583,884) 182,124 $ 1,705,122
==========================================================================================================
</TABLE>
* Information represents eight months of Flagship South Carolina and four
months of Nuveen Flagship South Carolina (see note 1).
N/A -- Flagship South Carolina was not authorized to issue Class B or Class R
Shares.
3. Distributions to Shareholders
On June 9, 1997, the Fund declared a dividend distribution from its tax-exempt
net investment income which was paid on July 1, 1997, to shareholders of record
on June 9, 1997, as follows:
<TABLE>
<CAPTION>
Nuveen Flagship
South Carolina
- --------------------------------------------------------------------------------
<S> <C>
Dividend per share:
Class A $.0415
Class B .0355
Class C .0375
Class R .0435
- --------------------------------------------------------------------------------
</TABLE>
- -----
20
<PAGE>
Nuveen Municipal Bond Fund
May 31, 1997 Annual Report
4. Securities Transactions
Purchases and sales (including maturities) of investments in municipal
securities for the fiscal year ended May 31, 1997 (eight months of Flagship
South Carolina and four months of Nuveen Flagship South Carolina -- see note 1),
aggregated $7,327,282 and $7,700,970, respectively.
At May 31, 1997, the identified cost of investments owned for federal income tax
purposes was the same as the cost for financial reporting purposes for the Fund.
At May 31, 1997, the Fund had an unused capital loss carryforward of $306,863
available for federal income tax purposes to be applied against future capital
gains, if any. If not applied, the carryover will expire in the year 2003.
5. Unrealized Appreciation (Depreciation)
At May 31, 1997, net unrealized appreciation aggregated $424,765 of which
$426,546 related to appreciated securities and $1,781 related to depreciated
securities.
6. Management Fee and Other Transactions with Affiliates
Under the Trust's investment management agreement with the Adviser, the 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 the Fund as follows:
<TABLE>
<CAPTION>
Average daily net asset value Management fee
- --------------------------------------------------------------------------------
<S> <C>
For the first $125 million .5500 of 1%
For the next $125 million .5375 of 1
For the next $250 million .5250 of 1
For the next $500 million .5125 of 1
For the next $1 billion .5000 of 1
For net assets over $2 billion .4750 of 1
- --------------------------------------------------------------------------------
</TABLE>
Prior to the reorganization (see note 1) Flagship South Carolina paid a
management fee of .5 of 1%. The management fee compensates the Adviser for
overall investment advisory and administrative services, and general office
facilities. The Trust pays no compensation directly to its Trustees who are
affiliated with the Adviser or to its officers, all of whom receive remuneration
for their services to the Trust from the Adviser.
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 May 31, 1997, the Distributor and its predecessor
(Flagship Funds Inc., a wholly-owned subsidiary of Flagship Resources Inc.)
collected gross sales charges on purchases of Class A Shares of approximately
$49,200 of which approximately $42,900 were paid out as concessions to
authorized dealers. The
- -----
21
<PAGE>
Notes to Financial Statements -- continued
Distributor and its predecessor also received 12b-1 service fees on Class A
Shares approximately one-half of which was paid to compensate authorized dealers
for providing services to shareholders relating to their investments.
During the fiscal year ended May 31, 1997, the Distributor and its predecessor
compensated authorized dealers directly with approximately $11,000 in commission
advances at the time of purchase. To compensate for commissions advanced to
authorized dealers, all 12b-1 service fees collected on Class B Shares during
the first year following a purchase, all 12b-1 distribution fees collected on
Class B Shares, and all 12b-1 service and distribution fees on Class C Shares
during the first year following a purchase are retained by the Distributor. The
remaining 12b-1 fees charged to the Fund were paid to compensate authorized
dealers for providing services to shareholders relating to their investments.
The Distributor and its predecessor also collected and retained approximately
$200 of CDSC on share redemptions during the fiscal year ended May 31, 1997.
7. Composition of Net Assets
At May 31, 1997, the Fund had an unlimited number of $.01 par value shares
authorized. Net assets consisted of:
<TABLE>
<CAPTION>
Nuveen Flagship
South Carolina
- -----------------------------------------------------------------------------------
<S> <C>
Capital paid-in $10,114,422
Balance of undistributed net investment income 2,323
Accumulated net realized gain (loss) from investment transactions (306,863)
Net unrealized appreciation of investments 424,765
- -----------------------------------------------------------------------------------
Net assets $10,234,647
===================================================================================
</TABLE>
- -----
22
<PAGE>
Financial Highlights
23
<PAGE>
Financial Highlights
Selected data for a share outstanding throughout each period is as
follows:
<TABLE>
<CAPTION>
Class (Inception date) Operating performance Less distributions
------------------------- --------------------------
NUVEEN FLAGSHIP Net
SOUTH CAROLINA++ Net realized and Distributions Net Total
asset unrealized from tax- asset return
value Net gain (loss) exempt net Distributions value on net
Year ending beginning investment from investment from capital end of asset
May 31, of period income(b) investments income gains period value(a)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Class A (7/93)
1997 $9.28 $.51 $ .24 $(.50) $ -- $9.53 8.28%
1996 9.45 .48 (.15) (.50) -- 9.28 3.53
1995 9.20 .50 .25 (.50) -- 9.45 8.54
1994(c) 9.58 .42 (.38) (.39) (.03) 9.20 .15+
Class B (2/97)
1997(c) 9.61 .13 (.11) (.11) -- 9.52 .20
Class C (2/97)
1997(c) 9.63 .13 (.13) (.11) -- 9.52 .03
Class R (2/97)
1997(c) 9.60 .14 (.07) (.13) -- 9.54 .75
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Annualized.
++ Information included prior to the year ending May 31, 1997,
reflects the financial highlights of Flagship South Carolina.
(a) Total returns are calculated on net asset value without any sales
charge.
(b) After waiver of certain management fees or reimbursement of
expenses, if applicable, by Nuveen Advisory or its predecessor
Flagship Financial.
(c) From commencement of class operations as noted.
------
24
<PAGE>
Nuveen Municipal Bond Fund
May 31, 1997 Annual Report
<TABLE>
<CAPTION>
Ratios/Supplemental data
- -----------------------------------------------------------------------------------------------------------------
Ratio Ratio
of net of net
Ratio of investment Ratio of investment
expenses income to expenses income to
to average average to average average
net assets net assets net assets net assets
Net assets before before after after Portfolio
end of period reimburse- reimburse- reimburse- reimburse- turnover
(in thousands) ment ment ment(b) ment(b) rate
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 9,629 1.55% 4.22% .41% 5.36% 68%
10,534 1.53 4.16 .71 4.98 76
9,013 1.86 4.08 .40 5.54 87
6,284 2.12+ 3.10+ .40+ 4.82+ 88
160 2.12+ 3.84+ 1.09+ 4.87+ 68
420 1.91+ 3.85+ .90+ 4.86+ 68
25 1.17+ 4.70+ .14+ 5.73+ 68
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
-----
25
<PAGE>
Independent Auditors' Report
To the Board of Trustees and Shareholders of
Nuveen Flagship South Carolina Municipal Bond Fund:
We have audited the accompanying statement of net assets of Nuveen
Flagship South Carolina Municipal Bond Fund, including the
portfolio of investments, as of May 31, 1997, the related statement
of operations for the period then ended and the statement of
changes in net assets, and the financial highlights for each of the
periods presented. These financial statements and financial
highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities
owned as of May 31, 1997, by correspondence with the Fund's
custodian. An audit also includes assessing the accounting
principles used and significant estimates made by management as
well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights
present fairly, in all material respects, the financial position of
the Nuveen Flagship South Carolina Municipal Bond Fund at
May 31, 1997, the results of its operations, the changes in its net
assets and the financial highlights for the respective stated
periods, in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Dayton, Ohio
July 11, 1997
-----
26
<PAGE>
Shareholder Meeting Report
Flagship South Carolina
<TABLE>
<CAPTION>
A Shares
- --------------------------------------------------------------------------------
<S> <C> <C>
Advisory Agreement For 848,949
Against 20,456
Abstain --
------------------------------------------------
Total 869,405
- --------------------------------------------------------------------------------
Broker Non Votes 23,734
- --------------------------------------------------------------------------------
Reorganization For 610,184
Against 10,506
Abstain 5,129
------------------------------------------------
Total 625,819
- --------------------------------------------------------------------------------
Broker Non Votes 267,320
- --------------------------------------------------------------------------------
Investment Objective For 610,092
Against 15,727
Abstain --
------------------------------------------------
Total 625,819
- --------------------------------------------------------------------------------
Broker Non Votes 267,320
- --------------------------------------------------------------------------------
Investment Assets For 610,092
Against 15,727
Abstain --
------------------------------------------------
Total 625,819
- --------------------------------------------------------------------------------
Broker Non Votes 267,320
- --------------------------------------------------------------------------------
Type Of Securities For 610,092
Against 15,727
Abstain --
------------------------------------------------
Total 625,819
- --------------------------------------------------------------------------------
Broker Non Votes 267,320
- --------------------------------------------------------------------------------
Borrowing For 610,092
Against 15,727
Abstain --
------------------------------------------------
Total 625,819
- --------------------------------------------------------------------------------
Broker Non Votes 267,320
- --------------------------------------------------------------------------------
Pledges For 610,092
Against 15,727
Abstain --
------------------------------------------------
Total 625,819
- --------------------------------------------------------------------------------
Broker Non Votes 267,320
------------------------------------------------
</TABLE>
----
27
<PAGE>
Shareholder Meeting Report
Flagship South Carolina --
continued
<TABLE>
<CAPTION>
A Shares
- --------------------------------------------------------------------------------
<S> <C> <C>
Senior Securities For 610,092
Against 15,727
Abstain --
------------------------------------------------
Total 625,819
- --------------------------------------------------------------------------------
Broker Non Votes 267,320
- --------------------------------------------------------------------------------
Underwriting For 610,092
Against 15,727
Abstain --
------------------------------------------------
Total 625,819
- --------------------------------------------------------------------------------
Broker Non Votes 267,320
- --------------------------------------------------------------------------------
Real Estate For 599,543
Against 26,276
Abstain --
------------------------------------------------
Total 625,819
- --------------------------------------------------------------------------------
Broker Non Votes 267,320
- --------------------------------------------------------------------------------
Commodities For 610,092
Against 15,727
Abstain --
------------------------------------------------
Total 625,819
- --------------------------------------------------------------------------------
Broker Non Votes 267,320
- --------------------------------------------------------------------------------
Loans For 610,092
Against 15,727
Abstain --
------------------------------------------------
Total 625,819
- --------------------------------------------------------------------------------
Broker Non Votes 267,320
- --------------------------------------------------------------------------------
Short Sales/Margin Purchases For 610,092
Against 15,727
Abstain --
------------------------------------------------
Total 625,819
- --------------------------------------------------------------------------------
Broker Non Votes 267,320
- --------------------------------------------------------------------------------
Put and Call Options For 610,092
Against 15,727
Abstain --
------------------------------------------------
Total 625,819
- --------------------------------------------------------------------------------
Broker Non Votes 267,320
------------------------------------------------
</TABLE>
----
28
<PAGE>
Nuveen Municipal Bond Fund
May 31, 1997 Annual Report
<TABLE>
<CAPTION>
A Shares
- --------------------------------------------------------------------------------
<S> <C> <C>
Industry Concentration For 599,543
Against 26,276
Abstain --
------------------------------------------------
Total 625,819
- --------------------------------------------------------------------------------
Broker Non Votes 267,320
- --------------------------------------------------------------------------------
Affiliate Purchases For 610,092
Against 15,727
Abstain --
------------------------------------------------
Total 625,819
- --------------------------------------------------------------------------------
Broker Non Votes 267,320
- --------------------------------------------------------------------------------
Investment Companies For 610,092
Against 15,727
Abstain --
------------------------------------------------
Total 625,819
- --------------------------------------------------------------------------------
Broker Non Votes 267,320
- --------------------------------------------------------------------------------
12b-1 Fees For 741,310
Against 128,095
Abstain --
------------------------------------------------
Total 869,405
- --------------------------------------------------------------------------------
Broker Non Votes 23,734
------------------------------------------------
</TABLE>
----
29
<PAGE>
Shareholder Meeting Report
Flagship South Carolina --
continued
<TABLE>
<CAPTION>
Directors A Shares
- --------------------------------------------------------------------------------
<S> <C> <C>
Bremner For 878,029
Withhold 15,110
------------------------------------------------
Total 893,139
- --------------------------------------------------------------------------------
Brown For 878,029
Withhold 15,110
------------------------------------------------
Total 893,139
- --------------------------------------------------------------------------------
Dean For 878,029
Withhold 15,110
------------------------------------------------
Total 893,139
- --------------------------------------------------------------------------------
Impellizzeri For 878,029
Withhold 15,110
------------------------------------------------
Total 893,139
- --------------------------------------------------------------------------------
Rosenheim For 878,029
Withhold 15,110
------------------------------------------------
Total 893,139
- --------------------------------------------------------------------------------
Sawers For 878,029
Withhold 15,110
------------------------------------------------
Total 893,139
- --------------------------------------------------------------------------------
Schneider For 878,029
Withhold 15,110
------------------------------------------------
Total 893,139
- --------------------------------------------------------------------------------
Schwertfeger For 878,029
Withhold 15,110
------------------------------------------------
Total 893,139
------------------------------------------------
</TABLE>
----
30
<PAGE>
Shareholder Information
Nuveen Family of Mutual Funds
Nuveen offers a variety of funds designed to help you reach your financial
goals.
