As filed with the Securities and Exchange Commission on October 26, 1995.
Registration Nos. 2-84470
811-3770
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES [ ]
ACT OF 1933
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 22 [x]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT [ ]
COMPANY ACT OF 1940
Amendment No. 23 [x]
FLAGSHIP ADMIRAL FUNDS INC.
(Exact Name of Registrant as Specified in Charter)
One Dayton Centre
One South Main Street
Dayton, Ohio 45402
(Address of Principal Executive Offices) (Zip Code)
(513) 461-0332
(Registrant's Telephone Number, Including Area Code)
RICHARD P. DAVIS Please Send Copy of
President Communications to:
Flagship Tax Exempt RICHARD T. PRINS, ESQ.
Funds Trust Skadden, Arps, Slate, Meagher &
One Dayton Centre Flom
One South Main Street 919 Third Avenue
Dayton, Ohio 45402 New York, New York 10022
(Name and Address of Agent for (212) 735-3000
Service)
It is proposed that this filing will become effective (check appropriate box)
[x] Immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b), or
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2), or
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485
Registrant has registered an indefinite number of its shares of beneficial
interest pursuant to Rule 24f-2 under the Investment Company Act of 1940, as
amended, and has filed a Rule 24f-2 Notice with the Commission for its most
recent fiscal year ended June 30, 1995.
<PAGE>
CROSS REFERENCE SHEET
(As Required by Item 501(B) OF Regulation S-K)
Part A of The Golden Rainbow Fund A James Advised Mutual Fund(TM)
N-1A Item No. Location
- ------------------------------------------ ----------------------------------
Item 1. Cover Page ................... Cover Page
Item 2. Synopsis ...................... Fees and Expenses
Item 3. Condensed Financial
Information ................... Financial Highlights
Item 4. General Description of
Registrant ................... Cover Page; Who should Invest in
the Fund?; The Fund and Its
Objective; Description of Shares
Item 5. Management of the Fund ...... Management of the Fund;
Distributor; Financial
Highlights
Item 5A. Management's Discussion of
Fund Performance ............. Not Applicable
Item 6. Capital Stock and Other
Securities ................... Description of Shares; How To Buy
Shares; How To Redeem Shares; How
Fund Shares Are Priced; Cover
Page; Distributions; Taxes
Item 7. Purchase of Securities Being
Offered ...................... How to Buy Shares; How Fund
Shares Are Priced; Distributor
Item 8. Redemption or Repurchase ..... How to Redeem Shares; Free
Repurchase; Systematic Withdrawal
Plan; Direct Deposits
Item 9. Pending Legal Proceedings ..... Not Applicable
Part B of The Golden Rainbow Fund A James Advised Mutual Fund(TM)
Item 10. Cover Page ................... Cover Page
Item 11. Table of Contents ............. Table of Contents
Item 12. General Information and
History ...................... Not Applicable
Item 13. Investment Objectives and Investment Objectives and
Policies ...................... Policies
Item 14. Management of the Fund ....... Officers, Directors and
Stockholders
Item 15. Control Persons and
Prinicpal Holders of
Securities ................... Officers, Directors and
Stockholders
Item 16. Investment Advisory and
Other Services ................ Investment Advisory Services;
Distributor; Officers, Directors
and Stockholders; Custodian and
Transfer Agent
Item 17. Brokerage Allocation and
Other Practices ............... Portfolio Transactions
Item 18. Capital Stock and Other
Securities ................... Distributions
Item 19. Purchase, Redemption and
Pricing of Securities Being
Offered ....................... Purchase, Redemption and Pricing
of Shares; see also Part A--How
to Invest in the Fund; How to
Redeem; Net Asset Value
Item 20. Tax Status ................... Taxes
Item 21. Underwriters .................. Distributor
Item 22. Calculation of Performance
Data ......................... Yield and Total Return
Calculation
Item 23. Financial Statements .......... Financial Statements
<PAGE>
Part A of Flagship Utility Income Fund(TM)
N-1A Item No. Location
- ------------------------------------------ -------------------------------
Item 1. Cover Page ................... Cover Page
Item 2. Synopsis ...................... Fees and Expenses
Item 3. Condensed Financial
Information ................... Financial Highlights
Item 4. General Description of
Registrant ................... Cover Page; The Fund and Its
Objective; Investment
Considerations and Risk Factors;
How To Buy Shares; General
Information
Item 5. Management of the Fund ....... About the Investment Manager;
About the Distributor; Financial
Highlights; Custodian and
Transfer Agent; Counsel and
Auditors
Item 5A. Management's Discussion of
Fund Performance ............. Not Applicable
Item 6. Capital Stock and Other
Securities ................... How To Buy Shares; How To Redeem
Shares; Exchange and Reinvestment
Privilege; Additional
Information; Cover Page; How Fund
Shares Are Priced; Distributions
and Yield; Taxes
Item 7. Purchase of Securities Being
Offered ...................... How To Buy Shares; About the
Distributor; How Fund Shares Are
Priced
Item 8. Redemption or Repurchase ..... How to Redeem Shares; Exchange
and Reinvestment Privilege;
Systematic Withdrawal Plan;
Direct Deposits
Item 9. Pending Legal Proceedings ..... Not Applicable
Part B of Flagship Utility Income Fund(TM)
Item 10. Cover Page ................... Cover Page
Item 11. Table of Contents ............. Table of Contents
Item 12. General Information and
History ...................... Not Applicable
Item 13. Investment Objectives and
Policies ...................... Investment Objectives and
Policies; Portfolio Transactions
Item 14. Management of the Fund ....... Officers, Directors and
Stockholders
Item 15. Control Persons and
Principal Holders of
Securities ................... Officers, Directors and
Stockholders
Item 16. Investment Advisory and
Other Services ................ Investment Advisory Services;
Distributor; Officers, Directors and
Stockholders; Custodian and Transfer
Agent; Auditors
Item 17. Brokerage Allocation and
other Practices ............... Portfolio Transactions
Item 18. Capital Stock and Other
Securities ................... Distributions; Shares of the Fund
Item 19. Purchase, Redemption and
Pricing of Securities Being
Offered ....................... Purchase, Redemption and Pricing of
Shares; see also Part A--How To Buy
Shares; How To Redeem Shares;
Distributions and Yield
Item 20. Tax Status ................... Taxes
Item 21. Underwriters .................. Distributor
Item 22. Calculation of Performance
Data ......................... Yield and Total Return
Calculation
Item 23. Financial Statements .......... Financial Statements
<PAGE>
Part A of Flagship Limited Term
U.S. Government Fund and Flagship Intermediate U.S.
Government Fund
N-1A Item No. Location
- ------------------------------------------ ---------------------------------
Item 1. Cover Page ................... Cover Page
Item 2. Synopsis ...................... Fees and Expenses
Item 3. Condensed Financial
Information ................... Financial Highlights
Item 4. General Description of
Registrant ................... Cover Page; Summary; The Funds
and Their Objectives; Investment
Considerations and Related Risk
Factors; Investment Techniques;
How To Buy Shares
Item 5. Management of the Fund ...... About the Investment Manager;
About the Distributor; Financial
Highlights; Custodian and
Transfer Agent
Item 5A. Management's Discussion of
Fund Performance ............. Not Applicable
Item 6. Capital Stock and Other
Securities ................... How To Buy Shares; General
Information; How To Redeem
Shares; Exchange and Reinvestment
Privilege; Cover Page;
Distributions and Taxes
Item 7. Purchase of Securities Being
Offered ...................... How To Buy Shares; About the
Distributor; How Fund Shares Are
Priced
Item 8. Redemption or Repurchase ...... How to Redeem Shares; Exchange
and Reinvestment Privilege;
Systematic Withdrawal
Plan
Item 9. Pending Legal Proceedings ..... How to Redeem Shares; Exchange
and Reinvestment Privilege;
Systematic Withdrawal Plan;
Direct Deposits
Part B of Flagship Limited Term
U.S. Government Fund and
Flagship Intermediate U.S. Government Fund
Item 10. Cover Page ................... Cover Page
Item 11. Table of Contents ............. Table of Contents
Item 12. General Information and
History ...................... Not Applicable
Item 13. Investment Objectives and
Policies ...................... Investment Objectives and
Policies; Portfolio Transactions
Item 14. Management of the Fund ...... Officers, Directors and
Stockholders
Item 15. Control Persons and
Principal Holders of
Securities ................... Officers, Directors and Stockholders
Item 16. Investment Advisory and
Other Services ................ Investment Advisory Services;
Distributor; Officers, Directors and
Stockholders; Custodian
and Transfer and Transfer Agent;
Auditors
Item 17. Brokerage Allocation and
Other Practices ............... Portfolio Transactions
Item 18. Capital Stock and Other
Securities ................... Distributions; Shares of the
Funds
Item 19. Purchase, Redemption and
Pricing of Securities Being
Offered ....................... Purchase, Redemption and Pricing
of Shares; see also Part A--How To
Buy Shares; How To Redeem Shares;
Redemption and Exchange
Privilege; How Fund Shares Are
Priced
Item 20. Tax Status ................... Taxes
<PAGE>
N-1A Item No. Location
- ------------------------------------------ -------------------------------
Item 21. Underwriters .................. Distributor
Item 22. Calculation of Performance
Data ......................... Yield and Total Return
Calculation
Item 23. Financial Statements .......... Financial Statements
Part C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of this Registration Statement.
<PAGE>
[Golden Rainbow logo] The Golden Rainbow
A James Advised Mutual Fund(SM)
TABLE OF CONTENTS
Page
Fees and Expenses 2
Financial Highlights 2
Who Should Invest in the Fund? 3
The Fund and Its Objective 3
How to Buy Shares 6
How to Redeem Shares 8
Free Repurchase 8
Systematic Withdrawal Plan 8
Direct Deposits 9
How Fund Shares are Priced 9
Taxes 9
Yield 10
Management of the Fund 11
Distributor 12
Multiple Class Distribution 13
Description of Shares 13
Custodian and Transfer Agent 13
Counsel and Auditors 13
Additional Information 14
Application 15
The Golden Rainbow A James Advised Mutual Fund(sm) (the "Fund") is a series of
Flagship Admiral Funds Inc.(sm) (the "Corporation") a series, open-end,
diversified mutual fund with five series outstanding. The Fund seeks to provide
total return through a combination of growth and income from investing in equity
and/or debt securities and preservation of capital in declining markets. The
Fund will attempt to provide total return in excess of the rate of inflation
over the long term (three to five years). No assurance can be given that the
Fund will achieve its objective. The Fund may invest in equity securities traded
on any national stock exchange or NASDAQ or in debt securities that are rated
"A" or better by Moody's or S&P, or if unrated, of equivalent quality, as well
as equity and debt securities of non-United States issuers and American
Depositary Receipts. The Fund may invest its assets in any combination of
securities and is not limited with respect to the proportion invested in any
category.
Account Information:
toll free at 1-800-543-8721
This Prospectus sets forth concisely the information about the Fund that you
should know before investing in shares of the Fund. A Statement of Additional
Information dated October 26, 1995, containing additional information about
the Fund has been filed with the Securities and Exchange Commission, and is
hereby incorporated by reference into this Prospectus. A copy of the
Statement of Additional Information can be obtained without charge by
telephoning or writing to the Fund. Please read and retain this Prospectus
for future reference.
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. SHARES IN THE FUND ARE NOT DEPOSITS OR
OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK SELLING THE SHARES,
NOR ARE THEY FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD, OR ANY OTHER U.S. GOVERNMENT AGENCY. INVESTMENT
RISKS INCLUDE POSSIBLE LOSS OF PRINCIPAL. THE VALUE OF THE INVESTMENT AND ITS
RETURN WILL FLUCTUATE AND ARE NOT GUARANTEED. WHEN SOLD, THE VALUE OF THE
INVESTMENT MAY BE HIGHER OR LOWER THAN THE AMOUNT ORIGINALLY INVESTED.
October 26, 1995
<PAGE>
FEES AND EXPENSES
Shareholder
Transaction
Expense Annual Fund Operating Expenses After
- ---------------------- Fee Waivers & Reimbursement
Maximum Maximum Arrangements*
Front End CDSL ----------------------------------------
Sales Load Imposed Total Fund
Imposed On On Management 12b-1 Other Operating
Purchases Purchases Fee Fee Expenses Expenses
- ---------- -------- -------- --- ------- ----------
4.20% N/A .74% .30% .16% 1.20%
Example of Expenses
----------------------------------------------
Total Fund An Investor in the Fund
Operating Would Pay the Following Dollar Amount of
Expenses Expenses on a $1,000 Investment Assuming
Without (1) 5% Annual Return and (2) Redemption
Waiver Or at the End of Each Period
Reimburse- ----------------------------------------------
ment 1 Year 3 Years 5 Years 10 Years
- ---------- -------- -------- -------- ----------
1.30% $54 $78 $105 $181
* Percentage based on actual fees incurred from the previous fiscal year
restated to reflect current fees and operating expenses. The Adviser has
agreed to waive a portion of its fees to the extent total fund operating
expenses exceed the above stated amount. Persons who indirectly purchase
Fund shares through intermediaries may pay fees charged by such
intermediaries in addition to the expenses and fees of the Fund shown
above.
The preceding prescribed table is meant to assist an investor in understanding
the various costs and expenses that may directly or indirectly be incurred as a
result of an investment in the Fund. As indicated in the expense table, the Fund
utilizes a 12b-1 plan and management fee, both of which are more fully described
herein. These expenses should not be considered a representation of past or
future expenses as actual expenses may be greater or less than those shown.
FINANCIAL HIGHLIGHTS
The following data have been derived from financial statements and financial
highlights audited by Deloitte & Touche LLP, independent auditors whose
reports and related notes appear in the Statement of Additional Information.
The following table provides per share income and capital changes for a share
of capital stock of the Fund outstanding from July 1, 1991 (commencement of
operations), to June 30, 1995.
<TABLE>
<CAPTION>
Income from Investment
Operations Less Distributions
----------------------------- ----------------------------------------
Net
Realized
Net &
Asset Unrealized Dividends Distri- Net
Value Net Gain Total (From butions Asset
Year Beginning Invest- (Loss) From Net (From Returns Total Value
Ended of ment on Investment Investment Capital of Distri- End of
June 30, Period Income Securities Operations Income) Gains) Capital butions Period
- --------- ------- ------- ------- ------- ------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1992 $15.00 $.87 $ .90 $1.77 $.87 $.02 $-- $ .89 $15.88
1993 15.88 .76 2.05 2.81 .75 .13 -- .88 17.81
1994 17.81 .66 (.89) (.23) .66 .25 -- .91 16.67
1995 16.67 .69 1.94 2.63 .68 .35 -- 1.03 18.27
<CAPTION>
Ratios/Supplemental Data
-----------------------------------------
Ratio
of
Ratio Net
of Investment
Expenses Income
Net to to
Year Assets Average Average Portfolio
Ended Total End of Net Net Turnover
June 30, Return Period Assets Assets Rate
- --------- ------- ------- ------- ------- ---------
1992 11.91% $124,563 1.09% 5.51% 10.48%
1993 18.09 179,209 1.02 4.44 38.42
1994 (2.69) 188,747 .96 3.70 30.64
1995 16.55 191,473 1.04 4.05 48.46
</TABLE>
The Fund's annual report for the most recent fiscal year includes a
discussion of fund performance. It is available upon request and without
charge.
2
<PAGE>
WHO SHOULD INVEST IN THE FUND?
The Fund is specially designed for investors who seek total return from
investments in equity and debt securities and who also seek capital
preservation in declining markets. The Fund's investment adviser expects to
invest in securities that make the Fund a suitable investment for individuals
wishing to make long-term investments, Individual Retirement Accounts, Keogh
Plans and other retirement or pension oriented plans, trusts or accounts. The
Fund's shares are offered to individuals or entities which are customers of a
securities dealer affiliated with Citizens Federal Bank, F.S.B., ("Citizens
Federal") or trust customers of Citizens Federal.
The minimum initial investment in the Fund is $5,000, except for qualified
individual retirement plans which have a $2,000 minimum initial investment.
Its shares are sold at a public offering price that is equal to the net asset
value per share plus a sales charge through affiliated securities dealers of
Citizens Federal. Shares are sold at net asset value to investors through
trust accounts at Citizens Federal. Shares redeemable without any redemption
charge. In addition, the Fund has adopted a plan pursuant to Rule 12b-1 under
the Investment Company Act of 1940 (the "1940 Act") that permits the Fund to
spend up to .40% annually of its average daily net assets for certain
expenses related to the distribution of its shares (see "The Distributor").
The Fund expects to pay dividends quarterly.
THE FUND AND ITS OBJECTIVE
The Fund's investment objective is to provide total return through a
combination of growth and income primarily in equity and/or debt securities
and preservation of capital in declining markets. The Fund's investment
objective is a fundamental policy that cannot be changed without
authorization by a vote of a majority of the outstanding shares of the Fund.
The Fund will seek to provide total return in excess of the rate of inflation
over the long term (three to five years). The Manager of the Fund is Flagship
Financial Inc. (the "Manager"), and the Investment Adviser is James
Investment Research, Inc. (the "Adviser").
To accomplish the foregoing investment objective, the Fund intends to invest
its assets in a portfolio consisting of equity securities traded on a
national securities exchange or NASDAQ; high grade debt securities rated "A"
or better by Moody's Investors Service, Inc. ("Moody's") or Standard and
Poor's Ratings Group ("S&P"), or unrated securities determined by the Adviser
to be of equivalent quality; securities issued or guaranteed by the United
States government or its agencies or instrumentalities; equity and dollar
denominated debt securities of non-United States issuers; United States
domiciled closed-end mutual funds which invest in the securities of
non-United States issuers; preferred stock rated "A" or better; and
convertible securities including convertible bonds, which shall be treated as
equity and not debt securities for purposes of determining investment
quality.
Investment Strategy
The Adviser does its own research using quantitative databases and statistical
expertise. It utilizes a number of elements to help predict future stock and
bond price movements. When selecting equity securities, the Adviser focuses on
value, neglect or limited following by Wall Street analysts and on management
commitment and assesses a number of fundamental factors such as earnings,
earnings trend, price earnings multiples, return on assets, and balance sheet
data as well as other proprietary calculations to identify stocks which it
considers undervalued.
The Adviser expects that the fixed income portion of the Fund portfolio will
consist primarily of U.S. Treasury securities or high grade corporate bonds. In
addition, when the Adviser believes that interest rates will fall, it expects
that it may extend maturities in anticipation of capital appreciation in the
bonds. If the Adviser believes that interest rates may rise, it expects to seek
capital preservation through the purchase of shorter term bonds.
Under normal market conditions the Adviser expects that the Fund will hold both
debt and equity securities, the proportions of which are not fixed and may
invest up to 90% of its assets in either debt or equity securities and, for
temporary defensive purposes, may invest up to 100% of its assets in short term
U.S. Government or high quality money market instruments or repurchase
agreements collateralized by such securities or any other security of equivalent
quality deemed appropriate. The Adviser expects that the bulk of the portion of
the Fund's assets invested in equities will be invested in New York Stock
Exchange listed equity securities, but the bulk of the Fund's assets could
consist of American Stock Exchange and over-the-counter traded equity securities
in appropriate circumstances, such as when they are determined to be undervalued
by the Adviser. The Fund may also invest in closed-end funds which invest in the
securities of non-United States issuers, foreign equity securities, or American
3
<PAGE>
Depositary Receipts of such securities. See "Non-United States Securities."
The Fund may invest in the following types of securities in any proportion:
convertible preferred and common stocks, long and short term debt securities,
money market instruments, repurchase agreements, and "when issued" securities
of any of the above, as well as new types of securities that may be created
in the future, but will do so only to the extent such investment is
compatible with its investment objective. The Fund may invest in debt
obligations of any maturity and will select such investments consistent with
its anticipated needs for liquidity to meet redemptions.
The Fund will limit its holdings of debt securities to issues rated, at the time
of purchase, "A" or better by either Moody's, or S&P, respectively or other
issues believed by the Adviser to be of at least comparable quality. Securities
rated A are judged by Moody's to be upper medium grade obligations, security for
principal and interest of which are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future. S&P
believes debt rated A has a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in higher rated categories.
The Fund may invest up to 10% of its assets in money market funds or closed-end
funds (which invest in the securities of non-United States issuers) which are
registered investment companies, subject to the requirements of applicable law.
Such investments could result in stockholders paying duplicate or multiple fees,
as such money market or closed-end funds incur expenses similar to those of the
Fund. The Adviser will only invest in money market funds or closed-end funds
when it believes the yields on such funds are beneficial even including multiple
fees. Risks associated with investment in the securities of non-United States
issuers and closed-end funds which invest in the securities of non-United States
issuers are discussed below under "Non-United States Securities."
American Depositary Receipts
American Depositary Receipts (ADR's) represent interests in underlying equity
securities of non-United States issuers which do not trade directly in the
United States. ADR programs may be sponsored by the issuers or unsponsored, that
is, organized without the issuer's assistance. Generally, the underlying equity
securities are deposited with a bank or other financial institution and the ADR
is traded, representing an interest in the shares on deposit and entitling the
owner of the ADR to interest and dividend income from the shares pursuant to the
contractual arrangements relating to the ADR program. ADR's often trade at a
lower price than the underlying security and may be less liquid, but at the same
time provide a potential for greater yields.
Non-United States Securities
The Fund may invest up to 30% of its assets in securities issued by non-United
States issuers and up to 10% of its assets in investment companies including
closed-end funds which invest in the securities of non-United States issuers.
Investments in securities of non-United States issuers involve certain risks not
ordinarily associated with investments in securities of domestic issuers. Such
risks include fluctuations in foreign exchange rates, future political and
economic developments, and the possible imposition of exchange controls or other
foreign governmental laws or restrictions. Securities denominated or quoted in
currencies other than the U.S. dollar will have their value affected by changes
in foreign currency exchange rates and such changes may affect unrealized
appreciation or depreciation, although the Fund will attempt to hedge such
risks. See "Hedging". With respect to certain countries, there is the
possibility of expropriation of assets, confiscatory taxation, political or
social instability or diplomatic developments which could adversely affect
investments in those countries.
There may be less publicly available information about a non-United States
company than about a United States company, and such a company may not be
subject to accounting, auditing and financial reporting standards and
requirements comparable to or as uniform as those of United States companies.
Non-United States securities markets (other than Japan), while growing in
volume, have, for the most part, substantially less volume than United States
markets, and securities of many non-United States companies are less liquid and
their prices more volatile than securities of comparable United States
companies. Transaction costs on non-United States securities markets are
generally higher than in the United States and settlement procedures are often
not as regulated as in the United States. There is generally less government
supervision and regulation of exchanges, brokers and issuers than there is in
the United States. The Fund may have greater difficulty taking appropriate legal
action with respect to foreign investments in non-United States courts than with
respect to domestic issuers in United States courts.
Dividend and interest income from non-United States securities will generally be
subject to withholding taxes by the country in which the issuer is located and
the Fund will not be able to pass through to its stockholders foreign tax
credits or deductions with respect to these taxes.
4
<PAGE>
Other Policies
Among other things, the Fund may not make loans (other than repurchase
agreements), except to the extent the purchase of debt obligations of any type
are considered loans, and except that the Fund may lend portfolio securities
pursuant to ("SEC") requirements and the exchanges on which such securities are
traded; invest more than 25% of the value of its assets in one industry; or
issue securities senior to its stock.
Repurchase Agreements
The Fund may enter into repurchase agreements and may invest up to 5% of its
assets in repurchase agreements longer than seven days in order to realize
additional income. Repurchase agreements are generally agreements under which
the Fund obtains securities subject to resale to the seller at an agreed upon
price and date. The repurchase agreement must be fully collateralized at all
times by securities with a value at least equal to 100% of the current market
value of the loaned securities. There are certain risks associated with such
transactions which are described in the Statement of Additional Information. As
with any extension of credit, there are risks of delay in recovery and loss of
rights in collateral should the borrower of the securities fail financially.
Loans of Securities
The Fund may make loans of its portfolio securities in order to realize
additional income. All such loans shall be fully collateralized. There are
certain risks associated with such transactions which are discussed in the
Statement of Additional Information. As with any extension of credit, there are
risks of delay in recovery and loss of rights in collateral should the borrower
of the securities fail financially.
Hedging
The Fund may purchase and sell exchange-listed and over-the-counter put and call
options on securities, equity and fixed-income indices and other financial
instruments, purchase and sell financial futures contracts and options thereon,
enter into various interest rate transactions such as swaps, caps, floors or
collars, and enter into various currency transactions such as currency forward
contracts, currency futures contracts, currency swaps or options on currencies
or currency futures (collectively, all the above are called "hedging
transactions"). Hedging transactions may be used to attempt to protect against
possible changes in the market value of securities held in or to be purchased
for the Fund's portfolio resulting from securities markets or currency exchange
rate fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of the Fund's portfolio,
or to establish a position in the derivatives markets as a temporary substitute
for purchasing or selling particular securities. No more than 5% of the Fund's
assets will be committed to hedging transactions entered into for non-hedging
purposes. Any or all of these investment techniques may be used at any time and
there is no particular strategy that dictates the use of one technique rather
than another, as use of any hedging transaction is a function of numerous
variables including market conditions. The ability of the Fund to utilize these
hedging transactions successfully will depend on the Adviser's ability to
predict pertinent market movements, which cannot be assured. The Fund will
comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments. Hedging transactions involving financial
futures and options thereon will be purchased, sold or entered into only for
bona fide hedging, risk management or portfolio management purposes and not for
speculative purposes.
Risks
Hedging transactions have risks associated with them including possible default
by the other party to the transaction, illiquidity and, to the extent the
Adviser's view as to certain market movements is incorrect, the risk that the
use of such hedging transactions could result in losses greater than if they had
not been used. Use of put and call options may result in losses to the Fund,
force the sale or purchase of portfolio securities at inopportune times or for
prices higher than (in the case of put options) or lower than (in the case of
call options) current market values, limit the amount of appreciation the Fund
can realize on its investments or cause the Fund to hold a security it might
otherwise sell. The use of currency transactions can result in the Fund
incurring losses as a result of a number of factors including the imposition of
exchange controls, suspension of settlements, or the inability to deliver or
receive a specified currency. The use of options and futures transactions
entails certain other risks. In particular, the variable degree of correlation
between price movements of futures contracts and price movements in the related
5
<PAGE>
portfolio position of the Fund creates the possibility that losses on the
hedging instrument may be greater than gains in the value of the Fund's
position. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the use
of futures and options transactions for hedging should tend to minimize the
risk of loss due to a decline in the value of the hedged position, at the
same time they tend to limit any potential gain which might result from an
increase in value of such position. Finally, the daily variation margin
requirements for futures contracts would create a greater ongoing potential
financial risk than would purchases of options, where the exposure is limited
to the cost of the initial premium. Losses resulting from the use of hedging
transactions would reduce net asset value, and possibly income, and such
losses can be greater than if the hedging transactions had not been utilized.
Borrowing
The Fund may borrow from time to time on a temporary basis in amounts up to
33-1/3% of its net assets. Such borrowings are called leverage, and while they
provide opportunity for greater returns than if borrowing had not occurred, to
the extent the interest on the borrowings exceeds the interest on dividends
received, there is a risk that the income to the Fund will be less than if the
borrowing had not been made. To the extent the Fund invests the proceeds from
borrowings in equity or fixed income securities, the net asset value of the Fund
may appreciate or depreciate more rapidly than a fund that does not utilize
leverage. The Adviser will only cause the Fund to borrow when there is an
expectation it will benefit the Funds.
Fundamental Restrictions
The Fund as a whole has adopted a number of fundamental investment restrictions,
which may not be changed without the approval of its stockholders. These
restrictions are set forth in the Statement of Additional Information. Other
than such restrictions and the fundamental objective above, the Fund has no
investment policies which it considers fundamental.
Restricted Securities
The Fund may invest up to 10% of its assets (valued at the purchase date) in
illiquid securities, including securities that are subject to restrictions on
disposition under the Securities Act of 1933 or for which market quotations are
not readily available, including repurchase agreements in excess of seven days.
Due to the illiquid nature of restricted securities, if the Funds were forced to
sell such securities, it might have to do so at a disadvantageous price.
HOW TO BUY SHARES
Shares of the Fund are sold in a continuous offering at a public offering
price that is equal to net asset value per share next determined after a
purchase order is received by the Fund plus a sales charge as shown below
(see "How Fund Shares are Priced"). The minimum initial investment in the
Fund is $5,000, except for qualified individual retirement plans which have a
$2,000 minimum. Additional purchases of $100 or more may be made at any time.
Retail Shares
<TABLE>
<CAPTION>
Total Sales Charge
------------------------------
Percentage of Percentage of Dealer Concession or Agency
Size of Transaction Offering Net Asset Commission as Percentage
At Public Offering Price Price Value of Offering Price
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------
Less than $ 50,000 4.20% 4.38% 3.70%
$ 50,000 to $ 100,000 4.00 4.18 3.50
$ 100,000 to $ 250,000 3.50 3.65 3.00
$ 250,000 to $ 500,000 2.50 2.61 2.00
$ 500,000 to $1,000,000 2.00 2.09 1.50
$1,000,000 to $2,000,000 .50 .52 .30
</TABLE>
6
<PAGE>
Shares of the Fund are sold to individuals or entities who hold their shares in
individual or master trust accounts at Citizens Federal, including Individual
Retirement Accounts, Keogh Plans, pension plans, bank and/or savings and loan
trust departments, trusts or accounts, including individuals who have signed
trust agreements. Such shares are sold in a continuous offering at the public
offering price, which is equal to the net asset value per share next determined
after a purchase order is received by the Fund (see "How Fund Shares are
Priced"). Purchases may also be made as described below under "Purchase For
Trust Accounts Through Dealers." In addition, shares of the Fund may be
purchased, in amounts less than the minimum purchase amount, by officers,
directors and employees of the Fund, the Adviser, the Manager, or the
Distributor, and any such person's spouse, children, and trustees or custodians
of any qualified pension or profit sharing plan or IRA established for the
benefit of such person. Such person should request instructions on how to invest
or redeem from Flagship Funds Inc. (the "Distributor"). The Fund reserves the
right to reject any order for shares.
Purchase For Trust Accounts Through Dealers
To purchase shares through a dealer, you should direct your dealer to contact
Flagship Funds Inc. (the "Distributor") to request information on the Fund and
on Citizens Federal's process for establishing the necessary trust accounts. The
Distributor can be reached toll free at 1-800-414-7447. After establishing an
account, an investor may, either directly or through a broker, purchase shares
of the Fund. For purchases made through a dealer, that dealer will be designated
as the broker of record for those account assets. The public offering price is
the Funds's net asset value. Because the Fund determines net asset value daily
as of the close of trading (normally 4:00 p.m. New York time) on the New York
Stock Exchange on each day that the Exchange is open for trading, the dealer
must transmit your request to Citizens Federal prior to such time in order for
your order to be executed at the net asset value to be determined that day. Any
change in price due to the failure of the Fund to receive an order prior to the
close of the Exchange must be settled between the investor and the dealer
placing the order.
Automatic Investment Plan
The Fund offers current shareholders who receive a quarterly statement from
Flagship the convenience of automatic monthly investing. Each month the amount
you specify ($100 minimum) will be transferred from your bank to the Fund. To
initiate the automatic investment plan, complete the application form and attach
a voided check.
The Fund pays the cost associated with these transfers, but reserves the right,
upon ninety (90) days written notice, to make reasonable charges for this
service. Your bank may charge for debiting your account. Shareholders can change
the amount or discontinue their participation in the plan by written notice to
the Shareholder Services Agent thirty (30) days prior to fund transfer date.
Because a sales charge is applied on new shares purchased, it would be
disadvantageous to purchase shares while also making systematic withdrawals.
Letter of Intent (Retail Shares only)
A shareholder may qualify for reduced sales charges by sending to the Fund
(within 90 days after the first purchase desired to be included in the purchase
program) the signed, non-binding Letter of Intent section on the application
form. All investments in retail shares of the Fund count toward the indicated
goal. Please see the Statement of Additional Information for further details.
Escrow provision: It is understood that 5% of the dollar amount checked on the
application will be held in a special escrow account. These shares will be held
by the escrow agent subject to the terms of the escrow. All dividends and
capital gains distributions on the escrowed shares will be credited to the
Shareholder's Account in shares. If the total purchases, less redemptions by the
shareholder, his spouse, children and parents, equal the amount specified under
this Letter, the shares held in escrow will be deposited to the Shareholder's
Open Account or delivered to the shareholder or to his order. If the total
purchases, less redemptions, exceed the amount specified under this Letter and
an amount which would qualify for a further quantity discount, a retroactive
price adjustment will be made by the Distributor and the dealer through whom
purchases were made pursuant to this Letter of Intent (to reflect such further
quantity discount). The resulting difference in offering price will be applied
to the purchase of additional shares at the offering price applicable to a
single purchase of the dollar amount of the total purchases. If the total
purchases less redemptions are less than the amount specified under this Letter,
the Shareholder will remit to the Distributor an amount equal to the difference
in the dollar amount of sales charge actually paid and the amount of sales
charge which would have applied to the aggregate purchases if the total of such
purchases had been made at a
7
<PAGE>
single time. Upon such remittance the shares held for the shareholder's
account will be deposited to his Account or delivered to him or to his order.
If within 20 days after written request by the Distributor such difference in
sales charge is not paid, the Distributor is hereby authorized to redeem an
appropriate number of shares to realize such difference. The Distributor is
hereby irrevocably constituted under this Letter of Intent to effect such
redemption as agent of the shareholder. The shareholder or his dealer will
inform the Shareholder Services Agent that this Letter is in effect each time
a purchase is made.
General
All funds will be fully invested in full and fractional shares. All dividends
declared will be paid in the form of additional full and fractional shares at
net asset value unless the Fund has received an election in writing from the
stockholder to receive such dividends in cash. Such dividends can be deposited
electronically into a shareholder's Citizens Federal or other bank account using
the Automated Clearing House ("ACH") system. See "Direct Deposits."
The issuance of shares is recorded on the books of the Fund, and, to avoid
additional operating costs and for investor convenience, share certificates will
not be issued, except by special arrangement.
HOW TO REDEEM SHARES
Stockholders should advise their financial consultant of their desire to redeem
shares. Upon receipt by the Fund of a proper redemption request, the Fund will
redeem shares at their next determined net asset value. See "How Fund Shares are
Priced." Neither the Distributor nor the Fund charges a fee or a commission for
redemption, except that the Fund may charge a fee for wiring redemption
proceeds.
Signature Guarantee
The Shareholder Services Agent may require a signature guarantee on certain
written transaction requests. A signature guarantee may be executed by any
"eligible" guarantor. Eligible guarantors include member firms of a domestic
stock exchange, commercial banks, trust companies, savings associations and
credit unions as defined by the Federal Deposit Insurance Act. You should verify
with the institution that they are an acceptable (eligible) guarantor prior to
signing.
FREE REPURCHASE
A shareholder who has redeemed shares may repurchase shares at net asset value
without incurring the applicable sales charge. Such a purchase must be in an
amount between the stated minimum investment of such fund and the amount of the
proceeds of redemption within one year of the redemption. This feature may be
exercised by a shareholder only twice per calendar year. Exercising the
reinvestment privilege will not affect the character of any gain or loss
realized on the redemption for federal income tax purposes, except that if the
redemptions resulted in a loss, the reinvestment may result in the loss being
disallowed under the "wash sale" rules.
SYSTEMATIC WITHDRAWAL PLAN
Accounts with a value greater than $10,000 may establish a Systematic Withdrawal
Plan ("SWP") and receive monthly or quarterly checks for $100 or more as
specified by the shareholder. To establish a SWP all distributions must be in
the form of shares. Such payments are drawn from the proceeds of the redemption
shares held in the shareholder's account. To the extent that SWP redemptions
exceed dividend income reinvested in the account, such redemptions will reduce
and may ultimately exhaust the number of shares in the account. To initiate this
service, shares having an aggregate value of at least $10,000 must be held by
the Shareholder Services Agent. Maintaining a SWP concurrently with an
investment program would be disadvantageous because of the sales charges
included in share purchases. Therefore, a shareholder should not have a SWP in
effect at the same time he is making recurring purchases of shares of the Fund.
The Shareholder by written instructions to the Shareholder Services Agent may
withdraw from the program, change the payee or change the dollar amount of each
payment. The Shareholder Services Agent may charge the account for services
rendered and expenses incurred beyond those normally assumed by the Fund with
respect to the liquidation of shares. No charge is currently assessed against
the account, but could be instituted by the Shareholder Services Agent on 60
days' notice in writing to the shareholder in the event that the
8
<PAGE>
Fund ceases to assume the cost of these services. The Fund reserves the right
to amend or terminate the SWP on thirty days' notice.
DIRECT DEPOSITS
Shareholders can have dividends or SWP redemption proceeds deposited
electronically into their Citizens Federal or other bank accounts. Under
normal circumstances, direct deposits are credited to the account on the
second business day of the month following normal payment. In order to
utilize this option, the shareholder's bank must be a member of Automated
Clearing House. In addition, the shareholder must (1) fill out the
appropriate section of the application attached to this Prospectus and (2)
include with the completed application a voided check from the bank account
into which funds are to be deposited. Once the Shareholder Services Agent has
received the application and the voided check, such shareholder's designated
bank account, following any dividend or redemption, will be credited with the
proceeds. Once enrolled in direct deposit, a shareholder may terminate
participation at any time by written notice to the Shareholder Services
Agent.
HOW FUND SHARES ARE PRICED
For purposes of pricing purchases and redemptions, the net asset value of the
Fund is separately determined by Fifth Third Bank as of the close of trading
on the New York Stock Exchange on each day that the Exchange is open for
business, except for Ohio bank holidays, (and will also be computed as of
4:00 p.m. New York time on any other day on which purchase or redemption
orders are received and there is a sufficient degree of trading in the
portfolio securities of the Fund such that the Fund's net asset value per
share might be affected). Net asset value per share of the Fund is calculated
(to the nearest cent) by adding the value of all securities and other assets,
subtracting all of the liabilities and dividing the remainder by the number
of shares outstanding at the time the determination is made.
Assets of the Fund for which market quotations are readily available are
valued at market value. Equity securities are valued at the last sale price
on the exchange on which they are traded, but if no trades have occurred that
day at the mean of the bid and asked prices. Over-the-counter securities are
valued at the mean of the bid and asked prices as are listed debt securities.
Securities with remaining maturities of 60 days or less are valued at their
amortized cost under rules adopted by the SEC unless conditions indicate
otherwise. Other assets and securities are valued at their fair value as
determined in good faith under procedures established by the Fund's Board of
Directors.
TAXES
The following discussion is a general summary of certain of the current
federal income tax laws regarding the Fund and its investors. The discussion
does not purport to deal with all of the federal income tax consequences
applicable to the Fund, or to all categories of investors who may be subject
to special rules (for example, foreign investors). Investors should consult
their own tax consultant for more detailed information regarding the above
and for information regarding any state, local or foreign taxes that may be
applicable to them.
Distributions and Taxes
The Fund intends to qualify for taxation as a regulated investment company
("RIC") under the Internal Revenue Code of 1986, as amended (the "Code") and
satisfy certain other requirements, so that the Fund will not be subject to
federal income tax to the extent it distributes all of its net investment income
and capital gain to its stockholders at least annually. Stockholders generally
will be required to pay federal income taxes on the dividends and distributions
they receive from the Fund, whether received in cash or in additional shares of
the Fund, and on gains realized upon redemption of their shares.
Following each calendar year, each stockholder will receive information for tax
purposes on the dividends and capital gains distributions received during the
previous year. The Fund may make distributions from net investment income or
capital gain and may also make distributions in kind. Dividends from net
investment income and any net short-term capital gain will be taxable as
ordinary income. Any distribution designated as realized net capital gain (the
excess of net long-term capital gain over net short-term capital loss) will be
taxable as long-term capital gain, regardless of the stockholder's holding
period. The Internal Revenue Service requires backup withholding of federal
9
<PAGE>
income tax of 31% of the gross amount of ordinary dividends, capital gain
dividends, and redemption proceeds paid or credited to stockholders who do
not furnish a valid social security or taxpayer identification number.
Redemptions
Redemptions of shares will be taxable transactions for federal income tax
purposes. Generally, gain or loss will be recognized in an amount equal to the
difference between the stockholder's basis in its shares and the amount
received. Assuming that such shares are held as a capital asset, such gain or
loss will be a capital gain or loss and will generally be a long-term capital
gain or loss if the stockholder has held its shares for a period of one year or
more. If a stockholder redeems shares of the Fund at a loss and makes an
additional investment in the Fund 30 days before or after such redemption, the
loss may be disallowed under the wash sale rules.
State and Local Taxes
The Fund is organized as a Maryland corporation and, except for some small
amounts of taxes based on share capital, the Fund will not be subject to
Maryland income taxes to the extent that it is not subject to federal income
taxes. Stockholders may be subject to state and local taxes on distributions
received from the Fund, which taxes may be determined differently from federal
income taxes thereon.
YIELD
Yield and Current Return
In accordance with SEC regulations, the Fund may include its current yield
and/or average annual total return in advertisements or information furnished to
stockholders or potential investors.
Yield and Total Return Calculation
The Fund's yield is calculated in accordance with the SEC's standardized yield
formula. In it, dividend and interest income over the 30 day measurement period
is reduced by period expenses and divided by the number of days within the
measurement period to arrive at a daily income rate. This daily income rate is
then expressed as a semiannually compounded yield based on the net asset value
of a share assuming a standardized 360 day year.
The Fund's average annual total return for any time period is calculated by
assuming an investment at the beginning of the measurement period at the net
asset value. Dividends from the net investable amount are then reinvested in
additional shares each month at the net asset value. At the end of the
measurement period, the total number of shares owned are redeemed at net asset
value. The change in the total value during the investment period is then
expressed as an average annual total rate of return.
The Fund may also advertise total return which is calculated differently from
"average annual total return" (a "nonstandardized quotation"). A nonstandardized
quotation of total return measures the percentage change in the value of an
account between the beginning and end of a period, assuming no activity in the
account other than reinvestment of dividends and capital gains distributions. A
nonstandardized quotation of total return will always be accompanied by the
Fund's "average annual total return" as described above.
Yield and current return will vary from time to time depending on market
conditions, the composition of the portfolio, operating expenses and other
factors. These factors and possible differences in method of calculating
performance figures should be considered when comparing the performance figures
of the Funds with those of other investment vehicles. Yield and return
information is based on historical performance and is not intended to indicate
future performance. See the Statement of Additional Information "Yield and Total
Return Calculation."
The Fund's dividends vary with fluctuations in the income earned on its
portfolio securities and in its expenses while its net asset value varies with
realized and unrealized gains and losses on its portfolio securities to the
extent not reflected in dividends. Consequently, any given current distribution
yield quotation should not be considered representative of what the distribution
yield may be for any specified period in the future. Distribution yield
quotations may not necessarily be useful in comparing an investment in the Funds
with investment alternatives that provide a fixed rate of interest, that are
insured or guaranteed or that compute yield or return on a different basis.
10
<PAGE>
MANAGEMENT OF THE FUND
Directors
The business and affairs of the Fund are managed under the direction of its
Board of Directors.
Manager
The manager to the Fund is Flagship Financial Inc. (the "Manager"), whose
principal business address is One Dayton Centre, One South Main St., Dayton,
Ohio 45402-2030. The Manager is a wholly-owned subsidiary of Flagship Resources
Inc., which is owned and/or controlled by Bruce P. Bedford and Richard P. Davis
and members of their immediate families. Messrs. Bedford and Davis each serve as
a director and an officer of the Fund as well as the Manager and the
Distributor.
Pursuant to the terms of a Management Agreement, dated May 30, 1991 (the
"Management Agreement"), the Manager, subject to the general supervision of the
Fund's Board of Directors and in conformity with the stated policies of the
Fund, manages the Fund including general supervision of the purchase and sale of
securities, and provides supervisory and corporate administrative services to
the Fund. In this regard, it is the responsibility of the Manager to assure
compliance with applicable law and the Fund's policies and to perform, or
supervise the performance of, administrative services in connection with the
Fund including: (i) assisting in supervising all aspects of the Fund's
operations; (ii) providing the Fund, at the Manager's expense, with the services
of persons competent to perform such administrative and clerical functions as
are necessary in order to provide effective corporate administration of the
Fund; and (iii) providing the Fund, at the Manager's expense, with adequate
office space and related services. The Fund's accounting records are maintained,
at the Fund's expense, by its Custodian, The Fifth Third Bank.
As compensation for the services rendered by the Manager under the Management
Agreement, the Fund will pay the Manager a fee, computed daily and payable
monthly, at an annual rate of .74% of the Fund's average daily net assets. Of
this amount, the Manager will pay the Investment Adviser, pursuant to an
Investment Advisory Agreement, .55% of the Fund's average daily net assets (see
below). For the fiscal year ended June 30, 1995, the total expenses of the Fund
and the fee paid to the Manager, expressed as a percentage of average net assets
on an annualized basis, were 1.04% and .74%, respectively.
The Fund has adopted a Code of Ethics regarding restrictions on the investment
activity of specified "Investment Personnel." These include restrictions on
personal investing, pre-clearance of trades, sanctions and disgorgement of
certain profits, as well as prohibitions on short swing profits, investments in
initial public offerings and holding public directorships.
The Manager, which has been a registered investment adviser since 1978, also
renders investment advisory and management services to others. The Manager
manages an aggregate of approximately $4.3 billion in assets, in both taxable
and tax-exempt domestic portfolios, primarily for mutual funds, insurance and
reinsurance companies, other corporations and employee benefits plans.
Investment Adviser
The investment adviser to the Fund is James Investment Research, Inc. (the
"Adviser"), whose principal business address is 1349 Fairground Road,
Beavercreek, Ohio 45385. The Adviser is owned by Frank James, Ph.D., who
established it in 1972. The Adviser provides advice to institutional as well as
individual clients, including NYSE listed corporations, colleges, banks,
hospitals, foundations, trusts, endowment funds and individuals.
Pursuant to an Investment Advisory Agreement among the Adviser, the Manager and
the Fund dated May 30, 1991, the Adviser has complete investment discretion with
respect to making the Fund investments subject to the general supervision of the
Board of Directors and the authority of the Manager to assure compliance by the
Adviser with applicable law and the Fund's investment objectives and policies.
Investment decisions are made by a team of portfolio managers, each of whom has
been employed by the Adviser for more than five years.
As compensation for the services rendered by the Adviser under the Advisory
Agreement, the Manager will pay the Adviser a fee, computed daily and payable
monthly, at an annual rate of .55% of the Fund's average daily net assets. For
the fiscal year ended June 30, 1995, the fee paid to the Investment Adviser was
.55% of average net assets on an annualized basis. The Advisory Agreement may be
terminated on 60 days notice without penalty by either the Fund, the Manager or
the Adviser provided that the Manager may only terminate the Advisory Agreement
with the concurrence of a majority of the Board of Directors, including a
majority of the independent Directors.
The Adviser may allocate brokerage in a manner that takes account of the sale of
Fund shares.
11
<PAGE>
DISTRIBUTOR
The Fund has entered into a Distribution Agreement (the "Distribution
Agreement") with Flagship Funds Inc. (the "Distributor"), pursuant to which
the Distributor serves as the exclusive selling agent and Distributor of the
Fund's shares, and in that capacity will make a continuous offering of the
shares and will be responsible for all sales and promotion efforts.
The Fund has adopted a plan (the "Plan") pursuant to Rule 12b-1 under the
1940 Act which permits the Fund to pay for certain distribution and promotion
expenses related to marketing its shares. Such expenses may include certain
fees to broker-dealers of record for customers of Citizens Federal, who are
stockholders of the Fund, but such fees shall not, when aggregated with other
expenses reimbursed to the Distributor in accordance with the Plan, exceed
the maximum 12b-1 fee set forth in the table on page 2 of this Prospectus.
The Fund's 12b-1 plan conforms to the requirements of the rules of the
National Association of Securities Dealers with regard to Rule 12b-1 plans.
