JAMES
ADVANTAGE
FUNDS
Advised by James
Investment Research, Inc.
o
June 30, 1998
Annual Report
o
The
Golden Rainbow
Fund
<PAGE>
THE GOLDEN RAINBOW FUND
LETTER TO SHAREHOLDERS
================================================================================
Welcome to the James Advantage Funds. On behalf of the trustees, the officers
and the employees of our Fund, I would like to thank you for your support. The
reorganization of the Golden Rainbow into our fund family is complete. This has
been an exciting year for us as we worked to build a foundation for future
success. We look forward to continuing our conservative approach with the Golden
Rainbow Fund as well as offering shareholders additional styles and objectives
through new funds in the coming months.
INVESTMENT GOALS AND OBJECTIVES
The appreciation of the largest and bluest stocks over the last twelve months
was truly amazing, especially since most stocks lagged considerably over that
time period. The Golden Rainbow Fund's emphasis on capital preservation is
becoming more important as the rally loses steam. We take a prudent approach to
investing in stocks, striving to moderate the risks inherent in the stock market
with a balance of corporate and government bonds. This balance changes with
market conditions. Our goal is to take advantage of the opportunities for
appreciation in rising markets, while moderating risks during down markets.
INVESTMENT PHILOSOPHY
We follow a conservative approach to money management using a value-oriented
investment approach to select stocks and bonds for the Fund's portfolio. Our
investment philosophy is to seek appreciation while remaining committed to
capital preservation. To this end, we utilize a top-down approach to investing.
This means that we continuously analyze general economic trends, including the
direction of interest rates and the outlook for inflation. We filter this
information to identify promising markets, industry sectors and specific equity
issues.
STRATEGY FOR MEETING FUND OBJECTIVES
The stock market has exhibited a split personality. Smaller stocks have been
under-performing, while large companies have been doing quite well. The very
largest companies have returned more than 31 percent in the last year and
smaller companies have returned less than 5 percent. Because of the elevated
price levels, it has become more difficult to find good value in some of the
largest stocks that have been leading the advance. Maintaining a position in
equities is prudent, however, because of their long term potential. We believe
valuation levels are excessive for some stocks and volatility may shake
investors' confidence. It would be normal for the market to need a period of
time to consolidate its recent gains, and we favor a prudent approach at this
time, seeking a blend of securities which hold up well in more difficult
markets.
There are certainly positives for the future. We expect inflation to remain low
and the slowing economy to provide a boost for bonds, lowering interest rates.
Our present plans are to focus on high-quality bonds and value-oriented stocks.
THE MARKET OVER THE PAST YEAR
While the major indices rose, the average stock didn't fare too well. Volatility
has become more commonplace -- at one point the Dow Jones Industrials had lost
over 1000 points from its high in August 1997. During this fall correction, we
were able to pick up some top quality stocks which have done well. However,
defensive, value-oriented and smaller securities all lagged the major indices.
The bond market did well during the fiscal year and the bonds in the portfolio
made an excellent contribution to your overall returns.
FUND PERFORMANCE
Since smaller stocks have been lagging, we have been able to purchase for you
securities which appeared to be at bargain prices. Among these were companies
such as American Bankers Insurance and Life RE. Both have since been targets of
take-overs. In addition, Lehman Brothers and Mohawk Industries provided
excellent opportunities and offered strong appreciation to your Fund. Some of
your other smaller companies we purchased have not yet responded, but we expect
good results from these over the longer run. Basic material stocks and those
with links to Asia have been hurt by the difficulties in the Far East.
The Fund under-performed the Lipper Balanced Fund Index, which was to be
expected given the Fund's conservative nature and its heavier weighting in
bonds.
1
<PAGE>
THE GOLDEN RAINBOW FUND
LETTER TO SHAREHOLDERS (Continued)
================================================================================
The market weighted S&P 500 Index returned 30.17% for the twelve months ended
June 30, 1998, while the Russell 2000 returned 16.62%. The strong stock market
helped the return on The Golden Rainbow, but the Fund's emphasis on bonds held
the total return down from the lofty levels of the indexes. The Lehman
Intermediate Bond Index returned 8.60% for the year. Still, the Fund's 9.54%
total return over the year was in line with expectations for a conservative
balanced fund.