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
Insured
Intermediate-Term
Limited-Term
State Funds
Alabama Michigan
Arizona Missouri
California New Jersey
Colorado New Mexico
Connecticut New York
Florida North Carolina
Georgia Ohio
Kansas Pennsylvania
Kentucky South Carolina
Louisiana Tennessee
Maryland Virginia
Massachusetts Wisconsin
To purchase additional shares of your Nuveen Municipal Bond Fund, contact your
financial adviser. If you would like to add to your current investment on a
monthly or semi-annual basis, you can sign up for Nuveen's systematic investing
program, which allows you to invest a fixed dollar amount every month
automatically.
You can also invest automatically through dividend reinvestment. By reinvesting
your fund's dividends back into the fund, you gain the added growth potential of
long-term compounding.
For more information on any of these service options call your adviser, or
Nuveen at (800) 621-7227.
-----
31
<PAGE>
Fund Information
Board of Directors
Robert P. Bremner
Lawrence H. Brown
Anthony T. Dean
Anne E. Impellizzeri
Peter R. Sawers
William J. Schneider
Timothy R. Schwertfeger
Judith M. Stockdale
Fund Manager
Nuveen Advisory Corp.
333 West Wacker Drive
Chicago, IL 60606
Custodian
The Chase Manhattan Bank
4 New York Plaza
New York, NY 10004-2413
Transfer Agent,
Shareholder Services and
Dividend Disbursing Agent
Boston Financial
Nuveen Investor Services
P.O. Box 8509
Boston, MA 02266-8509
(800) 225-8530
Legal Counsel
Fried, Frank, Harris, Shriver
& Jacobson
Washington, D.C.
Independent Auditors
Deloitte & Touche LLP
Dayton, Ohio
----
32
<PAGE>
[PHOTO OF JOHN NUVEEN, SR. APPEARS HERE]
[LETTERHEAD OF NUVEEN APPEARS HERE]
Serving Investors
for Generations
Since our founding in 1898, John Nuveen & Co. has been synonymous with
investments that withstand the test of time. Today, we offer a broad range of
investments designed for mature investors whose portfolios are the principal
source of their ongoing financial security. More than 1.3 million investors have
trusted Nuveen to help them maintain the lifestyle they currently enjoy.
A value investing approach -- purchasing securities of strong companies and
communities that represent good long-term value -- is the cornerstone of
Nuveen's investment philosophy. It is a careful, long-term strategy that offers
the potential for attractive returns with moderated risk. Successful value
investing begins with in-depth research and a discerning eye for marketplace
opportunity. Nuveen's team of investment professionals is backed by the
discipline, resources and expertise of almost a century of investment
experience, including one of the most recognized research departments in the
industry.
To meet the unique circumstances and financial planning needs of mature
investors, Nuveen offers a wide array of equity and fixed-income mutual funds,
unit trusts, exchange-traded funds, individual managed account services, and
cash management products, including many that generate tax-free income.
To find out more about how Nuveen investment products and services can help you
preserve your financial security, talk with your financial adviser, or call us
at (800) 621-7227 for more information, including a prospectus where applicable.
Please read that information carefully before you invest.
<PAGE>
NUVEEN
MUNICIPAL
BONDS FUNDS
MAY 31, 1997
ANNUAL REPORT
DEPENDABLE, TAX-FREE INCOME
TO HELP YOU KEEP MORE OF
WHAT YOU EARN.
TENNESSEE
[PHOTO APPEARS HERE]
<PAGE>
CONTENTS
1 Dear Shareholder
3 Answering Your Questions
6 Tennessee Overview
9 Financial Section
31 Shareholder Meeting Report
35 Shareholder Information
36 Fund Information
<PAGE>
[PHOTO OF Timothy R. Schwertfeger APPEARS HERE]
DEAR SHAREHOLDER
It's a pleasure to report to you on the performance of the Nuveen Flagship
Tennessee Municipal Bond Fund. Over the past year, the fund posted sizable
gains. For the fiscal year ended May 31, 1997, the value of your investment rose
7.71% for Class A shares if you chose to reinvest your tax-free income
dividends.
Over this 12-month period, the total return performance for the fund (with
income reinvested) kept close pace with the 8.28% increase produced by the
Lehman Brothers Municipal Bond Index, which is used to represent the broad
municipal bond market on an unmanaged basis.
In addition to substantial total returns, shareholders continue to enjoy very
attractive current yields generated by a portfolio of quality bonds, which
provide excellent income for investors. As of May 31, 1997, shareholders were
receiving tax-free yields on net asset value of 5.06% for Class A shares. To
match this yield, investors in the 35% combined federal and state income tax
bracket would have had to earn at least 7.78% on taxable alternatives.
These results were produced against a backdrop of continued economic expansion
and the lowest unemployment rates in almost two decades, a combination that in
the past has foreshadowed an increase in inflation. In March, the Federal
Reserve made a pre-emptive strike by raising short-term interest rates by 0.25%,
but then maintained the status quo at its May and July meetings. Overall market
returns continue to be good, but fear of inflation has hampered the performance
of municipals and led to
____
1
<PAGE>
"IN ADDITION TO SUBSTANTIAL TOTAL RETURNS, SHAREHOLDERS CONTINUE TO ENJOY VERY
ATTRACTIVE CURRENT YIELDS GENERATED BY A PORTFOLIO OF QUALITY BONDS."
increased volatility in both the equity and bond markets. During this time,
bonds have often been the bellwether for the direction of stocks. Whenever
inflation talk is at its most rampant, the stock market has kept an eye on the
bond market for its response before reacting.
In the first six months of the year, the markets also focused on fiscal issues,
including the federal budget accord and discussion of plans to reduce taxes and
eliminate the deficit. The economy appeared to be moderating, corporate earnings
reports continued to exhibit strength, and interest rates fell in the second
quarter. All of this was positive news. The net effect is that the markets are
better off now than at the beginning of the year, but the volatility experienced
in getting there has been significant.
Recently, the need for diversification and a renewed emphasis on asset
allocation-as well as attractive yields-have sparked increased interest in tax-
free investments. The current level of the stock market reminds investors to re-
allocate profits to other segments of the market in order to limit risk. Nuveen
municipal bond funds provide an excellent lower-risk alternative, and their
current yields make them very attractive.
On behalf of everyone at Nuveen, I thank you for your confidence in us and our
family of investments. You can continue to depend on us for high-quality
investments that withstand the test of time. We look forward to reporting to you
again in six months.
Sincerely,
/s/ Timothy R. Schwertfeger
TIMOTHY R. SCHWERTFEGER
Chairman of the Board
July 15, 1997
____
2
<PAGE>
[PHOTO OF TED NEILD APPEARS HERE]
TED NEILD, HEAD OF NUVEEN'S DAYTON-BASED PORTFOLIO MANAGEMENT TEAM, TALKS ABOUT
THE MUNICIPAL BOND MARKET AND OFFERS INSIGHTS INTO FACTORS THAT AFFECTED FUND
PERFORMANCE OVER THE PAST YEAR.
ANSWERING YOUR QUESTIONS
WHAT ARE THE INVESTMENT OBJECTIVES OF THE FUND?
The fund aims to provide investors with a high level of tax-free income while
preserving capital by investing in a diversified portfolio of high-quality
municipal bonds. To that end, we attempt to maximize the fund's after-tax total
return by generating high tax-free income and minimizing the distribution of
taxable capital gains when possible.
WHAT IS YOUR STRATEGY FOR MEETING THESE OBJECTIVES?
To meet this fund's objectives of income and enhanced value, our portfolio
management strategy relies on conservative value investing principles, sound
research and credit surveillance activities, and senior management involvement.
At Nuveen, value investing means taking a fundamental approach to finding bonds
that offer the best balance of high potential return with low risk regardless of
the direction of interest rates. This approach focuses on the characteristics of
individual bonds, such as sector, geographic region, structure and intrinsic
credit quality, rather than on the general economic environment. The idea behind
this philosophy is that we, as investment managers, can control the selection
process, but not the direction of the economy as a whole.