The Plan authorizes the Fund to expend its monies in an amount equal to the
aggregate for all such expenditures to such percentage of the Fund's daily
net asset value as may be determined from time to time by vote cast in person
at a meeting called for such purpose, by a majority of the Fund's
disinterested directors. The scope of the foregoing shall be interpreted by
the directors, whose decision shall be conclusive except to the extent it
contravenes established legal authority. Without in any way limiting the
discretion of the directors, the following activities are hereby declared to
be primarily intended to result in the sale of shares of the Fund:
advertising the Fund or the Fund's Manager's mutual fund activities;
compensating underwriters, dealers, brokers, banks and other selling entities
and sales and marketing personnel of any of them for sales of shares of the
Fund, whether in a lump sum or on a continuous, periodic, contingent,
deferred or other basis; compensating underwriters, dealers, brokers, banks
and other servicing entities and servicing personnel (including the Fund's
Manager and its personnel of any of them for providing services to
shareholders of the Fund relating to their investment in the Fund, including
assistance in connection with inquiries relating to shareholder accounts; the
production and dissemination of prospectuses including statements of
additional information) of the Fund and the preparation, production and
dissemination of sales, marketing and shareholder servicing materials; and
the ordinary or capital expenses, such as equipment, rent, fixtures,
salaries, bonuses, reporting and recordkeeping and third party consultancy or
similar expenses relating to any activity for which payment is authorized by
the directors and the financing of any activity for which payment is
authorized by the directors. Pursuant to the Plan the Fund through authorized
officers may make similar payments for marketing services to
non-broker-dealers who enter into service agreements with the Fund.
The Distributor has voluntarily waived any portion of its normally retained
12b-1 fee with regard to its service agreement with Citizens Federal and
limited its payments to $500 per month plus reimbursement of expenses and
12b-1 fees with regard to selling agreements with broker-dealers affiliated
with Citizens Federal until notice to and approval by the Fund's Board of
Directors is obtained for increased payments.
The maximum amount payable by the Fund under the Plan and related agreements
on an annual basis is .40% of average daily net assets for the year. In the
case of broker-dealers and others, such as banks, who have selling or service
agreements with the Distributor or the Fund, the maximum amount payable to
any recipient is .0005479% per day (.20% on an annualized basis) of the
proportion of daily net assets represented by such person's customers. The
Board of Directors may reduce these amounts at any time. Expenditures
pursuant to the Plan and related agreements may reduce current yield after
expenses. For the fiscal year ended June 30, 1995, the Fund paid $321,321
under the Plan and related agreements (the Distributor permanently waived
$433,700 for the same period).
Various federal and state laws prohibit national banks and some
state-chartered commercial banks from underwriting or dealing in the Fund's
shares. In the unlikely event that a court were to find that these laws also
prohibit such banks from providing services of the type contemplated by the
Fund's service agreement, the Fund would seek alternative providers of such
services and expects that stockholders would not experience any disadvantage.
In addition, under the securities laws in some states, banks and financial
institutions may be required to register as dealers pursuant to state law.
12
<PAGE>
MULTIPLE CLASS DISTRIBUTION
The SEC has adopted rules which permit funds to issue multiple classes of
shares and impose deferred sales charges. The Corporation has adopted a plan
pursuant to such rules permitting each of the Corporation's series to offer
multiple classes of shares consistent with such rules.
DESCRIPTION OF SHARES
The Corporation was organized on April 18, 1983, as a Maryland corporation.
On October 15, 1987, the Corporation's stockholders approved amendments to
the Corporation's Articles of Incorporation converting it into a series fund.
The authorized capital stock of the Corporation consists of 600,000,000
shares of stock, par value $.001 per share, divided into five classes, with
200,000,000 shares of Utility Income Fund Portfolio Stock allocated to the
Flagship Utility Income Fund with four sub-classes authorized each with
49,125,000 shares of stock designated as Class A, Class B, Class C and Class
Y, respectively; 100,000,000 shares of The Golden Rainbow - A James Advised
Mutual Fund Portfolio Stock allocated to The Golden Rainbow A James Advised
Mutual Fund; 100,000,000 shares of Flagship Short Term U.S. Government Fund
Portfolio Stock allocated to the Flagship Short Term U.S. Government Fund;
100,000,000 shares of Flagship Limited Term U.S. Government Fund Portfolio
Stock allocated to the Flagship Limited Term U.S. Government Fund with four
sub-classes authorized each with 24,500,000 shares of stock designated as
Class A, Class B, Class C and Class Y, respectively; and 100,000,000 shares
of Flagship Intermediate U.S. Government Fund Portfolio Stock allocated to
the Flagship Intermediate U.S. Government Fund with four sub-classes
authorized each with 24,500,000 shares of stock designated as Class A, Class
B, Class C and Class Y, respectively. Each of the Flagship Utility Income
Fund and the Flagship U.S. Government Funds are offered through a separate
prospectus. Pursuant to Maryland law and the Corporation's charter, the Board
of Directors may increase the authorized capital and reclassify unissued
shares of any class to create additional classes of stock with specified
rights, preferences, and limitations. Each share is entitled to one vote per
share on all matters subject to stockholders' vote. Shares of all classes
vote together as a single class except that where a matter affects a
particular class differently from other classes, that class will vote
separately on such matter. The Corporation is not required to hold meetings
of stockholders for the purpose of electing directors unless less than a
majority of the directors elected by stockholders remain in office. If the
Corporation does not hold annual meetings of stockholders, it will abide by
section 16 (c) of the 1940 Act which provides certain rights to stockholders.
Directors may be removed by vote of a majority of the outstanding shares of
the Corporation.
Each share is entitled to participate equally in dividends and distributions
declared by the Directors with respect to shares of the same class, and in
the net distributable assets allocated to such class on liquidation.
Stockholders are entitled to redeem their shares, as set forth under "How to
Redeem." There are no conversion, preemptive or exchange rights in connection
with any shares of the Fund, nor are there cumulative voting rights. All
shares of the Fund when issued will be fully paid and nonassessable by the
Fund.
Almost all of the Fund's shares are owned by Citizens Federal Bank, F.S.B.,
Dayton, Ohio acting as either trustee, investment agent, or custodian for its
clients. While Citizens Federal has the legal right in certain situations to
vote on behalf of its clients, it is anticipated that Citizens Federal will
contact its clients and vote in accordance with their preferences.
CUSTODIAN AND TRANSFER AGENT
The Fifth Third Bank, Fifth Third Center, 38 Fountain Square Plaza,
Cincinnati, Ohio 45263, is the custodian, transfer agent and dividend
disbursing agent ("Shareholder Servicing Agent") for the Fund. It also
maintains the accounting records, determines the net asset value, and
performs other stockholder services for the Fund.
COUNSEL AND AUDITORS
Skadden, Arps, Slate, Meagher & Flom, counsel to the Corporation, passes upon
legal matters for the Corporation. Deloitte & Touche LLP, independent
auditors, are auditors of the Corporation. Miles & Stockbridge, Maryland
counsel to the Corporation, passes upon the legality of the Corporation's
shares.
13
<PAGE>
ADDITIONAL INFORMATION
The Fund issues to its stockholders semiannual reports containing unaudited
financial statements for the Fund and annual reports containing audited
financial statements approved annually by the Board of Directors. The words
'A James Advised Mutual Fund' are used under revocable license from James
Investment Research, Inc. The Fund's license to use the James language will
terminate if the Adviser ceases to be Adviser to the Fund.
This Prospectus does not contain all the information included in the
Registration Statement filed with the Securities and Exchange Commission
under the Securities Act of 1933 and the 1940 Act with respect to the
securities offered hereby, certain portions of which have been omitted
pursuant to the rules and regulations of the Securities and Exchange
Commission. The Registration Statement including the exhibits filed therewith
may be examined at the office of the Securities and Exchange Commission in
Washington, D.C.
Statements contained in this Prospectus as to the contents of any contract or
other document referred to are not necessarily complete, and, in each
instance, reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement of which this Prospectus
forms a part, each such statement being qualified in all respects by such
reference.
No person has been authorized to give any information or to make
representations, other than those contained in this Prospectus, in connection
with the offer made by this Prospectus, and, if given or made, such other
information or representations must not be relied upon as having been
authorized by the Fund or its Distributor. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy by the Fund
or by the Distributor in any State in which such offer to sell or
solicitation of an offer to buy may not lawfully be made.
The symbol (sm) indicates a service mark of the Manager.
(C) 1995, Flagship Funds Inc. GR-O-3000 (10-26-95)
14
<PAGE>
GOLDEN RAINBOW FUND APPLICATION FORM
PLEASE PRINT OR TYPE ALL INFORMATION
NOTE: You must complete Sections 1, 2, 3, 4, 5 and sign the signature line.
Your signature is required for processing. Complete sections 7, 8, 9, 10, 11
and 12 for optional services.
PLEASE MAIL THIS APPLICATION & YOUR CHECK TO:
Golden Rainbow Fund
c/o MGF Service Corp.
P.O. Box 5354
Cincinnati, OH 45201-5354
1. YOUR ACCOUNT REGISTRATION
Please check only ONE registration type:
Owner Name(s) (First, Middle Initial (if used), Last)
[ ] Individual or Joint Account*
_____________________________________________________________________________
_____________________________________________________________________________
*Joint tenants with rights of survivorship unless tenancy in common is
indicated
[ ] Other Entity
_____________________________________________________________________________
_____________________________________________________________________________
[ ] Uniform Gift to Minors Minor's state of residence
_____________________________________________________________________________
Minor's Name (One name only)
_____________________________________________________________________________
Custodian Name (One name only)
2. YOUR MAILING ADDRESS
_____________________________________________________________________________
Street or P.O. Box Suite or Apt. Number
_____________________________________________________________________________
City
______ ________________ _________
State Zip Code
( ) - ( ) -
_____________________________________________________________________________
Daytime Phone Evening Phone
[ ] U.S. Citizen or
[ ] Other (specify) _________________________________________________________
3. YOUR SOCIAL SECURITY/TAX ID NUMBER
For Individual or Joint accounts use Social Security number of owner.
For custodial accounts use minor's Social Security number.
________ ____ ________
Social Security Number
____ ____________________
Tax ID Number
4. YOUR INITIAL INVESTMENT
I want to invest in this amount*:
$_____________
*Minimum of $5,000.
Attach check payable to The Golden Rainbow
5. DIVIDEND/DISTRIBUTION OPTION
If no option is selected, all distributions will be reinvested.
[ ] Reinvest dividends and capital gains.
[ ] Pay dividends in cash, reinvest capital gains.
[ ] Pay dividends and capital gains in cash.
[ ] Deposit dividends directly into the bank account indicated on
the attached VOIDED check (subject to terms and conditions
in the prospectus).
[ ] Send my distributions to the address listed below.
_____________________________________________________________________________
Name of Individual
_____________________________________________________________________________
Street Address
____________________________________________________________________________
City
______ ________________ _________
State Zip Code
6. DEALER AUTHORIZATION
We are a duly registered and licensed dealer and have a sales agreement with
Flagship Funds Inc. We are authorized to purchase shares from the Fund for
the investor. The investor is authorized to send any future payments directly
to the Fund for investment. Confirm each transaction to the investor and to
us. We guarantee the genuineness of the investor's signature.
_____________________________________________________________________________
Investment Firm
_____________________________________________________________________________
Investment Professional's Name Rep #
______________________________________________________________________________
Branch Address Branch #
______________________________________________________________________________
City
______ ________________ _________
State Zip Code
( ) -
______________________________________________________________________________
Investment Professional's Phone Number
X ___________________________________________________________________________
Signature of Investment Professional
7. LETTER OF INTENT (Retail Shares only)
I/we agree to the escrow provision described in the prospectus and intend to
purchase, although I'm not obligated to do so, shares of the Fund designated
on this application within a 13-month period which, together with the total
asset value of shares owned, will aggregate at least:
[ ] $50,000 [ ] $100,000 [ ] $250,000
[ ] $500,000 [ ] $1,000,000
<PAGE>
8. AUTOMATIC INVESTMENT PLAN
Pursuant to the terms of the plan described in the prospectus, I/we
authorize the automatic monthly transfer of funds from my/our bank account
for investment in the above Flagship Fund. Attached is a VOIDED check from
that account.
$
______________________________________________________________________________
Amount ($100 Minimum)
______________________________________________________________________________
Name of Bank
______________________________________________________________________________
Bank Account #
______________________________________________________________________________
Bank's Street Address
______________________________________________________________________________
City
______ ________________ _________
State Zip Code
X ___________________________________________________________________________
Signature of Depositor Date
X ___________________________________________________________________________
Signature of Joint Depositor Date
9. SYSTEMATIC WITHDRAWAL PLAN
Pursuant to the terms of the plan described on the back of this application,
please send $_______________ [ ] per month [ ] quarterly to:
[ ] Me
[ ] The bank account indicated on the attached VOIDED check
[ ] Payee below
Give name and address only if different from account registration
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
10. TELEPHONE REDEMPTION
I/we hereby authorize the Fund to implement the following telephone
redemption requests (under $50,000 only) without signature verification to
the registered fund account name and address. Redemption proceeds may be
wired to the U.S. commercial bank designated, provided you complete the
information below and enclose a VOIDED check for that account.
_____________________________________________________________________________
Name of Bank
_____________________________________________________________________________
Bank Account #
_____________________________________________________________________________
Bank's Street Address
_____________________________________________________________________________
City
______ ________________ _________
State Zip Code
[ ] I do authorize redemption by telephone.
11. INTERESTED PARTY MAIL
[ ] Send my duplicate confirmation statements to the interested party listed
below.
_____________________________________________________________________________
Name of Individual
_____________________________________________________________________________
Street Address
_____________________________________________________________________________
City
______ ________________ _________
State Zip Code
SIGNATURE(S)
Under the penalties of perjury, I/we certify that the information provided on
this form is true, correct, and complete. The undersigned certify that I/we
have full authority and legal capacity to purchase, exchange or redeem shares
of the above named Fund(s) and affirm that I/we have received and read a
current Prospectus of the named Fund(s) and agree to be bound by its terms.
I/we agree to indemnify and hold harmless MFG Services Corp. and any Flagship
fund(s) which may be involved in transactions authorized by telephone against
any claim, loss, expense or damage, including reasonable fees of investigation
and counsel, in connection with any telephone withdrawal effected on my account
pursuant to procedures described in the Prospectus.
X ___________________________________ X ___________________________________
Signature Date Signature (Joint Tenant) Date
1. As required by the IRS I/we certify (a) that the number shown on this form is
my correct Taxpayer Identification number. I/we understand that if I/we do not
provide a Taxpayer Identification Number to the Fund within 60 days, the Fund is
required to withhold 31 percent of all reportable payments thereafter made to me
until I/we provide a number certified under penalties of perjury, and that I/we
may be subject to a $50 penalty by the IRS.
2. As required by the IRS I/we certify under penalties of perjury that I/we
are not subject to backup withholding by the IRS.
NOTE: Strike out Item (2) if you have been notified that you are subject to
backup withholding by the IRS and you have not received a notice from the IRS
advising you that backup withholding has been terminated.
X ___________________________________ X ___________________________________
Signature Date Signature (Joint Tenant) Date
Thank you for your investment in the Fund. You will receive a confirmation
statement shortly.
<PAGE>
FLAGSHIP ADMIRAL FUNDS INC.
STATEMENT OF ADDITIONAL INFORMATION
DATED OCTOBER 26, 1995
One Dayton Centre, One South Main Street; Dayton, OH 45402-2030
The Golden Rainbow A James Advised Mutual Fund series
This Statement of Additional Information provides certain detailed
information concerning the Fund. It is not a Prospectus and should be read in
conjunction with the Fund's current Prospectus for The Golden Rainbow A James
Advised Mutual Fund, a copy of which may be obtained without charge by
written request to: Flagship Funds Inc., One Dayton Centre, One South Main
St., Dayton, Ohio 45402-2030; or by telephone (toll free) at: (800) 227-
4648, or for TDD, (800) 360-4521.
This Statement of Additional Information relates to The Golden Rainbow A
James Advised Mutual Fund Prospectus dated October 26, 1995.
Table of Contents
Page
-------
Investment Objectives and Policies 2
Officers, Directors and Stockholders 9
Investment Advisory Services 10
Taxes 11
Yield and Total Return Calculation 12
Distributions 13
Distributor 13
Custodian and Transfer Agent 14
Auditors 14
Portfolio Transactions 14
Purchase, Redemption and Pricing of Shares 15
Other Information 15
Financial Statements F-1
Appendix I--Description of Securities Ratings I-1
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
Flagship Admiral Funds Inc. (the "Fund") has no fundamental objectives as
a whole. Each Portfolio of the Fund has its own objectives. The Golden
Rainbow A James Advised Mutual Fund ("GR Fund") has adopted the following
investment restrictions (which supplement the matters described under "The GR
Fund and Its Objective" in the GR Fund Prospectus), none of which may be
changed without the approval of the holders of a majority (as defined in the
Investment Company Act of 1940 (the "1940 Act")) of its outstanding shares.
The GR Fund may not:
(1) Purchase the securities of any one issuer, other than the U.S.
Government or any of its instrumentalities, if immediately after such
purchase more than 5% of the value of its total assets would be invested in
such issuer, or the Portfolio would own more than 10% of the outstanding
voting securities of such issuer, except that up to 25% of the value of the
Portfolio's total assets may be invested without regard to such 5% and 10%
limitations;
(2) Make loans, except to the extent the purchase of debt obligations
(including repurchase agreements and convertible securities) in accordance
with the Portfolio's investment objective and policies are considered loans
and except that the Portfolio may loan portfolio securities to qualified
institutional investors in compliance with requirements established from time
to time by the Securities and Exchange Commission ("SEC") and the securities
exchanges in which such securities are traded;
(3) Issue securities senior to its stock or borrow money, except that the
Portfolio has reserved the right to borrow money from banks on a temporary
basis from time to time to provide greater liquidity for redemptions or to
make additional portfolio investments. Such borrowings will not exceed
33-1/3% of the Portfolio's total net assets including all outstanding
borrowings immediately after the time the latest such borrowing is made, plus
amounts not exceeding 5% borrowed to settle securities trades;
(4) Purchase or retain the securities of any issuer any of whose officers,
directors, or security holders is a director or officer of the Fund or of its
investment adviser if or so long as the directors and officers of the Fund
and of its investment adviser together own beneficially more than 5% of any
class of securities of such issuer;
(5) Mortgage, pledge or hypothecate any assets except in an amount up to
33-1/3% of the value of the Portfolio's total assets, taken at cost, and only
to secure borrowings permitted by clause (3) above.
(6) Purchase or sell real estate, real estate whole mortgage loans or real
estate investment trust securities (excluding securities secured by real
estate or interests therein or issued by entities that invest in real estate
or interests therein), oil and gas interests or, except for bona fide hedging
purposes, commodities or commodity contracts.
(7) Acquire securities of other investment companies (other than in
connection with the acquisitions of such companies) other than as permitted
by applicable law.
(8) Act as an underwriter of securities or invest more than 10% of the
Portfolio's assets, as determined at the time of investment, in securities
that are subject to restrictions on disposition under the Securities Act of
1933 or for which market quotations are not readily available, including
repurchase agreements having more than seven days to maturity.
(9) Purchase securities on margin, make short sales of securities or
maintain a net short position.
In order to permit the sale of shares in certain states, the Fund may make
commitments more restrictive than the operating restrictions described above.
Should the Fund determine that any such commitment is no longer in the best
interest of the stockholders, it will revoke the commitment by terminating
sales of its shares in the state involved. Also, as a matter of policy that
is not fundamental, the GR Fund has determined that it will not invest in
warrants, own more than 5% of the outstanding voting securities of any issuer
and will only write call options which are fully covered.
The Fund places no restrictions on portfolio turnover except as may be
necessary to maintain its status as a regulated investment company under the
Internal Revenue Code.
Repurchase Agreements. The GR Fund may enter into repurchase agreements
with selected commercial banks and broker-dealers, under which it may acquire
securities and agree to resell the securities to the other party at an agreed
upon time and at an agreed upon price. The GR Fund would accrue as interest
the difference between the amount it pays for the securities and the amount
it receives upon resale. At the time the GR Fund enters into a repurchase
agreement, the value of the underlying security including accrued interest
will be equal to or exceed the value of the repurchase agreement and, for
repurchase agreements that mature in more than one day, the seller will agree
that the value of the underlying security including accrued interest will
continue to be at least equal to the value of the repurchase agreement. The
GR Fund will enter into repurchase agreements only with creditworthy parties
and will monitor such creditworthiness on an ongoing basis. Generally,
repurchase agreement activities will
2
<PAGE>
be restricted to well-capitalized commercial banks with assets in excess of
$1 billion, primary dealers in U.S. Government securities or broker-dealers
registered with the SEC. The underlying securities will only consist of U.S.
Government or Government Agency securities, certificates of deposit, bankers'
acceptances or commercial paper. In the event of default by such party, the
delays and expenses potentially involved in establishing the Fund's rights
to, and in liquidating the security may result in a loss.
Leverage. The GR Fund has reserved the right to borrow money from time to
time to provide greater liquidity for redemptions or to make additional
portfolio investments. If the GR Fund were to borrow money, income earned
from additional investments in excess of interest costs would improve
performance over what otherwise would be the case. Conversely, if the
investment performance of such additional investments failed to cover their
cost (including interest costs on such borrowings) the performance would be
poorer than would otherwise be the case. This speculative factor is known as
"leverage."
The 1940 Act limits the amount of money a fund may borrow to 33-1/3% of
the value of such fund's net assets plus all outstanding borrowings
immediately after the time the latest such borrowing is made. If the GR Fund
were to borrow money and the value of its assets were to fall below the
statutory coverage requirement for any reason, the GR Fund would have to take
corrective action to achieve compliance within three business days and
accordingly might be required to sell a portion of its securities at a time
when such sale might be disadvantageous.
"When Issued" Transactions. The Fund may purchase and sell securities on a
"when issued" and "delayed delivery" basis. These transactions are subject to
market fluctuation; the value at delivery may be more or less than the
purchase price. Since the Fund relies on the buyer or seller, as the case may
be, to consummate the transaction, failure by the other party to complete the
transaction may result in it missing the opportunity of obtaining a price or
yield considered to be advantageous. When the Fund is the buyer in such a
transaction, however, it will maintain with its custodian cash or high-grade
portfolio securities having an aggregate value equal to the amount of such
purchase commitments until payment is made. To the extent the Fund engages in
"when issued" and "delayed delivery" transactions, it will do so for the
purpose of acquiring securities for its portfolio consistent with its
investment objective and policies and not for the purpose of investment
leverage.
Diversification. As a diversified fund, the GR Fund may not purchase the
securities of any one issuer, other than the U.S. Government or any of its
instrumentalities, if immediately after such purchase more than 5% of the
value of its total assets would be invested in such issuer, or if it would
own more than 10% of the outstanding voting securities of such issuer, except
that up to 25% of the value of the GR Fund's total assets may be invested
without regard to such 5% and 10% limitations.
Hedging Transactions. The GR Fund may utilize various other investment
strategies as described below to hedge various market risks (such as interest
rates, currency exchange rates, and broad or specific equity market
movements), or to manage the effective maturity or duration of fixed-income
securities. Such strategies are generally accepted by modern portfolio
managers and are regularly utilized by many mutual funds and other
institutional investors. Techniques and instruments may change over time as
new instruments and strategies are developed or regulatory changes occur.
In the course of pursuing these investment strategies, the Fund may
purchase and sell exchange-listed and over-the-counter put and call options
on securities, equity and fixed-income indices and other financial
instruments, purchase and sell financial futures contracts and options
thereon, enter into various interest rate transactions such as swaps, caps,
floors or collars, and enter into various currency transactions such as
currency forward contracts, currency futures contracts, currency swaps or
options on currencies or currency futures (collectively, all the above are
called "Hedging Transactions"). Hedging Transactions may be used to attempt
to protect against possible changes in the market value of securities held in
or to be purchased for the GR Fund's portfolio resulting from securities
markets or currency exchange rate fluctuations, to protect the GR Fund's
unrealized gains in the value of its portfolio securities, to facilitate the
sale of such securities for investment purposes, to manage the effective
maturity or duration of the GR Fund's portfolio, or to establish a position
in the derivatives markets as a temporary substitute for purchasing or
selling particular securities. No more than 5% of the GR Fund's assets will
be committed to Hedging Transactions entered into for non-hedging purposes.
Any or all of these investment techniques may be used at any time and there
is no particular strategy that dictates the use of one technique rather than
another, as use of any Hedging Transaction is a function of numerous
variables including market conditions. The ability of the GR Fund to utilize
these Hedging Transactions successfully will depend on the Adviser's ability
to predict pertinent market movements, which cannot be assured. The GR Fund
will comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments. Hedging Transactions involving
financial futures and options thereon will be purchased, sold or entered into
only for bona fide hedging, risk management or portfolio management purposes
and not for speculative purposes.
3
<PAGE>
Hedging Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Hedging Transactions could result in losses greater than if
they had not been used. Use of put and call options may result in losses to
the GR Fund, force the sale or purchase of portfolio securities at
inopportune times or for prices higher than (in the case of put options) or
lower than (in the case of call options) current market values, limit the
amount of appreciation the GR Fund can realize on its investments or cause
the GR Fund to hold a security it might otherwise sell. The use of currency
transactions can result in the GR Fund incurring losses as a result of a
number of factors including the imposition of exchange controls, suspension
of settlements, or the inability to deliver or receive a specified currency.
The use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of
the GR Fund creates the possibility that losses on the hedging instrument may
be greater than gains in the value of the GR Fund's position. In addition,
futures and options markets may not be liquid in all circumstances and
certain over-the-counter options may have no markets. As a result, in certain
markets, the GR Fund might not be able to close out a transaction without
incurring substantial losses, if at all. Although the use of futures and
options transactions for hedging should tend to minimize the risk of loss due
to a decline in the value of the hedged position, at the same time they tend
to limit any potential gain which might result from an increase in value of
such position. Finally, the daily variation margin requirements for futures
contracts would create a greater ongoing potential financial risk than would
purchases of options, where the exposure is limited to the cost of the
initial premium. Losses resulting from the use of Hedging Transactions would
reduce net asset value, and possibly income, and such losses can be greater
than if the Hedging Transactions had not been utilized.
General Characteristics of Options. Put options and call options typically
have similar structural characteristics and operational mechanics regardless
of the underlying instrument on which they are purchased or sold. Thus, the
following general discussion relates to each of the particular types of
options discussed in greater detail below. In addition, many Hedging
Transactions involving options require segregation of GR Fund assets in
special accounts, as described below under "Use of Segregated and Other
Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium,
the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, currency or other instrument at the exercise
price. For instance, the GR Fund's purchase of a put option on a security
might be designed to protect its holdings in the underlying instrument (or,
in some cases, a similar instrument) against a substantial decline in the
market value by giving the GR Fund the right to sell such instrument at the
option exercise price. A call option, upon payment of a premium, gives the
purchaser of the option the right to buy, and the seller the obligation to
sell, the underlying instrument at the exercise price. The GR Fund's purchase
of a call option on a security, financial future, index, currency or other
instrument might be intended to protect the GR Fund against an increase in
the price of the underlying instrument that it intends to purchase in the
future by fixing the price at which it may purchase such instrument. An
American style put or call option may be exercised at any time during the
option period while a European style put or call option may be exercised only
upon expiration or during a fixed period prior thereto. The Fund is
authorized to purchase and sell exchange-listed options and over-the-counter
options ("OTC options"). Exchange-listed options are issued by a regulated
intermediary such as the Options Clearing Corporation ("OCC"), which
guarantees the performance of the obligations of the parties to such options.
The discussion below uses the OCC as a paradigm, but is also applicable to
other financial intermediaries.
With certain exceptions, OCC-issued and exchange-listed options generally
settle by physical delivery of the underlying security or currency, although
in the future cash settlement may become available. Index options and
Eurodollar instruments are cash settled for the net amount, if any, by which
the option is "in-the-money" (i.e., where the value of the underlying
instrument exceeds, in the case of a call option, or is less than, in the
case of a put option, the exercise price of the option) at the time the
option is exercised. Frequently, rather than taking or making delivery of the
underlying instrument through the process of exercising the option, listed
options are closed by entering into offsetting purchase or sale transactions
that do not result in ownership of the new option.
The GR Fund's ability to close out its position as a purchaser or seller
of an OCC or exchange-listed put or call option is dependent, in part, upon
the liquidity of the option market. Among the possible reasons for the
absence of a liquid option market on an exchange are: (i) insufficient
trading interest in certain options; (ii) restrictions on transactions
imposed by an exchange; (iii) trading halts, suspensions or other
restrictions imposed with respect to particular classes or series of options
or underlying securities including reaching daily price limits; (iv)
interruption of the normal operations of the OCC or an exchange; (v)
inadequacy of the facilities of an exchange or OCC to handle current trading
volume; or (vi) a decision by one or more exchanges to discontinue the
trading of options (or a particular class or series of options), in which
event the relevant market for that option on that exchange would cease to
exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
4
<PAGE>
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent
that the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange-listed options,
which generally have standardized terms and performance mechanics, all the
terms of an OTC option, including such terms as method of settlement, term,
exercise price, premium, guarantees and security, are set by negotiation of
the parties. The GR Fund will only sell OTC options (other than OTC currency
options) that are subject to a buy-back provision permitting the GR Fund to
require the Counterparty to sell the option back to the GR Fund at a formula
price within seven days. The GR Fund expects generally to enter into OTC
options that have cash settlement provisions, although it is not required to
do so.
Unless the parties provide for it, there is no central clearing or
guaranty function in an OTC option. As a result, if the Counterparty fails to
make or take delivery of the security, currency or other instrument
underlying an OTC option it has entered into with the GR Fund or fails to
make a cash settlement payment due in accordance with the terms of that
option, the GR Fund will lose any premium it paid for the option as well as
any anticipated benefit of the transaction. Accordingly, the Adviser must
assess the creditworthiness of each such Counterparty or any guarantor or
credit enhancement of the Counterparty's credit to determine the likelihood
that the terms of the OTC option will be satisfied. The GR Fund will engage
in OTC option transactions only with United States government securities
dealers recognized by the Federal Reserve Bank of New York as "primary
dealers" or broker dealers, domestic or foreign banks or other financial
institutions which have received (or the guarantors of the obligations of
which have received) a short-term credit rating of "A-1" from Standard &
Poor's Ratings Group(R) ("S&P") or "P-1" from Moody's Investor Service, Inc.
("Moody's") or an equivalent rating from any nationally recognized
statistical rating organization ("NRSRO"). The staff of the SEC currently
takes the position that OTC options purchased by the GR Fund, and portfolios
securities "covering" the amount of the GR Fund's obligation pursuant to an
OTC option sold by it (the cost of the sell-back plus the in-the-money
amount, if any,) are illiquid, and are subject to the GR Fund's limitation on
investing no more than 10% of its assets in illiquid securities.
If the GR Fund sells a call option, the premium that it receives may serve
as a partial hedge, to the extent of the option premium, against a decrease
in the value of the underlying securities or instruments in its portfolio or
will increase the GR Fund's income. The sale of put options can also provide
income.
The GR Fund may purchase and sell call options on securities, including
U.S. Treasury and agency securities, mortgage-backed securities, corporate
debt securities, equity securities (including convertible securities) and
Eurodollar instruments that are traded on U.S. and foreign securities
exchanges and in the over-the-counter markets and on securities indices,
currencies and futures contracts. All calls sold by the GR Fund must be
"covered" (i.e., the Fund must own the securities or futures contract subject
to the call) or must meet the asset segregation requirements described below
as long as the call is outstanding. Even though the GR Fund will receive the
option premium to help protect it against loss, a call sold by the GR Fund
exposes the GR Fund during the term of the option to possible loss of
opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the GR Fund to hold a security or
instrument which it might otherwise have sold.
The GR Fund may purchase and sell put options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, corporate debt
securities, equity securities (including convertible securities) and
Eurodollar instruments (whether or not it holds the above securities in its
portfolio) and on securities indices, currencies and futures contracts other
than futures on individual corporate debt and individual equity securities.
The GR Fund will not sell put options if, as a result, more than 50% of the
GR Fund's assets would be required to be segregated to cover its potential
obligations under such put options other than those with respect to futures
and options thereon. In selling put options, there is a risk that the GR Fund
may be required to buy the underlying security at a disadvantageous price
above the market price.
General Characteristics of Futures. The GR Fund may enter into financial
futures contracts or purchase or sell put and call options on such futures as
a hedge against anticipated interest rate, currency or equity market changes,
for duration management and for risk management purposes. Futures are
generally bought and sold on the commodities exchanges where they are listed
with payment of initial and variation margin as described below. The sale of
a futures contract creates a firm obligation by the GR Fund, as seller, to
deliver to the buyer the specific type of financial instrument called for in
the contract at a specific future time for a specified price (or, with
respect to index futures and Eurodollar instruments, the net cash amount).
Options on futures contracts are similar to options on securities except that
an option on a futures contract gives the purchaser the right in return for
the premium paid to assume a position in a futures contract and obligates the
seller to deliver such option.
5
<PAGE>
The GR Fund's use of financial futures and options thereon will in all
cases be consistent with applicable regulatory requirements and in particular
the rules and regulations of the Commodity Futures Trading Commission and
will be entered into only for bona fide hedging, risk management (including
duration management) or other portfolio management purposes. Typically,
maintaining a futures contract or selling an option thereon requires the GR
Fund to deposit with a financial intermediary as security for its obligations
an amount of cash or other specified assets (initial margin) which initially
is typically 1% to 10% of the face amount of the contract (but may be higher
in some circumstances). Additional cash or assets (variation margin) may be
required to be deposited thereafter on a daily basis as the mark to market
value of the contract fluctuates. The purchase of an option on financial
futures involves payment of a premium for the option without any further
obligation on the part of the GR Fund. If the GR Fund exercises an option on
a futures contract, it will be obligated to post initial margin (and
potential subsequent variation margin) for the resulting futures position
just as it would for any position. Futures contracts and options thereon are
generally settled by entering into an offsetting transaction, but there can
be no assurance that the position can be offset prior to settlement at an
advantageous price nor that delivery will occur.
The GR Fund will not enter into a futures contract or related option
(except for closing transactions) if, immediately thereafter, the sum of the
amount of its initial margin and premiums on open futures contracts and
options thereon would exceed 5% of the GR Fund's total assets (taken at
current value); however, in the case of an option that is in-the-money at the
time of the purchase, the in-the-money amount may be excluded in calculating
the 5% limitation. The segregation requirements with respect to futures
contracts and options thereon are described below.
Options on Securities Indices and Other Financial Indices. The GR Fund
also may purchase and sell call and put options on securities indices and
other financial indices and in so doing can achieve many of the same
objectives it would achieve through the sale or purchase of options on
individual securities or other instruments. Options on securities indices and
other financial indices are similar to options on a security or other
instrument except that, rather than settling by physical delivery of the
underlying instrument, they settle by cash settlement, i.e., an option on an
index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of the index upon which the option is
based exceeds, in the case of a call, or is less than, in the case of a put,
the exercise price of the option (except if, in the case of an OTC option,
physical delivery is specified). This amount of cash is equal to the excess
of the closing price of the index over the exercise price of the option,
which also may be multiplied by a formula value. The seller of the option is
obligated, in return for the premium received, to make delivery of this
amount. The gain or loss on an option on an index depends on price movements
in the instruments making up the market, market segment, industry or other
composite on which the underlying index is based, rather than price movements
in individual securities, as is the case with respect to options on
securities.
Currency Transactions. The GR Fund may engage in currency transactions
with Counterparties in order to hedge the value of portfolio holdings
denominated in particular currencies against fluctuations in relative value.
Currency transactions include forward currency contracts, exchange-listed
currency futures, exchange-listed and OTC options on currencies, and currency
swaps. A forward currency contract involves a privately negotiated obligation
to purchase or sell (with delivery generally required) a specific currency at
a future date, which may be any fixed number of days from the date of the
contract agreed upon by the parties, at a price set at the time of the
contract. A currency swap is an agreement to exchange cash flows based on the
notional difference among two or more currencies and operates similarly to an
interest rate swap, which is described below. The GR Fund may enter into
currency transactions with Counterparties which have received (or the
guarantors of the obligations of such Counterparties have received) a credit
rating of A-1 or P-1 by S&P or Moody's, respectively, or that have an
equivalent rating from an NRSRO or (except for OTC currency options) are
determined to be of equivalent credit quality by the Adviser.
The GR Fund's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps will be
limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is entering into a currency transaction with
respect to specific assets or liabilities of the GR Fund, which will
generally arise in connection with the purchase or sale of its portfolio
securities or the receipt of income therefrom. Position hedging is entering
into a currency transaction with respect to portfolio security positions
denominated or generally quoted in that currency.
The GR Fund will not enter into a transaction to hedge currency exposure
to an extent greater, after netting all transactions intended to wholly or
partially offset other transactions, than the aggregate market value (at the
time of entering into the transaction) of the securities held in its
portfolio that are denominated or generally quoted in or currently
convertible into such currency other than with respect to proxy hedging as
described below.
The GR Fund may also cross-hedge currencies by entering into transactions
to purchase or sell one or more currencies that are expected to decline in
value relative to other currencies to which the GR Fund has or in which the
GR Fund expects to have portfolio exposure.
6
<PAGE>
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, the GR Fund may also engage in
proxy hedging. Proxy hedging is often used when the currency to which the GR
Fund's portfolio is exposed is difficult to hedge or to hedge against the
dollar. Proxy hedging entails entering into a forward contract to sell a
currency whose changes in value are generally considered to be linked to a
currency or currencies in which some or all of the GR Fund's portfolio
securities are or are expected to be denominated, and to buy U.S. dollars.
The amount of the contract would not exceed the value of the GR Fund's
securities denominated in linked currencies. For example, if the Adviser
considers the Austrian schilling is linked to the German deutschemark (the
"D-mark"), the GR Fund holds securities denominated in schillings and the
Adviser believes that the value of schillings will decline against the U.S.
dollar, the Adviser may enter into a contract to sell D-marks and buy
dollars. Currency hedging involves some of the same risks and considerations
as other transactions with similar instruments. Currency transactions can
result in losses to the GR Fund if the currency being hedged fluctuates in
value to a degree or in a direction that is not anticipated. Further, there
is the risk that the perceived linkage between various currencies may not be
present or may not be present during the particular time that the GR Fund is
engaging in proxy hedging. If the GR Fund enters into a currency hedging
transaction, the GR Fund will comply with the asset segregation requirements
described below.
Risks of Currency Transactions. Currency transactions are subject to risks
different from those of other portfolio transactions. Because currency
control is of great importance to the issuing governments and influences
economic planning and policy, purchases and sales of currency and related
instruments can be negatively affected by government exchange controls,
blockages, and manipulations or exchange restrictions imposed by governments.
These can result in losses to the GR Fund if it is unable to deliver or
receive currency or funds in settlement of obligations and could also cause
hedges it has entered into to be rendered useless, resulting in full currency
exposure as well as incurring transaction costs. Buyers and sellers of
currency futures are subject to the same risks that apply to the use of
futures generally. Further, settlement of a currency futures contract for the
purchase of most currencies must occur at a bank based in the issuing nation.
Trading options on currency futures is relatively new, and the ability to
establish and close out positions on such options is subject to the
maintenance of a liquid market which may not always be available. Currency
exchange rates may fluctuate based on factors extrinsic to that country's
economy.
Combined Transactions. The GR Fund may enter into multiple transactions,
including multiple options transactions, multiple futures transactions,
multiple currency transactions (including forward currency contracts) and any
combination of futures, options and currency transactions ("component"
transactions), instead of a single Hedging Transaction, as part of a single
or combined strategy when, in the opinion of the Adviser, it is in the best
interests of the GR Fund to do so. A combined transaction will usually
contain elements of risk that are present in each of its component
transactions. Although combined transactions are normally entered into based
on the Adviser's judgment that the combined strategies will reduce risk or
otherwise more effectively achieve the desired portfolio management goal, it
is possible that the combination will instead increase such risks or hinder
achievement of the portfolio management objective.
Swaps, Caps, Floors and Collars. Among the Hedging Transactions into which
the GR Fund may enter are interest rate, currency and index swaps and the
purchase or sale of related caps, floors and collars. The GR Fund expects to
enter into these transactions primarily to preserve a return or spread on a
particular investment or portion of its portfolio, to protect against
currency fluctuations, as a duration management technique or to protect
against any increase in the price of securities the GR Fund anticipates
purchasing at a later date. The GR Fund intends to use these transactions as
hedges and not as speculative investments and will not sell interest rate
caps or floors where it does not own securities or other instruments
providing the income stream the GR Fund may be obligated to pay. Interest
rate swaps involve the exchange by the GR Fund with another party of their
respective commitments to pay or receive interest, e.g., an exchange of
floating rate payments for fixed rate payments with respect to a notional
amount of principal. A currency swap is an agreement to exchange cash flows
on a notional amount of two or more currencies based on the relative value
differential among them and an index swap is an agreement to swap cash flows
on a notional amount based on changes in the values of the reference indices.
The purchase of a cap entitles the purchaser to receive payments on a
notional principal amount from the party selling such cap to the extent that
a specified index exceeds a predetermined interest rate or amount. The
purchase of a floor entitles the purchaser to receive payments on a notional
principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar
is a combination of a cap and a floor that preserves a certain return within
a predetermined range of interest rates or values.
The GR Fund will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or
dates specified in the instrument, with the GR Fund receiving or paying, as
the case may be, only the net amount of the two payments. Inasmuch as these
swaps, caps, floors, and collars are entered into for good faith hedging
purposes, the Adviser and the GR Fund believe such obligations do not
7
<PAGE>
constitute senior securities under the 1940 Act and, accordingly, will not
treat them as being subject to its borrowing restrictions. The GR Fund will
not enter into any swap, cap, floor or collar transaction unless, at the time
of entering into such transaction, the unsecured long-term debt of the
Counterparty, combined with any credit enhancements, is rated at least "A" by
S&P or Moody's or has an equivalent rating from an NRSRO or is determined to
be of equivalent credit quality by the Adviser. If there is a default by the
Counterparty, the GR Fund may have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown
substantially in recent years with a large number of banks and investment
banking firms acting both as principals and as agents utilizing standardized
swap documentation. As a result, the swap market has become relatively
liquid. Caps, floors and collars are more recent innovations for which
standardized documentation has not yet been fully developed and, accordingly,
they are less liquid than swaps.
Eurodollar Instruments. The GR Fund may make investments in Eurodollar
instruments. Eurodollar instruments are U.S. dollar-denominated futures
contracts or options thereon which are linked to the London Interbank Offered
Rate ("LIBOR"), although foreign currency-denominated instruments are
available from time to time. Eurodollar futures contracts enable purchasers
to obtain a fixed rate for the lending of funds and sellers to obtain a fixed
rate for borrowings. The GR Fund might use Eurodollar futures contracts and
options thereon to hedge against changes in LIBOR, to which many interest
rate swaps and fixed income instruments are linked.
Risks of Hedging Transactions Outside the United States. When conducted
outside the United States, Hedging Transactions may not be regulated as
rigorously as in the United States, may not involve a clearing mechanism and
related guarantees, and are subject to the risk of governmental actions
affecting trading in, or the prices of, foreign securities, currencies and
other instruments. The value of such positions also could be adversely
affected by: (i) other complex foreign political, legal and economic factors,
(ii) lesser availability than in the United States of data on which to make
trading decisions, (iii) delays in the GR Fund's ability to act upon economic
events occurring in foreign markets during nonbusiness hours in the United
States, (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States, and (v) lower
trading volume and liquidity.
Use of Segregated and Other Special Accounts. Many Hedging Transactions,
in addition to other requirements, require that the GR Fund segregate liquid
high grade assets with its custodian to the extent GR Fund obligations are
not otherwise "covered" through ownership of the underlying security,
financial instrument or currency. In general, either the full amount of any
obligation by the GR Fund to pay or deliver securities or assets must be
covered at all times by the securities, instruments or currency required to
be delivered, or, subject to any regulatory restrictions, an amount of cash
or liquid high grade securities at least equal to the current amount of the
obligation must be segregated with the custodian. The segregated assets
cannot be sold or transferred unless equivalent assets are substituted in
their place or it is no longer necessary to segregate them. For example, a
call option written by the GR Fund will require the Fund to hold the
securities subject to the call (or securities convertible into the needed
securities without additional consideration) or to segregate liquid
high-grade securities sufficient to purchase and deliver the securities if
the call is exercised. A call option sold by the GR Fund on an index will
require the GR Fund to own portfolio securities which correlate with the
index or to segregate liquid high grade assets equal to the excess of the
index value over the exercise price on a current basis. A put option written
by the GR Fund requires the GR Fund to segregate liquid, high grade assets
equal to the exercise price.
Except when the GR Fund enters into a forward contract for the purchase or
sale of a security denominated in a particular currency, which requires no
segregation, a currency contract which obligates the GR Fund to buy or sell
currency will generally require the GR Fund to hold an amount of that
currency or liquid securities denominated in that currency equal to the GR
Fund's obligations or to segregate liquid high grade assets equal to the
amount of the GR Fund's obligation.
OTC options entered into by the GR Fund, including those on securities,
currency, financial instruments or indices and OCC-issued and exchange-listed
index options will generally provide for cash settlement. As a result, when
the GR Fund sells these instruments it will only segregate an amount of
assets equal to its accrued net obligations, as there is no requirement for
payment or delivery of amounts in excess of the net amount. These amounts
will equal 100% of the exercise price in the case of a noncash settled put,
the same as an OCC guaranteed listed option sold by the GR Fund, or the
in-the-money amount plus any sell-back formula amount in the case of a
cash-settled put or call. In addition, when the GR Fund sells a call option
on an index at a time when the in-the-money amount exceeds the exercise
price, the GR Fund will segregate, until the option expires or is closed out,
cash or cash equivalents equal in value to such excess. OCC-issued and
exchange-listed options sold by the GR Fund other than those above generally
settle with physical delivery, or with an election of either physical
delivery or cash settlement and the GR Fund will segregate an amount of
assets equal to the full value of the option. OTC options settling with
physical delivery, or with an election of either physical delivery or cash
settlement, will be treated the same as other options settling with physical
delivery.
8
<PAGE>
In the case of a futures contract or an option thereon, the GR Fund must
deposit initial margin and possible daily variation margin in addition to
segregating assets sufficient to meet its obligation to purchase or provide
securities or currencies, or to pay the amount owed at the expiration of an
index-based futures contract. Such assets may consist of cash, cash
equivalents, liquid debt or equity securities or other acceptable assets.
With respect to swaps, the GR Fund will accrue the net amount of the
excess, if any, of its obligations over its entitlements with respect to each
swap on a daily basis and will segregate an amount of cash or liquid high
grade securities having a value equal to the accrued excess. Caps, floors and
collars require segregation of assets with a value equal to the GR Fund's net
obligation, if any.
Hedging Transactions may be covered by other means when consistent with
applicable regulatory policies. The GR Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated
assets, equals its net outstanding obligation in related options and Hedging
Transactions. For example, the GR Fund could purchase a put option if the
strike price of that option is the same or higher than the strike price of a
put option sold by the GR Fund. Moreover, instead of segregating assets if
the GR Fund held a futures or forward contract, it could purchase a put
option on the same futures or forward contract with a strike price as high or
higher than the price of the contract held. Other Hedging Transactions may
also be offset in combinations. If the offsetting transaction terminates at
the time of or after the primary transaction no segregation is required, but
if it terminates prior to such time, assets equal to any remaining obligation
would need to be segregated.
OFFICERS, DIRECTORS AND STOCKHOLDERS
The directors and executive officers of the Fund are listed below. All of
the Directors and officers hold the equivalent positions with Flagship Tax
Exempt Funds Trust and the series thereof. Except as indicated, each
individual has held the office shown or other offices in the same company for
the last five years and has a business address at One Dayton Centre, One
South Main St.; Dayton, Ohio 45402-2030, which is also the address of the
Fund.
The "interested" directors of the Fund (as defined in the 1940 Act) are
indicated by an asterisk (*).
<TABLE>
<CAPTION>
Principal Occupation
Name and Address Positions with the Fund During Past Five Years
- --------------------------- ------------------------ -------------------------------------------------------
<S> <C> <C>
Bruce P. Bedford* Director Chairman and Chief Executive Officer of Flagship
Resources Inc. ("Flagship"), Flagship Financial Inc.
(the "Manager"), and Flagship Funds Inc. (the
"Distributor").
Richard P. Davis* President and President and Chief Operating Officer of Flagship, the
Director Manager, and the Distributor.
Robert P. Bremner Director Private Investor and Management Consultant.