EXPECTATIONS FOR THE FUTURE
Last year, we expected the stock market to enter a difficult phase, and the
performance of the typical small and moderate sized firms bears this out. We
have anticipated for some time that the incredible bull run in the stock market
would run into obstacles, and we think that will hold true next year. A
conservative approach to investing, with a focus on value and defense, is likely
to work well. A slowing economy should lead to lower interest rates, which would
be beneficial to the bond portion of your Fund. Investors looking for stability
should focus on value, income and preservation of assets.
/s/ Barry R. James
Barry R. James, CFA, CIC
Portfolio Manager
Comparison of the Change in Value of a $10,000 Investment in The Golden Rainbow
Fund, Standard & Poor's 500 Index and a Blended 25/25/50 Index(A).
S&P Blended The Golden The Golden
500 25/25/50 Rainbow Rainbow
Date Index Index Fund (NAV) Fund (Offer)
07/01/91 10,000 10,000 10,000 9,580
09/30/91 10,535 10,579 10,633 10,187
12/31/91 11,418 11,205 11,129 10,662
03/31/92 11,129 11,294 10,937 10,477
06/30/92 11,340 11,379 11,191 10,721
09/30/92 11,697 11,801 11,797 11,302
12/31/92 12,286 12,369 12,227 11,714
03/31/93 12,822 12,880 13,002 12,456
06/30/93 12,883 13,105 13,215 12,660
09/30/93 13,215 13,624 13,951 13,365
12/31/93 13,522 13,804 13,817 13,236
03/31/94 13,010 13,441 13,297 12,738
06/30/94 13,064 13,284 13,018 12,472
09/30/94 13,702 13,731 13,236 12,680
12/31/94 13,699 13,659 13,242 12,686
03/31/95 15,033 14,449 14,153 13,558
06/30/95 16,468 15,493 15,172 14,535
09/30/95 17,777 16,312 15,660 15,002
12/31/95 18,848 16,934 16,246 15,564
03/31/96 19,859 17,307 16,209 15,528
06/30/96 20,751 17,772 16,349 15,662
09/30/96 21,392 18,083 16,577 15,880
12/31/96 23,175 18,916 17,659 16,917
03/31/97 23,796 18,788 17,773 17,027
06/30/97 27,951 20,647 19,054 18,254
09/30/97 30,044 22,081 20,145 19,299
12/31/97 30,907 22,290 19,919 19,083
03/31/98 35,218 23,802 20,859 19,983
06/30/98 36,381 23,950 20,859 19,983
------------------------------------------------
The Golden Rainbow Fund
Average Annual Total Returns
1 Year 5 Years Since Inception(B)
4.9% 8.6% 10.4%
------------------------------------------------
(A) The Blended Index is comprised of a 25% weighting in the Standard & Poor's
500 Index, a 25% weighting in the Russell 2000 Index and a 50% weighting in
the Lehman Brothers Intermediate Government/Corporate Bond Index.
(B) Fund inception was July 1, 1991.
2
<PAGE>
THE GOLDEN RAINBOW FUND
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1998
================================================================================
ASSETS
Investment securities, at value (cost of $111,197,152) (Note 1) .. $131,143,975
Receivables:
Dividends and interest ........................................ 1,315,443
Other assets ..................................................... 7,489
------------
TOTAL ASSETS ................................................ 132,466,907
------------
LIABILITIES
Cash overdraft ................................................... 229,885
Payable for capital shares redeemed .............................. 94,577
Accrued expenses:
Management fees (Note 3) ...................................... 10,681
12b-1 distribution and service fees (Note 3) .................. 3,608
Other ......................................................... 33,875
------------
TOTAL LIABILITIES ........................................... 372,626
------------
NET ASSETS ....................................................... $132,094,281
============
NET ASSETS CONSIST OF:
Paid-in capital .................................................. $ 98,447,391
Accumulated net realized gains from security transactions ........ 13,627,121
Undistributed net investment income .............................. 72,946
Net unrealized appreciation on investments ....................... 19,946,823
------------
NET ASSETS ....................................................... $132,094,281
============
Shares of beneficial interest outstanding (unlimited
number of shares authorized, no par value) .................... 6,965,537
============
Net asset value and redemption price per share ................... $ 18.96
============
Maximum offering price per share (net asset
value per share plus sales load of 4.20% of the offering price) $ 19.79
============
See notes to financial statements.