WHAT KEY ECONOMIC FACTORS AFFECTED THE FUND'S PERFORMANCE DURING THE YEAR?
The U.S. economy continued to grow, exhibiting low unemployment, increased
manufacturing and construction activity, and lack of price pressure at the
consumer and producer levels. The fund had the added advantage of operating in a
healthy supply environment, where securities were available as needed.
____
3
<PAGE>
"AT NUVEEN, VALUE INVESTING MEANS TAKING A FUNDAMENTAL APPROACH TO FINDING BONDS
THAT OFFER THE BEST BALANCE OF HIGH POTENTIAL RETURN WITH LOW RISK REGARDLESS OF
THE DIRECTION OF INTEREST RATES."
GIVEN THIS MARKET ENVIRONMENT, HOW DID THE FUND PERFORM?
A strong national economy and growth of business in Tennessee meant strong
performance for the Tennessee Municipal Bond Fund. Investors were rewarded with
a total return on net asset value for the year of 7.71% for Class A shares,
including price changes and reinvested dividends. Additionally, the fund was
ranked sixth among 21 Tennessee municipal bond funds for the one-year period by
Lipper Analytical Services, a nationally recognized performance measurement
service.
WHAT STRATEGIES DID YOU EMPLOY TO ADD VALUE?
We focused on taking advantange of some changes in the state's municipal bond
market to increase the income and stability of the fund. In Tennessee, it can
sometimes be challenging to find high-quality bonds with the kind of call
protection we at Nuveen seek. However, we discovered some new bond issues during
the year with very strong call protection, which enhanced the stability of the
fund. In addition, we were able to increase the income of the fund by purchasing
higher-yielding bonds in sectors such as housing and pollution control.
WHAT IS THE CURRENT STATUS OF TENNESSEE'S MUNICIPAL MARKET?
Overall, 1996 was a good year for Tennessee's municipal market. Conservative
fiscal management, moderate debt levels and consistent economic growth have
strengthened the state's general obligation debt. A majority of Tennessee's
capital projects are funded on a current basis, resulting in infrequent
municipal bond issuance. Debt issuance has historically funded correctional and
higher education facilities, but healthcare and infrastructure offerings have
increased over the past year. State municipal bond issuance was down 25% to
$1.16 billion in the first 6 months of 1997. Financing medical assistance
through a program called TennCare continues to strain the state's finances.
Federal subsidies have not completely offset cost overruns in the managed care
program.
____
4
<PAGE>
WHAT IS THE CURRENT OUTLOOK FOR THE MUNICIPAL MARKET AS A WHOLE?
As we make our way through the seventh year of the current economic expansion,
some observers believe that a fundamental shift may have occurred in our
economy. Based on past experience and months of reports of economic growth,
especially employment statistics, the markets have long been anticipating an
increase in inflation. However, even with almost full employment, we have not
seen the expected rise in hourly wages that would be considered inflationary.
This change in the traditional economic cause-and-effect relationship has been
variously attributed to the globalization of the economy and consequent
competitive pressures, to increased use of technology, and to corporations'
recent ability to downsize as necessary. Although structural changes in the
economy appear to have suspended the relationship between faster growth and
higher inflation, the risk remains that inflation may reassert itself if
capacity constraints are reached and resources are stretched too thin.
Talk of Fed tightening will continue. If the Fed does act to increase rates, it
will be perceived as a move against inflation. If the Fed does not tighten, it
will be seen as an indication that the economy is doing well.
Nonetheless, for the remainder of 1997, the municipal market should continue to
offer the attractive yields and tax advantages that make it a good alternative
if and when a correction in the stock market occurs. While money continues to
flow into equity mutual funds, investors are also beginning to evaluate the
effect of the huge run-up in stock prices on their asset allocation, and many
are rebalancing their portfolios by shifting some assets into bonds.
____
5
<PAGE>
TENNESSEE
OVERVIEW
Credit Quality
[PIE CHART APPEARS HERE]
AAA/Pre-refunded 48%
AA 24%
A 18%
BBB/NR 10%
Diversification
[PIE CHART APPEARS HERE]
Health Care/Hospitals 17%
Housing Facilities 9%
Escrowed Bonds 14%
General Obligation 14%
Education 8%
Utility 9%
Pollution Control 19%
Water & Sewer 4%
Other 8%
<TABLE>
<CAPTION>
FUND HIGHLIGHTS
================================================================================
SHARE CLASS A B C R
<S> <C> <C> <C> <C>
Inception Date 11/87 2/97 10/93 2/97
- --------------------------------------------------------------------------------
Net Asset Value (NAV) $11.06 $11.06 $11.05 $ 11.04
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Total Net Assets ($000) $273,309
- --------------------------------------------------------------------------------
Average Weighted Maturity (years) 19.30
- --------------------------------------------------------------------------------
Average Weighted Duration (years) 7.03
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
ANNUALIZED TOTAL RETURN/1/
================================================================================
SHARE CLASS A(NAV) A(OFFER) B C R
<S> <C> <C> <C> <C>
1-Year 7.71% 3.18% 7.07% 7.12% 7.58%
- --------------------------------------------------------------------------------
5-Year 6.67% 5.76% 6.08% 6.07% 6.64%
- --------------------------------------------------------------------------------
Since Inception 7.83% 7.35% 7.34% 7.23% 7.82%
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
TAX-FREE YIELDS
================================================================================
SHARE CLASS A(NAV) A(Offer) B C R
<S> <C> <C> <C> <C> <C>
Dist Rate 5.29% 5.07% 4.55% 4.75% 5.50%
- --------------------------------------------------------------------------------
SEC 30-Day Yld 5.06% 4.85% 4.32% 4.51% 5.30%
- --------------------------------------------------------------------------------
Taxable Equiv Yld/2/ 7.78% 7.46% 6.65% 6.94% 8.15%
- --------------------------------------------------------------------------------
</TABLE>
1 Returns of the oldest share class of a fund are actual. Returns for other
classes are actual for the period since inception and prior to class
inception are the returns for the fund's oldest class, adjusted for
differences in sales charges and expenses. Class A shares have an initial
sales charge, while Class B, C and R shares have no initial sales charge.
Class B shares have a CDSC that declines from 5% to 0% after 6 years. Class C
shares have a 1% CDSC for redemptions within one year. Returns above do not
reflect imposition of the CDSC. Giving effect to the CDSC applicable to Class
B shares, the 1-year, 5-year and life-of-fund total returns above would be
3.07%, 5.92%, and 7.34%, respectively.
2 Based on SEC yield and a combined federal and state income tax rate of 35%.
Represents the yield on a taxable investment necessary to equal the yield of
the Nuveen fund on an after-tax basis.
6
<PAGE>
Nuveen Flagship Tennessee Municipal Bond Fund
May 31, 1997 Annual Report
* The Index Comparison shows change in value of a $10,000 investment in the 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.
Index Comparison*
[LINE CHART APPEARS HERE]
Lehman Brothers Nuveen Flagship Nuveen Flagship
Municipal Bond Tennesse Municipal Tennesse Municipal
Index Bond Fund (NAV) Bond Fund (Offer)
--------------- ------------------ ------------------
November 1987 10000 10000 9580
May 1988 10543.5 10441.4 10002.8
May 1989 11755.2 11892.2 11392.7
May 1990 12615.3 12520.5 11994.7
May 1991 13886.8 13725 13148.5
May 1992 15251.1 14912.3 14286
May 1993 17075.7 16789.6 16084.4
May 1994 17497.3 17049.9 16333.8
May 1995 19090.7 18421.5 17647.8
May 1996 19963.3 19118.1 18315.2
May 1997 21801.5 20591.3 19726.5
. Lehman Brothers Municipal Bond Index $21,801
. Nuveen Flagship Tennesse Municipal Bond Fund (NAV) $20,591
. Nuveen Flagship Tennesse Municipal Bond Fund (Offer) $19,726
Past performance is not predictive of future performance.
