<PAGE>
Prospectus
[PHOTO OF WOMAN APPEARS HERE]
NUVEEN
Municipal
Mutual Funds
Prospectus
Dependable, tax-free income to help you keep more of what you earn.
Alabama
Georgia
Louisiana
North Carolina
South Carolina
Tennessee
February 1, 1997
<PAGE>
- --------------------------------------------------------------------------------
INVESTING IN NUVEEN MUTUAL FUNDS
Since our founding in 1898, John Nuveen & Co. has been synonymous with invest-
ments that withstand the test of time. Today, we offer a range of equity and
fixed-income mutual funds designed to suit the unique circumstances and finan-
cial planning needs of mature investors. More than 1.3 million investors have
entrusted Nuveen to help them maintain the lifestyle they currently enjoy.
Value-investing -- purchasing securities of strong companies and communities
at an attractive price -- is the cornerstone of Nuveen's investment philoso-
phy. A long-term strategy that offers the potential for above average returns
over time with moderated risk, successful value-investing begins with in-depth
research and a discerning eye for value. Our team of investment professionals
is backed by the discipline, resources and expertise of Nuveen's almost a
century of investment experience, including one of the most recognized
research departments in the industry.
This prospectus describes in detail the investment objectives, policies and
risks of certain Nuveen municipal bond funds. We invite you to discuss the
contents with your financial adviser, or you may call us at 800-621-7227 for
additional information.
<PAGE>
- --------------------------------------------------------------------------------
PROSPECTUS
Nuveen Flagship Alabama Municipal Bond Fund
Nuveen Flagship Georgia Municipal Bond Fund
Nuveen Flagship Louisiana Municipal Bond Fund
Nuveen Flagship North Carolina Municipal Bond Fund
Nuveen Flagship South Carolina Municipal Bond Fund
Nuveen Flagship Tennessee Municipal Bond Fund
- --------------------------------------------------------------------------------
OVERVIEW
The funds listed above are part of the Nuveen Flagship Multistate Trust III, an
open-end investment company. Each fund seeks to provide high tax-free income
and preservation of capital through investments in diversified portfolios of
quality municipal bonds.
Each fund offers a set of flexible purchase options which permit you to
purchase fund shares in the way that is best suited to your individual circum-
stances and investment needs. For detailed information about these flexible
purchase options, please refer to "How to Select a Purchase Option" later in
this prospectus.
This prospectus contains important information you should know before invest-
ing. Please read it carefully and keep it for future reference. You can find
more detailed information about each fund in the statement of additional infor-
mation which is part of this prospectus by reference. For a free copy, write to
Nuveen or call (800) 621-7227.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, OR ANY OTHER U.S. GOVERNMENT AGENCY. SHARES OF THE FUNDS
INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL AMOUNT
INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
CONTENTS
<TABLE>
<S> <C>
OVERVIEW 1
FUND SUMMARIES AND FINANCIAL HIGHLIGHTS 2
FUND STRATEGIES
Investment Objective 14
How the Funds Select Investments 14
Risk Reduction Strategies 15
INVESTING IN THE FUNDS
How to Buy Fund Shares 16
How to Select a Purchase Option 16
How to Sell Fund Shares 17
Exchanging Shares 18
Optional Features and Services 19
DIVIDENDS AND TAXES
How the Funds Pay Dividends 20
Taxes and Tax Reporting 21
Taxable Equivalent Yields 22
GENERAL INFORMATION
How to Contact Nuveen 22
Fund Service Providers 22
How the Funds Report Performance 23
How Fund Shares are Priced 23
Organization 24
APPENDIX
Special State Considerations 24
</TABLE>
FEBRUARY 1, 1997
<PAGE>
- --------------------------------------------------------------------------------
Nuveen Flagship Alabama Municipal Bond Fund
PERFORMANCE INFORMATION
INCEPTION:
April 11, 1994
NET ASSETS:
$3.8 million
- --------------------------------------------------------------------------------
TOTAL RETURN (ANNUALIZED)
<TABLE>
<CAPTION>
CLASS A
(OFFER CLASS A
PRICE) (NAV) CLASS B CLASS C CLASS R
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 YEAR 1.15% 5.59% 1.01% 5.22% 5.59%
INCEPTION 6.22% 7.96% 5.96% 7.54% 7.92%
- -----------------------------------------------------------------------------------------------
</TABLE>
Class A total returns reflect actual performance for all periods; Class B, C
and R total returns reflect Class A performance for all periods, adjusted for
the differences in sales charges (and for Class B and C, fees) between the
classes. See Overview of Fund Operating Expenses and Shareholder Transaction
Expenses.
The fund assumes investment risk in pursuit of its investment objective,
chiefly in the form of interest rate risk and credit risk. The fund limits this
risk by purchasing only certain types and maturities of municipal bonds and by
diversifying its investment portfolio geographically and by industry. See Risk
Reduction Strategies in the prospectus for further information.
- --------------------------------------------------------------------------------
MATURITY (YEARS)
[BAR CHART APPEARS HERE]
Average Maturity 18.9
Average Modified Duration 8.6
- --------------------------------------------------------------------------------
CREDIT QUALITY
[PIE CHART APPEARS HERE]
AAA (67%)
AA (8%)
A (18%)
BBB (7%)
- --------------------------------------------------------------------------------
INDUSTRY DIVERSIFICATION (TOP 5)
[PIE CHART APPEARS HERE]
Education (20%)
Pre-refunded (11%)
Industrial Development and
Pollution Control (10%)
Municipal Revenue/
Water & Sewer (10%)
Non-State General
Obligations (9%)
Other (40%)
EXPENSE INFORMATION
SHAREHOLDER TRANSACTION EXPENSES
(Maximum, as % of Offering Price)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS R
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SALES CHARGE ON PURCHASES 4.20%(1) -- -- --
SALES CHARGE ON REINVESTED DIVIDENDS -- -- -- --
CONTINGENT DEFERRED SALES CHARGE (CDSC) ON REDEMPTIONS -- (1) 5%(2) 1%(3) --
</TABLE>
- --------------------------------------------------------------------------------
OVERVIEW OF FUND OPERATING EXPENSES (4)
(Annual, as % of Average Net Assets)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS R
- ---------------------------------------------------
<S> <C> <C> <C> <C>
MANAGEMENT FEES 0.55% 0.55% 0.55% 0.55%
12b-1 FEES 0.20% 0.95% 0.75% --
OTHER 2.49% 2.49% 2.49% 2.49%
- ---------------------------------------------------
TOTAL (GROSS) 3.24% 3.99% 3.79% 3.04%
WAIVERS/
REIMBURSEMENTS (2.99%) (2.99%) (2.99%) (2.99%)
- ---------------------------------------------------
TOTAL (NET) 0.25% 1.00% 0.80% 0.05%
</TABLE>
- --------------------------------------------------------------------------------
SUMMARY OF SHAREHOLDER EXPENSES (5)
The example illustrates the expenses on a hypothetical $1,000 investment in the
fund based on the Total Expenses shown at left, an assumed annual total return
of 5% and reinvestment of all dividends.
<TABLE>
<CAPTION>
HOLDING PERIOD CLASS A CLASS B CLASS C CLASS R
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 YEAR $44 $ 50 $ 8 $ 1
3 YEARS $50 $ 64 $26 $ 2
5 YEARS $55 $ 67 $44 $ 3
10 YEARS $72 $101 $99 $ 6
</TABLE>
Information as of 11/30/96 See Notes on Next Page
- --------------------------------------------------------------------------------
PAGE 2
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The financial highlights below are excerpted from the fund's latest annual
report which has been audited by Deloitte & Touche LLP, the fund's independent
auditors, and the fund's subsequent unaudited semi-annual report. For a free
copy of the fund's latest annual and semi-annual reports, write to Nuveen or
call (800) 621-7227.
<TABLE>
<CAPTION>
---------------- ------------------------------------------------------------------
<CAPTION>
- ------------------ --------------------------------------------------------
CLASS INVESTMENT OPERATIONS AND DISTRIBUTIONS:
(INCEPTION DATE)
<S> <C> <C> <C> <C> <C> <C>
Net Realized Distribu-
and Unreal- Dividends tions
Beginning Net ized Gain from Net from Ending
Year Ending Net Asset Investment (Loss) From Investment Capital Net Asset
May 31, Value Income(c) Investments(a) Income Gains Value
---------------- --------- ---------- -------------- ---------- --------- ---------
CLASS A (4/94)
1997(e) $9.77 $.26 $.42 $ (.26) $ -- $10.19
- -------------------------------------------------------------------------------------
1996 9.94 .53 (.17) (.53) -- 9.77
- -------------------------------------------------------------------------------------
1995 9.66 .52 .28 (.52) -- 9.94
- -------------------------------------------------------------------------------------
1994(d) 9.58 .03 .09 (.04) -- 9.66
- -------------------------------------------------------------------------------------
CLASS RATIOS/SUPPLEMENTAL DATA:
(INCEPTION DATE)
<S> <C> <C> <C> <C> <C>
Ratio of Net
Ratio of Investment
Ending Expenses to Income to Portfolio
Year Ending Total Net Assets Average Net Average Turnover
May 31, Return(b) (millions) Assets(c) Net Assets(c) Rate
- ------------------ --------- ---------- ----------- ------------- ---------
CLASS A (4/94)
1997(e) 14.20%+ $3.8 .54%+ 5.21%+ 66%
- -------------------------------------------------------------------------------------
1996 3.72 3.3 .48 5.24 42
- -------------------------------------------------------------------------------------
1995 8.77 1.9 .16 5.47 120
- -------------------------------------------------------------------------------------
1994(d) 9.34 .4 -- 2.42+ --
- -------------------------------------------------------------------------------------
</TABLE>
+ Annualized.
(a) Net of any applicable taxes.
(b) Total returns are calculated on net asset value and are annualized in the
first year after commencement of class operations.
(c) After waiver of certain management fees or reimbursement of expenses, if
applicable, by Flagship Financial, predecessor to Nuveen Advisory.
(d) From commencement of class operations as noted.
(e) For the six months ending November 30, 1996.
- --------------------------------------------------------------------------------
NOTES:
(1) The sales charge may be reduced or waived based on the amount of purchase
or for certain eligible categories of investors. A CDSC of 1% is imposed on
redemptions of certain purchases of $1 million or more within 18 months of
purchase.
(2) CDSC declines to 0% at the end of six years.
(3) Imposed only on redemptions within 12 months of purchase.
(4) Effective February 1, 1997, the fund eliminated the 0.20% distribution fee
on Class A shares and reduced the distribution fee on Class C shares from
0.75% to 0.55%. These lower expenses are reflected in the table and are
expected to reduce total operating expenses on Class A from 0.45% to 0.25%
and on Class C from 1.00% to 0.80%, as reflected in the table. Long-term
holders of Class B and C shares may pay more in distribution fees and CDSCs
than the maximum initial sales charge permitted under National Association
of Securities Dealers (NASD) Rules of Fair Practice. The
waiver/reimbursement levels shown reflect Nuveen's current undertaking,
made in connection with its acquisition of Flagship Resources as described
in "Fund Service Providers--Investment Adviser," to continue Flagship's
general dividend-setting practices.
(5) The expenses shown assume that you redeem your shares at the end of each
holding period. Class B shares convert to Class A shares after eight years.
If instead you redeemed your shares immediately prior to the end of each
holding period, your expenses would be higher. This example does not repre-
sent past or future expenses; actual expenses may be higher or lower.
- --------------------------------------------------------------------------------
PAGE 3
<PAGE>
- --------------------------------------------------------------------------------
Nuveen Flagship Georgia Municipal Bond Fund
PERFORMANCE INFORMATION
INCEPTION: March 27, 1986
NET ASSETS: $121.5 million
- --------------------------------------------------------------------------------
TOTAL RETURN (ANNUALIZED)
<TABLE>
<CAPTION>
CLASS A
(OFFER CLASS A
PRICE) (NAV) CLASS B CLASS C CLASS R
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 YEAR 1.07% 5.50% 0.93% 5.03% 5.50%
5 YEARS 6.21% 7.13% 6.39% 6.56% 7.13%
10 YEARS 6.60% 7.06% 6.59% 6.48% 7.06%
INCEPTION 7.13% 7.56% 7.12% 6.97% 7.56%
</TABLE>
Class A total returns reflect actual performance for all periods; Class C total
returns reflect actual performance for periods since class inception (see
"Financial Highlights" for dates), and Class A performance for periods prior to
class inception, adjusted for the differences in sales charges and fees between
the classes. Class B and R total returns reflect Class A performance for all
periods, adjusted for the differences in sales charges (and for Class B, fees)
between the classes. See Overview of Fund Operating Expenses and Shareholder
Transaction Expenses.
The fund assumes investment risk in pursuit of its investment objective,
chiefly in the form of interest rate risk and credit risk. The fund limits this
risk by purchasing only certain types and maturities of municipal bonds and by
diversifying its investment portfolio geographically and by industry. See Risk
Reduction Strategies in the prospectus for further information.
- --------------------------------------------------------------------------------
MATURITY (YEARS)
(BAR CHART APPEARS HERE)
Average Maturity 23.2
Average Modified Duration 9.1
- --------------------------------------------------------------------------------
CREDIT QUALITY
(PIE CHART APPEARS HERE)
NR (1%)
BBB (11%)
A (20%)
AA (18%)
AAA (50%)
- --------------------------------------------------------------------------------
INDUSTRY DIVERSIFICATION (TOP 5)
(PIE CHART APPEARS HERE)
Other (33%)
Municipal Revenue/
Utility (10%)
Hospitals (12%)
Housing/Single
Family (16%)
Special Tax
Revenue (16%)
Housing/
Multifamily (13%)
EXPENSE INFORMATION
SHAREHOLDER TRANSACTION EXPENSES
(Maximum, as % of Offering Price)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS R
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SALES CHARGE ON PURCHASES 4.20%(1) -- -- --
SALES CHARGE ON REINVESTED DIVIDENDS -- -- -- --
CONTINGENT DEFERRED SALES CHARGE (CDSC) ON REDEMPTIONS -- (1) 5%(2) 1%(3) --
</TABLE>
- --------------------------------------------------------------------------------
OVERVIEW OF FUND OPERATING EXPENSES(4)
(Annual, as % of Average Net Assets)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS R
- ---------------------------------------------------
<S> <C> <C> <C> <C>
MANAGEMENT FEES 0.55% 0.55% 0.55% 0.55%
12b-1 FEES 0.20% 0.95% 0.75% --
OTHER EXPENSES 0.16% 0.16% 0.16% 0.16%
- ---------------------------------------------------
TOTAL (GROSS) 0.91% 1.66% 1.46% 0.71%
WAIVERS/
REIMBURSEMENTS (0.38%) (0.38%) (0.38%) (0.38%)
- ---------------------------------------------------
TOTAL (NET) 0.53% 1.28% 1.08% 0.33%
</TABLE>
- --------------------------------------------------------------------------------
SUMMARY OF SHAREHOLDER EXPENSES(5)
The example illustrates the expenses on a hypothetical $1,000 investment in the
fund based on the Total Expenses shown at left, an assumed annual total return
of 5% and reinvestment of all dividends.
<TABLE>
<CAPTION>
HOLDING PERIOD CLASS A CLASS B CLASS C CLASS R
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 YEAR $ 47 $ 53 $ 11 $ 3
3 YEARS $ 58 $ 73 $ 34 $11
5 YEARS $ 70 $ 82 $ 60 $19
10 YEARS $106 $134 $132 $42
</TABLE>
Information as of 11/30/96 See Notes on Next Page
- --------------------------------------------------------------------------------
PAGE 4
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The financial highlights below are excerpted from the fund's latest annual
report which has been audited by Deloitte & Touche LLP, the fund's independent
auditors, and the fund's subsequent unaudited semi-annual report. For a free
copy of the fund's latest annual and semi-annual reports, write to Nuveen or
call (800) 621-7227.
<TABLE>
<CAPTION>
- ------------------ --------------------------------------------------------
CLASS INVESTMENT OPERATIONS AND DISTRIBUTIONS:
(INCEPTION DATE)
Net Realized Distribu-
and Unreal- Dividends tions
Beginning Net ized Gain from Net from Ending
Year Ending Net Asset Investment (Loss) From Investment Capital Net Asset
May 31, Value Income(c) Investments(a) Income Gains Value
---------------- --------- ---------- -------------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
CLASS A (3/86)
1997(e) $10.20 $.28 $.44 $(.28) $ -- $10.64
- -------------------------------------------------------------------------------------
1996 10.46 .57 (.25) (.58) -- 10.20
- -------------------------------------------------------------------------------------
1995 10.23 .58 .23 (.58) -- 10.46
- -------------------------------------------------------------------------------------
1994 10.62 .59 (.39) (.59) -- 10.23
- -------------------------------------------------------------------------------------
1993 10.16 .62 .45 (.61) -- 10.62
- -------------------------------------------------------------------------------------
1992 9.95 .63 .21 (.63) -- 10.16
- -------------------------------------------------------------------------------------
1991 9.67 .64 .28 (.64) -- 9.95
- -------------------------------------------------------------------------------------
1990 9.88 .65 (.22) (.64) -- 9.67
- -------------------------------------------------------------------------------------
1989 9.30 .65 .59 (.66) -- 9.88
- -------------------------------------------------------------------------------------
1988 9.19 .66 .11 (.66) -- 9.30
- -------------------------------------------------------------------------------------
1987 9.46 .62 (.24) (.64)(f) (.01) 9.19
- -------------------------------------------------------------------------------------
1986(d) 9.58 .10 (.13) (.09) -- 9.46
- -------------------------------------------------------------------------------------
CLASS C (1/94)
1997(e) 10.18 .25 .44 (.25) -- 10.62
- -------------------------------------------------------------------------------------
1996 10.44 .51 (.25) (.52) -- 10.18
- -------------------------------------------------------------------------------------
1995 10.21 .52 .23 (.52) -- 10.44
- -------------------------------------------------------------------------------------
1994(d) 10.91 .19 (.69) (.20) -- 10.21
- -------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------ --------------------------------------------------------
CLASS RATIOS/SUPPLEMENTAL DATA:
(INCEPTION DATE)
Ratio of Net
Ratio of Investment
Ending Expenses to Income to Portfolio
Year Ending Total Net Assets Average Net Average Turnover
May 31, Return(b) (millions) Assets(c) Net Assets(c) Rate
- ------------------ --------- ---------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C>
CLASS A (3/86)
1997(e) 14.35%+ $110.6 .86%+ 5.47%+ 25%
- -------------------------------------------------------------------------------------
1996 3.05 107.9 .80 5.46 59
- -------------------------------------------------------------------------------------
1995 8.31 113.4 .83 5.79 40
- -------------------------------------------------------------------------------------
1994 1.83 123.1 .70 5.47 39
- -------------------------------------------------------------------------------------
1993 10.84 101.2 .62 5.88 30
- -------------------------------------------------------------------------------------
1992 8.81 70.7 .57 6.31 21
- -------------------------------------------------------------------------------------
1991 9.90 44.8 .72 6.60 24
- -------------------------------------------------------------------------------------
1990 4.55 36.0 .84 6.62 34
- -------------------------------------------------------------------------------------
1989 13.77 35.6 .96 6.74 23
- -------------------------------------------------------------------------------------
1988 8.61 29.7 .91 7.14 46
- -------------------------------------------------------------------------------------
1987 4.13 33.4 .71 6.37 41
- -------------------------------------------------------------------------------------
1986(d) (1.80) 8.4 .83+ 5.48+ 6
- -------------------------------------------------------------------------------------
CLASS C (1/94)
1997(e) 13.79+ 10.8 1.41+ 4.90+ 25
- -------------------------------------------------------------------------------------
1996 2.48 9.4 1.34 4.90 59
- -------------------------------------------------------------------------------------
1995 7.72 7.0 1.38 5.18 40
- -------------------------------------------------------------------------------------
1994(d) (10.96) 4.3 1.27+ 4.55+ 39
- -------------------------------------------------------------------------------------
</TABLE>
+ Annualized.
(a) Net of any applicable taxes.
(b) Total returns are calculated on net asset value and are annualized in the
first year after commencement of class operations.
(c) After waiver of certain management fees or reimbursement of expenses, if
applicable, by Flagship Financial, predecessor to Nuveen Advisory.
(d) From commencement of class operations as noted.
(e) For the six months ending November 30, 1996.
(f) Includes a return of capital of $.02 per share.
- --------------------------------------------------------------------------------
NOTES:
(1)The sales charge may be reduced or waived based on the amount of purchase or
for certain eligible categories of investors. A CDSC of 1% is imposed on
redemptions of certain purchases of $1 million or more within 18 months of
purchase.
(2)CDSC declines to 0% at the end of six years.
(3)Imposed only on redemptions within 12 months of purchase.
(4)Effective February 1, 1997, the fund eliminated the 0.20% distribution fee
on Class A Shares and reduced the distribution fee on Class C shares from
0.75% to 0.55%. These lower expenses are reflected in the table and are
expected to reduce total operating expenses on Class A from 0.73% to 0.53%
and on Class C from 1.28% to 1.08%, as reflected in the table. Long-term
holders of Class B and C shares may pay more in distribution fees and CDSCs
than the maximum initial sales charge permitted under National Association
of Securities Dealers (NASD) Rules of Fair Practice. The
waiver/reimbursement levels shown reflect Nuveen's current undertaking, made
in connection with its acquisition of Flagship Resources as described in
"Fund Service Providers--Investment Adviser," to continue Flagship's general
dividend-setting practices.
(5)The expenses shown assume that you redeem your shares at the end of each
holding period. Class B shares convert to Class A shares after eight years.
If instead you redeemed your shares immediately prior to the end of each
holding period, your expenses would be higher. This example does not repre-
sent past or future expenses; actual expenses may be higher or lower.
- --------------------------------------------------------------------------------
PAGE 5
<PAGE>
- --------------------------------------------------------------------------------
Nuveen Flagship Louisiana Municipal Bond Fund
PERFORMANCE INFORMATION
INCEPTION:September 12, 1989
NET ASSETS: $82.0 million
- --------------------------------------------------------------------------------
TOTAL RETURN (ANNUALIZED)
<TABLE>
<CAPTION>
CLASS A
(OFFER CLASS A
PRICE) (NAV) CLASS B CLASS C CLASS R
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 YEAR 2.13% 6.60% 2.02% 6.03% 6.60%
5 YEARS 7.40% 8.32% 7.58% 7.77% 8.32%
INCEPTION 8.02% 8.67% 8.07% 8.10% 8.67%
</TABLE>
Class A total returns reflect actual performance for all periods; Class C total
returns reflect actual performance for periods since class inception (see
"Financial Highlights" for dates), and Class A performance for periods prior to
class inception, adjusted for the differences in sales charges and fees between
the classes. Class B and R total returns reflect Class A performance for all
periods, adjusted for the differences in sales charges (and for Class B, fees)
between the classes. See Overview of Fund Operating Expenses and Shareholder
Transaction Expenses.
The fund assumes investment risk in pursuit of its investment objective,
chiefly in the form of interest rate risk and credit risk. The fund limits this
risk by purchasing only certain types and maturities of municipal bonds and by
diversifying its investment portfolio geographically and by industry. See Risk
Reduction Strategies in the prospectus for further information.
- --------------------------------------------------------------------------------
MATURITY (YEARS)
(BAR CHART APPEARS HERE)
Average Maturity 22.4
Average Modified Duration 8.6
- --------------------------------------------------------------------------------
CREDIT QUALITY
(PIE CHART APPEARS HERE)
NR (3%)
BBB (17%)
A (12%)
AA (8%)
AAA (60%)
- --------------------------------------------------------------------------------
INDUSTRY DIVERSIFICATION (TOP 5)
(PIE CHART APPEARS HERE)
Industrial Development &
Pollution Control (21%)
Other (29%)
Hospitals (21%)
Non-State General
Obligations (15%)
Special Tax
Revenue (9%)
Escrowed to
Maturity (5%)
EXPENSE INFORMATION
SHAREHOLDER TRANSACTION EXPENSES
(Maximum, as % of Offering Price)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS R
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SALES CHARGE ON PURCHASES 4.20%(1) -- -- --
SALES CHARGE ON REINVESTED DIVIDENDS -- -- -- --
CONTINGENT DEFERRED SALES CHARGE (CDSC) ON REDEMPTIONS --(1) 5%(2) 1%(3) --
</TABLE>
- --------------------------------------------------------------------------------
OVERVIEW OF FUND OPERATING EXPENSES (4)
(Annual, as % of Average Net Assets)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS R
- ------------------------------------------------
<S> <C> <C> <C> <C>
MANAGEMENT FEES 0.55% 0.55% 0.55% 0.55%
12b-1 FEES 0.20% 0.95% 0.75% --
OTHER 0.20% 0.20% 0.20% 0.20%
- ------------------------------------------------
TOTAL (GROSS) 0.95% 1.70% 1.50% 0.75%
WAIVERS/
REIMBURSEMENTS (0.27%) (0.27%) (0.27%) (0.27%)
- ------------------------------------------------
TOTAL (NET) 0.68% 1.43% 1.23% 0.48%
</TABLE>
- --------------------------------------------------------------------------------
SUMMARY OF SHAREHOLDER EXPENSES (5)
The example illustrates the expenses on a hypothetical $1,000 investment in the
fund based on tht Total Expenses shown at left, an assumed annual total return
of 5% and reinvestment of all dividends.
<TABLE>
<CAPTION>
HOLDING PERIOD CLASS A CLASS B CLASS C CLASS R
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 YEAR $ 49 $ 54 $ 13 $ 5
3 YEARS $ 63 $ 77 $ 39 $15
5 YEARS $ 78 $ 90 $ 68 $27
10 YEARS $123 $151 $149 $60
</TABLE>
Information as of 11/30/96 See Notes on Next Page
- --------------------------------------------------------------------------------
PAGE 6
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The financial highlights below are excerpted from the fund's latest annual
report which has been audited by Deloitte & Touche LLP, the fund's independent
auditors, and the fund's subsequent unaudited semi-annual report. For a free
copy of the fund's latest annual and semi-annual reports, write to Nuveen or
call (800) 621-7227.
<TABLE>
<CAPTION>
- ------------------ --------------------------------------------------------
CLASS INVESTMENT OPERATIONS AND DISTRIBUTIONS:
(INCEPTION DATE)
Net Realized Distribu-
and Unreal- Dividends tions
Beginning Net ized Gain from Net from Ending
Year Ending Net Asset Investment (Loss) From Investment Capital Net Asset
May 31, Value Income(c) Investments(a) Income Gains Value
---------------- --------- ---------- -------------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
CLASS A (9/89)
1997(e) $10.71 $.29 $.49 $(.29) $ -- $11.20
- -------------------------------------------------------------------------------------
1996 10.80 .59 (.08) (.60) -- 10.71
- -------------------------------------------------------------------------------------
1995 10.48 .60 .32 (.60) -- 10.80
- -------------------------------------------------------------------------------------
1994 10.93 .61 (.40) (.62) (.04) 10.48
- -------------------------------------------------------------------------------------
1993 10.30 .64 .67 (.63) (.05) 10.93
- -------------------------------------------------------------------------------------
1992 10.02 .65 .35 (.65) (.07) 10.30
- -------------------------------------------------------------------------------------
1991 9.63 .66 .40 (.67) -- 10.02
- -------------------------------------------------------------------------------------
1990(d) 9.58 .44 .04 (.43) -- 9.63
- -------------------------------------------------------------------------------------
CLASS C (2/94)
1997(e) 10.70 .26 .49 (.26) -- 11.19
- -------------------------------------------------------------------------------------
1996 10.80 .53 (.09) (.54) -- 10.70
- -------------------------------------------------------------------------------------
1995 10.48 .54 .32 (.54) -- 10.80
- -------------------------------------------------------------------------------------
1994(d) 11.29 .16 (.81) (.16) -- 10.48
- -------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------ --------------------------------------------------------
CLASS RATIOS/SUPPLEMENTAL DATA:
(INCEPTION DATE)
Ratio of Net
Ratio of Investment
Ending Expenses to Income to Portfolio
Year Ending Total Net Assets Average Net Average Turnover
May 31, Return(b) (millions) Assets(c) Net Assets(c) Rate
- ------------------ --------- ---------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C>
CLASS A (9/89)
1997(e) 14.85%+ $75.9 .83%+ 5.36%+ 18%
- -------------------------------------------------------------------------------------
1996 4.77 72.0 .80 5.46 26
- -------------------------------------------------------------------------------------
1995 9.20 68.1 .83 5.80 44
- -------------------------------------------------------------------------------------
1994 1.77 66.8 .66 5.56 22
- -------------------------------------------------------------------------------------
1993 13.12 54.5 .61 5.95 29
- -------------------------------------------------------------------------------------
1992 10.35 38.9 .49 6.43 43
- -------------------------------------------------------------------------------------
1991 11.47 27.8 .38 6.79 57
- -------------------------------------------------------------------------------------
1990(d) 6.52 16.7 .44+ 6.40+ 32
- -------------------------------------------------------------------------------------
CLASS C (2/94)
1997(e) 14.28+ 6.1 1.38+ 4.81+ 18
- -------------------------------------------------------------------------------------
1996 4.12 5.7 1.35 4.87 26
- -------------------------------------------------------------------------------------
1995 8.59 3.2 1.37 5.21 44
- -------------------------------------------------------------------------------------
1994(d) (17.21) 1.5 1.23+ 4.79+ 22
- -------------------------------------------------------------------------------------
</TABLE>
+ Annualized.
(a) Net of any applicable taxes.
(b) Total returns are calculated on net asset value and are annualized in the
first year after commencement of class operations.
(c) After waiver of certain management fees or reimbursement of expenses, if
applicable, by Flagship Financial, predecessor to Nuveen Advisory.
(d) From commencement of class operations as noted.
(e) For the six months ending November 30, 1996.
- --------------------------------------------------------------------------------
NOTES:
(1)The sales charge may be reduced or waived based on the amount of purchase or
for certain eligible categories of investors. A CDSC of 1% is imposed on
redemptions of certain purchases of $1 million or more within 18 months of
purchase.
(2)CDSC declines to 0% at the end of six years.
(3)Imposed only on redemptions within 12 months of purchase.
(4)Effective February 1, 1997, the fund eliminated the 0.20% distribution fee
for Class A shares and reduced the distribution fee on Class C shares from
0.75% to 0.55%. These lower expenses are reflected in the table and are
expected to reduce total operating expenses on Class A from 0.88% to 0.68%
and on Class C from 1.43% to 1.23%, as reflected in the table. Long-term
holders of Class B and C shares may pay more in distribution fees and CDSCs
than the maximum initial sales charge permitted under National Association
of Securities Dealers (NASD) Rules of Fair Practice. The
waiver/reimbursement levels shown reflect Nuveen's current undertaking, made
in connection with its acquisition of Flagship Resources as described in
"Fund Service Providers--Investment Adviser," to continue Flagship's general
dividend-setting practices.