3
<PAGE>
THE GOLDEN RAINBOW FUND
STATEMENT OF OPERATIONS
For the Year Ended June 30, 1998
================================================================================
INVESTMENT INCOME
Dividends .................................................. $ 1,255,079
Interest ................................................... 5,136,345
------------
TOTAL INVESTMENT INCOME .................................. 6,391,424
------------
EXPENSES
Management fees (Note 3) ................................... 1,082,110
12b-1 distribution and service fees - Class A (Note 3) ..... 584,985
Custodian's fees and expenses .............................. 52,118
Shareholder report printing and mailing .................... 44,626
Other expenses ............................................. 37,136
------------
Total expenses before expense reimbursement ................ 1,800,975
Expense reimbursement (Note 3) ........................... (219,407)
------------
Net expenses ............................................... 1,581,568
------------
NET INVESTMENT INCOME ......................................... 4,809,856
------------
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS
Net realized gains from investment transactions ............ 17,391,584
Net change in unrealized appreciation
or depreciation of investments .......................... (8,773,490)
------------
NET REALIZED AND UNREALIZED GAINS ON INVESTMENTS .............. 8,618,094
------------
NET INCREASE IN NET ASSETS FROM OPERATIONS .................... $ 13,427,950
============
See notes to financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
THE GOLDEN RAINBOW FUND
STATEMENTS OF CHANGES IN NET ASSETS
For the Years Ended June 30, 1998 and 1997
=======================================================================================================
Year Ended Year Ended
June 30, June 30,
1998 1997
- -------------------------------------------------------------------------------------------------------
FROM OPERATIONS:
<S> <C> <C>
Net investment income ............................................. $ 4,809,856 $ 6,147,613
Net realized gains on investments ................................. 17,391,584 7,061,120
Net change in unrealized appreciation/depreciation on investments . (8,773,490) 12,505,157
------------- -------------
Net increase in net assets from operations ........................... 13,427,950 25,713,890
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income ........................................ (4,808,630) (6,084,217)
From net realized gains on investments ............................ (10,825,570) (3,654,423)
------------- -------------
Decrease in net assets from distributions to shareholders ............ (15,634,200) (9,738,640)
------------- -------------
FROM CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold ......................................... 8,787,070 6,057,561
Reinvestment of distributions to shareholders ..................... 14,819,001 8,979,282
Payments for shares redeemed ...................................... (46,489,017) (58,135,678)
------------- -------------
Net decrease in net assets from capital share transactions ........... (22,882,946) (43,098,835)
------------- -------------
TOTAL DECREASE IN NET ASSETS ......................................... (25,089,196) (27,123,585)
NET ASSETS:
Beginning of year ................................................. 157,183,477 184,307,062
------------- -------------
End of year ....................................................... $ 132,094,281 $ 157,183,477
============= =============
UNDISTRIBUTED NET INVESTMENT INCOME .................................. $ 72,946 $ 71,720
============= =============
SUMMARY OF CAPITAL SHARE ACTIVITY:
Shares sold ....................................................... 453,412 332,181
Shares issued in reinvestment of distributions to shareholders .... 798,284 492,197
Shares redeemed ................................................... (2,425,023) (3,180,078)
------------- -------------
Net decrease in shares outstanding ................................ (1,173,327) (2,355,700)
Shares outstanding, beginning of year ............................. 8,138,864 10,494,564
------------- -------------