3725 Huntington St., N.W.
Washington, DC 20015
Joseph F. Castellano Director Professor and Former Dean, College of Business and
4249 Honeybrook Avenue Administration, Wright State University.
Dayton, OH 45415
Paul F. Nezi Director Executive Vice President, Marketing Sales & Product
227 E. Dixon Avenue Development, ChoiceCare; prior to March, 1993, Vice
Dayton, OH 45419 President and General Manager, Advanced Imaging
Products, a division of AM International; prior to
March, 1991, Partner, Hooper & Nezi, a marketing and
communications firm.
William J. Schneider Director Senior Partner of Miller-Valentine Partners; Vice
4000 Miller-Valentine Ct. President of Miller-Valentine Realty, Inc.
P.O. Box 744
Dayton, OH 45401
M. Patricia Madden Vice President Vice President, Operations, of the Distributor.
Michael D. Kalbfleisch Treasurer and Secretary Vice President and Chief Financial Officer of Flagship,
the Manager, and the Distributor.
9
<PAGE>
Principal Occupation
Name and Address Positions with the Fund During Past Five Years
- --------------------------- ------------------------ -------------------------------------------------------
LeeAnne Sparling Controller Director of Portfolio Operations of the Manager
Sharon M. Luster Assistant Secretary Compliance Manager of the Distributor; Assistant
Secretary of Flagship, the Manager, and the
Distributor.
</TABLE>
<TABLE>
<CAPTION>
Total Compensation
From Registrant and
Pension or Estimated Fund Complex
Aggregate Retirement Benefit Annual Benefits (all other Flagship Mutual
Name of Person, Compensation Accrued as Part of Upon Funds) Paid to Directors
Position From Registrant Fund Expenses Retirement (Number of Other Funds)
- -------------------- ---------------- ------------------ --------------- ----------------------------
<S> <C> <C> <C> <C>
Robert P. Brenner $6,000 $0 N/A $20,500(26)
Director
Joseph F. Castellano $6,000 $0 N/A $19,500(26)
Director
William J. Schneider $6,000 $0 N/A $20,000(26)
Director
Paul F. Nezi $6,000 $0 N/A $20,000(26)
Director
Bruce Paul Bedford 0 0 N/A 0
Chairman & Director
Richard P. Davis 0 0 N/A 0
President & Director
M. Patricia Madden 0 0 N/A 0
Vice President
Michael D. Kalbfleisch 0 0 N/A 0
Treasurer & Secretary
LeeAnne G. Sparling 0 0 N/A 0
Controller
Sharon M. Luster 0 0 N/A 0
Asst. Secretary
</TABLE>
As of September 1, 1995, to the knowledge of management, the following
stockholder held of record more than 5% of the GR Fund: Citizens Federal
Bank, F.S.B. ("Citizens Federal"), One Citizens Federal Centre, Dayton, Ohio,
45402, 97%. All Directors and officers as a group own less than 1% of the
outstanding shares as of the above date.
The GR Fund has no knowledge of any other person owning more than 5% of
the outstanding shares as of such date.
INVESTMENT ADVISORY SERVICES
As stated in the GR Fund Prospectus, Flagship Financial Inc., a
wholly-owned subsidiary of Flagship Resources Inc., acts as the manager (the
"Manager") to the GR Fund pursuant to a Management Agreement (the "Management
Agreement"), and James Investment Research, Inc. acts as investment adviser
(the "Adviser") pursuant to an Investment Advisory Agreement. The Investment
Advisory Agreement provides for indemnification of the Manager by the Fund
unless the Manager acted with gross negligence, willful misfeasance, reckless
disregard of the duties of its position or with bad faith.
See "MANAGEMENT OF THE FUND--Manager and Investment Adviser" in the
Prospectus for a description of the Manager's and Adviser's duties. The
Manager's administrative obligations include: (i) assisting in supervising
all aspects of the Fund's operations; (ii) providing the Fund, at the
Manager's expense, with the services of persons competent to perform such
administrative and clerical functions as are necessary in order to provide
effective corporate administration of the Fund; and (iii) providing the Fund,
at the Manager's expense, with adequate office space and related services.
The Manager also has authority to require compliance with applicable law by
the Adviser and assure itself of such compliance. The Adviser has discretion
to make all GR Fund investments. For the three fiscal years ended June 30,
1993, June 30, 1994 and June 30, 1995, respectively, the GR Fund paid
10
<PAGE>
$1,090,755, $1,434,132, and $1,396,526 to the Manager pursuant to its
Management Agreement of which $810,696, $1,065,909, and $1,037,959,
respectively, were paid to the Adviser pursuant to its Investment Advisory
Agreement. The GR Fund's accounting records are maintained, at the Fund's
expense, by its Custodian, The Fifth Third Bank.
The Manager has advanced all organization expenses of the GR Fund, which
include printing of documents, fees and disbursements of the GR Fund's
counsel and accountants, registration fees under the Securities Act of 1933,
the 1940 Act and state securities laws, as well as the initial fees of the GR
Fund's custodian and transfer agent. Such fees aggregated approximately
$283,670. The expenses are being reimbursed to the Manager by uniform pro
rata deductions from the net asset value of the Fund accrued daily and paid
monthly over the five-year period which commenced July 1, 1991.
The Management Agreement and the Investment Advisory Agreement will each
terminate automatically upon assignment and continuance must be approved
annually by the Fund's Board of Directors or a majority of the Fund's
outstanding voting shares and in either case, by a majority of the Fund's
independent directors. The Management Agreement is terminable at any time
without penalty by the Board of Directors or by a vote of a majority of the
voting shares on 60 days' written notice to the Manager, or by the Manager on
60 days' written notice to the Fund, and the Advisory Agreement is terminable
by either the Board of Directors (including a majority of the disinterested
Directors), the shareholders, or the Manager (with the concurrence of a
majority of the Board of Directors including a majority of the disinterested
Directors) on the one hand and the Adviser on the other, each by 60 days'
notice to the other.
The Manager and Adviser have agreed that in the event the operating
expenses of the GR Fund (including fees paid to the Manager and the Adviser
and payments to the Distributor but excluding taxes, interest, brokerage and
extraordinary expenses) for any fiscal year ending on a date on which the
Advisory Agreement is in effect, exceed the expense limitations imposed by
applicable state securities laws or any regulations thereunder, or the amount
provided in the Fees and Expenses in the Prospectus, the Adviser will, up to
the amount of its fee, reduce its fee or reimburse the Fund in the amount of
such excess. As of the date of this Prospectus, under the most restrictive
state regulations applicable, the Adviser would be required to reimburse the
Fund such operating expenses exceeding 2-1/2% of the first $30 million of the
average net assets, 2% of the next $70 million of the average net assets, and
1-1/2% of the remaining average net assets. The Manager and the Adviser
believe that such operating expenses will be less than such amounts. Pursuant
to an arrangement among the Adviser, the Manager and Citizens Federal, to the
extent that the Adviser reduces its fee or reimburses the Fund pursuant to
the Investment Advisory Agreement, the Adviser will be partially reimbursed
by the Manager and Citizens Federal.
Under their agreements with the Fund, the Manager and the Adviser will be
indemnified by the Fund for any actions taken unless such person acted with
gross negligence, willful misfeasance, reckless disregard of the duties of
its position or with bad faith. In addition, under the Investment Advisory
Agreement, the Manager and Adviser cross-indemnify each other.
Securities held by the Fund may also be held by, or be appropriate
investments for, other investment advisory clients of the Manager, the
Adviser and their affiliates. Because of different objectives or other
factors, a particular security may be bought for one or more clients when one
or more clients are selling the same security. If purchases or sales of
securities for the Fund or other advisory clients arise for consideration at
or about the same time, transactions in such securities will be made, insofar
as feasible, for the Fund and such other clients in a manner deemed equitable
to all. To the extent that transactions on behalf of more than one client of
the Manager or Adviser during the same period may increase the demand for
securities being purchased or the supply of securities being sold, there may
be an adverse effect on the price of such securities.
TAXES
References are made to the sections in the Prospectus entitled "Taxes" for
a discussion of relevant tax matters and to which the discussion below is
supplementary.
Taxation of the Fund
Each Portfolio of the Fund intends to qualify as a regulated investment
company ("RIC") for federal income tax purposes. In order to so qualify, each
Portfolio must, among other things: (a) derive at least 90% of its gross
income from dividends, interest, payments with respect to loans of securities
and gains from the sale or other disposition of securities or certain other
related income; (b) generally derive less than 30% of its gross income from
gains from the sale or other disposition of securities and certain other
investments held for less than three months; and (c) diversify its holdings
so that at the end of each fiscal quarter, (i) at least 50% of the value of
such Portfolio's assets is represented by cash, United States government
securities, securities of other regulated investment companies, and other
securities which, with respect to any one issuer, do not represent more than
5% of the value of such Portfolio's assets nor more than 10% of the voting
securities of such issuer, and (ii) not more than 25% of the value of such
Portfolio's assets is invested in the securities of any one issuer (other
than United States government securities or the securities of other RICs).
11
<PAGE>
If each Portfolio of the Fund qualifies as a RIC and distributes to its
stockholders at least 90% of its investment company taxable income (not
including net capital gain, which is the excess of net long-term capital gain
over net short-term capital loss), then each Portfolio will not be subject to
federal income tax on the income so distributed. However, each Portfolio
would be subject to corporate income tax (currently at a 35% rate) on any
undistributed income. In addition, each Portfolio will be subject to a
nondeductible 4% excise tax on the amount by which the income it distributes
in any calendar year is less than a required distribution amount. The
required distribution amount for a calendar year equals the sum of (a) 98% of
each Portfolio's ordinary income for such calendar year; (b) 98% of the
excess of capital gains over capital losses for the one-year period ending on
October 31 of such calendar year; and (c) 100% of the undistributed income
and gains from prior years. Each Portfolio intends to distribute sufficient
income so as to avoid both corporate income tax and the excise tax. However,
a Portfolio may in the future decide to retain all or a portion of its net
capital gain. In such case, the Portfolio would be subject to corporate
income tax on such retained net capital gain, and would designate to
stockholders the undistributed capital gain. Stockholders would include as
long-term capital gain income such undistributed net capital gain, and
stockholders would be eligible for a credit with respect to such tax paid by
the Portfolio.
Distributions. The GR Fund normally will distribute substantially all of
its net investment income to stockholders in the form of dividends to be paid
quarterly as determined by the Board of Directors. Such dividends are taxable
whether paid in cash or additional shares of such series. The Board presently
intends to declare such distributions from net realized capital gain, if any,
at least annually at the end of each year.
Any dividends or distributions paid shortly after the purchase of shares
of the GR Fund by an investor may have the effect of reducing the per share
value of the shares owned by the investor by the per share amount of the
dividends or distributions. Furthermore, such dividends and distributions,
although in effect a return of capital, are subject to income taxes.
In the event that total distributions (including distributed or designated
net capital gain) for a taxable year exceed its investment company taxable
income and net capital gain, a portion of each distribution generally will be
treated as a return of capital. Distributions treated as a return of capital
reduce a stockholder's basis in its shares and could result in a capital gain
tax either when a distribution is in excess of basis or, more likely, when a
stockholder redeems its shares.
Stockholders of the GR Fund will be notified annually by the Fund as to
the federal tax status of dividends and distributions paid during the
calendar year. Dividends and distributions may also be subject to state and
local taxes. State and local tax treatment may vary according to applicable
laws. Stockholders can elect to receive distributions in cash or in
additional shares of the GR Fund. The price of the additional shares is
determined as of the record date for the dividend payment.
The Fund may in the future engage in various defensive hedging
transactions. Under various Code provisions, such transactions might change
the character of recognized gains and losses, accelerate the recognition of
certain gains and losses, and defer the recognition of certain losses.
Dividend and interest income from non-U.S. equity and debt securities may
be subject to a withholding tax imposed by the country in which the issuer is
located. Since the GR Fund anticipates that no more than 30% of the value of
its total assets will consist of non-U.S. equity and debt securities,
shareholders are not expected to be eligible for a pass-through of the
foreign taxes paid by the GR Fund.
YIELD AND TOTAL RETURN CALCULATION
In accordance with SEC regulations, the GR Fund may include current yield
and average annual total return in advertisements or information furnished to
stockholders or potential investors. Yields are calculated in accordance with
the SEC's standardized yield formula. In it, dividend and interest income
over the 30 day measurement period is reduced by period expenses and divided
by the number of days within the measurement period to arrive at a daily
income rate. This daily income rate is then expressed as a semiannually
compounded yield based on the maximum offering price of a share assuming a
standardized 360 day year.
The GR Fund may also advertise total return which is calculated
differently from "average annual total return" (a "non-standardized
quotation"). A non-standardized quotation of total return measures the
percentage change in the value of an account between the beginning and end of
a period, assuming no activity in the account other than reinvestment of
dividends and capital gains distributions. A non-standardized quotation of
total return will always be accompanied by the "average annual total return."
Average annual total return for any time period is calculated by assuming an
investment at the beginning of the measurement period at the maximum offering
price. Dividends from the net investable amount are then reinvested in
additional shares each month at the net asset value. At the end of the
measurement period, the total number of shares owned are redeemed at net
asset value. The change in the total value during the investment period is
then expressed as an average annual total rate of return. The GR Fund may
also quote rankings, yields or returns as published by recognized statistical
services or publishers wherein
12
<PAGE>
its performance is categorized or compared with other funds with similar
investment objectives, such as Lipper Analytical Service's "Growth and
Income," or this same data as quoted by Barron's, Business Week, Forbes,
Fortune, Micropal, Money, Mutual Fund, Personal Investing, Worth, Value Line
Mutual Fund Survey, or others; Weisenberger Investment Companies Service's
annual Investment Companies under "Equity" or "Equity-Asset Allocation"; or
Morningstar, Inc.'s Mutual Fund Values.
Current yield and total return will vary from time to time depending on
market conditions, the composition of the portfolio, operating expenses and
other factors. These factors and possible differences in method of
calculating performance figures should be considered when comparing the
performance figures of the GR Fund with those of other investment vehicles.
Yield and Total Return Calculation as of June 30, 1995:
Average Annual Total Return
-----------------------------
Current
30-Day Yield 1 Year 5 Year 10 Year Inception Date
- ------------- ------- ------- ------- -----------------
3.72% 16.55% 10.99%* N/A July 1, 1991
* Inception to date
DISTRIBUTIONS
The GR Fund normally will distribute substantially all of its net
investment income to stockholders in the form of dividends to be paid
quarterly as determined by the Board of Directors. Such dividends are taxable
whether paid in cash or additional shares of the GR Fund. The Board presently
intends to declare distributions from net realized capital gain, if any, at
least annually at the end of each year.
DISTRIBUTOR
As stated in the Prospectuses, Flagship Funds Inc., a wholly-owned
subsidiary of Flagship Resources Inc., acts as the distributor (the
"Distributor") of shares of the Fund in accordance with the terms of the
Distribution Agreement dated May 30, 1991, for the GR Fund. The Distributor
will make a continuous offering of the shares and will be responsible for all
sales and promotion efforts. There is no redemption charge. The Distribution
Agreement must be approved in the same manner as the Advisory Agreement
discussed under "Investment Advisory Services" above and will terminate
automatically if assigned by either party thereto and is terminable at any
time without penalty by the Board of Directors of the Fund or by vote of a
majority of a Portfolio's outstanding shares on 60 days' written notice to
the Distributor and by the Distributor on 60 days' written notice to the
Fund.
Pursuant to Rule 12b-1 under the 1940 Act, the GR Fund has adopted a plan
(the "Plan") which permits the GR Fund to pay for certain distribution and
promotion expenses related to marketing the shares of each Portfolio. The
Plan authorizes the GR Fund to expend its monies in an amount equal to the
aggregate for all such expenditures to such percentage of the GR Fund's daily
net asset value as may be determined from time to time by vote cast in person
at a meeting called for such purpose, by a majority of the GR Fund's
disinterested directors. The scope of the foregoing shall be interpreted by
the directors, whose decisions shall be conclusive except to the extent it
contravenes established legal authority. Without in any way limiting the
discretion of the directors, the following activities are hereby declared to
be primarily intended to result in the sale of shares of the GR Fund:
advertising the GR Fund or the GR Fund's Manager's mutual fund activities;
compensating underwriters, dealers, brokers, banks and other selling entities
and sales and marketing personnel of any of them for sales of shares of the
GR Fund, whether in a lump sum or on a continuous, periodic, contingent,
deferred or other basis; compensating underwriters, dealers, brokers, banks
and other servicing entities and servicing personnel (including the GR Fund's
Manager and its personnel or any of them for providing services to
shareholders of the GR Fund relating to their investment in the GR Fund,
including assistance in connection with inquiries relating to shareholder
accounts; the production and dissemination of prospectuses including
statements of additional information) of the GR Fund and the preparation,
production and dissemination of sales, marketing and shareholder servicing
materials; and the ordinary or capital expenses, such as equipment, rent
fixtures, salaries, bonuses, reporting and recordkeeping and third party
consultancy or similar expenses relating to any activity for which payment is
authorized by the directors; and the financing of any activity for which payment
is authorized by the directors. Pursuant to the Plan, the GR Fund
through authorized officers may make similar payments for marketing services
to non-broker-dealers who enter into service agreements with the GR Fund.
Citizens Federal Trust Department is such a non-broker-dealer who has entered
into a service agreement with the GR Fund.
The maximum amount payable by the Fund under the Plan and related
agreements on an annual basis is .40% of the GR Fund's average daily net
assets for the year. In the case of broker-dealers and others, such as banks,
who have Selling or Service Agreements with the Distributor or the GR Fund,
the maximum amount payable to any recipient is
13
<PAGE>
.0005479% per day (.20% on an annualized basis) of the proportion of daily
net assets of the Fund represented by such person's customers. As described
in the Prospectus, the Board of Directors may reduce these amounts at any
time and has reduced them for the GR Fund. All distribution expenses incurred
by the Distributor and others, such as broker-dealers or banks, in excess of
the amount paid by the GR Fund will be borne by such persons without any
reimbursement from the GR Fund. As detailed in the chart below, under its
Plan and related agreements, the GR Fund paid the amounts shown. Amounts
permanently waived for the same periods are also shown.
Fiscal Year Amount Paid Amount Permanently
Ended June 30 to Distributor Waived by Distributor
- -------------- --------------- ----------------------
1993 $218,962 $371,378
1994 224,637 551,045
1995 321,321 433,700
These amounts are summarized below as to purpose:
<TABLE>
<CAPTION>
Fiscal Year Compensation Advertising &
Ended June 30 to Brokers Promotions Overhead Total
- -------------- ------------- -------------------- ------- -------
<S> <C> <C> <C> <C>
1993 $139,804 $ 73,158 $ 6,000 $218,962
1994 170,065 54,572 -0- 224,637
1995 157,167 148,784 15,370 321,321
</TABLE>
The Plan, the Distribution Agreement, the Selling Agreements and the
Service Agreements of the Fund have been approved by the Fund's Board of
Directors, including a majority of the directors who are not "interested
persons" of the Fund and who have no direct or indirect financial interest in
the Plan or any related agreement, by vote cast in person at meetings called
for the purpose of voting on the Plan and such agreements and by the
stockholders on June 4, 1992. Continuation of the Plan and the related
agreements must be approved annually in the same manner, and the Plan or any
related agreement may be terminated at any time without penalty by a majority
of such independent directors or by a majority of a Portfolio's outstanding
shares. Any amendment increasing the maximum percentage payable under the
Plan or other material change must be approved by a majority of the
respective Portfolio's outstanding shares, and all other material amendments
to the Plan or any related agreement must be approved by a majority of the
independent directors.
In order for the Plan to remain effective, the selection and nomination of
directors who are not "interested persons" of the Fund must be done by the
directors who are not "interested persons" and the persons authorized to make
payments under the Plans must provide written reports at least quarterly to
the Board of Directors for their review.
CUSTODIAN AND TRANSFER AGENT
The custodian and transfer agent and dividend disbursing agent for the GR
Fund is The Fifth Third Bank, Fifth Third Center, 38 Fountain Square Plaza,
Cincinnati, Ohio 45263.
AUDITORS
Deloitte & Touche LLP, 1700 Courthouse Plaza N.E., Dayton, OH 45402, are
the independent auditors for the GR Fund.
PORTFOLIO TRANSACTIONS
Subject to policy established by the Fund's Board of Directors, the
Adviser is primarily responsible for making investment decisions for the GR
Fund. In placing orders, it is the policy of the Fund that the Adviser obtain
the best net results taking into account such factors as price (including the
dealer spread, where applicable); the size, type and difficulty of the
transaction involved; the size and breadth of the market; the firm's general
execution and operational facilities; and the firm's risk in positioning the
securities involved. While the Adviser seeks reasonably competitive prices or
commissions, the Fund will not necessarily always be paying the lowest price
or commission available. The Adviser does not expect to use any one
particular broker or dealer, but, subject to obtaining best execution,
brokers or dealers who provide supplemental investment research to the Fund
or the Adviser may receive orders for transactions by the Fund. In addition,
the Adviser may direct brokerage to brokers or dealers because of research
services provided. Such information may be used by other clients of the
Adviser and not just the Fund. Conversely, the Fund may benefit from research
services provided in respect to other clients. All research shall be paid for
in compliance with Section 28 (e) of the Securities Exchange Act of 1934 or
consistent with the fiduciary duties of the Board and the Adviser.
Information so received will be in addition to and not in lieu of the
services required to be performed by the Adviser under its Agreement and the
expenses of the Adviser will not necessarily be reduced as a result of the
receipt of such supplemental information. For the fiscal year ended June 30,
1995, the GR Fund paid $245,050 in brokerage commissions and made no payments
to brokers in respect to sales of GR Fund shares. The GR Fund expects to
purchase equity securities traded on the New York Stock Exchange and
elsewhere. Money market securities, bonds and debentures, in which the
Adviser
14
<PAGE>
may invest a portion of the Fund's assets, are usually traded
over-the-counter, but may be traded on an exchange. For listed securities,
the Adviser, on behalf of the Fund, will deal directly with the brokers and
dealers who make a market in the securities involved except in those
circumstances where better prices and execution are available elsewhere. Such
dealers usually are acting as principal for their own account. On occasion,
securities may be purchased directly from the issuer. The Adviser may also
deal with foreign dealers.
The Adviser is able to fulfill its obligations to furnish a continuous
investment program to the Fund without receiving research from brokers;
however, it considers access to such information to be an important element
of financial management. Although such information is considered useful, its
value is not determinable, as it must be reviewed and assimilated by them,
and does not reduce its normal research activities in rendering investment
advice under its Advisory Agreements. It is possible that the Adviser's
expenses could be materially increased if it attempted to purchase this type
of information or generate it through its own staff. While it is possible
that the Adviser might be influenced to direct brokerage to brokers providing
research to the Fund, the Fund believes that the requirement to obtain best
execution substantially mitigates this risk, and that the benefits are
appropriate. During the period from July 1, 1994, to June 30, 1995, the
Adviser did not direct any brokerage to brokers providing research and
related brokerage services.
One or more of the other accounts which the Manager or the Adviser manages
may own from time to time the same investments as the Fund. Investment
decisions are made independently from those of such other accounts; however,
from time to time, the same investment decision may be made for more than one
company or account. When two or more companies or accounts seek to purchase
or sell the same securities, the securities actually purchased or sold will
be allocated among the companies and accounts on a good faith equitable basis
by the Manager or the Adviser, as the case may be, in its discretion in
accordance with the accounts' various investment objectives. In some cases,
this system may adversely affect the price or size of the position obtainable
for the Fund. In other cases, however, the ability of the Fund to participate
in volume transactions may produce better execution. It is the opinion of the
Fund's Board of Directors that this advantage, when combined with the other
benefits available due to the Adviser's organizations, outweighs any
disadvantages that may be said to exist from exposure to simultaneous
transactions.
PURCHASE, REDEMPTION AND PRICING OF SHARES
The various manners in which the shares of the GR Fund are offered to the
public or may be redeemed, and the method of calculation by the GR Fund of
net asset value per share (which is the offering price of the shares) are
described in the GR Fund's Prospectus.
Letter of Intent (Retail Shares only). A shareholder may also qualify for
reduced sales charges by sending to the Fund (within 90 days after the first
purchase desired to be included in the purchase program) a signed,
non-binding letter of intent to purchase, during a 13-month period, an amount
sufficient to qualify for a reduced sales charge. A single letter may be used
for spouses, their children and parents or any single trust estate or other
fiduciary account. All investments in Class A Shares of the Fund or in Class
A Shares of any other open-end mutual fund subject to a front-end sales
charge distributed by the Distributor count toward the indicated goal. Once
the Distributor receives the required letter of intent, it will apply to
qualifying purchases within the 13-month period the sales charge that would
be applicable to a single purchase of the total amount indicated in the
letter. During the period covered by the letter of intent, 5% of the shares
purchased will be restricted until the stated goal is reached. If the
intended purchase program is not completed within the 13-month period, the
sales charge will be adjusted upward as appropriate and a sufficient number
of restricted shares will be redeemed by the Fund if the shareholder does not
pay the increased sales charge.
OTHER INFORMATION
The Prospectus and the Statement of Additional Information do not contain
all the information included in the Registration Statement filed with the SEC
under the Securities Act of 1933 and the 1940 Act with respect to the Fund
and the securities offered by it pursuant to the Prospectus, certain portions
of which have been omitted pursuant to the rules and regulations of the SEC .
The Registration Statement including the exhibits filed therewith may be
examined at the office of the SEC in Washington, D.C.
Statements contained in the Prospectus or in the Statement of Additional
Information as to the contents of any contract or other document referred to
are not necessarily complete, and, in each instance, reference is made to the
copy of such contact or other document filed as an exhibit to the
Registration Statement of which the Prospectus and the Statement of
Additional Information form a part, each such statement being qualified in
all respects by such reference.
15
<PAGE>
Index to Financial Statements of
Flagship Admiral Funds Inc.
The Golden Rainbow series
Page
-------
The Golden Rainbow A James Advised Mutual Fund
Audited Report for the period ending June 30, 1995
Statement of Investments in Securities and Net Assets F-2
Statement of Assets and Liabilities F-4
Statement of Operations F-5
Statements of Changes in Net Assets F-6
Notes to Financial Statements F-7
Financial Highlights F-9
Independent Auditors' Report F-10
<PAGE>
[LOGO: GOLDEN RAINBOW]
PORTFOLIO HIGHLIGHTS
(This information is not part of the audited financial
statements.)
ASSET ALLOCATION AS OF JUNE 30, 1995
(box) Cash and Other 4.4%
(box) Common Stocks
Basic Materials 5.2%
Consumer Cyclical 0.4%
Consumer Non-Cyclical 1.3%
Energy 4.4%
Finance 3.5%
Industrial 0.5%
International 7.3%
Technology 10.3%
Utilities 4.8%
37.7%
Corporate Bonds 1.0%
U.S. Government Obligations
Short-Term (0-5 years) 32.5%
Intermediate (5-10 years) --.%
Long-Term (10-30 years) 24.4%
56.9%
[Graphic: Pie Chart]
PERFORMANCE COMPARISON*
[Graphic: Line Chart]
(Value of $10,000 investment from Fund's inception.)
June 30, 1992 1993 1994 1995
FUND
PERFORMANCE $11,190 13,215 13,018 15,173
STANDARD AND
POOR'S 500 $10,996 12,497 12,673 15,977
CONSUMER
PRICE INDEX $10,309 10,616 10,888 11,197
16.55% and 10.99% are the average annual total returns for the Fund for one year
and since inception (7/1/91), respectively, after reinvestment of dividends, as
of June 30, 1995. *Assumes reinvestment of all dividends and distributions.The
quoted data represents past performance. Investment return and principal value
will fluctuate. An investor's shares, when redeemed, may be worth more or less
than their original value.
TEN LARGEST EQUITY HOLDINGS
1. Intel Corp. Semiconductor and memory circuits manufacturer
2. Hercules Inc. Chemical specialties company
3. Texas Instruments, Inc. Electronics and semiconductor
components company
4. Citicorp New York commercial banking
5. Mobil Corp. International oil and natural gas company
6. Lockheed Martin Corp. Diverse aerospace company
7. Exxon Corp. World's leading oil company
8. Coca-Cola ADR Mexican distributor & producer of soft drinks
9. Raytheon Co. Electronics, defense, and aircraft manufacturer
10. British Petroleum PLC-ADR Major integrated world
oil company
GOLDEN RAINBOW 3
<PAGE>
[LOGO: GOLDEN RAINBOW]
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS
June 30, 1995
COMMON STOCKS - 37.7%
Market
Shares Value
BASIC MATERIALS - 5.2%
70,100 Barrick Gold Corporation $ 1,770,025
10,000 Du Pont De Nemours & Co. 687,500
90,300 Hercules, Inc. 4,402,125
83,000 Homestake Mining Co. 1,369,500
135,000 Santa Fe Pacific Gold Corp. 1,636,875
Total 9,866,025
CONSUMER CYCLICAL - 0.4%
20,000 Echlin, Inc. 695,000
Total 695,000
CONSUMER NON-CYCLICAL - 1.3%
12,000 American Stores Company 337,500
25,000 Archer Daniels Midland
Company 465,625
9,300 Clorox Company 606,825
17,000 IBP, Inc. 739,500
5,000 Philip Morris Companies, Inc. 371,875
Total 2,521,325
ENERGY - 4.4%
31,000 Enron Corp. 1,088,875
39,500 Exxon Corp. 2,789,688
33,000 Mobil Corporation 3,168,000
20,000 Sonat, Inc. 610,000
22,000 Williams Company 767,250
Total 8,423,813
FINANCE - 3.5%
20,000 Alex Brown, Inc. 830,000
74,000 Citicorp 4,282,750
58,200 Protective Life Corporation 1,585,950
Total 6,698,700
INDUSTRIAL - 0.5%
29,700 Briggs & Stratton Corp. 1,024,650
Total 1,024,650
Market
Shares Value
INTERNATIONAL - 7.3%
27,677 British Petroleum PLC ADR $ 2,369,843
51,000 Chilgener S.A. ADR 1,612,875
123,000 Coca-Cola FEMSA S.A. ADR 2,613,750
50,000 De Beers CN Mine ADR 1,293,750
45,000 Placer Dome, Inc. Canada 1,175,625
27,500 Telecom New Zealand ADR 1,667,188
5,000 Telefonica De Argentina ADR 123,750
10,000 Telefonos Chile ADR 813,750
42,000 Telefonos De Mexico ADR 1,244,250
57,000 YPF S.A. ADR 1,075,875
Total 13,990,656
TECHNOLOGY - 10.3%
17,700* Compaq Computer Corp. 803,136
81,000 Intel Corporation 5,128,313
46,000 Lockheed Martin
Corporation 2,903,750
53,000 Pioneer Standard
Electronics 1,298,500
33,000 Raytheon Company 2,561,625
36,500* Seagate Technology, Inc. 1,432,625
10,000 Tektronix, Inc. 492,500
32,000 Texas Instruments, Inc. 4,284,000
15,500 Textron, Inc. 900,938
Total 19,805,387
UTILITIES - 4.8%
40,000 Ameritech Corporation 1,760,000
35,100 Duke Power Company 1,456,650
93,200 Energen Corporation 2,003,800
5,000 General Public Utilities 148,750
69,000 NIPSCO Industries, Inc. 2,346,000
8,000 Pacific Enterprises 196,000
50,000 Panhandle Eastern Corp. 1,218,750
Total 9,129,950
Total Common Stocks $72,155,506
(Cost $56,533,027)
4 GOLDEN RAINBOW
<PAGE>
[LOGO: GOLDEN RAINBOW]
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS (CONTINUED)
June 30, 1995
<TABLE>
<CAPTION>
Face Amount Market
CORPORATE BONDS - 1.0% (000 Omitted) Value
<S> <C> <C>
Coca-Cola Enterprises, 6.750%, 09/15/23 $ 500 $ 465,613
Illinois Bell Telephone, 7.125%, 07/01/23 500 482,868
Pacific Bell Telephone, 7.125%, 03/15/26 500 485,625
Procter & Gamble, 7.375%, 03/01/23 500 499,417
Total Corporate Bonds (Cost $1,989,770) 1,933,523
U.S. GOVERNMENT OBLIGATIONS - 56.9%
U.S. Treasury Bills, 0.000%, 12/14/95 13,000 12,681,381
U.S. Treasury Notes, 4.625%, 08/15/95 1,500 1,498,125
U.S. Treasury Notes, 4.625%, 02/15/96 8,000 7,950,000
U.S. Treasury Notes, 5.125%, 03/31/96 13,000 12,947,180
U.S. Treasury Notes, 7.875%, 07/15/96 7,000 7,148,750
U.S. Treasury Notes, 8.500%, 05/15/97 12,500 13,082,024
U.S. Treasury Notes, 6.125%, 5/31/97 2,000 2,011,250
U.S. Treasury Bonds, 5.500%, 04/15/00 5,000 4,907,809
U.S. Treasury Bonds, 9.125%, 05/15/09 8,000 9,477,495
U.S. Treasury Bonds, 10.375%, 11/15/09 500 640,468
U.S. Treasury Bonds, 10.000%, 05/15/10 8,000 10,117,495
U.S. Treasury Bonds, 8.125%, 08/15/19 14,500 16,919,688
U.S. Treasury Bonds, 6.250%, 08/15/23 1,000 945,937
U.S. Treasury Strip Principal Only, 02/15/15 20,000 5,295,038
U.S. Treasury Strip Principal Only, 05/15/17 15,000 3,360,223
Total U.S. Obligations (Cost $103,073,879) 108,982,863
SHORT-TERM INVESTMENTS - 3.6%
Fountain Square U.S. Treasury Obligation Fund 6,792,172
Total Investments in Securities - 99.2% 189,864,064
Excess of Other Assets over Liabilities - 0.8% 1,608,463
Total Net Assets - 100.0% $191,472,521
</TABLE>
*Non-income producing security.
See notes to financial statements.
GOLDEN RAINBOW 5
<PAGE>
[LOGO: GOLDEN RAINBOW]
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1995
ASSETS:
Investments, at market value (cost $161,596,676) $183,071,892
Short-term investments 6,792,172
Receivables:
Dividends 62,373
Interest 1,538,145
Receivable for investments sold 433,156
Deferred organizational expenses (Note G) 56,848
Other 11,003
Total assets 191,965,589
LIABILITIES:
Payable for Fund shares reacquired 186,001
Accrued expenses 250,213
Accrued organizational expenses (Note G) 56,848
Total liabilities 493,062
NET ASSETS:
Applicable to 10,481,430 shares issued and outstanding $191,472,527
NET ASSET VALUE PER SHARE $ 18.27
See notes to financial statements.
6 GOLDEN RAINBOW
<PAGE>
[LOGO: GOLDEN RAINBOW]
STATEMENT OF OPERATIONS
Year Ended
June 30, 1995
INVESTMENT INCOME:
Income:
Dividends $ 1,930,218
Interest 7,679,134
Total Income 9,609,352
Expenses:
Manager's fees (Note E) 1,396,526
Marketing, administrative and
distribution fees (Note F) 755,021
Custodian's fees 8,970
Audit fees 28,600
Insurance 8,615
Transfer and accounting agent's fees 71,500
Legal fees 43,028
Directors' fees 18,700
Reimbursement of organizational
expenses (Note G) 56,758
Registration fees 9,649
Distribution fees waived (Note F) (433,700)
Total expenses 1,963,667
Net investment income 7,645,685
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized gain on security transactions 7,317,261
Change in unrealized
appreciation (depreciation)
of investments 14,027,956
NET GAIN ON INVESTMENTS 21,345,217
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 28,990,902
See notes to financial statements.
GOLDEN RAINBOW 7
<PAGE>
[LOGO: GOLDEN RAINBOW]
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended Year Ended
June 30, 1995 June 30, 1994
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $ 7,645,685 $ 7,183,405
Net realized gain on security transactions 7,317,261 2,044,521
Change in unrealized appreciation
(depreciation) of investments 14,027,956 (12,561,513)
Net increase (decrease) in net assets
resulting from operations 28,990,902 (3,333,587)
DISTRIBUTIONS TO STOCKHOLDERS:
Dividends from net investment income (7,543,717) (7,193,717)
Distributions from net realized capital gains (3,868,849) (2,722,439)
Net decrease in net assets from distributions
to stockholders (11,412,566) (9,916,156)
CAPITAL STOCK TRANSACTIONS:
Proceeds from shares sold 17,930,464 49,886,629
Net asset value of shares issued in
reinvestment of dividends and distributions 10,515,950 9,245,476
Cost of shares redeemed (43,299,661) (36,343,504)
Net (decrease) increase in net assets from
capital stock transactions (14,853,247) 22,788,601
Total increase in net assets 2,725,089 9,538,858
NET ASSETS:
Beginning of year 188,747,438 179,208,580
End of year $ 191,472,527 $ 188,747,438
NET ASSETS CONSIST OF:
Common stock, at par $ 10,481 $ 11,325
Paid-in surplus 164,391,929 179,244,332
Undistributed net investment income 101,968
Accumulated net realized gain on
security transactions 5,492,933 2,044,521
Unrealized appreciation (depreciation)
of investments 21,475,216 7,447,260
$ 191,472,527 $ 188,747,438
</TABLE>
See notes to financial statements.
8 GOLDEN RAINBOW
<PAGE>
[LOGO: GOLDEN RAINBOW]
NOTES TO FINANCIAL STATEMENTS
Year ended June 30, 1995
A. DESCRIPTION OF BUSINESS
The Golden Rainbow A James Advised Mutual Fund (Fund) is a series of Flagship
Admiral Funds Inc. (Corporation), a Maryland corporation registered under the
Investment Company Act of 1940, as amended, as a diversified, no-load,
open-end management investment company. The Fund commenced investment
operations on July 1, 1991. Capital stock of the Fund, which is registered
under the Securities Act of 1933, as amended, is offered to the public on a
continuous basis.
B. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund.
Security Valuation
Portfolio securities listed or traded on a national securities exchange are
valued at the last sale price on such exchange on the valuation day. Listed
securities for which there were no sales that day and securities traded in
the over-the-counter market are valued at the mean between the last reported
bid and asked prices on the valuation day. Short-term investments are stated
at amortized cost, which approximates market value. Restricted securities and
other portfolio securities for which market quotations are not readily
available are valued at fair value as determined under procedures established
by the Board of Directors.
Restricted Securities
The Fund may purchase securities that are subject to restrictions on
disposition under the Securities Act of 1933 or for which market quotations
are not readily available, including repurchase agreements. There were no
restricted securities included in the statement of investments at June 30,
1995.
Federal Income Taxes
It is the Fund's policy to comply with the Internal Revenue Code requirements
applicable to regulated investment companies and to distribute all of its
taxable income to its stockholders. Therefore, no federal income tax
provision is required.
Security Transactions and Investment Income
Security transactions are accounted for on the date the securities are
purchased or sold (trade date). Dividend income is recorded on the
ex-dividend date. Interest income is recorded on the accrual basis. The Fund
amortizes discounts and premiums on purchases of securities on the same basis
for both financial reporting and tax purposes. Realized gains and losses on
security transactions are determined on the identified cost basis for both
financial statement and federal income tax purposes.
Distributions to Stockholders
Dividends from net investment income are declared and paid quarterly. Net
realized gains from security transactions, to the extent they exceed
available capital loss carryforwards, are distributed to stockholders.
Distributions are reinvested in additional shares unless otherwise requested.
Expenses
Estimated expenses are accrued daily. Shared expenses incurred by the
Corporation are allocated among the series based on each series' ratio of net
assets to the combined net assets. Specifically identified direct expenses
are charged to each series as incurred.
Securities Purchased on a "When Issued" Basis:
The Fund may, upon adequate segregation of securities as collateral, purchase
and sell portfolio securities on a "when issued" basis. These securities are
registered by a government agency, but have not been issued to the public.
Delivery and payment take place after the date of the transaction and such
securities are subject to market fluctuations during this period. The current
market value of these securities is determined in the same manner as other
portfolio securities. There were no "when issued" purchase commitments
included in the statement of investments at June 30, 1995.
GOLDEN RAINBOW 9
<PAGE>
[LOGO: GOLDEN RAINBOW]
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
C. CAPITAL STOCK
At June 30, 1995, there were 100,000,000 shares of $.001 par value capital
stock authorized. Transactions in capital stock were as follows:
Year Ended Year Ended
June 30, 1995 June 30, 1994
Shares sold 1,053,735 2,768,378
Shares issued in
reinvestment of
distributions 624,148 518,268
Shares reacquired (2,521,692) (2,025,442)
Net (decrease) increase
in shares
outstanding (843,809) 1,261,204
Outstanding at
beginning of year 11,325,239 10,064,035
Outstanding at
end of year 10,481,430 11,325,239
D. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities other than United States government
obligations and short-term notes for the year ended June 30, 1995, aggregated
$26,800,368 and $65,367,855, respectively. Purchases and sales of U.S.
government securities for the year ended June 30, 1995 aggregated $55,943,688
and $63,059,219, respectively.
At June 30, 1995, net unrealized appreciation for financial reporting and
federal income tax purposes aggregated $21,475,216 of which $22,268,162
related to appreciated securities and $792,946 related to depreciated
securities.
E. MANAGER'S FEES
Pursuant to the terms of the Management Agreement, Flagship Financial Inc.
(Manager), provides general supervision of the purchase and sale of
securities and supervisory and corporate administrative services and
facilities. The Manager, pursuant to an Investment Advisory Agreement, has
delegated complete investment discretion to the Adviser, James Investment
Research, Inc. As compensation for services rendered, the Manager receives an
amount computed daily and payable monthly, at an annual rate of .74% of the
average daily net assets of the Fund. Of this amount, the Manager pays the
Adviser a fee computed monthly on the average daily net assets of the Fund at
an annualized rate of .55% for investment advisory services rendered.
Included in accrued expenses at June 30, 1995 are accrued management fees of
$119,396.
F. MARKETING, ADMINISTRATIVE AND DISTRIBUTION FEES
The Fund has a Distribution Agreement with Flagship Funds Inc. (Distributor)
to serve as the exclusive selling agent of the Fund's capital stock. In that
capacity, the Distributor is responsible for all sales and promotional
efforts, including printing of prospectuses and reports used for sales
purposes. Pursuant to Rule 12b-1 under the Investment Company Act of 1940,
the Fund has adopted a plan to reimburse the Distributor each month for its
actual expenses incurred in the distribution and promotion of sales of the
Fund's capital stock. The maximum amount payable for these expenses on an
annual basis is .40% of the Fund's average daily net assets. During the year
ended June 30, 1995, the Distributor, at its discretion, permanently waived
$433,700 of its distribution fees. Included in accrued expenses at June 30,
1995 are accrued distribution fees of $74,911. Certain officers and/or
directors of the Fund are also officers and/or directors of the Distributor
and/or Manager.
G. ORGANIZATIONAL EXPENSES
The organizational expenses incurred on behalf of the Fund ($283,670) are
being reimbursed to the Manager on a straight-line basis over a period of
five years. As of June 30, 1995, $226,822 has been reimbursed.
10 GOLDEN RAINBOW
<PAGE>
[LOGO: GOLDEN RAINBOW]
FINANCIAL HIGHLIGHTS
Selected data for each share of capital stock outstanding
throughout the year:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended
06/30/95 06/30/94 06/30/93 06/30/92
<S> <C> <C> <C> <C>
Net asset value, beginning of year $ 16.67 $ 17.81 $ 15.88 $ 15.00
Income from investment operations:
Net investment income 0.69 $0.66 $ 0.76 $ 0.87
Net realized and unrealized gain (loss)
on securities 1.94 (0.89) 2.05 0.90
Total from investment operations 2.63 (0.23) 2.81 1.77
Less distributions:
Dividends from net investment income (0.68) (0.66) (0.75) (0.87)
Distributions from net realized capital gains (0.35) (0.25) (0.13) (0.02)
Total distributions (1.03) (0.91) (0.88) (0.89)
Net asset value, end of year $ 18.27 $ 16.67 $ 17.81 $ 15.88
Total return 16.55% (1.49%) 18.09% 11.91%
Ratios to average net assets:
Actual net of waivers and reimbursements:
Expenses 1.04% 0.96% 1.02% 1.09%
Net investment income 4.05% 3.70% 4.44% 5.51%
Assuming no waivers and reimbursements:
Expenses 1.27% 1.24% 1.28% 1.33%
Net investment income 3.82% 3.42% 4.18% 5.27%
Net assets, end of year (000's) $191,473 $188,747 $179,209 $124,563
Portfolio turnover rate 48.46% 30.64% 38.42% 10.48%
</TABLE>
GOLDEN RAINBOW 11
<PAGE>
[LOGO: GOLDEN RAINBOW]
INDEPENDENT AUDITORS' REPORT
TO THE STOCKHOLDERS AND DIRECTORS
THE GOLDEN RAINBOW A JAMES ADVISED
MUTUAL FUND
We have audited the accompanying statement of assets and liabilities, including
the statement of investments in securities and net assets, of The Golden Rainbow
A James Advised Mutual Fund as of June 30, 1995, the related statement of
operations for the year then ended, and the statements 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, 1995, by correspondence with the Fund's custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of The Golden Rainbow A
James Advised Mutual Fund at June 30, 1995, the results of its operations, the
changes in its net assets, and the financial highlights for the respective
stated years, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dayton, Ohio
July 24, 1995
12 GOLDEN RAINBOW
<PAGE>
APPENDIX I
DESCRIPTION OF SECURITIES RATINGS
Standard & Poor's Ratings Group(r) -- A brief description of the
applicable Standard & Poor's Ratings Group rating symbols and their meanings
(as published by Standard & Poor's Corporation) follows:
A Standard & Poor's corporate debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific debt obligation.
This assessment may take into consideration obligors such as guarantors,
insurers, or lessees.
The rating is not a recommendation to purchase, sell or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished by the issuer and
obtained by Standard & Poor's from other sources it considers reliable.
Standard & Poor's does not perform an audit in connection with any rating and
may, on occasion, rely on unaudited financial information. The ratings may be
changed, suspended, or withdrawn as a result of changes in, or unavailability
of, such information, or for other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
I. Likelihood of default -- capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in
accordance with the terms of the obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangements under
the laws of bankruptcy and other laws affecting creditors' rights.
l. Long-term bonds
AAA Bonds rated AAA have the highest rating assigned by Standard &
Poor's to a debt obligation. Capacity to pay interest and repay
principal is extremely strong.
AA Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the highest rated issues only
in small degree.
A Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than bonds in higher rated categories.
BBB Bonds rated BBB are regarded as having an adequate capacity to
pay interest and repay principal. Whereas they normally exhibit
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for bonds in this
category than for bonds in higher rated categories.
BB-D Debt rated "BB", "B", "CCC", "CC" and "C" is regarded, on
balance, as predominantly speculative with respect to capacity
to pay interest and repay principal in accordance with the
terms of the obligation. "BB" indicates the lowest degree of
speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions. The "CI" is
reserved for income bonds on which no interest is being paid.
Debt rated "D" is in default, and payment of interest and/or
repayment of principal is in arrears.
Plus (+) or Minus (-): The ratings from "AA" to "BBB" may be modified by
the addition of a plus or a minus sign to show relative standing within the
major rating categories.
Provisional Ratings: The letter "P" indicates that the rating is provisional.
A provisional rating assumes the successful completion of the project being
financed by the bonds being rated and indicates that payment of debt service
requirements is largely or entirely dependent upon the successful and timely
completion of the project. This rating, however, while addressing credit quality
subsequent to completion of the project, makes no comment on the likelihood of,
or the risk of default upon failure of, such completion. The investor should
exercise his own judgment with respect to such likelihood and risk.
I-1
<PAGE>
2. Preferred stock rating criteria
Preferred stock ratings reflect the merits of each issue relative to the
universe of preferreds, and not in relation to debt obligations. Since
preferred stock is by definition a junior ranking security, preferred stock
ratings do not factor in the security's junior position -- in a bankruptcy
reorganization or liquidation -- to a company's debt obligations. However,
preferred stock cannot be rated higher than a company's highest-ranking debt
obligations because the same basic methodology and ratio norms are used to
rate both types of securities.
The financial analysis performed in conjunction with preferred stock ratings
is virtually the same as that used to rate debt. Fixed-charge coverage and
capitalization ratios are calculated treating preferred stock obligations as
though they were debt. Accordingly, if there is a substantial amount of
preferred, the rating on preferred stock could differ greatly from the debt
rating; the company has less capacity to pay dividends and debt service than it
has to meet debt service alone. The size of the differential is a function of
how much preferred is outstanding. (While the gap can be a full rating category
or more, a large amount of preferred will drag down the debt rating as well.