(5)The expenses shown assume that you redeem your shares at the end of each
holding period. Class B shares convert to Class A shares after eight years.
If instead you redeemed your shares immediately prior to the end of each
holding period, your expenses would be higher. This example does not repre-
sent past or future expenses; actual expenses may be higher or lower.
- --------------------------------------------------------------------------------
PAGE 7
<PAGE>
- --------------------------------------------------------------------------------
Nuveen Flagship North Carolina Municipal Bond Fund
PERFORMANCE INFORMATION
INCEPTION: March 27, 1986
NET ASSETS: $195.1 million
- --------------------------------------------------------------------------------
TOTAL RETURN (ANNUALIZED)
<TABLE>
<CAPTION>
CLASS A
(OFFER CLASS A
PRICE) (NAV) CLASS B CLASS C CLASS R
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 YEAR -.01% 4.37% (0.16%) 3.90% 4.37%
5 YEARS 5.93% 6.84% 6.10% 6.22% 6.84%
10 YEARS 6.41% 6.86% 6.40% 6.26% 6.86%
INCEPTION 6.63% 7.06% 6.62% 6.45% 7.06%
</TABLE>
Class A total returns reflect actual performance for all periods; Class C total
returns reflect actual performance for periods since class inception (see
"Financial Highlights" for dates), and Class A performance for periods prior to
class inception, adjusted for the differences in sales charges and fees between
the classes. Class B and R total returns reflect Class A performance for all
periods, adjusted for the differences in sales charges (and for Class B, fees)
between the classes. See Overview of Fund Operating Expenses and Shareholder
Transaction Expenses.
The fund assumes investment risk in pursuit of its investment objective,
chiefly in the form of interest rate risk and credit risk. The fund limits this
risk by purchasing only certain types and maturities of municipal bonds and by
diversifying its investment portfolio geographically and by industry. See Risk
Reduction Strategies in the prospectus for further information.
- --------------------------------------------------------------------------------
MATURITY (YEARS)
(BAR CHART APPEARS HERE)
Average Maturity 18.4
Average Modified Duration 7.5
- --------------------------------------------------------------------------------
CREDIT QUALITY
(PIE CHART APPEARS HERE)
NR (3%)
BBB (15%)
A (16%)
AAA (38%)
AA (28%)
- --------------------------------------------------------------------------------
INDUSTRY DIVERSIFICATION (TOP 5)
(PIE CHART APPEARS HERE)
Other (30)%
Industrial Development
and Pollution Control (10)%
Municipal Revenue/
Water & Sewer (10)%
Hospitals (20)%
Pre-refunded (16)%
Municipal
Revenue/Utility (14)%
EXPENSE INFORMATION
SHAREHOLDER TRANSACTION EXPENSES
(Maximum, as % of Offering Price)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS R
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SALES CHARGE ON PURCHASES 4.20%(1) -- -- --
SALES CHARGE ON REINVESTED DIVIDENDS -- -- -- --
CONTINGENT DEFERRED SALES CHARGE (CDSC) ON REDEMPTIONS --(1) 5%(2) 1%(3) --
</TABLE>
- --------------------------------------------------------------------------------
OVERVIEW OF FUND OPERATING EXPENSES(4)
(Annual, as % of Average Net Assets)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS R
- ------------------------------------------------
<S> <C> <C> <C> <C>
MANAGEMENT FEES 0.55% 0.55% 0.55% 0.55%
12b-1 FEES 0.20% 0.95% 0.75% --
OTHER EXPENSES 0.15% 0.15% 0.15% 0.15%
- ------------------------------------------------
TOTAL (GROSS) 0.90% 1.65% 1.45% 0.70%
WAIVERS/
REIMBURSEMENTS -- -- -- --
- ------------------------------------------------
TOTAL (NET) 0.90% 1.65% 1.45% 0.70%
</TABLE>
- --------------------------------------------------------------------------------
SUMMARY OF SHAREHOLDER EXPENSES(5)
The example illustrates the expenses on a hypothetical $1,000 investment in the
fund based on the Total Expenses shown at left, an assumed annual total return
of 5% and reinvestment of all dividends.
<TABLE>
<CAPTION>
HOLDING PERIOD CLASS A CLASS B CLASS C CLASS R
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 YEAR $ 51 $ 56 $ 15 $ 7
3 YEARS $ 69 $ 84 $ 46 $22
5 YEARS $ 90 $101 $ 79 $39
10 YEARS $148 $175 $174 $87
</TABLE>
Information as of 11/30/96 See Notes on Next Page
- --------------------------------------------------------------------------------
PAGE 8
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The financial highlights below are excerpted from the fund's latest annual
report which has been audited by Deloitte & Touche LLP, the fund's independent
auditors, and the fund's subsequent unaudited semi-annual report. For a free
copy of the fund's latest annual and semi-annual reports, write to Nuveen or
call (800) 621-7227.
<TABLE>
<CAPTION>
- ------------------ -----------------------------------------------------------------
CLASS INVESTMENT OPERATIONS AND DISTRIBUTIONS:
(INCEPTION DATE)
Net Realized Distribu-
and Unreal- Dividends tions
Beginning Net ized Gain from Net from Ending
Year Ending Net Asset Investment (Loss) From Investment Capital Net Asset
May 31, Value Income(c) Investments(a) Income Gains Value
---------------- --------- ---------- -------------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
CLASS A (3/86)
1997(e) $10.05 $.27 $ .30 $(.27) $ -- $10.35
- -------------------------------------------------------------------------------------
1996 10.23 .55 (.18) (.55) -- 10.05
- -------------------------------------------------------------------------------------
1995 10.08 .57 .15 (.57) -- 10.23
- -------------------------------------------------------------------------------------
1994 10.51 .57 (.42) (.58) -- 10.08
- -------------------------------------------------------------------------------------
1993 9.97 .58 .55 (.59) -- 10.51
- -------------------------------------------------------------------------------------
1992 9.70 .60 .27 (.60) -- 9.97
- -------------------------------------------------------------------------------------
1991 9.46 .61 .24 (.61) -- 9.70
- -------------------------------------------------------------------------------------
1990 9.59 .61 (.13) (.61) -- 9.46
- -------------------------------------------------------------------------------------
1989 8.93 .62 .66 (.62) -- 9.59
- -------------------------------------------------------------------------------------
1988 8.80 .62 .13 (.62) -- 8.93
- -------------------------------------------------------------------------------------
1987 9.17 .61 (.36) (.62)(f) -- 8.80
- -------------------------------------------------------------------------------------
1986(d) 9.58 .08 (.40) (.09) -- 9.17
- -------------------------------------------------------------------------------------
CLASS C (10/93)
1997(e) 10.03 .24 .31 (.24) -- 10.34
- -------------------------------------------------------------------------------------
1996 10.22 .49 (.18) (.50) -- 10.03
- -------------------------------------------------------------------------------------
1995 10.06 .51 .16 (.51) -- 10.22
- -------------------------------------------------------------------------------------
1994(d) 10.84 .32 (.78) (.32) -- 10.06
- -------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------ -----------------------------------------------------------------
CLASS RATIOS/SUPPLEMENTAL DATA:
(INCEPTION DATE)
Ratio of Net
Ratio of Investment
Ending Expenses to Income to Portfolio
Year Ending Total Net Assets Average Net Average Turnover
May 31, Return(b) (millions) Assets(c) Net Assets(c) Rate
- ------------------ --------- ---------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C>
CLASS A (3/86)
1997(e) 11.43%+ $188.2 .96%+ 5.30%+ 16%
- -------------------------------------------------------------------------------------
1996 3.67 185.0 .90 5.32 54
- -------------------------------------------------------------------------------------
1995 7.45 191.9 .91 5.73 35
- -------------------------------------------------------------------------------------
1994 1.30 196.1 .89 5.41 21
- -------------------------------------------------------------------------------------
1993 11.66 169.9 .95 5.70 12
- -------------------------------------------------------------------------------------
1992 9.30 131.5 .98 6.10 17
- -------------------------------------------------------------------------------------
1991 9.28 108.9 .99 6.36 12
- -------------------------------------------------------------------------------------
1990 5.16 96.3 .94 6.40 34
- -------------------------------------------------------------------------------------
1989 14.78 87.5 .92 6.66 21
- -------------------------------------------------------------------------------------
1988 8.77 68.1 .83 6.93 75
- -------------------------------------------------------------------------------------
1987 2.54 66.1 .49 6.48 69
- -------------------------------------------------------------------------------------
1986(d) (19.48) 14.0 .67+ 4.75+ 17
- -------------------------------------------------------------------------------------
CLASS C (10/93)
1997(e) 11.06+ 6.9 1.51+ 4.74+ 16
- -------------------------------------------------------------------------------------
1996 3.01 6.6 1.45 4.77 54
- -------------------------------------------------------------------------------------
1995 6.97 6.0 1.46 5.13 35
- -------------------------------------------------------------------------------------
1994(d) (6.26) 4.2 1.49+ 4.65+ 21
- -------------------------------------------------------------------------------------
</TABLE>
+ Annualized.
(a) Net of any applicable taxes.
(b) Total returns are calculated on net asset value and are annualized in the
first year after commencement of class operations.
(c) After waiver of certain management fees or reimbursement of expenses, if
applicable, by Flagship Financial, predecessor to Nuveen Advisory.
(d) From commencement of class operations as noted.
(e) For the six months ending November 30, 1996.
(f) Includes a return of capital of $.01 per share.
NOTES:
- --------------------------------------------------------------------------------
(1) The sales charge may be reduced or waived based on the amount of purchase
or for certain eligible categories of investors. A CDSC of 1% is imposed on
redemptions of certain purchases of $1 million or more within 18 months of
purchase.
(2) CDSC declines to 0% at the end of six years.
(3) Imposed only on redemptions within 12 months of purchase.
(4) Effective February 1, 1997, the fund eliminated the 0.20% distribution fee
for Class A shares and reduced the distribution fee on Class C shares from
0.75% to 0.55%. These lower expenses are reflected in the table and are
expected to reduce total operating expenses on Class A from 1.10% to 0.90%
and on Class C from 1.65% to 1.45%, as reflected in the table. Long-term
holders of Class B and C shares may pay more in distribution fees and CDSCs
than the maximum initial sales charge permitted under National Association
of Securities Dealers (NASD) Rules of Fair Practice. The
waiver/reimbursement levels shown reflect Nuveen's current undertaking,
made in connection with its acquisition of Flagship Resources as described
in "Fund Service Providers--Investment Adviser," to continue Flagship's
general dividend-setting practices.
(5) The expenses shown assume that you redeem your shares at the end of each
holding period. Class B shares convert to Class A shares after eight years.
If instead you redeemed your shares immediately prior to the end of each
holding period, your expenses would be higher. This example does not repre-
sent past or future expenses; actual expenses may be higher or lower.
- --------------------------------------------------------------------------------
PAGE 9
<PAGE>
- --------------------------------------------------------------------------------
Nuveen Flagship South Carolina Municipal Bond Fund
PERFORMANCE INFORMATION
INCEPTION:
July 6, 1993
NET ASSETS:
$11.2 million
- --------------------------------------------------------------------------------
TOTAL RETURN (ANNUALIZED)
<TABLE>
<CAPTION>
CLASS A
(OFFER CLASS A
PRICE) (NAV) CLASS B CLASS C CLASS R
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 YEAR 0.57% 4.98% 0.42% 4.62% 4.98%
INCEPTION 4.09% 5.41% 4.04% 5.04% 5.41%
</TABLE>
Class A total returns reflect actual performance for all periods; Class B, C
and R total returns reflect Class A performance for all periods, adjusted for
the differences in sales charges (and for Class B and C, fees) between the
classes. See Overview of Fund Operating Expenses and Shareholder Transaction
Expenses.
The fund assumes investment risk in pursuit of its investment objective,
chiefly in the form of interest rate risk and credit risk. The fund limits this
risk by purchasing only certain types and maturities of municipal bonds and by
diversifying its investment portfolio geographically and by industry. See Risk
Reduction Strategies in the prospectus for further information.
- --------------------------------------------------------------------------------
MATURITY (YEARS)
(BAR CHART APPEARS HERE)
Average Maturity 18.5
Average Modified Duration 7.8
- --------------------------------------------------------------------------------
CREDIT QUALITY
(PIE CHART APPEARS HERE)
NR (5%)
BBB (12%)
A (14%)
AA (16%)
AAA (53%)
- --------------------------------------------------------------------------------
INDUSTRY DIVERSIFICATION (TOP 5)
(PIE CHART APPEARS HERE)
Education (9%)
Other (35%)
Municipal Revenue/
Water & Sewer (18%)
Municipal Revenue/
Utility (13%)
Municipal Appropriation
Obligations (13%)
Non-State General
Obligations (12%)
- --------------------------------------------------------------------------------
EXPENSE INFORMATION
SHAREHOLDER TRANSACTION EXPENSES
(Maximum, as % of Offering Price)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS R
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SALES CHARGE ON PURCHASES 4.20%(1) -- -- --
SALES CHARGE ON REINVESTED DIVIDENDS -- -- -- --
CONTINGENT DEFERRED SALES CHARGE (CDSC) ON REDEMPTIONS -- (1) 5%(2) 1%(3) --
</TABLE>
- --------------------------------------------------------------------------------
OVERVIEW OF FUND OPERATING EXPENSES (4)
(Annual, as % of Average Net Assets)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS R
- ------------------------------------------------
<S> <C> <C> <C> <C>
MANAGEMENT FEES 0.55% 0.55% 0.55% 0.55%
12b-1 FEES 0.20% 0.95% 0.75% --
OTHER EXPENSES 0.76% 0.76% 0.76% 0.76%
- ------------------------------------------------
TOTAL (GROSS) 1.51% 2.26% 2.06% 1.31%
WAIVERS/
REIMBURSEMENTS (1.15%) (1.15%) (1.15%) (1.15%)
- ------------------------------------------------
TOTAL (NET) 0.36% 1.11% 0.91% 0.16%
</TABLE>
- --------------------------------------------------------------------------------
SUMMARY OF SHAREHOLDER EXPENSES (5)
The example illustrates the expenses on a hypothetical $1,000 investment in the
fund based on the Total Expenses shown at left, an assumed annual total return
of 5% and reinvestment of all dividends.
<TABLE>
<CAPTION>
HOLDING PERIOD CLASS A CLASS B CLASS C CLASS R
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 YEAR $46 $ 51 $ 9 $ 2
3 YEARS $53 $ 68 $ 29 $ 5
5 YEARS $61 $ 73 $ 50 $ 9
10 YEARS $86 $114 $112 $20
</TABLE>
Information as of 11/30/96 See Notes on Next Page
- --------------------------------------------------------------------------------
PAGE 10
<PAGE>
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The financial highlights below are excerpted from the fund's latest annual
report which has been audited by Deloitte & Touche LLP, the fund's independent
auditors, and the fund's subsequent unaudited semi-annual report. For a free
copy of the fund's latest annual and semi-annual reports, write to Nuveen or
call (800) 621-7227.
<TABLE>
<CAPTION>
- ------------------ -----------------------------------------------------------------
CLASS INVESTMENT OPERATIONS AND DISTRIBUTIONS:
(INCEPTION DATE)
Net Realized Distribu-
and Unreal- Dividends tions
Beginning Net ized Gain from Net from Ending
Year Ending Net Asset Investment (Loss) From Investment Capital Net Asset
May 31, Value Income(c) Investments(a) Income Gains Value
---------------- --------- ---------- -------------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
CLASS A (7/93)
1997(e) $ 9.28 $.24 $ .34 $ (.25) $ -- $ 9.61
- -------------------------------------------------------------------------------------
1996 9.45 .48 (.15) (.50) -- 9.28
- -------------------------------------------------------------------------------------
1995 9.20 .50 .25 (.50) -- 9.45
- -------------------------------------------------------------------------------------
1994(d) 9.58 .42 (.38) (.39) (.03) 9.20
- -------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------ -----------------------------------------------------------------
CLASS RATIOS/SUPPLEMENTAL DATA:
(INCEPTION DATE)
Ratio of Net
Ratio of Investment
Ending Expenses to Income to Portfolio
Year Ending Total Net Assets Average Net Average Turnover
May 31, Return(b) (millions) Assets(c) Net Assets(c) Rate
- ------------------ --------- ---------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C>
CLASS A (7/93)
1997(e) 12.67%+ $ 11.2 .60%+ 5.10%+ 34%
- -------------------------------------------------------------------------------------
1996 3.53 10.5 .71 4.98 76
- -------------------------------------------------------------------------------------
1995 8.54 9.0 .40 5.54 87
- -------------------------------------------------------------------------------------
1994(d) .15 6.3 .40+ 4.82+ 88
- -------------------------------------------------------------------------------------
</TABLE>
+ Annualized.
(a) Net of any applicable taxes.
(b) Total returns are calculated on net asset value and are annualized in the
first year after commencement of class operations.
(c) After waiver of certain management fees or reimbursement of expenses, if
applicable, by Flagship Financial, predecessor to Nuveen Advisory.
(d) From commencement of class operations as noted.
(e) For the six months ending November 30, 1996.
- -------------------------------------------------------------------------------
NOTES:
(1) The sales charge may be reduced or waived based on the amount of purchase
or for certain eligible categories of investors. A CDSC of 1% is imposed
on redemptions of certain purchases of $1 million or more within 18 months
of purchase.
(2) CDSC declines to 0% at the end of six years.
(3) Imposed only on redemptions within 12 months of purchase.
(4) Effective February 1, 1997, the fund eliminated the 0.20% distribution fee
on Class A shares and reduced the distribution fee on Class C shares from
0.75% to 0.55%. These lower expenses are reflected in the table and are
expected to reduce total operating expenses on Class A from 0.56% to 0.36%
and on Class C from 1.11% to 0.91%, as reflected in the table. Long-term
holders of Class B and C shares may pay more in distribution fees and
CDSCs than the maximum initial sales charge permitted under National Asso-
ciation of Securities Dealers (NASD) Rules of Fair Practice. The
waiver/reimbursement levels shown reflect Nuveen's current undertaking,
made in connection with its acquisition of Flagship Resources as described
in "Fund Service Providers--Investment Adviser," to continue Flagship's
general dividend-setting practices.
(5) The expenses shown assume that you redeem your shares at the end of each
holding period. Class B shares convert to Class A shares after eight
years. If instead you redeemed your shares immediately prior to the end of
each holding period, your expenses would be higher. This example does not
represent past or future expenses; actual expenses may be higher or lower.
- -------------------------------------------------------------------------------
PAGE 11
<PAGE>
- --------------------------------------------------------------------------------
Nuveen Flagship Tennessee Municipal Bond Fund
PERFORMANCE INFORMATION
INCEPTION: November 2, 1987
NET ASSETS: $274.1 million
- --------------------------------------------------------------------------------
TOTAL RETURN (ANNUALIZED)
<TABLE>
<CAPTION>
CLASS A
(OFFER CLASS A
PRICE) (NAV) CLASS B CLASS C CLASS R
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 YEAR 0.74% 5.16% 0.59% 4.58% 5.16%
5 YEARS 6.23% 7.14% 6.40% 6.52% 7.14%
INCEPTION 7.57% 8.08% 7.56% 7.47% 8.08%
</TABLE>
Class A total returns reflect actual performance for all periods; Class C total
returns reflect actual performance for periods since class inception (see
"Financial Highlights" for dates), and Class A performance for periods prior to
class inception, adjusted for the differences in sales charges and fees between
the classes. Class B and R total returns reflect Class A performance for all
periods, adjusted for the differences in sales charges (and for Class B, fees)
between the classes. See Overview of Fund Operating Expenses and Shareholder
Transaction Expenses.
The fund assumes investment risk in pursuit of its investment objective,
chiefly in the form of interest rate risk and credit risk. The fund limits this
risk by purchasing only certain types and maturities of municipal bonds and by
diversifying its investment portfolio geographically and by industry. See Risk
Reduction Strategies in the prospectus for further information.
- --------------------------------------------------------------------------------
MATURITY (YEARS)
(BAR CHART APPEARS HERE)
Average Maturity 19.3
Average Modified Duration 7.0
- --------------------------------------------------------------------------------
CREDIT QUALITY
(PIE CHART APPEARS HERE)
NR (1%)
BBB (10%)
A (19%)
AA (23%)
AAA (47%)
- --------------------------------------------------------------------------------
INDUSTRY DIVERSIFICATION (TOP 5)
(PIE CHART APPEARS HERE)
Industrial Development &
Pollution Control (19%)
Other (34%)
Hospitals (17%)
Pre-refunded (15%)
Municipal Revenue/
Utility (8%)
Housing/Single
Family (7%)
EXPENSE INFORMATION
SHAREHOLDER TRANSACTION EXPENSES
(Maximum, as % of Offering Price)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS R
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SALES CHARGE ON PURCHASES 4.20%(1) -- -- --
SALES CHARGE ON REINVESTED DIVIDENDS -- -- -- --
CONTINGENT DEFERRED SALES CHARGE (CDSC) ON REDEMPTIONS -- (1) 5%(2) 1%(3) --
</TABLE>
- --------------------------------------------------------------------------------
OVERVIEW OF FUND OPERATING EXPENSES (4)
(Annual, as % of Average Net Assets)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS R
- ------------------------------------------------
<S> <C> <C> <C> <C>
MANAGEMENT FEES 0.54% 0.54% 0.54% 0.54%
12b-1 FEES 0.20% 0.95% 0.75% --
OTHER EXPENSES 0.13% 0.13% 0.13% 0.13%
- ------------------------------------------------
TOTAL (GROSS) 0.87% 1.62% 1.42% 0.67%
WAIVERS/
REIMBURSEMENTS (0.05%) (0.05%) (0.05%) (0.05%)
- ------------------------------------------------
TOTAL (NET) 0.82% 1.57% 1.37% 0.62%
</TABLE>
- --------------------------------------------------------------------------------
SUMMARY OF SHAREHOLDER EXPENSES (5)
The example illustrates the expenses on a hypothetical $1,000 investment in the
fund based on the Total Expenses shown at left, an assumed annual total return
of 5% and reinvestment of all dividends.
<TABLE>
<CAPTION>
HOLDING PERIOD CLASS A CLASS B CLASS C CLASS R
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 YEAR $ 50 $ 56 $ 14 $ 6
3 YEARS $ 67 $ 81 $ 43 $20
5 YEARS $ 86 $ 97 $ 75 $35
10 YEARS $139 $167 $165 $77
</TABLE>
Information as of 11/30/96 See Notes on Next Page
- --------------------------------------------------------------------------------
PAGE 12
<PAGE>
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The financial highlights below are excerpted from the fund's latest annual
report which has been audited by Deloitte & Touche LLP, the fund's independent
auditors, and the fund's subsequent unaudited semi-annual report. For a free
copy of the fund's latest annual and semi-annual reports, write to Nuveen or
call (800) 621-7227.
<TABLE>
<CAPTION>
- ------------------ ------------------------------------------------------------------
CLASS INVESTMENT OPERATIONS AND DISTRIBUTIONS:
(INCEPTION DATE)
Net Realized Distribu-
and Unreal- Dividends tions
Beginning Net ized Gain from Net from Ending
Year Ending Net Asset Investment (Loss) From Investment Capital Net Asset
May 31, Value Income(c) Investments(a) Income Gains Value
---------------- --------- ---------- -------------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
CLASS A (11/87)
1997(e) $10.83 $.29 $ .34 $(.29) $ -- $11.17
- -------------------------------------------------------------------------------------
1996 11.01 .59 (.18) (.59) -- 10.83
- -------------------------------------------------------------------------------------
1995 10.78 .60 .23 (.60) -- 11.01
- -------------------------------------------------------------------------------------
1994 11.23 .61 (.43) (.61) (.02) 10.78
- -------------------------------------------------------------------------------------
1993 10.56 .62 .68 (.63) -- 11.23
- -------------------------------------------------------------------------------------
1992 10.34 .65 .22 (.65) -- 10.56
- -------------------------------------------------------------------------------------
1991 10.09 .67 .26 (.67) (.01) 10.34
- -------------------------------------------------------------------------------------
1990 10.26 .67 (.15) (.67) (.02) 10.09
- -------------------------------------------------------------------------------------
1989 9.65 .68 .60 (.67) -- 10.26
- -------------------------------------------------------------------------------------
1988(d) 9.58 .35 .09 (.37) -- 9.65
- -------------------------------------------------------------------------------------
CLASS C (10/93)
1997(e) 10.82 .26 .34 (.26) -- 11.16
- -------------------------------------------------------------------------------------
1996 11.00 .53 (.18) (.53) -- 10.82
- -------------------------------------------------------------------------------------
1995 10.78 .54 .22 (.54) -- 11.00
- -------------------------------------------------------------------------------------
1994(d) 11.61 .35 (.83) (.34) (.010) 10.78
- -------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------ ------------------------------------------------------------------
CLASS RATIOS/SUPPLEMENTAL DATA:
(INCEPTION DATE)
Ratio of Net
Ratio of Investment
Ending Expenses to Income to Portfolio
Year Ending Total Net Assets Average Net Average Turnover
May 31, Return(b) (millions) Assets(c) Net Assets(c) Rate
- ------------------ --------- ---------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C>
CLASS A (11/87)
1997(e) 11.83%+ $258.6 .93%+ 5.28%+ 15%
- ---------------------------------------------------------------------------
1996 3.78 250.9 .88 5.30 38
- ---------------------------------------------------------------------------
1995 8.04 241.8 .89 5.64 23
- ---------------------------------------------------------------------------
1994 1.55 236.2 .76 5.42 17
- ---------------------------------------------------------------------------
1993 12.60 191.8 .88 5.66 15
- ---------------------------------------------------------------------------
1992 8.66 126.8 .84 6.18 35
- ---------------------------------------------------------------------------
1991 9.73 92.4 .76 6.60 30
- ---------------------------------------------------------------------------
1990 5.53 73.8 .78 6.57 56
- ---------------------------------------------------------------------------
1989 13.89 62.0 .62 6.80 50
- ---------------------------------------------------------------------------
1988(d) 7.50 23.7 .47+ 6.35+ 23
- ---------------------------------------------------------------------------
CLASS C (10/93)
1997(e) 11.26+ 15.5 1.48+ 4.73+ 15
- ---------------------------------------------------------------------------
1996 3.22 15.5 1.43 4.75 38
- ---------------------------------------------------------------------------
1995 7.35 12.5 1.44 5.08 23
- ---------------------------------------------------------------------------
1994(d) (5.92) 10.7 1.23+ 4.80+ 17
- ---------------------------------------------------------------------------
</TABLE>
+ Annualized.
(a) Net of any applicable taxes.
(b) Total returns are calculated on net asset value and are annualized in the
first year after commencement of class operations.
(c) After waiver of certain management fees or reimbursement of expenses, if
applicable, by Flagship Financial, predecessor to Nuveen Advisory.
(d) From commencement of class operations as noted.
(e) For the six months ending November 30, 1996.
- -------------------------------------------------------------------------------
NOTES:
(1) The sales charge may be reduced or waived based on the amount of purchase
or for certain eligible categories of investors. A CDSC of 1% is imposed
on redemptions of certain purchases of $1 million or more within 18 months
of purchase.
(2) CDSC declines to 0% at the end of six years.
(3) Imposed only on redemptions within 12 months of purchase.
(4) Effective February 1, 1997, the fund eliminated the 0.20% distribution fee
on Class A shares and reduced the distribution fee on Class C shares from
0.75% to 0.55%. These lower expenses are reflected in the table and are
expected to reduce total operating expenses on Class A from 1.02% to 0.82%
and on Class C from 1.57% to 1.37%, as reflected in the table. Long-term
holders of Class B and C shares may pay more in distribution fees and
CDSCs than the maximum initial sales charge permitted under National Asso-
ciation of Securities Dealers (NASD) Rules of Fair Practice. The
waiver/reimbursement levels shown reflect Nuveen's current undertaking,
made in connection with its acquisition of Flagship Resources as described
in "Fund Service Providers--Investment Adviser," to continue Flagship's
general dividend-setting practices.
(5) The expenses shown assume that you redeem your shares at the end of each
holding period. Class B shares convert to Class A shares after eight
years. If instead you redeemed your shares immediately prior to the end of
each holding period, your expenses would be higher. This example does not
represent past or future expenses; actual expenses may be higher or lower.
- -------------------------------------------------------------------------------
PAGE 13
<PAGE>
FUND STRATEGIES
- -------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of each fund is to provide you with as high a level
of current interest income exempt from regular federal, state and, in some
cases, local income taxes as is consistent with preservation of capital. There
is no assurance that the funds will achieve their investment objective.
INVESTOR SUITABILITY
The funds are a suitable investment for tax-conscious investors seeking to:
. Earn regular monthly tax-free dividends;
. Preserve investment capital over time;
. Reduce taxes on investment income;
. Set aside money systematically for retirement, estate planning or college
funding.
The funds are not a suitable investment for individuals seeking to:
. Pursue an aggressive, high-growth investment strategy;
. Invest through an IRA or 401k plan;
. Avoid fluctuations in share price.
- -------------------------------------------------------------------------------
HOW THE FUNDS SELECT
INVESTMENTS
TAX-FREE MUNICIPAL BONDS
The funds invest substantially all of their assets (at least 80%) in municipal
bonds that pay interest that is exempt from regular federal, state and, in
some cases, local income taxes. Income from these bonds may be subject to the
federal alternative minimum tax.
Municipal bonds are either general obligation or revenue bonds and typically
are issued to finance public projects (such as roads or public buildings), to
pay general operating expenses, or to refinance outstanding debt. Municipal
bonds may also be issued for private activities, such as housing, medical and
educational facility construction, or for privately owned industrial develop-
ment and pollution control projects. General obligation bonds are backed by
the full faith and credit, or taxing authority, of the issuer and may be
repaid from any revenue source; revenue bonds may be repaid only from the
revenues of a specific facility or source.
FOCUS ON QUALITY MUNICIPAL BONDS
The funds focus on quality municipal bonds that are either rated investment
grade (AAA/Aaa to BBB/Baa) by independent ratings agencies at the time of
purchase or are non-rated but judged to be investment grade by the funds'
investment adviser. If suitable municipal bonds from a specific state are not
available at attractive prices and yields, a fund may invest in municipal
bonds of U.S. territories (such as Puerto Rico and Guam) which are exempt from
regular federal, state, and local income taxes.