Shares outstanding, end of year ................................... 6,965,537 8,138,864
============= =============
</TABLE>
See notes to financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
THE GOLDEN RAINBOW FUND
FINANCIAL HIGHLIGHTS
==================================================================================================================================
PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended June 30,
-----------------------------------------------------------------
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period ....................... $ 19.31 $ 17.56 $ 18.27 $ 16.67 $ 17.81
--------- --------- --------- --------- ---------
Income from investment operations:
Net investment income ..................................... 0.65 0.66 0.73 0.69 0.66
Net realized and unrealized gains (losses) on investments . 1.08 2.16 0.61 1.94 (0.89)
--------- --------- --------- --------- ---------
Total from investment operations ............................. 1.73 2.82 1.34 2.63 (0.23)
--------- --------- --------- --------- ---------
Less distributions:
From net investment income ................................ (0.65) (0.68) (0.74) (0.68) (0.66)
From net realized gains on investments .................... (1.43) (0.39) (1.31) (0.35) (0.25)
--------- --------- --------- --------- ---------
Total distributions .......................................... (2.08) (1.07) (2.05) (1.03) (0.91)
--------- --------- --------- --------- ---------
Net asset value at end of period ............................. $ 18.96 $ 19.31 $ 17.56 $ 18.27 $ 16.67
========= ========= ========= ========= =========
Total return (A) ............................................. 9.5% 16.5% 7.8% 16.6% (1.5)%
========= ========= ========= ========= =========
Ratios/Supplementary Data:
Ratio of net expenses to average net assets(B) ............... 1.08% 1.09% 1.06% 1.04% 0.96%
Ratio of net investment income to average net assets ......... 3.29% 3.63% 4.01% 4.05% 3.70%
Portfolio turnover rate ...................................... 54% 56% 83% 48% 31%
Net assets at end of period (000's) .......................... $ 132,094 $ 157,183 $ 184,307 $ 191,473 $ 188,747
</TABLE>
(A) Total returns exclude the effect of applicable sales loads.
(B) Absent fee waivers and/or expense reimbursements, the ratios of expenses to
average net assets would have been 1.23%, 1.24%, 1.26%, 1.27%, and 1.24%
for the years ended June 30, 1998, 1997, 1996, 1995 and 1994, respectively
(Note 3).
See notes to financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
THE GOLDEN RAINBOW FUND
SCHEDULE OF INVESTMENTS
June 30, 1998
==============================================================================================
SHARES COMMON STOCKS -- 43.6% VALUE
- ----------------------------------------------------------------------------------------------
BASIC MATERIALS -- 4.9%
<S> <C> <C>
119,900 Barrick Gold Corporation ........................................ $ 2,300,581
21,700 E.I. du Pont de Nemours and Company Ltd. ........................ 1,619,363
85,050 Newmont Mining Corporation ...................................... 2,009,306
26,000 Oregon Steel Mills, Inc. ........................................ 484,250
------------
6,413,500
------------
CONSUMER, CYCLICAL -- 3.1%
16,000 Bowne & Company, Inc. ........................................... 720,000
19,400 Fabri-Centers Of America - Class A * ............................ 531,075
19,000 Furniture Brands International, Inc. * .......................... 533,188
10,000 General Motors Corporation ...................................... 668,125
29,000 Jones Apparel Group, Inc. * ..................................... 1,060,313
10,000 Kellwood Company ................................................ 357,500
10,000 Kimball International - Class B ................................. 181,250
------------
4,051,451
------------
CONSUMER, NON-CYCLICAL -- 9.9%
29,333 Bindley Western Industries ...................................... 967,998
53,000 Bristol-Myers Squibb Company .................................... 6,091,688
13,000 Dean Foods Company .............................................. 714,188