Even though a company under duress can stop paying the preferred dividends to
avoid default, the burden of the preferred increases the risk that the company
will face such a financial crisis. The company will pay dividends as long as
possible; this can sap its financial strength or siphon off funds that otherwise
could be used to protect the firm's competitive position.)
Preferred stock ratings also consider the vulnerability of the dividend to
the firm's discretionary passing on a payment. It is often appropriate to rate
preferred stock lower than indicated by pure financial analysis -- and well
below the debt rating -- in the case of speculative grade credits. Such issuers
may be expected to eliminate preferred dividends to help avoid financial
constraints. Similarly, covenants in debt instruments can endanger payment of
preferred dividends even if financial measures indicate a capacity to pay.
Moody's Investors Service Inc. -- A brief description of the applicable
Moody's Investors Service, Inc. rating symbols and their meanings follow:
l. Long-term bonds
Aaa -- Bonds which are rated Aaa are judged to be the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large, or by an exceptionally
stable, margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are more unlikely to
impair the fundamentally strong position of such issues. With the occasional
exception of oversupply in a few specific instances, the safety of obligations
of this class is so absolute that their market value is affected solely by money
market fluctuations.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than the Aaa
Securities. These Aa bonds are high grade, their market value virtually immune
to all but money market influences, with the occasional exception of oversupply
in a few specific instances.
A -- Bonds which are rated A possess many favorable investment attributes and
are to be considered as higher medium grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to A-rated bonds may be influenced to some degree
by credit circumstances during a sustained period of depressed business
conditions. During periods of normalcy, bonds of this quality frequently move in
parallel with Aaa and Aa obligations, with the occasional exception of
oversupply in a few specific instances.
Baa -- Bonds which are rated Baa are considered as lower medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments may be lacking or may be characteristically unreliable over
any great length of time. Such bonds lack outstanding investment characteristics
and in fact have speculative characteristics as well. The market value of
Baa-rated bonds is more sensitive to change in economic circumstances, and aside
from occasional speculative factors applying to some bonds of this class, Baa
market valuations move in parallel with Aaa, Aa, and A obligations during
periods of economic normalcy, except in instances of oversupply.
Ba-C -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often, the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class. Bonds which are rated B generally
lack characteristics of the desirable investment. Assurance of interest and
principal payments or of maintenance of other terms of the contract over any
long period of time may be small. Bonds which are rated Caa are of poor
standing. Such issues may be in default or there may be present elements
I-2
<PAGE>
of danger with respect to principal or interest. Bonds which are rated Ca
represent obligations which are speculative in a high degree. Such issues are
often in default or have other marked shortcomings. Bonds which are rated C
are the lowest rated class of bonds, and issues so rated can be regarded as
having extremely poor prospects of ever attaining any real investment
standing.
Moody's bond rating symbols may contain numerical modifiers of a generic
rating classification. The modifier l 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 generic
rating category.
Con. -- Bonds for which the security depends upon the completion of some
act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operating experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting
condition attaches. Parenthetical rating denotes probable credit status upon
completion of construction or elimination of basis of condition.
2. Preferred Stock
aaa An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and
the least risk of dividend impairment within the universe of
preferred stocks.
aa An issue which is rated "aa" is considered a high-grade
preferred stock. This rating indicates that there is a
reasonable assurance that earnings and asset protection will
remain relatively well maintained in the foreseeable future.
a An issue which is rated "a" is considered to be an upper-medium
grade preferred stock. While risks are judged to be somewhat
greater than in the "aaa" and "aa" classification, earnings and
asset protection are, nevertheless, expected to be maintained at
adequate levels.
baa An issue which is rated "baa" is considered to be a medium-grade
preferred stock, neither highly protected nor poorly secured.
Earnings and asset protection appear adequate at present but may
be questionable over any great length of time.
ba An issue which is rated "ba" is considered to have speculative
elements and its future cannot be considered well assured.
Earnings and asset protection may be very moderate and not well
safeguarded during adverse periods. Uncertainty of position
characterizes preferred stocks in this class.
b An issue which is rated "b" generally lacks the characteristics
of a desirable investment. Assurance of dividend payments and
maintenance of other terms of the issue over any long period of
time may be small.
caa An issue which is rated "caa" is likely to be in arrears on
dividend payments. This rating designation does not purport to
indicate the future status of payments.
ca An issue which is rated "ca" is speculative in a high degree and
is likely to be in arrears on dividends with little likelihood
of eventual payments.
c This is the lowest rated class of preferred or preference stock.
Issues so rated can be regarded as having extremely poor
prospects of everattaining any real investment standing.
- -----------
* Note: Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification: the modifier 1 indicates that the security ranks in the
higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking and the modifier 3 indicates that the issue ranks in the
lower end of its generic rating category.
I-3
<PAGE>
Fitch Investors Service, Inc. -- A brief description of the applicable
Fitch Investors Service, Inc. rating symbols and their meanings follows:
l. Long-term bonds
AAA Bonds considered to be investment grade and the of
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.
AA Bonds considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest
and repay principal is very strong, although not quite as
strong as bonds rated 'AAA'. Because bonds 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-l+'.
A Bonds 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.
BBB Bonds 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.
Plus (+) Minus (-) Plus and minus signs are used with a rating symbol
to indicate the relative position of a credit within the
rating category. Plus and minus signs, however, are not
used in the 'AAA' category. NR Indicates that Fitch does
not rate the specific issue.
Conditional A conditional rating is premised on the successful
completion of a project or the occurrence of a specific
event.
Suspended A rating is suspended when Fitch deems the amount
of information available from the issuer to be inadequate
for rating purposes.
Withdrawn A rating will be withdrawn when an issue matures or
is called or refinanced, and, at Fitch's discretion, when
an issuer fails to furnish proper and timely information.
FitchAlert Ratings are placed on FitchAlert to notify
investors of an occurrence that is likely to result in a
rating change and the likely direction of such change.
These are designated as "Positive," indicating a potential
upgrade, "Negative," for potential downgrade, or
"Evolving," where ratings may be raised or lowered.
FitchAlert is relatively short-term, and should be
resolved within 12 months.
Credit Trend Credit trend indicators show whether credit
fundamentals are improving, stable, declining, or
uncertain, as follows:
Improving (up arrow)
Stable (left, right arrow)
Declining (down arrow)
Uncertain (up, down arrow)
Credit trend indicators are not predictions that any
rating change will occur, and have a longer-term time
frame than issues placed on FitchAlert.
I-4
<PAGE>
Duff & Phelps Credit Rating Scale -- A brief description of the applicable
Duff & Phelps rating symbols and their meanings follows:
AAA Highest credit quality. The risk factors are negligible, being
only slightly more than for risk-free U.S. Treasury debt.
AA+ High credit quality. Protection factors are strong. Risk is modest
AA but may vary slightly from time to time because of economic
AA- conditions.
A+ Protection factors are average but adequate. However, risk factors
A are more variable and greater in periods of economic stress.
A-
BBB+ Below average protection factors but still considered sufficient
BBB for prudent investment. Considerable variability in risk during
BBB- economic cycles.
BB+ Below investment grade but deemed likely to meet obligations when
BB due. Present or prospective financial protection factors fluctuate
BB- according to industry conditions or company fortunes. Overall
quality may move up or down frequently within this category.
B+ Below investment grade and possessing risk that obligations will
B not be met when due. Financial protection factors will fluctuate
B- widely according to economic cycles, industry conditions and/or
company fortunes. Potential exists for frequent changes in the
rating within this category or into a higher or lower rating grade.
CCC Well below investment grade securities. Considerable uncertainty
exists as to timely payment of principal, interest or preferred
dividends. Protection factors are narrow and risk can be
substantial with unfavorable economic/industry conditions, and/or
with unfavorable company developments.
DD Defaulted debt obligations, issuer failed to meet scheduled
principal and/or interest payments.
DP Preferred stock with dividend arrearages.
I-5
<PAGE>
Investor Guide
[Rainbow logo] THE GOLDEN RAINBOW
A JAMES ADVISED MUTUAL FUND(SM)
[photo of middle-aged man and wife with teenage daughter and son.]
SEEKING TO PROVIDE TOTAL
RETURN AND PRESERVATION OF
CAPITAL FROM A PORTFOLIO OF
EQUITY AND DEBT SECURITIES
Shares of the Fund are not endorsed nor guaranteed by a bank, are not deposits
or other obligations of a bank, are not insured by the Federal Deposit Insurance
Corporation, nor any other government agency, and involve investment risks,
including the possible loss of principal. Return and value of an investment in
the underlying Fund will fluctuate so that shares, when redeemed, may be worth
more or less than their original cost. This brochure includes a prospectus which
describes in detail the Fund's objective, investment policies, risks, sales
charges, fees, and other matters of interest. Please read the prospectus
carefully before you invest or send money. The Fund is sponsored and distributed
by Flagship Funds Inc., One Dayton Centre, One South Main Street, Dayton, Ohio
45402-2030 (1-800-227-4648), which is not affiliated with a bank.
<PAGE>
[photo of man and two small children washing car]
A STRATEGIC APPROACH TO ACCUMULATING WEALTH
The Fund seeks to provide total return to its investors through a managed
portfolio that changes in response to current market conditions. This means that
the Fund will seek to take advantage of growth opportunities in rising markets
while attempting to avoid potential losses in declining markets. Under normal
market conditions, the Fund will invest in a widely diversified portfolio.
INVESTING IN THE FUND
You can buy shares of the Fund at the public offering price (including
applicable sales charge) with a minimum initial investment of $5,000. You may
make subsequent investments in the Fund for as little as $100. The Fund also
offers the convenience of automatic monthly investing.
DIVIDENDS
Dividends are declared and paid quarterly. Capital gains distributions, if any,
are declared and paid annually. Dividends and capital gains may be automatically
reinvested in additional shares of the Fund at no charge.
FUND FEATURES
The Fund features include:
(bullet) Portfolio diversification
(bullet) Dividends declared and paid quarterly
(bullet) Capital gains distributions, if any, paid annually
(bullet) Automatic reinvestment of dividends and capital gains available
(bullet) Qualified for Individual Retirement Accounts
(bullet) Direct deposit of dividends to bank accounts available
(bullet) Automatic investment plan
(bullet) Quarterly shareholder statements
(bullet) Annual and semiannual reports
The Golden Rainbow
A James Advised
Mutual Fund is a
professionally managed
and advised
investment vehicle
which seeks to help
you achieve your goals.
[photo of man and young child]
<PAGE>
[photo of young father, mother, child on beach]
JAMES INVESTMENT RESEARCH'S INVESTMENT PHILOSOPHY
James Investment Research's (JIR) investment philosophy is to seek appreciation
with preservation of capital and reduction of risk. Three major factors are
considered by JIR as they evaluate securities; value, neglect and management
confidence. They seek undervalued securities which are neglected by the markets
but show evidence of management confidence. When appropriate, JIR seeks to lower
risk by purchasing bonds which are rated "A" or better by Moody's Investor
Services or Standard and Poor's Corporation.
THE FUND'S ADVISOR
An investment advisor, JIR has approximately $1 billion in assets under
management for individuals, corporations and other institutions. The
professional analysts at JIR follow a top-down approach to investment research.
For example, they begin by analyzing general economic trends, such as the
overall direction of the economy, interest rates and inflation. These findings
help identify promising markets, industry sectors and specific stock issues.
THE FUND'S DISTRIBUTOR
The Fund's distributor and marketing agent is Flagship Funds Inc., a
broker/dealer registered with the Securities and Exchange Commission (SEC) and a
member of the National Association of Securities Dealers. Flagship Financial
Inc., an affiliate investment advisor registered with the SEC, is responsible
for general supervision of the administrative, compliance, accounting and
custodial functions of the Fund. Flagship Financial manages approximately $4.5
billion in fixed income securities for mutual funds and institutional clients.
[older couple outdoors]
<PAGE>
[Rainbow logo] THE GOLDEN RAINBOW
A JAMES ADVISED MUTUAL FUND(SM)
One Dayton Centre
One South Main Street
Dayton, Ohio 45402-2030
513-461-0332
800-414-7447
227-4648
For account information: 800-543-8721
(c) 1995, Flagship Funds Inc. GR-A-100 (10-26-95)
<PAGE>
Prospectus dated October 26, 1995
TABLE OF CONTENTS
Page
Fees and Expenses 2
Financial Highlights 3
The Fund and Its Objective 4
Investment Considerations and Risk Factors 4
How To Buy Shares 6
How To Redeem Shares 9
Exchange and Reinvestment Privilege 10
Systematic Withdrawal Plan 10
Direct Deposits 11
How Fund Shares Are Priced 11
Taxes 11
Distributions and Yield 12
About the Investment Manager 14
About the Distributor 14
General Information 15
Custodian and Transfer Agent 16
Counsel and Auditors 16
Additional Information 16
Application 17
FLAGSHIP
UTILITY INCOME
FUND(R)
Flagship Utility Income Fund(sm) (the "Fund") is a diversified series of
Flagship Admiral Funds Inc. (the "Corporation"), an open-end mutual fund with
five series outstanding. The Fund seeks to provide current income and
long-term growth of income and capital for individual and corporate investors
by investing primarily in the preferred and common stocks of companies in the
public utilities industry. The Fund will seek capital appreciation as a
secondary objective. No assurance can be given that the Fund will achieve its
objective.
This Prospectus sets forth concisely the information about the Fund that you
should know before investing. Please read and retain it for future reference.
A Statement of Additional Information dated October 26, 1995 containing
additional information about the Fund has been filed with the Securities and
Exchange Commission, and is hereby incorporated by reference into this
Prospectus. A copy of the Statement of Additional Information can be obtained
without charge by telephoning the Fund toll free at: 1-800-414-7447, or for
TDD, 1-800-360-4521.
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. SHARES IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF,
OR GUARANTEED OR ENDORSED BY ANY BANK SELLING THE SHARES, NOR ARE THEY
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER U.S. GOVERNMENT AGENCY. INVESTMENT RISKS INCLUDE
POSSIBLE LOSS OF PRINCIPAL. THE VALUE OF THE INVESTMENT AND ITS RETURN WILL
FLUCTUATE AND ARE NOT GUARANTEED. WHEN SOLD, THE VALUE OF THE INVESTMENT MAY
BE HIGHER OR LOWER THAN THE AMOUNT ORIGINALLY INVESTED.
<PAGE>
FEES AND EXPENSES
Class A Shares Class C Shares
---------------------------------------- --------------- ---------------
Shareholder Transaction Expenses
Maximum Front End Sales Load
Imposed on Purchase 4.20% None
Maximum CDSL Imposed on Redemptions
(if redeemed within 1 year of purchase) None 1.00%
Maximum Sales Charge Imposed on
Reinvested Dividend None None
Redemption Fee None None
Exchange Fee None None
Annual Fund Operating Expenses As a
Percentage of Average Net Assets After
Fee Waiver & Reimbursement Arrangements
Management Fee
(See "About the Investment Manager") .30% .30%
12b-1 Fee (See "About the Distributor") .40% .95%(a)
Other Expenses .45% .45%
Total Fund Operating Expenses 1.20% 1.75%
Total Fund Operating Expenses Without
Waiver or Reimbursement 1.52% 2.06%
Percentage based on actual fees incurred from the previous fiscal year
restated to reflect current fees and operating expenses. The manager, at its
discretion, anticipates waiving a portion of its management fee and providing
expense reimbursement for the Fund. Class C Shares are sold without a
front-end sales charge but their 12b-1 fees may cause long-term stockholders
to pay more than the economic equivalent of the maximum permitted front-end
sales charge.
(a) Of this amount, 0.75% is an asset based sales charge and 0.20% is a
service fee.
EXAMPLE OF EXPENSES
An investor in the Fund would pay the following dollar amount of expenses
on a $1,000 investment assuming: (1) 5% annual return and (2) Redemption at
the end of each period.
1 year 3 years 5 years 10 years
- ----------------- ------- ------- ------- ---------
Class A Shares $54 $78 $105 $181
Class C Shares $28 $55 $ 95 $206
$18* $55 $ 95 $206
* Expenses assuming no redemption within one year of purchase
The preceding fee tables are provided to assist investors in understanding
the various costs and expenses which may directly or indirectly be incurred
as a result of an investment in the Fund. The rules of the Securities and
Exchange Commission ("SEC") require that the Fund's maximum sales charge be
reflected in the fee table. As indicated in the expense table, the Fund
utilizes a declining sales load for Class A Shares and a contingent deferred
sales load ("CDSL") for Class C Shares. Long-term Class C shareholders could
pay more than the economic equivalent of the maximum front end sales charges
for Class A Shares. The Fund's 12b-1 plan and management fee are more fully
described herein. These expenses should not be considered a representation of
actual past or future expenses, as actual expenses may be greater or less
than those shown.
2
<PAGE>
FINANCIAL HIGHLIGHTS
The following information was derived from audited financial statements
and financial highlights audited by Deloitte & Touche LLP, independent
auditors. Their report on the financial statements and related notes appears
in the Statement of Additional Information.
PER SHARE INCOME AND CAPITAL CHANGES
The following table provides per share income and capital changes for a
share of capital stock of the Flagship Basic Value Fund outstanding from
August 26, 1983 (commencement of operations) to June 30, 1991, and of Class A
Shares of the Flagship Utility Income Fund ("Utility Fund") from July 1, 1991
to June 30, 1995, and of Class C Shares of the Utility Fund from July 6, 1993
to June 30, 1995. On June 4, 1992 the stockholders of the Flagship Basic
Value Fund approved a change in the fundamental investment objective and
policies of the Fund to that described in this Prospectus. As a result of the
fundamental change in the Fund, the financial information below is primarily
of historical value and has only limited relevance to the Fund's current
operations and performance as a utility fund. The Fund does not expect
portfolio turnover to exceed 100%.
<TABLE>
<CAPTION>
Income from
Investment Operations Less Distributions
------------------------------------ ------------------------------------
Net
Realized
&
Net Unreal- Divi-
Asset ized Total dends Net
Value Gains From From Distri- Asset
Begin- Net (Loss) Invest- Net butions Value
ning Invest- on ment Invest- From Returns Total End Total
Year Ended of ment Secur- Oper- ment Capital of Distri- of Return
June 30, Period Income ities ations Income Gains Capital butions Period (d)
- ---------- ------ ------ ------ ------ ------ ------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Class A
8/26/83(a)-
12/31/83 $16.67(a) $ .71 ($ .44) $ .27 $ .71 $ .71 $16.23 2.72%
01/01/84-
06/30/84 16.23 .88 (.97) (.09) .88 $.02 $.03 .93 15.21 (1.06)
1985 15.21 1.67 .81 2.48 1.66 1.66 16.03 17.23
1986 16.03 1.40 (.66) .74 1.37 1.37 15.40 4.64
1987 15.40 1.08 .11 1.19 1.09 1.09 15.50 7.95
1988 15.50 1.15 (3.12) (1.97) 1.18 1.18 12.35 (13.60)
1989 12.35 1.06 (1.27) (.21) .97 .97 11.17 (1.70)
1990 11.17 .80 (.50) .30 1.02 1.02 10.45 2.56
1991 10.45 .76 (.88) (.12) .82 .82 9.51 (1.14)
1992 9.51 .67 .69 1.36 .69 .69 10.18 14.69
1993 10.18 .67 .86 1.53 .67 .67 11.04 15.86
1994 11.04 .63 (1.34) (.71) .64 .64 9.69 (6.83)
1995 9.69 .64 .55 1.19 .64 .64 10.24 12.73
Class C
- ----------
1994(a) 11.05 .59 (1.39) (.80) .56 .56 9.69 (7.52)
1995 9.69 .59 .55 1.14 .59 .59 10.24 12.14
<CAPTION>
Ratios/Supplemental Data
-----------------------------------------------------
Ratio of
Net
Ratio of Investment
Net Assets Expenses Income to
End of to Average Average Portfolio
Year Ended Period Net Net Turnover
June 30, (000's) Assets (b) Assets (b) Rate (c)
- ---------- ---------- ---------- ---------- ------------
Class A
8/26/83(a)-
12/31/83 $ 64,665 1.03% 12.51% 28.78%
01/01/84-
06/30/84 193,602 1.03 10.96 83.25
1985 241,121 1.02 10.68 128.80
1986 307,604 .96 8.76 182.89
1987 236,607 .99 7.00 315.96
1988 84,749 1.00 7.88 186.30
1989 32,692 1.23 9.03 120.45
1990 16,934 1.21 7.29 148.46
1991 12,830 1.48 7.79 116.16
1992 6,050 1.42 6.72 58.50
1993 32,819 1.03 6.31 154.12
1994 26,921 .94 5.92 193.14
1995 25,000 1.00 6.52 158.55
Class C
- ----------
1994(a) 5,129 1.46 5.69 193.14
1995 5,501 1.54 6.01 158.55
</TABLE>
(a) Commencement of investment operations.
(b) Annualized.
(c) Annualization is not appropriate.
(d) The total returns shown do not include the effects of front-end or
contingent deferred sales loads and are annualized in first year after
commencement of investment operations.
Note: All amounts have been adjusted for a 3-for-1 stock split which occurred
on July 1, 1992.
The Fund's annual report for the most recent fiscal year includes a
discussion of fund performance. It is available upon request and without
charge.
3
<PAGE>
THE FUND AND ITS OBJECTIVE
The Fund is a professionally managed, diversified series of an open-end
investment company. The Fund's objective is to seek "current income and
long-term growth of income and capital." To the extent consistent with the
primary investment objective, the Fund will seek capital appreciation as a
secondary objective. The Fund will also seek to maximize the amount of its
qualifying dividend income under Federal income tax laws. Under current
Federal income tax laws, qualifying dividends paid by the Fund will qualify
for the 70% dividends-received deduction for corporations. The Fund's
investment objectives are fundamental and cannot be changed without
authorization by a vote of a majority of the outstanding shares of the Fund.
To accomplish its objective, the Fund intends to invest at least 65% of
its total assets in the securities, including preferred and common stock, of
companies in the public utilities industry, including companies principally
engaged in the production, transmission or distribution of electric energy,
gas, water or communications services such as telephone or telecommunications
services, or in solid waste disposal. The Fund also may seek to enhance its
return by selling options on portfolio securities. However, the income
generated from such options would not qualify for the 70% dividends-received
deduction.
The Manager will continuously monitor the issuers of securities in which
the Fund is likely to invest and will diversify the Fund's portfolio among
issues that the Manager believes will best accomplish the Fund's objective.
As to preferred and debt securities, the Fund will limit its holdings to
issues rated, at the time of purchase, as investment grade by either Moody's
Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings Group(R)
("S&P"), Duff and Phelp ("D&P"), or Fitch Investors Service ("Fitch")
respectively or other issues believed by the Manager to be of at least
comparable quality.
THE UTILITIES INDUSTRY
As a fundamental policy, the Fund will concentrate its investments with at
least 65% of its total assets invested in companies in the public utilities
industry. As a result of this concentration policy, the Fund's performance
will depend in part on conditions in the public utilities industry. Utility
stocks have traditionally been popular among more conservative investors,
because they have generally paid above-average dividends. However, utility
stocks can still be affected by the risks of the stock market, as well as by
special factors specific to public utility companies.
Rates of return of utility companies generally are subject to review and
limitation by state public utilities commissions and tend to fluctuate with
marginal financing costs. Rate changes, however, ordinarily lag behind the
changes in financing costs, and thus can favorably or unfavorably affect the
earnings or dividend pay-outs on utilities stocks depending upon whether such
rates and costs are declining or rising.
INVESTMENT CONSIDERATIONS AND RISK FACTORS
INVESTMENT RISKS
Utility companies in the United States are generally subject to
substantial regulation intended to ensure appropriate standards of review and
adequate capacity to meet public demand. The nature of regulation in the
utility industries continues to evolve in the United States. Although certain
companies may develop more profitable opportunities, others may be forced to
defend their core business and may be less profitable. Electric utility
companies have historically been subject to the risks associated with
increases in fuel and other operating costs, high interest costs on
borrowings, costs associated with compliance with environmental, nuclear
facility and other safety regulations and changes in the regulatory climate.
Increased scrutiny of electric utilities might result in higher costs and
higher capital expenditures, with the risk that regulators might disallow
inclusion of these costs in rate authorizations. Increasing competition due
to past regulatory changes in the telephone communications industry continue,
and whereas certain companies have benefited, many companies may be adversely
affected in the future. Gas transmission companies and gas distribution
companies continue to undergo significant changes as well. Many companies
have diversified into oil and gas exploration and development, making returns
more sensitive to energy prices. In addition, several large suppliers have
recently suffered financial difficulties, partly as a result of being locked
into long-term fixed-price contracts. Water supply utilities are in an
industry that is highly fragmented due to local ownership and generally the
companies are more mature and are experiencing little or no per capita volume
growth. There can also be no assurance that regulatory policies or accounting
standards changes will not negatively affect utility companies' earnings or
dividends. The telephone and telecommunications industry, while undergoing
rapid growth in some segments, is also subject to regulatory changes and
numerous competitive pressures as technologies are developed. It also
requires substantial capital for new technology. Under market conditions that
are unfavorable to the public utilities industry, the Fund may temporarily
significantly reduce its investment in that industry. Some public utility
companies are facing increased competition, which may reduce their profits.
All of these factors are subject to rapid changes, which may affect utility
companies independently from the stock market as a whole.
BORROWING
The Fund may borrow from time to time on a temporary basis in amounts up
to 25% of its net assets. Such borrowings are called leverage, and while they
provide opportunity for greater returns than if borrowing had not occurred,
to the extent the interest on the borrowings exceeds the interest on
dividends received, there is a risk that the income to the Fund will be less
than if the
4
<PAGE>
borrowing had not been made. To the extent the Fund invests the proceeds from
borrowings in equity or fixed income securities, the net asset value of the
Fund may appreciate or depreciate more rapidly than a fund that does not
utilize leverage. The Adviser will only cause the Fund to borrow when there
is an expectation it will benefit the Fund. Borrowing by the Fund would cause
a pro rata portion of the dividends-received deduction with respect to the
Fund's dividends to be disallowed. Accordingly, the Fund does not intend to
borrow to any significant extent.
RESTRICTED SECURITIES
The Fund may invest up to 10% of its assets (valued at the purchase date)
in illiquid securities, including securities that are subject to restrictions
on disposition under the Securities Act of 1933 or for which market
quotations are not readily available, including repurchase agreements in
excess of seven days. Under guidelines adopted by the SEC, the Manager is
permitted to determine whether certain securities are liquid pursuant to
procedures approved by the Fund's Board of Directors. Due to the less liquid
nature of restricted securities, if the Fund were forced to sell such
securities, it might have to do so at a disadvantageous price.
HEDGING
In order to hedge the risks of equity market and interest rate changes,
the Fund may utilize various publicly or privately traded instruments
including options, futures contracts or options on futures contracts or stock
or financial index options or futures thereon. The range of permissible
hedging activities may well change over time as new instruments are created
or regulatory changes occur. In addition, the Fund may utilize such contracts
or options as a means of increasing the yield and/or total return of the
Fund's portfolio. Such trading strategies are a generally accepted part of
portfolio management engaged in by many mutual funds. The Fund's use of
futures and options on futures would in all cases be consistent with
applicable regulatory requirements and in particular, the rules and
regulations of the Commodity Futures Trading Commission with which the Fund
must comply in order not to be deemed a commodity pool operator within the
meaning and intent of the Commodity Exchange Act and any applicable state
laws. Hedging instruments have risks associated with them including possible
failure of delivery, illiquidity and market risks.
RISKS
In addition to the risks described above, the use of options and futures
transactions for hedging purposes entails certain other risks. In particular,
the variable degree of correlation between price movement of futures
contracts and price movements in the position being hedged creates the
possibility that losses on the hedge may be greater than gains in the Fund's
position. In addition, futures transactions markets may not be liquid in all
circumstances. As a result, in volatile markets, the Fund might not be able
to close out a transaction without incurring losses substantially greater
than the initial deposit. Although the contemplated use of these contracts
should tend to minimize the risk of loss due to the decline in the value of
the hedged portion, at the same time they tend to limit any potential gain
which might result from an increase in value of such position. The ability of
the Fund to hedge successfully would depend on the Manager's ability to
forecast pertinent market movements, which cannot be assured. Furthermore,
the Fund's holding period in its portfolio assets could be suspended during
the period in which risks were hedged. As described below in "Taxes
- --Dividends", the Fund must satisfy certain holding period requirements to be
eligible for the dividends-received deduction. Finally, the daily deposit
requirements in futures contracts would create an ongoing greater potential
financial risk than would purchases of options, where the exposure is limited
to the cost of the initial premium. Losses due to hedging transactions would
reduce net asset value.
QUALITY
The Fund will invest in preferred stocks and debt obligations which are
rated at the date of purchase as investment grade, which means that such
securities will be rated no lower than Baa by Moody's or BBB by S&P or BBB by
D&P, or BBB by Fitch. Securities rated Baa by Moody's, BBB by S&P or Fitch or
D&P generally are regarded as having an adequate capacity to pay interest and
repay principal. However, such securities lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Generally, the Fund will not invest in securities rated lower than Baa by
Moody's or BBB by S&P, or Fitch, or D&P, respectively, but may do so if the
Manager believes the financial condition of the issuer or other available
protections reduce the risk to the Fund. For example, the Fund may invest in
such a security if the Manager believes the issuer's assets are sufficient to
insure that the issuer can repay its outstanding obligations. The Fund will
not invest more than 5% of its assets in securities rated below investment
grade. The Fund may also invest in unrated securities if the Manager
determines that such securities present attractive investment opportunities
and are of comparable quality to the other securities in which the Fund may
invest.
OTHER POLICIES
Among other things, the Fund may not make loans (other than repurchase
agreements), except to the extent the purchase of debt obligations of any
type are considered loans, and except that the Fund may lend portfolio
securities, not exceeding 5% of the value of its assets, pursuant to SEC
requirements and the exchanges on which such securities are traded; issue
securities senior to its stock; or invest more than 5% of the value of its
assets in repurchase agreements or when-issued or delayed delivery
transactions.
5
<PAGE>
HOW TO BUY SHARES
CONTINUOUS OFFERING
Shares of the Fund are sold in a continuous offering at the public
offering price, which is equal to the net asset value per share next
determined after a purchase order is received by the Fund (see "How Fund
Shares are Priced") plus a sales charge which, at the election of the
purchaser, may be imposed (i) at the time of purchase (Class A Shares) or
(ii) on a contingent deferred basis (Class C Shares). When placing purchase
orders, investors should specify whether the order is for Class A or Class C
Shares. All purchase orders that fail to specify a Class will automatically
be invested in Class A Shares. Purchases may be made as described below under
"Purchase Through Dealers" and "Purchase by Check." The Fund reserves the
right to reject any order for shares. The following table shows the total
sales charges or underwriting discounts and dealer concessions for each
amount.
CLASS A SHARES
<TABLE>
<CAPTION>
Total Sales Charge
------------------------------
Percentage of Percentage of Dealer Concession or Agency
Size of Transaction Offering Net Asset Commission as Percentage
At Public Offering Price Price Value of Offering Price
- -------------------------- ------------- ------------- ---------------------------
<S> <C> <C> <C>
Less than $ 50,000 4.20% 4.38% 3.70%
$ 50,000 to $ 100,000 4.00 4.18 3.50
$ 100,000 to $ 250,000 3.50 3.65 3.00
$ 250,000 to $ 500,000 2.50 2.61 2.00
$ 500,000 to $1,000,000 2.00 2.09 1.50
$1,000,000 to $2,000,000 .50 .52 .30
$2,000,000 and over -- -- --*
</TABLE>
*Finder's fee of .15% for amounts over $2,000,000 (subject to repayment if
shares are redeemed in less than one year).
No sales charge will be assessed on purchases by stockholders who owned
shares of the fund on June 4, 1992.
CLASS C SHARES
Class C Shares are offered at net asset value, without initial sales charge,
subject to a continuing 0.95% annual distribution fee (of which .75% is an
asset based sales charge and .20% is a service fee) and a CDSL of 1% if
redeemed within one year of the purchase date. The first year of the annual
distribution fee is paid to the Distributor, and in subsequent years 0.75% is
paid to the dealer and 0.20% is paid to the Distributor.
The minimum purchase required to open an account in the Fund is $3,000.
For investments by Individual Retirement Accounts or Keogh accounts, the
minimum initial purchase is $1,000. Additional purchases of $50 or more may
be made at any time. Any order in an amount of $1,000,000 or more must be for
Class A Shares because it will ordinarily be more advantageous for an
investor making an investment of such size to purchase Class A Shares. The
Fund executes purchase orders immediately prior to declaration of the daily
dividend as of the close of business on the day the order is received.
Payments by wire will begin to earn dividends on the business day that the
Fund's custodian bank receives payment for your shares. All other forms of
payment will begin to earn dividends on the subsequent business day. When you
redeem shares, you will continue to receive dividends up to, but not
including, payment date. See "How to Redeem Shares" and "Distributions and
Yield." Because dividends do not begin until payment is received, you should
request your dealer to forward payment promptly. To the extent your
securities account or bank account is charged for your purchase before the
Fund receives funds, your dealer or bank may be earning interest on your
funds.
At various times the Distributor may implement programs whereby a dealer's
sales force may be eligible for nominal awards or whereby the Distributor
will reallow to any dealer that sponsors sales programs conforming to
criteria established by the Distributor up to an additional 0.50% of the
sales generated by the dealer (but never, together with the commission, more
than the total sales charge) at the public offering price during such program
(see "About the Distributor" below). These programs will not affect the price
investors pay for shares or the amount that the Fund will receive from such
sale. A salesperson and any other person entitled to receive compensation for
selling Fund shares may receive different compensation for selling one
particular class of shares over another. Quantity discounts may be modified
or terminated at any time. For more information about quantity discounts,
contact your dealer or the Distributor. Where a dealer receives the total
sales charge, such dealer may be deemed to be an underwriter.
PURCHASE THROUGH DEALERS
To purchase shares through a dealer, you should request your dealer to
transmit an order to Boston Financial for the appropriate number of shares
and make arrangements with your dealer to transmit funds for the purchase.
Your dealer may require you to fill out an Application Form or similar
application.
The public offering price is based on net asset value and includes the
applicable sales charge. Because the Fund determines net asset value for each
series daily as of the close of the regular trading session (normally 4:00
p.m. New York time) on the New York
6
<PAGE>
Stock Exchange on each day that the Exchange is open for trading, your dealer
must transmit your order to the Fund prior to such time in order for your
order to be executed at the public offering price based on the net asset
value to be determined that day. Any change in price due to the failure of
the Fund to receive an order prior to the close of the Exchange must be
settled between you and your dealer. Similarly, if your dealer fails to
provide timely payment (normally three business days after the order is
received), the Distributor may sell the shares to other investors at the then
current offering price. If the Distributor does so, the dealer will be
responsible to the Distributor for any loss which the Distributor incurs in
connection with the transaction, and you must settle with your dealer your
rights to shares at the price on the day you ordered them.
PURCHASE BY CHECK
To purchase shares by check, please mail the amount you wish to invest
and, in the case of a new account, a completed Application Form to: Boston
Financial, Attention: Flagship Utility Income Fund, P.O. Box 8509, Boston, MA
02266-8509. Checks should be made payable to Flagship Utility Income Fund.
Orders will be priced at the public offering price based on the net asset
value (including the applicable sales charge) next determined after the order
is received and will be executed on the day the check is received.
AUTOMATIC INVESTMENT PLAN
The Fund offers current stockholders who receive a quarterly statement
from Flagship the convenience of automatic monthly investing. On the tenth
day of each month the amount you specify ($50 minimum) will be transferred
from your bank to the Fund. To initiate the automatic investment plan,
complete the application form and attach a voided check.
The Fund pays the cost associated with these transfers, but reserves the
right, upon ninety (90) days written notice, to make reasonable charges for
this service. Your bank may charge for debiting your account. Stockholders
can change the amount or discontinue their participation in the plan by
written notice to Boston Financial thirty (30) days prior to fund transfer
date. Because a sales charge is applied on new Class A Shares purchased, it
would be disadvantageous to purchase Class A Shares while also making
systematic withdrawals.
DESCRIPTION OF CLASSES
Currently the Fund offers two classes of shares, Class A Shares and Class
C Shares. Other classes of shares are not presently available, but may be
offered in the future. The Fund is authorized to offer up to four classes of
shares which may be purchased at a price equal to their net asset value per
share, plus (for certain classes) a sales charge (discussed below) which, at
the election of the purchaser, may be imposed either (i) at the time of
purchase (the "Class A Shares") or (ii) on a contingent deferred basis (the
"Class B Shares" or the "Class C Shares"). The four classes of shares each
represent an interest in the same portfolio of investments of the Fund and
have the same rights, except (i) Class B and Class C Shares bear the expenses
of the deferred sales arrangement and any expenses (including a higher
distribution services fee) resulting from such sales arrangement, (ii) each
class that is subject to a distribution fee has exclusive voting rights with
respect to those provisions of the Fund's Rule 12b-1 distribution plan which
relate only to such class and (iii) the classes have different exchange
privileges. Additionally, Class B Shares will automatically convert into
Class A Shares after a specified period of years as described below (see
"Shares of the Fund " in the Statement of Additional Information). The net
income attributable to Class B and Class C Shares and the dividends payable
on Class B and Class C Shares will be reduced by the amount of the higher
distribution services fee and certain other incremental expenses associated
with the deferred sales charge arrangement. The net asset value per share of
Class A Shares, Class B Shares, Class C Shares and Class Y Shares is expected
to be substantially the same, but it may differ from time to time.
1. Class A Shares. The public offering price of Class A Shares is equal to
net asset value plus an initial sales charge that is a variable percentage of
the offering price depending on the amount of the sale. Net asset value will
be determined as described in this Prospectus under "How Fund Shares are
Priced". The net assets attributable to Class A Shares are subject to an
ongoing distribution services fee (see "About the Distributor" below).
Purchasers of Class A Shares may be entitled to reduced sales charges through
a combination of investments, rights of accumulation or a Letter of Intent
even if their current investment would not normally qualify for a quantity
discount (see "Reduced Sales Charges" below). Class A Shares also qualify for
certain exchange and reinvestment privileges as described in "Exchange And
Reinvestment Privilege" below. The investor or the investor's broker or
dealer is responsible for promptly forwarding payment to the Fund for shares
purchased.
2. Class C Shares. Class C Shares are sold at net asset value (see "How
Fund Shares are Priced") without a sales charge at the time of purchase.
Instead, the Class C Shares are subject to a 1% CDSL if they are redeemed
within one year after purchase. The net assets attributable to Class C Shares
are subject to an ongoing distribution services fee of 0.95% (see "About the
Distributor" below). The Class C Shares have no conversion rights.
The CDSL will not be imposed on amounts representing increases in net
asset value above the initial purchase price. Additionally, no charge will be
assessed on Class C Shares derived from reinvestment of dividends or capital
gains distributions. The CDSL will be waived (i) on redemption of shares
following the death of a shareholder, (ii) on certain redemptions in
connection with IRAs and other qualified retirement plans, and (iii) when
Class C Shares are exchanged for Class C Shares of other Flagship funds
distributed by the Distributor (see "Exchange And Reinvestment Privilege"
below). In the case of an exchange, the length of time that the investor held
the original Class C Shares is counted towards satisfaction of the period
during which a deferred sales charge is imposed on the Class C Shares for
which the exchange was made.
Class B and Y Shares are not presently available. They are described fully
in the Fund's Statement of Additional Information.
7
<PAGE>
GENERAL
All funds will be fully invested in full and fractional shares. The
issuance of shares is recorded on the books of the Fund, and, to avoid
additional operating costs and for investor convenience, share certificates
will not be issued, except by special arrangement. The Fund's transfer agent
will send to each stockholder of record a confirmation of each purchase and
redemption transaction (including the aggregate number of shares owned after
such transaction) by such stockholder and a monthly statement summarizing
purchases, redemptions and dividend accruals and distributions in the account
during the prior month.
REDUCED SALES CHARGES
During the continuous offering, the Distributor will offer several reduced
sales charge programs as described below.
1. CUMULATIVE PURCHASE DISCOUNT (CLASS A SHARES ONLY)
Whenever an individual stockholder purchases Class A Shares of the Fund,
such individual stockholder may aggregate his holdings of all Class A Shares
in any other open-end mutual fund subject to a front-end sales charge
distributed by the Distributor and any current purchases of Class A Shares to
determine the applicable sales charge. A reduced sales charge will be imposed
if the aggregated amount qualifies for one according to the rate schedule. An
individual stockholder may also aggregate the holdings of a spouse, any of
their children and parents in the same fashion when making a particular
purchase. Finally, for purposes of determining the applicable sales charge,
trusts and other fiduciaries may aggregate the holdings of each trust estate
or other fiduciary account in the same fashion even if the beneficiaries are
unrelated. Any stockholder may also combine his holdings of Class A Shares
subject to a front-end sales charge and current purchases of Class A Shares
in all of such funds distributed by the Distributor in order to qualify for a
reduced sales charge on any particular purchase.
2. LETTER OF INTENT (CLASS A SHARES ONLY)
A stockholder may also qualify for reduced sales charges by sending to the
Fund (within 90 days after the first purchase desired to be included in the
purchase program) a signed, non-binding letter of intent to invest, during a
13-month period, an amount sufficient to qualify for a reduced sales charge.
A single letter may be used for spouses, their children and parents or any
single trust estate or other fiduciary account. All investments in the Fund
or any other mutual fund distributed by the Distributor which is sold with a
sales charge count toward the indicated goal. Once the Distributor receives
the required letter of intent, it will apply to qualifying purchases within
the 13-month period the sales charge that would be applicable to a single
purchase of the total amount indicated in the letter. During the period
covered by the letter of intent, 5% of the shares purchased will be
restricted until the stated goal is reached. If the intended purchase program
is not completed within the 13-month period, the sales charge will be
adjusted upward as appropriate and a sufficient number of restricted shares
will be redeemed by the Fund if the stockholder does not pay the increased
sales charge.
3. BROKER-DEALER AND FLAGSHIP EMPLOYEES
In view of the reduction of distribution expenses associated with sales of
the Fund's shares to registered representatives and full-time employees of
broker/dealers who have signed Selling Agreements with the Distributor, such
individuals are permitted to purchase shares of the Fund at net asset value
for their personal accounts. The purchaser must certify to the Fund that
certain qualifications have been met and agree to certain restrictions (such
as an investment letter) in order to take advantage of this program. For
similar reasons, shares of the Fund may be purchased at net asset value and
in amounts less than the minimum purchase price by officers, directors and
full-time employees of the Fund, the Distributor and the Manager. For this
purpose, the terms "registered representatives of broker/dealers who have
signed Dealer Agreements with the Distributor", "officers", "directors" and
"employees" include such persons' spouses, children and parents, as well as
the trustee or custodian of any qualified pension or profit sharing plan or
IRA established for the benefit of such officer, director, employee, spouse,
child or parent.
4. GROUP PURCHASES (CLASS A SHARES ONLY)
Members of a qualified group may purchase shares of the Fund at a reduced
sales charge applicable to the group as a whole, if such purchases are made
in an amount and manner acceptable to the Fund. The sales charge, if any, is
based on the aggregate dollar value of shares purchased and still owned by
the group, plus the current purchase amount. Members of a qualified group may
purchase shares at net asset value (without sales charge) where the amount
invested is documented to the Fund to be proceeds from distributions of a
unit investment trust. Shares of the Fund may be purchased at net asset value
(without sales charge) by tax-qualified employee benefit plans and by trust
companies and bank trust departments for funds over which they exercise
exclusive discretionary investment authority for which they charge customary
fees and which are held in a fiduciary, agency, advisory, custodial or
similar capacity.
A "qualified group" is one which (i) has previously been in existence,
(ii) has a primary purpose other than acquiring Fund shares at a discount and
(iii) satisfies investment criteria described in the Prospectus which enables
the Distributor to realize economies of scale in its costs of distributing
shares. A qualified group must have more than 10 members and must agree to
comply with certain administrative requirements relating to its group
purchases.
Under such purchase plans, subsequent investments will continue until such
time as the investor notifies his group to discontinue further investments.
There may be a delay between the time a member's funds are received by the
group and the time the money reaches the Fund because of a qualified group's
remittance procedures. Unless otherwise noted above, the investment in the
Fund will be made at the public offering price based on net asset value
determined on the day that the funds are received in proper form by the Fund.
8
<PAGE>
5. REDEMPTIONS FROM UNRELATED FUNDS
Shares of the Fund may be purchased at net asset value where the amount
invested is documented to the Fund to be proceeds from the redemption (within
one year of the purchase of Fund shares) of shares of unrelated investment
companies on which the investor has paid initial or contingent deferred sales
charges, or is no longer subject to a CDSL.
6. WRAP FEE ACCOUNTS
Shares of the Fund may be purchased at net asset value by broker/dealers
on behalf of wrap fee client accounts for which the broker/dealer charges a
fee and performs advisory, custodial, recordkeeping or other services.
LETTER OF INTENT ESCROW PROVISION (CLASS A SHARES ONLY)
It is understood that 5% of the dollar amount checked on the application
will be held in a special escrow account. These shares will be held by the
escrow agent subject to the terms of the escrow. All dividends and capital
gains distributions on the escrowed shares will be credited to the
Shareholder's Account in shares. If the total purchases, less redemptions by
the shareholder, his spouse, children and parents, equal the amount specified
under this Letter, the shares held in escrow will be deposited to the
Shareholder's Open Account or delivered to the shareholder or to his order.
If the total purchases, less redemptions, exceed the amount specified under
this Letter and an amount which would qualify for a further quantity
discount, a retroactive price adjustment will be made by the Distributor and
the dealer through whom purchases were made pursuant to this Letter of Intent
(to reflect such further quantity discount). The resulting difference in
offering price will be applied to the purchase of additional shares at the
offering price applicable to a single purchase of the dollar amount of the
total purchases. If the total purchases less redemptions are less than the
amount specified under this Letter, the Shareholder will remit to the
Distributor an amount equal to the difference in the dollar amount of sales
charge actually paid and the amount of sales charge which would have applied
to the aggregate purchases if the total of such purchases had been made at a
single time. Upon such remittance the shares held for the shareholder's
account will be deposited to his Account or delivered to him or to his order.
If within 20 days after written request by the Distributor such difference in
sales charge is not paid, the Distributor is hereby authorized to redeem an
appropriate number of shares to realize such difference. The Distributor is
hereby irrevocably constituted under this Letter of Intent to effect such
redemption as agent of the Shareholder. The shareholder or his dealer will
inform Boston Financial that this Letter is in effect each time a purchase is
made.
HOW TO REDEEM SHARES
Upon receipt by Boston Financial through one of the methods discussed
below of a proper redemption request (indicating your name and account number
and the dollar or share amount to be redeemed from the particular series),
the Fund will redeem shares at their next determined net asset value. See
"How Fund Shares are Priced." Proceeds of redemptions of recently purchased
shares may be delayed for 15 days or more, pending collection of funds for
the initial purchase. Neither the Distributor nor the Fund charges a fee or a
commission for redemption. For further information on redemptions or
exchanges, please contact your dealer or call Boston Financial toll free at:
1-800-225-8530, or for TDD, 1-800-360-4521.
REDEMPTION THROUGH DEALERS
You may redeem shares through any dealer which has a Selling Agreement
with the Distributor. Your dealer is responsible for transmitting the
redemption request to Boston Financial by the close of trading on the New
York Stock Exchange on a particular day in order for you to receive the
redemption price based upon the net asset value per share determined that
day. If the dealer fails to do so, you will receive the redemption price next
calculated after your request and any other materials are received and your
entitlement to any prior day's redemption price must be settled between you
and your dealer. Your dealer may charge a service fee for handling your
redemption request.
OTHER REDEMPTION METHODS
You may redeem shares by telephone (provided that you did not reject the
telephone redemption service on your application) toll free at:
1-800-225-8530, or for TDD, 1-800-360-4521. For funds to be wired ($5,000
minimum on wires) the completed bank account information portion of the
telephone redemption section in the application must already be on file with
Boston Financial. Proceeds will be wired normally on the next business day
Boston Financial is open for business. For all other redemptions your
redemption request must be submitted in writing to Boston Financial at the
address below. The Fund's purchase application relieves the Fund and the
Transfer Agent (Boston Financial) of any liability for loss, costs, or
expenses arising out of telephone redemptions that are reasonably believed to
be genuine. The Fund will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine, and if it does not, it
may be liable for any losses due to fraudulent or unauthorized instructions.