The funds may purchase municipal bonds that represent lease obligations. These
carry special risks because the issuer of the bonds may not be obligated to
appropriate money annually to make payments under the lease. In order to
reduce this risk, the funds will only purchase leases where the issuer has a
strong incentive to continue making appropriations until maturity.
Bond ratings are furnished by Standard & Poor's Corporation, Fitch Investors
Services, and Moody's Investors Services. The ratings BBB and Baa are not
identical--S&P and Fitch consider bonds rated BBB to have adequate capacity to
pay principal and interest; Moody's considers bonds rated Baa to have some
speculative characteristics. Bond ratings represent the opinions of the
ratings agencies; they are not absolute standards of quality.
VALUE INVESTING STRATEGY
The funds' investment adviser uses a value-oriented strategy and looks for
higher-yielding and undervalued municipal bonds that offer above-average total
return potential. The adviser emphasizes fundamental research and selects
municipal bonds on the basis of its evaluation of each bond's relative value
in terms of current yield, price, credit quality and future prospects. The
adviser then monitors each fund's portfolio to assure that municipal bonds
purchased continue to represent over time, in its opinion, the best values
available.
PORTFOLIO MATURITY
Each fund purchases municipal bonds with different maturities in pursuit of
its investment objective, but maintains under normal market conditions an
investment portfolio with an overall weighted average maturity within a
defined range. All of the funds described in this prospectus are long-term
funds and normally maintain a weighted average portfolio maturity of 15 to 30
years. See "Defensive Investment Strategies" below for further information.
PORTFOLIO TURNOVER
A fund buys and sells portfolio securities in the normal course of its invest-
ment activities. The proportion of the fund's investment portfolio that is
sold
- -------------------------------------------------------------------------------
PAGE 14
<PAGE>
and replaced with new securities during a year is known as the fund's portfolio
turnover rate. The funds intend to keep portfolio turnover relatively low
in order to reduce trading costs and the realization of taxable capital gains.
Each fund, however, may make limited short-term trades to take advantage of
market opportunities and reduce market risk.
DELAYED DELIVERY TRANSACTIONS
Each fund may buy or sell bonds on a when-issued or delayed delivery basis,
making payment or taking delivery at a later date, normally within 15 to 45
days of the trade date. This type of transaction may involve an element of risk
because no interest accrues on the bonds prior to settlement and, since securi-
ties are subject to market fluctuation, the value of the bonds at time of
delivery may be less (or more) than cost.
- --------------------------------------------------------------------------------
RISK REDUCTION STRATEGIES
In pursuit of its investment objective, each fund assumes investment risk,
chiefly in the form of interest rate and credit risk. Interest rate risk is the
risk that changes in market interest rates will affect the value of a fund's
investment portfolio. In general, the value of a municipal bond falls when
interest rates rise, and increases when interest rates fall. Credit risk is the
risk that an issuer of a municipal bond is unable to meet its obligation to
make interest and principal payments. In general, lower rated municipal bonds
are perceived to carry a greater degree of risk in the issuer's ability to make
interest and principal payments. Municipal bonds with longer maturities (dura-
tions) or lower ratings generally provide higher current income, but are
subject to greater price fluctuation due to changes in market conditions than
bonds with shorter maturities or higher ratings, respectively.
Because the funds primarily purchase municipal bonds from a specific state,
each fund also bears investment risk from the economic, political or regulatory
changes that could adversely affect municipal bond issuers in that state and
therefore the value of the fund's investment portfolio. These risks may be
greater for the Alabama, Georgia, Louisiana, North Carolina and South Carolina
Funds, which as "non-diversified" funds may concentrate their investments in
municipal bonds of certain issuers to a greater extent than the Tennessee Fund
described in this prospectus, which is a diversified fund.
The funds limit your investment risk generally by restricting the types and
maturities of municipal bonds they purchase, and by diversifying their invest-
ment portfolios across different industry sectors. The funds should be consid-
ered long-term investments and may not be suitable for investors with short-
term investment horizons.
INVESTMENT LIMITATIONS
The funds have adopted certain investment limitations (based on total fund
assets) designed to limit your investment risk and maintain portfolio diversi-
fication. Each fund may not have more than:
. 25% in any one industry sector, such as electric utilities or health care;
and
. 10% in borrowings (33% if used to meet redemptions).
As a diversified fund, the Tennessee Fund also may not have more than:
. 5% in securities of any one issuer (except U.S. government securities or for
25% of each fund's assets).
DEFENSIVE INVESTMENT STRATEGIES
Each fund may invest in high quality short-term municipal securities in order
to reduce risk and preserve capital. Under normal market conditions, each fund
may invest only up to 20% of net assets in short-term municipal securities that
are exempt from regular federal income tax, although the funds may invest up to
100% as a temporary defensive measure in response to adverse market conditions.
During temporary defensive periods, the weighted average maturity of a fund's
investment portfolio may fall below the defined range described above under
"Portfolio Maturity."
If suitable short-term municipal investments are not reasonably available, the
funds may invest in short-term taxable securities that are rated Aaa or AAA, by
Moody's or S&P, respectively, or issued by the U.S. government, and that have a
maturity of one year or less or have a variable interest rate.
Each fund may also use various investment strategies designed to limit the risk
of bond price fluctuations and to preserve capital. These hedging strategies
include using financial futures contracts, options on financial futures, or
options based on either an index of long-term tax-free securities or on debt
securities whose prices, in the opinion of the funds' investment adviser,
correlate with the prices of the funds' investments. The funds, however, have
no present intent to use these strategies.
FUNDAMENTAL INVESTMENT POLICIES
Each fund's investment objective as well as the policies described above in
"Focus on Quality Municipal Bonds" and "Risk Reduction Strategies" are funda-
mental and may not be changed without the approval of a majority of the share-
holders of each fund.
- --------------------------------------------------------------------------------
PAGE 15
<PAGE>
INVESTING IN THE FUNDS
- -------------------------------------------------------------------------------
HOW TO BUY FUND SHARES
You may open an account with $3,000 and make additional investments at any
time with as little as $50. Reinvestment of Nuveen unit trust distributions
have no purchase minimums. The share price you pay will depend on when Nuveen
receives your order: orders received before the close of regular trading on
the New York Stock Exchange (normally 4:00 p.m. Eastern time) will receive
that day's share price; otherwise you will receive the next business day's
share price.
BUYING SHARES THROUGH A FINANCIAL ADVISER
You may buy fund shares through your financial adviser, who can handle all the
details for you, including establishing an account with Nuveen. Financial
advisers can also help you review your financial needs and formulate long-term
investment goals and objectives. In addition, financial advisers generally can
help you develop a customized financial plan, select investments, and monitor
and review your portfolio on an ongoing basis to assure your investments
continue to meet your needs as circumstances change.
Financial advisers are usually paid either from fund sales charges and fees or
by charging you a separate fee in lieu of a sales charge for ongoing invest-
ment advice and services.
If you do not have a financial adviser, call (800) 621-7227 and Nuveen can
refer you to one in your area.
BUYING SHARES BY MAIL
You may also open an account and purchase shares by mail by completing the
enclosed Nuveen application and mailing it along with your check (payable to
the appropriate fund) to the address listed under "How to Contact Nuveen."
Sales charges are not waived when you buy shares by mail.
Each fund reserves the right to reject any purchase order and waive or
increase minimum investment requirements. The funds also reserve the right to
suspend the issuance of shares at any time; any suspension, however, will not
affect your ability to redeem shares.
- -------------------------------------------------------------------------------
HOW TO SELECT A PURCHASE
OPTION
The funds offer you a variety of flexible options when buying shares. Whether
you typically work with a financial adviser on a commission or a fee basis or
prefer to work on a more self-directed basis, you can purchase shares in the
way that is most suited to your individual circumstances and investment needs.
Each of the four available ways to purchase fund shares is called a class of
shares: Class A, Class B, Class C and Class R. While each of these classes
features different sales charges, on-going fees and eligibility requirements,
each entitles you to a share of the same portfolio of municipal bonds.
Selecting the class of shares which is most appropriate for you will depend on
a variety of factors. You should weigh carefully whether you and your finan-
cial adviser work on a commission or fee basis, the types of services that you
will receive, the amount you intend to buy, how long you plan to own your
investment and whether or not you will reinvest dividends. If you compensate
your financial adviser directly, you should consider the fees your financial
adviser charges for investment advice or handling your trades in addition to
any sales charges and fees imposed by the funds. Please refer to your finan-
cial adviser's sales material for further information. Each class of shares is
described in more detail below and under "Fund Service Providers--The Distrib-
utor." Your financial adviser can explain each option and help you determine
which is most appropriate for you, or you can call (800) 621-7227.
BUYING CLASS A SHARES
You may buy Class A shares at their public offering price on the day of
purchase. The price you pay will equal the Class A NAV (net asset value) plus
a sales charge based upon the amount of your purchase. Class A shares also
bear a 0.20% annual service fee which compensates your financial adviser for
providing you with ongoing service.
The following Class A sales charges and commissions apply to all funds
described in this prospectus:
- -------------------------------------------------------------------------------
CLASS A SALES CHARGES AND COMMISSIONS
<TABLE>
<CAPTION>
AUTHORIZED DEALER
SALES CHARGE COMMISSION
------------------------------------- -----------------
AS % OF
AS % OF PUBLIC YOUR NET AS % OF PUBLIC
PURCHASE AMOUNT OFFERING PRICE INVESTMENT OFFERING PRICE
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Up to $50,000 4.20% 4.38% 3.70%
$50,000-100,000 4.00 4.18 3.50
$100,000-250,000 3.50 3.63 3.00
$250,000-500,000 2.50 2.56 2.00
$500,000-1,000,000 2.00 2.04 1.50
$1,000,000 and over --(1) -- --(1)
- ------------------------------------------------------------------------------------
</TABLE>
(1) Nuveen pays authorized dealers a commission equal to the sum of 1% of the
first $2.5 million, plus 0.50% of the next $2.5 million, plus 0.25% of any
amount over $5 million. Unless the authorized dealer waived the commis-
sion, you may be assessed a contingent deferred sales charge (CDSC) of 1%
if you redeem any of your shares within 18 months of purchase. The CDSC is
calculated on the lower of your purchase price or redemption proceeds.
- -------------------------------------------------------------------------------
PAGE 16
<PAGE>
Nuveen periodically undertakes sales promotion programs with authorized dealers
and may pay them the full applicable sales charge as a commission. In addition,
Nuveen may provide support to authorized dealers in connection with sales meet-
ings, seminars, prospecting seminars and other events at which Nuveen presents
its products and services. Under certain circumstances, Nuveen also will share
with authorized dealers up to half the costs of advertising that features the
products and services of both parties. The statement of additional information
contains further information about these programs. Nuveen pays for these
programs at its own expense and not out of fund assets.
- --------------------------------------------------------------------------------
OTHER SALES CHARGE DISCOUNTS
Nuveen offers a number of programs that enable you to reduce or eliminate the
sales charge on Class A shares:
Sales Charge Reductions Sales Charge Waivers
. Rights of Accumulation . Unit Trust Reinvestment
. Letter of Intent (LOI) . Purchases using Redemptions from Unrelated Funds
. Group Purchase . Fee-Based Programs
. Bank Trust Departments
. Certain Employees of Nuveen or Authorized Dealers
Please refer to the statement of additional information for detailed descrip-
tions of these programs. Further information on these programs is also avail-
able through your financial adviser or by calling (800) 621-7227. Your finan-
cial adviser can also provide and help you prepare the necessary application
forms. You or your financial adviser are responsible for notifying Nuveen about
your eligibility for any sales charge reduction or waiver at the time of each
purchase.
The funds may modify or discontinue these programs at any time upon written
notice to shareholders.
BUYING CLASS B SHARES
You may buy Class B shares at their public offering price on the day of
purchase. The price you pay will equal the Class B NAV. There is no initial
sales charge, but Class B shares bear a 0.20% annual service fee which compen-
sates your financial adviser for providing you with ongoing service, and a
0.75% annual distribution fee which compensates Nuveen for paying your finan-
cial adviser a 4% commission at the time of purchase.
Class B shares convert automatically to Class A shares eight years after
purchase. Class B shares will convert only if the fund is assured that the
conversion does not generate tax consequences for investors, based upon the
opinion of outside counsel or the written assurance of the IRS.
- --------------------------------------------------------------------------------
CLASS B CONTINGENT DEFERRED SALES CHARGE
If you redeem Class B shares within six years of purchase, you will be assessed
a contingent deferred sales charge (CDSC) based upon the following schedule:
<TABLE>
<CAPTION>
DURING YEAR 1 2 3 4 5 6 7+
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
CDSC 5% 4% 4% 3% 2% 1% 0%
</TABLE>
The CDSC is calculated on the lower of your purchase price or redemption
proceeds.
BUYING CLASS C SHARES
You may buy Class C shares at their public offering price on the day of
purchase. The price you pay will equal the Class C NAV. There is no initial
sales charge, but Class C shares bear a 0.20% annual service fee which compen-
sates your financial adviser for providing you with ongoing service, and a
0.55% annual distribution fee which compensates Nuveen for paying your finan-
cial adviser for the sale, including a 1% commission at the time of sale.
If you redeem your Class C shares within one year of purchase, you may be
assessed a CDSC of 1%. The CDSC is calculated on the lower of your purchase
price or redemption proceeds.
BUYING CLASS R SHARES
You may purchase Class R shares at their public offering price on the day of
purchase. The price you pay will equal the Class R NAV. You may purchase Class
R shares only if you are investing at least $1 million or would otherwise
qualify to purchase Class A shares without a sales charge as described under
"Other Sales Charge Discounts" above. There are no sales charges or ongoing
fees. Class R Shares have lower ongoing expenses than Class A Shares.
- --------------------------------------------------------------------------------
HOW TO SELL FUND SHARES
You may use one of the methods described below to redeem your shares on any day
the New York Stock Exchange is open. You will receive the share price next
determined after Nuveen has received your redemption request in good order.
Your redemption request must be received before the close of trading of the New
York Stock Exchange (normally 4 p.m. Eastern time) for you to receive that
day's price. The funds do not charge any redemption fees, although you will be
assessed a CDSC were applicable.
- --------------------------------------------------------------------------------
PAGE 17
<PAGE>
SELLING SHARES THROUGH YOUR FINANCIAL ADVISER
You may sell fund shares by contacting your financial adviser who can provide
and help you prepare all the necessary documentation. Your financial adviser
may charge you for this service.
SELLING SHARES BY TELEPHONE
Unless you have declined telephone redemption privileges, you may sell fund
shares by calling (800) 621-7227. Your redemption must not exceed $50,000 and
you may not redeem by telephone shares held in certificate form. Checks will
be issued only to the shareholder on record and mailed to the address on
record. If you have established electronic funds transfer privileges on your
account, you may have redemption proceeds transferred electronically to your
bank account; if you are redeeming $1,000 or more, you may expedite your
request by having your redemption proceeds wired directly into your bank
account.
Nuveen and Boston Financial Data Services ("Boston Financial") will be liable
for losses resulting from unauthorized telephone redemptions only if they do
not follow reasonable procedures designed to verify the identity of the
caller. You should immediately verify your trade confirmations when you
receive them.
SELLING SHARES BY MAIL
You may sell fund shares by mail by sending a written request to Nuveen at the
address listed below under "How to Contact Nuveen." Your request must include
the following information:
. The fund's name;
. Your name and account number;
. The dollar or share amount you wish to redeem;
. The signature of each owner exactly as it appears on the account;
. The name of the person you want your redemption proceeds paid to, if other
than to the shareholder of record;
. The address you want your redemption proceeds sent to, if other than the
address of record;
. Any certificates you have for the shares; and
. Any required signature guarantees.
Signatures must be guaranteed if you are redeeming more than $50,000, you want
the check payable to someone other than the shareholder on record, or you want
the check sent to another address (or the address on record has been changed
within the last 60 days). Signature guarantees must be obtained from a bank,
brokerage firm or other financial intermediary that is a member of an approved
Medallion Guarantee Program or that is otherwise approved by the
fund. A notary public cannot provide a signature guarantee.
Unless other arrangements are made, checks will be sent to your address on
record. Checks will normally be mailed within one business day, but in no
event more than seven days from receipt of your redemption request. If any
shares were purchased less than 15 days prior to your request, the fund will
not mail your redemption proceeds until the check for your purchase has
cleared, which may take up to 15 days.
Each fund may suspend redemptions or delay payment on redemptions for more
than seven days (three days for street name accounts) in certain extraordinary
circumstances as described in the statement of additional information.
OPERATION OF THE CDSC
When you redeem Class A, Class B, or Class C shares subject to a CDSC, the
fund will first redeem any shares that are not subject to a CDSC or that
represent an increase in the value of your fund account due to capital appre-
ciation, and then redeem the shares you have owned for the longest period of
time, unless you ask the fund to redeem your shares in a different order. No
CDSC is imposed on shares you buy through the reinvestment of dividends and
capital gains. The holding period is calculated on a monthly basis and begins
on the first day of the month in which you buy shares. When you redeem shares
subject to a CDSC, the CDSC is calculated on the lower of your purchase price
or redemption proceeds, deducted from your redemption proceeds, and paid to
Nuveen. The CDSC may be waived under certain special circumstances as
described in the statement of additional information.
ACCOUNT MINIMUMS
From time to time, the funds may establish minimum account size requirements.
The funds reserve the right to liquidate your account upon 30 days written
notice if the value of your account falls below an established minimum. The
funds presently have set a minimum balance of $100 unless you have an active
unit trust reinvestment account. You will not be assessed a CDSC on an invol-
untary redemption.
- -------------------------------------------------------------------------------
EXCHANGING SHARES
You may exchange fund shares at any time for the same class of shares in
another Nuveen national or state mutual fund. You may exchange fund shares by
calling (800) 621-7227 or by mailing your written request to Nuveen at the
address listed under "How to Contact Nuveen."
- -------------------------------------------------------------------------------
PAGE 18
<PAGE>
You must have owned your fund shares for at least 15 days and your exchange
must meet the minimum purchase requirements of the fund into which you are
exchanging. No CDSC will be assessed on an exchange, and the holding period of
your investment will be carried over to the new fund for purposes of deter-
mining any future CDSC. You may not exchange Class B shares for shares of a
Nuveen money market fund.
Because an exchange is treated for tax purposes as the concurrent sale and
purchase of fund shares, you should consult your tax adviser about the tax
consequences of any contemplated exchange. Each fund reserves the right to
limit or terminate exchange privileges if it believes doing so is in the best
interests of fund shareholders.
RESTRICTIONS ON MARKET TIMING
The exchange privilege is not intended to permit you to use a fund for short-
term trading. Excessive exchange activity may interfere with portfolio manage-
ment, raise fund operating expenses or otherwise have an adverse effect on fund
shareholders. In order to limit excessive exchange activity and in other
circumstances where the funds' investment adviser believes doing so would be in
the best interests of the fund, each fund reserves the right to revise or
terminate the exchange privilege, limit the amount or number of exchanges, or
reject any exchange. You will be notified in the event this happens to the
extent required by law.
- --------------------------------------------------------------------------------
OPTIONAL FEATURES AND SERVICES
SYSTEMATIC INVESTMENT
Once you have opened an account, you may make regular investments of $50 or
more a month through automatic deductions from your bank account (see "Fund
Direct--Electronic Funds Transfer" below), or directly from your paycheck. To
invest regularly from your bank account, simply complete the appropriate
section of the account application. To invest regularly from your paycheck,
call Nuveen for a Payroll Direct Deposit Enrollment form. If you need addi-
tional copies of these forms, or would like assistance completing them, contact
your financial adviser or call Nuveen at (800) 621-7227.
One of the benefits of systematic investing is "dollar cost averaging." Because
you are making fixed payments, you buy fewer shares when the price is high, and
more when the price is low. As a result, the average price you pay will be less
than the average share price of fund shares over this period. Dollar cost aver-
aging does not assure profits or protect against losses in a steadily declining
market. Since dollar cost averaging involves continuous investment regardless of
fluctuating price levels, you should consider your financial ability to continue
investing in declining as well as rising markets before deciding to invest in
this way.
Systematic investing may also make you eligible for reduced sales charges on
shares of the fund as well as other Nuveen mutual funds (see "Other Sales
Charge Discounts").
- --------------------------------------------------------------------------------
THE POWER OF SYSTEMATIC INVESTING
The chart below illustrates the benefits of systematic investing based on a
$3,000 initial investment and subsequent monthly investments of $100 over 20
years. The example assumes you earn a return of 4%, 5% or 6% annually on your
investment and that you reinvest all dividends. These annual returns do not
reflect past or projected fund performance.
<TABLE>
<CAPTION>
(CHART APPEARS HERE)
ACCOUNT VALUES FOR TOTAL RETURNS OF
AMOUNT -------------------------------------
YEAR INVESTED 4.00% 5.00% 6.00%
----- -------- ------- ------- -------
<S> <C> <C> <C> <C>
0 $ 2,874 $ 2,874 $ 2,874 $ 2,874
5 8,622 9,861 10,203 10,561
10 14,370 18,391 19,610 20,929
15 20,118 28,807 31,681 34,913
20 25,866 41,525 47,173 53,779
</TABLE>
SYSTEMATIC WITHDRAWALS
If the value of your fund account is at least $10,000, you may request to have
$50 or more withdrawn automatically from your account. You may elect to receive
payments monthly, quarterly or semi-annually, and may choose to receive a
check, have the monies transferred directly into your bank account (see "Fund
Direct--Electronic Funds Transfer" below), paid to a third party or sent
payable to you at an address other than your address of record. You must
complete the appropriate section of the account application to participate in
the fund's systematic withdrawal plan.
You should not establish systematic withdrawals if you intend to make concur-
rent purchases of Class A, B or C shares because you may unnecessarily pay a
sales charge or CDSC on these purchases.
- --------------------------------------------------------------------------------
PAGE 19
<PAGE>
REINSTATEMENT PRIVILEGE
If you redeem fund shares on which you paid an initial sales charge or contin-
gent deferred sales charge (CDSC), you may reinvest all or part of your
redemption proceeds up to one year later without incurring any additional
charge. You may only reinvest into the same class of shares you redeemed and
will receive the share price next determined after Nuveen receives your rein-
vestment request. You may exercise this privilege only once per redemption
request.
If you paid a CDSC, your CDSC will be refunded and your holding period rein-
stated. You should consult your tax adviser about the tax consequences of
exercising your reinstatement privilege.
FUND DIRECT-ELECTRONIC FUNDS TRANSFER
You may arrange to transfer funds electronically between your bank account and
your fund account by completing the appropriate section of the account appli-
cation. If you need additional copies of this form, or would like assistance
completing it, contact your financial adviser or call Nuveen at (800) 621-
7227. You may use Fund Direct to quickly and conveniently purchase or sell
shares by telephone, systematically invest or withdraw funds, or send dividend
payments directly to your bank account.
If you have established electronic funds transfer privileges on your account,
you may request that redemption proceeds of $1,000 or more be wired directly
into your bank account. While you will generally receive your redemption
proceeds more quickly than a regular telephone redemption, the fund may charge
you a fee for this expedited service.
DIVIDENDS AND TAXES
- -------------------------------------------------------------------------------
HOW THE FUNDS PAY DIVIDENDS
The funds pay tax-free dividends monthly and any taxable capital gains or
other distributions once a year in December. The funds declare dividends on or
about the ninth of each month and generally pay dividends on the first busi-
ness day of the following month.
PAYMENT AND REINVESTMENT OPTIONS
The funds automatically reinvest your dividends each month in additional fund
shares unless you request otherwise. You may request to have your dividends
paid to you by check, deposited directly into your bank account, paid to a
third party, sent to an address other than your address of record or rein-
vested in shares of another Nuveen mutual fund. If you wish to do so, complete
the appropriate section of the account application, contact your financial
adviser or call Nuveen at (800) 621-7227.
CALCULATION OF FUND DIVIDENDS
Each fund pays dividends based upon its past and projected net income in order
to distribute substantially all of its net income each fiscal year.
In order to maintain a more stable monthly dividend, each fund may sometimes
distribute less or more than the amount of net income earned in a particular
period as a result of fluctuations in a fund's net income. Undistributed net
income is included in the fund's share price; similarly, distributions from
previously undistributed net income reduce the fund's share price. This divi-
dend policy is not expected to affect the management of a fund's portfolio.
Dividends for Class A, B, C and R shares are determined in the same manner and
at the same time. Dividends per share will vary based on which class of fund
shares you own, reflecting the different ongoing fees and other expenses of
each class.
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<PAGE>
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TAXES AND TAX REPORTING
The discussion below and in the statement of additional information provides
general tax information related to an investment in fund shares. Because tax
laws are complex and often change, you should consult your tax adviser about
the tax consequences of a specific fund investment.
Each fund primarily invests in municipal bonds from a specific state or in
municipal bonds whose income is otherwise exempt from regular federal, state
and local income taxes. Consequently, the regular monthly dividends you receive
will be exempt from regular federal, state and, in some cases, local income
taxes. All or a portion of these dividends, however, may be subject to the
federal alternative minimum tax (AMT).
Although the funds do not seek to realize taxable income or capital gains, the
funds may realize and distribute taxable income or capital gains from time to
time as a result of each fund's normal investment activities. Each fund will
distribute in December any taxable income or capital gains realized over the
preceding year. Net short-term gains are taxable as ordinary income. Net long-
term capital gains are taxable as long-term capital gains regardless of how
long you have owned your investment. Taxable dividends do not qualify for a
dividends received deduction if you are a corporate shareholder.
Each year, you will receive a year-end statement that describes the tax status
of dividends paid to you during the preceding year, including the source of its
investment income by state and the portion of its income that is subject to
AMT. You will receive this statement from the firm where you purchased your
fund shares if you hold your investment in street name; Nuveen will send you
this statement if you hold your shares in registered form.
The tax status of your dividends is not affected by whether you reinvest your
dividends or receive them in cash.
BUYING OR SELLING SHARES CLOSE TO A RECORD DATE
If you purchase fund shares shortly before the record date for a taxable divi-
dend, the entire dividend you receive may be taxable to you even though a
portion of the dividend effectively represents a return of your purchase price.
This is commonly known as "buying a dividend." Similarly, if you sell or
exchange fund shares shortly before the record date for a tax-exempt dividend,
a portion of the price you receive may be treated as a taxable capital gain
even though it reflects tax-free income earned but not yet distributed by the
fund.
TAX CONSEQUENCES OF PRIVATE ACTIVITY BONDS
Because each fund may invest in private activity bonds, the portion of your
regular monthly dividends derived from the income earned on these bonds that
would otherwise be tax-exempt will be treated as taxable income if:
. you are subject to the AMT (including corporate shareholders);
. you are a "substantial user" of a facility financed by these bonds; or
. you are a "related person" of a substantial user.
REDEEMING SHARES HELD LESS THAN SIX MONTHS
If you sell or exchange shares that you have owned for less than six months and
you recognized a short-term capital loss when you redeemed your shares, the
loss you can claim will be reduced by the amount of tax-free dividends paid to
you on those shares. Any remaining short-term capital loss will be treated as
long-term capital loss to the extent you also received capital gain dividends
on those shares. You should consult your tax adviser for complete information
about these rules. Please consider the tax consequences carefully when contem-
plating a redemption.
OTHER IMPORTANT TAX INFORMATION
In order to avoid corporate taxation of its earnings and to pay tax-free divi-
dends, each fund must meet certain I.R.S. requirements that govern the fund's
sources of income, diversification of assets and distribution of earnings to
shareholders. Each fund has met these requirements in the past and intends to
do so in the future. If a fund failed to do so, the fund would be required to
pay corporate taxes on its earnings and all your distributions would be taxable
as ordinary income.
A fund may be required to withhold 31% of certain of your dividends if you have
not provided the fund with your correct taxpayer identification number (nor-
mally your social security number), or if you are otherwise subject to back-up
withholding.
If you receive social security benefits, you should be aware that tax-free
income is taken into account in calculating the amount of these benefits that
may be subject to federal income tax.
If you borrow money to buy fund shares, you may not deduct the interest on that
loan. Under I.R.S. rules, fund shares may be treated as having been bought with
borrowed money even if the purchase cannot be traced directly to borrowed
money.
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<PAGE>
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TAXABLE EQUIVALENT YIELDS
The taxable equivalent yield is the current yield you would need to earn on a
taxable investment in order to equal a stated tax-free yield on a municipal
investment. To assist you to more easily compare municipal investments like
the funds with taxable alternative investments, the table below presents the
taxable equivalent yields for a range of hypothetical tax-free yields and tax
rates:
- -------------------------------------------------------------------------------
TAXABLE EQUIVALENT OF TAX-FREE YIELDS
<TABLE>
<CAPTION>
TAX-FREE YIELD
TAX RATE 4.00% 4.50% 5.00% 5.50% 6.00%
- ------ -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
28.0% 5.56% 6.25% 6.94% 7.64% 8.33%
31.0% 5.80% 6.52% 7.25% 7.97% 8.70%
36.0% 6.25% 7.03% 7.81% 8.59% 9.37%
39.6% 6.62% 7.45% 8.28% 9.11% 9.93%
</TABLE>
The yields and tax rates shown above are hypothetical and do not predict your
actual returns or effective tax rate. For more detailed information, see the
statement of additional information or consult your tax adviser.
GENERAL INFORMATION
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HOW TO CONTACT NUVEEN
GENERAL INFORMATION
If you would like general information about Nuveen Mutual Funds or any other
Nuveen product, call (800) 621-7227 between 7:30 a.m. and 7:00 p.m. Central
time.
PURCHASES, REDEMPTIONS AND OTHER TRANSACTIONS
If you are calling to purchase or redeem shares, request an exchange or
conduct other account transactions, call (800) 621-7227 between 7:30 a.m. and
7:00 p.m. Central time. If you are sending a written request to Nuveen, you
should mail your request to the following address:
Nuveen Mutual Funds
P.O. Box 8509
Boston, MA 02266-8509
When purchasing fund shares by mail, please be sure to include a check made
out to the name of the Fund and mark clearly on your check which class of
shares you are purchasing. If you do not specify which class of shares you are
purchasing, Nuveen will assume you are buying Class A shares if you are
opening a new account; if you are adding to an existing account, Nuveen will
assume you wish to buy more shares of the class you already own.