7,000 Kroger Company * ................................................ 300,125
5,000 Lilly (Eli) & Co. ............................................... 330,313
2,300 Pfizer, Inc. .................................................... 249,981
51,000 Premark International, Inc. ..................................... 1,644,750
20,000 Procter & Gamble Company ........................................ 1,821,250
15,000 Supervalu, Inc. ................................................. 665,625
5,000 Warner-Lambert, Inc. ............................................ 346,875
------------
13,132,793
------------
ENERGY -- 5.1%
32,000 Exxon Corporation ............................................... 2,282,000
21,000 Helmerich & Payne ............................................... 467,250
5,000 Lakehead Pipeline LP. ........................................... 240,937
17,000 Mobil Corporation ............................................... 1,302,625
15,000 Snyder Oil Corporation .......................................... 299,062
64,500 Williams Companies .............................................. 2,176,875
------------
6,768,749
------------
7
<PAGE>
<CAPTION>
THE GOLDEN RAINBOW FUND
SCHEDULE OF INVESTMENTS (Continued)
==============================================================================================
SHARES COMMON STOCKS -- 43.6% VALUE
- ----------------------------------------------------------------------------------------------
FINANCE -- 4.3%
<S> <C> <C>
30,000 American Bankers Insurance Group ................................ $ 1,803,750
20,000 Lehman Brothers Holding Company ................................. 1,551,250
12,000 Life Re Corporation ............................................. 984,000
8,000 Public Storage Property Trust ................................... 224,000
22,750 Security Capital Industrial Trust * ............................. 568,750
10,000 UMB Financial Corporation ....................................... 495,000
------------
5,626,750
------------
INDUSTRIAL -- 2.7%
19,000 Airborne Freight Corporation .................................... 663,812
9,000 Case Corporation ................................................ 434,250
5,000 Lafarge Corporation ............................................. 196,562
36,000 Mohawk Industries, Inc. * ....................................... 1,140,750
37,000 Timken Company .................................................. 1,140,063
------------
3,575,437
------------
INTERNATIONAL -- 2.3%
25,000 Korea Electric Power SPN-ADR .................................... 178,125
95,000 YPF S.A.-ADR .................................................... 2,855,937
------------
3,034,062
------------
TECHNOLOGY -- 4.4%
20,000 CTS Corporation ................................................. 590,000
69,800 Intel Corporation ............................................... 5,173,925
5,000 Quantum Corporation * ........................................... 103,750
------------
5,867,675
------------
UTILITIES -- 6.9%
33,000 Columbia Energy Corporation ..................................... 1,835,625
35,500 Duke Energy Corporation ......................................... 2,103,375
90,400 Energen Corporation ............................................. 1,819,300
92,000 NIPSCO Industries ............................................... 2,576,000
7,000 Pinnacle West Capital ........................................... 315,000
20,000 Washington Water and Power Company .............................. 448,750
------------
9,098,050
------------
TOTAL COMMON STOCKS (COST $40,309,042) .......................... $ 57,568,467
------------
<CAPTION>
==============================================================================================
Par Value CORPORATE BONDS -- 4.5% Value
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
$ 2,625,000 Ameritech, 5.95%, 1/15/38 ....................................... $ 2,668,861
1,200,000 Bank One Texas, 6.25%, 2/15/08 .................................. 1,194,576
500,000 GTE, 7.51%, 4/1/09 .............................................. 545,046
500,000 Illinois Bell Telephone, 7.125%, 7/1/23 ......................... 511,676
500,000 Pacific G & E, 7.25%, 8/1/26 .................................... 523,673