The procedures include requiring a form of personal identification prior to
acting on telephone instructions, recording such instructions, and providing
written confirmation of such transactions.
Payment will be made by sending a check to you at the address on your most
recent Application Form. Checks will normally be sent out within one business
day, but in no event more than the required settlement period as set by
regulations following receipt
9
<PAGE>
of the redemption request in proper form. For redemption requests over
$50,000, or if the registration on your account has been changed within the
past 60 days, or if the redemption proceeds are to go to an address other
than the address of record, the Fund must receive a letter of instruction
signed by all persons authorized to sign for the account exactly as it is
registered. All signatures must be guaranteed (see below). The letter must be
mailed to: Boston Financial, Attention: Flagship Utility Income Fund, P.O.
Box 8509, Boston, MA 02266-8509.
SIGNATURE GUARANTEE
Boston Financial may require a signature guarantee on certain written
transaction requests. A signature guarantee may be executed by any "eligible"
guarantor. Eligible guarantors include member firms of a domestic stock
exchange, commercial banks, trust companies, savings associations and credit
unions as defined by the Federal Deposit Insurance Act. You should verify
with the institution that they are an acceptable (eligible) guarantor prior
to signing.
FURTHER INFORMATION
If you redeem all shares owned, the dividends declared during the month
through the time of redemption will be included in the remittance. Due to the
relatively high cost of handling small investments, the Fund reserves the
right to involuntarily redeem, at net asset value, the shares of any
stockholder whose redemptions cause the value of its holdings to have a value
of less than $1,000. Before the Fund redeems such shares and sends the
proceeds to the stockholder, the stockholder will be given written notice
that the value of the shares in the account is less than the minimum amount
and will be allowed 30 days to make an additional investment in an amount
which will increase the value of his holdings to at least $1,000.
Shares purchased other than by Federal Funds wire or bank wire may not be
redeemed by telephone until 15 calendar days after the purchase of such
shares, but may be redeemed pursuant to the ordinary redemption procedure
during such period. For further details on redemption, contact your dealer or
call Boston Financial toll free at: 1-800-225-8530, or for TDD,
1-800-360-4521.
EXCHANGE AND REINVESTMENT PRIVILEGE
Any Class A Shares which have been registered in a stockholder's name for
at least 15 calendar days, except shares of money market funds, may be
exchanged on the basis of relative net asset value per share for Class A
Shares of any other tax exempt, U.S. Government, or taxable fixed-income fund
or series thereof distributed by the Distributor in any state where such
exchange may legally be made. Similarly, Class C Shares may be exchanged for
Class C Shares of any other fund or series thereof distributed by the
Distributor which are sold pursuant to a similar CDSL arrangement on the
basis of relative net asset value per share without the payment of any CDSL
otherwise due upon redemption of Class C Shares. For purposes of computing
the CDSL payable upon the redemption of shares acquired through such an
exchange, the period of time for which the investor held the Class C Shares
will be counted toward the holding period applicable to the Class C Shares
which the investor acquired through the exchange. In order to qualify for the
exchange privilege, it is required that the shares being exchanged have a net
asset value of at least the minimum amount required to make an initial
investment in the fund for which the exchange is being made. Shares must be
on deposit at Boston Financial before the exchange can be made. Stockholders
of the Fund should obtain and read a current prospectus of the fund into
which the exchange is to be made before effecting an exchange.
The exchange privilege may be modified or terminated at any time. The Fund
reserves the right to limit the number of times an investor may exercise the
exchange privilege. To exercise the exchange privilege, you must either
contact your dealer or broker, who will advise the Fund of the exchange, or
complete the Exchange Application available from Boston Financial or the
Distributor and submit it to Boston Financial. If you have certificates for
any shares being exchanged, you must surrender such certificates at the time
of exchange.
A stockholder who has redeemed shares may repurchase at net asset value,
without a sales charge, shares of the Fund or shares of other funds with a
sales charge distributed by the Distributor in any amount between the stated
minimum investment amount of such fund and the proceeds of redemption. The
reinvestment request must be received by Boston Financial within 1 year of
the redemption and this feature may be exercised by a stockholder only twice
per calendar year.
An exchange between funds pursuant to the exchange privilege is treated as
a sale for federal income tax purposes and, depending upon the circumstances,
a capital gain or loss may be realized. However, stockholders who exchange
between funds within 90 days of the initial purchase date may not take as a
loss the amount of the sales charge paid. Exercising the reinvestment
privilege will not affect the character of any gain or loss realized on the
redemption for federal income tax purposes, except that if the redemption
resulted in a loss, the reinvestment may result in the loss being disallowed
under the "wash sale" rules. For further details on exchanges or
reinvestment, please contact your dealer or call Boston Financial toll free
at: 1-800-225-8530, or for TDD, 1-800-360-4521.
SYSTEMATIC WITHDRAWAL PLAN
Accounts with a value greater than $10,000 may establish a Systematic
Withdrawal Plan ("SWP") and receive monthly or quarterly checks for $50 or
more as specified by the shareholder. To establish a SWP all distributions
must be in the form of shares. Such payments are drawn from the proceeds of
the redemption shares held in the shareholder's account. To the extent that
redemptions
10
<PAGE>
for a SWP exceed dividend income reinvested in the account, such redemptions
will reduce and may ultimately exhaust the number of shares in the account.
To initiate this service, shares having an aggregate value of at least
$10,000 must be held by the Shareholder Services Agent. Maintaining a SWP
concurrently with an investment program would be disadvantageous because of
the sales charges included in share purchases. Therefore, a shareholder
should not have a SWP in effect at the same time he is making recurring
purchases of shares of the Fund. The Shareholder by written instructions to
Boston Financial may withdraw from the program, change the payee or change
the dollar amount of each payment. Boston Financial may charge the account
for services rendered and expenses incurred beyond those normally assumed by
the Fund with respect to the liquidation of shares. No charge is currently
assessed against the account, but could be instituted by Boston Financial on
60 days' notice in writing to the shareholder in the event that the Fund
ceases to assume the cost of these services. The Fund reserves the right to
amend or terminate the SWP on thirty days' notice.
DIRECT DEPOSITS
Shareholders can have dividends or SWP redemption proceeds deposited
electronically into their bank accounts. Under normal circumstances, direct
deposits are credited to the account on the second business day of the month
following normal payment. In order to utilize this option, the shareholder's
bank must be a member of Automated Clearing House. In addition, the
shareholder must (1) fill out the appropriate section of the application
attached to this Prospectus and (2) include with the completed application a
voided check from the bank account into which redemptions are to be
deposited. Once Boston Financial has received the application and the voided
check, such shareholder's designated bank account, following any dividend or
redemption, will be credited with the proceeds. Once enrolled in direct
deposit, a shareholder may terminate participation at any time by written
notice to Boston Financial.
HOW FUND SHARES ARE PRICED
For purposes of pricing purchases and redemptions, the net asset value of
each class of shares of the Fund is separately determined by Boston Financial
as of the close of the regular trading session on the New York Stock Exchange
on each day that the Exchange is open for business (and will also be computed
as of 4:00 p.m., New York time, on any other day on which purchase or
redemption orders are received and there is a sufficient degree of trading in
the portfolio securities of the Fund such that net asset value per share
might be affected). Net asset value per share of the Fund is calculated (to
the nearest cent) by adding the value of all securities and other assets,
subtracting all of the liabilities and dividing the remainder by the number
of shares outstanding at the time the determination is made.
Assets of the Fund for which market quotations are readily available are
valued at market value. Securities with remaining maturities of 60 days or
less are valued at their amortized cost under rules adopted by the SEC. Other
assets and securities are valued at their fair value as determined in good
faith under procedures established by the Directors of the Fund.
TAXES
The following discussion is a general summary of certain of the current
federal income tax laws regarding the Fund and its investors. The discussion
does not purport to deal with all of the federal income tax consequences
applicable to the Fund, or to all categories of investors who may be subject
to special rules (for example, foreign investors). Investors should consult
their own tax consultant for more detailed information regarding the above
and for information regarding any state, local or foreign taxes that may be
applicable to them.
The Fund intends to qualify for taxation as a regulated investment company
("RIC") under the Internal Revenue Code of 1986, as amended (the "Code"), so
that the Fund will not be subject to federal income tax to the extent it
distributes its income to its stockholders. In order to so qualify, certain
gross income and other requirements must be satisfied.
DIVIDENDS
Dividends other than capital gain dividends paid by the Fund to
individuals will be taxable as ordinary income. If the Fund qualifies for
taxation as a RIC and satisfies certain requirements discussed below,
dividends paid by the Fund (other than capital gain distributions, which are
discussed separately below) will be eligible, whether paid in cash or in
additional shares, for the 70% dividends-received deduction that is available
to corporate taxpayers to the extent attributable to dividends received by
the Fund from domestic corporations. After giving effect to such 70%
deduction, such dividends are subject to a maximum effective rate of federal
corporate income tax of approximately 10.5%, in contrast to the maximum
federal corporate income tax rate of approximately 35%.
Dividends distributed by the Fund to stockholders will only be eligible
for the dividends-received deduction to the extent of the Fund's gross income
that consists of dividends received on equity securities of domestic
corporations with respect to which the Fund meets the same holding period,
risk of loss and borrowing limitations applicable to the Fund's stockholders,
as described below under "Holding Period and Other Requirements". If the
expenses and losses of the Fund equal or exceed non-qualifying income (if
any), all dividends distributed by the Fund may qualify for the
dividends-received deduction.
In the event that the Fund's total distributions (including distributed or
designated net capital gain) for a taxable year exceed, generally, its
investment company taxable income and net capital gain, a portion of each
distribution will be treated as a return of
11
<PAGE>
capital, which will not qualify for the dividends-received deduction.
Distributions treated as a return of capital reduce a stockholder's basis in
its shares and could result in recognition of capital gain either when a
distribution is in excess of basis, or more likely, when a stockholder
redeems its shares.
For purposes of the alternative minimum tax imposed on corporations,
alternative minimum taxable income will be increased by 75% of the amount by
which an alternative measure of income (adjusted current earnings) that
includes the full amount of dividends received (without regard to the
dividends-received deduction) exceeds the amount otherwise determined to be
the alternative minimum taxable income. Accordingly, an investment in the
Fund may cause a corporate stockholder to be subject to (or result in an
increased liability under) the alternative minimum tax.
HOLDING PERIOD AND OTHER REQUIREMENTS
In order to qualify for the benefits of the dividends-received deduction,
a corporate stockholder must satisfy certain holding period requirements with
respect to the Fund's shares. Section 246 of the Code permits the
dividends-received deduction to corporate stockholders only if the shares
with respect to which the dividends were paid have been held for more than 45
days. The holding period requirements are separately applicable to each block
of shares acquired, including each block of shares received in payment of the
Fund's daily dividends. The Fund has received a ruling under Section 246 with
respect to this issue from the Internal Revenue Service (the "IRS")
confirming the Fund's interpretation. For purposes of determining whether
this holding period requirement has been met, the day of acquisition and any
day after the first 45 days after the date on which such shares become
ex-dividend must be disregarded. The Fund and the Manager believe that once a
stockholder has satisfied this 46-day holding period with respect to any
block of shares, such stockholder will similarly satisfy the 46-day holding
period on reinvested dividends declared with respect to such shares to the
extent that such stockholder's total redemptions during any period do not
exceed its total investment in such shares immediately prior to such period
and are properly identified, as described below, as relating to such shares.
In addition, the holding period is reduced for periods during which the
stock is subject to diminished risk of loss including, for example, because
the holder has acquired a put option or sold a call option (other than
certain covered call options where the exercise price is not substantially
below the selling price) or otherwise hedged his position. If the holding
period is not satisfied, the dividends-received deduction is disallowed,
regardless of whether the shares with respect to which the dividends were
paid have been sold or otherwise disposed of.
The dividends-received deduction will also be reduced, for stockholders
who incur indebtedness in order to purchase shares of the Fund, by the
percentage of the cost of the shares that is debt-financed. Generally, this
limitation applies only if the debt is directly attributable to the purchase
of shares. Whether debt is directly attributable to the purchase of shares
depends on the particular facts and circumstances of each situation and
accordingly stockholders are urged to consult their tax advisers.
CAPITAL GAIN DIVIDENDS
The Fund will be subject to federal income taxation (at the capital gain
rate) on its net capital gain (i.e., the excess of net long-term capital gain
over net short-term capital loss) unless such amounts are distributed to the
stockholders and designated as capital gain dividends. If the Fund
distributes such capital gain dividends, the stockholders will treat such
amounts as a long-term capital gain for purposes of computing their own
federal income tax liability. Alternatively, the Fund may pay the tax with
respect to the net capital gain and then designate, but not distribute, all
or a portion of such gain. Stockholders will treat such designated amounts as
a capital gain on their federal income tax returns, but they will receive a
credit or refund equal to the federal income taxes paid by the Fund with
respect to such capital gains. Any actual or designated distributions
attributable to net capital gains will not be eligible for the
dividends-received deduction. If a capital gain dividend is paid with respect
to any shares which are sold at a loss after being held for six months or
less, then any loss realized upon the sale of such shares will be treated as
a long-term capital loss to the extent of such capital gain dividend.
REDEMPTIONS
Redemptions of shares will be taxable transactions for federal income tax
purposes. Generally, gain or loss will be recognized in an amount equal to
the difference between the stockholder's basis in its shares and the amount
received. Assuming that such shares are held as a capital asset, such gain or
loss will be a capital gain or loss and will generally be a long-term capital
gain or loss if the stockholder has held its shares for a period of one year
or more. If a stockholder redeems shares of the Fund at a loss and makes an
additional investment in the Fund 30 days before or after such redemption,
the loss may be disallowed under the wash sale rules.
STATE AND LOCAL TAXES
Stockholders may be subject to state and local taxes on distributions
received from the Fund, which taxes may be determined differently than
federal income taxes thereon. Stockholders should consult their own tax
advisors as to the state and local tax consequences of investing in the Fund.
DISTRIBUTIONS AND YIELD
DISTRIBUTIONS
The Fund will seek to distribute all of its income each year. The Fund
declares dividends daily immediately prior to the close of business, from its
net investment income. Each such dividend will be payable with respect to
fully paid shares to stockholders
12
<PAGE>
of record at the time of declaration. All daily dividends declared during a
given month will be paid as of the last calendar day of the month.
Distributions of realized net capital gains, if any, will generally be
declared and paid at the end of the year in which they have been earned. In
accordance with Securities and Exchange Commission regulations, the Fund may
include its current yield and/or return in advertisements or information
furnished to stockholders or potential investors.
DIVIDEND PAYMENT OPTIONS
Several dividend payment options are available to stockholders. The
activation of these options varies with the nature of a stockholder's
administrative relationship with the Fund.
If the stockholder receives periodic statements regarding the Fund from
their broker/dealer, then all dividends are automatically paid in cash unless
the stockholder instructs their broker/dealer to implement a different
option.
If the stockholder receives a periodic statement directly from the Fund,
then all dividends are automatically reinvested unless the stockholder
instructs the Fund to implement a different option.
The dividend payment options are to:
1. Automatically reinvest all interest and capital gains distributions.
2. Pay interest dividends in cash, and reinvest capital gains
distributions.
3. Pay both interest and capital gains distributions in cash.
4. Direct all dividends to another Flagship tax exempt or U.S. Government
fund account which has an identical registration and tax identification
number (the $3,000 minimum initial investment applies).
5. Have dividends deposited electronically via Automated Clearing House
("ACH") into a bank account. See "Direct Deposits" and "Systematic Withdrawal
Plan" above.
All reinvested or directed dividends will be at net asset value without
any sales charge. Your broker, or Flagship customer service representative
can help you change your option from your initial account opening
instructions.
TAX OBJECTIVES OF DIVIDEND POLICY FOR CORPORATE INVESTORS
The Fund's dividend procedures are designed to maximize the Federal income
tax advantage of the 70% dividends-received deduction to domestic corporate
stockholders . Although the Fund and the Manager believe that the Fund will
be able to achieve its tax objectives, there can be no assurances on this
matter. For further information regarding the dividends-received deduction,
see the Statement of Additional Information, "Taxes."
CAPITAL GAIN DIVIDENDS
Normally the Fund will make a distribution of realized net capital gain
for a taxable year within 75 days after the end of such year (June 30) and
may make an additional distribution in order to avoid an excise tax which is
imposed on any undistributed income if substantially all of such income has
not been declared and distributed within certain time periods. The Fund
retains the discretion, however, not to distribute all or a portion of such
gain if, in its judgment, nondistribution of such gain would help achieve the
tax objectives of the Fund.
YIELD AND TOTAL RETURN CALCULATION
The yield for each class of the Fund's shares is calculated in accordance
with the SEC's standardized yield formula. Under this formula, dividend and
interest income over the 30 day measurement period is reduced by period
expenses and divided by the number of days within the measurement period to
arrive at a daily income rate. This daily income rate is then expressed as a
semiannually compounded yield based on the maximum offering price of a share
assuming a standardized 360 day year.
The average annual total return for each class of the Fund's shares for
any time period is calculated by assuming an investment at the beginning of
the measurement period at the maximum offering price. Dividends from the net
investable amount are then reinvested in additional shares each month at the
net asset value. At the end of the measurement period, the total number of
shares owned are redeemed at net asset value (less any applicable contingent
deferred sales load). The change in the total value during the investment
period is then expressed as an average annual total rate of return.
The Fund may also advertise total return for each class of shares which is
calculated differently from "average annual total return" (a "nonstandardized
quotation"). A nonstandardized quotation of total return measures the
percentage change in the value of an account between the beginning and end of
a period, assuming no activity in the account other than reinvestment of
dividends and capital gains distributions. The Fund may also quote a tax
equivalent current yield for corporate investors assuming the availability of
the 70% dividends-received deduction for all of the Fund's daily dividends
and an appropriate specified corporate tax rate. These computations may or
may not include the effect of applicable sales charges which, if included,
would reduce total return. A nonstandardized quotation of total return for a
particular class of shares will always be accompanied by the "average annual
total return" for such class as described above.
Current yield and total return of each class will vary from time to time
depending on market conditions, the composition of the portfolio, operating
expenses and other factors. These factors and possible differences in method
of calculating performance figures should be considered when comparing the
performance figures of the Fund with those of other investment vehicles.
Yield and return information is based on historical performance and is not
intended to indicate future performance. See "Yield and Total Return
Calculation" in the Statement of Additional Information.
13
<PAGE>
ABOUT THE INVESTMENT MANAGER
The business and affairs of the Fund are managed under the direction of
its Board of Directors. The investment adviser to the Fund is Flagship
Financial Inc. (the "Manager"), whose principal business address is One
Dayton Centre, One South Main St., Dayton, Ohio 45402-2030. The Manager, as
well as the Distributor, is a wholly-owned subsidiary of Flagship Resources
Inc., which is owned and/or controlled by Bruce P. Bedford and Richard P.
Davis and members of their immediate families. Messrs. Bedford and Davis each
serve as a director and an officer of the Fund as well as the Manager and the
Distributor.
Pursuant to the terms of an Investment Advisory Agreement, dated November
27, 1984 (the "Advisory Agreement"), the Manager, subject to the general
supervision of the Fund's Board of Directors and in conformity with the
stated policies of the Fund, renders investment supervisory and corporate
administrative services to the Fund. In this regard, it is the responsibility
of the Manager to make investment decisions for the Fund and to place the
purchase and sale orders. The Manager's Investment Policy Committee,
comprised of all of the portfolio managers and principal executive officers,
meets monthly to review the domestic economic outlook and the status of the
financial markets, and to set the policy guidelines for the management of
each of the Funds. Implementation, trading, and temporary modification of a
Fund's strategy is the function of a small team of portfolio managers who
back each other up. Each team is led by a designated portfolio manager who is
primarily responsible for the day-to-day operations and performance of the
Funds. The designated team leader for the Utility Income Fund is Richard
Huber, Vice President of the Manager.
In addition, the Manager performs, or supervises the performance of,
administrative services in connection with the Fund including (i) assisting
in supervising all aspects of the Fund's operations; (ii) providing the Fund,
at the Manager's expense, with the services of persons competent to perform
such administrative and clerical functions as are necessary in order to
provide effective corporate administration of the Fund; and (iii) providing
the Fund, at the Manager's expense, with adequate office space and related
services. The Fund's accounting records are maintained, at the Fund's
expense, by its Custodian, Boston Financial.
As compensation for the services rendered by the Manager under the
Advisory Agreement, the Fund will pay the Manager a fee, computed daily and
payable monthly, at an annual rate of .50% of its average daily net assets up
to and including $100,000,000, plus .45% of such net assets over $100,000,000
up to and including $200,000,000, plus .40% of such net assets over
$200,000,000 up to and including $300,000,000, plus .35% of such net assets
over $300,000,000 up to and including $500,000,000, plus .30% of such net
assets over $500,000,000. For the Fund's fiscal year ended June 30, 1995, the
fee paid to the Manager was .02% of average net assets, and the total
expenses of the Fund was 1.00% of average net assets for Class A shares and
1.54% of average net assets for Class C Shares.
The Fund has adopted a Code of Ethics regarding restrictions on the
investment activity of specified "Investment Personnel." These include
restrictions on personal investing, pre-clearance of trades, sanctions and
disgorgement of certain profits, as well as prohibitions on short swing
profits, investments in initial public offerings and holding public
directorships.
The Manager, which has been a registered investment adviser since 1978,
also renders investment advisory and management services to others. The
Manager manages an aggregate of approximately 4.3 billion in assets, in both
taxable and tax-exempt domestic portfolios, primarily for mutual funds,
insurance and reinsurance companies, other corporations and employee benefits
plans, and is investment adviser to Flagship Tax Exempt Funds Trust, an
investment company with assets of approximately 3.9 billion, all assets as of
August 31, 1995.
ABOUT THE DISTRIBUTOR
The Fund has entered into a Distribution Agreement (the "Distribution
Agreement") with Flagship Funds Inc. (the "Distributor"), pursuant to which
the Distributor serves as the exclusive selling agent and distributor of the
Fund's shares, and in that capacity will make a continuous offering of the
shares and will be responsible for all sales and promotion efforts.
Pursuant to Rule 12b-1 under the 1940 Act, the Fund has adopted a plan
(the "Plan") with respect to the Class A, Class B, and Class C Shares which
permits the Fund to pay for certain distribution and promotion expenses
related to marketing its shares. The Fund's Rule 12b-1 Plan conforms to the
requirements of the rules of the National Association of Securities Dealers
with regard to Rule 12b-1 plans.
The Plan authorizes the Fund to expend its monies in an amount equal to
the aggregate for all such expenditures to such percentage of the Fund's
daily net asset value as may be determined from time to time by vote cast in
person at a meeting called for such purpose, by a majority of the Fund's
disinterested directors. The scope of the foregoing shall be interpreted by
the directors, whose decision shall be conclusive except to the extent it
contravenes established legal authority. Without in any way limiting the
discretion of the directors, the following activities are hereby declared to
be primarily intended to result in the sale of shares of the Fund:
advertising the Fund or the Fund's Manager's mutual fund activities;
compensating underwriters, dealers, brokers, banks and other selling entities
and sales and marketing personnel of any of them for sales of shares of the
Fund, whether in a lump sum or on a continuous, periodic, contingent,
deferred or other basis: compensating underwriters, dealers, brokers, banks
and other servicing entities and servicing personnel (including the Fund's
Manager and its personnel of any of them for providing services to
shareholders of the Fund relating to their investment in the Fund, including
assistance in connection with inquiries relating to shareholder accounts; the
production and dissemination of prospectuses including statements of
additional information) of the Fund and the preparation, production and
dissemination of sales, marketing and shareholder servicing materials; and
the ordinary or capital expenses, such as equipment, rent, fixtures,
salaries, bonuses, reporting and recordkeeping and third
14
<PAGE>
party consultancy or similar expenses relating to any activity for which
payment is authorized by the directors; and the financing of any activity for
which payment is authorized by the directors. Pursuant to the Plan, the Fund
through authorized officers may make similar payments for marketing services
to non-broker-dealers who enter into service agreements with the Fund.
The maximum amount payable by the Fund under the Plan and related
agreements on an annual basis is .95% of average daily net assets for the
year. Of this amount, 0.75% is an asset based sales charge and .20% is a
service fee. In the case of broker-dealers and others, such as banks, who
have selling or service agreements with the Distributor or the Fund, the
maximum amount payable to any recipient is .00260% per day (.95% on an
annualized basis) of the proportion of average daily net assets represented
by such person's customers. A salesperson and any other person entitled to
receive compensation for selling Fund shares may receive different
compensation for selling one particular class of shares over another. The
Board of Directors may reduce these amounts at any time. Amounts payable by a
class of shares may be lower than the maximum and have been described
previously. Expenditures pursuant to the Plan and related agreements may
reduce current yield after expenses. Under the Plan and related agreements,
in the fiscal year ended June 30, 1995 the Fund's Class A Shares paid
$101,226 and Class C Shares paid $48,312.
The Distributor periodically undertakes sales promotion programs with
broker-dealers with whom it has Distribution Agreements, in which it will
grant a partial or full reallowance of its retained underwriting commission
for fund sales as permitted by applicable rules. In addition, it will support
those firms' efforts in sales training seminars, management meetings, and
broker roundtables where it has the opportunity to present the Distributor's
products and services. The Distributor also provides recognition for
outstanding sales achievements during a year through membership in its
Admiral's, Captain's or Yacht Clubs which includes a membership plaque and a
recognition memento. In addition, the distributor provides recognition
through the awarding of imprinted nominal promotional items; client leads; as
well as "thank you" dinners and entertainment. Its agents also typically
provide food for office meetings. Under appropriate terms it will share with
broker-dealers a portion of the cost of prospecting seminars and shareholder
gatherings. In those situations where there is no retained underwriting
commission, i.e., on the sale of Class C Shares, the Distributor will
periodically pay for similar activities at its own expense.
Various federal and state laws prohibit national banks and some
state-chartered commercial banks from underwriting or dealing in the Fund's
shares. In the unlikely event that a court were to find that these laws also
prohibit such banks from providing services of the type contemplated by the
Fund's service agreement, the Fund would seek alternative providers of such
services and expects that stockholders would not experience any disadvantage.
In addition, under the securities laws in some states, banks and financial
institutions may be required to register as dealers pursuant to state law.
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Corporation was organized on April 18, 1983, as a Maryland
corporation. On October 15, 1987, The Corporation's stockholders approved
amendments to the Corporation's Articles of Incorporation converting it into
a series fund. On June 4, 1992 the stockholders approved a change in the name
of the Corporation to Flagship Admiral Funds Inc. and a change in the name of
the Fund Stock to Flagship Utility Income Fund Portfolio Stock. The
authorized capital stock of the Corporation consists of 600,000,000 shares of
stock, par value $.001 per share, divided into five classes, with 200,000,000
shares of Flagship Utility Income Fund Portfolio Stock allocated to the
Flagship Utility Income Fund with four sub-classes authorized each with
49,125,000 shares designated as Class A, Class B, Class C and Class Y,
respectively; 100,000,000 shares of The Golden Rainbow - A James Advised
Mutual Fund Portfolio Stock allocated to The Golden Rainbow - A James Advised
Mutual Fund; 100,000,000 shares of Flagship Short Term U.S. Government Fund
Portfolio Stock allocated to the Flagship Short Term U.S. Government Fund;
100,000,000 shares of Flagship Limited Term U.S. Government Fund Portfolio
Stock allocated to the Flagship Limited Term U.S. Government Fund with four
sub-classes authorized each with 24,500,000 shares designated as Class A, B,
C & Y, respectively; and 100,000,000 shares of Flagship Intermediate U.S.
Government Fund Portfolio Stock allocated to the Flagship Intermediate U.S.
Government Fund with four sub-classes authorized each with 24,500,000 shares
designated as Class A, B, C & Y, respectively. Pursuant to Maryland law and
the Corporation's charter, the Board of Directors may increase the authorized
capital and reclassify unissued shares of any class to create additional
classes of stock with specified rights, preferences, and limitations. Each
share is entitled to one vote per share on all matters subject to
stockholders' vote. Shares of all classes vote together as a single class
except that where a matter affects a particular class differently from other
classes, that class will vote separately on such matter. The Corporation is
not required to hold meetings of stockholders for the purpose of electing
directors unless less than a majority of the directors elected by
stockholders remain in office. If the Corporation does not hold annual
meetings of stockholders, it will abide by Section 16 (c) of the 1940 Act
which
15
<PAGE>
provides that the Directors will call a meeting of stockholders for the
purpose of voting on the question of the removal of a Director if so
requested in writing by the holders of 10% or more of the Fund's outstanding
shares and will assist such stockholders in communicating with the other
stockholders. Directors may be removed by vote of a majority of the
outstanding shares of the Corporation.
Each share is entitled to participate equally in dividends and
distributions declared by the Directors with respect to shares of the same
class, and in the net distributable assets allocated to such class on
liquidation. Stockholders are entitled to redeem their shares, and such
shares are subject to redemption by the Fund, as set forth under "How to
Redeem or Exchange." There are no conversion, preemptive or exchange rights
in connection with any shares of the Fund, nor are there cumulative voting
rights. All shares of the Fund when issued will be fully paid and
nonassessable by the Fund.
CUSTODIAN AND TRANSFER AGENT
Boston Financial, 225 Franklin Street, Boston, Massachusetts 02106, is the
Fund's custodian, transfer agent and dividend disbursing agent. It also
maintains the Fund's accounting records, determines the net asset value, and
performs other stockholder services for the Corporation and each series.
COUNSEL AND AUDITORS
Skadden, Arps, Slate, Meagher & Flom, counsel to the Fund, passes upon
certain legal matters for the Corporation and the Fund. Deloitte & Touche
LLP, independent auditors, are auditors for the Fund and advise the Fund as
to certain tax matters.
Miles & Stockbridge, Maryland counsel to the Fund, passes upon the
legality of the Fund's shares.
ADDITIONAL INFORMATION
Please direct your inquiries to a Flagship Representative at
1-800-414-7447 or for TDD, 1-800-360-4521.The Fund issues to its stockholders
semiannual reports containing unaudited financial statements for the Fund and
annual reports containing audited financial statements approved annually by
the Board of Directors.
This Prospectus does not contain all the information included in the
Registration Statement filed with the SEC under the Securities Act of 1933
and the 1940 Act with respect to the securities offered hereby, certain
portions of which have been omitted pursuant to the rules and regulations of
the SEC. The Registration Statement including the exhibits filed therewith
may be examined at the office of the SEC in Washington, D.C.
Statements contained in this Prospectus as to the contents of any contract
or other document referred to are not necessarily complete, and, in each
instance, reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement of which this Prospectus
forms a part, each such statement being qualified in all respects by such
reference.
No person has been authorized to give any information or to make any
representations, other than those contained in this Prospectus, in connection
with the offer made by this Prospectus, and, if given or made, such other
information or representations must not be relied upon as having been
authorized by the Fund or its Distributor. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy by the Fund
or by the Distributor in any State in which such offer to sell or
solicitation of an offer to buy may not lawfully be made.
The symbol(R) indicates a registered mark of Flagship Utility Income Fund
owned by Flagship Financial Inc.
One Dayton Centre
One South Main Street
Dayton, Ohio 45402-2030
1-800-227-4648
(C)1995, Flagship Funds Inc. UI-A-3000 (10-26-95)
16
<PAGE>
FLAGSHIP UTILITY INCOME FUND APPLICATION FORM
PLEASE PRINT OR TYPE ALL INFORMATION
NOTE: You must complete Sections 1, 2, 3, 4, 5 and sign the signature line.
Your signature is required for processing. Complete sections 7, 8, 9, 10, 11
and 12 for optional services.
PLEASE MAIL THIS APPLICATION & YOUR CHECK TO:
Boston Financial
Attn: Flagship Utility Income Fund
P.O. Box 8509
Boston, MA 02266-8509
1. YOUR ACCOUNT REGISTRATION
Please check only ONE registration type:
Owner Name(s) (First, Middle Initial (if used), Last)
[ ] Individual or Joint Account*
_____________________________________________________________________________
_____________________________________________________________________________
*Joint tenants with rights of survivorship unless tenancy in common is
indicated
[ ] Other Entity
_____________________________________________________________________________
_____________________________________________________________________________
[ ] Uniform Gift to Minors
_____________________________________________________________________________
Custodian Name (One name only)
_____________________________________________________________________________
Minor's Name (One name only)
Minor's state of residence _______
2. YOUR MAILING ADDRESS
_____________________________________________________________________________
Street or P.O. Box Suite or Apt. Number
_____________________________________________________________________________
City
______ ________________ _________
State Zip Code
( ) - ( ) -
_____________________________________________________________________________
Daytime Phone Evening Phone
[ ] U.S. Citizen or
[ ] Other (specify) _________________________________________________________
3. YOUR SOCIAL SECURITY/TAX ID NUMBER
For Individual or Joint accounts use Social Security number of owner.
For custodial accounts use minor's Social Security number.
________ ____ ________
Social Security Number
____ ____________________
Tax ID Number
4. YOUR INITIAL INVESTMENT
I want to invest in this Flagship Utility Income Fund.
Please indicate class of shares
Amount*
$ _____________________ [ ] A Shares**
$ _____________________ [ ] C Shares***
*Minimum of $3,000. **Front end sales charge. ***Level load. If no
share class is marked, investment will automatically be made in A Shares.
Attach check payable to Name of Fund
[ ] Purchase or check through Dealer Account
[ ] Exchange of bonds. (See application and transmittal letter)
5. DIVIDEND/DISTRIBUTION OPTION
If no option is selected, all distributions will be reinvested.
[ ] Reinvest dividends and capital gains.
[ ] Pay dividends in cash, reinvest capital gains.
[ ] Pay dividends and capital gains in cash.
[ ] Direct dividends to an existing account with identical registration.
Designate the Fund name and account number below.
_____________________________________________________________________________
Name of Fund
_____________________________________________________________________________
Existing Fund Account Number
[ ]Deposit dividends directly into the bank account indicated on the attached
VOIDED check (subject to terms and conditions in the prospectus).
6. DEALER AUTHORIZATION
We are a duly registered and licensed dealer and have a sales agreement with
Flagship Funds Inc. We are authorized to purchase shares from the Fund for
the investor. The investor is authorized to send any future payments directly
to the Fund for investment. Confirm each transaction to the investor and to
us. We guarantee the genuineness of the investor's signature.
_____________________________________________________________________________
Investment Firm
_____________________________________________________________________________
Investment Professional's Name Rep #
______________________________________________________________________________
Branch Address Branch #
______________________________________________________________________________
City
______ ________________ _________
State Zip Code
( ) -
______________________________________________________________________________
Investment Professional's Phone Number
X ___________________________________________________________________________
Signature of Investment Professional
7. LETTER OF INTENT (Class A Shares only)
I/we agree to the escrow provision described in the prospectus and intend to
purchase, although I'm not obligated to do so, shares of the Fund designated
on this application within a 13 month period which, together with the total
asset value of shares owned, will aggregate at least:
[ ] $50,000 [ ] $100,000 [ ] $250,000
[ ] $500,000 [ ] $1,000,000 [ ] $2,000,000
<PAGE>
8. CUMULATIVE PURCHASE DISCOUNT
[ ] I/we qualify for cumulative discount with the accounts listed below.
_____________________________________________________________________________
Fund Name
_____________________________________________________________________________
Account Number
_____________________________________________________________________________
Fund Name
_____________________________________________________________________________
Account Number
_____________________________________________________________________________
Fund Name
_____________________________________________________________________________
Account Number
9. AUTOMATIC INVESTMENT PLAN
Pursuant to the terms of the plan described in the prospectus, I/we authorize
the automatic monthly transfer of funds from my/our bank account for
investment in the above Flagship Fund. Attached is a VOIDED check from that
account.
$ ___________________________________________________________________________
Amount ($50 Minimum)
_____________________________________________________________________________
Name of Bank
_____________________________________________________________________________
Bank Account #
_____________________________________________________________________________
Bank's Street Address
_____________________________________________________________________________
City
______ ________________ _________
State Zip Code
X ___________________________________________________________________________
Signature of Depositor Date
X ___________________________________________________________________________
Signature of Joint Depositor Date
10. SYSTEMATIC WITHDRAWAL PLAN
Pursuant to the terms of the plan described on the back of this application,
please send $_______________ [ ] per month [ ] quarterly to:
[ ] Me
[ ] The bank account indicated on the attached VOIDED check
[ ] Payee below
Give name and address only if different from account registration
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
11. TELEPHONE REDEMPTION
I/we hereby authorize the Fund to implement the following telephone
redemption requests (under $50,000 only) without signature verification to
the registered fund account name and address. Redemption proceeds may be
wired to the U.S. commercial bank designated, provided you complete the
information below and enclose a VOIDED check for that account.
_____________________________________________________________________________
Name of Bank
_____________________________________________________________________________
Bank Account Number
_____________________________________________________________________________
Bank's Street Address
_____________________________________________________________________________
City
______ ________________ _________
State Zip Code
[ ] I do not authorize redemption by telephone.
12. INTERESTED PARTY MAIL/DIVIDEND MAIL
[ ] Send duplicate confirmation statements to the interested party listed
below.
[ ] Send my distributions to the address listed below.
_____________________________________________________________________________
Name of Individual
_____________________________________________________________________________
Street Address
_____________________________________________________________________________
City
______ ________________ _________
State Zip Code
SIGNATURE(S)
Under the penalties of perjury, I/we certify that the information provided on
this form is true, correct, and complete. The undersigned certify that I/we
have full authority and legal capacity to purchase, exchange or redeem shares
of the above named Fund(s) and affirm that I/we have received and read a
current Prospectus of the named Fund(s) and agree to be bound by its terms.
I/we agree to indemnify and hold harmless State Street Bank and Trust
Company, Boston Financial, and any Flagship fund(s) which may be involved in
transactions authorized by telephone against any claim, loss, expense or
damage, including reasonable fees of investigation and counsel, in connection
with any telephone withdrawal effected on my account pursuant to procedures
described in the Prospectus.
X ___________________________________ X ___________________________________
Signature Date Signature (Joint Tenant) Date
1. As required by the IRS I/we certify (a) that the number shown on this form is
my correct Taxpayer Identification number. I/we understand that if I/we do not
provide a Taxpayer Identification Number to the Fund within 60 days, the Fund is
required to withhold 31 percent of all reportable payments thereafter made to me
until I/we provide a number certified under penalties of perjury, and that I/we
may be subject to a $50 penalty by the IRS.
2. As required by the IRS I/we certify under penalties of perjury that I/we
are not subject to backup withholding by the IRS.
NOTE: Strike out Item (2) if you have been notified that you are subject to
backup withholding by the IRS and you have not received a notice from the IRS
advising you that backup withholding has been terminated.
X ___________________________________ X ___________________________________
Signature Date Signature (Joint Tenant) Date
Thank you for your investment in the Fund. You will receive a confirmation
statement shortly.
<PAGE>
FLAGSHIP ADMIRAL FUNDS INC.
STATEMENT OF ADDITIONAL INFORMATION
DATED OCTOBER 26, 1995
One Dayton Centre, One South Main Street; Dayton, OH 45402-2030
Flagship Utility Income Fund series
This Statement of Additional Information provides certain detailed
information concerning the Fund. It is not a Prospectus and should be read in
conjunction with the Fund's current Prospectus for the Flagship Utility
Income Fund, a copy of which may be obtained without charge by written
request to: Flagship Funds Inc., One Dayton Centre, One South Main Street;
Dayton, Ohio 45402-2030; by telephone at: (800) 227-4648, or for TDD at (800)
360-4521.
This Statement of Additional Information relates to the Flagship Utility
Income Fund Prospectus dated October 26, 1995.
Table of Contents
Page
-------
Investment Objectives and Policies 2
Shares of the Fund 4
Officers, Directors and Stockholders 5
Investment Advisory Services 7
Taxes 7
Yield and Total Return Calculation 10
Distributions 11
Distributor 12
Custodian and Transfer Agent 14
Auditors 14
Portfolio Transactions 14
Purchase, Redemption and Pricing of Shares 15
Servicemark 15
Other Information 15
Financial Statements F-1
Appendix I--Description of Securities Ratings I-1
Appendix II--Description of Hedging Techniques II-1
Appendix III--Corporate Tax Equivalent Chart III-1
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
Flagship Admiral Funds Inc. (the "Fund") has no fundamental objectives as
a whole. Each Portfolio of the Fund has its own objectives. The Flagship
Utility Income Fund ("Utility Income Fund") has adopted the following
investment restrictions (which supplement the matters described under "The
Fund and Its Objective" in the Utility Income Fund Prospectus), none of which
may be changed without the approval of the holders of a majority (as defined
in the Investment Company Act of 1940 (the "1940 Act")) of its outstanding
shares. The Utility Income Fund may not:
(1) Purchase the securities of any one issuer, other than the U.S.
Government or any of its instrumentalities, if immediately after such
purchase more than 5% of the value of its total assets would be invested in
such issuer, or the Portfolio would own more than 10% of the outstanding
voting securities of such issuer, except that up to 25% of the value of the
Portfolio's total assets may be invested without regard to such 5% and 10%
limitations;
(2) Make loans, except to the extent the purchase of debt obligations
(including repurchase agreements) in accordance with the Portfolio's
investment objective and policies are considered loans and except that the
Portfolio may loan portfolio securities to qualified institutional investors
in compliance with requirements established from time to time by the
Securities and Exchange Commission ("SEC") and the securities exchanges in
which such securities are traded;
(3) Issue securities senior to its stock or borrow money, except that the
Portfolio has reserved the right to borrow money from banks on a temporary
basis from time to time to provide greater liquidity for redemptions or to
make additional portfolio investments. Such borrowings will not exceed 25% of
the Portfolio's net assets plus all outstanding borrowings immediately after
the time the latest such borrowing is made;
(4) Purchase or retain the securities of any issuer any of whose officers,
directors, or security holders is a director or officer of the Fund or of its
investment adviser if or so long as the directors and officers of the Fund
and of its investment adviser together own beneficially more than 5% of any
class of securities of such issuer;
(5) Mortgage, pledge or hypothecate any assets except in an amount up to
50% of the value of the Portfolio's net assets, taken at cost, and only to
secure borrowings permitted by clause (3) above.
(6) Purchase or sell real estate, real estate mortgage loans, real estate
investment trust securities, commodities, commodity contracts (except for
bona fide hedging purposes) or oil and gas interests.
(7) Acquire securities of other investment companies (other than in
connection with the acquisitions of such companies).
(8) Act as an underwriter of securities or invest more than 10% of the
Portfolio's assets, as determined at the time of investment, in securities
that are subject to restrictions on disposition under the Securities Act of
1933 or for which market quotations are not readily available, including
repurchase agreements having more than seven days to maturity.
(9) Purchase securities on margin, make short sales of securities or
maintain a net short position.
In order to permit the sale of shares in certain states, the Fund may make
commitments more restrictive than the operating restrictions described above.
Should the Fund determine that any such commitment is no longer in the best
interest of the stockholders, it will revoke the commitment by terminating
sales of its shares in the state involved. Also, as a matter of policy that
is not fundamental, the Utility Income Fund has determined that it will not
invest in warrants, own more than 5% of the outstanding voting securities of
any issuer and will only write call options which are fully covered.
The Fund places no restrictions on portfolio turnover except as may be
necessary to maintain its status as a regulated investment company under the
Internal Revenue Code of 1986, as amended (the "Code").
Repurchase Agreements. The Utility Income Fund may enter into repurchase
agreements with selected commercial banks and broker-dealers, in an amount up
to 5% of its total assets, under which such Fund acquires securities and
agrees to resell the securities to the other party at an agreed upon time and
at an agreed upon price. The Fund would accrue as interest the difference
between the amount it pays for the securities and the amount it receives upon
resale. At the time it enters into a repurchase agreement, the value of the
underlying security including accrued interest will be equal to or exceed the
value of the repurchase agreement and, for repurchase agreements that mature
in more than one day, the seller will agree that the value of the underlying
security including accrued interest will continue to be at least equal to the
value of the repurchase agreement. The Utility Income Fund will enter into
2
<PAGE>
repurchase agreements only with creditworthy parties and will monitor such
creditworthiness on an ongoing basis. Generally, repurchase agreement
activities will be restricted to well-capitalized commercial banks with
assets in excess of $1 billion, primary dealers in U.S. Government securities
or broker-dealers registered with the Securities and Exchange Commission. The
underlying securities will only consist of U.S. Government or Government
Agency securities, certificates of deposit, bankers' acceptances or
commercial paper. In the event of default by such party, the delays and
expenses potentially involved in establishing the Fund's rights to, and in
liquidating the security may result in a loss.
Leverage. The Utility Income Fund has reserved the right to borrow money
from time to time to provide greater liquidity for redemptions or to make
additional portfolio investments. If a Portfolio were to borrow money, income
earned from additional investments in excess of interest costs would improve
performance over what otherwise would be the case. Conversely, if the
investment performance of such additional investments failed to cover their
cost (including interest costs on such borrowings) the performance would be
poorer than would otherwise be the case. This speculative factor is known as
"leverage."
The 1940 Act limits the amount of money a fund may borrow to 33-1/3% of
the value of such fund's net assets plus all outstanding borrowings
immediately after the time the latest such borrowing is made; the Utility
Income Fund has elected to restrict its borrowings to a maximum amount of
25%. If a Portfolio were to borrow money and the value of its assets were to
fall below the statutory coverage requirement for any reason, the Portfolio
would have to take corrective action to achieve compliance within three
business days and accordingly might be required to sell a portion of its
securities at a time when such sale might be disadvantageous.
"When Issued" Transactions. The Utility Income Fund may purchase and sell
securities on a "when issued" and "delayed delivery" basis. These
transactions are subject to market fluctuation; the value at delivery may be
more or less than the purchase price. Since the Fund relies on the buyer or
seller, as the case may be, to consummate the transaction, failure by the
other party to complete the transaction may result in it missing the
opportunity of obtaining a price or yield considered to be advantageous. When
the Fund is the buyer in such a transaction, however, it will maintain with
its custodian cash or high-grade portfolio securities having an aggregate
value equal to the amount of such purchase commitments until payment is made.
To the extent the Fund engages in "when issued" and "delayed delivery"
transactions, it will do so for the purpose of acquiring securities for its
portfolio consistent with its investment objective and policies and not for
the purpose of investment leverage.
Diversification. As a diversified fund, the Utility Income Fund may not
purchase the securities of any one issuer, other than the U.S. Government or
any of its instrumentalities, if immediately after such purchase more than 5%
of the value of its total assets would be invested in such issuer, or if it
would own more than 10% of the outstanding voting securities of such issuer,
except that up to 25% of the value of the Utility Income Fund's total assets
may be invested without regard to such 5% and 10% limitations.
General Characteristics and Risks of Options and Futures
Put Options. A put option gives the purchaser of the option the right to
sell and the writer of the option the obligation to buy the underlying
security at the exercise price during the option period. The purchase of a
put option on a security would be designed to protect the Fund's holdings in
a security against a substantial decline in the market value. The Fund is
authorized to purchase exchange-listed options and over-the-counter options
("OTC Options"). Listed options are issued by the Options Clearing
Corporation ("OCC") which guarantees the performance of the obligations of
the parties to such options. OTC options shall be treated as illiquid.
The Fund's ability to close out its position as a purchaser of an
exchange-listed put option is dependent upon the existence of a liquid
secondary market on option exchanges. Among the possible reasons for the
absence of a liquid secondary market on an exchange are: (i) insufficient
trading interest in certain options; (ii) restrictions on transactions
imposed by an exchange; (iii) trading halts, suspensions or other
restrictions imposed with respect to particular classes or series of options
or underlying securities; (iv) interruption of the normal operations on an
exchange; (v) inadequacy of the facilities of an exchange or OCC to handle
current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of
options), in which event the secondary market on that exchange (or in that
class of series of options) would cease to exist, although outstanding
options on that exchange that had been listed by the OCC as a result of
trades on that exchange would generally continue to be exercisable in
accordance with their terms. OTC Options are purchased from or sold to
dealers or financial institutions which have entered into direct agreement
with the Fund. With OTC Options, such variables as expiration date, exercise
price and premium will be agreed upon between the Fund and the transacting
3
<PAGE>
dealer, without the intermediation of a third party such as the OCC. If the
transacting dealer fails to make or take delivery of the securities
underlying an option it has written, in accordance with the terms of that
option as written, the Fund would lose the premium paid for the option as
well as any anticipated benefit of the transaction. The Fund will engage in
OTC Option transactions only with primary United States Government securities
dealers recognized by the Federal Reserve Bank of New York.