- -------------------------------------------------------------------------------
FUND SERVICE PROVIDERS
INVESTMENT ADVISER
Nuveen Advisory Corp. ("Nuveen Advisory") serves as the investment adviser to
the funds and in this capacity is responsible for the selection and on-going
monitoring of the municipal bonds in each fund's investment portfolio. Nuveen
Advisory serves as investment adviser to investment portfolios with more than
$35 billion in municipal assets under management. The activities of Nuveen
Advisory, which also include managing the funds' business affairs and
providing certain clerical, bookkeeping and other administrative services, are
overseen by the funds' Board of Trustees. Established in 1976, Nuveen Advisory
is a wholly-owned subsidiary of John Nuveen & Co. Incorporated, which itself
is approximately 78% owned by the St. Paul Companies, Inc. Effective January
1, 1997, The John Nuveen Company acquired Flagship Resources Inc., and as part
of that acquisition, Flagship Financial, the adviser to the Flagship Funds,
was merged with Nuveen Advisory.
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PAGE 22
<PAGE>
For providing these services, Nuveen Advisory is paid an annual management fee.
The following schedule applies to all funds described in this prospectus:
- --------------------------------------------------------------------------------
MANAGEMENT FEES
<TABLE>
<CAPTION>
AVERAGE DAILY MANAGEMENT
NET ASSET VALUE FEE
- --------------------------------------
<S> <C>
For the first $125 million 0.5500%
For the next $125 million 0.5375%
For the next $250 million 0.5250%
For the next $500 million 0.5125%
For the next $1 billion 0.5000%
For assets over $2 billion 0.4750%
- --------------------------------------
</TABLE>
For more information about fees and expenses, see the fund operating expense
tables in the Fund Summaries.
PORTFOLIO MANAGERS
Overall investment management strategy and operating policies for the funds are
set by the Investment Policy Committee of Nuveen Advisory. The Investment
Policy Committee is comprised of the principal executive officers and portfolio
managers of Nuveen Advisory and meets regularly to review economic conditions,
the outlook for the financial markets in general and the status of the munic-
ipal markets in particular. Day-to-day operation of each fund and the execution
of its specific investment strategies is the responsibility of the designated
portfolio manager described below.
Michael Davern is the portfolio manager for the Alabama and Georgia Funds. Mr.
Davern has managed these funds since 1994, first as a Vice President of Flag-
ship Financial Inc., the funds' prior investment adviser, and then as a Vice
President of Nuveen Advisory after the acquisition of Flagship Resources Inc.
by The John Nuveen Company in January 1997. Walter Parker is the portfolio
manager for the North Carolina, South Carolina, and Tennessee Funds. Mr. Parker
has managed these funds since 1995, and since 1994 had been a Vice President of
Flagship Financial Inc., the funds' prior investment adviser, until becoming a
Vice President of Nuveen Advisory upon the acquisition of Flagship Resources
Inc. by The John Nuveen Company in January 1997. Jan Terbreuggen is the port-
folio manager for the Louisiana Fund. Mr. Terbrueggen has managed the fund as a
Vice President of Flagship Financial Inc., the funds' prior investment adviser,
since 1992, until becoming a Vice President of Nuveen Advisory upon the acqui-
sition of Flagship Resources Inc. by The John Nuveen Company in January 1997.
THE DISTRIBUTOR
John Nuveen and Co. Incorporated serves as the selling agent and distributor of
the funds' shares. In this capacity, Nuveen manages the offering of the funds'
shares and is responsible for all sales and promotional activities. In order to
reimburse Nuveen for its costs in connection with these activities, including
compensation paid to authorized dealers, each fund has adopted a distribution
and service plan under Rule 12b-1 of the Investment Company Act of 1940.
The plan authorizes each fund to pay Nuveen an annual 0.20% service fee on the
average daily net assets of each class of shares outstanding. The plan also
authorizes each fund to pay Nuveen an annual 0.75% distribution fee on the
average daily net assets of Class B shares outstanding. The plan also autho-
rizes each fund to pay Nuveen an annual 0.55% distribution fee on the average
daily net assets of Class C shares outstanding. In order to help compensate
Nuveen for the sales commission paid to financial advisers at the time of sale
on sales of Class B and Class C shares, Nuveen retains the first year's service
fee on sales of Class B shares and all Class B distribution fees; and retains
the first year's service and distribution fees on sales of Class C shares.
Otherwise, Nuveen pays these fees to the broker of the record. The statement of
additional information contains a detailed description of the plan and its
provisions.
TRANSFER AGENT
The funds have appointed Boston Financial, P.O. Box 8509, Boston, MA, 02266-
8509, as the transfer agent responsible for distributing dividend payments and
providing certain bookkeeping, data processing and other administrative serv-
ices in connection with the maintenance of shareholder accounts.
- --------------------------------------------------------------------------------
HOW THE FUNDS REPORT
PERFORMANCE
Each fund may quote its yield and total return in reports to shareholders,
sales literature and advertisements. The funds may also compare their invest-
ment results to various passive indices or other mutual funds with similar
investment objectives. Comparative performance information may include data
from Lipper Analytical Services, Inc., Morningstar, Inc. and other industry
publications. See the statement of additional information for a more detailed
discussion.
- --------------------------------------------------------------------------------
HOW FUND SHARES ARE PRICED
The share price for each class of fund shares, also called its net asset value
(NAV), is calculated every business day as of the close of regular trading on
the New York Stock Exchange (normally 4 p.m. Eastern time). The net asset value
for a class of fund shares is computed by calculating the total value of the
class' portion of the fund's portfolio investments and other assets,
subtracting any liabilities or other debts, and dividing by the total number of
its shares outstanding.
- --------------------------------------------------------------------------------
PAGE 23
<PAGE>
The prices of municipal bonds in each fund's investment portfolio are provided
by a pricing service approved and supervised by the fund's Board of Trustees.
When price quotes are not readily available (which is usually the case for
municipal securities), the pricing service establishes fair market value based
on yields or prices of municipal bonds of comparable quality, type of issue,
coupon, maturity and rating, indications of value from securities dealers and
general market conditions.
- --------------------------------------------------------------------------------
ORGANIZATION
The Trust is an open-end investment company under the Investment Company Act of
1940, consisting of multiple funds. The shares of each fund are divided into
classes. Each class of shares represents an interest in the same portfolio of
investments and the shares of each class have equal rights as to voting,
redemption, dividends and liquidation. However, each class bears different
sales charges and service fees. B shares convert to A shares after 8 years. C
shares purchased before February 1, 1997 convert to A shares six years after
purchase, but only if you request conversion. You must submit your request to
the transfer agent no later than the last business day of the 71st month
following the month in which you purchased your shares.
The funds are not required to and do not intend to hold annual meetings. Share-
holders owning ten percent or more of a fund's outstanding shares may call a
special meeting for any purpose, including to elect or remove trustees or to
change fundamental policies.
APPENDIX
- --------------------------------------------------------------------------------
SPECIAL STATE CONSIDERATIONS
Because the funds primarily purchase municipal bonds from a specific state,
each fund also bears investment risk from economic, political or regulatory
changes that could adversely affect municipal bond issuers in that state and
therefore the value of the fund's investment portfolio. The following discus-
sion of special state considerations was obtained from official offering state-
ments of these issuers and has not been independently verified by the funds.
The discussion includes general state tax information related to an investment
in fund shares. Because tax laws are complex and often change, you should
consult your tax adviser about the state tax consequences of a specific fund
investment. See the statement of additional information for further informa-
tion.
ALABAMA
The industrialization of Alabama's economy over the past two decades has
resulted in a manufacturing sector that represents just over a quarter of the
state's gross product and 20% of employment. The sector has diversified beyond
primary textiles, chemicals, rubbers and plastics. Nine consecutive years of
private sector capital investment exceeding $2 billion annually has also left
the state's manufacturing facilities modernized and more competitive in the
domestic and world markets. Expanded paper and pulp production have helped make
the state one of the nation's top five timber producers. In recent years, the
importance of the service sector has grown as regional concentrations such as
the medical complex in Birmingham and the high technology research center at
Huntsville stimulate growth. The trade and service sectors have provided 75% of
job growth in recent years.
The state's unemployment rate fell from 6.8% in 1994 to 6.3% in 1995. Some $2.6
billion in capital investments in 1994 alone led to 22,862 new jobs. Alabama
enjoyed a 25.92% increase in per capital income from 1990-94 outstripping the
15.42% national average for the same period. Per capita income growth also
significantly outpaced the national average during the period from 1980 to
1990. Per capita income rose 4.8% to $18,781 in 1995.
S&P gives Alabama's general obligation bonds an AA rating while Moody's
gives them an Aa rating.
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<PAGE>
Tax Treatment.
The Alabama Fund's regular monthly dividends will not be subject to Alabama
personal income taxes to the extent they are paid out of income earned on
Alabama municipal bonds or U.S. government securities. You will be subject to
Alabama personal income taxes, however, to the extent the Alabama Fund real-
izes any taxable income or capital gains even if such income or gains are not
distributed to you as dividends, or if you sell or exchange Alabama Fund
shares and realize a capital gain on the transaction.
The treatment of corporate shareholders of the Alabama Fund is similar to that
described above.
GEORGIA
Georgia's diverse economic base depends on manufacturing, wholesale and retail
trade and a growing service sector. The chief sources of manufacturing employ-
ment are textiles, food products, paper products, electronic equipment and
aircraft. The state's largest city, Atlanta, is an economic and transportation
center for the entire southeast region as well as the focus of the state's
growth. Increased spending on education, especially technical schools, has
attracted businesses to the state and stimulated job growth in the environ-
mental technology, biotechnology and telecommunications industries.
Unemployment was a low 4.5% as of August 1996. According to Standard & Poor's,
recent financial statistics rank Georgia among the top five states nationally
in employment and population growth. Personal income per capita has steadily
gained relative to the national average since the 1980's. Per capita personal
income rose 5.4% in 1995 to $21,278.
Georgia's conservative financial operations resulted in an undesignated
surplus reaching over $174 million in 1996 out of a balanced budget of $10.7
billion. An economic downturn at the beginning of the decade resulted in oper-
ating deficits from 1990-92 but was remedied by revenue growth in 1993 and
1994 which led to budgetary surpluses. The state sets aside three percent of
its budget annually in reserve funds. Georgia also enjoys a sound debt struc-
ture guarded and restrained by a cap on debt obligations which is tied to
expected revenues. S&P gives Georgia's general obligation bonds an AA+ rating
while Moody's gives them an Aaa rating.
Tax Treatment.
The Georgia Fund's regular monthly dividends will not be subject to Georgia
personal income taxes to the extent they are paid out of income earned on
Georgia municipal bonds or U.S. government securities. You will be subject to
Georgia personal income taxes, however, to the extent the Georgia Fund
distributes any taxable income or realized capital gains, or if you sell or
exchange Georgia Fund shares and realize a capital gain on the transaction.
The treatment of corporate shareholders of the Georgia Fund is similar to that
described above.
LOUISIANA
The significance of Louisiana's oil and gas industry to its economy can cause
the state financial difficulties when the markets for those products are unfa-
vorable. The state suffered a period of severe oil-related financial disloca-
tion in the early 1980's. As a result, the state has attempted to diversify its
economic base by developing industries such as timber, aqua culture, fish and
seafood production which take advantage of Louisiana's replenished natural
resources as well as expanding its trans-portation facilities. Still, the
state's economy remains subject to the risks of a non-diversified economy where
manufacturing only represented 10.7% of employment in 1994 while government
employment represented 19.3% of the state total.
Louisiana's unemployment rate has exceeded the national average in these past
two years despite strong job growth rates. As of August 1996, the unemployment
rate was 6.9%. However, the state ranked first in the nation in personal
income growth with per capita income rising 6.9% to $18,827 in 1995 after
years of decline relative to the national average.
Since 1993 the state has applied small budget surpluses to the reduction of
outstanding debts. However, the 1996 budget includes a $41 million shortfall
and revenues are not projected to cover the needs in future years. Proposed
spending reductions are crucial to balancing future budgets. The outcome of a
proposed referendum on legalized gambling could also impact future revenues.
S&P gives Louisiana's general obligation bonds an A- rating while Moody's
gives them a Baa1 rating.
Tax Treatment.
The Louisiana Fund's regular monthly dividends will not be subject to Loui-
siana personal income tax to the extent they are paid out of income earned on
Louisiana municipal obligations or U.S. government securities. You will be
subject to Louisiana personal income tax, however, to the extent the Louisiana
Fund distributes any taxable income or realized capital gains, or if you sell
or exchange Louisiana Fund shares and realize capital gain on the transaction.
The treatment of corporate shareholders of the Louisiana Fund is similar to
that described above.
NORTH CAROLINA
The greater part of North Carolina's diverse economic base is divided among
agricultural, manufacturing and tourism industries. The state's manufacturing
employment ranks as one of the largest in the Southeast region despite
agriculture's historical dominance. The textile industry employs the greatest
number of manufacturing workers while broiler and
- -------------------------------------------------------------------------------
PAGE 25
<PAGE>
pork production have surpassed tobacco as the leading source of agricultural
income due to diversification in that sector. The state also enjoys increased
economic activity in the financial services, research and high technology
manufacturing sectors.
The unemployment rate was a low 4.1% at the end of August 1996, consistent
with the state's tendency to fall below the national average. The state ranks
among the top ten in terms of economic growth, as measured by job and personal
income increases. Per capita income grew from $7,999 in 1980 to $20,604 in
1995.
The state has implemented sound financial policies and maintains low debt
levels. Its Constitution mandates that total expenditures not exceed receipts
for the same period plus any surplus available at the start of the fiscal
year. The state succeeded in decreasing expenditures and increasing revenues
in the face of 1990 and 1991 budget shortfalls that reflected the nationwide
economic downturn. These conservative policies, combined with economic recov-
ery, resulted in budget surpluses in 1992, 1993, 1994 and 1995. S&P gives
North Carolina's general obligation bonds an AAA rating while Moody's gives
them an Aaa rating.
Tax Treatment.
The North Carolina Fund's regular monthly dividends will not be subject to
North Carolina personal income taxes to the extent they are paid out of income
earned on North Carolina municipal bonds or obligations of the U.S. govern-
ment. You will be subject to North Carolina personal income taxes, however, to
the extent the North Carolina fund distributes any taxable income or realized
capital gains, or if you sell or exchange North Carolina Fund shares and
realize a capital gain on the transaction.
The treatment of corporate shareholders of the North Carolina Fund is similar
to that described above.
SOUTH CAROLINA
The manufacturing sector leads South Carolina's economy and constitutes some
25% of employment compared to a national average of 15%. One in three manufac-
turing jobs relates directly or indirectly to the textile industry, a sector
which faces greater international competition due to the NAFTA. Reductions in
defense related jobs at the Charleston Naval Base and Savannah River Plant
have been offset by private sector plant expansions and openings attracted by
the state's lower corporate income tax rate and tax incentives provided in the
1980's. The state's Economic Development Board expected capital investment in
new plants and expansions in 1994 alone to create over 16,000 new jobs.
Significant trade and service sectors anchor a diverse economic base.
South Carolina's monthly unemployment rate fell below the comparable national
average during 1995, resting at 5.1% at the end of September 1995, but
increased slightly to 5.9% by August 1996. Per capita income grew at a
compounded annual rate of 6.2% from 1989 to 1994, surpassing the 5.3% national
growth rate and the 6.1% southeastern region growth rate during the same
period. Per capita income rose to $18,788 in 1995, ranking the State 7th in
the nation in terms of income growth for that year.
South Carolina's Constitution mandates a balanced budget and employs several
means to ensure its achievement. Each quarter the State Budget and Control
Board must monitor revenues and lower appropriations in the event the state
projects a deficit after the first or second quarters. The Constitution also
requires the government to set aside three percent of General Fund revenues in
a General Reserve Fund and two percent in a Capital Reserve Fund as a hedge
against any year end deficit. During the fiscal year, the state must fund its
operating expenses with the Capital Reserve Fund moneys before resorting to any
cuts in an effort to meet projected deficits. At the end of the year, the
legislature may apply both funds to any deficit but any moneys taken from the
General Reserve must be replaced within three years. The legislature must
account for any remaining budget shortfall during the succeeding fiscal year. As
a result of this process South Carolina enjoyed budget surpluses in 1994 and
1995 while the state remedied its 1992 and 1993 deficits with combined cuts and
the use of Reserve Funds.
By law, appropriations cannot increase at a rate that exceeds the state's
economic growth rate nor can the number of state employees increase at a rate
greater than the state's population growth rate. S&P gives South Carolina's
general obligation bonds an AAA rating while Moody's gives them an Aaa rating.
Tax Treatment.
The South Carolina Fund's regular monthly dividends will not be subject to
South Carolina personal income taxes to the extent they are paid out of income
earned on South Carolina municipal bonds or U.S. government securities. You
will be subject to South Carolina personal income taxes, however, to the
extent the South Carolina Fund distributes any taxable income or realized
capital gains, or if you sell or exchange South Carolina Fund shares and
realize a capital gain on the transaction.
The treatment of corporate shareholders of the South Carolina Fund is similar
to that described above.
TENNESSEE
Manufacturing historically dominates Tennessee's economy but growth in the
state's service and trade industries restructured the state's economy over the
past 15-20 years. From 1973 to 1993, employment in the service sector
increased from 14.5% to 24.7%
- -------------------------------------------------------------------------------
PAGE 26
<PAGE>
of non-agricultural employment while that share of manufacturing employment
fell from 33.9% to 22.7% of non-agricultural employment. As a result, the
employment base is better diversified among the state's manufacturing, serv-
ice, trade and government sectors. Economic performance tends to parallel the
national average. For example, the state recovered from the recession felt
nationwide in the early 1990's and has posted moderate economic gains in the
years since.
The state's monthly unemployment rate stood at 4.6% in August 1996, compared
to a national average of 5.1%. Still, nine Tennessee counties suffered unem-
ployment rates above 10% at the end of 1995. Personal income levels rose 5.9%
in 1993 and 7.03% in 1994. Personal income grew some 87.1% from 1983 to 1993 to
reach $18,434 per capita. The per capita average increased again to $20,376 in
1995.
Tennessee's Constitution requires that a fiscal year's expenditures not exceed
that year's revenues and available reserves. Rainy-day fund reserves equaled
$101 million at the end of 1995. The rate of growth of appropriations also
cannot outpace the projected growth of the state's economy. S&P gives
Tennessee's general obligation bonds an AA+ rating while Moody's gives them an
Aaa rating.
Tax Treatment.
The Tennessee Fund's regular monthly dividends will not be subject to
Tennessee personal income taxes to the extent they are paid out of income
earned on or capital gains realized from the sale of Tennessee municipal bonds
or U.S. government securities. You will be subject to Tennessee personal
income taxes, however, to the extent the Tennessee Fund distributes any
taxable income or realized capital gains on other securities. You will not be
subject to Tennessee personal income taxes if you sell or exchange Tennessee
Fund shares.
The treatment of corporate shareholders of the Tennessee fund differs from
that described above.
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PAGE 27
<PAGE>
Nuveen Family of Mutual Funds
Nuveen's family of funds offers a variety of funds designed to help
you reach your financial goals. The funds below are grouped by
investment objectives.
GROWTH AND INCOME FUNDS
Growth and Income Stock Fund
Balanced Stock and Bond Fund
Balanced Municipal and Stock Fund
MUNICIPAL BOND FUNDS
National Funds/1/
State Funds
Alabama Michigan
Arizona Missouri
California/2/ New Jersey/3/
Colorado New Mexico
Connecticut New York/2/
Florida/3/ North Carolina
Georgia Ohio
Kansas Pennsylvania
Kentucky/4/ South Carolina
Louisiana Tennessee
Maryland Virginia
Massachusetts/2/ Wisconsin
Notes
1. Long-term, insured long-term, intermediate-term and limited-term
portfolios.
2. Long-term and insured long-term portfolios.
3. Long-term and intermediate-term portfolios.
4. Long-term and limited-term portfolios.
NUVEEN
John Nuveen & Co. Incorporated
333 West Wacker Drive
Chicago, IL 60606-1286
(800) 621-7227
VPR-MS5
<PAGE>
FEBRUARY 1, 1997
NUVEEN FLAGSHIP MULTISTATE TRUST III
NUVEEN FLAGSHIP ALABAMA MUNICIPAL BOND FUND
NUVEEN FLAGSHIP GEORGIA MUNICIPAL BOND FUND
NUVEEN FLAGSHIP LOUISIANA MUNICIPAL BOND FUND
NUVEEN FLAGSHIP NORTH CAROLINA MUNICIPAL BOND FUND
NUVEEN FLAGSHIP SOUTH CAROLINA MUNICIPAL BOND FUND
NUVEEN FLAGSHIP TENNESSEE MUNICIPAL BOND FUND
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus. This Statement
of Additional Information should be read in conjunction with the Prospectus of
the Nuveen Flagship Multistate Trust III dated February 1, 1997. The Prospectus
may be obtained without charge from certain securities representatives, banks,
and other financial institutions that have entered into sales agreements with
John Nuveen & Co. Incorporated, or from the Funds, by mailing a written request
to the Funds, c/o John Nuveen & Co. Incorporated, 333 West Wacker Drive,
Chicago, Illinois 60606 or by calling (800) 414-7447.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Policies and Investment Portfolio............................... S-2
Management................................................................. S-9
Investment Adviser and Investment Management Agreement..................... S-13
Portfolio Transactions..................................................... S-14
Net Asset Value............................................................ S-14
Tax Matters................................................................ S-15
Performance Information.................................................... S-20
Additional Information on the Purchase and Redemption of Fund Shares....... S-25
Distribution and Service Plan.............................................. S-29
Independent Public Accountants and Custodian............................... S-30
Financial Statements....................................................... S-30
Appendix A--Ratings of Investments......................................... A-1
Appendix B--Description of Hedging Techniques.............................. B-1
</TABLE>
The audited financial statements for each Fund's most recent fiscal year
appear in the Funds' Annual Reports and the unaudited financial statements for
the most recent semi-annual period for each Fund appear in the Funds' Semi-
Annual Reports; each is included herein by reference. The Semi-Annual Reports
accompany this Statement of Additional Information.
<PAGE>
INVESTMENT POLICIES AND INVESTMENT PORTFOLIO
INVESTMENT POLICIES
The investment objective and certain fundamental investment policies of each
Fund are described in the Prospectus. Each of the Funds, as a fundamental
policy, may not, without the approval of the holders of a majority of the
shares of that Fund:
(1) Invest in securities other than Municipal Obligations and temporary
investments, as described in the Prospectus. Municipal Obligations are
municipal bonds that pay interest that is exempt from regular federal
income taxes.
(2) Invest more than 5% of its total assets in securities of any one
issuer, except this limitation shall not apply to securities of the United
States Government, and to the investment of 25% of such Fund's assets. This
limitation shall apply only to the Georgia Municipal Bond Fund, the
Louisiana Municipal Bond Fund, the North Carolina Municipal Bond Fund, and
the Tennessee Municipal Bond Fund.
(3) Borrow money, except from banks for temporary or emergency purposes
and not for investment purposes and then only in an amount not exceeding
(a) 10% of the value of its total assets at the time of borrowing or (b)
one-third of the value of the Fund's total assets including the amount
borrowed, in order to meet redemption requests which might otherwise
require the untimely disposition of securities. While any such borrowings
exceed 5% of such Fund's total assets, no additional purchases of
investment securities will be made by such Fund. If due to market
fluctuations or other reasons, the value of the Fund's assets falls below
300% of its borrowings, the Fund will reduce its borrowings within 3
business days. To do this, the Fund may have to sell a portion of its
investments at a time when it may be disadvantageous to do so.
(4) Pledge, mortgage or hypothecate its assets, except that, to secure
borrowings permitted by subparagraph (2) above, it may pledge securities
having a market value at the time of pledge not exceeding 10% of the value
of the Fund's total assets.
(5) Issue senior securities as defined in the Investment Company Act of
1940, except to the extent such issuance might be involved with respect to
borrowings described under item (3) above or with respect to transactions
involving futures contracts or the writing of options within the limits
described in the Prospectus and this Statement of Additional Information.
(6) Underwrite any issue of securities, except to the extent that the
purchase or sale of Municipal Obligations in accordance with its investment
objective, policies and limitations, may be deemed to be an underwriting.
(7) Purchase or sell real estate, but this shall not prevent any Fund
from investing in Municipal Obligations secured by real estate or interests
therein or foreclosing upon and selling such security.
(8) Purchase or sell commodities or commodities contracts or oil, gas or
other mineral exploration or development programs, except for transactions
involving futures contracts within the limits described in the Prospectus
and this Statement of Additional Information.
(9) Make loans, other than by entering into repurchase agreements and
through the purchase of Municipal Obligations or temporary investments in
accordance with its investment objective, policies and limitations.
(10) Make short sales of securities or purchase any securities on margin,
except for such short-term credits as are necessary for the clearance of
transactions.
(11) Write or purchase put or call options, except to the extent that the
purchase of a stand-by commitment may be considered the purchase of a put,
and except for transactions involving options within the limits described
in the Prospectus and this Statement of Additional Information.
(12) Invest more than 25% of its total assets in securities of issuers in
any one industry; provided, however, that such limitations shall not be
applicable to Municipal Obligations issued by governments or political
subdivisions of governments, and obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities.
(13) Purchase or retain the securities of any issuer other than the
securities of the Fund if, to the Fund's knowledge, those trustees of the
Trust, or those officers and directors of Nuveen Advisory Corp. ("Nuveen
Advisory"), who individually own beneficially more than 1/2 of 1% of the
outstanding securities of such issuer, together own beneficially more than
5% of such outstanding securities.
In addition, each Fund, as a non-fundamental policy, may not invest more than
15% of its net assets in "illiquid" securities, including repurchase agreements
maturing in more than seven days.
For the purpose of applying the limitations set forth in paragraph (2) above,
an issuer shall be deemed the sole issuer of a security when its assets and
revenues are separate from other governmental entities and its securities are
backed only by its assets and revenues. Similarly, in the case of a non-
governmental user, such as an industrial corporation or a privately owned or
operated hospital, if the security is backed only by the assets and revenues of
the non-governmental user, then such non-governmental user would be deemed to
be the sole issuer. Where a security is also backed by the
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enforceable obligation of a superior or unrelated governmental entity or other
entity (other than a bond insurer), it shall also be included in the
computation of securities owned that are issued by such governmental or other
entity.
Where a security is guaranteed by a governmental entity or some other
facility, such as a bank guarantee or letter of credit, such a guarantee or
letter of credit would be considered a separate security and would be treated
as an issue of such government, other entity or bank. Where a security is
insured by bond insurance, it shall not be considered a security issued or
guaranteed by the insurer; instead the issuer of such security will be
determined in accordance with the principles set forth above. The foregoing
restrictions do not limit the percentage of the Fund's assets that may be
invested in securities insured by any single insurer.
The foregoing restrictions and limitations, as well as a Fund's policies as
to ratings of portfolio investments, will apply only at the time of purchase of
securities, and the percentage limitations will not be considered violated
unless an excess or deficiency occurs or exists immediately after and as a
result of an acquisition of securities, unless otherwise indicated.
The foregoing fundamental investment policies, together with the investment
objective of each Fund, cannot be changed without approval by holders of a
"majority of the Fund's outstanding voting shares." As defined in the
Investment Company Act of 1940, this means the vote of (i) 67% or more of the
Fund's shares present at a meeting, if the holders of more than 50% of the
Fund's shares are present or represented by proxy, or (ii) more than 50% of the
Fund's shares, whichever is less.
The Nuveen Flagship Multistate Trust III (the "Trust") is an open-end
management series investment company organized as a Massachusetts business
trust on July 1, 1996. Each of the Funds is an open-end management investment
company organized as a series of the Nuveen Flagship Multistate Trust III. The
Trust is an open-end management series company under SEC Rule 18f-2. Each Fund
is a separate series issuing its own shares. The Trust currently has six
series: the Nuveen Flagship Alabama Municipal Bond Fund (formerly the Flagship
Alabama Double Tax Exempt Fund, a series of the Flagship Tax Exempt Funds
Trust); the Nuveen Flagship Georgia Municipal Bond Fund (formerly the Flagship
Georgia Double Tax Exempt Fund, a series of the Flagship Tax Exempt Funds
Trust); the Nuveen Flagship Louisiana Municipal Bond Fund (formerly the
Flagship Louisiana Double Tax Exempt Fund, a series of the Flagship Tax Exempt
Funds Trust); the Nuveen Flagship North Carolina Municipal Bond Fund (formerly
the Flagship North Carolina Tax Exempt Fund, a series of the Flagship Tax
Exempt Funds Trust); the Nuveen Flagship South Carolina Municipal Bond Fund
(formerly the Flagship South Carolina Double Tax Exempt Fund, a series of the
Flagship Tax Exempt Funds Trust); and the Nuveen Flagship Tennessee Municipal
Bond Fund (formerly the Flagship Tennessee Double Tax Exempt Fund, a series of
the Flagship Tax Exempt Funds Trust). Certain matters under the Investment
Company Act of 1940 which must be submitted to a vote of the holders of the
outstanding voting securities of a series company shall not be deemed to have
been effectively acted upon unless approved by the holders of a majority of the
outstanding voting securities of each Fund affected by such matter.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of a trust may, under
certain circumstances, be held personally liable as partners for its
obligations. However, the Declaration of Trust contains an express disclaimer
of shareholder liability for acts or obligations of the Trust and requires that
notice of this disclaimer be given in each agreement, obligation or instrument
entered into or executed by the Trust or the Trustees. The Declaration of Trust
further provides for indemnification out of the assets and property of the
Trust for all loss and expense of any shareholder personally liable for the
obligations of the Trust. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is limited to circumstances in which
both inadequate insurance existed and the Trust itself were unable to meet its
obligations. The Trust believes the likelihood of these circumstances is
remote.
PORTFOLIO SECURITIES
As described in the Prospectus, each of the Funds invests substantially all
of its assets (at least 80%) in a portfolio of Municipal Obligations free from
regular federal and state income tax in each Fund's respective state, which
generally will be Municipal Obligations issued within the Fund's respective
state. In general, Municipal Obligations include debt obligations issued by
states, cities and local authorities to obtain funds for various public
purposes, including construction of a wide range of public facilities such as
airports, bridges, highways, hospitals, housing, mass transportation, schools,
streets and water and sewer works. Industrial development bonds and pollution
control bonds that are issued by or on behalf of public authorities to finance
various privately-rated facilities are included within the term Municipal
Obligations if the interest paid thereon is exempt from federal income tax.