[BAR CHART APPEARS HERE]
Dividend History (A Shares)
June 1996 0.04775
July 1996 0.04955
Aug. 1996 0.04955
Sept. 1996 0.04795
Oct. 1996 0.04955
Nov. 1996 0.04795
Dec. 1996 0.04955
Jan. 1997 0.04968
Feb. 1997 0.0488
March 1997 0.0488
April 1997 0.0488
May 1997 0.0488
____
7
<PAGE>
FINANCIAL SECTION
CONTENTS
10 Portfolio of Investments
19 Statement of Net Assets
20 Statement of Operations
21 Statement of Changes in Net Assets
22 Notes to Financial Statements
28 Financial Highlights
30 Independent Auditors' Report
____
9
<PAGE>
PORTFOLIO OF INVESTMENTS
NUVEEN FLAGSHIP TENNESSEE
<TABLE>
<CAPTION>
PRINCIPAL OPTIONAL CALL MARKET
AMOUNT DESCRIPTION PROVISIONS* RATINGS** VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
EDUCATION -- 5.4%
Metropolitan Government, Nashville and Davidson
County, Tennessee, Health and Education Facilities
Board Revenue Refunding and Improvement,
Meharry Medical College:
$ 1,000,000 6.000%, 12/01/19 12/17 at 100 AAA $ 1,064,760
4,000,000 5.000%, 12/01/24 6/09 at 100 AAA 3,673,120
Metropolitan Government, Nashville and Davidson
County, Tennessee, Health and Education Facilities
Board Revenue Refunding, Vanderbilt University
Series A:
1,000,000 7.625%, 5/01/08 5/98 at 102 AA 1,048,520
2,850,000 7.625%, 5/01/16 5/98 at 102 AA 2,988,282
3,705,000 Tennessee State School Bond Authority, Higher 5/02 at 101 1/2 AAA 3,886,137
Education Facilities, Series A, 6.250%, 5/01/22
2,000,000 Tennessee State School Bond Authority, Refunding, 5/06 at 102 AA 2,008,300
Higher Educational Facilities, Series C,
5.700%, 5/01/20
- -----------------------------------------------------------------------------------------------------------------------------------
ESCROWED TO MATURITY -- 0.2%
2,205,000 Metropolitan Government, Nashville and Davidson No Opt. Call Aaa 484,946
County, Tennessee, Health and Education Facilities
Board Revenue, Subordinate Volunteer Healthcare,
0.000%, 6/01/21
- -----------------------------------------------------------------------------------------------------------------------------------
HOSPITALS -- 15.7%
1,265,000 Bristol, Tennessee, Health and Educational Facilities No Opt. Call AAA 1,443,770
Board Revenue Refunding, Bristol Memorial
Hospital, 6.750%, 9/01/10
1,930,000 Chattanooga, Tennessee, Health, Education and 9/01 at 102 AAA 2,079,247
Housing Facility Board Revenue, Memorial Hospital
Project, Series A, 6.600%, 9/01/12
Clarksville, Tennessee, Hospital Revenue Refunding
and Improvement, Clarksville Memorial Project:
1,000,000 6.250%, 7/01/08 7/03 at 102 Baa1 1,034,520
1,775,000 6.250%, 7/01/13 7/03 at 102 Baa1 1,797,099
1,250,000 6.375%, 7/01/18 7/03 at 102 Baa1 1,271,438
Cookeville, Tennessee, Industrial Development
Board Hospital Revenue Refunding, Cookeville
General Hospital Project:
4,550,000 5.750%, 10/01/10 12/03 at 102 A 4,448,217
1,000,000 5.625%, 10/01/16 10/06 at 102 A 975,760
</TABLE>
____
10
<PAGE>
Nuveen Municipal Bond Fund
May 31, 1997 Annual Report
<TABLE>
<CAPTION>
PRINCIPAL OPTIONAL CALL MARKET
AMOUNT DESCRIPTION PROVISIONS* RATINGS** VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> 10
HOSPITALS -- CONTINUED
$ 7,350,000 Jackson, Tennessee, Hospital Revenue Refunding and 4/05 at 102 AAA $ 7,368,669
Improvement, 5.625%, 4/01/15
4,000,000 Johnson City, Tennessee, Health and Educational 7/04 at 102 AAA 3,806,560
Facilities Board, Hospital Revenue Refunding,
Johnson City Medical Center Hospital,
5.000%, 7/01/13
2,090,000 Johnson City, Tennessee, Health and Educational 7/01 at 102 AAA 2,250,867
Facilities Board, Hospital Revenue Refunding and
Improvement, Johnson City Medical,
6.750%, 7/01/16
1,790,000 Knox County, Tennessee, Health Educational and 1/98 at 102 AAA 1,862,370
Housing Facilities Board Hospital Facilities
Revenue, Fort Sanders Regional Medical Center,
8.000%, 1/01/08
Knox County, Tennessee, Health Educational and
Housing Facilities Board, Hospital Facilities
Revenue Refunding, Fort Sanders Alliance:
1,000,000 6.250%, 1/01/13 No Opt. Call AAA 1,085,990
3,000,000 5.250%, 1/01/15 No Opt. Call AAA 2,937,510
Metropolitan Government Nashville and Davidson
County, Tennessee, Health and Education Facilities
Board Revenue, Hospital, Adventist Health System:
1,250,000 5.750%, 11/15/25 11/05 at 102 AAA 1,255,325
2,395,000 7.000%, 11/15/16 11/01 at 102 AAA 2,614,119
4,000,000 Shelby County, Tennessee, Health Educational and 8/05 at 102 AAA 3,887,960
Housing Facility Board Hospital Revenue, Formerly
Shelby County, Tennessee Health Educational
Refunding Methodist Health System, Inc.,
5.250%, 8/01/15
2,500,000 Sumner County, Tennessee, Health Educational and 11/04 at 102 A- 2,770,650
Housing Facilities Board Revenue Refunding,
Sumner Regional Health System Inc., Series 1994,
7.500%, 11/01/14
</TABLE>
____
11
<PAGE>
PORTFOLIO OF INVESTMENTS
NUVEEN FLAGSHIP TENNESSEE - CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL OPTIONAL CALL MARKET
AMOUNT DESCRIPTION PROVISIONS* RATINGS** VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
HOUSING/MULTIFAMILY -- 2.5%
$ 1,200,000 Chattanooga, Tennessee, Health Education and 7/03 at 102 Aaa $ 1,215,276
Housing Facility Board, Multifamily Mortgage
Revenue Refunding, Windridge Apartments,
Series A, 5.950%, 7/01/14
3,500,000 Franklin, Tennessee, Industrial Development Board, 10/06 at 102 AAA 3,519,670
Multifamily Revenue Refunding, Housing, Landings
Apartment Project, Series A, 6.000%, 10/01/26
Metropolitan Government Nashville and Davidson
County, Tennessee, Health and Education Facilities
Board Revenue, Housing, Mortgage, Herman Street:
250,000 7.000%, 6/01/17 6/02 at 103 AAA 267,710
495,000 7.250%, 6/01/32 6/02 at 103 AAA 525,799
1,250,000 Metropolitan Government Nashville and Davidson 10/98 at 103 AAA 1,311,825
County, Tennessee, Industrial Development Board
Revenue Refunding, Multifamily Housing, St. Paul
Retirement, Series A, 8.125%, 10/01/28
- -----------------------------------------------------------------------------------------------------------------------------------
HOUSING/SINGLE FAMILY -- 6.7%
290,000 Hamilton County, Tennessee, Single Family Revenue, 9/00 at 102 AAA 304,970
Mortgage, Home Purchase and Rehabilitation
Program, 8.000%, 9/01/23
6,000,000 Tennessee Housing Development Agency, 7/06 at 102 AA 6,111,780
Homeownership Program, Issue 4A,
6.375%, 7/01/22
700,000 Tennessee Housing Development Agency, 7/98 at 103 AA 710,052
Homeownership Program, Issue J,
7.750%, 7/01/17
2,000,000 Tennessee Housing Development Agency, 7/99 at 103 AA 2,037,640
Homeownership Program, Series O,
7.750%, 7/01/20
805,000 Tennessee Housing Development Agency, 7/00 at 103 AA 846,675
Homeownership Program, Series P,
7.700%, 7/01/16
120,000 Tennessee Housing Development Agency, 7/01 at 102 Aa2 125,654
Homeownership Program, Issue U,
7.400%, 7/01/16
3,900,000 Tennessee Housing Development Agency, 7/01 at 102 Aa2 4,078,932
Homeownership Program, Issue T,
7.375%, 7/01/23
</TABLE>
____
12
<PAGE>
Nuveen Municipal Bond Fund
May 31, 1997 Annual Report
<TABLE>
<CAPTION>
PRINCIPAL OPTIONAL CALL MARKET
AMOUNT DESCRIPTION PROVISIONS* RATINGS** VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
HOUSING/SINGLE FAMILY -- CONTINUED
$ 2,695,000 Tennessee Housing Development Agency, 7/02 at 102 AA $ 2,811,478
Homeownership Program, Issue WR,
6.800%, 7/01/17
350,000 Tennessee Housing Development Agency, 7/02 at 102 AA 363,559
Homeownership Program, Issue XR,
6.875%, 7/01/22
1,000,000 Tennessee Housing Development Agency, Mortgage 7/04 at 102 A+ 1,046,590
Finance, Series A, 6.900%, 7/01/25
- -----------------------------------------------------------------------------------------------------------------------------------
INDUSTRIAL DEVELOPMENT AND POLLUTION CONTROL -- 18.5%
3,000,000 Chattanooga, Tennessee, Industrial Development Board, 7/03 at 103 A-1+ 3,210,570
Pollution Control Revenue, E.I.DuPont, Series A,
6.350%, 7/01/22
12,000,000 Humphreys County, Tennessee, Industrial Development 5/04 at 102 AA- 12,929,640
Board, Solid Waste Disposal Revenue, E.I. DuPont
Denemours and Company Project, 6.700%, 5/01/24
6,750,000 Loudon County, Tennessee, Industrial Development 2/03 at 102 AA 6,920,910
Board, Solid Waste Disposal Revenue, Kimberly
Clark Corporation Project, 6.200%, 2/01/23
7,000,000 Maury County, Tennessee, Industrial Development 9/04 at 102 A- 7,428,610
Board, Pollution Control Revenue, Multi Modal,
Refunding, Saturn Corporation Project,
6.500%, 9/01/24
2,500,000 McMinn County, Tennessee, Industrial Development 3/01 at 102 Baa1 2,715,650
Board, Pollution Control Revenue, Calhoun
Newsprint Company Project, Bowater, Series A,
7.625%, 3/01/16
4,950,000 McMinn County, Tennessee, Industrial Development 12/02 at 102 Baa1 5,351,198
Board, Solid Waste Revenue, Recycling Facility,
Calhoun Newsprint, Bowater, 7.400%, 12/01/22
Memphis, Shelby County, Tennessee, Airport
Authority, Special Facilities and Project Revenues,
Federal Express Corporation:
5,545,000 7.875%, 9/01/09 9/01 at 103 BBB 6,173,082
4,100,000 6.750%, 9/01/12 9/02 at 102 BBB 4,380,645
</TABLE>
____
13
<PAGE>
PORTFOLIO OF INVESTMENTS
NUVEEN FLAGSHIP TENNESSEE - CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL OPTIONAL CALL MARKET
AMOUNT DESCRIPTION PROVISIONS* RATINGS** VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INDUSTRIAL DEVELOPMENT AND POLLUTION CONTROL - CONTINUED
$ 250,000 Memphis, Shelby County, Tennessee, Industrial No Opt. Call A1 $ 287,688
Development Board, Industrial Development
Revenue, Colonial Baking Company, Memphis
Project, 9.500%, 4/01/01
1,245,000 South Fulton Inc., Tennessee, Industrial Development 10/05 at 102 A3 1,284,267
Board, Industrial Development Revenue, Tyson
Foods Inc. Project, 6.400%, 10/01/20
- -----------------------------------------------------------------------------------------------------------------------------------
MUNICIPAL APPROPRIATION OBLIGATIONS - 2.2%
2,660,000 Tennessee State Local Development Authority 10/02 at 102 A- 2,846,785
Revenue, Community Provider, Loan Program,
7.000%, 10/01/21
1,500,000 Wilson County, Tennessee, Certificates of Participation, 6/04 at 102 A 1,555,920
Educational Facilities, 6.125%, 6/30/10
1,500,000 Wilson County, Tennessee, Certificates of Participation, 6/04 at 102 A 1,548,660