The hours of trading for options on securities may not conform to the
hours during which the underlying securities are traded. To the extent that
the option markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying markets
that cannot be reflected in the option markets.
Futures Contracts and Related Options
Characteristics. The Fund may sell financial futures contracts or purchase
put options on such futures as a hedge against anticipated interest rate
changes and may purchase stock index options or futures thereon to hedge
against changes in the equity markets. It may also utilize such investments
to hedge currency risk. A futures contract sale creates an obligation by the
Fund, as seller, to deliver the specific type of financial instrument called
for in the contract at a specified future time for a specified price. Options
on futures contracts are similar to options on securities except that an
option on a futures contract gives the purchaser the right in return for the
premium paid to assume a position in a futures contract (a long position if
the option is a call and a short position if the option is a put). Stock
index options may also be listed on a stock exchange.
Limitations on Use of Options and Futures. The Fund's use of futures and
options on futures will in all cases be consistent with applicable regulatory
requirements and in particular the rules and regulations of the Commodity
Futures Trading Commission with which the Fund must comply in order not to be
deemed a commodity pool operator within the meaning and intent of the
Commodity Exchange Act.
Risks. Typically, investment in futures contracts requires the Fund to
deposit with the applicable exchange or other specified financial
intermediary as security for its obligations an amount of cash or other
specified securities which initially is 1% to 5% of the face amount of the
contract and which thereafter fluctuates on a periodic basis as the value of
the contract fluctuates. Investment in options involves payment of a premium
for the option without any further obligation on the part of the Fund.
The Fund will not engage in transactions in futures contracts or related
options for speculative purposes but only as a hedge against changes
resulting from market conditions in the values of securities in its
portfolio. In addition, the Fund will not enter into a futures contract or
related option (except for closing transactions) if, immediately thereafter,
the sum of the amount of its initial deposits and premiums on open contracts
and options would exceed 5% of its total assets (taken at current value).
Also, when required, a segregated account of cash or cash equivalents will be
maintained and marked to market in an amount equal to the market value of the
contract.
Hedging transactions present certain risks. In particular, the variable
degree of correlation between price movements of futures contracts and price
movements in the position being hedged creates the possibility that losses on
the hedge may be greater than gains in the value of the Fund's position. In
addition, futures and futures option markets may not be liquid in all
circumstances. As a result, in volatile markets, the Fund may not be able to
close out a transaction without incurring losses substantially greater than
the initial deposit. Although the contemplated use of these contracts should
tend to minimize the risk of loss due to a decline in the value of the hedged
position, at the same time they tend to limit any potential gain which might
result from an increase in the value of such position. The ability of the
Fund to hedge successfully will depend on the Adviser's ability to predict
pertinent market movements, which cannot be assured. Finally, the 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 net asset value. Income earned by the Fund from its hedging activities
generally will be treated as capital gains.
SHARES OF THE FUND
The SEC has adopted rules under the 1940 Act which permit funds to issue
multiple classes of shares and impose deferred sales charges. The Fund has
adopted a plan under such rules and may issue multiple classes of shares
pursuant to such rules. The Fund is currently authorized to offer four
classes of shares of beneficial interest ("Class A Shares," "Class B Shares,"
"Class C Shares" and "Class Y Shares") as discussed in the Prospectus. Class
A Shares, Class B Shares, Class C Shares and Class Y Shares have identical
voting rights, except that each class
4
<PAGE>
that is subject to a distribution fee votes separately as a class with
respect to the Fund's Rule 12b-1 distribution plan. Currently, the Fund is
offering Class A and C Shares. No class B or Y Shares are available. Any
shares of the Fund outstanding prior to July 1, 1993, have been
re-denominated as Class A Shares.
Class B Shares. Class B Shares are sold at net asset value (see "Net Asset
Value") without a sales charge at the time of purchase. Instead, the sales
charge is imposed on a contingent deferred basis. The net assets attributable
to Class B Shares are subject to an ongoing distribution fee (see
"Distributor" below). The amount of the contingent deferred sales charge, if
any, will vary depending on the number of years from the time of payment of
the purchase of Class B Shares until the time such shares are redeemed.
Solely for purposes of determining the number of years from the time of any
payment of the purchase of Class B Shares, all payments during any month will
be aggregated and deemed to have been made on the last day of the month.
Class B Shares automatically convert into Class A Shares not more than 10
years after the end of the month in which a shareholder's order to purchase
Class B Shares was accepted. As a result, the shares that converted will no
longer be subject to a sales charge upon redemption and will enjoy the lower
Class A distribution services fee.
For purposes of conversion of Class A Shares, Class B Shares purchased
through the reinvestment of dividends and distributions paid in respect of
Class B Shares in a shareholder's account will be considered to be held in a
separate sub-account. Each time any Class B Shares in the shareholder's
account (other than those in the sub-account) convert to Class A Shares, an
equal pro rata portion of the Class B Shares in the sub-account also will
convert to Class A Shares. The conversion of Class B Shares to Class A Shares
is subject to the continuing determination that (i) the assessment of the
higher distribution services fee and transfer agency cost with respect to
Class B Shares does not result in the Fund's dividends or distributions
constituting "preferential dividends" under the Code, and (ii) that the
conversion of Class B Shares does not constitute a taxable event under
federal income tax law. The conversion of Class B Shares to Class A Shares
may be suspended if such an opinion is no longer available. In that event, no
further conversions of Class B Shares would occur, and Class B Shares might
continue to be subject to the higher distribution services fee for an
indefinite period, which period may extend beyond the period ending 10 years
after the end of the month in which the shares were issued.
The Class B Shares are otherwise the same as Class C Shares and are
subject to the same conditions, except that they can only be exchanged for
other Class B Shares without imposition of sales charges.
Class Y Shares. Class Y Shares will be offered only to institutional
investors, at a price equal to net asset value. No front-end or deferred
sales charge is imposed on Class Y Shares. Additionally, Class Y Shares are
not subject to a Rule 12b-1 distribution fee. Net asset value will be
determined as described in this Prospectus under "Net Asset Value." The Class
Y Shares have no conversion feature, and they can only be exchanged for other
Class Y Shares without payment of applicable sales charges, if such charges
have not been previously paid.
OFFICERS, DIRECTORS AND STOCKHOLDERS
The directors and executive officers of the Fund are listed below. All of
the Directors and officers hold the equivalent positions with Flagship Tax
Exempt Funds Trust and the series thereof. Except as indicated, each
individual has held the office shown or other offices in the same company for
the last five years and has a business address at One Dayton Centre, One
South Main Street; Dayton, Ohio 45402-2030, which is also the address of the
Fund.
The "interested" directors of the Fund (as defined in the 1940 Act) are
indicated by an asterisk (*).
<TABLE>
<CAPTION>
Principal Occupation
Name and Address Positions with the Fund During Past Five Years
- --------------------------- ------------------------ ------------------------------------------------------
<S> <C> <C>
Bruce P. Bedford* Director Chairman and Chief Executive Officer of Flagship
Resources Inc. ("Flagship"), Flagship Financial Inc.
(the "Manager"), and Flagship Funds Inc. (the
"Distributor").
Richard P. Davis* President and President and Chief Operating Officer of Flagship,
Director the Manager, and the Distributor.
5
<PAGE>
Principal Occupation
Name and Address Positions with the Fund During Past Five Years
- --------------------------- ------------------------ ------------------------------------------------------
Robert P. Bremner Director Private Investor and Management Consultant.
3725 Huntington St., N.W.
Washington, DC 20015
Joseph F. Castellano Director Professor and Former Dean, College of Business and
4249 Honeybrook Avenue Administration, Wright State University.
Dayton, OH 45415
Paul F. Nezi Director Executive Vice President, Marketing Sales & Product
227 E. Dixon Avenue Development, ChoiceCare; prior to March, 1993, Vice
Dayton, OH 45419 President and General Manager, Advanced Imaging
Products, a division of AM International; prior to
March, 1991, Partner, Hooper & Nezi, a marketing and
communications firm.
William J. Schneider Director Senior Partner of Miller-Valentine Partners; Vice
4000 Miller-Valentine Ct. President of Miller-Valentine Realty, Inc.
P.O. Box 744
Dayton, OH 45401
M. Patricia Madden Vice President Vice President, Operations, of the Distributor.
Michael D. Kalbfleisch Treasurer and Vice President and Chief Financial Officer of
Secretary Flagship, the Manager, and the Distributor.
LeeAnne G. Sparling Controller Director of Portfolio Operations of the Manager.
Sharon M. Luster Assistant Compliance Manager of the Distributor; Assistant
Secretary Secretary of Flagship, the Manager and the
Distributor.
</TABLE>
Compensation: Trustees and Officers
<TABLE>
<CAPTION>
Total Compensation
From Registrant and
Pension or Estimated Fund Complex (all other
Aggregate Retirement Benefit Annual Benefits Flagship Mutual Funds)
Name of Person, Compensation Accrued as Part of Upon Paid to Directors
Position From Registrant Fund Expenses Retirement (Number of Other Funds)
- -------------------- ---------------- ------------------ --------------- ------------------------
<S> <C> <C> <C> <C>
Robert P. Bremner $6,000 $0 N/A $20,500 (26)
Director
Joseph F. Castellano $6,000 $0 N/A $19,500 (26)
Director
William J. Schneider $6,000 $0 N/A $20,000 (26)
Director
Paul F. Nezi $6,000 $0 N/A $20,000 (26)
Director
Bruce Paul Bedford 0 0 N/A 0
Chairman & Director
Richard P. Davis 0 0 N/A 0
President & Director
M. Patricia Madden 0 0 N/A 0
Vice President
Michael D. Kalbfleisch 0 0 N/A 0
Treasurer &
Secretary
LeeAnne G. Sparling 0 0 N/A 0
Controller
Sharon M. Luster 0 0 N/A 0
Assistant Secretary
</TABLE>
6
<PAGE>
As of August 31, 1995, to the knowledge of management, no person
beneficially owned more than 5% of the Flagship Utility Income Fund's
outstanding shares. All directors and officers as a group own less than 1% of
the outstanding shares as of the above date. The Fund has no knowledge of any
other person owning more than 5% of the outstanding shares as of such date.
INVESTMENT ADVISORY SERVICES
As stated in the Utility Income Fund Prospectus, Flagship Financial Inc.,
a wholly-owned subsidiary of Flagship Resources Inc., acts as investment
adviser (the "Manager") to the Utility Income Fund pursuant to an Investment
Advisory Agreement (the "Advisory Agreement").
See "About the Investment Manager" in the Prospectus for a description of
the Manager's duties as investment adviser. The Manager's administrative
obligations include: (i) assisting in supervising all aspects of the Utility
Income Fund's operations; (ii) providing the Utility Income Fund, at the
Manager's expense, with the services of persons competent to perform such
administrative and clerical functions as are necessary in order to provide
effective corporate administration of the Utility Income Fund; and (iii)
providing the Utility Income Fund, at the Manager's expense, with adequate
office space and related services. The Utility Income Fund paid $-0-;
$20,811; and $6,194 to the Manager pursuant to its Advisory Agreement for the
three fiscal years ended June 30, 1993; June 30, 1994; and June 30, 1995;
respectively. The amounts paid for the fiscal years ended June 30, 1993; June
30, 1994; and June 30, 1995; do not include $79,672; $158,722; and $145,717
respectively, of the Manager's fee which was permanently waived by the
Manager for that period. The Utility Income Fund's accounting records are
maintained, at the Utility Income Fund's expense, by its Custodian, Boston
Financial.
The Advisory Agreement will terminate automatically upon assignment and
its continuance must be approved annually by the Fund's Board of Directors or
a majority of the Fund's outstanding voting shares and in either case, by a
majority of the Fund's independent directors. The Advisory Agreement is
terminable at any time without penalty by the Board of Directors or by a vote
of a majority of the voting shares on 60 days' written notice to the Manager,
or by the Manager on 60 days' written notice to the Utility Income Fund.
The Manager of the Utility Income Fund has agreed that in the event the
operating expenses of the Utility Income Fund (including fees paid by the
Utility Income Fund to the Manager and payments by the Utility Income Fund to
the Distributor but excluding taxes, interest, brokerage and extraordinary
expenses) for any fiscal year ending on a date on which the Advisory
Agreement with the Utility Income Fund is in effect, exceed the expense
limitations imposed by applicable state securities laws or any regulations
thereunder, it will, up to the amount of its fee, reduce its fee or reimburse
the Utility Income Fund in the amount of such excess. As of the date of this
Prospectus, under the most restrictive state regulations applicable, the
Manager would be required to reimburse the Utility Income Fund such operating
expenses exceeding 2-1/2% of the first $30 million of the average net assets,
2% of the next $70 million of the average net assets, and 1-1/2% of the
remaining average net assets. The Manager believes that such operating
expenses will be less than such amounts.
Securities held by the Utility Income Fund may also be held by, or be
appropriate investments for, other investment advisory clients of the Manager
and its affiliates. Because of different objectives or other factors, a
particular security may be bought for one or more clients when one or more
clients are selling the same security. If purchases or sales of securities
for the Utility Income Fund or other advisory clients arise for consideration
at or about the same time, transactions in such securities will be made,
insofar as feasible, for the Utility Income Fund and such other clients in a
manner deemed equitable to all. To the extent that transactions on behalf of
more than one client of the Manager during the same period may increase the
demand for securities being purchased or the supply of securities being sold,
there may be an adverse effect on the price of such securities.
TAXES
References are made to the sections in the Prospectus entitled "Taxes" for
a discussion of relevant tax matters and to which the discussion below is
supplementary.
Taxation of the Fund
Each Portfolio of the Fund intends to qualify as a regulated investment
company ("RIC") for federal income tax purposes. In order to so qualify, each
Portfolio must, among other things: (a) derive at least 90% of its gross
income from dividends, interest, payments with respect to loans of securities
and gains from the sale or other disposition of securities or certain other
related income; (b) generally derive less than 30% of its gross income from
7
<PAGE>
gains from the sale or other disposition of securities and certain other
investments held for less than three months; and (c) diversify its holdings
so that at the end of each fiscal quarter, (i) at least 50% of the value of
such Portfolio's assets is represented by cash, United States government
securities, securities of other regulated investment companies, and other
securities which, with respect to any one issuer, do not represent more than
5% of the value of such Portfolio's assets nor more than 10% of the voting
securities of such issuer, and (ii) not more than 25% of the value of such
Portfolio's assets is invested in the securities of any one issuer (other
than United States government securities or the securities of other RICs).
If each Portfolio of the Fund qualifies as a RIC and distributes to its
stockholders at least 90% of its investment company taxable income (not
including net capital gain, which is the excess of net long-term capital gain
over net short-term capital loss), then each Portfolio will not be subject to
Federal income tax on the income so distributed. However, each Portfolio
would be subject to corporate income tax (currently at a 34% rate) on any
undistributed income. In addition, each Portfolio will be subject to a
nondeductible 4% excise tax on the amount by which the income it distributes
in any calendar year is less than a required distribution amount. The
required distribution amount for a calendar year equals the sum of (a) 98% of
each Portfolio's ordinary income for such calendar year; (b) 98% of the
excess of capital gains over capital losses for the one-year period ending on
October 31 of such calendar year; and (c) 100% of the undistributed income
and gains from prior years. Each Portfolio intends to distribute sufficient
income so as to avoid both corporate income tax and the excise tax. However,
a Portfolio may in the future decide to retain all or a portion of its net
capital gain. In such case, the Portfolio would be subject to corporate
income tax on such retained net capital gain; would designate to stockholders
the undistributed capital gain; stockholders would include as long-term
capital gain income such undistributed net capital gain; and stockholders
would be eligible for a credit with respect to such tax paid by the
Portfolio.
Tax Objective of Dividend Policy for Corporate Investors
The Utility Income Fund's dividend procedures are designed to maximize the
federal income tax advantage of the 70% dividends-received deduction to
domestic corporate stockholders. If the Utility Income Fund did not declare
dividends on a frequent basis, the net asset value would tend to rise during
the period between dividends, due to income received on the investment
portfolio and the gradual increase in market value shown by many preferred
stocks or other securities as periodic dividend payment dates approach. Under
this method, any increase in net asset value would result in short- or
long-term capital gains rather than dividend income for stockholders who
redeemed shares between dividend payment dates. By averaging the anticipated
income on a daily basis and declaring each day's anticipated income as a
dividend, the Utility Income Fund seeks to maximize the portion of the
Utility Income Fund's income and temporary unrealized appreciation that will
qualify as dividend income. Although the Utility Income Fund and the Manager
believe that the Utility Income Fund will be able to achieve its tax
objectives, there can be no assurances on this matter.
Dividends distributed by the Fund to stockholders will only be eligible
for the dividends-received deduction to the extent of the Fund's gross income
that consists of dividends received on equity securities of domestic
corporations with respect to which the Fund meets the same holding period,
risk of loss and borrowing limitations applicable to the Fund's stockholders,
as described below under "Holding Period and Other Requirements". If the
expenses and losses of the Fund equal or exceed non-qualifying income (if
any), all dividends distributed by the Fund may qualify for the
dividends-received deduction.
In the event that the Fund's total distributions (including distributed or
designated net capital gain) for a taxable year exceed, generally, its
investment company taxable income and net capital gain, a portion of each
distribution will be treated as a return of capital, which will not qualify
for the dividends-received deduction. Distributions treated as a return of
capital reduce a stockholder's basis in its shares and could result in
recognition of capital gain either when a distribution is in excess of basis,
or more likely, when a stockholder redeems its shares.
For purposes of the alternative minimum tax imposed on corporations,
alternative minimum taxable income will be increased by 75% of the amount by
which an alternative measure of income (adjusted current earnings) that
includes the full amount of dividends received (without regard to the
dividends-received deduction) exceeds the amount otherwise determined to be
the alternative minimum taxable income. Accordingly, an investment in the
Fund may cause a corporate stockholder to be subject to (or result in an
increased liability under) the alternative minimum tax.
Holding Period and Other Requirements
In order to qualify for the benefits of the dividends-received deduction,
a corporate stockholder must satisfy certain holding period requirements with
respect to the Fund's shares. Section 246 of the Code permits the
dividends-received deduction to corporate stockholders only if the shares
with respect to which the dividends were
8
<PAGE>
paid have been held for more than 45 days. The holding period requirements
are separately applicable to each block of shares acquired, including each
block of shares received in payment of the Fund's daily dividends. The Fund
has received a ruling under Section 246 with respect to this issue from the
Internal Revenue Service (the "IRS") confirming the Fund's interpretation.
For purposes of determining whether this holding period requirement has been
met, the day of acquisition and any day after the first 45 days after the
date on which such shares become ex-dividend must be disregarded. The Fund
and the Manager believe that once a stockholder has satisfied this 46-day
holding period with respect to any block of shares, such stockholder will
similarly satisfy the 46-day holding period on reinvested dividends declared
with respect to such shares to the extent that such stockholder's total
redemptions during any period do not exceed its total investment in such
shares immediately prior to such period and are properly identified, as
described below, as relating to such shares.
In addition, the holding period is reduced for periods during which the
stock is subject to diminished risk of loss including, for example, because
the holder has acquired a put option or sold a call option (other than
certain covered call options where the exercise price is not substantially
below the selling price) or otherwise hedged his position. If the holding
period is not satisfied, the dividends-received deduction is disallowed,
regardless of whether the shares with respect to which the dividends were
paid have been sold or otherwise disposed of.
The dividends-received deduction will also be reduced, for stockholders
who incur indebtedness in order to purchase shares of the Fund, by the
percentage of the cost of the shares that is debt-financed. Generally, this
limitation applies only if the debt is directly attributable to the purchase
of shares. Whether debt is directly attributable to the purchase of shares
depends on the particular facts and circumstances of each situation and
accordingly stockholders are urged to consult their tax advisers.
A stockholder and the Fund may also be subject to the extraordinary
dividend provision of the Code under which a stockholder's basis in stock can
be reduced if certain extraordinary dividends are received.
Identification of Utility Income Fund Shares. The IRS has specific
regulations governing the identification of shares to be redeemed by a
stockholder that wishes to redeem some, but not all, of its shares. In
effect, provided that any shares redeemed are properly identified, as
described below, as shares which have been held for more than 45 days, these
regulations permit a stockholder to make redemptions on a weekly or even
daily basis without adversely affecting the availability of the
dividends-received deduction to the extent that total redemptions by such
stockholder during any period do not exceed its total investment in such
shares immediately prior to such period.
The IRS's regulations permit a stockholder to identify specifically the
shares to be redeemed, thereby enabling such stockholder to select for
redemption those shares having a tax basis and holding period considered to
be most favorable by such stockholder. Alternatively, the regulations also
permit a stockholder to elect to differentiate shares on the basis of long-
and short-term holding periods and to designate from which category the
redeemed shares are to be drawn. For tax basis purposes, the basis of all
shares in a category will be averaged. In the absence of adequate
identification under the rules, any shares redeemed, including classes of
shares subject to a contingent deferred sales load, will be charged against
the earliest lot(s) acquired for both holding period and tax basis purposes.
Basis Adjustment for Extraordinary Dividends of Utility Income Fund. Under
section 1059 of the Code, a corporation which receives an "extraordinary
dividend" and disposes of the stock with respect to which such dividend was
paid, provided generally that such stock has not been held for at least two
years prior to the date of declaration, announcement or agreement about the
extraordinary dividend, is required to reduce its basis in such stock (but
not below zero) by the amount of the dividend which was not taxed because of
the dividends-received deduction with such basis reduction generally being
treated as having occurred immediately before the sale or disposition of such
stock. To the extent of such untaxed amount exceeds the shareholder's basis,
such excess will be taxed as gain upon a sale or disposition of such stock.
An extraordinary dividend generally is any dividend that equals or exceeds
10% of the shareholder's basis in the stock (5% in the case of preferred
stocks).
For this purpose, generally, all dividends received within any 85-day
period, and, if such dividends total more than 20% of the shareholder's basis
in its stock, all dividends received within one year, must be aggregated for
purposes of determining whether such dividends constitute extraordinary
dividends. The holder may elect to determine the status of extraordinary
dividends by reference to the fair market value of the stock as of the date
before the ex-dividend date, rather than by reference to the adjusted basis
of such stock (provided the holder established the fair market value to the
satisfaction of the IRS). If the Fund receives any extraordinary dividends
(as so defined) with respect to any stock and does not maintain the two-year
holding period described above, its basis in such stock will be reduced, and
it may recognize additional gain upon disposition of such stock. Similarly,
if the dividends
9
<PAGE>
received by an investor constitute extraordinary dividends, the investor may
be required to recognize additional gain upon redemption. See "Taxes--Capital
Gain Dividends" and "Taxes--Redemptions" in the Utility Income Fund
Prospectus.
Section 1059(f) of the Code generally provides that dividends on certain
self-liquidating stock are treated as extraordinary dividends without regard
to the period that the taxpayer has held such stock. In general, the stock
that is subject to this provision is preferred stock which (i) when issued,
has a dividend rate which declines (or can reasonably be expected to decline)
in the future, (ii) has an issue price in excess of its liquidation rights or
stated redemption price, or (iii) is otherwise structured to enable corporate
shareholders to reduce tax through a combination of dividend received
deduction and loss on the disposition of the stock. Although it is arguable
that the dividend rate on adjustable rate preferred stock can reasonably be
expected to decline in the future, the Fund does not believe that this
provision was intended to cover stock which is not designed to produce both
an increased dividends received deduction and a capital loss. The Fund does
not intend to invest in stock paying dividends which are treated as
extraordinary under this provision.
In determining whether the two-year holding period has been met, the same
rules apply as are applicable to the 45-day holding period requirement for
the dividends-received deductions.
In the event that total distributions (including distributed or designated
net capital gain) for a taxable year exceed its investment company taxable
income and net capital gain, a portion of each distribution generally will be
treated as a return of capital. Distributions treated as a return of capital
reduce a stockholder's basis in its shares and could result in a capital gain
tax either when a distribution is in excess of basis or, more likely, when a
stockholder redeems its shares.
Stockholders of a Portfolio will be notified annually by the Fund as to
the federal tax status of dividends and distributions paid during the
calendar year. Dividends and distributions may also be subject to state and
local taxes. State and local tax treatment may vary according to applicable
laws. Stockholders can elect to receive distributions in cash or in
additional shares of such Portfolio. The price of the additional shares is
determined as of the record date for the dividend payment.
The Fund may in the future engage in various defensive hedging
transactions. Under various Code provisions such transactions might change
the character of recognized gains and losses, accelerate the recognition of
certain gains and losses, and defer the recognition of certain losses.
YIELD AND TOTAL RETURN CALCULATION
In accordance with SEC regulations, the Fund may include current yield and
average annual total return in advertisements or information furnished to
stockholders or potential investors. Yields are calculated (separately for
each class of shares) in accordance with the SEC's standardized yield
formula. Under this formula, dividend and interest income over the 30 day
measurement period, is reduced by period expenses and divided by the number
of days within the measurement period to arrive at a daily income rate. This
daily income rate is then expressed as a semiannually compounded yield based
on the maximum offering price of a share assuming a standardized 360 day
year. The Utility Income Fund may quote a tax equivalent yield which reflects
the rate a corporate investor (assuming the availability of the 70%
dividends-received deduction for all daily dividends and a then appropriate
and specified corporate tax rate) would have to earn on a taxable security in
order to equal the same after-tax return.
The Fund may also advertise total return for each class of shares which is
calculated differently from "average annual total return" (a
"non-standardized quotation"). A non-standardized quotation of total return
measures the percentage change in the value of an account between the
beginning and end of a period, assuming no activity in the account other than
reinvestment of dividends and capital gains distributions. A non-standardized
quotation of total return for a particular class of shares will always be
accompanied by the "average annual total return" for such class. Average
annual total return for any time period is calculated (separately for each
class) by assuming an investment at the beginning of the measurement period
at the maximum offering price. Dividends from the net investable amount are
then reinvested in additional shares each month at the net asset value. At
the end of the measurement period, the total number of shares owned are
redeemed at net asset value (less any applicable contingent deferred sales
load). The change in the total value during the investment period is then
expressed as an average annual total rate of return. The Utility Income Fund
may also quote its current yield and total return of each class on a tax
equivalent basis assuming the availability of the 70% dividends-received
deduction for all of its daily dividends and a then appropriate and specified
corporate tax rate. The Utility Income Fund may also quote rankings,
10
<PAGE>
yields or returns as published by recognized statistical services or
publishers wherein its performance is categorized or compared with other
funds with similar investment objectives, such as Lipper Analytical Service's
"Utility Funds" under "Equity Funds," or this same data as quoted by
Barron's, Business Week, Forbes, Fortune, Micropal, Money, Mutual Fund,
Personal Investing, Worth, Value Line Mutual Fund Survey, or others;
Weisenberger Investment Companies Service's annual Investment Companies under
"Growth and Current Income"; or Morningstar, Inc.'s Mutual Fund Values under
"Specialty--Utilities."
Current yield and total return of each class will vary from time to time
depending on market conditions, the composition of the portfolio, operating
expenses and other factors. These factors and possible differences in method
of calculating performance figures should be considered when comparing the
performance figures of the Utility Income Fund with those of other investment
vehicles.
Yield and Total Return Calculation as of June 30, 1995, for the Utility
Income Fund (there is no historical data for Class B or Y Shares):
Current
30 Day Average Annual Total Return
Yield ----------------------------------
Inception
1 Year 5 Year 10 Year Date
--------- --------- --------- --------- --------------
Class A 5.82% 8.00% 5.24%* N/A Aug. 26, 1983
Class C 5.61% 11.14% 1.91%** N/A July 6, 1993
*Since change in investment objective (July 1, 1992)
**Since inception
DISTRIBUTIONS
The Utility Income Fund anticipates making daily distributions. The
anticipated daily distributable income of the Utility Income Fund for a
particular day will be equal to the "anticipated daily dividend and interest
income" for the day, less the "anticipated daily expenses" for that day plus
or minus any special adjustment for that day.
As with all declarations of distributions by investment companies, the net
asset value will be reduced by the amount of each daily dividend at the time
of declaration.
Anticipated Daily Dividend and Interest Income
In order to determine this component of anticipated daily distributable
income, the Manager will first project the amount of the next anticipated
dividend or interest payment (or accretion of discount in the case of
discounted instruments) on each security and the date upon which such
dividend or interest is scheduled to be paid and will then divide such amount
by the number of days from the most recent dividend or interest payment date
to the next anticipated payment date.
The Manager will continually monitor each portfolio instrument held by the
Utility Income Fund and will revise, as often as appropriate, its projections
of the amount and timing of dividend and interest payments. In making any
revision, the Manager will recalculate the anticipated daily dividend or
interest income for the instrument and calculate the difference between the
original and revised anticipated daily income figures. The Manager will then
use the revised figure after temporarily adjusting it to account for the
cumulative effect of such revision on the period prior to such revision. In
making this temporary adjustment, the Manager will generally add or subtract
such difference to or from the revised daily income figure for the particular
instrument for the same number of days as have already elapsed prior to such
revision during the anticipated payment period. However, if the revised
figure is less than 50% of the original figure, the Manager will make such
adjustment over a longer period of time or, in extreme cases, will apply such
adjustment to other portfolio securities in order to minimize the effect of
any such revision.
Special dividends, if any, will not be included in anticipated daily
income until declared and will then be included ratably over the number of
days remaining from the time the Manager learns of such declaration to the
end of the month following the month during which such dividend is paid (but
in no event later than the end of the Utility Income Fund's taxable year).
There is, of course, no assurance that dividends will be declared by the
directors of the companies in which the Utility Income Fund invests or that
interest will be paid on the debt obligations held by the Utility Income
Fund.
11
<PAGE>
Anticipated Daily Expenses
In order to determine this component of the anticipated daily
distributable income, the Manager will first project the total amount of
anticipated expenses in a proportionate amount for each class and will then
divide such amount by the number of days during the year. The Manager will
continually monitor the Utility Income Fund's expenses and will revise, as
often as appropriate, its projections of such expenses. In making any
revision, the Manager will, in the same manner as described above under
"Anticipated Daily Dividend and Interest Income," recalculate the anticipated
daily expenses figure and the cumulative difference and will then spread the
amount of such difference over the number of days remaining during the year.
Special Adjustments
Gains and losses on portfolio securities (both realized and unrealized) do
not enter into the determination of anticipated daily distributable income
even though such gains and losses affect the Utility Income Fund's net asset
value and even though realized gains and losses affect the Utility Income
Fund's book and taxable income. The Utility Income Fund does not include
these gains and losses in the determination of anticipated daily
distributable income because (i) it is the belief of the Utility Income Fund
and the Manager that any component of gains and losses on the sale of
securities that is attributable to the timing of dividend or interest
payments on portfolio securities is likely to be reflected in the anticipated
dividend and interest income component of the daily dividend formula and (ii)
the Utility Income Fund and the Manager do not expect that a significant
portion of the Utility Income Fund's income will be short- or long-term
capital gain or loss.
The Manager will, however, continually monitor the Utility Income Fund's
aggregate short- and long-term capital gain or loss and ordinary income after
taking into account dividends declared with respect to anticipated dividend
and interest income on portfolio securities sold prior to the Utility Income
Fund being entitled to receive such income. If the Manager concludes that the
Utility Income Fund is accumulating short-term capital gain or loss ordinary
income in an amount which may be material, the Utility Income Fund reserves
the right to adjust the daily dividend so as to more nearly accomplish the
Utility Income Fund's objective of distributing as much as practicable of its
investment company taxable income in the form of dividends. Any such
adjustments will be made over the course of such period of not less than 60
days as the Utility Income Fund shall determine (but in no event ending later
than the last day of the Utility Income Fund's taxable year).
DISTRIBUTOR
As stated in the Prospectus, Flagship Funds Inc., a wholly-owned
subsidiary of Flagship Resources Inc., acts as the distributor (the
"Distributor") of shares of the Fund in accordance with the terms of the
Distribution Agreement originally dated December 18, 1984 for the Flagship
Utility Income Fund. Following stockholder approval of multiple classes of
shares and consequent changes to the Distribution Plan, revised Distribution
Agreements were executed on September 2, 1992, for the Utility Income Fund.
The Distributor will make a continuous offering of the shares and will be
responsible for all sales and promotion efforts. There is no redemption
charge. Each Distribution Agreement must be approved in the same manner as
the Advisory Agreement discussed under "Investment Advisory Services" above
and will terminate automatically if assigned by either party thereto and is
terminable at any time without penalty by the Board of Directors of the Fund
or by vote of a majority of the Utility Income Fund's outstanding shares on
60 days' written notice to the Distributor and by the Distributor on 60 days'
written notice to the Utility Income Fund.
Pursuant to Rule 12b-1 under the 1940 Act, the Fund has adopted a plan
(the "Plan") with respect to Class A Shares, Class B Shares and Class C
Shares which permits the Fund to pay for certain distribution and promotion
expenses related to marketing the shares of each Portfolio. The Plan
authorizes the Fund to expend its monies in an amount equal to the aggregate
for all such expenditures to such percentage of the Fund's daily net asset
value as may be determined from time to time by vote cast in person at a
meeting called for such purpose, by a majority of the Fund's disinterested
directors. The scope of the foregoing shall be interpreted by the directors,
whose decision shall be conclusive except to the extent it contravenes
established legal authority. Without in any way limiting the discretion of
the directors, the following activities are hereby declared to be primarily
intended to result in the sale of shares of the Fund: advertising the Fund or
the Fund's investment manager's mutual fund activities; compensating
underwriters, dealers, brokers, banks and other selling entities and sales
and marketing personnel of any of them for sales of shares of the Fund,
whether in a lump sum or on a continuous, periodic, contingent, deferred or
other basis; compensating underwriters, dealers, brokers, banks and other
servicing entities and servicing personnel (including the Fund's investment
manager and its personnel of any of them for providing services to
shareholders
12
<PAGE>
of the Fund relating to their investment in the Fund, including assistance in
connection with inquiries relating to shareholder accounts; the production
and dissemination of prospectuses including statements of additional
information) of the Fund and the preparation, production and dissemination of
sales, marketing and shareholder servicing materials; and the ordinary or
capital expenses, such as equipment, rent, fixtures, salaries, bonuses,
reporting and recordkeeping and third party consultancy or similar expenses
relating to any activity for which payment is authorized by the directors;
and the financing of any activity for which payment is authorized by the
directors. Pursuant to the Plan, the Fund through authorized officers may
make similar payments for marketing services to non-broker-dealers who enter
into service agreements with the Fund.
The maximum amount payable by the Fund under the Plan and related
agreements with respect to Class A Shares is .40% of each Portfolio's average
daily net assets for the year attributable to such Class A Shares. For Class
B Shares, the maximum amount payable annually is .95% of such Portfolio's
average daily net assets attributable to such Class B Shares. For Class C
Shares, the maximum amount payable annually is .95% of such Portfolio's
average daily net assets attributable to such Class C Shares. In the case of
broker-dealers and others, such as banks, who have Selling or Service
Agreements with the Distributor or the Fund, the maximum amount payable to
any recipient is .001096% per day (.40% on an annualized basis) of the
proportion of daily net assets of the Portfolio attributable to Class A
Shares represented by such person's customers. The maximum amount payable to
any such recipient with respect to Class B Shares is .00260% per day (.95% on
an annualized basis) of the proportion of average daily net assets of such
Portfolio's attributable to Class B Shares represented by such person's
customers. The maximum amount payable to any such recipient with respect to
Class C Shares is .00260% per day (.95% on an annualized basis) of the
proportion of average daily net assets of such Portfolio's attributable to
Class C Shares represented by such person's customers. As described in the
Prospectus, the Board of Directors may reduce these amounts at any time. All
distribution expenses incurred by the Distributor and others, such as
broker-dealers or banks, in excess of the amount paid by a Portfolio will be
borne by such persons without any reimbursement from such Portfolio.
As detailed in the chart below, under its Plan and related agreements, the
Flagship Utility Income Fund paid the amounts shown. Amounts permanently
waived by the Distributor for the same periods are also shown. There is no
historical data for Class B Shares.
Fiscal Year Amount Paid Amount Permanently
Ended June 30 to Distributor Waived by Distributor
- ------------------ ---------------- ---------------------
Class A
1993 $ 53,599 $10,139
1994 128,548 --
1995 101,226 --
Class C
1994 32,610 3,378
1995 48,312 --
These amounts are summarized below as to purpose:
<TABLE>
<CAPTION>
Fiscal Year Compensation Upfront Advertising & Salaries &
Ended June 30 to Brokers Commissions Promotions Benefits Overhead Total
- -------------- ---------- ---------- ------------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Class A
- --------------
1993 36,042 -- -- 17,557 -- 53,599
1994 75,919 -- 52,629 -- -- 128,548
1995 60,804 -- 40,422 -- -- 101,226
Class C
- --------------
1994 32,610 -- -- -- -- 32,610
1995 21,763 15,255 4,566 5,929 799 48,312
</TABLE>
The Plan, the Distribution Agreement, the Selling Agreements and the
Service Agreements of the Fund have been renewed with respect to the Utility
Income Fund, by the Fund's Board of Directors, including a majority of the
directors who are not "interested persons" of the Fund and who have no direct
or indirect financial interest in the Plan or any related agreement, by vote
cast in person at meetings called for the purpose of voting on the Plan and
such agreements. Continuation of the Plan and the related agreements must be
approved annually in the same manner, and the Plan or any related agreement
may be terminated at any time without penalty by a majority of such
independent directors or by a majority of a Portfolio's outstanding shares.
Any amendment increasing the maxi-
13
<PAGE>
mum percentage payable under the Plan or other material change must be
approved by a majority of the respective Portfolio's outstanding shares, and
all other material amendments to the Plan or any related agreement must be
approved by a majority of the independent directors.
In order for the Plan to remain effective, the selection and nomination of
directors who are not "interested persons" of the Fund must be done by the
directors who are not "interested persons" and the persons authorized to make
payments under the Plans must provide written reports at least quarterly to
the Board of Directors for their review.
Also in its capacity as national wholesale underwriter for shares of the
Fund, the Distributor received commissions on sales of the Fund's Class A and
Class C Shares offered on a continuous basis for the years ended June 30,
1993 and 1994, as follows (no commissions were received in prior years; there
is no historical data for Class B or Y Shares):
Fiscal Year Aggregate Retained by
Ended June 30 Amount Distributor
- -------------- --------- --------------
Class A
1993 $1,009,000 $46,000
1994 297,500 37,300
1995 84,100 10,200
Contingent Deferred
Sales Load
- ------------- --------------------
Class C
1994 $2,600
1995 4,100
CUSTODIAN AND TRANSFER AGENT
Boston Financial, 225 Franklin Street, Boston, Massachusetts 02107, is the
custodian, transfer agent and dividend disbursing agent for the Utility
Income Fund. It also maintains the accounting records, determines the net
asset value and performs other stockholder services for the Utility Income
Fund.
AUDITORS
Deloitte & Touche LLP, 1700 Courthouse Plaza N.E., Dayton, OH 45402, are
the independent auditors for the Fund.
PORTFOLIO TRANSACTIONS
Subject to policy established by the Fund's Board of Directors, the
Manager is primarily responsible for the Utility Income Fund's investment
decisions and the placing of securities orders. In placing orders, it is the
policy of the Fund that the Manager obtain the best net results taking into
account such factors as price (including the dealer spread, where
applicable); the size, type and difficulty of the transaction involved; the
size and breadth of the market; the firm's general execution and operational
facilities; and the firm's risk in positioning the securities involved. While
the Manager seeks reasonably competitive prices or commissions, the Portfolio
will not necessarily always be paying the lowest price or commission
available. The Manager does not expect to use any one particular broker or
dealer, but, subject to obtaining best execution, brokers or dealers who
provide supplemental investment research to the Fund or the Manager may
receive orders for transactions by the Fund. In addition, the Manager may
direct brokerage to brokers or dealers because of research services provided.
Such information may be used by other clients of the Manager and not just the
Fund. Conversely, the Fund may benefit from research services provided in
respect to other clients. All research shall be paid for in compliance with
Section 28 (e) of the Securities Exchange Act of 1934 or consistent with the
fiduciary duties of the Board and the Manager. Information so received will
be in addition to and not in lieu of the services required to be performed by
the Manager under its Agreement and the expenses of the Manager will not
necessarily be reduced as a result of the receipt of such supplemental
information. For the fiscal year ended June 30, 1995, the Utility Income Fund
paid $75,732 in brokerage commissions. The preferred stock and other equity
securities in which the Utility Income Fund may invest are traded primarily
on the national securities exchanges and in the over-the-counter market.
Money market securities, bonds and debentures, in which the Manager may
invest a portion of the Portfolio's assets, are usually traded
over-the-counter, but may be traded on an exchange. For listed securities,
the Manager will deal directly with the brokers and dealers who make a market
in the securities involved except in those circumstances where better prices
and execution are available elsewhere. Such dealers usually are acting as
principal for their own account. On occasion, securities may be purchased
directly from the issuer.
14
<PAGE>
The Manager is able to fulfill its obligations to furnish a continuous
investment program to the Portfolio without receiving research from brokers;
however, it considers access to such information to be an important element
of financial management. Although such information is considered useful, its
value is not determinable, as it must be reviewed and assimilated, and does
not reduce normal research activities in rendering investment advice under
the Advisory Agreement. It is possible that the Manager's expenses could be
materially increased if it attempted to purchase this type of information or
generate it through its own staff.
One or more of the other accounts which the Manager manages may own from
time to time the same investments as the Portfolio. Investment decisions for
the Portfolio are made independently from those of such other accounts;
however, from time to time, the same investment decision may be made for more
than one company or account. When two or more companies or accounts seek to
purchase or sell the same securities, the securities actually purchased or
sold will be allocated among the companies and accounts on a good faith
equitable basis by the Manager in its discretion in accordance with the
accounts' various investment objectives. In some cases, this system may
adversely affect the price or size of the position obtainable for the
Portfolio. In other cases, however, the ability of the Portfolio to
participate in volume transactions may produce better execution for the
Portfolio. It is the opinion of the Fund's Board of Directors that this
advantage, when combined with the other benefits available due to the
Manager's organization, outweighs any disadvantages that may be said to exist
from exposure to simultaneous transactions.
PURCHASE, REDEMPTION AND PRICING OF SHARES
The various manners in which the shares of the Utility Income Fund are
offered to the public or may be redeemed, and the method of calculation by
the Utility Income Fund of net asset value per share (which is the offering
price of the shares plus a sales charge that varies with the amount
purchased) are described in the Utility Income Fund's Prospectus.
Under "Group Purchases," shares of the Fund may be purchased at net asset
value (without sales charge) by tax-qualified employee benefit plans and by
trust companies and bank trust departments for funds over which they exercise
exclusive discretionary investment authority for which they charge customary
fees and which are held in a fiduciary, agency, advisory, custodial or
similar capacity.
SERVICEMARK
Flagship Financial has filed for federal registration of the Fund's
servicemark. In addition, Flagship Financial has filed for federal
registration with regard to its use of the servicemark "Plain Vanilla" in the
investment and mutual fund area.
OTHER INFORMATION
The Prospectus and the Statement of Additional Information do not contain
all the information included in the Registration Statement filed with the SEC
under the Securities Act of 1933 and the 1940 Act with respect to the Fund
and the securities offered by it pursuant to the Prospectus, certain portions
of which have been omitted pursuant to the rules and regulations of the SEC.
The Registration Statement including the exhibits filed therewith may be
examined at the office of the SEC in Washington, D.C.
Statements contained in the Prospectus or in the Statement of Additional
Information as to the contents of any contract or other document referred to
are not necessarily complete, and, in each instance, reference is made to the
copy of such contract or other document filed as an exhibit to the
Registration Statement of which the Prospectus and the Statement of
Additional Information form a part, each such statement being qualified in
all respects by such reference.
15
<PAGE>
Index to Financial Statements of
Flagship Admiral Funds Inc.
Flagship Utility Income Fund series
Page
-------
Flagship Utility Income Fund Financial Statements and
Independent Auditors' Report
for the period ending June 30, 1995 (formerly Flagship Basic
Value Fund)
Statement of Investments in Securities and Net Assets F-2
Statement of Assets and Liabilities F-3
Statement of Operations F-3
Statements of Changes in Net Assets F-4
Notes to Financial Statements F-5
Financial Highlights F-8
Independent Auditors' Report F-10
F-1
<PAGE>
Ship logo
Portfolio Highlights Flagship Utility Income Fund
================================================================================
ASSET ALLOCATION AND INDUSTRY ANALYSIS
AS OF JUNE 30, 1995
[Graphic: Pie Chart]
COMMON STOCK - 64.4%
PIE CHART ART
OTHER NET ASSETS - 3.5%
PREFERRED STOCK AND
OTHER FIXED INCOME - 32.1%
COMMON FIXED
STOCK INCOME
ELECTRIC UTILITY 40.9% 19.5%
TELECOMMUNICATIONS 12.5% 1.8%
NATURAL GAS/PIPELINE 9.1% 2.2%
ENVIRONMENTAL SERVICES 1.9% --.%
INSURANCE/FINANCE --.% 8.6%
OTHER NET ASSETS 3.5%
PERFORMANCE COMPARISON*(Value of $10,000 investment since
Fund's change in investment objectives.) - Class A
[Graphic: Line Graph]
June 30, 1993 1994 1995
FUND AFTER SALES
CHARGE AND EXPENSES $11,099 10,341 11,655
STANDARD AND
POOR'S 500 $11,364 11,525 14,529
STANDARD AND
POOR'S UTILITY $12,542 11,608 13,383
The average annual total returns for the Fund for one year and since change in
investment objectives (7/1/92), after deduction of the maximum sales charge and
reinvestment of dividends, are 8.00% and 5.24%, respectively, for Class A stock
and 11.14% and 1.91% since inception (7/6/93) for Class C stock as of June 30,
1995. *Assumes reinvestment of all dividends and distributions. The performance
of Class C stock will be greater than or less than results of Class A stock due
to differing sales charges and expenses. The quoted data represents past
performance. Investment return and principal value will fluctuate. An investor's
shares, when redeemed, may be worth more or less than their original value.
UTILITY 3
<PAGE>
Ship logo
Statement of Investments in Securities and Net Assets June 30, 1995
================================================================================
Market
Shares Common Stock - 64.4% Value
Electric Utility - 40.9%
15,000 Baltimore Gas & Electric Company $ 375,000
10,000 Boston Edison Company 261,250
15,900 Central and South West Corporation 417,375
20,690 CINergy Corporation 543,112
27,150 DQE, Inc. 638,025
20,000 Detroit Edison Company 590,000
10,000 Entergy Corporation 241,250
20,000 Florida Power and Light Group, Inc. 772,500
20,000 Florida Progress Corporation 625,000
22,000 General Public Utilities Corporation 654,500
10,000 Houston Industries, Inc. 421,250
21,500 Illinova Corporation 545,562
20,000 IPALCO Enterprises, Inc. 637,500
19,800 LG&E Energy Corporation 772,200
17,500 New England Electric System 603,750
18,600 Northeast Utilities 418,500
34,000 Pacificorp 637,500
20,500 Public Service Enterprise Group, Inc. 568,875
18,600 Rochester Gas & Electric Corporation 395,250
30,000 Southern Company 671,250
19,300 Texas Utilities Company 663,438
21,500 United Illuminating Company 709,500
11,300 Utilicorp United, Inc. 317,812
Total 12,480,399
Environmental Services - 1.9%
20,000 WMX Technologies, Incorporated 567,500
Total 567,500
Natural Gas/Pipeline - 9.1%
15,000 Enron Corporation 526,875
31,400 MCN Corporation 620,150
20,000 Pacific Enterprises 490,000
30,000 Piedmont Natural Gas Company, Inc. 622,500
15,000 Williams Companies, Inc. 523,126
Total 2,782,651
Telecommunications - 12.5%
10,000 American Telephone & Telegraph Company 531,250
15,000 Ameritech 660,000
10,000 Bell Atlantic Corporation 560,000
15,000 NYNEX Corporation 603,750
15,000 SBC Communications, Incorporated 714,375
10,000 Sprint Corporation 336,250
10,000 U.S. West, Incorporated 416,250
Total 3,821,875
Total Common Stock (Cost $18,814,890) $19,652,425
Shares/ Market
Face Amount Value
Preferred Stock - 25.8%
Electric Utility - 16.7%
7,275 Baltimore Gas & Electric Company
(7.7800%) Series 1973 $ 727,500
20,000 Connecticut Light and Power Company
(9.300%) Series A 530,000
7,000 Commonwealth Edison Company (8.380%) 693,000
30,000 Detroit Edison Company (7.7500%) 746,250
20,000 Illinois Power Company (9.4500%) Series A 535,000
20,000 Med-Ed Capital (9.000%) Series A 515,000
20,000 Mission Energy Company (9.875%) Series A 540,000
7,872 Mississippi Power & Light (9.1600%) 810,816
Total 5,097,566
Insurance/Finance - 5.1%
30,000 Progressive Corporation (9.375%) Series A 772,500
30,000 SunAmerica, Inc. (9.250%) Series B 791,250
Total 1,563,750
Natural Gas/Pipeline - 2.2%
24,600 Phillips Gas Company (9.320%) Series A 664,200
Total 664,200
Telecommunications - 1.8%
20,000 GTE Corporation (9.2500%) Series A 542,500
Total 542,500
Total Preferred Stock (Cost $7,764,513) 7,868,016
Bonds - 6.3%
Corporate Bonds - 2.8%
800,000 Philadelphia Electric Company,
8.625%, 06/01/22 846,301
Total Corporate Bonds 846,301
Municipal Bonds - 3.5%
1,000,000 United Nations Development Corporation -
New York State Public Benefit Corporation -
Exchangeable Senior Lien Taxable Revenue -
Series 1995, 8.800%, 07/01/15 1,055,000
Total Municipal Bonds 1,055,000
Total Bonds (Cost $ 1,814,537) 1,901,301
Total Investments in Securities - 96.5% 29,421,742
Excess of Other Assets over Liabilities - 3.5% 1,079,582
Total Net Assets - 100% $30,501,324
See notes to financial statements.