The investment assets of each Fund will consist of (1) Municipal Obligations
which are rated at the time of purchase within the four highest grades (Baa or
BBB or better) by Moody's Investors Service, Inc. ("Moody's"), by Standard and
Poor's Corporation ("S&P") or by Fitch Investors Service, Inc. ("Fitch"), (2)
unrated Municipal Obligations which, in the opinion of Nuveen Advisory, have
credit characteristics equivalent to bonds rated within the four highest grades
by Moody's, S&P or Fitch, except that the Fund may not invest more than 20% of
its net assets in unrated bonds and (3) temporary investments as described
below, the income from which may be subject to state income tax or to both
federal and state income taxes. See Appendix A for more information about
ratings by Moody's, S&P, and Fitch.
As described in the Prospectus, each Fund may invest in Municipal Obligations
that constitute participations in a lease obligation or installment purchase
contract obligation (hereafter collectively called "lease obligations") of a
municipal
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authority or entity. Although lease obligations do not constitute general
obligations of the municipality for which the municipality's taxing power is
pledged, a lease obligation is ordinarily backed by the municipality's covenant
to budget for, appropriate and make the payments due under the lease
obligation. However, certain lease obligations contain "non-appropriation"
clauses which provide that the municipality has no obligation to make lease or
installment purchase payments in future years unless money is appropriated for
such purpose on a yearly basis. Although nonappropriation lease obligations are
secured by the leased property, disposition of the property in the event of
foreclosure might prove difficult. A Fund will seek to minimize the special
risks associated with such securities by only investing in those
nonappropriation leases where Nuveen Advisory has determined that the issuer
has a strong incentive to continue making appropriations and timely payment
until the security's maturity. Some lease obligations may be illiquid under
certain circumstances. Lease obligations normally provide a premium interest
rate which along with regular amortization of the principal may make them
attractive for a portion of the assets of the Funds.
Obligations of issuers of Municipal Obligations are subject to the provisions
of bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors. In addition, the obligations of such issuers may become subject to
the laws enacted in the future by Congress, state legislatures or referenda
extending the time for payment of principal and/or interest, or imposing other
constraints upon enforcement of such obligations or upon municipalities to levy
taxes. There is also the possibility that, as a result of legislation or other
conditions, the power or ability of any issuer to pay, when due, the principal
of and interest on its Municipal Obligations may be materially affected.
PORTFOLIO TRADING AND TURNOVER
The Funds will make changes in their investment portfolio from time to time
in order to take advantage of opportunities in the municipal market and to
limit exposure to market risk. The Funds may also engage to a limited extent in
short-term trading consistent with their investment objective. Securities may
be sold in anticipation of market decline or purchased in anticipation of
market rise and later sold. In addition, a security may be sold and another of
comparable quality purchased at approximately the same time to take advantage
of what Nuveen Advisory believes to be a temporary disparity in the normal
yield relationship between the two securities. Each Fund may make changes in
its investment portfolio in order to limit its exposure to changing market
conditions. Changes in a Fund's investments are known as "portfolio turnover."
While it is impossible to predict future portfolio turnover rates, the annual
portfolio turnover rate for each of the Funds is generally not expected to
exceed 75%. However, each Fund reserves the right to make changes in its
investments whenever it deems such action advisable and, therefore, a Fund's
annual portfolio turnover rate may exceed 75% in particular years depending
upon market conditions.
The portfolio turnover rates for the Funds, for the fiscal year-end of the
Fund as a series of its predecessor entity (described above), as indicated,
were:
<TABLE>
<CAPTION>
FISCAL
YEAR
1995 1996
---- ----
<S> <C> <C>
Nuveen Flagship Alabama Municipal Bond Fund (5/31)............. 120% 42%
Nuveen Flagship Georgia Municipal Bond Fund (5/31)............. 40% 59%
Nuveen Flagship Louisiana Municipal Bond Fund (5/31)........... 44% 26%
Nuveen Flagship North Carolina Municipal Bond Fund (5/31)...... 35% 54%
Nuveen Flagship South Carolina Municipal Bond Fund (5/31)...... 87% 76%
Nuveen Flagship Tennessee Municipal Bond Fund (5/31)........... 23% 38%
</TABLE>
WHEN-ISSUED SECURITIES
Each Fund may purchase and sell Municipal Obligations on a when-issued or
delayed delivery basis. When-issued and delayed delivery transactions arise
when securities are purchased or sold with payment and delivery beyond the
regular settlement date. (When-issued transactions normally settle within 15-45
days.) On such transactions the payment obligation and the interest rate are
fixed at the time the buyer enters into the commitment. The commitment to
purchase securities on a when-issued or delayed delivery basis may involve an
element of risk because the value of the securities is subject to market
fluctuation, no interest accrues to the purchaser prior to settlement of the
transaction, and at the time of delivery the market value may be less than
cost. At the time a Fund makes the commitment to purchase a Municipal
Obligation on a when-issued or delayed delivery basis, it will record the
transaction and reflect the amount due and the value of the security in
determining its net asset value. Likewise, at the time a Fund makes the
commitment to sell a Municipal Obligation on a delayed delivery basis, it will
record the transaction and include the proceeds to be received in determining
its net asset value; accordingly, any fluctuations in the value of the
Municipal Obligation sold pursuant to a delayed delivery commitment are ignored
in calculating net asset value so long as the commitment remains in effect. The
Funds will maintain designated readily marketable assets at least equal in
value to commitments to purchase when-issued or delayed delivery securities,
such assets to be segregated by the Custodian specifically for the settlement
of such commitments. The Funds will only make commitments to purchase Municipal
Obligations on a when-issued or delayed delivery basis with the intention of
actually acquiring the securities, but the Funds reserve the right to sell
these securities before the settlement date if it is deemed advisable. If a
when-issued security is sold before delivery any gain or loss would not be tax-
exempt. The Funds commonly engage in when-issued transactions in order to
purchase or sell newly-issued Municipal Obligations, and may engage in delayed
delivery transactions in order to manage its operations more effectively.
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<PAGE>
SPECIAL CONSIDERATIONS RELATING TO MUNICIPAL OBLIGATIONS OF DESIGNATED STATES
As described in the Prospectus, except for investments in temporary
investments, each of the Funds will invest substantially all of its assets (at
least 80%) in municipal bonds that are exempt from federal and state tax in
that state ("Municipal Obligations"), generally Municipal Obligations issued in
its respective state. Each Fund is therefore more susceptible to political,
economic or regulatory factors adversely affecting issuers of Municipal
Obligations in its state. Brief summaries of these factors are contained in the
Prospectus. Set forth below is additional information that bears upon the risk
of investing in Municipal Obligations issued by public authorities in the
states of currently offered Funds. This information was obtained from official
statements of issuers located in the respective states as well as from other
publicly available official documents and statements. The Funds have not
independently verified any of the information contained in such statements and
documents. The information below is intended only as a general summary, and is
not intended as a discussion of any specific factor that may affect any
particular obligation or issuer.
FACTORS PERTAINING TO ALABAMA
The industrialization of Alabama's economy over the past two decades has
resulted in a manufacturing sector that represents just over a quarter of the
state's gross product and 20% of employment. The sector has diversified beyond
primary textiles, chemicals, rubbers and plastics. Nine consecutive years of
private sector capital investment exceeding $2 billion annually has also left
the state's manufacturing facilities modernized and more competitive in the
domestic and world markets. Expanded paper and pulp production have helped make
the state one of the nation's top five timber producers. In recent years, the
importance of the service sector has grown as regional concentrations such as
the medical complex in Birmingham and the high technology research center at
Huntsville stimulate growth. The trade and service sectors have provided 75% of
job growth in recent years.
The state's unemployment rate fell from 6.8% in 1994 to 4.9% in 1995, a rate
below the national average of 5.1%. Some $2.6 billion in capital investments in
1994 alone led to 22,862 new jobs. Alabama enjoyed a 25.92% increase in per
capita income from 1990-94 outstripping the 15.42% national average for the
same period. Per capita income growth also significantly outpaced the national
average during the period from 1980 to 1990. Per capita income rose 4.8% to
$18,781 in 1995.
As of February 9, 1996, S&P gives Alabama's general obligation bonds an AA
rating while Moody's gives them an Aa rating.
FACTORS PERTAINING TO GEORGIA
Georgia's diverse economic base depends on manufacturing, wholesale and
retail trade and a growing service sector. The chief sources of manufacturing
employment are textiles, food products, paper products, electronic equipment
and aircraft. The state's largest city, Atlanta, is an economic and
transportation center for the entire southeast region as well as the focus of
the state's growth. Increased spending on education, especially technical
schools, has attracted businesses to the state and stimulated job growth in the
environmental technology, biotechnology and telecommunications industries.
Unemployment was a low 4.5% as of August 1996. According to Standard &
Poor's, recent financial statistics rank Georgia among the top five states
nationally in employment and population growth. Personal income per capita has
steadily gained relative to the national average since the 1980's. Per capita
personal income rose 5.4% in 1995 to $21,278.
Georgia's conservative financial operations resulted in an undesignated
surplus reaching over $174 million in 1996 out of a balanced budget of $10.7
billion. An economic downturn at the beginning of the decade resulted in
operating deficits from 1990-92 but was remedied by revenue growth in 1993 and
1994 which led to budgetary surpluses. The state sets aside three percent of
its budget annually in reserve funds. Georgia also enjoys a sound debt
structure guarded and restrained by a cap on debt obligations which is tied to
expected revenues. As of February 9, 1996, S&P gives Georgia's general
obligation bonds an AA+ rating while Moody's gives them an Aaa rating.
FACTORS PERTAINING TO LOUISIANA
The significance of Louisiana's oil and gas industry to its economy can cause
the state financial difficulties when the markets for those products are
unfavorable. The state suffered a period of severe oil-related financial
dislocation in the early 1980's. As a result, the state has attempted to
diversify its economic base by developing industries such as timber, aqua
culture, fish and seafood production which take advantage of Louisiana's
replenished natural resources as well as expanding its transportation
facilities. Still, the state's economy remains subject to the risks of a non-
diversified economy where manufacturing only represented 10.7% of employment in
1994 while government employment represented 19.3% of the state total.
Louisiana's unemployment rate has exceeded the national average in these past
two years despite strong job growth rates. As of August 1996, the unemployment
rate was 6.9%. However, the state ranked first in the nation in personal income
growth with per capita income rising 6.9% to $18,827 in 1995 after years of
decline relative to the national average.
Since 1993 the state has applied small budget surpluses to reduction of
outstanding debts. However, the 1996 budget includes a $41 million shortfall
and revenues are not projected to cover the needs in future years. Proposed
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<PAGE>
spending reductions are crucial to balancing future budgets. The outcome of a
proposed referendum on legalized gambling could also impact future revenues. As
of February 9, 1996, S&P gives Louisiana's general obligation bonds an A-
rating while Moody's gives them an Baa1 rating.
FACTORS PERTAINING TO NORTH CAROLINA
The greater part of North Carolina's diverse economic base is divided among
agricultural, manufacturing and tourism industries. The state's manufacturing
employment ranks as one of the largest in the Southeast region despite
agriculture's historical dominance. The textile industry employs the greatest
number of manufacturing workers while broiler and pork production have
surpassed tobacco as the leading source of agricultural income due to
diversification in that sector. The state also enjoys increased economic
activity in the financial services, research and high technology manufacturing
sectors.
The unemployment rate was a low 4.1% at the end of August 1996, consistent
with the state's tendency to fall below the national average. The state ranks
among the top ten in terms of economic growth, as measured by job and personal
income increases. Per capita income grew from $7,999 in 1980 to $20,604 in
1995.
The state has implemented sound financial policies and maintains low debt
levels. Its Constitution mandates that total expenditures not exceed receipts
for the same period plus any surplus available at the start of the fiscal year.
The state succeeded in decreasing expenditures and increasing revenues in the
face of 1990 and 1991 budget shortfalls that reflected the nationwide economic
downturn. These conservative policies, combined with economic recovery,
resulted in budget surpluses in 1992, 1993, 1994 and 1995. As of February 9,
1996, S&P gives North Carolina's general obligation bonds an AAA rating while
Moody's gives them an Aaa rating.
FACTORS PERTAINING TO SOUTH CAROLINA
The manufacturing sector leads South Carolina's economy and constitutes some
25% of employment compared to a national average of 15%. One in three
manufacturing jobs relates directly or indirectly to the textile industry, a
sector which faces greater international competition due to the NAFTA.
Reductions in defense related jobs at the Charleston Naval Base and Savannah
River Plant have been offset by private sector plant expansions and openings
attracted by the state's lower corporate income tax rate and tax incentives
provided in the 1980's. The state's Economic Development Board expected capital
investment in new plants and expansions in 1994 alone to create over 16,000 new
jobs. Significant trade and service sectors anchor a diverse economic base.
South Carolina's monthly unemployment rate fell below the comparable national
average during 1995, resting at 5.1% at the end of September 1995, but
increased slightly to 5.9% by August 1996. Per capita income grew at a
compounded annual rate of 6.2% from 1989 to 1994, surpassing the 5.3% national
growth rate and the 6.1% southeastern region growth rate during the same
period. Per capita income rose to $18,788 in 1995, ranking the state 7th in the
nation in terms of income growth for that year.
South Carolina's Constitution mandates a balanced budget and employs several
means to ensure its achievement. Each quarter the State Budget and Control
Board must monitor revenues and lower appropriations in the event the state
projects a deficit after the first or second quarters. The Constitution also
requires the government to set aside three percent of General Fund revenues in
a General Reserve Fund and two percent in a Capital Reserve Fund as a hedge
against any year end deficit. During the fiscal year, the state must fund its
operating expenses with the Capital Reserve Fund moneys before resorting to any
cuts in an effort to meet projected deficits. At the end of the year, the
legislature may apply both funds to any deficit but any moneys taken from the
General Reserve must be replaced within three years. The legislature must
account for any remaining budget shortfall during the succeeding fiscal year.
As a result of this process, South Carolina enjoyed budget surpluses in 1994
and 1995 while the state remedied its 1992 and 1993 deficits with combined cuts
and the use of Reserve Funds.
By law, appropriations cannot increase at a rate that exceeds the state's
economic growth rate nor can the number of state employees increase at a rate
greater than the state's population growth rate. As of February 9, 1996, S&P
gives South Carolina's general obligation bonds an AA+ rating while Moody's
gives them an Aaa rating.
FACTORS PERTAINING TO TENNESSEE
Manufacturing historically dominates Tennessee's economy but growth in the
state's service and trade industries restructured the state's economy over the
past 15-20 years. From 1973 to 1993, employment in the service sector increased
from 14.5% to 24.7% of non-agricultural employment while that share of
manufacturing employment fell from 33.9% to 22.7% of non-agricultural
employment. As a result, the employment base is better diversified among the
state's manufacturing, service, trade and government sectors. Economic
performance tends to parallel the national average. For example, the state
recovered from the recession felt nationwide in the early 1990's and has posted
moderate economic gains in the years since.
The state's monthly unemployment rate stood at 4.6% in August 1996, compared
to a national average of 5.1%. Still, nine Tennessee counties suffered
unemployment rates above 10% at the end of 1995. Personal income levels rose
5.9% in 1993 and 7.03% in 1994. Personal income grew some 87.1% from 1983 to
1993 to reach $18,434 per capita. The per capita average increased again to
$20,376 in 1995.
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<PAGE>
Tennessee's Constitution requires that a fiscal year's expenditures not
exceed that year's revenues and available reserves. Rainy-day fund reserves
equaled $101 million at the end of 1995. The rate of growth of appropriations
also cannot outpace the projected growth of the state's economy. As of February
9, 1996, S&P gives Tennessee's general obligation bonds an AA+ rating while
Moody's gives them an Aaa rating.
HEDGING AND OTHER DEFENSIVE ACTIONS
Each Fund may periodically engage in hedging transactions. Hedging is a term
used for various methods of seeking to preserve portfolio capital value of
offsetting price changes in one investment through making another investment
whose price should tend to move in the opposite direction. It may be desirable
and possible in various market environments to partially hedge the portfolio
against fluctuations in market value due to interest rate fluctuations by
investment in financial futures and index futures as well as related put and
call options on such instruments. Both parties entering into an index or
financial futures contract are required to post an initial deposit of 1% to 5%
of the total contract price. Typically, option holders enter into offsetting
closing transactions to enable settlement in cash rather than take delivery of
the position in the future of the underlying security. Each Fund will only sell
covered futures contracts, which means that the Fund segregates assets equal to
the amount of the obligations.
These transactions present certain risks. In particular, the imperfect
correlation between price movements in the futures contract and price movements
in the securities being hedged creates the possibility that losses on the hedge
by a Fund may be greater than gains in the value of the securities in such
series, portfolio. In addition, futures and options markets may not be liquid
in all circumstances. As a result, in volatile markets, a Fund may not be able
to close out the transaction without incurring losses substantially greater
than the initial deposit. Finally, the potential daily deposit requirements in
futures contracts create an ongoing greater potential financial risk than do
options transactions, where the exposure is limited to the cost of the initial
premium. Losses due to hedging transactions will reduce yield. Net gains, if
any, from hedging and other portfolio transactions will be distributed as
taxable distributions to shareholders.
No Fund will make any investment (whether an initial premium or deposit or a
subsequent deposit) other than as necessary to close a prior investment if,
immediately after such investment, the sum of the amount of its premiums and
deposits would exceed 5% of such series' net assets. Each series will invest in
these instruments only in markets believed by the investment adviser to be
active and sufficiently liquid. For further information regarding these
investment strategies and risks presented thereby, see Appendix B to this
Statement of Additional Information.
Each Fund reserves the right for liquidity or defensive purposes (such as
thinness in the market for municipal securities or an expected substantial
decline in value of long-term obligations), to temporarily invest up to 20% of
its assets in obligations issued or guaranteed by the U.S. Government and its
agencies or instrumentalities, including up to 5% in adequately collateralized
repurchase agreements relating thereto. Interest on each instrument is taxable
for Federal income tax purposes and would reduce the amount of tax-free
interest payable to shareholders.
TEMPORARY INVESTMENTS
The Prospectus discusses briefly the ability of the Funds to invest a portion
of their assets in federally tax-exempt or taxable "temporary investments."
Temporary investments will not exceed 20% of a Fund's assets except when made
for defensive purposes. The Funds will invest only in taxable temporary
investments that are either U.S. Government securities or are rated within the
highest grade by Moody's, S&P, or Fitch and mature within one year from the
date of purchase or carry a variable or floating rate of interest. See Appendix
A for more information about ratings by Moody's, S&P, and Fitch.
The Funds may invest in the following federally tax-exempt temporary
investments:
Bond Anticipation Notes (BANs) are usually general obligations of state
and local governmental issuers which are sold to obtain interim financing
for projects that will eventually be funded through the sale of long-term
debt obligations or bonds. The ability of an issuer to meet its obligations
on its BANs is primarily dependent on the issuer's access to the long-term
municipal bond market and the likelihood that the proceeds of such bond
sales will be used to pay the principal and interest on the BANs.
Tax Anticipation Notes (TANs) are issued by state and local governments
to finance the current operations of such governments. Repayment is
generally to be derived from specific future tax revenues. Tax anticipation
notes are usually general obligations of the issuer. A weakness in an
issuer's capacity to raise taxes due to, among other things, a decline in
its tax base or a rise in delinquencies, could adversely affect the
issuer's ability to meet its obligations on outstanding TANs.
Revenue Anticipation Notes (RANs) are issued by governments or
governmental bodies with the expectation that future revenues from a
designated source will be used to repay the notes. In general, they also
constitute general obligations of the issuer. A decline in the receipt of
projected revenues, such as anticipated revenues from another level of
government, could adversely affect an issuer's ability to meet its
obligations on outstanding RANs. In addition, the possibility that the
revenues would, when received, be used to meet other obligations could
affect the ability of the issuer to pay the principal and interest on RANs.
Construction Loan Notes are issued to provide construction financing for
specific projects. Frequently, these notes are redeemed with funds obtained
from the Federal Housing Administration.
S-7
<PAGE>
Bank Notes are notes issued by local government bodies and agencies as
those described above to commercial banks as evidence of borrowings. The
purposes for which the notes are issued are varied but they are frequently
issued to meet short-term working capital or capital-project needs. These
notes may have risks similar to the risks associated with TANs and RANs.
Tax-Exempt Commercial Paper (Municipal Paper) represents very short-term
unsecured, negotiable promissory notes, issued by states, municipalities
and their agencies. Payment of principal and interest on issues of
municipal paper may be made from various sources, to the extent the funds
are available therefrom. Maturities of municipal paper generally will be
shorter than the maturities of TANs, BANs or RANs. There is a limited
secondary market for issues of municipal paper.
Certain Municipal Obligations may carry variable or floating rates of
interest whereby the rate of interest is not fixed, but varies with changes in
specified market rates or indices, such as a bank prime rate or a tax-exempt
money market index.
While these various types of notes as a group represent the major portion of
the tax-exempt note market, other types of notes are occasionally available in
the marketplace and the Fund may invest in such other types of notes to the
extent permitted under its investment objective, policies and limitations. Such
notes may be issued for different purposes and may be secured differently from
those mentioned above.
The Funds may also invest in the following taxable temporary investments:
U.S. Government Direct Obligations are issued by the United States
Treasury and include bills, notes and bonds.
--Treasury bills are issued with maturities of up to one year. They are
issued in bearer form, are sold on a discount basis and are payable at
par value at maturity.
--Treasury notes are longer-term interest bearing obligations with
original maturities of one to seven years.
--Treasury bonds are longer-term interest-bearing obligations with
original maturities from five to thirty years.
U.S. Government Agencies Securities--Certain federal agencies have been
established as instrumentalities of the United States Government to supervise
and finance certain types of activities. These agencies include, but are not
limited to, the Bank for Cooperatives, Federal Land Banks, Federal Intermediate
Credit Banks, Federal Home Loan Banks, Federal National Mortgage Association,
Government National Mortgage Association, Export-Import Bank of the United
States, and Tennessee Valley Authority. Issues of these agencies, while not
direct obligations of the United States Government, are either backed by the
full faith and credit of the United States or are guaranteed by the Treasury or
supported by the issuing agencies' right to borrow from the Treasury. There can
be no assurance that the United States Government itself will pay interest and
principal on securities as to which it is not legally so obligated.
Certificates of Deposit (CDs)--A certificate of deposit is a negotiable
interest bearing instrument with a specific maturity. CDs are issued by banks
in exchange for the deposit of funds and normally can be traded in the
secondary market, prior to maturity. The Fund will only invest in U.S. dollar
denominated CDs issued by U.S. banks with assets of $1 billion or more.
Commercial Paper--Commercial paper is the term used to designate unsecured
short-term promissory notes issued by corporations. Maturities on these issues
vary from a few days to nine months. Commercial paper may be purchased from
U.S. corporations.
Other Corporate Obligations--The Funds may purchase notes, bonds and
debentures issued by corporations if at the time of purchase there is less than
one year remaining until maturity or if they carry a variable or floating rate
of interest.
Repurchase Agreements--A repurchase agreement is a contractual agreement
whereby the seller of securities (U.S. Government or Municipal Obligations)
agrees to repurchase the same security at a specified price on a future date
agreed upon by the parties. The agreed upon repurchase price determines the
yield during a Fund's holding period. Repurchase agreements are considered to
be loans collateralized by the underlying security that is the subject of the
repurchase contract. The Funds will only enter into repurchase agreements with
dealers, domestic banks or recognized financial institutions that in the
opinion of Nuveen Advisory present minimal credit risk. The risk to the Funds
is limited to the ability of the issuer to pay the agreed-upon repurchase price
on the delivery date; however, although the value of the underlying collateral
at the time the transaction is entered into always equals or exceeds the
agreed-upon repurchase price, if the value of the collateral declines there is
a risk of loss of both principal and interest. In the event of default, the
collateral may be sold but a Fund might incur a loss if the value of the
collateral declines, and might incur disposition costs or experience delays in
connection with liquidating the collateral. In addition, if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization upon the collateral by a Fund may be delayed or limited. Nuveen
Advisory will monitor the value of collateral at the time the transaction is
entered into and at all times subsequent during the term of the repurchase
agreement in an effort to determine that the value always equals or exceeds the
agreed upon price. In the event the value of the collateral declined below the
repurchase price, Nuveen Advisory will demand additional collateral from the
issuer to increase the value of the collateral to at least that of the
repurchase price.
Each of the Funds will not invest more than 10% of its assets in repurchase
agreements maturing in more than seven days.
S-8
<PAGE>
MANAGEMENT
The management of the Trust, including general supervision of the duties
performed for the Funds under the Investment Management Agreement, is the
responsibility of its Board of Trustees. The Trust currently has eight
trustees, two of whom are "interested persons" (as the term "interested
persons" is defined in the Investment Company Act of 1940) and six of whom are
"disinterested persons." The names and business addresses of the trustees and
officers of the Trust and their principal occupations and other affiliations
during the past five years are set forth below, with those trustees who are
"interested persons" of the Trust indicated by an asterisk.
<TABLE>
<CAPTION>
POSITIONS
AND OFFICES PRINCIPAL OCCUPATIONS
NAME AND ADDRESS AGE WITH TRUST DURING PAST FIVE YEARS
- ---------------- --- ----------- ----------------------
<S> <C> <C> <C>
Timothy R. 47 Chairman and Chairman since July 1, 1996 of The John Nuveen
Schwertfeger* Trustee Company, John Nuveen & Co. Incorporated, Nuveen
333 West Wacker Drive Advisory Corp. and Nuveen Institutional Advisory
Chicago, IL 60606 Corp.; prior thereto Executive Vice President and
Director of The John Nuveen Company (since March
1992), John Nuveen & Co. Incorporated, Nuveen
Advisory Corp. (since October 1992) and Nuveen
Institutional Advisory Corp. (since October 1992).
Anthony T. Dean* 51 President and President since July 1, 1996 of The John Nuveen
333 West Wacker Drive Trustee Company, John Nuveen & Co. Incorporated, Nuveen
Chicago, IL 60606 Advisory Corp. and Nuveen Institutional Advisory
Corp.; prior thereto, Executive Vice President and
Director of The John Nuveen Company (since March
1992), John Nuveen & Co. Incorporated, Nuveen
Advisory Corp. (since October 1992) and Nuveen
Institutional Advisory Corp. (since October 1992).
Robert P. Bremner 56 Trustee Private Investor and Management Consultant.
3725 Huntington
Street, N.W.
Washington, D.C. 20015
Lawrence H. Brown 62 Trustee Retired (August 1989) as Senior Vice President of
201 Michigan Avenue The Northern Trust Company.
Highwood, IL 60040
Anne E. Impellizzeri 64 Trustee President and Chief Executive Officer of Blanton-
3 West 29th Street Peale Institute (since December 1990).
New York, NY 10001
Margaret K. Rosenheim 70 Trustee Helen Ross Professor of Social Welfare Policy,
969 East 60th Street School of Social Service Administration,
Chicago, IL 60637 University of Chicago.
Peter R. Sawers 63 Trustee Adjunct Professor of Business and Economics,
22 The Landmark University of Dubuque, Iowa; Adjunct Professor,
Northfield, IL 60093 Lake Forest Graduate School of Management, Lake
Forest, Illinois (since January 1992); prior
thereto, Executive Director, Towers Perrin
Australia (management consultant); Chartered
Financial Analyst; Certified Management
Consultant.
William J. Schneider 56 Trustee Senior Partner, Miller-Valentine Partners, Vice
4000 Miller-Valentine President, Miller-Valentine Realty, Inc.
Ct.
P.O. Box 744
Dayton, OH 45401
Bruce P. Bedford 56 Executive Vice Executive Vice President of John Nuveen & Co.
333 West Wacker Drive President Incorporated, Nuveen Advisory Corp. and Nuveen
Chicago, IL 60606 Institutional Advisory Corp. (since January 1997),
Chairman and CEO of Flagship Resources Inc. and
Flagship Financial Inc. and the Flagship funds
(since January 1986).
Michael S. Davern 39 Vice President Vice President of Nuveen Advisory Corp. (since
One South Main Street January 1997); Vice President and Portfolio
Dayton, OH 45402 Manager (since September 1991) of Flagship
Financial.
</TABLE>
S-9
<PAGE>
<TABLE>
<CAPTION>
POSITIONS
AND OFFICES PRINCIPAL OCCUPATIONS
NAME AND ADDRESS AGE WITH TRUST DURING PAST FIVE YEARS
- ---------------- --- ----------- ----------------------
<S> <C> <C> <C>
William M. 32 Vice President Vice President of Nuveen Advisory Corp. (since
Fitzgerald December 1995); Assistant Vice President of Nuveen
333 West Advisory Corp. (from September 1992 to December
Wacker 1995), prior thereto Assistant Portfolio Manager
Drive of Nuveen Advisory Corp. (from June 1988 to
Chicago, IL September 1992).
60606
Kathleen M. 49 Vice President Vice President of John Nuveen & Co. Incorporated.
Flanagan
333 West
Wacker
Drive
Chicago, IL
60606
J. Thomas 41 Vice President Vice President of Nuveen Advisory Corp.
Futrell
333 West
Wacker
Drive
Chicago, IL
60606
Richard A. 33 Vice President Vice President of Nuveen Advisory Corp. (since
Huber January 1997); Vice President and Portfolio
3450 Manager (since August 1985) of Flagship Financial.
Cassandra
Drive
Tipp City,
OH 45371
Steven J. 39 Vice President Vice President of Nuveen Advisory Corp.
Krupa
333 West
Wacker
Drive
Chicago, IL
60606
Anna R. 50 Vice President Vice President of John Nuveen & Co. Incorporated.
Kucinskis
333 West
Wacker
Drive
Chicago, IL
60606
Larry W. 45 Vice President Vice President (since September 1992), and
Martin Assistant Secretary and Assistant General Counsel
333 West of John Nuveen & Co. Incorporated; Vice President
Wacker (since May 1993) and Assistant Secretary of Nuveen
Drive Advisory Corp.; Vice President (since May 1993)
Chicago, IL and Assistant Secretary (since January 1992) of
60606 Nuveen Institutional Advisory Corp.; Assistant
Secretary of The John Nuveen Company (since
February 1993).
Edward F. 31 Vice President Vice President (since September 1996), previously
Neild, IV Assistant Vice President (since December 1993) of
One South Nuveen Advisory Corp., portfolio manager prior
Main Street thereto (since January 1992); Vice President
Dayton, OH (since September 1996), previously Assistant Vice
45402 President (since May 1995) of Nuveen Institutional
Advisory Corp., portfolio manager prior thereto
(since January 1992).
Walter K. 48 Vice President Vice President of Nuveen Advisory Corp. (since
Parker January 1997); Vice President and Portfolio
One South Manager (since July 1994) of Flagship Financial;
Main Street Portfolio Manager and CIO Trust Investor (between
Dayton, OH 1983 and June 1994) for PNC Bank.