500,000 Procter & Gamble, 7.375%, 3/1/23 ................................ 533,353
------------
TOTAL CORPORATE BONDS (COST $5,846,202) ......................... $ 5,977,185
------------
8
<PAGE>
<CAPTION>
THE GOLDEN RAINBOW FUND
SCHEDULE OF INVESTMENTS (Continued)
==============================================================================================
Par Value U.S. GOVERNMENT & AGENCY BONDS -- 49.2% Value
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
$ 3,000,000 U.S. Treasury Notes, 5.375%, 2/15/01 ............................ $ 2,989,689
9,000,000 U.S. Treasury Notes, 6.250%, 4/30/01 ............................ 9,165,942
5,000,000 U.S. Treasury Notes, 6.500%, 5/31/01 ............................ 5,126,565
6,000,000 U.S. Treasury Notes, 5.500%, 1/31/03 ............................ 5,994,378
16,000,000 U.S. Treasury Notes, 6.250%, 2/15/07 ............................ 16,760,000
7,300,000 U.S. Treasury Notes, 6.125%, 8/15/07 ............................ 7,598,847
500,000 U.S. Treasury Bonds, 10.375%, 11/15/09 .......................... 625,469
2,000,000 U.S. Treasury Bonds, 10.000%, 5/15/10 ........................... 2,490,626
3,000,000 U.S. Treasury STRIPS, 0.000%, 5/15/08 ........................... 1,732,410
3,000,000 Federal Home Loan Bank Bonds, 5.920%, 4/16/01 ................... 2,990,031
5,000,000 Federal National Mortgage Association, 6.870%, 7/17/07 .......... 5,101,485
1,000,000 Federal National Mortgage Association, 6.030%, 5/15/03 .......... 1,005,715
3,352,448 Government National Mortgage Association, 7.500%, 9/15/26 ....... 3,443,600
------------
TOTAL U.S. GOVERNMENT & AGENCY BONDS (COST $62,468,351) ......... $ 65,024,757
------------
SHORT-TERM INVESTMENTS -- 2.0%
Star Treasury Money Market Fund (at cost) ....................... $ 2,573,566
------------
TOTAL INVESTMENT SECURITIES -- 99.3% (COST $111,197,152) ........ $131,143,975
OTHER ASSETS LESS LIABILITIES -- 0.7% ........................... 950,306
------------
NET ASSETS -- 100.0% ............................................ $132,094,281
============
</TABLE>
* Non-income producing securities.
See notes to financial statements.
9
<PAGE>
THE GOLDEN RAINBOW FUND
NOTES TO FINANCIAL STATEMENTS
June 30, 1998
================================================================================
1. GENERAL INFORMATION AND SIGNIFICANT ACCOUNTING POLICIES
The Golden Rainbow Fund (the "Fund") is a diversified series of The James
Advantage Funds (the "Trust"), an open-end management investment company,
organized as an Ohio business trust on August 29, 1997. The Fund is registered
under the Investment Company Act of 1940 (the "1940 Act").
The Fund seeks to provide total return through a combination of growth, income
and preservation of capital in declining markets. The Fund seeks to achieve its
objective by investing primarily in equity and/or debt securities that the
Fund's adviser, James Investment Research, Inc. ("James") believes are
undervalued.
At the close of business on June 26, 1998, the Fund acquired the assets and
assumed the liabilities of The Golden Rainbow A James Advised Mutual Fund (the
"Predecessor Fund") in a tax-free reorganization. As a result of the
reorganization, the Fund assumed the financial history of the Predecessor Fund
(See Note 4).
The following is a summary of significant accounting policies followed by the
Fund in preparation of its financial statements, in accordance with generally
accepted accounting principles.
SHARE VALUATION
The net asset value per share of the Fund is calculated daily by dividing the
total value of the Fund's assets, less liabilities, by the number of shares
outstanding. The maximum offering price per share is equal to net asset value
per share plus a sales load equal to 4.38% of net asset value (or 4.2% of the
offering price). The redemption price per share is equal to the net asset value
per share.
SECURITIES VALUATION
Securities which are traded on any exchange or on the NASDAQ over-the-counter
market are valued at the last quoted sale price. Lacking a last sale price, a
security is valued at its last bid price except when, in the Adviser's opinion,
the last price does not accurately reflect the current value of the security.