4 UTILITY
<PAGE>
Ship logo
Statement of Assets and Liabilities June 30, 1995
==============================================================================
ASSETS:
Investments, at market value (cost $28,393,940) $29,421,742
Cash 493,562
Receivable for investments sold 449,985
Receivable for Fund shares sold 11,873
Dividend and interest receivable 331,731
Other 12,626
Total assets 30,721,519
LIABILITIES:
Payable for Fund shares reacquired 17,676
Distributions payable 154,037
Accrued expenses 48,482
Total liabilities 220,195
NET ASSETS $30,501,324
Class A:
Applicable to 2,440,747 shares issued and outstanding $25,000,193
Net asset value per share $ 10.24
Class C:
Applicable to 537,415 shares issued and outstanding $ 5,501,131
Net asset value per share $ 10.24
Ship logo
Statement of Operations For the year ended June 30, 1995
==============================================================================
INVESTMENT INCOME:
Dividends $ 2,185,091
Interest 100,479
Total Income 2,285,570
EXPENSES:
Distribution fees - Class A (Note F) 101,226
Distribution fees - Class C (Note F) 48,312
Investment advisory fees (Note E) 151,911
Custody and accounting fees 49,650
Transfer agent's fees 54,125
Registration fees 40,210
Legal fees 5,680
Audit fees 22,215
Directors' fees 3,285
Stockholder services fees (Note F) 9,570
Other 2,031
Advisory fees waived (Note E) (145,717)
Expense subsidy (Note E) (10,950)
Total expenses 331,548
Net investment income 1,954,022
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on security transactions (1,509,016)
Change in unrealized appreciation (depreciation) of investments 3,182,126
Net gain on investments 1,673,110
Net increase in net assets resulting from operations $ 3,627,132
See notes to financial statements.
UTILITY 5
<PAGE>
Ship logo
Statements of Changes in Net Assets
================================================================================
Year Ended Year Ended
June 30, 1995 June 30, 1994
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 1,954,022 $ 2,110,396
Net realized loss on security transactions (1,509,016) (1,252,472)
Change in unrealized appreciation
(depreciation) of investments 3,182,126 (3,477,732)
Net increase (decrease) in net assets
resulting from operations 3,627,132 (2,619,808)
Distributions to stockholders:
Dividends from net investment income - Class A (1,648,894) (1,910,056)
Dividends from net investment income - Class C (305,128) (205,087)
Net decrease in net assets from
distributions to stockholders - Class A (1,648,894) (1,910,056)
Net decrease in net assets from distributions (305,128) (205,087)
to stockholders - Class C
Capital stock transactions:
Proceeds from shares sold - Class A 4,148,639 8,859,621
Proceeds from shares sold - Class C 1,333,733 6,033,884
Net asset value of shares issued in
reinvestment of distributions - Class A 844,993 1,007,293
Net asset value of shares issued in 211,855 128,860
reinvestment of distributions - Class C
Cost of shares reacquired - Class A (8,294,648) (11,729,856)
Cost of shares reacquired - Class C (1,466,485) (333,507)
Net decrease in net assets from (3,301,016) (1,862,942)
capital stock transactions - Class A
Net increase in net assets from 79,103 5,829,237
capital stock transactions - Class C
Total decrease in net assets (1,548,803) (768,656)
NET ASSETS:
Beginning of year 32,050,127 32,818,783
End of year $ 30,501,324 $ 32,050,127
NET ASSETS CONSIST OF:
Common stock, at par $ 2,979 $ 3,308
Paid-in surplus (Note D) 73,633,772 84,388,042
Accumulated net realized loss on security (44,163,229) (50,186,899)
transactions (Note D)
Unrealized appreciation (depreciation)
of investments 1,027,802 (2,154,324)
$ 30,501,324 $ 32,050,127
See notes to financial statements
6 UTILITY
<PAGE>
Ship logo
Notes to Financial Statements Year ended June 30, 1995
================================================================================
A. DESCRIPTION OF BUSINESS
Flagship Utility Income Fund (Fund) is a series of Flagship Admiral Funds
Inc. (Corporation), a Maryland corporation registered under the Investment
Company Act of 1940, as amended, as a diversified, open-end management
investment company. The Fund commenced investment operations on August 26,
1983. On July 6, 1993 the Fund began to offer Class C stock to the investing
public. Class A stock is sold with a front-end sales charge. Class C stock is
offered with no front-end sales charge but is assessed a contingent deferred
sales charge if redeemed within one year from the time of purchase. Both
classes of stock have identical rights and privileges except with respect to
the effect of sales charges, the distribution and/or service fees borne by
each class, expenses specific to each class, voting rights on matters
affecting a single class and the exchange privileges of each class. Capital
stock of the Fund, which is registered under the Securities Act of 1933, as
amended, is offered to the public on a continuous basis.
B. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund.
Security Valuations: Portfolio securities listed or traded on a national
securities exchange are valued at the last sale price on such exchange on the
valuation day. Listed securities for which there were no sales that day and
securities traded in the over-the-counter market are valued at the mean
between the last reported bid and asked prices on the valuation day.
Short-term investments are stated at amortized cost, which approximates
market value. Restricted securities and other portfolio securities for which
market quotations are not readily available are valued at fair value as
determined under procedures established by the Board of Directors.
Restricted Securities: The Fund may purchase securities that are subject to
restrictions on disposition under the Securities Act of 1933 or for which
market quotations are not readily available, including repurchase agreements.
There were no restricted securities included in the statement of investments
at June 30, 1995.
Federal Income Taxes: It is the Fund's policy to comply with the Internal
Revenue Code requirements applicable to regulated investment companies and to
distribute all of its taxable income to its stockholders. Therefore, no
federal income tax provision is required. Distributions from net realized
capital gains may differ for financial statement and tax purposes primarily
due to the treatment of wash sales and post-October capital losses.
Security Transactions and Investment Income: Security transactions are
accounted for on the date the securities are purchased or sold (trade date).
Realized gains and losses on securities are based upon the specific
identification method for both financial statement and federal income tax
purposes. The Fund amortizes discounts and premiums paid on purchases of
portfolio securities on the same basis for both financial reporting and tax
purposes. For municipal securities, market discounts are recognized as
ordinary income upon disposition or maturity. Dividend income is recorded on
the ex-dividend date. Interest income is recorded on the accrual basis.
Distributions to Stockholders: The Fund's anticipated daily net investment
income is declared as a dividend each day and paid monthly. Dividends are
reinvested in additional shares unless otherwise requested. Net realized
gains on security transactions, to the extent they exceed available capital
loss carryforwards, are distributed to stockholders.
Expense Allocation: Estimated expenses are accrued daily. Shared expenses
incurred by the Corporation are allocated based on each series' ratio of net
assets to the combined net assets. Specifically identified direct expenses
are charged to each series as incurred. Fund expenses not specific to any
class of stock are prorated among the classes based upon the eligible net
assets of each class. Specifically identified direct expenses of each class
are charged to that class as incurred.
UTILITY 7
<PAGE>
Notes to Financial Statements
================================================================================
Custodian Fees: The Fund has entered into an agreement with the custodian to
reduce monthly custodian charges for compensating cash balances maintained on
deposit. The compensating balance credit is based on 80% of the daily
effective federal funds rate. Securities
Purchased on a "When Issued" Basis: The Funds may, upon adequate segregation
of securities as collateral, purchase and sell portfolio securities on a
"when issued" basis. These securities are registered by a government agency,
but have not been issued to the public. Delivery and payment take place after
the date of the transaction and such securities are subject to market
fluctuations during this period. The current market value of these securities
is determined in the same manner as other portfolio securities. There were no
"when issued" purchase commitments included in the statements of investments
at June 30, 1995.
C. CAPITAL STOCK
At June 30, 1995, there were 200,000,000 shares equally divided among the two
Classes of $.001 par value capital stock authorized. Transactions in capital
stock were as follows:
Year Ended Year Ended
June 30, 1995 June 30, 1994
CLASS A
Shares sold 429,971 814,207
Shares issued in
reinvestment of
distributions 86,590 93,684
Shares reacquired (853,817) (1,101,513)
Net decrease in shares
outstanding (337,256) (193,622)
Outstanding at beginning
of year 2,778,003 2,971,625
Outstanding at end of year 2,440,747 2,778,003
Period From
Year Ended July 6, 1993 to
June 30, 1995 June 30, 1994
CLASS C
Shares sold 136,957 549,426
Shares issued in
reinvestment of
distributions 21,703 12,274
Shares reacquired (150,761) (32,184)
Net increase in shares
outstanding 7,899 529,516
Outstanding at beginning
of period 529,516 -0-
Outstanding at end of period 537,415 529,516
The entire amount of the Fund's dividends to its corporate stockholders is
eligible for the qualified dividends-received deduction.
D. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities other than United States government
obligations and short-term notes for the year ended June 30, 1995 aggregated
$43,549,639 and $47,109,664, respectively.
At June 30, 1995, net unrealized appreciation for financial reporting and
federal income tax purposes aggregated $1,027,802 of which $1,605,391 related
to appreciated securities and $577,589 related to depreciated securities.
At June 30, 1995, the Fund has available a capital loss carryforward of
$44,163,200 to offset future net capital gains in the amounts of
approximately $24,235,300 through June 30, 1996, $14,004,400 through June 30,
1997, $1,285,200 through June 30, 1998, $1,876,800 through June 30, 1999,
$1,241,900 through June 30, 2002 and $1,519,600 through June 30, 2003. At
June 30, 1995, the Fund reclassified $7,532,686 of expired capital loss
carryforward from accumulated net realized loss on security transactions to
additional paid-in surplus. Net investment income, net realized gains, and
net assets were not affected by this reclassification.
8 UTILITY
<PAGE>
Notes to Financial Statements
================================================================================
E. INVESTMENT ADVISORY FEES
Pursuant to the terms of the Investment Advisory Agreement, the Advisor,
Flagship Financial Inc., provides the Fund with investment advice,
administrative services and facilities. In addition, the Advisor places the
purchases and sales orders for the portfolio transactions of the Fund. As
compensation for these services, the Advisor is paid a fee computed daily and
payable monthly at an annual rate varying from .30% to .50% of the average
net asset value of the Fund, depending on its size. During the year ended
June 30, 1995, the Advisor, at its discretion, permanently waived $145,717 of
its advisory fees. Also, under an agreement with the Fund, the Advisor has
agreed to subsidize certain expenses (excluding advisory and distribution
fees) until the Fund reaches a sufficient size to maintain a normal expense
ratio to average net assets.
F. MARKETING, ADMINISTRATIVE AND DISTRIBUTION FEES
The Fund has a Distribution Agreement with Flagship Funds Inc. (Distributor).
The Distributor serves as the exclusive selling agent and distributor of the
Fund's Class A and Class C capital stock and in that capacity is responsible
for all sales and promotional efforts, including printing of prospectuses and
reports used for sales purposes. Pursuant to Rule 12b-1 under the Investment
Company Act of 1940, the Fund has adopted a plan to reimburse the Distributor
each month for its actual expenses incurred in the distribution and promotion
of sales of the Fund's capital stock. The maximum amount payable for these
expenses on an annual basis is .40% and .95% of the Fund's average daily net
assets for Class A and Class C stock, respectively. Included in accrued
expenses at June 30, 1995, were accrued distribution fees of $8,259 and
$4,323 for Class A and Class C shares, respectively. Certain non-promotional
expenses directly attributed to current stockholders are aggregated by the
Distributor and passed through to the Fund as stockholder services fees.
In its capacity as national wholesale underwriter for the shares of the
Fund, the Distributor received commissions on sales of the Fund's Class A
stock of approximately $84,100 for the year ended June 30, 1995, of which
approximately $73,900 was paid to other dealers. For the year ended June 30,
1995, the Distributor received approximately $4,100 of contingent deferred
sales charges on redemption of Class C stock. Certain officers and directors
of the Fund are also officers and/or directors of the Distributor and/or
Advisor.
G. LINE OF CREDIT
The Fund participates in a line of credit provided by State Street Bank &
Trust Co.
The Fund may temporarily for emergency purposes, borrow up to $2 million
under the line of credit. Borrowings are collateralized with pledged
securities and are due on demand with interest currently at 1% above the
federal funds rate. At June 30, 1995, the Fund had no borrowings outstanding
under the line of credit. The average daily amount of borrowings under the
line of credit during the year ended June 30, 1995 was approximately
$153,900, with a weighted average annualized interest rate of 7.08%.
UTILITY 9
<PAGE>
Ship logo
Financial Highlights Selected data for each share of capital
stock outstanding throughout the year.
================================================================================
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Year Ended
June 30, 1995 June 30, 1994 June 30, 1993 June 30, 1992 June 30, 1991
<S> <C> <C> <C> <C> <C>
Class A
Net asset value, beginning of year $ 9.69 $ 11.04 $ 10.18 $ 9.51 $ 10.45
Income from investment operations:
Net investment income 0.64 0.63 0.67 0.67 0.76
Net realized and unrealized
gain (loss) on securities 0.55 (1.34) 0.86 0.69 (0.88)
Total from investment operations 1.19 (0.71) 1.53 1.36 (0.12)
Less distributions:
Dividends from net investment income (0.64) (0.64) (0.67) (0.69) (0.82)
Total distributions (0.64) (0.64) (0.67) (0.69) (0.82)
Net asset value, end of year $ 10.24 $ 9.69 $ 11.04 $10.18 $ 9.51
Total return(a) 12.73% (6.83%) 15.86% 14.69% (1.14%)
Ratios to average net assets:
Actual net of waivers and reimbursements:
Expenses 1.00% 0.94% 1.03% 1.42% 1.48%
Net investment income 6.52% 5.92% 6.31% 6.72% 7.79%
Assuming no waivers and reimbursements:
Expenses 1.52% 1.38% 1.62% 1.62% 1.62%
Net investment income 6.00% 5.48% 5.72% 6.52% 7.65%
Net assets, end of year (000's) $25,000 $26,921 $32,819 $6,050 $12,830
Portfolio turnover rate 158.55% 193.14% 154.12% 58.50% 116.16%
</TABLE>
(a) The total returns shown do not include the effect of applicable
front-end sales charge.
10 UTILITY
<PAGE>
Ship logo
Financial Highlights Selected data for each share of capital
stock outstanding throughout the period.
================================================================================
Period From
Year Ended July 6, 1993 to
June 30, 1995 June 30, 1994
Class C
Net asset value, beginning of period $ 9.69 $ 11.05
Income from investment operations:
Net investment income 0.59 0.59
Net realized and unrealized
gain (loss) on securities 0.55 (1.39)
Total from investment operations 1.14 (0.80)
Less distributions:
Dividends from net investment income (0.59) (0.56)
Total distributions (0.59) (0.56)
Net asset value, end of period $ 10.24 $ 9.69
Total return(a) 12.14% (7.52%)
Ratios to average net assets
(annualized where appropriate):
Actual net of waivers and reimbursements:
Expenses 1.54% 1.46%
Net investment income 6.01% 5.69%
Assuming no waivers and reimbursements:
Expenses 2.06% 2.04%
Net investment income 5.49% 5.11%
Net assets, end of period (000's) $ 5,501 $ 5,129
Portfolio turnover rate 158.55% 193.14%
(a) The total returns shown do not include the effect of applicable contingent
deferred sales charge and are annualized where appropriate.
UTILITY 11
<PAGE>
Ship logo
Independent Auditors' Report
================================================================================
TO THE STOCKHOLDERS AND DIRECTORS
FLAGSHIP UTILITY INCOME FUND
We have audited the accompanying statement of assets and liabilities, including
the statement of investments in securities and net assets, of the Flagship
Utility Income Fund as of June 30, 1995, the related statement of operations for
the year then ended, and the statements of changes in net assets and the
financial highlights for each of the periods presented. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of June
30, 1995, by correspondence with the Fund's custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of the Flagship Utility
Income Fund at June 30, 1995, the results of its operations, the changes in its
net assets, and the financial highlights for the respective stated periods, in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dayton, Ohio
July 24, 1995
12 UTILITY
<PAGE>
APPENDIX I
DESCRIPTION OF SECURITIES RATINGS
Standard & Poor's Ratings Group(R) -- A brief description of the
applicable Standard & Poor's Ratings Group rating symbols and their meanings
(as published by Standard & Poor's Corporation) follows:
A Standard & Poor's corporate debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific debt obligation.
This assessment may take into consideration obligors such as guarantors,
insurers, or lessees.
The rating is not a recommendation to purchase, sell or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished by the issuer and
obtained by Standard & Poor's from other sources it considers reliable.
Standard & Poor's does not perform an audit in connection with any rating and
may, on occasion, rely on unaudited financial information. The ratings may be
changed, suspended, or withdrawn as a result of changes in, or unavailability
of, such information, or for other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
I. Likelihood of default -- capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in
accordance with the terms of the obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangements under
the laws of bankruptcy and other laws affecting creditors' rights.
l. Long-term bonds
AAA Bonds rated AAA have the highest rating assigned by Standard & Poor's
to a debt obligation. Capacity to pay interest and repay principal
is extremely strong.
AA Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small
degree.
A Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than bonds
in higher rated categories.
BBB Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for bonds in this category than for
bonds in higher rated categories.
BB-D Debt rated "BB", "B", "CCC", "CC" and "C" is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation.
"BB" indicates the lowest degree of speculation and "C" the highest
degree of speculation. While such debt will likely have some quality
and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions. The
"CI" is reserved for income bonds on which no interest is being paid.
Debt rated "D" is in default, and payment of interest and/or repayment
of principal is in arrears.
Plus (+) or Minus (-): The ratings from "AA" to "BBB" may be modified by
the addition of a plus or a minus sign to show relative standing within the
major rating categories.
Provisional Ratings: The letter "P" indicates that the rating is provisional.
A provisional rating assumes the successful completion of the project being
financed by the bonds being rated and indicates that payment of debt service
requirements is largely or entirely dependent upon the successful and timely
completion of the project. This rating, however, while addressing credit quality
subsequent to completion of the project, makes no comment on the likelihood of,
or the risk of default upon failure of, such completion. The investor should
exercise his own judgment with respect to such likelihood and risk.
I-1
<PAGE>
2. Preferred stock rating criteria
Preferred stock ratings reflect the merits of each issue relative to the
universe of preferreds, and not in relation to debt obligations. Since
preferred stock is by definition a junior ranking security, preferred stock
ratings do not factor in the security's junior position -- in a bankruptcy
reorganization or liquidation -- to a company's debt obligations. However,
preferred stock cannot be rated higher than a company's highest-ranking debt
obligations because the same basic methodology and ratio norms are used to
rate both types of securities.
The financial analysis performed in conjunction with preferred stock
ratings is virtually the same as that used to rate debt. Fixed-charge
coverage and capitalization ratios are calculated treating preferred stock
obligations as though they were debt. Accordingly, if there is a substantial
amount of preferred, the rating on preferred stock could differ greatly from
the debt rating; the company has less capacity to pay dividends and debt
service than it has to meet debt service alone. The size of the differential
is a function of how much preferred is outstanding. (While the gap can be a
full rating category or more, a large amount of preferred will drag down the
debt rating as well. Even though a company under duress can stop paying the
preferred dividends to avoid default, the burden of the preferred increases
the risk that the company will face such a financial crisis. The company will
pay dividends as long as possible; this can sap its financial strength or
siphon off funds that otherwise could be used to protect the firm's
competitive position.)
Preferred stock ratings also consider the vulnerability of the dividend to
the firm's discretionary passing on a payment. It is often appropriate to
rate preferred stock lower than indicated by pure financial analysis -- and
well below the debt rating -- in the case of speculative grade credits. Such
issuers may be expected to eliminate preferred dividends to help avoid
financial constraints. Similarly, covenants in debt instruments can endanger
payment of preferred dividends even if financial measures indicate a capacity
to pay.
Moody's Investors Service Inc. -- A brief description of the applicable
Moody's Investors Service, Inc. rating symbols and their meanings follow:
l. Long-term bonds
Aaa -- Bonds which are rated Aaa are judged to be the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large, or by an
exceptionally stable, margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are more unlikely to impair the fundamentally strong position of such issues.
With the occasional exception of oversupply in a few specific instances, the
safety of obligations of this class is so absolute that their market value is
affected solely by money market fluctuations.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than
the Aaa Securities. These Aa bonds are high grade, their market value
virtually immune to all but money market influences, with the occasional
exception of oversupply in a few specific instances.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as higher medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to A-rated bonds may be influenced
to some degree by credit circumstances during a sustained period of depressed
business conditions. During periods of normalcy, bonds of this quality
frequently move in parallel with Aaa and Aa obligations, with the occasional
exception of oversupply in a few specific instances.
Baa -- Bonds which are rated Baa are considered as lower medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments may be lacking or may be characteristically unreliable over
any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well. The
market value of Baa-rated bonds is more sensitive to change in economic
circumstances, and aside from occasional speculative factors applying to some
bonds of this class, Baa market valuations move in parallel with Aaa, Aa, and
A obligations during periods of economic normalcy, except in instances of
oversupply.
Ba-C -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often, the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in
I-2
<PAGE>
this class. Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may
be small. Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to
principal or interest. Bonds which are rated Ca represent obligations which
are speculative in a high degree. Such issues are often in default or have
other marked shortcomings. Bonds which are rated C are the lowest rated class
of bonds, and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
Moody's bond rating symbols may contain numerical modifiers of a generic
rating classification. The modifier l 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 generic
rating category.
Con. -- Bonds for which the security depends upon the completion of some
act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operating experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting
condition attaches. Parenthetical rating denotes probable credit status upon
completion of construction or elimination of basis of condition.
2. Preferred Stock
aaa An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the
least risk of dividend impairment within the universe of preferred
stocks.
aa An issue which is rated "aa" is considered a high-grade preferred
stock. This rating indicates that there is a reasonable assurance that
earnings and asset protection will remain relatively well maintained
in the foreseeable future.
a An issue which is rated "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in
the "aaa" and "aa" classification, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.
baa An issue which is rated "baa" is considered to be a medium-grade
preferred stock, neither highly protected nor poorly secured. Earnings
and asset protection appear adequate at present but may be
questionable over any great length of time.
ba An issue which is rated "ba" is considered to have speculative
elements and its future cannot be considered well assured. Earnings
and asset protection may be very moderate and not well safeguarded
during adverse periods. Uncertainty of position characterizes
preferred stocks in this class.
b An issue which is rated "b" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance
of other terms of the issue over any long period of time may be small.
caa An issue which is rated "caa" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the
future status of payments.
ca An issue which is rated "ca" is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of
eventual payments.
c This is the lowest rated class of preferred or preference stock.
Issues so rated can be regarded as having extremely poor prospects of
everattaining any real investment standing.
* Note: Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification: the modifier 1 indicates that the security ranks in the
higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking and the modifier 3 indicates that the issue ranks in the
lower end of its generic rating category.
I-3
<PAGE>
Fitch Investors Service, Inc. -- A brief description of the applicable
Fitch Investors Service, Inc. rating symbols and their meanings follows:
l. Long-term bonds
AAA Bonds considered to be investment grade and the of 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.
AA Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated 'AAA'. Because bonds 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-l+'.
A Bonds 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.
BBB Bonds 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.
Plus (+) Minus (-) Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the
rating category. Plus and minus signs, however, are not
used in the 'AAA' category. NR Indicates that Fitch does
not rate the specific issue.
Conditional A conditional rating is premised on the successful completion of
a project or the occurrence of a specific event.
Suspended A rating is suspended when Fitch deems the amount of information
available from the issuer to be inadequate for rating purposes.
Withdrawn A rating will be withdrawn when an issue matures or is called or
refinanced, and, at Fitch's discretion, when an issuer fails to
furnish proper and timely information.
FitchAlert Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the
likely direction of such change. These are designated as
"Positive," indicating a potential upgrade, "Negative," for
potential downgrade, or "Evolving," where ratings may be raised
or lowered. FitchAlert is relatively short-term, and should be
resolved within 12 months.
Credit Trend Credit trend indicators show whether credit fundamentals are
improving, stable, declining, or uncertain, as follows:
Improving [arrow up]
Stable [arrow left and right]
Declining [arrow down]
Uncertain [arrow up and down]
Credit trend indicators are not predictions that any rating
change will occur, and have a longer-term time frame than
issues placed on FitchAlert.
I-4
<PAGE>
Duff & Phelps Credit Rating Scale -- A brief description of the applicable
Duff & Phelps rating symbols and their meanings follows:
AAA Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+ High credit quality. Protection factors are strong. Risk is modest
AA but may vary slightly from time to time because of economic
AA- conditions.
A+ Protection factors are average but adequate. However, risk factors
A are more variable and greater in periods of economic stress.
A-
BBB+ Below average protection factors but still considered sufficient for
BBB prudent investment. Considerable variability in risk during economic
BBB- cycles.
BB+ Below investment grade but deemed likely to meet obligations when
BB due. Present or prospective financial protection factors fluctuate
BB- according to industry conditions or company fortunes. Overall quality
may move up or down frequently within this category.
B+ Below investment grade and possessing risk that obligations will not
B be met when due. Financial protection factors will fluctuate widely
B- according to economic cycles, industry conditions and/or company
fortunes. Potential exists for frequent changes in the rating within
this category or into a higher or lower rating grade.
CCC Well below investment grade securities. Considerable uncertainty
exists as to timely payment of principal, interest or preferred
dividends. Protection factors are narrow and risk can be substantial
with unfavorable economic/industry conditions, and/or with
unfavorable company developments.
DD Defaulted debt obligations, issuer failed to meet scheduled principal
and/or interest payments.
DP Preferred stock with dividend arrearages.
I-5
<PAGE>
APPENDIX II
DESCRIPTION OF HEDGING TECHNIQUES
Set forth below is additional information regarding the funds' 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 a fund 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
series 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 series 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. A fund 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 series.
There is no guarantee that such closing transactions can be effected.
Index Contracts
Index Futures. An index which assigns relative values to the securities
included in the index is traded on the Chicago Board of Trade. The index
fluctuates with changes in the market values of all such securities included
rather than a single security. An index future is a bilateral agreement
pursuant to which two parties agree to take or make delivery of an amount of
cash--rather than any security--equal to specified dollar amount times the
II-1
<PAGE>
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 Fund may also purchase put or call options on U.S.
Government or equity 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.
Index futures and options transactions would be subject to risks similar
to transactions in financial futures and options thereon as described above.
No fund will enter into transactions in index or financial futures or related
options unless and until, in the Manager'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
such 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 such fund is authorized to invest. Repurchase agreements may be
characterized as loans secured by the underlying securities. A 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 Directors ("Qualified
Institutions"). The Manager will monitor the continued creditworthiness of
Qualified Institutions, subject to the oversight of the series Board of
Directors.
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 series 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 series' ability to dispose of the underlying securities may
be restricted. Finally, it is possible that the series 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 series 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.
II-2
<PAGE>
APPENDIX III
TAX EQUIVALENT YIELD
This chart shows the taxable yield that a corporate investor would have to
earn in order to equal the amount of after tax income generated by the given
Fund yield.
<TABLE>
<CAPTION>
CORPORATE TAXABLE
FUND YIELD FUND YIELD FUND YIELD
(Before Tax) (After Tax) (Before Tax)
---------------- --------------- ----------------
<S> <C> <C>
6.00% 5.37% 8.26%
7.00 6.27 9.64
8.00 7.16 11.02
9.00 8.06 12.39
10.00 8.95 13.77
11.00 9.85 15.15
12.00 10.74 16.52
13.00 11.64 17.90
14.00 12.53 19.28
15.00 13.43 20.65
16.00 14.32 22.03
</TABLE>
* Assuming that all the Fund's income qualifies for the 70% corporate
dividend-received deduction and that the corporate investor is at a maximum
Federal tax rate (35% tax rate).
III-1
<PAGE>
[Front Cover]
Investor Guide
FLAGSHIP
UTILITY INCOME
FUND(R)
[Family Photo]
Seeking Income For Today
and Growth for Tomorrow
[Graphic: Clipper Ship]
THIS BROCHURE INCLUDES A PROSPECTUS WHICH DESCRIBES IN DETAIL THE FUND'S
OBJECTIVES, INVESTMENT POLICIES, RISKS, SALES CHARGES, FEES, AND OTHER MATTERS
OF INTEREST. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE YOU INVEST OR SEND
MONEY.
<PAGE>
The Fund invests primarily in
the preferred and common stocks
of carefully selected American
companies in the electric, tele-
communications, natural gas and
water businesses.
[Graphic: Power line support]
Flagship Utility Income Fund
Your Investment Objectives
For retirement planning, building an investment portfolio or staying ahead of
inflation, you need to make investment decisions which enable you to earn an
attractive return and preserve your investment capital. You may also need an
investment which gives you the opportunity to achieve two major investment
objectives: regular monthly income for current expenses and growth potential for
future needs.
An Opportunity for Income and Growth
The Flagship Utility Income Fund is a professionally managed, diversified
portfolio of domestic utility stocks which seeks to provide dividend income
today and long-term growth of income and capital for tomorrow. The Fund invests
primarily in the preferred and common stocks of carefully selected American
companies in the electric, telephone, telecommunications, natural gas and water
businesses. These companies supply essential services to consumers and industry
while traditionally providing consistent earnings and dividend growth.
Consistency of Earnings
Utility stocks have demonstrated their ability to hold value through various
market conditions. They make up an investment sector that is known for
attractive dividend yields and are, therefore, treated differently from other
equity securities by the financial community. Their services are basic
necessities, and their earnings are relatively consistent.
[Photo: Middle-age couple]
Shares, when redeemed, may be worth more or less than their
original cost. Investment in the Fund is not FDIC insured.
The value of the Fund may fluctuate. The return on the
investment is not guaranteed. Not a part of the prospectus
Utilities For Income and Growth
Not a part of the prospectus
<PAGE>
Utilities for Income and Growth
A Hedge Against Inflation
In addition to attractive dividends, utility stocks offer the potential to stay
ahead of inflation. In fact, income and appreciation from utility stocks may
help investors increase their purchasing power. For the 10-year period between
1985 and 1994, inflation eroded the value of the dollar at an average annual
rate of 3.59%. For the same period, the Standard & Poor's (S&P) 40 Utility Index
experienced dividend growth of 3.19% and appreciation of 7.06%.
Growth of a $10,000 Investment
With steady, growing dividend earnings and relatively stable stock prices, even
during economic downturns, the utility sector has long been a favorite for
conservative investors. Over the past 10 years, a hypothetical investment of
$10,000 in the S&P 40 Utility Index would have grown to $36,645. Given their
lower volatility and more conservative, defensive positioning, utility
investments are frequently viewed as a good balance between risk and reward.
Growth of a $10,000 Investment
[Mountain graph showing growth of consumer price index (CPI), S&P 500 and
S&P utilities from 1985 to 1994 with the following plot points:]
Year S&P 500 S&P Utilities CPI
10,000 10,000 10,000
1985 13,164 13,281 10,380
1986 15,607 17,058 10,505
1987 16,403 16,563 10,967
1988 19,128 19,571 11,449
1989 25,189 28,813 11,976
1990 24,409 28,075 12,730
1991 31,846 32,180 13,112
1992 24,272 34,783 13,506
1993 37,727 39,806 13,870
1994 38,225 36,545 14,245
An investment in the S&P 40 Utility Index would be worth $50,286.
An investment in the S&P 500 Index would be worth $40,073.
This example is intended for illustrative purposes only and does not represent
the past or the future performance of any Flagship fund. The S&P 40 Utility
Index is an unmanaged index of the 40 largest, publicly-held utility companies
in the U.S., which measures stock price and dividends. The S&P 500 is a
diversified, unmanaged index of the largest industrial companies which also
measures stock price and dividends. The Consumer Price Index is a measure of the
average change in prices over time in a fixed market basket of goods and
services. Sources: Standard and Poor's Research, Bureau of Labor Statistics.
Not a part of the prospectus
With their growing dividends and
appreciation, utility stocks may
help you stay ahead of inflation
and increase your purchasing
power.
[Graphic: Power line support]
<PAGE>
The Benefits of the Fund
History of Growing Dividends
[Bar graph showing the history of
dividend growth with the X-axis being
years with the following plot points:]
1985 $6.73
1986 $7.03
1987 $7.38
1988 $7.62
1989 $7.89
1990 $8.29
1991 $8.51
1992 $8.55
1993 $8.66
1994 $8.86
A good all-weather investment, utilities
have traditionally provided an attractive
total return.
[Graphic: Power line support]
Growth of Dividends
With steady, growing dividend income in almost any economic climate and their
historically reliable cash flow, utilities have paid higher dividends than
non-utility securities. As part of its investment strategy for the Fund,
Flagship will invest in utility stocks with a history of rising dividends.
Special Advantages
Utility stocks provide steady growth opportunities for investors. Because they
operate largely as regulated monopolies whose business prospects are more
certain than those of other industrial companies, they are considered
conservative investments, suitable when current income and preservation of
capital are investment objectives.
Fund Benefits
The Flagship Utility Income Fund is designed for individual and corporate
investors, including personal or company-sponsored retirement plans. The Fund's
special benefits include:
(bullet) Investment in the Basic, Essential Utility Companies
(bullet) Portfolio Diversification
(bullet) Monthly Dividends With Capital Gains Distributions, if any,
Paid Annually
(bullet) Automatic Investment and Dividend Reinvestment Options
Not a part of the prospectus
<PAGE>
Suitable for Individuals and Corporations
For Individual and Corporate Investors
[Photo: Elderly couple]
The Fund provides the opportunity for current and growing monthly dividend
income, stock price appreciation and a way to stay ahead of inflation. The Fund
is appropriate for Individual Retirement Accounts, Keogh Accounts and other
tax-qualified retirement plans. The Fund attempts to qualify most dividend
income for the 70% corporate dividends-received deduction. A corporation paying
taxes at the maximum corporate rate keeps almost 90% of its dividend income from
the Fund, even after taxes.
- -----------------------------------------------------------------------------
The Fund's Philosophy
Flagship's investment philosophy is designed to achieve current income and
long-term growth of income and capital for individual and corporate investors.
In addition to purchased research, Flagship will use the findings of its own
credit analysis and equity research team to determine whether a utility is
appropriate for the Fund.
- -----------------------------------------------------------------------------
The Fund is appropriate for Individual
Retirement Accounts, Keogh Accounts and
other tax-qualified retirement plans.
[Graphic: Power line support]
Not a part of the prospectus
<PAGE>
As part of its investment strategy for
the Fund, Flagship will invest in
utility stocks with a history of
rising dividends.
[Photo: Child with dog]
[Graphic: Power line support]
Utilities Provide Vital Services
The Fund's Portfolio
The Fund will purchase the securities of utilities with:
(bullet) Service Areas with Healthy Economies and Growing Populations
(bullet) A Favorable Regulatory Climate
(bullet) The Potential for Increased Earnings and Dividends
(bullet) Strong Management
(bullet) High Overall Ratings by Standard & Poor's or other
Rating Agencies
Electric
The Fund selects electric utilities, with high dividends, total return
potential, financial strength, and regulatory flexibility.
Telecommunications
The investment characteristics of the communications industry are changing from
income-oriented to capital gains-oriented. As Companies continue to make
significant investments in their non-regulated businesses, they are also
maximizing efficiencies in their regulated businesses.
Natural Gas
The natural gas industry offers current and longer-term opportunities for the
Fund as industrial and residential customers worldwide recognize the benefits of
conversion to a key alternative to fossil fuels.
Water
Besides personal use, water utilities are engaged in providing water for fire
protection, sewage disposal, manufacturing, recycling and recreation.
Not a part of the prospectus
<PAGE>
The Fund's Investment Adviser
Flagship
Flagship was originally founded in 1970 as the money management division of The
Mead Corporation, the forest products company. Since the launch of Flagship and
its family of specialty fixed income mutual funds, assets under management have
grown to nearly $4.5 billion with a shareholder base of over 100,000.
The company is based in Dayton, Ohio.
Performance
As a specialist in fixed income portfolio management, Flagship is
well positioned to uncover investment opportunities as it seeks to enhance
shareholder value. Flagship's portfolio management team utilizes an active
strategy, and anticipates changing economic conditions, as they seek to achieve
your investment objectives.
Service
Flagship's well-trained, responsive customer service team exists solely to meet
your needs. Their goal is to give every shareholder request individualized
attention, promptly providing accurate information and requested services.
Reliability
The investment strategies and disciplines of the portfolio management team are
supported by the company-wide commitment to provide consistently reliable
performance. Flagship's professional staff is focused on meeting investor
expectations and in fulfilling their mission: to seek to provide superior
investment returns on the assets they manage for clients.
Not a part of this prospectus.
[Photo: Flagship's Investment Policy Committee]
Flagship's Investment Policy Committee:
(Seated from left to right) Bruce P. Bedford--Chairman,
Richard P. Davis--President.
(Standing from left to right) Michael D. Kalbfleisch--Chief Financial Officer,
Michael S. Davern, Richard A Huber, Jan E. Terbruggen, Walter K. Parker--
Portfolio Managers.
[Graphic: Clipper ship inside a seal that reads
"Flagship - Performance - Realiability - Service"
in the outside ring.]
[Graphic: Power line support]
<PAGE>
[Back Cover]
[Screened background image of Power line]
[Flagship Clipper Ship logo]
One Dayton Centre
One South Main Street
Dayton, Ohio 45402-2030
This brochure is authorized for distribution only when accompanied or preceded
by an effective prospectus.
(C)1995, Flagship Funds Inc. UI-I-100 (10-26-95)
<PAGE>
Flagship Utility Template
A. Name of the Fund
B. Current Date
C. List Net Asset Value Price, Maximum Offer Price, Distribution Yield,
Beta, Average Quality, Net Assets in millions and Annualized Dividend.
D. Block showing Who is Flagship Fund
-Over 20 years fixed income management experience
-Formerly a division of Mead Corporation
-Over 3.8 billion in assets under management
-Attentive and active investment style
-Comprehensive ongoing credit research
E. Graph showing Sector Analysis
-Breakdown of sectors between telecommunications, natural gas, money
markets, insurance/finance and electric utilities.
F. Chart showing Average Annual Total Return which includes one year, three
years, five years, ten years and since inception* of both classes of funds -
Class A**, Class C***.
Disclosure reads: *Since the inception date of the funds: (date of A shares)
for A shares; (date of C shares) for C shares.
**For the period ending (last quarter end) including
maximum sales charge of (maximum sales charge for the fund)
***No initial sales load; 1% CDSC if redeemed within
1 year of purchase. Returns assume reinvestment of
dividends and capital gains and reflect past investment
results. Past performance does not indicate future
results. The investment return and principal will
fluctuate with market conditions so that shares, upon
redemption, may be worth more or less than the
original cost.
G. Block showing Account Size in thousands for both A and C* shares
-First block shows $0-$50 A-shares 4.20% C-shares 1.00%
-Next block shows $50-$100 A-shares 4.00% C-shares 1.00%
-Next block shows $100-$250 A-shares 3.50% C-shares 1.00%
-Next block shows $250-$500 A-shares 2.50% C-shares 1.00%
-Next block shows $500-$1000 A-shares 2.00% C-shares 1.00%
-Next block shows $1000-$2000 A-shares .50% C-shares ----
-$2,000 and over A-shares --- C-shares ----
*1.00% CDSC when redeemed within the first 12 months.
<PAGE>
FLAGSHIP UTILITY
INCOME FUND
Friday, September 22, 1995
NAV MAXIMUM DISTRIBUTION AVERAGE NET ASSETS ANNUALIZED
OFFER YIELD BETA QUALITY (MILLIONS) DIVIDEND
A $10.46 $10.92 0.06 .056 A $25 $0.635
A $10.46 $10.92 0.06 .056 A $25 $0.635
WHO IS FLAGSHIP?
(bullet) Over 20 years fixed income management experience
(bullet) Formerly a division of Mead Corporation
(bullet) Over 3.8 billion in assets under management
(bullet) Attentive and active investment style
(bullet) Comprehensive ongoing credit review
SECTOR ANALYSIS
Telecomm (14.4%)
Natural Gas (21.1%)
Electric Util (54.2%)
MMKT (0.9%)
Insurance/Finan (9.4%)
AVERAGE ANNUAL TOTAL RETURN A** C**
One Year 8.00% 11.14%
Three Years n/a n/a
Five Years n/a n/a
Ten Years n/a n/a
Since Inception* 5.24% 1.91%
*Since the inception date of the funds: 7/1/92 for A shares;
**For the period ending 6/30/95 including maximum sales charge of 4.20%
***No initial sales load: 1% CDSC if redeemed within 1 year of purchase.
Returns assume reinvestment of dividends and capital gains and reflect past
investment results. Past performance does not indicate future results.
The investment return and principal will fluctuate with market conditions
so that shares, upon redemption, may be worth more or less than the original
cost.
ACCOUNT SIZE
(000s) A SHARES C SHARES*
$0-$50 4.20% 1.00%
$50-$100 4.00% 1.00%
$100-$250 3.50% 1.00%
$250-$500 2.50% 1.00%
$500-$1,000 2.00% 1.00%
$1,000-$2,000 .50% ---
$2,000 and over --- ---
*1.00% CDSC when redeemed within the first 12 months
FLAGSHIP
Flagship Funds, Inc.
Form: TPFF08.FSL
<PAGE>
Prospectus Dated October 26, 1995
TABLE OF CONTENTS
Page
Summary 2
Fees and Expenses 2
Financial Highlights 3
The Funds and Their Objectives 3
Investment Considerations and Related Risk Factors 3
Investment Techniques 5
How To Buy Shares 6
How To Redeem Shares 9
Exchange and Reinvestment Privilege 10
Systematic Withdrawal Plan 10
Direct Deposits 10
How Fund Shares Are Priced 10
Distributions and Taxes 11
About the Investment Manager 12
About the Distributor 12
General Information 13
Custodian and Transfer Agent 14
Counsel and Auditors 14
Additional Information 14
Application 15
FLAGSHIP
U.S. GOVERNMENT
FUNDS(SM)
The Flagship U.S. Government Funds ("Funds") are three diversified series of
Flagship Admiral Funds Inc. (the "Corporation"), an open-end mutual fund with
five outstanding series. The Funds offered by this prospectus are:
(bullet) Flagship Limited Term U.S. Government Fund(sm)
(bullet) Flagship Intermediate U.S. Government Fund(sm)
Flagship Short Term U.S. Government Fund(sm) is not currently being offered.
Consistent with its range of effective average maturity, each of the Funds
seeks to provide high current income consistent with liquidity and
preservation of capital by investing primarily in debt securities issued or
guaranteed by the U.S. Treasury and U.S. Government, its agencies, or
instrumentalities. In order to hedge against changes in interest rates, each
of the Funds may also purchase or sell put or call options on debt
securities, financial futures and indices, and engage in transactions
involving interest rate contracts and options on such contracts. The Funds do
not engage in any option writing program for the purpose of enhancing or
supporting their respective monthly distributions. There is no assurance that
the Funds will achieve their investment objectives.
This prospectus sets forth concisely the information about the Funds that you
should know before investing. Please read it carefully and retain it for
future reference.
A Statement of Additional Information dated October 26, 1995, containing more
detailed information, has been filed with the Securities and Exchange
Commission and (together with any supplements thereto) is incorporated herein
by reference. The Statement of Additional Information may be obtained without
charge by telephoning the Funds toll free at 1-800-414-7447 or for TDD,
1-800-360-4521.
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. SHARES IN THE FUND ARE NOT DEPOSITS OR
OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK SELLING THE SHARES,
NOR ARE THEY FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD, OR ANY OTHER U.S. GOVERNMENT AGENCY. INVESTMENT
RISKS INCLUDE POSSIBLE LOSS OF PRINCIPAL. THE VALUE OF THE INVESTMENT AND ITS
RETURN WILL FLUCTUATE AND ARE NOT GUARANTEED. WHEN SOLD, THE VALUE OF THE
INVESTMENT MAY BE HIGHER OR LOWER THAN THE AMOUNT ORGINALLY INVESTED.
<PAGE>
SUMMARY
INVESTMENT OBJECTIVES AND POLICIES
Consistent with its range of effective average maturity, each of the Funds
seeks high current income consistent with liquidity and preservation of
capital by investing primarily in various U.S. Treasury and U.S. Government
debt obligations.
These securities are issued or guaranteed by the U.S. Treasury, the U.S.
Government or by its agencies or instrumentalities ("U.S. Government
Securities"). Because the Funds are limited to investing in U.S. Government
Securities, current income would not be expected to be as high as that which
could be obtained from investing in lower credit quality debt securities. In
addition, each Fund is permitted to invest in other types of debt securities,
including collateralized mortgage obligations. The Funds vary only by
duration, or the effective average maturity of their portfolio. The Limited
Term Fund has an effective average maturity of from 1-5 years and the
Intermediate Fund has an effective average maturity of 5-10 years.
For a more detailed discussion of each Fund's investment objectives and
policies, please see "The Funds and Their Objectives." There is, of course,
no assurance that the Funds will achieve their investment objectives.
INVESTMENT RISKS
The risks inherent in each Fund depend primarily upon the term and quality
of the obligations in that Fund's portfolio as well as on market conditions.
Interest rate fluctuations will affect a Fund's net asset value, but not the
income received by the Fund from its portfolio securities. However, because
yields on debt securities available for purchase by a Fund vary over time, no
specific yield on shares of a Fund can be assured. The securities in which
the Funds invest will generally fluctuate in value inversely with changes in
interest rates. The Limited Term Fund is appropriate for investors who seek
more income than a money market fund, but who can accept some net asset value
fluctuation. The Intermediate Fund is appropriate for investors who seek high
income with less net asset value fluctuation from interest rate changes than
that of a longer-term fund. Each Flagship U.S. Government Fund is designed
for investors who seek high income with minimum risk other than the risk of
changes in net asset value caused by fluctuations in prevailing levels of
interest rates. Please see "Investment Considerations and Risk Factors" for
further information.