45402
O. Walter 57 Vice President Vice President and Controller of The John Nuveen
Renfftlen Company (since March 1992), John Nuveen & Co.
333 West Incorporated, Nuveen Advisory Corp. and Nuveen
Wacker Institutional Advisory Corp.
Drive
Chicago, IL
60606
Thomas C. 45 Vice President Vice President of Nuveen Advisory Corp. and Nuveen
Spalding, Institutional Advisory Corp.; Chartered Financial
Jr. Analyst.
333 West
Wacker
Drive
Chicago, IL
60606
H. William 62 Vice President Vice President and Treasurer of The John Nuveen
Stabenow Company (since March 1992), John Nuveen & Co.
333 West Incorporated, Nuveen Advisory Corp. and Nuveen
Wacker Institutional Advisory Corp. (since January 1992).
Drive
Chicago, IL
60606
Jan E. 41 Vice President Vice President of Nuveen Advisory Corp. (since
Terbrueggen January 1997); Vice President and Portfolio
One South Manager (since January 1992) of Flagship
Main Street Financial.
Dayton, OH
45402
</TABLE>
S-10
<PAGE>
<TABLE>
<CAPTION>
POSITIONS
AND OFFICES PRINCIPAL OCCUPATIONS
NAME AND ADDRESS AGE WITH TRUST DURING PAST FIVE YEARS
- ---------------- --- ----------- ----------------------
<S> <C> <C> <C>
Gifford 40 Vice President Vice President (since September 1992), Assistant
R. and Assistant Secretary and Assistant General Counsel of John
Zimmerman Secretary Nuveen & Co. Incorporated; Vice President (since
333 West May 1993) and Assistant Secretary of Nuveen
Wacker Advisory Corp.; Vice President (since May 1993)
Drive and Assistant Secretary (since January 1992) of
Chicago, Nuveen Institutional Advisory Corp.
IL 60606
</TABLE>
Anthony Dean, Margaret Rosenheim and Timothy Schwertfeger serve as members of
the Executive Committee of the Board of Trustees. The Executive Committee,
which meets between regular meetings of the Board of Trustees, is authorized to
exercise all of the powers of the Board of Trustees.
The trustees of the Trust are also directors or trustees, as the case may be,
of 36 other Nuveen open-end funds advised by Nuveen Advisory Corp. Mr. Dean,
Mr. Schwertfeger, Mr. Brown, Ms. Impellizzeri, Ms. Rosenheim and Mr. Sawers
also are directors or trustees of 52 Nuveen closed-end funds.
The following table sets forth compensation paid by the Trust to each of the
trustees of the Trust and the total compensation paid to each trustee during
the calendar year 1996. The Trust has no retirement or pension plans. The
officers and trustees affiliated with Nuveen serve without any compensation
from the Trust.
<TABLE>
<CAPTION>
TOTAL
AGGREGATE COMPENSATION
COMPENSATION FROM TRUST AND
FROM THE SERIES FUND COMPLEX
NAME OF TRUSTEE OF THIS TRUST PAID TO TRUSTEES
--------------- --------------- ----------------
<S> <C> <C>
Robert P. Bremner........................ $3,422(1) $20,500(1)
Lawrence H. Brown........................ $ 00 $58,500
Anne E. Impellizzeri..................... $ 00 $58,500
Margaret K. Rosenheim.................... $ 00 $66,315(2)
Peter R. Sawers.......................... $ 00 $58,500
William J. Schneider..................... $3,589(1) $21,500(1)
</TABLE>
- --------
(1) As a trustee of the Flagship Funds, for the 12 month period ended May 31,
1996.
(2) Includes $1,565 in interest accrued on deferred compensation from prior
years.
Each trustee who is not affiliated with Nuveen or Nuveen Advisory receives a
fee. The Trust requires no employees other than its officers, all of whom are
compensated by Nuveen.
The officers and directors of each Fund, in the aggregate, own less than 1%
of the shares of the Fund.
The following table sets forth the percentage ownership of each person, who,
as of January 3, 1997, owns of record, or is known by Registrant to own of
record or beneficially 5% or more of any class of a Fund's shares.
<TABLE>
<CAPTION>
PERCENTAGE
NAME OF FUND AND CLASS NAME AND ADDRESS OF OWNER OF OWNERSHIP
- ---------------------- ------------------------- ------------
<S> <C> <C>
Nuveen Flagship Alabama
Municipal Bond Fund Merrill Lynch, Pierce, Fenner & Smith 24.44%
Class A Shares............ For the sole benefit of its customers
Attn Fund Administration
4800 Deer Lake Dr., E FL 3
Jacksonville, FL 32246-6484
Farley L. Berman 9.54
1234 Champaign Avenue
Anniston, AL 36207-4727
Prudential Securities, Inc. FBO 6.87
Jerry F. Wilson
P.O. Box 300
Addison, AL 35540-0300
Smith Barney Inc. 5.81
00144705397
388 Greenwich Street
New York, NY 10013-2375
Nuveen Flagship Georgia
Municipal Bond Fund Merrill Lynch, Pierce, Fenner & Smith 39.37
Class A Shares............ For the sole benefit of its customers
Attn Fund Administration
4800 Deer Lake Dr., E 3rd Fl
Jacksonville, FL 32246-6484
</TABLE>
S-11
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE
NAME OF FUND AND CLASS NAME AND ADDRESS OF OWNER OF OWNERSHIP
- ---------------------- ------------------------- ------------
<S> <C> <C>
Nuveen Flagship Georgia
Municipal Bond Fund Merrill Lynch, Pierce, Fenner & Smith 52.61%
Class C Shares............ for the sole benefit of its customers
Attn Fund Administration
4800 Deer Lake Dr., E FL 3
Jacksonville, FL 32246-6484
Nuveen Flagship Louisiana
Municipal Bond Fund Merrill Lynch, Pierce, Fenner & Smith 45.62
Class A Shares............ for the sole benefit of its customers
Attn Fund Administration
4800 Deer Lake Dr., E FL 3
Jacksonville, FL 32246-6484
Nuveen Flagship Louisiana
Municipal Bond Fund Merrill Lynch, Pierce, Fenner & Smith 49.98
Class C Shares............ for the sole benefit of its customers
Attn Fund Administration
4800 Deer Lake Dr., E FL 3
Jacksonville, FL 32246-6484
Nuveen Flagship North
Carolina Municipal Bond Merrill Lynch, Pierce, Fenner & Smith 19.07
Fund for the sole benefit of its customers
Class A Shares............ Attn Fund Administration
4800 Deer Lake Dr., E FL 3
Jacksonville, FL 32246-6484
Nuveen Flagship North
Carolina Municipal Bond Merrill Lynch, Pierce, Fenner & Smith 24.51
Fund for the sole benefit of its customers
Class C Shares............ Attn Fund Administration
4800 Deer Lake Dr., E FL 3
Jacksonville, FL 32246-6484
Nuveen Flagship South
Carolina Municipal Bond Merrill Lynch, Pierce, Fenner & Smith 22.08
Fund For the sole benefit of its customers
Class A Shares............ Attn: Fund Administration
4800 Deer Lake Dr., E FL 3
Jacksonville, FL 32246-6484
Janece Marsha Garrison 10.61
1017 Stevens Creek Rd., Unit K-211
Augusta, GA 30907-3285
BHC Securities, Inc.
Trade House Account 10.60
Attn: Mutual Fund Dept.
2005 Market St.
Philadelphia, PA 19103-7042
JC Bradford & Co., Cust. FBO 6.41
Ruth K. Keever
330 Commerce St.
Nashville, TN 37201-1805
Nuveen Flagship Tennessee
Municipal Bond Fund Merrill Lynch, Pierce, Fenner & Smith 21.00
Class A Shares............ For the sole benefit of its customers
Attn: Fund Administration
4800 Deer Lake Dr., E FL 3
Jacksonville, FL 32246-6484
Nuveen Flagship Tennessee
Municipal Bond Fund Merrill Lynch, Pierce, Fenner & Smith 42.98
Class C Shares............ For the sole benefit of its customers
Attn: Fund Administration
4800 Deer Lake Dr., E FL 3
Jacksonville, FL 32246-6484
</TABLE>
S-12
<PAGE>
INVESTMENT ADVISER AND INVESTMENT MANAGEMENT AGREEMENT
Nuveen Advisory Corp. acts as investment adviser for and manages the
investment and reinvestment of the assets of each of the Funds. Nuveen Advisory
also administers the Trust's business affairs, provides office facilities and
equipment and certain clerical, bookkeeping and administrative services, and
permits any of its officers or employees to serve without compensation as
trustees or officers of the Trust if elected to such positions. See "Fund
Service Providers" in the Prospectus.
Pursuant to an investment management agreement between Nuveen Advisory and
the Trust, each of the Funds has agreed to pay an annual management fee at the
rates set forth below:
<TABLE>
<CAPTION>
AVERAGE DAILY NET ASSET VALUE FEE MANAGEMENT FEE
- --------------------------------- --------------
<S> <C>
For the first $125 million....................................... .5500 of 1%
For the next $125 million........................................ .5375 of 1%
For the next $250 million........................................ .5250 of 1%
For the next $500 million........................................ .5125 of 1%
For the next $1 billion.......................................... .5000 of 1%
For assets over $2 billion....................................... .4750 of 1%
</TABLE>
Nuveen Advisory has committed through at least 1998 to continue Flagship's
general dividend-setting practices.
For the last three fiscal years, the Funds paid net management fees to
Flagship Financial, predecessor to Nuveen Advisory, as follows:
<TABLE>
<CAPTION>
MANAGEMENT FEES NET OF
EXPENSE REIMBURSEMENT
PAID TO FLAGSHIP FEE WAIVERS AND EXPENSE
FINANCIAL FOR THE YEAR REIMBURSEMENTS
ENDED FOR THE YEAR ENDED
------------------------ -----------------------
5/31/94 5/31/95 5/31/96 5/31/94 5/31/95 5/31/96
-------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Alabama Municipal Bond Fund... $ 00 00 00 107 4,854 70,457
Georgia Municipal Bond Fund... $165,095 287,399 235,562 421,674 321,940 366,193
Louisiana Municipal Bond Fund. $ 24,821 96,442 148,090 290,721 240,777 222,310
North Carolina Municipal Bond
Fund......................... $676,431 675,473 674,110 290,321 289,460 318,954
South Carolina Municipal Bond
Fund......................... $ 00 00 00 23,928 37,587 86,888
Tennessee Municipal Bond Fund. $548,942 776,025 921,400 597,902 442,963 389,150
</TABLE>
In addition to the management fee of Nuveen Advisory, each Fund pays all
other costs and expenses of its operations and a portion of the Trust's general
administrative expenses allocated in proportion to the net assets of each Fund.
Nuveen Advisory is a wholly owned subsidiary of John Nuveen & Co.
Incorporated ("Nuveen"), the Funds' principal underwriter. Founded in 1898,
Nuveen is the oldest and largest investment banking firm specializing in the
underwriting and distribution of tax-exempt securities and maintains one of the
largest research departments in the investment banking community devoted to the
analysis of municipal securities. In 1961, Nuveen began sponsoring the Nuveen
Tax-Exempt Unit Trust and since that time has issued more than $36 billion in
tax-exempt unit trusts, including over $12 billion in tax-exempt insured unit
trusts. In addition, Nuveen open-end and closed-end funds held approximately
$35 billion in tax-exempt securities under management as of the date of this
Statement. Over 1,000,000 individuals have invested to date in Nuveen's tax-
exempt funds and trusts. Nuveen is a subsidiary of The John Nuveen Company
which, in turn, is approximately 78% owned by The St. Paul Companies, Inc.
("St. Paul"). St. Paul is located in St. Paul, Minnesota and is principally
engaged in providing property-liability insurance through subsidiaries.
Effective January 1, 1997, The John Nuveen Company acquired Flagship Resources
Inc., and as part of that acquisition, Flagship Financial, the adviser to the
Flagship Funds, was merged with Nuveen Advisory.
Nuveen Advisory's portfolio managers call upon the resources of Nuveen's
Research Department. The Nuveen Research Department reviews more than $100
billion in municipal bonds every year.
The Funds, the other Nuveen funds, Nuveen Advisory, and other related
entities have adopted a code of ethics which essentially prohibits all Nuveen
fund management personnel, including Nuveen fund portfolio managers, from
engaging in personal investments which compete or interfere with, or attempt to
take advantage of, a Fund's anticipated or actual portfolio transactions, and
is designed to assure that the interests of Fund shareholders are placed before
the interests of Nuveen personnel in connection with personal investment
transactions.
S-13
<PAGE>
PORTFOLIO TRANSACTIONS
Nuveen Advisory, in effecting purchases and sales of portfolio securities for
the account of each Fund, will place orders in such manner as, in the opinion
of management, will offer the best price and market for the execution of each
transaction. Portfolio securities will normally be purchased directly from an
underwriter or in the over-the-counter market from the principal dealers in
such securities, unless it appears that a better price or execution may be
obtained elsewhere. Portfolio securities will not be purchased from Nuveen or
its affiliates except in compliance with the Investment Company Act of 1940.
The Funds expect that all portfolio transactions will be effected on a
principal (as opposed to an agency) basis and, accordingly, do not expect to
pay any brokerage commissions. Purchases from underwriters will include a
commission or concession paid by the issuer to the underwriter, and purchases
from dealers will include the spread between the bid and asked price. Given the
best price and execution obtainable, it will be the practice of the Funds to
select dealers which, in addition, furnish research information (primarily
credit analyses of issuers and general economic reports) and statistical and
other services to Nuveen Advisory. It is not possible to place a dollar value
on information and statistical and other services received from dealers. Since
it is only supplementary to Nuveen Advisory's own research efforts, the receipt
of research information is not expected to reduce significantly Nuveen
Advisory's expenses. While Nuveen Advisory will be primarily responsible for
the placement of the business of the Funds, the policies and practices of
Nuveen Advisory in this regard must be consistent with the foregoing and will,
at all times, be subject to review by the Board of Trustees.
Nuveen Advisory reserves the right to, and does, manage other investment
accounts and investment companies for other clients, which may have investment
objectives similar to the Funds. Subject to applicable laws and regulations,
Nuveen Advisory will attempt to allocate equitably portfolio transactions among
the Funds and the portfolios of its other clients purchasing or selling
securities whenever decisions are made to purchase or sell securities by a Fund
and one or more of such other clients simultaneously. In making such
allocations the main factors to be considered will be the respective investment
objectives of the Fund and such other clients, the relative size of portfolio
holdings of the same or comparable securities, the availability of cash for
investment by the Fund and such other clients, the size of investment
commitments generally held by the Fund and such other clients and opinions of
the persons responsible for recommending investments to the Fund and such other
clients. While this procedure could have a detrimental effect on the price or
amount of the securities available to a Fund from time to time, it is the
opinion of the Board of Trustees that the benefits available from Nuveen
Advisory's organization will outweigh any disadvantage that may arise from
exposure to simultaneous transactions.
Under the Investment Company Act of 1940, the Funds may not purchase
portfolio securities from any underwriting syndicate of which Nuveen is a
member except under certain limited conditions set forth in Rule 10f-3. The
Rule sets forth requirements relating to, among other things, the terms of an
issue of Municipal Obligations purchased by a Fund, the amount of Municipal
Obligations which may be purchased in any one issue and the assets of a Fund
which may be invested in a particular issue. In addition, purchases of
securities made pursuant to the terms of the Rule must be approved at least
quarterly by the Board of Trustees, including a majority of the trustees who
are not interested persons of the Trust.
NET ASSET VALUE
As stated in the Prospectus, the net asset value of the shares of the Funds
will be determined separately for each class of the Funds' shares by The Chase
Manhattan Bank, the Funds' custodian, as of the close of trading (normally 4:00
p.m. Eastern Time) on each day on which the Exchange is normally open for
trading. The Exchange is not open for trading on New Year's Day, Washington's
Birthday, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving
Day and Christmas Day. The net asset value per share of a class of shares of a
Fund will be computed by dividing the value of the Fund's assets attributable
to the class, less the liabilities attributable to the class, by the number of
shares of the class outstanding.
In determining net asset value for the Funds, each Fund's custodian utilizes
the valuations of portfolio securities furnished by a pricing service approved
by the trustees. Securities for which quotations are not readily available
(which constitute a majority of the securities held by the Funds) are valued at
fair value as determined by the pricing service using methods which include
consideration of the following: yields or prices of municipal bonds of
comparable quality, type of issue, coupon, maturity and rating; indications as
to value from dealers; and general market conditions. The pricing service may
employ electronic data processing techniques and/or a matrix system to
determine valuations. The procedures of the pricing service and its valuations
are reviewed by the officers of the Trust under the general supervision of the
Board of Trustees.
S-14
<PAGE>
TAX MATTERS
FEDERAL INCOME TAX MATTERS
The following discussion of federal income tax matters is based upon the
advice of Fried, Frank, Harris, Shriver & Jacobson, counsel to the Trust.
Each Fund intends to qualify under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code") for tax treatment as a regulated investment
company. In order to qualify as a regulated investment company, a Fund must
satisfy certain requirements relating to the source of its income,
diversification of its assets, and distributions of its income to shareholders.
First, a Fund must derive at least 90% of its annual gross income (including
tax-exempt interest) from dividends, interest, payments with respect to
securities loans, gains from the sale or other disposition of stock or
securities, foreign currencies or other income (including but not limited to
gains from options and futures) derived with respect to its business of
investing in such stock or securities (the "90% gross income test"). Second, a
Fund must derive less than 30% of its annual gross income from the sale or
other disposition of any of the following which was held for less than three
months: (i) stock or securities and (ii) certain options, futures, or forward
contracts (the "short-short test"). Third, a Fund must diversify its holdings
so that, at the close of each quarter of its taxable year, (i) at least 50% of
the value of its total assets is comprised of cash, cash items, United States
Government securities, securities of other regulated investment companies and
other securities limited in respect of any one issuer to an amount not greater
in value than 5% of the value of a Fund's total assets and to not more than 10%
of the outstanding voting securities of such issuer, and (ii) not more than 25%
of the value of the total assets is invested in the securities of any one
issuer (other than United States Government securities and securities of other
regulated investment companies) or two or more issuers controlled by a Fund and
engaged in the same, similar or related trades or businesses.
As a regulated investment company, a Fund will not be subject to federal
income tax in any taxable year for which it distributes at least 90% of the sum
of (i) its "investment company taxable income" (which includes dividends,
taxable interest, taxable original issue discount and market discount income,
income from securities lending, net short-term capital gain in excess of long-
term capital loss, and any other taxable income other than "net capital gain"
(as defined below) and is reduced by deductible expenses) and (ii) its net tax-
exempt interest (the excess of its gross tax-exempt interest income over
certain disallowed deductions). A Fund may retain for investment its net
capital gain (which consists of the excess of its net long-term capital gain
over its short-term capital loss). However, if a Fund retains any net capital
gain or any investment company taxable income, it will be subject to tax at
regular corporate rates on the amount retained. If a Fund retains any capital
gain, such Fund may designate the retained amount as undistributed capital
gains in a notice to its shareholders who, if subject to federal income tax on
long-term capital gains, (i) will be required to include in income for federal
income tax purposes, as long-term capital gain, their shares of such
undistributed amount, and (ii) will be entitled to credit their proportionate
shares of the tax paid by such Fund against their federal income tax
liabilities if any, and to claim refunds to the extent the credit exceeds such
liabilities. For federal income tax purposes, the tax basis of shares owned by
a shareholder of the Fund will be increased by an amount equal under current
law to 65% of the amount of undistributed capital gains included in the
shareholder's gross income. Each Fund intends to distribute at least annually
to its shareholders all or substantially all of its net tax-exempt interest and
any investment company taxable income and net capital gain.
Treasury regulations permit a regulated investment company, in determining
its investment company taxable income and net capital gain, i.e., the excess of
net long-term capital gain over net short-term capital loss for any taxable
year, to elect (unless it has made a taxable year election for excise tax
purposes as discussed below) to treat all or part of any net capital loss, any
net long-term capital loss or any net foreign currency loss incurred after
October 31 as if they had been incurred in the succeeding year.
Each Fund also intends to satisfy conditions (including requirements as to
the proportion of its assets invested in Municipal Obligations) that will
enable it to designate distributions from the interest income generated by
investments in Municipal Obligations, which is exempt from regular federal
income tax when received by such Fund, as exempt-interest dividends.
Shareholders receiving exempt-interest dividends will not be subject to regular
federal income tax on the amount of such dividends. Insurance proceeds received
by a Fund under any insurance policies in respect of scheduled interest
payments on defaulted Municipal Obligations will be excludable from federal
gross income under Section 103(a) of the Code. In the case of non-appropriation
by a political subdivision, however, there can be no assurance that payments
made by the insurer representing interest on "non-appropriation" lease
obligations will be excludable from gross income for federal income tax
purposes. See "Investment Policies and Investment Portfolio; Portfolio
Securities."
Distributions by a Fund of net interest received from certain taxable
temporary investments (such as certificates of deposit, commercial paper and
obligations of the U.S. Government, its agencies and instrumentalities) and net
short-term capital gains realized by a Fund, if any, will be taxable to
shareholders as ordinary income whether received in cash or additional shares.
If a Fund purchases a Municipal Obligation at a market discount, any gain
realized by the Fund upon sale or redemption of the Municipal Obligation will
be treated as taxable interest income to the extent such gain does not exceed
the market discount, and any gain realized in excess of the market discount
will be treated as capital gains. Any net long-term capital gains realized by a
Fund and distributed to shareholders in cash or additional shares, will be
taxable to shareholders as long-term capital gains regardless of the length of
time investors have owned shares of a Fund.
S-15
<PAGE>
Distributions by a Fund that do not constitute ordinary income dividends,
exempt-interest dividends, or capital gain dividends will be treated as a
return of capital to the extent of (and in reduction of) the shareholder's tax
basis in his or her shares. Any excess will be treated as gain from the sale of
his or her shares, as discussed below.
If a Fund has both tax-exempt and taxable income, it will use the "average
annual" method for determining the designated percentage that is taxable income
and designate the use of such method within 60 days after the end of the Fund's
taxable year. Under this method, one designated percentage is applied uniformly
to all distributions made during the Fund's taxable year. The percentage of
income designated as tax-exempt for any particular distribution may be
substantially different from the percentage of the Fund's income that was tax-
exempt during the period covered by the distribution.
If a Fund engages in hedging transactions involving financial futures and
options, these transactions will be subject to special tax rules, the effect of
which may be to accelerate income to a Fund, defer a Fund's losses, cause
adjustments in the holding periods of a Fund's securities, convert long-term
capital gains into short-term capital gains and convert short-term capital
losses into long-term capital losses. These rules could therefore affect the
amount, timing and character of distributions to shareholders.
Because the taxable portion of a Fund's investment income consists primarily
of interest, none of its dividends, whether or not treated as exempt-interest
dividends, is expected to qualify under the Internal Revenue Code for the
dividends received deductions for corporations.
Prior to purchasing shares in a Fund, the impact of dividends or
distributions which are expected to be or have been declared, but not paid,
should be carefully considered. Any dividend or distribution declared shortly
after a purchase of such shares prior to the record date will have the effect
of reducing the per share net asset value by the per share amount of the
dividend or distribution.
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to shareholders of
record on a specified date in one of those months and paid during the following
January, will be treated as having been distributed by a Fund (and received by
the shareholders) on December 31.
The redemption or exchange of the shares of a Fund normally will result in
capital gain or loss to the shareholders. Generally, a shareholder's gain or
loss will be long-term gain or loss if the shares have been held for more than
one year. Present law taxes both long- and short-term capital gains of
corporations at the rates applicable to ordinary income. For non-corporate
taxpayers, however, net capital gains (i.e., the excess of net long-term
capital gain over net short-term capital loss) will be taxed at a maximum
marginal rate of 28%, while short-term capital gains and other ordinary income
will be taxed at a maximum marginal rate of 39.6%. Because of the limitations
on itemized deductions and the deduction for personal exemptions applicable to
higher income taxpayers, the effective tax rate may be higher in certain
circumstances.
All or a portion of a sales charge paid in purchasing shares of a Fund cannot
be taken into account for purposes of determining gain or loss on the
redemption or exchange of such shares within 90 days after their purchase to
the extent shares of a Fund or another fund are subsequently acquired without
payment of a sales charge pursuant to the reinvestment or exchange privilege.
Any disregarded portion of such charge will result in an increase in the
shareholder's tax basis in the shares subsequently acquired. Moreover, losses
recognized by a shareholder on the redemption or exchange of shares of a Fund
held for six months or less are disallowed to the extent of any distribution of
exempt-interest dividends received with respect to such shares and, if not
disallowed, such losses are treated as long-term capital losses to the extent
of any distributions of long-term capital gains made with respect to such
shares. In addition, no loss will be allowed on the redemption or exchange of
shares of a Fund if the shareholder purchases other shares of such Fund
(whether through reinvestment of distributions or otherwise) or the shareholder
acquires or enters into a contract or option to acquire securities that are
substantially identical to shares of a Fund within a period of 61 days
beginning 30 days before and ending 30 days after such redemption or exchange.
If disallowed, the loss will be reflected in an adjustment to the basis of the
shares acquired.
It may not be advantageous from a tax perspective for shareholders to redeem
or exchange shares after tax-exempt income has accrued but before the record
date for the exempt-interest dividend representing the distribution of such
income. Because such accrued tax-exempt income is included in the net asset
value per share (which equals the redemption or exchange value), such a
redemption could result in treatment of the portion of the sales or redemption
proceeds equal to the accrued tax-exempt interest as taxable gain (to the
extent the redemption or exchange price exceeds the shareholder's tax basis in
the shares disposed of) rather than tax-exempt interest.
In order to avoid a 4% federal excise tax, a Fund must distribute or be
deemed to have distributed by December 31 of each calendar year at least 98% of
its taxable ordinary income for such year, at least 98% of the excess of its
realized capital gains over its realized capital losses (generally computed on
the basis of the one-year period ending on October 31 of such year) and 100% of
any taxable ordinary income and the excess of realized capital gains over
realized capital losses for the prior year that was not distributed during such
year and on which such Fund paid no federal income tax. For purposes of the
excise tax, a regulated investment company may reduce its capital gain net
income (but not below its net capital gain) by the amount of any net ordinary
loss for the calendar year. The Funds intend to make timely distributions in
compliance with these requirements and consequently it is anticipated that they
generally will not be required to pay the excise tax.
S-16
<PAGE>
If in any year a Fund should fail to qualify under Subchapter M for tax
treatment as a regulated investment company, the Fund would incur a regular
corporate federal income tax upon its income for that year (other than interest
income from Municipal Obligations), and distributions to its shareholders would
be taxable to shareholders as ordinary dividend income for federal income tax
purposes to the extent of the Fund's available earnings and profits.
Among the requirements that a Fund must meet in order to qualify under
Subchapter M in any year is that less than 30% of its gross income must be
derived from the sale or other disposition of securities and certain other
assets held for less than three months.
Because the Funds may invest in private activity bonds, the interest on which
is not federally tax-exempt to persons who are "substantial users" of the
facilities financed by such bonds or "related persons" of such "substantial
users," the Funds may not be an appropriate investment for shareholders who are
considered either a "substantial user" or a "related person" within the meaning
of the Code. For additional information, investors should consult their tax
advisers before investing in a Fund.
Federal tax law imposes an alternative minimum tax with respect to both
corporations and individuals. Interest on certain Municipal Obligations, such
as bonds issued to make loans for housing purposes or to private entities (but
not for certain tax-exempt organizations such as universities and non-profit
hospitals), is included as an item of tax preference in determining the amount
of a taxpayer's alternative minimum taxable income. To the extent that a Fund
receives income from Municipal Obligations subject to the alternative minimum
tax, a portion of the dividends paid by it, although otherwise exempt from
federal income tax, will be taxable to shareholders to the extent that their
tax liability is determined under the alternative minimum tax regime. The Funds
will annually supply shareholders with a report indicating the percentage of
Fund income attributable to Municipal Obligations subject to the federal
alternative minimum tax.
In addition, the alternative minimum taxable income for corporations is
increased by 75% of the difference between an alternative measure of income
("adjusted current earnings") and the amount otherwise determined to be the
alternative minimum taxable income. Interest on all Municipal Obligations, and
therefore all distributions by the Funds that would otherwise be tax-exempt, is
included in calculating a corporation's adjusted current earnings.
Tax-exempt income, including exempt-interest dividends paid by a Fund, will
be added to the taxable income of individuals receiving social security or
railroad retirement benefits in determining whether a portion of that benefit
will be subject to federal income tax.
The Code provides that interest on indebtedness incurred or continued to
purchase or carry shares of any Fund is not deductible. Under rules used by the
IRS for determining when borrowed funds are considered used for the purpose of
purchasing or carrying particular assets, the purchase of shares of a Fund may
be considered to have been made with borrowed funds even though such funds are
not directly traceable to the purchase of shares.
The Funds are required in certain circumstances to withhold 31% of taxable
dividends and certain other payments paid to non-corporate holders of shares
who have not furnished to the Funds their correct taxpayer identification
number (in the case of individuals, their social security number) and certain
certifications, or who are otherwise subject to backup withholding.
The foregoing is a general and abbreviated summary of the provisions of the
Code and Treasury Regulations presently in effect as they directly govern the
taxation of the Fund and its shareholders. For complete provisions, reference
should be made to the pertinent Code sections and Treasury Regulations. The
Code and Treasury Regulations are subject to change by legislative or
administrative action, and any such change may be retroactive with respect to
Fund transactions. Shareholders are advised to consult their own tax advisers
for more detailed information concerning the federal taxation of the Funds and
the income tax consequences to their shareholders.
STATE TAX MATTERS
The discussion of tax treatment is based on the assumptions that the Funds
will qualify under Subchapter M of the Code as regulated investment companies
and as qualified investment funds under applicable state law, that they will
satisfy the conditions which will cause distributions to qualify as exempt-
interest dividends to shareholders when distributed as intended, and that each
Fund will distribute all interest and dividends it receives to its
shareholders. Unless otherwise noted, shareholders in each Fund will not be
subject to state income taxation on distributions that are attributable to
interest earned on the municipal obligations issued by that state or its
subdivisions, or on obligations of the United States. Shareholders generally
will be required to include capital gain distributions in their income for
state tax purposes. The tax discussion summarizes general state tax laws which
are currently in effect and are subject to change by legislative or
administrative action; any such changes may be retroactive with respect to the
applicable Fund's transactions. Investors should consult a tax adviser for more
detailed information about state taxes to which they may be subject.