Educational Facilities, 6.250%, 6/30/15
- -----------------------------------------------------------------------------------------------------------------------------------
MUNICIPAL REVENUE/OTHER - 1.8%
5,000,000 Metropolitan Government, Nashville and Davidson 7/06 at 101 AAA 5,042,550
County, Tennessee, Sports Authority Revenue,
Public Improvement, Stadium Project,
5.750%, 7/01/26
- -----------------------------------------------------------------------------------------------------------------------------------
MUNICIPAL REVENUE/TRANSPORTATION - 1.8%
Metropolitan Nashville Airport Authority, Tennessee
Airport Revenue, Series C:
145,000 6.625%, 7/01/07 7/01 at 102 AAA 157,461
4,385,000 6.600%, 7/01/15 7/01 at 102 AAA 4,754,392
- -----------------------------------------------------------------------------------------------------------------------------------
MUNICIPAL REVENUE/UTILITY - 8.9%
2,150,000 Dickson, Tennessee, Electric System Revenue, 9/08 at 102 AAA 2,135,918
5.500%, 9/01/16
Jackson, Tennessee, Electric System Revenue,
Series E:
315,000 6.300%, 8/01/09 8/00 at 102 A1 330,567
335,000 6.300%, 8/01/10 8/00 at 102 A1 350,330
355,000 6.300%, 8/01/11 8/00 at 102 A1 370,269
380,000 6.300%, 8/01/12 8/00 at 102 A1 395,474
3,000,000 Jackson, Tennessee, Natural Gas Revenue, 4/07 at 100 AAA 2,795,580
5.000%, 4/15/18
3,500,000 Lawrenceburg, Tennessee, Electric Revenue, 7/08 at 100 AAA 3,427,725
5.500%, 7/01/26
</TABLE>
____
14
<PAGE>
Nuveen Municipal Bond Fund
May 31, 1997 Annual Report
<TABLE>
<CAPTION>
PRINCIPAL OPTIONAL CALL MARKET
AMOUNT DESCRIPTION PROVISIONS* RATINGS** VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL REVENUE/UTILITY - CONTINUED
$ 3,000,000 Madison, Tennessee, Suburban Utility District 2/08 at 100 AAA $ 2,784,330
Waterworks Revenue, Refunding, 5.000%, 2/01/19
Metropolitan Government, Nashville and Davidson
County, Tennessee, Electric Revenue, Series A:
3,300,000 0.000%, 5/15/10 No Opt. Call AA 1,646,106
7,800,000 0.000%, 5/15/11 No Opt. Call AA 3,662,490
5,000,000 0.000%, 5/15/12 No Opt. Call AA 2,207,850
3,250,000 5.625%, 5/15/14 5/06 at 102 AA 3,297,710
1,000,000 Middle Tennessee Utility District Tennessee Natural 10/02 at 102 AAA 1,053,000
Gas Revenue, 6.250%, 10/01/12
- -----------------------------------------------------------------------------------------------------------------------------------
MUNICIPAL REVENUE/WATER AND SEWER - 3.9%
1,520,000 Clarksville, Tennessee, Water Sewer and Gas No Opt. Call AAA 538,126
Revenue Refunding and Improvement,
0.000%, 2/01/16
1,125,000 Eastside Utility District, Hamilton County, Tennessee, 11/01 at 102 BBB+ 1,178,168
Waterworks Revenue, 6.750%, 11/01/11
140,000 Metropolitan Government, Nashville and Davidson 1/98 at 100 AAA 141,763
County, Tennessee, Water and Sewer Revenue,
Refunding,7.000%, 1/01/14
1,000,000 Milcrofton, Tennessee, Utility District Waterworks 2/06 at 102 N/R 980,740
Revenue, Tennessee Waterworks Revenue
Refunding, Junior Lien, 6.000%, 2/01/24
1,020,000 Mount Juliet, Tennessee, Public Building Authority 2/99 at 102 AAA 1,088,085
Revenue, Utility District Loan, Series D, Hermitage,
7.550%, 2/01/19
Tennessee State, Local Development Authority
Revenue, State Loan Program, Series A:
1,325,000 7.000%, 3/01/12 3/01 at 102 AA- 1,428,721
1,175,000 7.000%, 3/01/21 3/01 at 102 AA- 1,267,825
2,300,000 White House Utility District Tennessee, Robertson 1/02 at 102 AAA 2,426,017
and Sumner Counties, Waterworks System
Revenue Refunding and Improvement, Series B,
6.375%, 1/01/22
1,500,000 Wilson County, Tennessee, Water and Wastewater 3/08 at 102 Baa1 1,529,325
Authority, Waterworks Revenue Refunding and
Improvement, 6.000%, 3/01/14
</TABLE>
____
15
<PAGE>
PORTFOLIO OF INVESTMENTS
NUVEEN FLAGSHIP TENNESSEE - CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL OPTIONAL CALL MARKET
AMOUNT DESCRIPTION PROVISIONS* RATINGS** VALUE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NON-STATE GENERAL OBLIGATIONS - 7.3%
Hamilton County, Tennessee:
$ 1,490,000 6.250%, 2/01/20 2/05 at 102 Aa2 $ 1,566,526
2,025,000 6.300%, 2/01/25 2/05 at 102 Aa2 2,139,595
5,000,000 Johnson City, Tennessee, School Sales Tax, 5/06 at 100 AAA 5,438,450
6.700%, 5/01/21
1,435,000 Memphis, Tennessee, Series B Airport, 7/98 at 102 AA 1,497,738
7.050%, 7/01/10
8,000,000 Metropolitan Government Nashville and Davidson 5/06 at 101 AA 8,168,240
Counties, Tennessee, Public Improvement,
5.875%, 5/15/21
1,000,000 Shelby County, Tennessee, Refunding, Series A, 4/05 at 101 AA+ 1,012,410
5.625%, 4/01/14
- --------------------------------------------------------------------------------------------------------------------------
PRE-REFUNDED - 13.6%***
Anderson County, Tennessee, Health and Educational
Facilities Board Revenue, Hospital, Refunding
Improvement Methodist Medical Center of Oak Ridge:
2,400,000 8.125%, 7/01/08 No Opt. Call A1 2,552,016
250,000 8.125%, 7/01/08 No Opt. Call AAA 265,890
1,500,000 Chattanooga, Tennessee, Municipal Public No Opt. Call AA- 1,603,470
Improvement Sewer Facility,
8.000%, 6/01/10
1,000,000 Chattanooga, Tennessee, Variable Purpose, No Opt. Call AA- 1,092,390
7.250%, 5/01/12
1,700,000 Clarksville, Tennessee, Water Sewer and Gas Revenue, No Opt. Call AAA 1,777,435
7.700%, 2/01/18
1,455,000 Gladeville, Tennessee, Utility District Waterworks No Opt. Call AAA 1,586,357
Revenue, 7.400%, 10/01/10
3,000,000 Knox County, Tennessee, Health Educational and No Opt. Call AAA 3,263,610
Housing Facilities Board, Hospital Facilities Revenue
Refunding, Mercy Health System, Cincinnati,
Series A, 7.600%, 9/01/19
3,065,000 Knox County, Tennessee, Health Educational and No Opt. Call AAA 3,308,085
Housing Facilities Board, Hospital Facilities Revenue,
Fort Sanders Alliance Obligation, Series C,
7.000%, 1/01/15
</TABLE>
____
16
<PAGE>
Nuveen Municipal Bond Fund
May 31, 1997 Annual Report
<TABLE>
<CAPTION>
PRINCIPAL OPTIONAL CALL MARKET
AMOUNT DESCRIPTION PROVISIONS* RATINGS** VALUE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PRE-REFUNDED - CONTINUED
$ 1,220,000 Metropolitan Government Nashville and Davidson No Opt. Call N/R $ 1,346,624
Counties, Tennessee, Health and Education Facilities
Board Revenue, Homes Inc. Project,
Series A, 9.000%, 10/01/22
2,500,000 Mount Juliet, Tennessee, Public Building Authority No Opt. Call AAA 3,107,525
Revenue, Utility District Loan, Series B, Madison
Suburban, 7.800%, 2/01/19
1,500,000 Northeast Knox Tennessee Utility District, Water No Opt. Call AAA 1,623,585
Revenue, 7.000%, 1/01/20
1,365,000 Puerto Rico Commonwealth, Refunding, No Opt. Call A 1,451,500
8.000%, 7/01/07
1,000,000 Puerto Rico Commonwealth Highway Authority, No Opt. Call AAA 1,065,010
Highway Revenue, Series P, 8.125%, 7/01/13
1,000,000 Puerto Rico Electric Power Authority, Power Revenue, No Opt. Call AAA 1,063,700
Formerly Puerto Rico Commonwealth Water
Resource Authority Power, Refunding, Series M,
8.000%, 7/01/08
865,000 Selmer, Tennessee, Refunding, No Opt. Call Baa 920,940
8.200%, 7/01/13
200,000 Sevier County, Tennessee, Public Building Authority, No Opt. Call AAA 210,194
Solid Waste Facility, 6.750%, 8/01/09
Shelby County, Tennessee, Health Educational and
Housing Facilities Board Revenue, Lebonheur
Children's Medical Center, Series C:
1,000,000 7.625%, 8/15/09 No Opt. Call AA 1,061,350
2,000,000 7.600%, 8/15/19 No Opt. Call AAA 2,122,140
4,000,000 Sullivan County, Tennessee, Health Educational and No Opt. Call AAA 4,352,920
Housing Facilities Board Revenue, Hospital,
Holston Valley Health Care, 7.250%, 2/15/20
125,000 Tennessee State School Bond Authority, Higher No Opt. Call AA 133,489
Educational Facilities, 7.000%, 5/01/20
1,000,000 West Knox Utility District, Knox County, Tennessee, No Opt. Call AAA 1,071,310
Water and Sewer Revenue, Improvement,
7.750%, 12/01/08
</TABLE>
____
17
<PAGE>
PORTFOLIO OF INVESTMENTS
NUVEEN FLAGSHIP TENNESSEE - CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL OPTIONAL CALL MARKET
AMOUNT DESCRIPTION PROVISIONS* RATINGS** VALUE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PRE-REFUNDED - CONTINUED
Wilson County, Tennessee, Water and Wastewater
Authority Waterworks Revenue Refunding
and Improvement:
$ 1,000,000 7.875%, 3/01/09 No Opt. Call N/R $ 1,077,400
950,000 8.000%, 3/01/14 No Opt. Call N/R 1,025,345
- ------------------------------------------------------------------------------------------------------------------------------
SPECIAL TAX REVENUE - 2.4%
6,275,000 Puerto Rico Commonwealth Highway and 7/16 at 100 A 6,102,875
Transportation Authority Highway Revenue,
Series Y, 5.500%, 7/01/36
500,000 Puerto Rico Commonwealth Highway and No Opt. Call AAA 505,990
Transportation Authority Highway Revenue,
Series W, 5.500%, 7/01/15
- ------------------------------------------------------------------------------------------------------------------------------
STATE/TERRITORIAL GENERAL OBLIGATIONS - 6.0%
385,000 Puerto Rico Commonwealth, Refunding, 7/98 at 102 A 408,797
8.000%, 7/01/07
16,100,000 Puerto Rico Public Buildings Authority Revenue No Opt. Call A 15,877,173
Guaranteed, Refunding, Series L, 5.500%, 7/01/21
- ------------------------------------------------------------------------------------------------------------------------------
$ 266,785,000 Total Investments - (cost 264,745,972 $250,892,508) - 96.9%
- ------------------------------------------------------------------------------------------------------------------------------
TEMPORARY INVESTMENTS IN SHORT-TERM MUNICIPAL SECURITIES - 1.6%
$ 4,500,000 Metropolitan Nashville (AMR), Series B, Variable Rate Demand Bonds,
4.000%, 10/01/02+ AAA 4,500,000
- ------------------------------------------------------------------------------------------------------------------------------
Other Assets Less Liabilities - 1.5% 4,063,398
------------------------------------------------------------------------------------------------
Net Assets - 100% $273,309,370
================================================================================================
* Optional Call Provisions (not covered by the
report of independent auditors): 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 auditors): Using the higher of
Standard & Poor's or Moody's rating.