All other securities for which over-the-counter market quotations are readily
available are valued at their last bid price. When market quotations are not
readily available, when the Adviser determines the last bid price does not
accurately reflect the current value or when restricted securities are being
valued, such securities are valued at their fair value as determined in good
faith in accordance with consistently applied procedures established by and
under the general supervision of the Board of Trustees.
Fixed income securities generally are valued by using market quotations, but may
be valued on the basis of prices furnished by a pricing service when market
quotations are not readily available. A pricing service utilizes electronic data
processing techniques based on yield spreads relating to securities with similar
characteristics to determine prices for normal institutional-size trading units
of debt securities without regard to sale or bid prices.
SECURITIES TRANSACTIONS
Securities transactions are recorded on a trade date basis. Realized gains and
losses from such security transactions are determined on the specific
identification method. Securities purchased or sold on a when-issued or delayed
delivery basis may have extended settlement periods. Any securities so purchased
are subject to market fluctuation during this period. The Fund has instructed
the custodian to segregate assets in a separate account with a current value at
least equal to the amount of its when-issued and delayed delivery purchase
commitments. At June 30, 1998, the Fund had no such outstanding purchase
commitments.
10
<PAGE>
THE GOLDEN RAINBOW FUND
NOTES TO FINANCIAL STATEMENTS (Continued)
================================================================================
INVESTMENT INCOME
Dividend income is recorded on the ex-dividend date. Interest income is
determined on the basis of interest accrued, adjusted for amortization of
premiums and accretion of discounts on long-term debt securities when required
for federal income tax purposes.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Net investment income is declared and distributed to shareholders quarterly. Net
realized capital gains from investment transactions, if any, are distributed to
shareholders not less frequently than annually. Furthermore, capital gains are
distributed only to the extent they exceed available capital loss carryovers.
Distributions to shareholders of net investment income and net realized capital
gains are recorded on the ex-dividend date. The amount and timing of
distributions are determined in accordance with federal income tax regulations,
which may differ from generally accepted accounting principles. Accordingly,
temporary over-distributions as a result of these differences may occur and will
be classified as either distributions in excess of net investment income and/or
distributions in excess of net realized gains from investment transactions,
where applicable.
FEDERAL INCOME TAXES
The Fund intends to distribute all taxable income and capital gains to
shareholders and to otherwise comply with the requirements of Subchapter M of
the Internal Revenue Code applicable to regulated investment companies.
Therefore, no federal tax provision is required.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of increases and decreases in net
assets from operations during the reporting period.
2. SECURITIES TRANSACTIONS
Purchases and sales (including maturities) of investments in long-term U.S.
government obligations for the fiscal year ended June 30, 1998 equaled
$49,601,284 and $66,454,938, respectively. Purchases and sales (including
maturities) of investments in other long-term securities for the fiscal year
ended June 30, 1998 equaled $25,692,012 and $38,430,119, respectively.
At June 30, 1998, the identified cost of investments owned for federal income
tax purposes was the same as the cost for financial reporting purposes.
The net unrealized appreciation for financial reporting and federal income tax
purposes aggregated $19,946,823, of which $22,065,535 related to appreciated
securities and $2,118,712 related to depreciated securities.
3. MANAGEMENT FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Effective June 26, 1998, the Fund retains James Investment Research, Inc.
("James") to manage the Fund's investments. Under the Fund's Investment
Management Agreement with James, the Fund pays a monthly management fee, at an
annual rate of .74% of the average daily net assets of the Fund. James has
agreed to waive a portion of its fee until at least June 30, 1999, so that the
fee after waivers will be 0.65%. In addition, James may voluntarily reimburse
expenses from time to time, which may be terminated at any time at its
discretion.
11
<PAGE>
THE GOLDEN RAINBOW FUND
NOTES TO FINANCIAL STATEMENTS (Continued)
================================================================================
Prior to June 26, 1998, the Predecessor Fund retained The John Nuveen Company
("Nuveen") as the investment manager of the Predecessor Fund. Under the
Management Agreement with Nuveen, the Predecessor Fund paid a monthly management
fee, at an annual rate of .74% of the average daily net assets of the
Predecessor Fund. The management fee compensated Nuveen for overall investment
advisory and administrative services and general office facilities. Under an
Investment Advisory Agreement between the Predecessor Fund, Nuveen and James,
Nuveen (not the Fund) paid James a monthly fee at an annual rate of .55% of the
Fund's average daily net assets for its services as sub-adviser.