ALABAMA
The following is a general, abbreviated summary of certain provisions of the
applicable Alabama tax law as presently in effect as it directly governs the
taxation of resident individual and corporate shareholders of the Alabama Fund.
This summary does not address the taxation of other shareholders nor does it
discuss any local taxes that may be applicable.
S-17
<PAGE>
These provisions are subject to change by legislative or administrative action,
and any such change may be retroactive with respect to Alabama Fund
transactions.
The following is based on the assumptions that the Alabama Fund will qualify
under Subchapter M of the Code as a regulated investment company, that it will
satisfy the conditions which will cause Alabama Fund distributions to qualify
as exempt-interest dividends to shareholders, and that it will distribute all
interest and dividends it receives to the Alabama Fund's shareholders.
The Alabama Fund will be subject to the Alabama corporate franchise tax and
the Alabama income tax only if it has a sufficient nexus with Alabama. If it is
subject to such taxes, it does not expect to pay a material amount of either
tax.
Distributions by the Alabama Fund that are attributable to interest on any
obligation of Alabama and its political subdivisions or to interest on
obligations of the United States, its territories, possessions, or
instrumentalities that are exempt from state taxation under federal law will
not be subject to the Alabama personal income tax or the Alabama corporate
income tax. Distributions attributable to all other taxable income realized by
the Alabama Fund, including capital gains will be subject to the Alabama
personal and corporate income taxes.
Gain on the sale, exchange, or other disposition of shares of the Alabama
Fund will be subject to the Alabama personal and corporate income taxes.
Shares of the Alabama Fund may be subject to the Alabama inheritance tax and
the Alabama estate tax if held by an Alabama decedent at the time of death.
Shareholders are advised to consult with their own tax advisers for more
detailed information concerning Alabama and local tax matters.
GEORGIA
The following is a general, abbreviated summary of certain provisions of the
applicable Georgia tax law as presently in effect as it directly governs the
taxation of resident individual and corporate shareholders of the Georgia Fund.
This summary does not address the taxation of other shareholders nor does it
discuss any local taxes that may be applicable. These provisions are subject to
change by legislative or administrative action, and any such change may be
retroactive with respect to Georgia Fund transactions.
The following is based on the assumptions that the Georgia Fund will qualify
under Subchapter M of the Code as a regulated investment company, that it will
satisfy the conditions which will cause Georgia Fund distributions to qualify
as exempt-interest dividends to shareholders, and that it will distribute all
interest and dividends it receives to the Georgia Fund's shareholders.
The Georgia Fund will be subject to the Georgia corporate net worth tax and
the Georgia corporate income tax only if it has a sufficient nexus with
Georgia. If it is subject to such taxes, it does not expect to pay a material
amount of either tax.
Distributions from the Georgia Fund that are attributable to interest on any
obligation of Georgia or its political subdivisions or on obligations of the
United States, its territories, possessions, or instrumentalities that are
exempt from state taxation under federal law will not be subject to the Georgia
personal income tax or the Georgia corporate income tax. All other
distributions, including distributions attributable to capital gains, will be
subject to the Georgia personal and corporate income taxes.
Gain on the sale, exchange, or other disposition of shares of the Georgia
Fund will be subject to the Georgia personal and corporate income taxes.
Shares of the Georgia Fund may be subject to the Georgia estate tax if held
by a Georgia decedent at the time of death.
Shareholders should note that the Georgia intangible personal property tax
has been repealed effective January 1, 1997.
Shareholders are advised to consult with their own tax advisers for more
detailed information concerning Georgia and local tax matters.
LOUISIANA
The following is a general, abbreviated summary of certain provisions of the
applicable Louisiana tax law as presently in effect as it directly governs the
taxation of resident individual and corporate shareholders of the Louisiana
Fund. This summary does not address the taxation of other shareholders nor does
it discuss any local taxes that may be applicable. These provisions are subject
to change by legislative or administrative action, and any such change may be
retroactive with respect to Louisiana Fund transactions.
The following is based on the assumptions that the Louisiana Fund will
qualify under Subchapter M of the Code as a regulated investment company, that
it will satisfy the conditions which will cause Louisiana Fund distributions to
qualify as exempt-interest dividends to shareholders, and that it will
distribute all interest and dividends it receives to the Louisiana Fund's
shareholders.
S-18
<PAGE>
The Louisiana Fund will be subject to the Louisiana corporate franchise tax
and corporate income tax only if it has a sufficient nexus with Louisiana. If
it is subject to such taxes, it does not expect to pay a material amount of
either tax.
Distributions by the Louisiana Fund that are attributable to interest on any
obligation of Louisiana and its political subdivisions or to interest on
obligations of the United States, its territories, possessions or
instrumentalities that are exempt from state taxation under federal law will
not be subject to the Louisiana personal income tax or the Louisiana corporate
income tax. All other distributions, including distributions attributable to
capital gains, will be subject to the Louisiana personal and corporate income
taxes.
Gain on the sale, exchange, or other disposition of shares of the Louisiana
Fund will be subject to the Louisiana personal and corporate income taxes.
Shares of the Louisiana Fund may be subject to the Louisiana inheritance tax
and the Louisiana estate tax if held by a Louisiana decedent at the time of
death.
Shareholders are advised to consult with their own tax advisers for more
detailed information concerning Louisiana tax matters.
NORTH CAROLINA
The following is a general, abbreviated summary of certain provisions of the
applicable North Carolina tax law as presently in effect as it directly governs
the taxation of resident individual and corporate shareholders of the North
Carolina Fund. This summary does not address the taxation of other shareholders
nor does it discuss any local taxes that may be applicable. These provisions
are subject to change by legislative or administrative action, and any such
change may be retroactive with respect to North Carolina Fund transactions.
The following is based on the assumptions that the North Carolina Fund will
qualify under Subchapter M of the Code as a regulated investment company, that
it will satisfy the conditions which will cause North Carolina Fund
distributions to qualify as exempt-interest dividends to shareholders, and that
it will distribute all interest and dividends it receives to the North Carolina
Fund's shareholders.
The North Carolina Fund will be subject to the North Carolina corporation
income tax and the North Carolina franchise tax only if it has a sufficient
nexus with North Carolina. If it is subject to such taxes, it does not expect
to pay a material amount of either tax.
Distributions from North Carolina Fund that are attributable to interest on
any obligation of North Carolina or its political subdivisions or to interest
on obligations of the United States, its territories, possessions, or
instrumentalities that are exempt from state taxation under federal law will
not be subject to the North Carolina personal income tax or the North Carolina
corporation income tax. All other distributions, including distributions
attributable to capital gains, will be subject to the North Carolina personal
and corporation income taxes.
Gain on the sale, exchange, or other disposition of shares of the North
Carolina Fund will be subject to the North Carolina personal and corporation
income taxes.
Shares of the North Carolina Fund may be subject to the North Carolina
inheritance tax and the North Carolina estate tax if owned by a North Carolina
decedent at the time of death.
Shareholders are advised to consult with their own tax advisers for more
detailed information concerning North Carolina and local tax matters.
SOUTH CAROLINA
The following is a general, abbreviated summary of certain provisions of the
applicable South Carolina tax law as presently in effect as it directly governs
the taxation of resident individual and corporate shareholders of the South
Carolina Fund. This summary does not address the taxation of other shareholders
nor does it discuss any local taxes that may be applicable. These provisions
are subject to change by legislative or administrative action, and any such
change may be retroactive with respect to South Carolina Fund transactions.
The following is based on the assumptions that the South Carolina Fund will
qualify under Subchapter M of the Code as a regulated investment company, that
it will satisfy the conditions which will cause South Carolina Fund
distributions to qualify as exempt-interest dividends to shareholders, and that
it will distribute all interest and dividends it receives to the South Carolina
Fund's shareholders.
The South Carolina Fund will be subject to the South Carolina corporation net
license fee and the South Carolina corporate income tax only if it has a
sufficient nexus with South Carolina. If it is subject to such taxes, it does
not expect to pay a material amount of either tax.
Distributions by the South Carolina Fund that are attributable to interest on
any obligations of South Carolina or its political subdivisions or to interest
on obligations of the United States, its territories, possessions, or
instrumentalities that are exempt from state taxation under federal law will
not be subject to the South Carolina personal income tax or the South Carolina
corporate income tax. All other distributions, including distributions
attributable to capital gains, will be subject to the South Carolina personal
and corporate income taxes.
S-19
<PAGE>
Gain on the sale, exchange, or other disposition of shares of the South
Carolina Fund will be subject to the South Carolina personal and corporate
income taxes.
Shares of the South Carolina Fund may be subject to the South Carolina estate
tax if owned by a South Carolina decedent at the time of death.
Shareholders are advised to consult with their own tax advisers for more
detailed information concerning South Carolina and local tax matters.
TENNESSEE
The following is a general, abbreviated summary of certain provisions of the
applicable Tennessee tax law as presently in effect as it directly governs the
taxation of resident individual and corporate shareholders of the Tennessee
Fund. This summary does not address the taxation of other shareholders nor does
it discuss any local taxes that may be applicable. These provisions are subject
to change by legislative or administrative action, and any such change may be
retroactive with respect to Tennessee Fund transactions.
The following is based on the assumptions that the Tennessee Fund will
qualify under Subchapter M of the Code as a regulated investment company, that
it will invest at least 75% of its assets in any Obligation of Tennessee and
its political subdivisions ("Tennessee Obligations") or obligations of the
United States, its territories, possessions, or instrumentalities that are
exempt from state taxation under federal law ("Federal Obligations"), that it
will satisfy the conditions which will cause Tennessee Fund distributions to
qualify as exempt-interest dividends to shareholders, and that it will
distribute all interest and dividends it receives to the Tennessee Fund's
shareholders.
The Tennessee Fund is not subject to Tennessee taxes.
Distributions from the Tennessee Fund that are attributable to interest on
Tennessee Obligations or to interest on Federal Obligations will not be subject
to the Tennessee individual income tax (also known as the "Hall income tax").
In addition, under current administrative practice of the Tennessee Department
of Revenue, dividends attributable to gains realized from the sale or exchange
of Tennessee Obligations or Federal Obligations will not be subject to the
Tennessee individual income tax. All other distributions will be subject to
such tax.
All distributions from the Tennessee Fund, regardless of source, will be
subject to the Tennessee corporate excise tax.
Gain on the sale, exchange, or other disposition of shares of the Tennessee
Fund will not be subject to the Tennessee individual income tax will be subject
to the Tennessee corporate excise tax.
Shares of the Tennessee Fund may be subject to the Tennessee inheritance tax
and the Tennessee estate tax if owned by a Tennessee decedent at the time of
death.
Shareholders are advised to consult with their own tax advisers for more
detailed information concerning Tennessee and local tax matters.
PERFORMANCE INFORMATION
The historical investment performance of the Funds may be shown in the form
of "yield," "taxable equivalent yield," "average annual total return,"
"cumulative total return" and "taxable equivalent total return" figures, each
of which will be calculated separately for each class of shares.
In accordance with a standardized method prescribed by rules of the
Securities and Exchange Commission ("SEC"), yield is computed by dividing the
net investment income per share earned during the specified one month or 30-day
period by the maximum offering price per share on the last day of the period,
according to the following formula:
a -b
Yield=2 [(----- + 1)/6/ -1]
cd
In the above formula, a = dividends and interest earned during the period; b
= expenses accrued for the period (net of reimbursements); c = the average
daily number of shares outstanding during the period that were entitled to
receive dividends; and d = the maximum offering price per share on the last day
of the period. In the case of Class A shares, the maximum offering price
includes the current maximum front-end sales charge of 4.20%.
In computing yield, the Funds follow certain standardized accounting
practices specified by SEC rules. These practices are not necessarily
consistent with those that the Funds use to prepare their annual and interim
financial statements in conformity with generally accepted accounting
principles. Thus, yield may not equal the income paid to shareholders or the
income reported in a Fund's financial statements.
Taxable equivalent yield is computed by dividing that portion of the yield
which is tax-exempt by the remainder of (1 minus the stated combined federal
and state income tax rate, taking into account the deductibility of state taxes
for federal income tax purposes) and adding the product to that portion, if
any, of the yield that is not tax exempt.
S-20
<PAGE>
The taxable equivalent yields quoted below are based upon (1) the stated
combined federal and state income tax rates and (2) the yields for the 30-day
period quoted in the left-hand column. None of the Funds had Class B Shares
outstanding as of the date of this statement of additional information.
<TABLE>
<CAPTION>
AS OF NOVEMBER 30, 1996
-------------------------------------------
COMBINED FEDERAL TAXABLE
YIELD AND STATE TAX RATE* EQUIVALENT YIELD
----- ------------------- ----------------
<S> <C> <C> <C>
Alabama Municipal Bond Fund
Class A Shares............ 4.92% 41.5% 8.41%
Class C Shares............ N/A N/A N/A
Class R Shares............ N/A N/A N/A
Georgia Municipal Bond Fund
Class A Shares............ 4.60% 43.0% 8.07%
Class C Shares............ 4.27% 43.0% 7.49%
Class R Shares............ N/A N/A N/A
Louisiana Municipal Bond
Fund
Class A Shares............ 4.66% 42.0% 8.03%
Class C Shares............ 4.32% 42.0% 7.45%
Class R Shares............ N/A N/A N/A
North Carolina Municipal
Bond Fund
Class A Shares............ 4.25% 44.5% 7.66%
Class C Shares............ 3.89% 44.5% 7.01%
Class R Shares............ N/A N/A N/A
South Carolina Municipal
Bond Fund
Class A Shares............ 5.04% 44.0% 9.00%
Class C Shares............ N/A N/A N/A
Class R Shares............ N/A N/A N/A
Tennessee Municipal Bond
Fund
Class A Shares............ 4.40% 43.0% 7.72%
Class C Shares............ 4.06% 43.0% 7.12%
Class R Shares............ N/A N/A N/A
</TABLE>
- --------
* The combined tax rates used in these tables represent the highest or one
of the highest combined tax rates applicable to state taxpayers, rounded
to the nearest .5%; these rates do not reflect the current federal tax
limitations on itemized deductions and personal exemptions, which may
raise the effective tax rate and taxable equivalent yield for taxpayers
above certain income levels.
For additional information concerning taxable equivalent yields, see the
Taxable Equivalent Yields tables in the Prospectus.
The Funds may from time to time in their advertising and sales materials
report a quotation of their current distribution rate. The distribution rate
represents a measure of dividends distributed for a specified period.
Distribution rate is computed by taking the most recent monthly tax-free income
dividend per share, multiplying it by 12 to annualize it, and dividing by the
appropriate price per share (e.g., net asset value for purchases to be made
without a load such as reinvestments from Nuveen UITs, or the maximum public
offering price). The distribution rate differs from yield and total return and
therefore is not intended to be a complete measure of performance. Distribution
rate may sometimes differ from yield because a Fund may be paying out more than
it is earning and because it may not include the effect of amortization of bond
premiums to the extent such premiums arise after the bonds were purchased.
The distribution rates as of the period quoted, based on the maximum public
offering price then in effect for the Funds, and assuming the imposition of the
maximum sales charge for Class A Shares of 4.20%, were as follows:
<TABLE>
<CAPTION>
NOVEMBER 30, 1996
-----------------------
DISTRIBUTION RATES
-----------------------
CLASS A CLASS C CLASS R
------- ------- -------
<S> <C> <C> <C>
Alabama Municipal Bond Fund....................... 4.90% N/A N/A
Georgia Municipal Bond Fund....................... 5.00% 4.69% N/A
Louisiana Municipal Bond Fund..................... 4.95% 4.65% N/A
North Carolina Municipal Bond Fund ............... 4.86% 4.54% N/A
South Carolina Municipal Bond Fund................ 4.90% N/A N/A
Tennessee Municipal Bond Fund..................... 4.93% 4.62% N/A
</TABLE>
S-21
<PAGE>
Average annual total return quotation is computed in accordance with a
standardized method prescribed by SEC rules. The average annual total return
for a specific period is found by taking a hypothetical, $1,000 investment
("initial investment") in Fund shares on the first day of the period, reducing
the amount to reflect the maximum sales charge, and computing the "redeemable
value" of that investment at the end of the period. The redeemable value is
then divided by the initial investment, and this quotient is taken to the Nth
root (N representing the number of years in the period) and 1 is subtracted
from the result, which is then expressed as a percentage. The calculation
assumes that all income and capital gains distributions have been reinvested in
Fund shares at net asset value on the reinvestment dates during the period.
Total returns for the oldest class of each fund reflect actual performance
for all periods. For other classes existing prior to February 1, 1997, total
returns reflect actual performance for periods since class inception, and the
oldest class's performance for periods prior to inception, adjusted for the
differences in sales charges and fees between the classes. For classes created
on February 1, 1997, total returns reflect the oldest class's performance for
all periods, adjusted for the differences in sales charges and fees between the
classes.
The inception dates for each class of the Funds' shares are as follows:
<TABLE>
<CAPTION>
INCEPTION DATES
------------------
<S> <C>
Alabama Municipal Bond Fund
Class A Shares....................................... April 4, 1994
Class B Shares....................................... February 1, 1997
Class C Shares....................................... February 1, 1997
Class R Shares....................................... February 1, 1997
Georgia Municipal Bond Fund
Class A Shares....................................... March 27, 1986
Class B Shares....................................... February 1, 1997
Class C Shares....................................... January 4, 1994
Class R Shares....................................... February 1, 1997
Lousiana Municipal Bond Fund
Class A Shares....................................... September 12, 1989
Class B Shares....................................... February 1, 1997
Class C Shares....................................... February 2, 1994
Class R Shares....................................... February 1, 1997
North Carolina Municipal Bond Fund
Class A Shares....................................... March 27, 1986
Class B Shares....................................... February 1, 1997
Class C Shares....................................... October 4, 1993
Class R Shares....................................... February 1, 1997
South Carolina Municipal Bond Fund
Class A Shares....................................... July 6, 1993
Class B Shares....................................... February 1, 1997
Class C Shares....................................... February 1, 1997
Class R Shares....................................... February 1, 1997
Tennessee Municipal Bond Fund
Class A Shares....................................... November 2, 1987
Class B Shares....................................... February 1, 1997
Class C Shares....................................... October 4, 1993
Class R Shares....................................... February 1, 1997
</TABLE>
S-22
<PAGE>
The annual total return figures for the Funds, including the effect of the
maximum sales charge for Class A shares, and applicable CDSC for Class B
Shares, for the one-year, five-year and ten-year periods (as applicable) ended
November 30, 1996 and for the period from inception through November 30, 1996,
respectively, were:
<TABLE>
<CAPTION>
ANNUAL TOTAL RETURN
-----------------------------------------------------
ONE YEAR FIVE YEARS TEN YEARS FROM INCEPTION
ENDED ENDED ENDED THROUGH
NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
1996 1996 1996 1996
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
Alabama Municipal Bond
Fund
Class A Shares........ 1.15% N/A N/A 6.22%
Class B Shares........ 1.01% N/A N/A 5.96%
Class C Shares........ 5.22% N/A N/A 7.54%
Class R Shares........ 5.59% N/A N/A 7.92%
Georgia Municipal Bond
Fund
Class A Shares........ 1.07% 6.21% 6.60% 7.13%
Class B Shares........ 0.93% 6.39% 6.59% 7.12%
Class C Shares........ 5.03% 6.56% 6.48% 6.97%
Class R Shares........ 5.50% 7.13% 7.06% 7.56%
Louisiana Municipal Bond
Fund
Class A Shares........ 2.13% 7.40% N/A 8.02%
Class B Shares........ 2.02% 7.58% N/A 8.07%
Class C Shares........ 6.03% 7.77% N/A 8.10%
Class R Shares........ 6.60% 8.32% N/A 8.67%
North Carolina Municipal
Bond Fund
Class A Shares........ .01% 5.93% 6.41% 6.63%
Class B Shares........ 0.16% 6.10% 6.40% 6.62%
Class C Shares........ 3.90% 6.22% 6.26% 6.45%
Class R Shares........ 4.37% 6.84% 6.86% 7.06%
South Carolina Municipal
Bond Fund
Class A Shares........ .57% N/A N/A 4.09%
Class B Shares........ 0.42% N/A N/A 4.04%
Class C Shares........ 4.62% N/A N/A 5.04%
Class R Shares........ 4.98% N/A N/A 5.41%
Tennessee Municipal Bond
Fund
Class A Shares........ .74% 6.23% N/A 7.57%
Class B Shares........ 0.59% 6.40% N/A 7.56%
Class C Shares........ 4.58% 6.52% N/A 7.47%
Class R Shares........ 5.16% 7.14% N/A 8.08%
</TABLE>
Calculation of cumulative total return is not subject to a prescribed
formula. Cumulative total return for a specific period is calculated by first
taking a hypothetical initial investment in Fund shares on the first day of the
period, deducting (in some cases) the maximum sales charge, and computing the
"redeemable value" of that investment at the end of the period. The cumulative
total return percentage is then determined by subtracting the initial
investment from the redeemable value and dividing the remainder by the initial
investment and expressing the result as a percentage. The calculation assumes
that all income and capital gains distributions by the Fund have been
reinvested at net asset value on the reinvestment dates during the period.
Cumulative total return may also be shown as the increased dollar value of the
hypothetical investment over the period. Cumulative total return calculations
that do not include the effect of the sales charge would be reduced if such
charge were included.
S-23
<PAGE>
The cumulative total return figures for the Funds, including the effect of
the maximum sales charge for the Class A Shares, and applicable CDSC for Class
B Shares, for the one-year, five-year and ten-year periods (as applicable)
ended November 30, 1996, and for the period since inception through November
30, 1996, respectively, using the performance of the oldest class for periods
prior to the inception of the newer classes, as described above, were as
follows:
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN
-----------------------
FROM
ONE YEAR FIVE YEARS TEN YEARS INCEPTION
ENDED ENDED ENDED THROUGH
NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
1996 1996 1996 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Alabama Municipal Bond
Fund
Class A Shares........ 1.15% N/A N/A 17.25%
Class B Shares........ 1.01% N/A N/A 16.50%
Class C Shares........ 5.22% N/A N/A 21.14%
Class R Shares........ 5.59% N/A N/A 22.27%
Georgia Municipal Bond
Fund
Class A Shares........ 1.07% 35.17% 89.43% 108.58%
Class B Shares........ 0.93% 36.29% 89.26% 108.41%
Class C Shares........ 5.03% 37.41% 87.37% 105.47%
Class R Shares........ 5.50% 41.10% 97.74% 117.72%
Louisiana Municipal Bond
Fund
Class A Shares........ 2.13% 42.88% N/A 74.52%
Class B Shares........ 2.02% 44.12% N/A 75.10%
Class C Shares........ 6.03% 45.38% N/A 75.41%
Class R Shares........ 6.60% 49.14% N/A 82.17%
North Carolina Municipal
Bond Fund
Class A Shares........ -.01% 33.38% 86.05% 98.49%
Class B Shares........ -0.16% 34.47% 85.88% 98.33%
Class C Shares........ 3.90% 35.20% 83.49% 94.96%
Class R Shares........ 4.37% 39.23% 94.20% 107.19%
South Carolina Municipal
Bond Fund
Class A Shares........ .57% N/A N/A 14.62%
Class B Shares........ 0.42% N/A N/A 14.43%
Class C Shares........ 4.62% N/A N/A 18.23%
Class R Shares........ 4.98% N/A N/A 19.65%
Tennessee Municipal Bond
Fund
Class A Shares........ .74% 35.27% N/A 93.99%
Class B Shares........ 0.59% 36.39% N/A 93.83%
Class C Shares........ 4.58% 37.15% N/A 92.35%
Class R Shares........ 5.16% 41.20% N/A 102.49%
</TABLE>
Calculation of taxable equivalent total return is also not subject to a
prescribed formula. Taxable equivalent total return for a specific period is
calculated by first taking a hypothetical initial investment in Fund shares on
the first day of the period, computing the total return for each calendar year
in the period in the manner described above, and increasing the total return
for each such calendar year by the amount of additional income that a taxable
fund would need to have generated to equal the income on an after-tax basis, at
a specified income tax rate (usually the highest marginal federal tax rate),
calculated as described above under the discussion of "taxable equivalent
yield." The resulting amount for the calendar year is then divided by the
initial investment amount to arrive at a "taxable equivalent total return
factor" for the calendar year. The taxable equivalent total return factors for
all the calendar years are then multiplied together and the result is then
annualized by taking its Nth root (N representing the number of years in the
period) and subtracting 1, which provides a taxable equivalent total return
expressed as a percentage.
Using the 41.5% maximum combined marginal federal and State tax rate for
1997, the annual taxable equivalent total return for the Alabama Municipal
Fund' Class A shares for the one-year period ended November 30, 1996 was 9.37%.
Class A Shares of the Funds are sold at net asset value plus a current
maximum sales charge of 4.20% of the offering price. This current maximum sales
charge will typically be used for purposes of calculating performance figures.
Yield, returns and net asset value of each class of shares of the Funds will
fluctuate. Factors affecting the performance of the Funds include general
market conditions, operating expenses and investment management. Any additional
fees charged by a securities representative or other financial services firm
would reduce returns described in this section. Shares of the Funds are
redeemable at net asset value, which may be more or less than original cost.
In reports or other communications to shareholders or in advertising and
sales literature, the Funds may also compare their performance with that of:
(1) the Consumer Price Index or various unmanaged bond indexes such as the
Lehman Brothers Municipal Bond Index and the Salomon Brothers High Grade
Corporate Bond Index and (2) other
S-24
<PAGE>
fixed income or municipal bond mutual funds or mutual fund indexes as reported
by Lipper Analytical Services, Inc. ("Lipper"), Morningstar, Inc.
("Morningstar"), Wiesenberger Investment Companies Service ("Wiesenberger") and
CDA Investment Technologies, Inc. ("CDA") or similar independent services which
monitor the performance of mutual funds, or other industry or financial
publications such as Barron's, Changing Times, Forbes and Money Magazine.
Performance comparisons by these indexes, services or publications may rank
mutual funds over different periods of time by means of aggregate, average,
year-by-year, or other types of total return and performance figures. Any given
performance quotation or performance comparison should not be considered as
representative of the performance of the Funds for any future period.
Each fund may from time to time in its advertising and sales materials
compare its current yield or total return with the yield or total return on
taxable investments such as corporate or U.S. Government bonds, bank
certificates of deposit (CDs) or money market funds. These taxable investments
have investment characteristics that differ from those of the Funds. U.S.
Government bonds, for example, are long-term investments backed by the full
faith and credit of the U.S. Government, and bank CDs are generally short-term,
FDIC-insured investments, which pay fixed principal and interest but are
subject to fluctuating rollover rates. Money market funds are short-term
investments with stable net asset values, fluctuating yields and special
features enhancing liquidity.
There are differences and similarities between the investments which the
Funds may purchase and the investments measured by the indexes and reporting
services which are described herein. The Consumer Price Index is generally
considered to be a measure of inflation. The CDA Mutual Fund-Municipal Bond
Index is a weighted performance average of other mutual funds with a federally
tax-exempt income objective. The Salomon Brothers High Grade Corporate Bond
Index is an unmanaged index that generally represents the performance of high
grade long-term taxable bonds during various market conditions. The Lehman
Brothers Municipal Bond Index is an unmanaged index that generally represents
the performance of high grade intermediate and long-term municipal bonds during
various market conditions. Lipper calculates municipal bond fund averages based
on average maturity and credit quality. Morningstar rates mutual funds by
overall risk-adjusted performance, investment objectives, and assets. Lipper,
Morningstar, Wiesenberger and CDA are widely recognized mutual fund reporting
services whose performance calculations are based upon changes in net asset
value with all dividends reinvested and which do not include the effect of any
sales charges. The market prices and yields of taxable and tax-exempt bonds
will fluctuate. The Funds primarily invest in investment grade Municipal
Obligations in pursuing their objective of as high a level of current interest
income which is exempt from federal and state income tax as is consistent, in
the view of the Funds' management, with preservation of capital.
The Funds may also compare their taxable equivalent total return performance
to the total return performance of taxable income funds such as treasury
securities funds, corporate bond funds (either investment grade or high yield),
or Ginnie Mae funds. These types of funds, because of the character of their
underlying securities, differ from municipal bond funds in several respects.
The susceptibility of the price of treasury bonds to credit risk is far less
than that of municipal bonds, but the price of treasury bonds tends to be
slightly more susceptible to change resulting from changes in market interest
rates. The susceptibility of the price of investment grade corporate bonds and
municipal bonds to market interest rate changes and general credit changes is
similar. High yield bonds are subject to a greater degree of price volatility
than municipal bonds resulting from changes in market interest rates and are
particularly susceptible to volatility from credit changes. Ginnie Mae bonds
are generally subject to less price volatility than municipal bonds from credit
concerns, due primarily to the fact that the timely payment of monthly
installments of principal and interest are backed by the full faith and credit
of the U.S. Government, but Ginnie Mae bonds of equivalent coupon and maturity
are generally more susceptible to price volatility resulting from market
interest rate changes. In addition, the volatility of Ginnie Mae bonds due to
changes in market interest rates may differ from municipal bonds of comparable
coupon and maturity because bonds of the sensitivity of Ginnie Mae prepayment
experience to change in interest rates.
ADDITIONAL INFORMATION ON THE PURCHASE AND
REDEMPTION OF FUND SHARES
As described in the Prospectus, the Funds provide you with alternative ways
of purchasing Fund shares based upon your individual investment needs and
preferences.
Each class of shares of a Fund represents an interest in the same portfolio
of investments. Each class of shares is identical in all respects except that
each class bears its own class expenses, including distribution and
administration expenses, and each class has exclusive voting rights with
respect to any distribution or service plan applicable to its shares. As a
result of the differences in the expenses borne by each class of shares, net
income per share, dividends per share and net asset value per share will vary
among a Fund's classes of shares.
Shareholders of each class will share expenses proportionately for services
that are received equally by all shareholders. A particular class of shares
will bear only those expenses that are directly attributable to that class,
where the type or amount of services received by a class varies from one class
to another. For example, class-specific expenses generally will include
distribution and service fees.
S-25
<PAGE>
REDUCTION OR ELIMINATION OF UP-FRONT SALES CHARGE ON CLASS A SHARES
Rights of Accumulation. You may qualify for a reduced sales charge on a
purchase of Class A Shares of any Fund if the amount of your purchase, when
added to the value that day of all of your prior purchases of shares of any
Fund or of another Nuveen Mutual Fund, or units of a Nuveen unit trust, on
which an up-front sales charge or ongoing distribution fee is imposed, or is
normally imposed, falls within the amounts stated in the Class A Sales Charges
and Commissions table in "How to Select a Purchase Option" in the Prospectus.