*** Pre-refunded 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. Pre-refunded
securities are normally considered to be
equivalent to AAA-rated securities.
N/R - Investment is not rated.
+ The security has a maturity of more than one
year, but has variable rate and demand
features which qualify it as a short-term
security. The rate disclosed is that
currently in effect. This rate changes
periodically based on market conditions or a
specified market index.
</TABLE>
____
18 See accompanying notes to financial statements.
<PAGE>
Nuveen Municipal Bond Fund
STATEMENT OF NET ASSETS May 31, 1997 Annual Report
MAY 31, 1997
<TABLE>
<CAPTION>
NUVEEN FLAGSHIP
TENNESSEE
- --------------------------------------------------------------------------------------------
<S> <C>
ASSETS
Investments in municipal securities, at market value (note 1) $264,745,972
Temporary investments in short-term municipal securities,
at amortized cost, which approximates market value (note 1) 4,500,000
Cash 581,246
Receivables:
Interest 4,808,256
Shares sold 309,104
Other assets 60,879
- --------------------------------------------------------------------------------------------
Total assets 275,005,457
- --------------------------------------------------------------------------------------------
LIABILITIES
Payable for Shares redeemed 241,504
Accrued expenses:
Management fees (note 6) 102,351
12b-1 distribution and service fees (notes 1 and 6) 53,587
Other 97,579
Dividends payable 1,201,066
- --------------------------------------------------------------------------------------------
Total liabilities 1,696,087
- --------------------------------------------------------------------------------------------
Net assets (note 7) $273,309,370
============================================================================================
CLASS A SHARES (NOTE 1)
Net assets $257,475,423
Shares outstanding 23,281,377
Net asset value and redemption price per share $ 11.06
Offering price per share (net asset value per share plus
maximum sales charge of 4.20% of offering price) $ 11.54
============================================================================================
CLASS B SHARES (NOTE 1)
Net assets $ 536,952
Shares outstanding 48,528
Net asset value, offering and redemption price per share $ 11.06
============================================================================================
CLASS C SHARES (NOTE 1)
Net assets $ 15,049,410
Shares outstanding 1,361,620
Net asset value, offering and redemption price per share $ 11.05
============================================================================================
CLASS R SHARES (NOTE 1)
Net assets $ 247,585
Shares outstanding 22,423
Net asset value, offering and redemption price per share $ 11.04
============================================================================================
</TABLE>
____
19 See accompanying notes to financial statements.
<PAGE>
STATEMENT OF OPERATIONS
YEAR ENDED MAY 31, 1997
<TABLE>
<CAPTION>
NUVEEN FLAGSHIP
TENNESSEE *
- --------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
Tax-exempt interest income (note 1) $ 16,788,455
- --------------------------------------------------------------------------------------------
EXPENSES
Management fees (note 6) 1,392,750
12b-1 service fees -- Class A (notes 1 and 6) 852,686
12b-1 distribution and service fees -- Class B (notes 1 and 6) 761
12b-1 distribution and service fees -- Class C (notes 1 and 6) 137,228
Shareholders' servicing agent fees and expenses 164,828
Custodian's fees and expenses 99,627
Trustees' fees and expenses (note 6) 6,150
Professional fees 22,843
Shareholders' reports -- printing and mailing expenses 25,459
Federal and state registration fees 14,527
Other expenses 10,300
- --------------------------------------------------------------------------------------------
Total expenses before reimbursement 2,727,159
Expense reimbursement (note 6) (341,259)
- --------------------------------------------------------------------------------------------
Net expenses 2,385,900
- --------------------------------------------------------------------------------------------
Net investment income 14,402,555
- --------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN FROM INVESTMENTS
Net realized gain from investment transactions (notes 1 and 4) 1,595,041
Net change in unrealized appreciation or depreciation of investments 3,989,675
- --------------------------------------------------------------------------------------------
Net gain from investments 5,584,716
- --------------------------------------------------------------------------------------------
Net increase in net assets from operations $ 19,987,271
============================================================================================
</TABLE>
* Information represents eight months of Flagship Tennessee and four months of
Nuveen Flagship Tennessee (see note 1 of the Notes to Financial Statements).
____
20
<PAGE>
Nuveen Municipal Bond Fund
STATEMENT OF CHANGES IN NET ASSETS May 31, 1997 Annual Report
<TABLE>
<CAPTION>
NUVEEN FLAGSHIP FLAGSHIP
TENNESSEE * TENNESSEE
--------------------------------------------
YEAR ENDED 1/31/97 YEAR ENDED 1/31/97
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS
Net investment income $ 14,402,555 $ 13,837,178
Net realized gain from investment transactions
Notes 1 and 4) 1,595,041 7,163
Net change in unrealized appreciation or depreciation
of investments 3,989,675 (4,307,255)
- --------------------------------------------------------------------------------------------------------
Net increase in net assets from operations 19,987,271 9,537,086
- --------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1)
From undistributed net investment income:
Class A (13,649,276) (13,267,447)
Class B (3,542) N/A
Class C (744,238) (682,508)
Class R (2,064) N/A
- --------------------------------------------------------------------------------------------------------
Decrease in net assets from distributions to shareholders (14,399,120) (13,949,955)
- --------------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 2)
Net proceeds from sale of shares 27,836,928 39,204,201
Net proceeds from shares issued to shareholders
due to reinvestment of distributions 7,269,232 7,501,429
- --------------------------------------------------------------------------------------------------------
35,106,160 46,705,630
- --------------------------------------------------------------------------------------------------------
Cost of shares redeemed (33,754,624) (30,194,633)
- --------------------------------------------------------------------------------------------------------
Net increase in net assets from Fund share transactions 1,351,536 16,510,997
- --------------------------------------------------------------------------------------------------------
Net increase in net assets 6,939,687 12,098,128
- --------------------------------------------------------------------------------------------------------
Net assets at the beginning of year 266,369,683 254,271,555
- --------------------------------------------------------------------------------------------------------
Net assets at the end of year 273,309,370 $ 266,369,683
- --------------------------------------------------------------------------------------------------------
Balance of undistributed net investment income at end of year $ 3,435 $ --
========================================================================================================
</TABLE>
* Information represents eight months of Flagship Tennessee and four months
of Nuveen Flagship Tennessee (see note 1 of the Notes to Financial
Statements).
N/A -- Flagship Tennessee was not authorized to issue Class B or Class R Shares.
____
21
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. GENERAL INFORMATION AND SIGNIFICANT ACCOUNTING POLICIES
The Nuveen Flagship Multistate Trust III (the "Trust") is an open-end investment
company registered under the Investment Company Act of 1940, as amended. The
Trust comprises Nuveen Flagship Tennessee Municipal Bond Fund (the "Fund"),
among others. The Trust was organized as a Massachusetts business trust on July
1, 1996.
The John Nuveen Company, parent of John Nuveen & Co. Incorporated and Nuveen
Advisory Corp., respectively, the distributor ("Distributor") and investment
advisor ("Adviser") of the Fund, 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, Flagship Tennessee Double Tax
Exempt Fund ("Flagship Tennessee") was reorganized into the Trust and renamed
Nuveen Flagship Tennessee Municipal Bond Fund ("Nuveen Flagship Tennessee").
The Fund seeks to provide high tax-free income and preservation of capital
through investments in a diversified portfolio of quality municipal bonds.
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements in accordance with
generally accepted accounting principles.
SECURITIES VALUATION
The prices of municipal bonds in the 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 Fund has 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 May
31, 1997, the Fund had no such 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.
____
22
<PAGE>
NUVEEN MUNICIPAL BOND FUND
MAY 31, 1997 ANNUAL REPORT
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Tax-exempt net investment income is declared as a dividend monthly and payment
is made or reinvestment is credited to shareholder accounts on the first
business day after month-end. Net realized capital gains and/or market discount
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 carryovers. Prior to the
reorganization, tax-exempt net investment income for Flagship Tennessee was
declared as a dividend daily and payment was made on the last business day of
each month.
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
The Fund is a separate taxpayer for federal income tax purposes. The Fund
intends to comply with the requirements of the Internal Revenue Code applicable
to regulated investment companies and to distribute all of its tax-exempt net
investment income, in addition to any significant amounts of net realized
capital gains and/or market discount from investment transactions. The Fund
currently considers significant net realized capital gains and/or market
discount as amounts in excess of $.001 per share. Furthermore, the Fund intends
to satisfy conditions which will enable interest from municipal securities,
which is exempt from regular federal and Tennessee state income taxes, to retain
such tax-exempt status when distributed to the shareholders of the Fund. All
income dividends paid during the fiscal year ended May 31, 1997, have been
designated Exempt Interest Dividends. Net realized capital gains and market
discount distributions are subject to federal taxation.
FLEXIBLE SALES CHARGE PROGRAM
The Fund offers Class A, B, C and R Shares. Class B and R Shares were first
offered for sale on February 1, 1997. Class A Shares are sold with a sales
charge and incur an annual 12b-1 service fee. 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 contingent deferred sales charge
("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 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 18 months 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.
____
23
<PAGE>
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DERIVATIVE FINANCIAL INSTRUMENTS
The Fund may invest in certain derivative financial instruments including
futures, forward, swap, and option contracts, and other financial instruments
with similar characteristics. Although the Fund is authorized to invest in such
financial instruments, and may do so in the future, it did not make any such
investments during the fiscal year ended May 31, 1997.
EXPENSE ALLOCATION
Expenses of the Fund 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.
____
24
<PAGE>
NUVEEN MUNICIPAL BOND FUND
MAY 31, 1997 ANNUAL REPORT
2. FUND SHARES
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
NUVEEN FLAGSHIP FLAGSHIP
TENNESSEE* TENNESSEE
- ---------------------------------------------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED
5/31/97 5/31/96
- ---------------------------------------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold:
Class A 2,181,165 $ 23,957,505 3,011,203 $ 33,202,281
Class B 48,526 533,276 N/A N/A
Class C 282,598 3,100,098 542,572 6,001,920
Class R 22,306 246,049 N/A N/A
Shares issued to shareholders due to
reinvestment of distributions:
Class A 619,521 6,805,317 636,833 7,027,667
Class B 66 718 N/A N/A
Class C 42,079 461,759 42,969 473,762
Class R 131 1,438 N/A N/A
- ---------------------------------------------------------------------------------------------------------------------
3,196,392 35,106,160 4,233,577 46,705,630
- ---------------------------------------------------------------------------------------------------------------------
Shares redeemed:
Class A (2,682,025) (29,442,527) (2,452,182) (27,004,837)
Class B (64) (699) N/A N/A
Class C (393,458) (4,311,248) (290,776) (3,189,796)
Class R (14) (150) N/A N/A
- ---------------------------------------------------------------------------------------------------------------------
(3,075,561) (33,754,624) (2,742,958) (30,194,633)
- ---------------------------------------------------------------------------------------------------------------------
Net increase 120,831 $ 1,351,536 1,490,619 $ 16,510,997
=====================================================================================================================
</TABLE>
* Information represents eight months of Flagship Tennessee and four months of
Nuveen Flagship Tennessee (see note 1).