For the fiscal year ended June 30 ,1998, the Fund incurred management fees
totalling $1,082,110, of which $1,071,429 was paid to Nuveen and $10,681 was
paid to James. In addition, James earned $796,332 in fees under its sub-advisory
contract with Nuveen.
Prior to June 26, 1998, the Predecessor Fund had a Distribution Agreement with
Nuveen, pursuant to which Nuveen served as the exclusive selling agent and
distributor of the Predecessor Fund's shares, and in that capacity made a
continuous offering of the Predecessor Fund's shares and was responsible for all
sales and promotion efforts. In addition, the Predecessor Fund had adopted a
plan pursuant to Rule 12b-1 under the 1940 Act which permitted the Predecessor
Fund to pay certain distribution and promotion expenses related to marketing its
shares. The maximum amount payable by the Predecessor Fund under the 12b-1 Plan
on an annualized basis was .40% of its average daily net assets. For the fiscal
year ended June 30, 1998, Nuveen earned $10,233 in commissions on the sale of
Fund shares and the Fund paid Nuveen $361,970 under the 12b-1 Plan. Nuveen
permanently waived $219,407 of fees under the 12b-1 Plan during the period.
Effective June 26, 1998, the Fund adopted a plan pursuant to Rule 12b-1 under
the 1940 Act which is essentially identical to the Predecessor Fund's 12b-1
Plan.
4. REORGANIZATION OF THE GOLDEN RAINBOW FUND
The Golden Rainbow Fund was originally organized as a series of the Flagship
Admiral Funds Inc., a Maryland corporation. On June 26, 1998, pursuant to an
Agreement and Plan of Reorganization, all assets and liabilities of the
Predecessor Fund, which had substantially identical investment objectives and
policies as the Fund, were transferred in exchange for all capital shares of the
Fund. The Predecessor Fund then distributed to its shareholders as a liquidating
dividend all capital shares of the Fund in exchange for and in cancellation of
its capital shares.
For federal income tax purposes, the reorganization qualified as a tax-free
reorganization with no tax consequences to the Predecessor Fund, the Fund or its
shareholders.
12
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
================================================================================
To the Board of Trustees and Shareholders of The Golden Rainbow Fund:
We have audited the accompanying statement of assets and liabilities of The
Golden Rainbow Fund ("the Fund"), including the schedule of investments, as of
June 30, 1998, the related statement of operations for the year then ended and
the statement of changes in net assets, and the financial highlights for each of
the years presented. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of June
30, 1998, by correspondence with the Fund's custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of The Golden Rainbow
Fund at June 30, 1998, the results of its operations, the changes in its net
assets and the financial highlights for the respective stated periods, in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dayton, Ohio
August 13, 1998
13
<PAGE>
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14
<PAGE>
This Page Intentionally Left Blank
15
<PAGE>
INVESTMENT ADVISER
James Investment Research, Inc.
P.O. Box 8
Alpha, Ohio 45301
[email protected]
o
CUSTODIAN
Star Bank, N.A.
425 Walnut Street
Cincinnati, Ohio 45202
o
TRANSFER AGENT
Countrywide Fund Services, Inc.
312 Walnut Street
Cincinnati, Ohio 45202
o
INDEPENDENT AUDITORS
Deloitte & Touche LLP
1700 Courthouse Plaza, N.E.
Dayton, Ohio 45402
o
DISTRIBUTOR
CW Fund Distributors, Inc.
312 Walnut Street
Cincinnati, Ohio 45202
o
LEGAL COUNSEL
Brown, Cummins & Brown
3500 Carew Tower
Cincinnati, Ohio 45202
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