You or your financial adviser must notify Nuveen or the Fund's transfer agent
of any cumulative discount whenever you plan to purchase Class A Shares of a
Fund that you wish to qualify for a reduced sales charge.
Letter of Intent. You may qualify for a reduced sales charge on a purchase of
Class A Shares of any Fund if you plan to purchase Class A Shares of Nuveen
Mutual Funds over the next 13 months and the total amount of your purchases
would, if purchased at one time, qualify you for one of the reduced sales
charges shown in the Class A Sales Charges and Commissions table in "How to
Select a Purchase Option" in the Prospectus. In order to take advantage of this
option, you must complete the applicable section of the Application Form or
sign and deliver either to an Authorized Dealer or to the Fund's transfer agent
a written Letter of Intent in a form acceptable to Nuveen. A Letter of Intent
states that you intend, but are not obligated, to purchase over the next 13
months a stated total amount of Class A Shares that would qualify you for a
reduced sales charge shown above. You may count shares of a Nuveen Mutual Fund
that you already own on which you paid an up-front sales charge or an ongoing
distribution fee and any Class C Shares of a Nuveen Mutual Fund that you
purchase over the next 13 months towards completion of your investment program,
but you will receive a reduced sales charge only on new Class A Shares you
purchase with a sales charge over the 13 months. You cannot count towards
completion of your investment program Class A Shares that you purchase without
a sales charge through investment of distributions from a Nuveen Mutual Fund or
a Nuveen Unit Trust or otherwise.
By establishing a Letter of Intent, you agree that your first purchase of
Class A Shares of a Fund following execution of the Letter of Intent will be at
least 5% of the total amount of your intended purchases. You further agree that
shares representing 5% of the total amount of your intended purchases will be
held in escrow pending completion of these purchases. All dividends and capital
gains distributions on Class A Shares held in escrow will be credited to your
account. If total purchases, less redemptions, prior to the expiration of the
13 month period equal or exceed the amount specified in your Letter of Intent,
the Class A Shares held in escrow will be transferred to your account. If the
total purchases, less redemptions, exceed the amount specified in your Letter
of Intent and thereby qualify for a lower sales charge than the sales charge
specified in your Letter of Intent, you will receive this lower sales charge
retroactively, and the difference between it and the higher sales charge paid
will be used to purchase additional Class A Shares on your behalf. If the total
purchases, less redemptions, are less than the amount specified, you must pay
Nuveen an amount equal to the difference between the amounts paid for these
purchases and the amounts which would have been paid if the higher sales charge
had been applied. If you do not pay the additional amount within 20 days after
written request by Nuveen or your financial adviser, Nuveen will redeem an
appropriate number of your escrowed Class A Shares to meet the required
payment. By establishing a Letter of Intent, you irrevocably appoint Nuveen as
attorney to give instructions to redeem any or all of your escrowed shares,
with full power of substitution in the premises.
You or your financial adviser must notify Nuveen or the Fund's transfer agent
whenever you make a purchase of Fund shares that you wish to be covered under
the Letter of Intent option.
Reinvestment of Nuveen Unit Trust Distributions. You may purchase Class A
Shares without an up-front sales charge by reinvestment of distributions from
any of the various unit trusts sponsored by Nuveen. There is no initial or
subsequent minimum investment requirement for such reinvestment purchases.
Group Purchase Programs. If you are a member of a qualified group, you may
purchase Class A Shares of any Fund or of another Nuveen Mutual Fund at the
reduced sales charge applicable to the group's purchases taken as a whole. A
"qualified group" is one which has previously been in existence, has a purpose
other than investment, has ten or more participating members, has agreed to
include Fund sales publications in mailings to members and has agreed to comply
with certain administrative requirements relating to its group purchases.
Under any group purchase program, the minimum monthly investment in Class A
Shares of any particular Fund or portfolio by each participant is $50, and the
minimum monthly investment in Class A Shares of any particular Fund or
portfolio for all participants in the program combined is $3,000. No
certificates will be issued for any participant's account. All dividends and
other distributions by a Fund will be reinvested in additional Class A Shares
of the same Fund. No participant may utilize a systematic withdrawal program.
To establish a group purchase program, both the group itself and each
participant must fill out special application materials, which the group
administrator may obtain from the group's financial adviser, by calling Nuveen
toll-free (800) 621-7227.
Reinvestment of Redemption Proceeds from Unaffiliated Funds. You may also
purchase Class A Shares at net asset value without a sales charge if the
purchase takes place through a broker-dealer and represents the reinvestment of
the proceeds of the redemption of shares of one or more registered investment
companies not affiliated with Nuveen. You must provide appropriate
documentation that the redemption occurred not more than one year prior to the
reinvestment of the
S-26
<PAGE>
proceeds in Class A Shares, and that you either paid an up-front sales charge
or were subject to a contingent deferred sales charge in respect of the
redemption of such shares of such other investment company.
Special Sales Charge Waivers. Class A Shares of a Fund may be purchased at
net asset value without a sales charge, and Class R Shares may be purchased, by
the following categories of investors:
. officers, trustees and former trustees of the Nuveen and Flagship Funds;
. bona fide, full-time and retired employees of Nuveen, any parent company
of Nuveen, and subsidiaries thereof, or their immediate family members;
. any person who, for at least 90 days, has been an officer, director or
bona fide employee of any Authorized Dealer, or their immediate family
members;
. officers and directors of bank holding companies that make Fund shares
available directly or through subsidiaries or bank affiliates;
. bank or broker-affiliated trust departments investing funds over which
they exercise exclusive discretionary investment authority and that are
held in a fiduciary, agency, advisory, custodial or similar capacity;
. investors purchasing on a periodic fee, asset-based fee or no transaction
fee basis through a broker-dealer sponsored mutual fund purchase program;
. clients of investment advisers, financial planners or other financial
intermediaries that charge periodic or asset-based fees for their
services.
Holders of Class C Shares acquired on or before January 31, 1997 can convert
those shares to Class A Shares of the same fund at the shareholder's
affirmative request six years after the date of purchase. Holders of Class C
Shares must submit their request to the transfer agent no later than the last
business day of the 71st month following the month in which they purchased
their shares. Holders of Class C Shares purchased after that date will not have
the option to convert those shares to Class A Shares.
Any Class A Shares purchased pursuant to a special sales charge waiver must
be acquired for investment purposes and on the condition that they will not be
transferred or resold except through redemption by the Funds. You or your
financial adviser must notify Nuveen or the Fund's transfer agent whenever you
make a purchase of Class A Shares of any Fund that you wish to be covered under
these special sales charge waivers.
Class A Shares of any Fund may be issued at net asset value without a sales
charge in connection with the acquisition by a Fund of another investment
company. All purchases under the special sales charge waivers will be subject
to minimum purchase requirements as established by the Funds.
In determining the amount of your purchases of Class A Shares of any Fund
that may qualify for a reduced sales charge, the following purchases may be
combined: (1) all purchases by a trustee or other fiduciary for a single trust,
estate or fiduciary account; (2) all purchases by individuals and their
immediate family members (i.e., their spouses, their parents, their children
and their grandchildren); or (3) all purchases made through a group purchase
program as described above.
The reduced sales charge programs may be modified or discontinued by the
Funds at any time upon prior written notice to shareholders of the Funds.
For more information about the purchase of Class A Shares or reduced sales
charge programs, or to obtain the required application forms, call Nuveen toll-
free at (800) 621-7227.
REDUCTION OR ELIMINATION OF CONTINGENT DEFERRED SALES CHARGE
Class A Shares are normally redeemed at net asset value, without any
Contingent Deferred Sales Charge ("CDSC"). However, in the case of Class A
Shares purchased at net asset value on or after July 1, 1996 because the
purchase amount exceeded $1 million, where the Authorized Dealer did not waive
the sales commission, a CDSC of 1% is imposed on any redemption within 18
months of purchase. In the case of Class B Shares redeemed within six years of
purchase, a CDSC is imposed, beginning at 5% for redemptions within the first
year, declining to 4% for redemptions within years two and three, and declining
by 1% each year thereafter until disappearing after the sixth year. Class C
Shares are redeemed at net asset value, without any CDSC, except that a CDSC of
1% is imposed upon redemption of Class C Shares that are redeemed within 12
months of purchase.
In determining whether a CDSC is payable, a Fund will first redeem shares not
subject to any charge, or that represent an increase in the value of a Fund
account due to capital appreciation, and then in the reverse order in which
shares were purchased, unless the shareholder specifies another order. No CDSC
is charged upon shares purchased as a result of automatic reinvestment of
dividends or capital gains paid. In addition, no CDSC will be charged on
exchanges of shares into another Nuveen Mutual Fund or Nuveen money market
fund. The holding period is calculated on a monthly basis and begins the first
day of the month in which the order for investment is received. The CDSC is
calculated based on the lower of the redeemed shares' cost or net asset value
at the time of the redemption and is deducted from the redemption proceeds.
Nuveen receives the amount of any CDSC shareholders pay. If Class A or Class C
shares subject to a CDSC are exchanged for shares of a Nuveen money market
fund, the CDSC would be imposed on the subsequent redemption of those money
market shares, and the period during which the shareholder holds the money
S-27
<PAGE>
market fund shares would be counted in determining the remaining duration of
the CDSC. The Fund may elect not to so count the period during which the
shareholder held the money market fund shares, in which event the amount of any
applicable CDSC would be reduced in accordance with applicable SEC rules by the
amount of any 12b-1 plan payments to which those money market funds shares may
be subject.
The CDSC may be waived or reduced under the following six special
circumstances: 1) redemptions within one year following the death or
disability, as defined in Section 72(m)(7) of the Internal Revenue Code of
1986, as amended, of a shareholder; 2) in whole or in part for redemptions of
shares by shareholders with accounts in excess of specified breakpoints that
correspond to the breakpoints under which the up-front sales charge on Class A
Shares is reduced pursuant to Rule 22d-1 under the Act; 3) redemptions of
shares purchased under circumstances or by a category of investors for which
Class A Shares could be purchased at net asset value without a sales charge; 4)
in connection with the exercise of a reinstatement privilege whereby the
proceeds of a redemption of a Fund's shares subject to a sales charge are
reinvested in shares of certain Funds within a specified number of days; 5) in
connection with the exercise of a Fund's right to redeem all shares in an
account that does not maintain a certain minimum balance or that the applicable
board has determined may have material adverse consequences to the shareholders
of such Fund; and 6) redemptions made pursuant to a Fund's automatic withdrawal
plan, up to specified amounts. If a Fund waives or reduces the CDSC, such
waiver or reduction would be uniformly applied to all Fund shares in the
particular category. In waiving or reducing a CDSC, the Funds will comply with
the requirements of Rule 22d-1 of the Investment Company Act of 1940, as
amended.
GENERAL MATTERS
The Funds may encourage registered representatives and their firms to help
apportion their assets among bonds, stocks and cash, and may seek to
participate in programs that recommend a portion of their assets be invested in
tax-free, fixed income securities.
To help advisers and investors better understand and most efficiently use the
Funds to reach their investment goals, the Funds may advertise and create
specific investment programs and systems. For example, this may include
information on how to use the Funds to accumulate assets for future education
needs or periodic payments such as insurance premiums. The Funds may produce
software or additional sales literature to promote the advantages of using the
Funds to meet these and other specific investor needs.
Exchanges of shares of a Fund for shares of a Nuveen money market fund may be
made on days when both funds calculate a net asset value and make shares
available for public purchase. Shares of the Nuveen money market funds may be
purchased on days on which the Federal Reserve Bank of Boston is normally open
for business. In addition to the holidays observed by the Fund, the Nuveen
money market funds observe and will not make fund shares available for purchase
on the following holidays: Martin Luther King's Birthday, Columbus Day and
Veterans Day.
In addition, you may exchange Class R Shares of any Fund for Class A Shares
of the same Fund without a sales charge if the current net asset value of those
Class R Shares is at least $3,000 or you already own Class A Shares of that
Fund.
Each Fund may suspend the right of redemption, or delay payment to redeeming
shareholders for more than seven days, when the New York Stock Exchange is
closed (not including customary weekend and holiday closings); when trading in
the markets a Fund normally uses is restricted, or the SEC determines that an
emergency exists so that trading of a Fund's portfolio securities or
determination of a Fund's net asset value is not reasonably practical; or the
SEC by order permits the suspension of the right of redemption or the delay in
payment to redeeming shareholders for more than seven days.
Shares will be registered in the name of the investor or the investor's
financial adviser. A change in registration or transfer of shares held in the
name of a financial adviser may only be made by an order in good form from the
financial adviser acting on the investor's behalf. Share certificates will only
be issued upon written request to the Funds' transfer agent. No share
certificates will be issued for fractional shares.
For more information on the procedure for purchasing shares of a Fund and on
the special purchase programs available thereunder, see "How to Buy Fund
Shares" in the Prospectus.
Nuveen serves as the principal underwriter of the shares of the Funds
pursuant to a "best efforts" arrangement as provided by a distribution
agreement with the Nuveen Flagship Multistate Trust III, dated February 1, 1997
("Distribution Agreement"). Pursuant to the Distribution Agreement, the Trust
appointed Nuveen to be its agent for the distribution of the Funds' shares on a
continuous offering basis. Nuveen sells shares to or through brokers, dealers,
banks or other qualified financial intermediaries (collectively referred to as
"Dealers"), or others, in a manner consistent with the then effective
registration statement of the Trust. Pursuant to the Distribution Agreement,
Nuveen, at its own expense, finances certain activities incident to the sale
and distribution of the Funds' shares, including printing and distributing of
prospectuses and statements of additional information to other than existing
shareholders, the printing and distributing of sales literature, advertising
and payment of compensation and giving of concessions to Dealers. Nuveen
receives for its services the excess, if any, of the sales price of the Funds'
shares less the net asset value of those shares, and reallows a majority or all
of such amounts to the Dealers who sold the shares; Nuveen may act as such a
Dealer. Nuveen also receives compensation pursuant to a distribution plan
adopted by the Trust pursuant to Rule 12b-1 and described herein under
"Distribution and Service Plan." Nuveen receives any CDSCs imposed on
redemptions of Shares.
S-28
<PAGE>
The following table sets forth the aggregate amount of underwriting
commissions with respect to the sale of Fund shares and the amount thereof
retained by Nuveen (or Flagship Financial, Inc., which Nuveen acquired on
January 1, 1997) for each of the Funds for the last three fiscal years. All
figures are to the nearest thousand.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
MAY 31, 1996 MAY 31, 1995 MAY 31, 1994
------------------------ ------------------------ ------------------------
AMOUNT OF AMOUNT AMOUNT OF AMOUNT AMOUNT OF AMOUNT
UNDERWRITING RETAINED BY UNDERWRITING RETAINED BY UNDERWRITING RETAINED BY
COMMISSIONS FLAGSHIP COMMISSIONS FLAGSHIP COMMISSIONS FLAGSHIP
FUND ------------ ----------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Alabama Fund............ 37 5 41 6 15 0
Georgia Fund............ 293 39 347 47 945 127
Louisiana Fund.......... 254 33 247 32 575 71
North Carolina Fund..... 358 49 439 47 1,076 146
South Carolina Fund..... 48 8 44 6 111 6
Tennessee Fund.......... 639 88 846 113 2,124 285
</TABLE>
DISTRIBUTION AND SERVICE PLAN
The Funds have adopted a plan (the "Plan") pursuant to Rule 12b-1 under the
Investment Company Act of 1940, which provides that Class B Shares and Class C
Shares will be subject to an annual distribution fee, and that Class A Shares,
Class B Shares and Class C Shares will be subject to an annual service fee.
Class R Shares will not be subject to either distribution or service fees.
The distribution fee applicable to Class B and Class C Shares under each
Fund's Plan will be payable to reimburse Nuveen for services and expenses
incurred in connection with the distribution of Class B and Class C Shares,
respectively. These expenses include payments to Authorized Dealers, including
Nuveen, who are brokers of record with respect to the Class B and Class C
Shares, as well as, without limitation, expenses of printing and distributing
prospectuses to persons other than shareholders of the Fund, expenses of
preparing, printing and distributing advertising and sales literature and
reports to shareholders used in connection with the sale of Class B and Class C
Shares, certain other expenses associated with the distribution of Class B and
Class C Shares, and any distribution-related expenses that may be authorized
from time to time by the Board of Trustees.
The service fee applicable to Class A Shares, Class B Shares and Class C
Shares under each Fund's Plan will be payable to Authorized Dealers in
connection with the provision of ongoing account services to shareholders.
These services may include establishing and maintaining shareholder accounts,
answering shareholder inquiries and providing other personal services to
shareholders.
Each Fund may spend up to .20 of 1% per year of the average daily net assets
of Class A Shares as a service fee under the Plan applicable to Class A Shares.
Each Fund may spend up to .75 of 1% per year of the average daily net assets of
Class B Shares as a distribution fee and up to .20 of 1% per year of the
average daily net assets of Class B Shares as a service fee under the Plan
applicable to Class B Shares. Each Fund may spend up to .55 of 1% per year of
the average daily net assets of Class C Shares as a distribution fee and up to
.20 of 1% per year of the average daily net assets of Class C Shares as a
service fee under the Plan applicable to Class C Shares.
For the fiscal year ended May 31, 1996, 100% of service fees and distribution
fees were paid out as compensation to Authorized Dealers. For such period, the
service fee for the Funds was .20% and the distribution fee was .40% for the
Class A Shares and .75% for the Class C Shares.
<TABLE>
<CAPTION>
COMPENSATION PAID TO
AUTHORIZED DEALERS FOR
END OF FISCAL 1996
----------------------
<S> <C>
Alabama Municipal Bond Fund (5/31/96)
Class A................................................ $ 10,085
Class C................................................ N/A
Georgia Municipal Bond Fund (5/31/96)
Class A................................................ $448,491
Class C................................................ $ 75,046
Louisiana Municipal Bond Fund (5/31/96)
Class A................................................ $277,262
Class C................................................ $ 43,079
North Carolina Municipal Bond Fund (5/31/96)
Class A................................................ $765,262
Class C................................................ $ 64,653
South Carolina Municipal Bond Fund (5/31/96)
Class A................................................ $ 37,304
Class C................................................ N/A
Tennessee Municipal Bond Fund (5/31/96)
Class A................................................ $988,749
Class C................................................ $134,450
</TABLE>
S-29
<PAGE>
Under each Fund's Plan, the Fund will report quarterly to the Board of
Trustees for its review all amounts expended per class of shares under the
Plan. The Plan may be terminated at any time with respect to any class of
shares, without the payment of any penalty, by a vote of a majority of the
trustees who are not "interested persons" and who have no direct or indirect
financial interest in the Plan or by vote of a majority of the outstanding
voting securities of such class. The Plan may be renewed from year to year if
approved by a vote of the Board of Trustees and a vote of the non-interested
trustees who have no direct or indirect financial interest in the Plan cast in
person at a meeting called for the purpose of voting on the Plan. The Plan may
be continued only if the trustees who vote to approve such continuance
conclude, in the exercise of reasonable business judgment and in light of their
fiduciary duties under applicable law, that there is a reasonable likelihood
that the Plan will benefit the Fund and its shareholders. The Plan may not be
amended to increase materially the cost which a class of shares may bear under
the Plan without the approval of the shareholders of the affected class, and
any other material amendments of the Plan must be approved by the non-
interested trustees by a vote cast in person at a meeting called for the
purpose of considering such amendments. During the continuance of the Plan, the
selection and nomination of the non-interested trustees of the Trust will be
committed to the discretion of the non-interested trustees then in office.
INDEPENDENT PUBLIC ACCOUNTANTS AND CUSTODIAN
Deloitte & Touche LLP, independent public accountants, 1700 Courthouse Plaza
N.E., Dayton, Ohio 45402 has been selected as auditors for all of the Funds. In
addition to audit services, the auditors will provide consultation and
assistance on accounting, internal control, tax and related matters. The
financial statements incorporated by reference elsewhere in this Statement of
Additional Information and the information for prior periods set forth under
"Financial Highlights" in the Prospectus have been audited by the auditors as
indicated in their reports with respect thereto, and are included in reliance
upon the authority of that firm in giving that report.
The custodian of the assets of the Funds is The Chase Manhattan Bank, 770
Broadway, New York, New York 10003. The custodian performs custodial, fund
accounting, portfolio accounting, shareholder, and transfer agency services.
FINANCIAL STATEMENTS
The audited financial statements for each Fund's most recent fiscal year
appear in the Fund's Annual Reports and the unaudited financial statements for
the most recent semi-annual period for each fund appear in the Fund's Semi-
Annual Reports; each is included herein by reference. The Annual Reports and
the Semi-annual Reports accompany this Statement of Additional Information.
S-30
<PAGE>
APPENDIX A
RATINGS OF INVESTMENTS
The four highest ratings of Moody's for Municipal Obligations are Aaa, Aa, A
and Baa. Municipal Obligations rated Aaa are judged to be of the "best
quality." The rating of Aa is assigned to Municipal Obligations which are of
"high quality by all standards," but as to which margins of protection or other
elements make long-term risks appear somewhat greater than in Aaa rated
Municipal Obligations. The Aaa and Aa rated Municipal Obligations comprise what
are generally known as "high grade bonds." Municipal Obligations that are rated
A by Moody's possess many favorable investment attributes and are considered
upper medium grade obligations. Factors giving security to principal and
interest of A rated Municipal Obligations are considered adequate, but elements
may be present, which suggest a susceptibility to impairment sometime in the
future. Municipal Obligations rated Baa by Moody's are considered medium grade
obligations (i.e., they are neither highly protected nor poorly secured). Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well. Moody's bond rating symbols may contain numerical
modifiers of a generic rating classification. The modifier 1 indicates that the
bond ranks at the high end of its category; the modifier 2 indicates a mid-
range ranking; and the modifier 3 indicates that the issue ranks in the lower
end of its general rating category.
The four highest ratings of S&P for Municipal Obligations are AAA, AA, A and
BBB. Municipal Obligations rated AAA have a strong capacity to pay principal
and interest. The rating of AA indicates that capacity to pay principal and
interest is very strong and such bonds differ from AAA issues only in small
degree. The category of A describes bonds which have a strong capacity to pay
principal and interest, although such bonds are somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions. The
BBB rating is the lowest "investment grade" security rating by S&P. Municipal
Obligations rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas such bonds normally exhibit adequate protection
parameters, adverse economic conditions are more likely to lead to a weakened
capacity to pay principal and interest for bonds in this category than for
bonds in the A category.
The four highest ratings of Fitch for Municipal Obligations are AAA, AA, A
and BBB. Municipal Obligations rated AAA are considered to be investment grade
and of the highest credit quality. The obligor has an exceptionally strong
ability to pay interest and repay principal, which is unlikely to be affected
by reasonably foreseeable events. Municipal Obligations rated AA are considered
to be investment grade and of very high quality. The obligor's ability to pay
interest and repay principal is very strong, although not quite as strong as
bonds rated "AAA." Because Municipal Obligations rated in the "AAA" and "AA"
categories are not significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated "F-1+." Municipal
Obligations rated A are considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings. Municipal
Obligations rated BBB are considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these bonds,
and therefore impair timely payment. The likelihood that the ratings of these
bonds will fall below investment grade is higher than for bonds with higher
ratings.
The "Other Corporate Obligations" category of temporary investments are
corporate (as opposed to municipal) debt obligations rated AAA by S&P or Aaa by
Moody's. Corporate debt obligations rated AAA by S&P have an extremely strong
capacity to pay principal and interest. The Moody's corporate debt rating of
Aaa is comparable to that set forth above for Municipal Obligations.
Subsequent to its purchase by a Fund, an issue may cease to be rated or its
rating may be reduced below the minimum required for purchase by such Fund.
Neither event requires the elimination of such obligation from a Fund's
portfolio, but Nuveen Advisory will consider such an event in its determination
of whether the Fund should continue to hold such obligation.
A-1
<PAGE>
APPENDIX B
DESCRIPTION OF HEDGING TECHNIQUES
Set forth below is additional information regarding the various Fund's
defensive hedging techniques and use of repurchase agreements.
FUTURES AND INDEX TRANSACTIONS
Financial Futures. A financial future is an agreement between two parties to
buy and sell a security for a set price on a future date. They have been
designed by boards of trade which have been designated "contracts markets" by
the Commodity Futures Trading Commission ("CFTC").
The purchase of financial futures is for the purpose of hedging a Fund's
existing or anticipated holdings of long-term debt securities. When a Fund
purchases a financial future, it deposits in cash or securities an "initial
margin" of between 1% and 5% of the contract amount. Thereafter, the Fund's
account is either credited or debited on a daily basis in correlation with the
fluctuation in price of the underlying future or other requirements imposed by
the exchange in order to maintain an orderly market. The Fund must make
additional payments to cover debits to its account and has the right to
withdraw credits in excess of the liquidity, the Fund may close out its
position at any time prior to expiration of the financial future by taking an
opposite position. At closing a final determination of debits and credits is
made, additional cash is paid by or to the Fund to settle the final
determination and the Fund realizes a loss or gain depending on whether on a
net basis it made or received such payments.
The sale of financial futures is for the purpose of hedging a Fund's existing
or anticipated holdings of long-term debt securities. For example, if a Fund
owns long-term bonds and interest rates were expected to increase, it might
sell financial futures. If interest rates did increase, the value of long-term
bonds in the Fund's portfolio would decline, but the value of the Fund's
financial futures would be expected to increase at approximately the same rate
thereby keeping the net asset value of the Fund from declining as much as it
otherwise would have.
Among the risks associated with the use of financial futures by the Funds as
a hedging device, perhaps the most significant is the imperfect correlation
between movements in the price of the financial futures and movements in the
price of the debt securities which are the subject of the hedge.
Thus, if the price of the financial future moves less or more than the price
of the securities which are the subject of the hedge, the hedge will not be
fully effective. To compensate for this imperfect correlation, the Fund may
enter into financial futures in a greater dollar amount than the dollar amount
of the securities being hedged if the historical volatility of the prices of
such securities has been greater than the historical volatility of the
financial futures. Conversely, the Fund may enter into fewer financial futures
if the historical volatility of the price of the securities being hedged is
less than the historical volatility of the financial futures.
The market prices of financial futures may also be affected by factors other
than interest rates. One of these factors is the possibility that rapid changes
in the volume of closing transactions, whether due to volatile markets or
movements by speculators, would temporarily distort the normal relationship
between the markets in the financial future and the chosen debt securities. In
these circumstances as well as in periods of rapid and large price movements.
The Fund might find it difficult or impossible to close out a particular
transaction.
Options on Financial Futures. The Funds may also purchase put or call options
on financial futures which are traded on a U.S. Exchange or board of trade and
enter into closing transactions with respect to such options to terminate an
existing position. Currently, options can be purchased with respect to
financial futures on U.S. Treasury Bonds on The Chicago Board of Trade. The
purchase of put options on financial futures is analogous to the purchase of
put options by a Fund on its portfolio securities to hedge against the risk of
rising interest rates. As with options on debt securities, the holder of an
option may terminate his position by selling an option of the same Fund. There
is no guarantee that such closing transactions can be effected.
INDEX CONTRACTS
Index Futures. A tax-exempt bond index which assigns relative values to the
tax-exempt bonds included in the index is traded on the Chicago Board of Trade.
The index fluctuates with changes in the market values of all tax-exempt bonds
included rather than a single bond. An index future is a bilateral agreement
pursuant to
B-1
<PAGE>
which two parties agree to take or make delivery of an amount of cash--rather
than any security--equal to specified dollar amount times the difference
between the index value at the close of the last trading day of the contract
and the price at which the index future was originally written. Thus, an index
future is similar to traditional financial futures except that settlement is
made in cash.
Index Options. The Funds may also purchase put or call options on U.S.
Government or tax-exempt bond index futures and enter into closing transactions
with respect to such options to terminate an existing position. Options on
index futures are similar to options on debt instruments except that an option
on an index future gives the purchaser the right, in return for the premium
paid, to assume a position in an index contract rather than an underlying
security at a specified exercise price at any time during the period of the
option. Upon exercise of the option, the delivery of the futures position by
the writer of the option to the holder of the option will be accompanied by
delivery of the accumulated balance of the writer's futures margin account
which represents the amount by which the market price of the index futures
contract, at exercise, is less than the exercise price of the option on the
index future.
Bond index futures and options transactions would be subject to risks similar
to transactions in financial futures and options thereon as described above. No
series will enter into transactions in index or financial futures or related
options unless and until, in the Adviser's opinion, the market for such
instruments has developed sufficiently.
REPURCHASE AGREEMENTS
A Fund may invest temporarily up to 5% of its assets in repurchase
agreements, which are agreements pursuant to which securities are acquired by
the Fund from a third party with the understanding that they will be
repurchased by the seller at a fixed price on an agreed date. These agreements
may be made with respect to any of the portfolio securities in which the Fund
is authorized to invest. Repurchase agreements may be characterized as loans
secured by the underlying securities. The Fund may enter into repurchase
agreements with (i) member banks of the Federal Reserve System having total
assets in excess of $500 million and (ii) securities dealers, provided that
such banks or dealers meet the creditworthiness standards established by the
Fund's board of trustees ("Qualified Institutions"). The Adviser will monitor
the continued creditworthiness of Qualified Institutions, subject to the
oversight of the Fund's board of trustees.
The use of repurchase agreements involves certain risks. For example, if the
seller of securities under a repurchase agreement defaults on its obligation to
repurchase the underlying securities, as a result of its bankruptcy or
otherwise, the Fund will seek to dispose of such securities, which action could
involve costs or delays. If the seller becomes insolvent and subject to
liquidation or reorganization under applicable bankruptcy or other laws, the
Fund's ability to dispose of the underlying securities may be restricted.
Finally, it is possible that the Fund may not be able to substantiate its
interest in the underlying securities. To minimize this risk, the securities
underlying the repurchase agreement will be held by the custodian at all times
in an amount at least equal to the repurchase price, including accrued
interest. If the seller fails to repurchase the securities, the Fund may suffer
a loss to the extent proceeds from the sale of the underlying securities are
less than the repurchase price.
The resale price reflects the purchase price plus an agreed upon market rate
of interest which is unrelated to the coupon rate or date of maturity of the
purchased security. The collateral is marked to market daily. Such agreements
permit the Fund to keep all its assets earning interest while retaining
"overnight" flexibility in pursuit of investments of a longer-term nature.
B-2