N/A -- Flagship Tennessee was not authorized to issue Class B or R Shares.
3. DISTRIBUTIONS TO SHAREHOLDERS
On June 9, 1997, the Fund declared a dividend distribution from its tax-exempt
net investment income which was paid on July 1, 1997, to shareholders of record
on June 9, 1997, as follows:
<TABLE>
<CAPTION>
NUVEEN FLAGSHIP
TENNESSEE
- --------------------------------------------------------------------------------
Dividend per share:
<S> <C>
Class A $.0490
Class B .0420
Class C .0435
Class R .0505
- --------------------------------------------------------------------------------
</TABLE>
____
25
<PAGE>
NOTES TO FINANCIAL STATEMENTS - CONTINUED
4. SECURITIES TRANSACTIONS
Purchases and sales (including maturities) of investments in municipal
securities and temporary municipal investments for the fiscal year ended May 31,
1997, were as follows:
<TABLE>
<CAPTION>
NUVEEN FLAGSHIP
TENNESSEE*
- --------------------------------------------------------------------------------
<S> <C>
PURCHASES
Investments in municipal securities $62,364,697
Temporary municipal investments 5,500,000
SALES
Investments in municipal securities 67,024,956
Temporary municipal investments 1,000,000
================================================================================
</TABLE>
* Information represents eight months of Flagship Tennessee and four months of
Nuveen Flagship Tennessee (see note 1).
At May 31, 1997, the identified cost of investments owned for federal income tax
purposes was the same as the cost for financial reporting purposes for the Fund.
At May 31, 1997, the Fund had an unused capital loss carryforward of $3,996,954
available for federal income tax purposes to be applied against future capital
gains, if any. If not applied, the carryover will expire in the year 2003.
5. UNREALIZED APPRECIATION (DEPRECIATION)
At May 31, 1997, net unrealized appreciation aggregated $13,853,464, of which
$13,872,366 related to appreciated securities and $18,902 related to depreciated
securities.
6. MANAGEMENT FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Under the Trust's investment management agreement with the Adviser, the 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 the Fund as follows:
<TABLE>
<CAPTION>
AVERAGE DAILY NET ASSET VALUE MANAGEMENT FEE
- --------------------------------------------------------------------------------
<S> <C>
For the first $125 million .5500 of 1%
For the next $125 million .5375 of 1
For the next $250 million .5250 of 1
For the next $500 million .5125 of 1
For the next $1 billion .5000 of 1
For net assets over $2 billion .4750 of 1
- --------------------------------------------------------------------------------
</TABLE>
____
26
<PAGE>
NUVEEN MUNICIPAL BOND FUND
MAY 31, 1997 ANNUAL REPORT
Prior to the reorganization (see note 1) Flagship Tennessee paid a management
fee of .5 of 1%. The management fee compensates the Adviser for overall
investment advisory and administrative services, and general office facilities.
The Trust pays no compensation directly to its Trustees who are affiliated with
the Adviser or to its officers, all of whom receive remuneration for their
services to the Trust from the Adviser.
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 May 31, 1997, the Distributor and its predecessor
(Flagship Funds Inc., a wholly-owned subsidiary of Flagship Resources Inc.)
collected gross sales charges on purchases of Class A Shares of approximately
$612,200 of which approximately $526,600 were paid out as concessions to
authorized dealers. The Distributor and its predecessor also received 12b-1
service fees on Class A Shares, approximately one-half of which was paid to
compensate authorized dealers for providing services to shareholders relating to
their investments.
During the fiscal year ended May 31, 1997, the Distributor and its predecessor
compensated authorized dealers directly with approximately $52,900 in commission
advances at the time of purchase. To compensate for commissions advanced to
authorized dealers, all 12b-1 service fees collected on Class B Shares during
the first year following a purchase, all 12b-1 distribution fees collected on
Class B Shares, and all 12b-1 service and distribution fees on Class C Shares
during the first year following a purchase are retained by the Distributor. The
remaining 12b-1 fees charged to the Fund were paid to compensate authorized
dealers for providing services to shareholders relating to their investments.
The Distributor and its predecessor also collected and retained approximately
$6,100 of CDSC on share redemptions during the fiscal year ended May 31, 1997.
7. COMPOSITION OF NET ASSETS
At May 31, 1997, the Fund had an unlimited number of $.01 par value shares
authorized. Net assets consisted of:
<TABLE>
<CAPTION>
NUVEEN FLAGSHIP
TENNESSEE
- ---------------------------------------------------------------------------------
<S> <C>
Capital paid-in $263,449,425
Balance of undistributed net investment income 3,435
Accumulated net realized gain (loss) from investment transactions (3,996,954)
Net unrealized appreciation of investments 13,853,464
- ---------------------------------------------------------------------------------
Net assets $273,309,370
=================================================================================
</TABLE>
____
27
<PAGE>
FINANCIAL HIGHLIGHTS
Selected data for a share outstanding throughout each period is as
follows:
<TABLE>
<CAPTION>
CLASS (INCEPTION DATE) OPERATING PERFORMANCE LESS DISTRIBUTIONS
------------------------- ------------------------
NET
NUVEEN FLAGSHIP TENNESSEE++ NET REALIZED AND DIVIDENDS NET TOTAL
ASSET UNREALIZED FROM TAX- ASSET RETURN
VALUE NET GAIN (LOSS) EXEMPT NET DISTRIBUTIONS VALUE ON NET
YEAR ENDING BEGINNING INVESTMENT FROM INVESTMENT FROM CAPITAL END OF ASSET
MAY 31, OF PERIOD INCOME (B) INVESTMENTS INCOME GAINS PERIOD VALUE (A)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS A (11/87)
1997 $10.83 $.59 $ .23 $ (.59) $ - $11.06 7.71%
1996 11.01 .59 (.18) (.59) - 10.83 3.78
1995 10.78 .60 .23 (.60) - 11.01 8.04
1994 11.23 .61 (.43) (.61) (.02) 10.78 1.55
1993 10.56 .62 .68 (.63) - 11.23 12.60
1992 10.34 .65 .22 (.65) - 10.56 8.66
1991 10.09 .67 .26 (.67) (.01) 10.34 9.73
1990 10.26 .67 (.15) (.67) (.02) 10.09 5.53
1989 9.65 .68 .60 (.67) - 10.26 13.89
1988(c) 9.58 .35 .09 (.37) - 9.65 7.50+
CLASS B (2/97)
1997(c) 11.14 .14 (.09) (.13) - 11.06 .42
CLASS C (10/93)
1997 10.82 .53 .23 (.53) - 11.05 7.12
1996 11.00 .53 (.18) (.53) - 10.82 3.22
1995 10.78 .54 .22 (.54) - 11.00 7.35
1994(c) 11.61 .35 (.83) (.34) (.01) 10.78 (5.92)+
CLASS R (2/97)
1997(c) 11.09 .20 (.05) (.20) - 11.04 1.40
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Annualized.
++ Information included prior to the year ending May 31, 1997,
reflects the financial highlights of Flagship Tennessee.
(a) Total returns are calculated on net asset value without any sales
charge.
(b) After waiver of certain management fees or reimbursement of
expenses, if applicable, by Nuveen Advisory or its predecessor
Flagship Financial.
(c) From commencement of class operations as noted.
____
28
<PAGE>
Nuveen Municipal Bond Fund
May 31, 1997 Annual Report
<TABLE>
<CAPTION>
RATIO/SUPPLEMENTAL DATA
- ----------------------------------------------------------------------------------------------------
RATIO RATIO
OF NET OF NET
RATIO OF INVESTMENT RATIO OF INVESTMENT
EXPENSES INCOME TO EXPENSES INCOME TO
TO AVERAGE AVERAGE TO AVERAGE AVERAGE
NET ASSETS NET ASSETS NET ASSETS NET ASSETS
NET ASSETS BEFORE BEFORE AFTER AFTER PORTFOLIO
END OF PERIOD REIMBURSE- REIMBURSE- REIMBURSE- REIMBURSE- TURNOVER
(IN THOUSANDS) MENT MENT MENT (B) MENT (B) RATE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$257,475 .97% 5.23% .85% 5.35% 23%
250,886 1.01 5.17 .88 5.30 38
241,778 1.07 5.46 .89 5.64 23
236,230 1.02 5.16 .76 5.42 17
191,811 1.05 5.49 .88 5.66 15
126,833 1.04 5.98 .84 6.18 35
92,431 1.07 6.29 .76 6.60 30
73,752 1.08 6.27 .78 6.57 56
62,048 1.18 6.24 .62 6.80 50
23,725 1.29+ 5.53+ .47+ 6.35+ 23
537 1.60+ 4.49+ 1.37+ 4.72+ 23
15,049 1.53 4.67 1.40 4.80 23
15,483 1.56 4.62 1.43 4.75 38
12,494 1.62 4.90 1.44 5.08 23
10,652 1.63+ 4.40+ 1.23+ 4.80+ 17
248 .66+ 5.55+ .46+ 5.75+ 23
- ----------------------------------------------------------------------------------------------------
</TABLE>
____
29
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF
NUVEEN FLAGSHIP TENNESSEE MUNICIPAL BOND FUND:
We have audited the accompanying statement of net assets of Nuveen Flagship
Tennessee Municipal Bond Fund, including the portfolio of investments, as of May
31, 1997, the related statement of operations for the period then ended and the
statement of changes in net assets, and the financial highlights for each of the
periods presented. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 1997, by correspondence with the Fund's custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of the Nuveen Flagship
Tennessee Municipal Bond Fund at May 31, 1997, the results of its operations,
the changes in its net assets and the financial highlights for the respective
stated periods, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dayton, Ohio
July 11, 1997
____
30
<PAGE>
SHAREHOLDER MEETING REPORT
FLAGSHIP TENNESSEE
<TABLE>
<CAPTION>
A SHARES C SHARES
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
ADVISORY AGREEMENT For 17,052,669 1,083,828
Against 293,133 15,166
Abstain 396,163 14,917
--------------------------------------------------
Total 17,741,965 1,113,911
- --------------------------------------------------------------------------------
Broker Non Votes 294,847 41,820
- --------------------------------------------------------------------------------
REORGANIZATION For 12,071,192 504,755
Against 325,509 23,011
Abstain 440,804 13,468
--------------------------------------------------
Total 12,837,505 541,234
- --------------------------------------------------------------------------------
Broker Non Votes 5,199,307 614,497
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE For 11,982,460 493,436
Against 773,641 46,626
Abstain 81,404 1,172
--------------------------------------------------
Total 12,837,505 541,234
- --------------------------------------------------------------------------------
Broker Non Votes 5,199,307 614,497
- --------------------------------------------------------------------------------
INVESTMENT ASSETS For 11,992,269 493,436
Against 770,291 46,626
Abstain 74,945 1,172
--------------------------------------------------
Total 12,837,505 541,234
- --------------------------------------------------------------------------------
Broker Non Votes 5,199,307 614,497
- --------------------------------------------------------------------------------
TYPE OF SECURITIES For 11,987,472 493,729
Against 763,678 47,505
Abstain 86,356 --
--------------------------------------------------
Total 12,837,506 541,234
- --------------------------------------------------------------------------------
Broker Non Votes 5,199,306 614,497
- --------------------------------------------------------------------------------
BORROWING For 11,967,934 493,436
Against 782,715 47,505
Abstain 86,856 293
--------------------------------------------------
Total 12,837,505 541,234
- --------------------------------------------------------------------------------
Broker Non Votes 5,199,307 614,497
- --------------------------------------------------------------------------------
PLEDGES For 11,954,969 493,436
Against 794,496 47,505
Abstain 88,040 293
--------------------------------------------------
Total 12,837,505 541,234
- --------------------------------------------------------------------------------
Broker Non Votes 5,199,307 614,497
--------------------------------------------------
</TABLE>
____
31
<PAGE>
SHAREHOLDER MEETING REPORT
FLAGSHIP TENNESSEE
- CONTINUTED
<TABLE>
<CAPTION>
A SHARES C SHARES
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
SENIOR SECURITIES For 11,984,673 494,315
Against 770,729 46,626
Abstain 82,103 293
--------------------------------------------------
Total 1 2,837,505 541,234
- --------------------------------------------------------------------------------------
Broker Non Votes 5,199,307 614,497
- --------------------------------------------------------------------------------------
UNDERWRITING For 1 1,988,640 494,315
Against 763,640 46,626
Abstain 85,225 293
--------------------------------------------------
Total 1 2,837,505 541,234
- --------------------------------------------------------------------------------------
Broker Non Votes 5,199,307 614,497
- --------------------------------------------------------------------------------------
REAL ESTATE For 1 1,982,055 494,315
Against 788,625 46,626
Abstain 66,825 293
--------------------------------------------------
Total 1 2,837,505 541,234
- --------------------------------------------------------------------------------------
Broker Non Votes 5,199,307 614,497
- --------------------------------------------------------------------------------------
COMMODITIES For 1 1,916,105 494,315
Against 822,977 46,626
Abstain 98,423 293
--------------------------------------------------
Total 1 2,837,505 541,234
- --------------------------------------------------------------------------------------
Broker Non Votes 5,199,307 614,497
- --------------------------------------------------------------------------------------
LOANS For 1 1,977,317 494,315
Against 774,954 46,626
Abstain 85,234 293
--------------------------------------------------
Total 1 2,837,505 541,234
- --------------------------------------------------------------------------------------
Broker Non Votes 5,199,307 614,497
- --------------------------------------------------------------------------------------
SHORT SALES/MARGIN PURCHASES For 1 1,946,177 494,315
Against 799,310 46,626
Abstain 92,018 293
--------------------------------------------------
Total 1 2,837,505 541,234
- --------------------------------------------------------------------------------------
Broker Non Votes 5,199,307 614,497
- --------------------------------------------------------------------------------------
PUT AND CALL OPTIONS For 1 1,937,423 493,354
Against 798,821 47,880
Abstain 101,261 --
--------------------------------------------------
Total 1 2,837,505 541,234
- --------------------------------------------------------------------------------------
Broker Non Votes 5,199,307 614,497
--------------------------------------------------
</TABLE>
____
32
<PAGE>
Nuveen Municipal Bond Fund
May 31, 1997 Annual Report
<TABLE>
<CAPTION>
A SHARES C SHARES
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
INDUSTRY CONCENTRATION For 11,989,315 494,315
Against 771,263 46,626
Abstain 76,928 293
--------------------------------------------
Total 12,837,506 541,234
- --------------------------------------------------------------------------------
Broker Non Votes 5,199,306 614,497
- --------------------------------------------------------------------------------
AFFILIATE PURCHASES For 11,978,396 494,315
Against 773,674 46,626
Abstain 85,435 293
--------------------------------------------
Total 12,837,505 541,234
- --------------------------------------------------------------------------------
Broker Non Votes 5,199,307 614,497
- --------------------------------------------------------------------------------
INVESTMENT COMPANIES For 11,965,931 494,315
Against 799,735 46,626
Abstain 71,839 293
--------------------------------------------
Total 12,837,505 541,234
- --------------------------------------------------------------------------------
Broker Non Votes 5,199,307 614,497
- --------------------------------------------------------------------------------
DIV VS. NON-DIV For 11,977,637 494,315
Against 772,359 46,626
Abstain 87,510 293
--------------------------------------------
Total 12,837,506 541,234
- --------------------------------------------------------------------------------
Broker Non Votes 5,199,306 614,497
- --------------------------------------------------------------------------------
12B-1 FEES For 16,914,418 1,053,734
Against 338,747 25,849
Abstain 511,664 34,328
--------------------------------------------
Total 17,764,829 1,113,911
- --------------------------------------------------------------------------------
Broker Non Votes 271,983 41,820
--------------------------------------------
</TABLE>
____
33
<PAGE>
SHAREHOLDER MEETING REPORT
FLAGSHIP TENNESSEE
- CONTINUED
<TABLE>
<CAPTION>
A SHARES C SHARES
- --------------------------------------------------------------------------------
DIRECTORS
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
(A) Bremner For 17,576,454 1,118,392
Withhold 460,358 37,339
-------------------------------------------------
Total 18,036,812 1,155,731
- --------------------------------------------------------------------------------
(B) Brown For 17,576,454 1,118,392
Withhold 460,358 37,339
-------------------------------------------------
Total 18,036,812 1,155,731
- --------------------------------------------------------------------------------
(C) Dean For 17,576,454 1,118,392
Withhold 460,358 37,339
-------------------------------------------------
Total 18,036,812 1,155,731
- --------------------------------------------------------------------------------
(D) Impellizzeri For 17,576,454 1,118,392
Withhold 460,358 37,339
-------------------------------------------------
Total 18,036,812 1,155,731
- --------------------------------------------------------------------------------
(E) Rosenheim For 17,576,454 1,118,392
Withhold 460,358 37,339
-------------------------------------------------
Total 18,036,812 1,155,731
- --------------------------------------------------------------------------------
(F) Sawers For 17,576,454 1,118,392
Withhold 460,358 37,339
-------------------------------------------------
Total 18,036,812 1,155,731
- --------------------------------------------------------------------------------
(G) Schneider For 17,576,454 1,118,392
Withhold 460,358 37,339
-------------------------------------------------
Total 18,036,812 1,155,731
- --------------------------------------------------------------------------------
(H) Schwertfeger For 17,576,454 1,118,392
-------------------------------------------------
Withhold 460,358 37,339
- --------------------------------------------------------------------------------
Total 18,036,812 1,155,731
-------------------------------------------------
</TABLE>
____
34
<PAGE>
NUVEEN FAMILY OF MUTUAL FUNDS
Nuveen offers a variety of funds designed to help you reach your financial
goals.
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
Insured
Intermediate-Term
Limited-Term
STATE FUNDS
Alabama Michigan
Arizona Missouri
California New Jersey
Colorado New Mexico
Connecticut New York
Florida North Carolina
Georgia Ohio
Kansas Pennsylvania
Kentucky South Carolina
Louisiana Tennessee
Maryland Virginia
Massachusetts Wisconsin
SHAREHOLDER INFORMATION
To purchase additional shares of your Nuveen Municipal Bond Fund, contact your
financial adviser. If you would like to add to your current investment on a
monthly or semi-annual basis, you can sign up for Nuveen's systematic investing
program, which allows you to invest a fixed dollar amount every month
automatically.
You can also invest automatically through dividend reinvestment. By reinvesting
your fund's dividends back into the fund, you gain the added growth potential of
long-term compounding.
For more information on any of these service options call your adviser, or
Nuveen at (800) 621-7227.
____
35
<PAGE>
FUND INFORMATION
BOARD OF DIRECTORS
Robert P. Bremner
Lawrence H. Brown
Anthony T. Dean
Anne E. Impellizzeri
Peter R. Sawers
William J. Schneider
Timothy R. Schwertfeger
Judith M. Stockdale
FUND MANAGER
Nuveen Advisory Corp.
333 West Wacker Drive
Chicago, IL 60606
CUSTODIAN
The Chase Manhattan Bank
4 New York Plaza
New York, NY 10004-2413
TRANSFER AGENT,
SHAREHOLDER SERVICES AND
DIVIDEND DISBURSING AGENT
Boston Financial
Nuveen Investor Services
P.O. Box 8509
Boston, MA 02266-8509
(800) 225-8530
LEGAL COUNSEL
Fried, Frank, Harris, Shriver
& Jacobson
Washington, D.C.
INDEPENDENT AUDITORS
Deloitte & Touche LLP
Dayton, Ohio
____
36
<PAGE>
[PHOTO OF John Nuveen, Sr. APPEARS HERE]
NUVEEN
John Nuveen & Co. Incorporated
333 West Wacker Drive
Chicago, IL 60606-1286
(800) 621-7227
www.nuveen.com
SERVING INVESTORS
FOR GENERATIONS
Since our founding in 1898, John Nuveen & Co. has been synonymous with
investments that withstand the test of time. Today, we offer a broad range of
investments designed for mature investors whose portfolios are the principal
source of their ongoing financial security. More than 1.3 million investors have
trusted Nuveen to help them maintain the lifestyle they currently enjoy.
A value investing approach -- purchasing securities of strong companies and
communities that represent good long-term value -- is the cornerstone of
Nuveen's investment philosophy. It is a careful, long-term strategy that offers
the potential for attractive returns with moderated risk. Successful value
investing begins with in-depth research and a discerning eye for marketplace
opportunity. Nuveen's team of investment professionals is backed by the
discipline, resources and expertise of almost a century of investment
experience, including one of the most recognized research departments in the
industry.
To meet the unique circumstances and financial planning needs of mature
investors, Nuveen offers a wide array of equity and fixed-income mutual funds,
unit trusts, exchange-traded funds, individual managed account services, and
cash management products, including many that generate tax-free income.
To find out more about how Nuveen investment products and services can help you
preserve your financial security, talk with your financial adviser, or call us
at (800) 621-7227 for more information, including a prospectus where applicable.
Please read that information carefully before you invest.