FEES AND EXPENSES
<TABLE>
<CAPTION>
Annual Fund Operating Expenses As a
Percentage of Average Net Assets After
Shareholder Fee
Transaction Expense Waivers & Reimbursement Arrangements
------------------------ -----------------------------------------
Total Fund
Operating
Maximum Maximum Expenses
Front End CDSL Total Without
Sales Load Imposed on Fund Waiver or
Imposed on Redemp- Manage- 12b-1 Other Operating Reinburse-
Purchases tions ment Fee Fee Expenses Expenses ment
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Government Funds
Class "A" Shares
Limited Term 2.5% N/A .20% .40% .30% .90% 6.89%
Intermediate Term 3.0 N/A .20 .40 .30 .90 7.42
Class "C" Shares
Limited Term N/A 1.0(a) .20 .70(b) .30 1.20 7.50
Intermediate Term N/A 1.0(a) .20 .95(b) .30 1.45 8.10
- ------------------------------------------------------------------------------------------------------------
<CAPTION>
Example of Expenses
An investor in a Flagship
U.S. Government Fund would pay the
following dollar amount of expenses on a
$1,000 investment assuming
(1) 5% annual return and
(2) Redemption at the end of each period
----------------------------------------------
1 Year 3 Years 5 Years 10 Years
-----------------------------------------------------------------------
U.S. Government Funds
Class "A" Shares
Limited Term $34 $53 $74 $133
Intermediate Term 39 58 78 137
Class "C" Shares
Limited Term 22 38 66 145
Intermediate Term 25 46 79 174
-----------------------------------------------------------------------
</TABLE>
Percentages are based on actual fees incurred from the previous fiscal year
restated to reflect current fees and operating expenses. The manager, at its
discretion, anticipates waiving a portion of its management fee and providing
expense reimbursement for the Funds. Class C Shares are sold without a
front-end sales charge but their 12b-1 fees may cause long-term stockholders
to pay more than the economic equivalent of the maximum permitted front-end
sales charge. (a) No initial sales load; 1% contingent deferred sales load if
redeemed within one year of purchase. Example of expenses would be $10 less
in first year if no redemption occurs. (b) Of this amount, 0.20% is a service
fee and the remainder is an asset based sales charge.
The preceding prescribed table is meant to assist an investor in
understanding the various costs and expenses that may directly or indirectly
be incurred as a result of an investment in one of the Funds. As indicated in
the expense table, Flagship utilizes a declining sales load for Class A
Shares and a contingent deferred sales load ("CDSL") for Class C Shares.
Long-term Class C stockholders could pay more than the economic equivalent of
the maximum front end sales charges for Class A Shares. The Funds' 12b-1 Plan
and management fee are more fully described herein. These expenses should not
be considered a representation of actual past or future expenses, as actual
expenses may be greater or less than those shown.
2
<PAGE>
FINANCIAL HIGHLIGHTS
The following information was derived from financial statements and
financial highlights audited by Deloitte & Touche LLP, independent auditors.
Their report on the financial statements and related notes appears in the
Statement of Additional Information.
PER SHARE INCOME AND CAPITAL CHANGES
The following table provides per share income and capital changes for a
share of capital stock of the Class A and Class C Shares of each of the
series of the Funds outstanding from the date of commencement of operations
to June 30, 1995. The dates of commencement of operations were: Limited
Term-Class A, February 1, 1994; Limited Term-Class C, February 11, 1994;
Intermediate-Class A, February 1, 1994; and Intermediate-Class C, February
3, 1994.
<TABLE>
<CAPTION>
Income from
Investment Operations Less Distributions
-------------------------------------------- ---------------------------------------------
Net
Realized
Net &
Asset Unrealized Total Dividends Distri-
Value Gains From From Net butions
Beginning Net (Loss) Invest- Invest- From Returns Total
Year Ended of Investment on ment ment Capital of Distri-
June 30, Period Income Securities Operations Income Gains Capital butions
- ----------- -------- -------- -------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Limited
Class A
1994(a) $9.75 $.20 $(.40 ) $ (.20) $.19 $.19
1995 $9.36 $.59 $ .24 $ .83 $.59 $.59
Class C
1994(a) $9.75 $.17 $(.39 ) $ (.22) $.17 $.17
1995 $9.36 $.54 $ .24 $ .78 $.53 $.53
Intermediate
Class A
1994(a) $9.70 $.23 $(.68 ) $ (.45) $.22 $.22
1995 $9.03 $.60 $ .65 $ 1.25 $.60 $.60
Class C
1994(a) $9.70 $.19 $(.66 ) $ (.47) $.19 $.19
1995 $9.04 $.53 $ .65 $ 1.18 $.53 $.53
<CAPTION>
Ratios/Supplemental Data
------------------------------------------------------------
Ratio of
Ratio of Net
Net Assets Expenses Investment
Net Asset End of to Average Income to Portfolio
Year Ended Value End Total Period Net Average Net Turnover
June 30, of Period Return (d) (000's) Assets (b) Assets (b) Rate (c)
- ----------- ------------ ------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Limited
Class A
1994(a) $9.36 (5.54%) $ 435 0.21% 5.15% 113.35%
1995 $9.60 9.08% $1,599 .70% 6.32% 250.40%
Class C
1994(a) $9.36 (6.37%) $ 791 0.69% 4.70% 113.35%
1995 $9.61 8.65% $1,969 1.16% 5.84% 250.40%
Intermediate
Class A
1994(a) $9.03 (12.10%) $ 409 0.19% 5.90% 83.87%
1995 $9.68 14.43% $1,013 .69% 6.59% 205.91%
Class C
1994(a) $9.04 (12.60%) $1,081 0.91% 5.04% 83.87%
1995 $9.69 13.58% $2,249 1.40% 5.78% 205.91%
</TABLE>
(a) Commencement of investment operations. (b) Annualized. (c) Annualization
is not appropriate.
(d) The total returns shown do not include the effects of front-end or
contingent deferred sales loads and are annualized in first year after
commencement of investment operations.
The Fund's annual report for the most recent fiscal year includes a
discussion of fund performance. It is available upon request and without
charge.
THE FUNDS AND THEIR OBJECTIVES
The mutual funds offered by this prospectus are Flagship Limited Term U.S.
Government Fund(sm) and Flagship Intermediate U.S. Government Fund(sm) (the
"Limited Term" and "Intermediate" Funds respectively, and collectively, the
"Funds"). Each of the Funds is a professionally managed, diversified
investment company, commonly known as a "mutual fund." Mutual funds sell
their own shares to investors and invest the proceeds in a portfolio of
securities. A mutual fund allows you to pool your money with that of other
investors in order to obtain professional investment management. Mutual funds
generally make it possible for you to obtain greater diversification of your
investments and simplify your recordkeeping.
Each Fund seeks a high level of current income consistent with liquidity
and preservation of capital by investing primarily in U.S. Treasury and other
U.S. Government debt securities, consistent with specified effective average
maturity standards that differ between the Funds. Each Fund's investment
objective is a fundamental policy which may be changed only with the approval
of a "majority of the outstanding voting securities" of a Fund as defined in
the Investment Company Act of 1940 (the "1940 Act").
The Funds are series of the Flagship Admiral Funds Inc. (the
"Corporation"), which is authorized to issue shares of common stock in
separate series. Each series represents interests in a separate portfolio of
securities and other assets, with its own investment objectives and policies.
Flagship Financial Inc. (the "Manager") provides investment advisory and
administrative services to the Funds. The Manager also manages several other
mutual funds with different investment objectives, including tax-exempt bond
funds and a utility income fund. To obtain prospectuses and other information
on any of those mutual funds, please call 1-800-414-7447.
INVESTMENT CONSIDERATIONS AND RELATED RISK FACTORS
Each Fund invests as described below and also may employ the investment
techniques described elsewhere in this prospectus. In addition, each Fund may
also invest in options, futures contracts, and options on futures contracts
("futures options"). For a more complete explanation of these investment
techniques, please refer to "Investment Objectives and Policies" in the
Statement of Additional Information.
3
<PAGE>
Consistent with its range of effective average maturity, each Fund's
investment objective is to provide a high level of current income consistent
with liquidity and preservation of capital by investing primarily in
securities issued or guaranteed as to principal and interest by the U.S.
Treasury, the U.S. Government or by its agencies or instrumentalities ("U.S.
Government Securities").
U.S. Government Securities are: (i) bills, notes, bonds, and other debt
securities, differing as to maturity and rates of interest, that are issued
by and are direct obligations of the U.S. Treasury; and (ii) other securities
that are issued or guaranteed as to principal and interest by the U.S.
Government or by its agencies or instrumentalities and that include, but are
not limited to, Government National Mortgage Association ("GNMA"), Federal
Farm Credit Banks, Federal Home Loan Banks, Farmers Home Administration,
Federal Home Loan Mortgage Corporation ("FHLMC"), and Federal National
Mortgage Association ("FNMA"). In addition, the Fund may invest in principal
portions or coupon portions of U.S. Government Securities that have been
separated (stripped) by banks, brokerage firms, or other entities. Stripped
securities are usually sold separately in the form of receipts or
certificates representing undivided interests in the stripped portion.
Stripped securities may be more volatile than non-stripped securities. U.S.
Government Securities are generally viewed as being among the safest of debt
securities with respect to the timely payment of principal and interest (but
not with respect to any premium paid on purchase), but generally bear a lower
rate of interest than corporate debt securities. However, they are subject to
market risk like other debt securities, and therefore the Fund's shares can
be expected to fluctuate in value.
Because the Fund's investment policy permits it to invest in U.S.
Government Securities that are not backed by the full faith and credit of the
U.S. Treasury, investment in the Fund may involve risks that are different in
some respects from an investment in a fund that invests only in securities
that are backed by the full faith and credit of the U.S. Treasury. Such risks
may include a greater risk of loss of principal and interest on the
securities in the Fund's portfolio that are supported only by the issuing or
guaranteeing U.S. Government agency or instrumentality since the Fund must
look principally or solely to that entity for ultimate repayment.
Depending on market conditions, the Fund may invest a substantial portion
of its assets in mortgage-backed debt securities issued by GNMA, FNMA, and
FHLMC. Securities issued by GNMA represent an interest in a pool of mortgages
insured by the Federal Housing Administration or the Farmers Home
Administration, or guaranteed by the Veterans Administration. Securities
issued by FNMA and FHLMC, U.S. Government-sponsored corporations, also
represent an interest in a pool of mortgages.
The timely payment of principal and interest on GNMA securities is
guaranteed by GNMA and backed by the full faith and credit of the U.S.
Treasury. FNMA guarantees full and timely payment of interest and principal
on FNMA securities. FHLMC guarantees timely payment of interest and ultimate
collection of principal on FHLMC securities. FNMA and FHLMC securities are
not backed by the full faith and credit of the U.S. Treasury.
Mortgage-backed debt securities, such as those issued by GNMA, FNMA, and
FHLMC, are of the "modified pass-through type," which means the interest and
principal payments on mortgages in the pool are "passed through" to
investors. During periods of declining interest rates, there is increased
likelihood that mortgages will be prepaid, with a resulting loss of the
full-term benefit of any premium paid by the Fund on purchase of such
securities; in addition, the proceeds of prepayment would likely be invested
at lower interest rates.
Under normal market conditions, the Fund will invest at least 80% of its
assets in U.S. Government Securities. The Fund may also invest in other types
of debt securities, including collateralized mortgage obligations ("CMOs").
CMOs are securities collateralized by mortgages and mortgage-backed
securities. CMOs are not guaranteed by either the U.S. Government or by its
agencies or instrumentalities.
FIXED INCOME SECURITIES
When and if available, each of the Funds may purchase fixed income
securities at a discount from face value. However, the Funds do not intend to
hold such securities to maturity for the purpose of achieving potential
capital gains, unless current yields on these securities remain attractive.
ADDITIONAL RISK FACTORS
Since each of the Funds invests in fixed income securities, its net asset
value changes as the general levels of interest rates fluctuate. When
interest rates decline, the value of a fixed income portfolio can be expected
to rise. Conversely, when interest rates rise, the value of a fixed income
portfolio can be expected to decline.
Although changes in the value of securities subsequent to their
acquisition are reflected in the net asset value of shares of a Fund, such
changes will not affect the income received by that Fund from such
securities. However, the dividends paid by a Fund, if any, will increase or
decrease in relation to the income received by that Fund from its
investments, which would in any case be reduced by that Fund's expenses
before it is distributed to shareholders. Each of the Funds seeks to maintain
a relatively high, stable dividend. At times a portion of a dividend may
constitute a return of capital.
SHORT-TERM INVESTMENTS FOR DEFENSIVE PURPOSES
During periods of unusual market conditions when the Manager believes that
investing for defensive purposes is appropriate, or in order to meet
anticipated redemption requests, a large portion or all of the assets of one
or more of the Funds may be invested in cash or cash equivalents including,
short-term notes, obligations issued or guaranteed by the U.S. Treasury, the
U.S. Government or any of its agencies, authorities or instrumentalities and
related repurchase agreements. At times, each of the Funds is also permitted
to invest up to 10% of its total assets in other U.S. Treasury funds, U.S.
Government funds, or taxable money market funds, which
4
<PAGE>
are registered investment companies, subject to the requirements of
applicable law. Such investments could result in stockholders paying
duplicate or multiple fees, as such funds incur expenses similar to those of
the Funds. The Manager will only invest in such funds when it believes the
yields on such funds are beneficial even including multiple fees.
INVESTMENT TECHNIQUES
LENDING OF SECURITIES
Each of the Funds may make loans of its portfolio securities. Such loans
will usually be made only to member banks of the Federal Reserve System and
member firms (and subsidiaries thereof) of the New York Stock Exchange and
would be required to be secured continuously by collateral in cash, cash
equivalents or U.S. Government Securities maintained on a current basis at an
amount at least equal to the market value of the securities loaned. A Fund
would continue to collect the equivalent of the interest on the securities
loaned and would also receive either interest (through investment of cash
collateral) or a fee (if the collateral is U.S. Government Securities).
BORROWING
Each of the Funds may borrow from time to time on a temporary basis in
amounts up to 25% of its net assets. Such borrowings are called leverage, and
while they provide opportunity for greater returns than if borrowing had not
occurred, to the extent the interest on the borrowings exceeds the interest
on dividends received, there is a risk that the income to a Fund will be less
than if the borrowing had not been made. To the extent a Fund invests the
proceeds from borrowings in equity or fixed income securities, the net asset
value of the Fund may appreciate or depreciate more rapidly than a fund that
does not utilize leverage. The Manager will only cause a Fund to borrow when
there is an expectation it will benefit the Fund. Accordingly, none of the
Funds intend to borrow to any significant extent.
MORTGAGE DOLLAR ROLL TRANSACTIONS
Each of the Funds may enter into mortgage "dollar roll" transactions with
broker-dealers pursuant to which a Fund sells mortgage-backed securities for
delivery in the future (generally within 30 days) and simultaneously
contracts to repurchase substantially similar (same type, coupon and
maturity) securities on a specified future date. The Funds will only enter
into covered rolls. A "covered roll" is a specific type of dollar roll for
which there is an offsetting cash position or a cash equivalent security
position which matures on or before the forward settlement date of the dollar
roll transaction.
WHEN-ISSUED SECURITIES
In order to help ensure the availability of suitable securities for its
portfolio, each Fund may purchase securities on a "when-issued" or on a
"forward delivery" basis, which means that the obligations will be delivered
to the Fund making the purchase at a future date usually beyond customary
settlement time. It is expected that, under normal circumstances, a Fund
purchasing securities on a "when-issued" or "forward delivery" basis will
take delivery of such securities. In general, a Fund does not pay for the
securities until received and does not start earning interest on the
obligations until the contractual settlement date, even though the funds are
subject to market value fluctuations during such period. While awaiting
delivery of the obligations purchased on such bases, a Fund will establish a
segregated account consisting of cash, short-term money market instruments or
high grade debt securities at least equal to, on a daily basis, the amount of
the commitments to purchase "when-issued" securities.
ZERO COUPON BONDS AND DEFERRED INTEREST BONDS
Each of the Funds may invest in zero coupon and deferred interest bonds
which are debt obligations which are issued or purchased at a significant
discount from face value. There are certain risks associated with Zero Coupon
Bonds and Deferred Interest Bonds which are described in the Statement of
Additional Information.
STRIPPED MORTGAGE-BACKED SECURITIES
Each of the Funds may invest a portion of its assets in stripped
mortgage-backed securities ("SMBS"), which are derivative multiclass mortgage
securities usually structured with two classes that receive different
proportions of interest and principal distributions from an underlying pool
of mortgage assets.
HEDGING
The Funds may purchase and sell exchange-listed and over-the-counter put
and call options on fixed income indices and other financial instruments,
purchase and sell financial futures contracts and options thereon, enter into
various interest rate transactions such as swaps, caps, floors or collars
(collectively, all the above are called "hedging transactions"). Hedging
transactions may be used to attempt to protect against possible changes in
the market value of securities held in or to be purchased for a Fund's
portfolio resulting from securities markets to protect a Fund's unrealized
gains in the value of its portfolio securities, to facilitate the sale of
such securities for investment purposes, to manage the effective maturity or
duration of a Fund's portfolio, or to establish a position in the derivatives
markets as a temporary substitute for purchasing or selling particular
securities. Any or all of these investment techniques may be
5
<PAGE>
used at any time and there is no particular strategy that dictates the use of
one technique rather than another, as use of any hedging transactions is a
function of numerous variables including market conditions. The ability of
the Funds to utilize these hedging transactions successfully will depend on
the Manager's ability to predict pertinent market movements, which cannot be
assured. The Funds will comply with applicable regulatory requirements when
implementing these strategies, techniques and instruments. Hedging
transactions involving financial futures and options thereon will be
purchased, sold or entered into only for bona fide hedging, risk management
or portfolio management purposes and not for speculative purposes.
Hedging transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Manager's view as to certain market movements is incorrect, the risk that
the use of such hedging transactions could result in losses greater than if
they had not been used. Use of put and call options may result in losses to
the Funds, force the sale or purchase of portfolio securities at inopportune
times or for prices higher than (in the case of put options) or lower than
(in the case of call options) current market values, limit the amount of
appreciation the Funds can realize on its investments or cause the Funds to
hold a security they might otherwise sell. The use of options and futures
transactions entails certain other risks. In particular, the variable degree
of correlation between price movement of futures contracts and price
movements in the related portfolio position of a Fund create the possibility
that losses on the hedging instrument may be greater than gains in the value
of a Fund's position. In addition, futures and options markets may not be
liquid in all circumstances. As a result, in certain markets, a Fund might
not be able to close out a transaction without incurring substantial losses,
if at all. Although the use of futures and options transactions for hedging
should tend to minimize the risk of loss due to a decline in the value of the
hedged position, at the same time they tend to limit any potential gain which
might result from an increase in value of such position. Finally, the daily
variation margin requirements for futures contracts would create a greater
ongoing potential financial risk than would purchases of options, where the
exposure is limited to the cost of the initial premium. Losses resulting from
the use of hedging transactions would reduce net asset value, and possibly
income, and such losses can be greater than if the hedging transactions had
not been utilized.
HOW TO BUY SHARES
Shares of each Fund are sold in a continuous offering at a public offering
price that is equal to the net asset value per share next determined after a
purchase order is received by a Fund (see "How Fund Shares are Priced"), plus
a sales charge in the case of Class A or C Shares which, at the election of
the purchaser, may be imposed (i) at the time of purchase (Class A Shares) or
(ii) on a contingent deferred basis (Class C Shares). When placing purchase
orders, investors should specify whether the order is for Class A or Class C
Shares. All purchase orders that fail to specify a Class will automatically
be invested in Class A Shares. Purchases may be made as described below under
"Purchase Through Dealers" and "Purchase by Check". The Funds reserve the
right to reject any order for shares. The Funds may, in their sole
discretion, accept in-kind payments for the purchase of shares. The table
below shows the total sales charges or underwriting discounts and dealer
concessions for each amount.
CLASS A SHARES
<TABLE>
<CAPTION>
Dealer Concession
Total Sales Charge or Agency
---------------------------------- Commission as
Size of Transaction Percentage of Percentage of Percentage
At Public Offering Price Offering Price Net Asset Value of Offering Price
----------------------------------------- --------------- --------------- -----------------
<S> <C> <C> <C>
Intermediate Fund
Less than $50,000 3.00% 3.09% 2.50%
$ 50,000 to $ 100,000 2.50 2.58 2.00
$ 100,000 to $ 250,000 2.00 2.06 1.50
$ 250,000 to $ 500,000 1.50 1.55 1.25
$ 500,000 to $1,000,000 1.25 1.29 1.00
$1,000,000 to $2,000,000 .40 .41 .30
$2,000,000 and over -- -- --*
Limited Term Fund
Less than $50,000 2.50% 2.56% 2.00%
$ 50,000 to $ 100,000 2.00 2.05 1.60
$ 100,000 to $ 250,000 1.50 1.54 1.20
$ 250,000 to $ 500,000 1.25 1.28 1.00
$ 500,000 to $1,000,000 .75 .77 .60
$1,000,000 to $2,000,000 .25 .25 .20
$2,000,000 and over -- -- --*
</TABLE>
*Finder's fee of .15% for amounts over $2,000,000 (subject to repayment if
shares are redeemed in less than one year)
6
<PAGE>
CLASS C SHARES
Class C Shares of each Fund are offered at net asset value, without an
initial sales charge, subject to a continuing annual distribution fee of
0.70% for the Limited Term Fund, 0.95% for the Intermediate Term Fund (of
which .20% is a service fee and the remainder is an asset based sales charge)
and a CDSL of 1% if redeemed within one year of the purchase date. The first
year of the annual distribution fee is paid to the Distributor, and in
subsequent years 0.20% is paid to the Distributor and the remainder is paid
to the dealer.
The minimum purchase required to open an account in any series of the Fund
is $3,000 ($1,000 for Individual Retirement Accounts or Keogh accounts).
Additional purchases of $50 or more may be made at any time. Any order in an
amount of $1,000,000 or more must be for Class A Shares because it will
ordinarily be more advantageous for an investor making an investment of such
size to purchase Class A Shares. The Fund executes purchase orders
immediately prior to declaration of the daily dividend as of the close of
business on the day the order is received. Payments by wire will begin to
earn dividends on the business day that the Fund's custodian bank receives
payment for your shares. All other forms of payment will begin to earn
dividends on the subsequent business day. When you redeem shares, you will
continue to receive dividends up to, but not including, payment date. See
"How to Redeem Shares" and "Distributions and Taxes." Because dividends do
not begin until payment is received, you should request your dealer to
forward payment promptly. To the extent your securities account or bank
account is charged for your purchase before the Fund receives funds, your
dealer or bank may be earning interest on your funds.
At various times the Distributor may implement programs whereby a dealer's
sales force may be eligible for nominal awards or whereby the Distributor
will reallow to any dealer that sponsors sales programs conforming to
criteria established by the Distributor up to an additional 0.50% of the
sales generated by the dealer (but never, together with the commission, more
than the total sales charge) at the public offering price during such
program. (see "About the Distributor" below). These programs will not affect
the price investors pay for shares or the amount that the Fund will receive
from such sale. A salesperson and any other person entitled to receive
compensation for selling Fund shares may receive different compensation for
selling one particular class of shares over another. Quantity discounts may
be modified or terminated at any time. For more information about quantity
discounts, contact your dealer or the Distributor. Where a dealer receives
the total sales charge, such dealer may be deemed to be an underwriter.
PURCHASE THROUGH DEALERS
To purchase shares through a dealer, you should request your dealer to
transmit an order to Boston Financial for the appropriate number of shares
and make arrangements with your dealer to transmit funds for the purchase.
Your dealer may require you to fill out an Application Form or similar
application.
The public offering price is based on net asset value and includes the
applicable sales charge. Because the Fund determines net asset value for each
series daily as of the close of the regular trading session (normally 4:00
p.m. New York time) on the New York Stock Exchange on each day that the
Exchange is open for trading, your dealer must transmit your order to the
Fund prior to such time in order for your order to be executed at the public
offering price based on the net asset value to be determined that day. Any
change in price due to the failure of the Fund to receive an order prior to
the close of the Exchange must be settled between you and your dealer.
Similarly, if your dealer fails to provide timely payment (normally three
business days after the order is received), the Distributor may sell the
shares to other investors at the then current offering price. If the
Distributor does so, the dealer will be responsible to the Distributor for
any loss which the Distributor incurs in connection with the transaction, and
you must settle with your dealer your rights to shares at the price on the
day you ordered them.
PURCHASE BY CHECK
To purchase shares by check, please mail the amount you wish to invest
and, in the case of a new account, a completed Application Form to: Boston
Financial, Attention: (name of Fund) , P.O. Box 8509, Boston, MA 02266-8509.
Checks should be made payable to the name of the Fund.
AUTOMATIC INVESTMENT PLAN
The Fund offers current stockholders who receive a quarterly statement
from Flagship the convenience of automatic monthly investing. On the tenth
day of each month the amount you specify ($50 minimum) will be transferred
from your bank to the Fund. To initiate the automatic investment plan,
complete the application form and attach a voided check.
The Fund pays the cost associated with these transfers, but reserves the
right, upon ninety (90) days written notice, to make reasonable charges for
this service. Your bank may charge for debiting your account. Stockholders
can change the amount or discontinue their participation in the plan by
written notice to Boston Financial thirty (30) days prior to fund transfer
date. Because a sales charge is applied on new Class A Shares purchased, it
would be disadvantageous to purchase Class A Shares while also making
systematic withdrawals.
DESCRIPTION OF CLASSES
Currently the Funds offer two classes of shares, Class A Shares and Class
C Shares. Other classes of shares are not presently available, but may be
offered in the future. Funds are authorized to offer up to four classes of
shares which may be purchased at a price equal to their
7
<PAGE>
net asset value per share, plus (for certain classes) a sales charge
(discussed below) which, at the election of the purchaser, may be imposed
either (i) at the time of purchase (the "Class A Shares") or (ii) on a
contingent deferred basis (the "Class B Shares" or the "Class C Shares"). The
four classes of shares each represent an interest in the same portfolio of
investments of each of the Funds and have the same rights, except (i) Class B
and Class C Shares bear the expenses of the deferred sales arrangement and
any expenses (including a higher distribution services fee) resulting from
such sales arrangement, (ii) each class that is subject to a distribution fee
has exclusive voting rights with respect to those provisions of the Funds'
Rule 12b-1 distribution plan which relate only to such class and (iii) the
classes have different exchange privileges. Additionally, Class B Shares will
automatically convert into Class A Shares after a specified period of years
(see "Shares of the Funds" in the Statement of Additional Information). The
net income attributable to Class B and Class C Shares and the dividends
payable on Class B and Class C Shares will be reduced by the amount of the
higher distribution services fee and certain other incremental expenses
associated with the deferred sales charge arrangement. The net asset value
per share of Class A Shares, Class B Shares, Class C Shares and Class Y
Shares is expected to be substantially the same, but it may differ from time
to time.
1. Class A Shares. The public offering price of Class A Shares is equal to
net asset value plus an initial sales charge that is a variable percentage of
the offering price depending on the amount of the sale. Net asset value will
be determined as described in this Prospectus under "How Fund Shares are
Priced". The net assets attributable to Class A Shares are subject to an
ongoing distribution services fee (see "About the Distributor" below).
Purchasers of Class A Shares may be entitled to reduced sales charges through
a combination of investments, rights of accumulation or a Letter of Intent
even if their current investment would not normally qualify for a quantity
discount (see "Reduced Sales Charges" below). Class A Shares also qualify for
certain exchange and reinvestment privileges as described in "Exchange And
Reinvestment Privilege" below. The investor or the investor's broker or
dealer is responsible for promptly forwarding payment to the Fund for shares
purchased.
2. Class C Shares. Class C Shares are sold at net asset value (see "How
Fund Shares Are Priced") without a sales charge at the time of purchase.
Instead, the Class C Shares are subject to a 1% CDSL if they are redeemed
within one year after purchase. The net assets attributable to Class C Shares
are subject to an ongoing distribution services fee (see "How Fund Shares are
Price" above and "About the Distributor" below). The Class C Shares have no
conversion rights.
The CDSL will not be imposed on amounts representing increases in net
asset value above the initial purchase price. Additionally, no charge will be
assessed on Class C Shares derived from reinvestment of dividends or capital
gains distributions. The CDSL will be waived (i) on redemption of shares
following the death of a shareholder, (ii) on certain redemptions in
connection with IRAs and other qualified retirement plans, and (iii) when
Class C Shares are exchanged for Class C Shares of other Flagship funds (see
"Exchange And Reinvestment Privilege" below). In the case of an exchange, the
length of time that the investor held the original Class C Shares is counted
towards satisfaction of the period during which a deferred sales charge is
imposed on the Class C Shares for which the exchange was made.
Class B and Y Shares are not currently available. They are described fully
in the Funds' Statement of Additional Information.
GENERAL
All funds will be fully invested in full and fractional shares. The
issuance of shares is recorded on the books of the Funds, and, to avoid
additional operating costs and for investor convenience, share certificates
will not be issued, except by special arrangement. The Funds' transfer agent
will send to each stockholder of record a confirmation of each purchase and
redemption transactions (including the aggregate number of shares owned after
such transaction) by such stockholder and a monthly statement summarizing
purchases, redemptions and dividend accruals and distributions in the account
during the prior month.
REDUCED SALES CHARGES
During the continuous offering, the Distributor will offer several reduced
sales charge programs through rights of accumulation and combinations,
letters of intent, group purchases, redemptions from unrelated funds, and to
broker-dealer and Flagship employees. These programs are described in the
Statement of Additional Information.
LETTER OF INTENT ESCROW PROVISION (CLASS A SHARES ONLY)
It is understood that 5% of the dollar amount checked on the application
will be held in a special escrow account. These shares will be held by the
escrow agent subject to the terms of the escrow. All dividends and capital
gains distributions on the escrowed shares will be credited to the
Shareholder's Account in shares. If the total purchases, less redemptions by
the shareholder, his spouse, children and parents, equal the amount specified
under this Letter, the shares held in escrow will be deposited to the
Shareholder's Open Account or delivered to the shareholder or to his order.
If the total purchases, less redemptions, exceed the amount specified under
this Letter and an amount which would qualify for a further quantity
discount, a retroactive price adjustment will be made by Flagship Funds Inc.
("Flagship" or the "Distributor") and the dealer through whom purchases were
made pursuant to this Letter of Intent (to reflect such further quantity
discount). The resulting difference in offering price will be applied to the
purchase of additional shares at the offering price applicable to a single
purchase of the dollar amount of the total purchases. If the total purchases
less redemptions are less than the amount specified under this Letter, the
Shareholder will remit to Flagship an amount equal to the difference in the
dollar amount of sales charge actually paid and the amount of sales charge
which would have applied to the aggregate purchases if the total of such
purchases had been made at a single time. Upon such remittance the shares
held for the shareholder's
8
<PAGE>
account will be deposited to his Account or delivered to him or to his order.
If within 20 days after written request by Flagship such difference in sales
charge is not paid, Flagship is hereby authorized to redeem an appropriate
number of shares to realize such difference. Flagship Funds Inc. is hereby
irrevocably constituted under this Letter of Intent to effect such redemption
as agent of the Shareholder. The shareholder or his dealer will inform Boston
Financial that this Letter is in effect each time a purchase is made.
HOW TO REDEEM SHARES
Upon receipt by Boston Financial through one of the methods discussed
below of a proper redemption request (indicating your name and account number
and the dollar or share amount to be redeemed from the particular series),
the Fund will redeem shares at their next determined net asset value. See
"How Fund Shares Are Priced." Proceeds of redemptions of recently purchased
shares may be delayed for 15 days or more, pending collection of funds for
the initial purchase. Neither the Distributor nor the Fund charges a fee or a
commission for redemption. For further information on redemptions or
exchanges, please contact your dealer or call Boston Financial toll free at
1-800-225-8530 or for TDD, 1-800-360-4521.
REDEMPTION THROUGH DEALERS
You may redeem shares through any dealer which has a Selling Agreement
with the Distributor. Your dealer is responsible for transmitting the
redemption request to Boston Financial by the close of trading on the New
York Stock Exchange on a particular day in order for you to receive the
redemption price based upon the net asset value per share determined that
day. If the dealer fails to do so, you will receive the redemption price next
calculated after your request and any other materials are received. Your
entitlement to any prior day's redemption price must be settled between you
and your dealer. Your dealer may charge a service fee for handling your
redemption request.
OTHER REDEMPTION METHODS
You may redeem shares by telephone (provided that you did not reject the
telephone redemption service on your application) toll free at 1-800-225-8530
or for TDD, 1-800-360-4521. For funds to be wired ($5,000 minimum on wires)
the completed bank account information portion of the telephone redemption
section in the application must already be on file with Boston Financial.
Proceeds will be wired normally on the next business day Boston Financial is
open for business. For all other redemptions your redemption request must be
submitted in writing to Boston Financial at the address below. The Fund's
purchase application relieves the Fund and the Transfer Agent (Boston
Financial) of any liability for loss, costs, or expenses arising out of
telephone redemptions that are reasonably believed to be valid. The Fund will
employ reasonable procedures to confirm that instructions communicated by
telephone are genuine, and if it does not, it may be liable for any losses
due to fraudulent or unauthorized instructions. The procedures include
requiring a form of personal identification prior to acting on telephone
instructions, recording such instructions, and providing written confirmation
of such transactions.
Payment will be made by sending a check to you at the address on your most
recent Application Form. Checks will normally be sent out within one business
day, but in no event more than the required settlement period as set by
regulation following receipt of the redemption request in proper form. For
redemption requests over $50,000, or if the registration on your account has
been changed within the past 60 days, or if the redemption proceeds are to go
to an address other than the address of record, the Fund must receive a
letter of instruction signed by all persons authorized to sign for the
account exactly as it is registered. All signatures must be guaranteed (see
below). The letter must be mailed to: Boston Financial, Attention: Flagship
U.S. Government Funds, P.O. Box 8509, Boston, MA 02266-8509.
SIGNATURE GUARANTEE
Boston Financial may require a signature guarantee on certain written
transaction requests. A signature guarantee may be executed by any "eligible"
guarantor. Eligible guarantors include member firms of a domestic stock
exchange, commercial banks, trust companies, savings associations and credit
unions as defined by the Federal Deposit Insurance Act. You should verify
with the institution that they are an acceptable (eligible) guarantor prior
to signing.
FURTHER INFORMATION
If you redeem all shares owned, the dividends declared during the month
through the time of redemption will be included in the remittance. Due to the
relatively high cost of handling small investments, the Fund reserves the
right to involuntarily redeem, at net asset value, the shares of any
stockholder whose redemptions cause the value of its holdings to have a value
of less than $1,000. Before the Fund redeems such shares and sends the
proceeds to the stockholder, the stockholder will be given written notice
that the value of the shares in the account is less than the minimum amount
and will be allowed 30 days to make an additional investment in an amount
which will increase the value of his holdings to at least $1,000.
Shares purchased other than by Federal Funds wire or bank wire may not be
redeemed by telephone until 15 calendar days after the purchase of such
shares, but may be redeemed pursuant to the ordinary redemption procedure
during such period. For further details on redemption, contact your dealer or
call Boston Financial toll free at: 1-800-225-8530 or for TDD,
1-800-360-4521.
9
<PAGE>
EXCHANGE AND REINVESTMENT PRIVILEGE
Any Class A Shares which have been registered in a stockholder's name for
at least 15 calendar days, except shares of money market funds, may be
exchanged on the basis of relative net asset value per share for Class A
Shares of any other U.S. Government, utility, tax exempt, or taxable
fixed-income fund or series thereof distributed by the Distributor in any
state where such exchange may legally be made. Similarly, Class C Shares may
be exchanged for Class C Shares of any other fund or series thereof
distributed by the Distributor which are sold pursuant to a similar CDSC
arrangement on the basis of relative net asset value per share without the
payment of any CDSC otherwise due upon redemption of Class C Shares. For
purposes of computing the contingent deferred sales charge payable upon the
redemption of shares acquired through such an exchange, the period of time
for which the investor held the Class C Shares will be counted toward the
holding period applicable to the Class C Shares which the investor acquired
through the exchange. In order to qualify for the exchange privilege, it is
required that the shares being exchanged have a net asset value of at least
the minimum amount required to make an initial investment in the fund for
which the exchange is being made. Shares must be on deposit at Boston
Financial before the exchange can be made. Stockholders of the Fund should
obtain and read a current prospectus of the fund into which the exchange is
to be made before effecting an exchange.
The exchange privilege may be modified or terminated at any time. The Fund
reserves the right to limit the number of times an investor may exercise the
exchange privilege. To exercise the exchange privilege, you must either
contact your dealer or broker, who will advise the Fund of the exchange, or
complete the Exchange Application available from Boston Financial or the
Distributor and submit it to Boston Financial. If you have certificates for
any shares being exchanged, you must surrender such certificates at the time
of exchange.
A stockholder who has redeemed shares may repurchase at net asset value,
without a sales charge, shares of the Fund or shares of other funds with a
sales charge distributed by Flagship Funds Inc. in any amount between the
stated minimum investment amount of such fund and the proceeds of redemption.
The reinvestment request must be received by Boston Financial within 1 year
of the redemption and this feature may be exercised by a stockholder only
twice per calendar year.
An exchange between funds pursuant to the exchange privilege is treated as
a sale for federal income tax purposes and, depending upon the circumstances,
a capital gain or loss may be realized. However, stockholders who exchange
between funds within 90 days of the initial purchase date may not take as a
loss the amount of the sales charge paid. Exercising the reinvestment
privilege will not affect the character of any gain or loss realized on the
redemption for federal income tax purposes, except that if the redemption
resulted in a loss, the reinvestment may result in the loss being disallowed
under the "wash sale" rules. For further details on exchanges or
reinvestment, please contact your dealer or call Boston Financial toll free
at 1-800-225-8530 or for TDD, 1-800-360-4521.
SYSTEMATIC WITHDRAWAL PLAN
Accounts with a value greater than $10,000 may establish a Systematic
Withdrawal Plan ("SWP") and receive monthly or quarterly checks for $50 or
more as specified by the shareholder. To establish a SWP all distributions
must be in the form of shares. Such payments are drawn from the proceeds of
the redemption shares held in the shareholder's account. To the extent that
redemptions for a SWP exceed dividend income reinvested in the account, such
redemptions will reduce and may ultimately exhaust the number of shares in
the account. To initiate this service, shares having an aggregate value of at
least $10,000 must be held by the Shareholder Services Agent. Maintaining a
SWP concurrently with an investment program would be disadvantageous because
of the sales charges included in share purchases. Therefore, a shareholder
should not have a SWP in effect at the same time he is making recurring
purchases of shares of the Fund. The Shareholder by written instructions to
Boston Financial may withdraw from the program, change the payee or change
the dollar amount of each payment. Boston Financial may charge the account
for services rendered and expenses incurred beyond those normally assumed by
the Fund with respect to the liquidation of shares. No charge is currently
assessed against the account, but could be instituted by Boston Financial on
60 days' prior notice in writing to the shareholder in the event that the
Fund ceases to assume the cost of these services. The Fund reserves the right
to amend or terminate the SWP on thirty days' notice.
DIRECT DEPOSITS
Shareholders can have dividends or SWP redemption proceeds deposited
electronically into their bank accounts. Under normal circumstances, direct
deposits are credited to the account on the second business day of the month
following normal payment. In order to utilize this option, the shareholder's
bank must be a member of Automated Clearing House. In addition, the
shareholder must (1) fill out the appropriate section of the application
attached to this Prospectus and (2) include with the completed application a
voided check from the bank account into which redemptions are to be
deposited. Once Boston Financial has received the application and the voided
check, such shareholder's designated bank account, following any dividend or
redemption, will be credited with the proceeds. Once enrolled in direct
deposit, a shareholder may terminate participation at any time by written
notice to Boston Financial.
HOW FUND SHARES ARE PRICED
For purposes of pricing purchases and redemptions, the net asset value of
each series and each class of a series of the Fund is separately determined
by Boston Financial as of the close of the regular trading session on the New
York Stock Exchange on each day that the Exchange is open for business (and
will also be computed as of 4:00 p.m., New York time, on any other day on
which purchase or redemption orders
10
<PAGE>
are received and there is a sufficient degree of trading in the portfolio
securities of the Fund such that net asset value per share might be
affected). Net asset value per share of the Fund is calculated (to the
nearest cent) by adding the value of all securities and other assets,
subtracting all of the liabilities and dividing the remainder by the number
of shares outstanding at the time the determination is made.
Assets of the Fund for which market quotations are readily available are
valued at market value. Securities with remaining maturities of 60 days or
less are valued at their amortized cost under rules adopted by the Securities
and Exchange Commission ("SEC"). Other assets and securities are valued at
their fair value as determined in good faith under procedures established by
the Directors of the Fund.
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
Income dividends are declared daily and paid monthly. Each Fund intends to
distribute by the end of each calendar year at least 98% of any net capital
gains realized from the sale of securities during the twelve-month period
ended October 31, in that year. The Funds intend to distribute any
undistributed net investment income and net realized capital gains in the
following year.
DIVIDEND PAYMENT OPTIONS
Several dividend payment options are available to stockholders. The
activation of these options varies with the nature of a stockholder's
administrative relationship with the Fund.
If the stockholder receives periodic statements regarding the Fund from
their broker/dealer, then all dividends are automatically paid in cash unless
the stockholder instructs their broker/dealer to implement a different
option.
If the stockholder receives a periodic statement directly from the Fund,
then all dividends are automatically reinvested unless the stockholder
instructs the Fund to implement a different option.
The dividend payment options are to:
1. Automatically reinvest all interest and capital gains distributions.
2. Pay interest dividends in cash, and reinvest capital gains
distributions.
3. Pay both interest and capital gains distributions in cash.
4. Direct all dividends to another Flagship tax exempt or U.S. Government
fund account which has an identical registration and tax identification
number (the $3,000 minimum initial investment applies).
5. Have dividends deposited electronically via Automated Clearing House
into a bank account. See "Direct Deposits" and "Systematic Withdrawal Plan"
above.
All reinvested or directed dividends will be at net asset value without
any sales charge. Your broker or Flagship customer service representative can
help you change your option from your initial account opening instructions.
INCOME TAXES
Your distributions will be taxable to you, under income tax law, whether
received in cash or reinvested in additional shares. For Federal income tax
purposes, any distribution that is paid in January but was declared in the
prior calendar year is deemed paid in the prior calendar year.
You will be subject to Federal income tax at ordinary rates on income
dividends and distributions of net short-term capital gain. Distributions of
net long-term capital gain will be taxable to you as long-term capital gain
regardless of the length of time you have held your shares.
You will be advised annually as to the source of distributions. If you are
not subject to tax on your income, you will not be required to pay tax on
these amounts.
If you redeem shares of a Fund held for six months or less, any loss on
the sale of those shares will be a long-term capital loss to the extent of
any distributions of long-term capital gain you have received with respect to
those shares.
For Federal income tax purposes, each Fund is treated as a separate
taxable entity distinct from the other series of the Trust.
This section is not intended to be a full discussion of income tax laws
and their effect on shareholders. You may wish to consult your own tax
adviser.
BACKUP WITHHOLDING
If (a) you fail to (i) furnish your properly certified social security or
other tax identification number or (ii) certify that your tax identification
number is correct or that you are subject to backup withholding due to the
underreporting of certain income, or (b) the Internal Revenue Service informs
the Funds that your tax identification number is incorrect, the Funds may be
required to withhold Federal income tax at a rate of 31% ("backup
withholding") from certain payments (including redemption proceeds) to you.
These certifications are contained in the Application that you should
complete and return when you open an account. The Funds must promptly pay to
the IRS all amounts withheld. Therefore, it is usually not possible for a
Fund to reimburse you for amounts withheld. However, you may claim the amount
withheld as a credit on your Federal income tax return.
11
<PAGE>
ABOUT THE INVESTMENT MANAGER
The business and affairs of the Funds are managed under the direction of
their Board of Directors.
The investment adviser to the Funds is Flagship Financial Inc. (the
"Manager"), whose principal business address is One Dayton Centre, One South
Main St., Dayton, Ohio 45402-2030. The Manager, as well as the Distributor,
is a wholly-owned subsidiary of Flagship Resources Inc., which is owned
and/or controlled by Bruce P. Bedford and Richard P. Davis and members of
their immediate families. Messrs. Bedford and Davis each serve as a director
and an officer of the Fund as well as the Manager and the Distributor.
Pursuant to the terms of separate Investment Advisory Agreements, dated
December 3, 1993 (the "Advisory Agreements"), the Manager, subject to the
general supervision of the Funds' Board of Directors and in conformity with
the stated policies of the Funds, renders investment supervisory and
corporate administrative services to the Funds. In this regard, it is the
responsibility of the Manager to make investment decisions for the Funds and
to place the purchase and sale orders.
Each of the Funds is managed by experienced professionals. The Manager's
Investment Policy Committee, comprised of all of the portfolio managers and
principal executive officers, meets monthly to review the domestic economic
outlook and the status of the financial markets, and to set the policy
guidelines for the management of each of the Funds. Implementation, trading,
and temporary modification of a Fund's strategy is the function of a small
team of portfolio managers who back each other up. Each team is led by a
designated portfolio manager who is primarily responsible for the day-to-day
operations and performance of the Funds. The designated team leader for the
U.S. Government Funds is Jan Terbrueggen, Vice President of the Manager.
Prior to January, 1991, he was Vice President, Todd Investment Advisers
(Louisville, KY).
In addition, the Manager performs, or supervises the performance of,
administrative services in connection with the Funds including (i) assisting
in supervising all aspects of the Funds' operations; (ii) providing the
Funds, at the Manager's expense, with the services of persons competent to
perform such administrative and clerical functions as are necessary in order
to provide effective corporate administration of the Funds; and (iii)
providing the Funds, at the Manager's expense, with adequate office space and
related services. The Funds' accounting records are maintained, at the Funds'
expense, by its Custodian, State Street Bank and Trust Company.
As compensation for the services rendered by the Manager under the
Advisory Agreements, the Funds will pay the Manager a fee, computed daily and
payable monthly, at an annual rate of 0.50% of its average daily net assets
for the Flagship Intermediate U.S. Government Fund and 0.35% of its average
daily net assets for the Flagship Limited Term U.S. Government Fund. For the
fiscal year ended June 30, 1995, the total expenses of each class of shares
of each Fund, expressed as a percentage of average net assets on an
annualized basis, were: Limited Term-Class A, .70%; Limited Term-Class C,
1.16%; Intermediate-Class A, .69%; Intermediate-Class C, 1.40%. Fees paid to
the Manager, expressed as a percentage of net assets on an annualized basis,
were .05% for both the Limited Term and Intermediate series.
The Funds have adopted a Code of Ethics regarding restrictions on the
investment activity of specified "Investment Personnel." These include
restrictions on personal investing, pre-clearance of trades, sanctions and
disgorgement of certain profits, as well as prohibitions on short swing
profits, investments in initial public offerings and holding public
directorships.
The Manager, which has been a registered investment adviser since 1978,
also renders investment advisory and management services to others. The
Manager manages an aggregate of approximately $4.3 billion in assets, in both
taxable and tax-exempt domestic portfolios, primarily for mutual funds,
insurance and reinsurance companies, other corporations and employee benefits
plans, and is investment adviser to Flagship Tax Exempt Funds Trust, an
investment company with assets of approximately $3.9 billion, all assets as
of August 31, 1995.
ABOUT THE DISTRIBUTOR
Each of the Funds has entered into separate Distribution Agreements (the
"Distribution Agreements") with Flagship Funds Inc. (the "Distributor"),
which has the same address as the Manager, pursuant to which the Distributor
serves as the exclusive selling agent and distributor of each Fund's shares,
and in that capacity will make a continuous offering of the shares of each
Fund and will be responsible for all sales and promotion efforts.
The Corporation has adopted a plan (the "Plan") pursuant to Rule 12b-1
which conforms to the requirements of the rules of the National Association
of Securities Dealers under the 1940 Act with respect to the Class A, Class B
and Class C Shares which permits each Fund to pay for certain distribution
and promotion expenses related to marketing such series' shares.
The Plan authorizes the Funds to expend their monies in an amount equal to
the aggregate for all such expenditures to such percentage of each Fund's
daily net asset value as may be determined from time to time by vote cast in
person at a meeting called for such purpose, by a majority of the Funds'
disinterested directors. The scope of the foregoing shall be interpreted by
the directors, whose decision shall be conclusive except to the extent it
contravenes established legal authority. Without in any way limiting the
discretion of the directors, the following activities are hereby declared to
be primarily intended to result in the sale of shares of the Funds
advertising the Funds or the Funds' investment manager's mutual fund
activities; compensating underwriters, dealers, brokers, banks and other
selling entities and sales and marketing personnel of any of them for sales
of shares of the Funds, whether in a lump sum or on a continuous, periodic,
contingent, deferred or other basis: compensating underwriters, dealers,
brokers, banks and other servicing entities and servicing personnel
(including the Funds' investment manager and its personnel or any of them for
providing services to shareholders of the Funds relating to their investment
in the Funds including assistance in connection with inquiries relating
12
<PAGE>
to shareholder accounts; the production and dissemination of prospectuses
including statements of additional information) of the Funds and the
preparation, production and dissemination of sales, marketing and shareholder
servicing materials; and the ordinary or capital expenses, such as equipment,
rent, fixtures, salaries, bonuses, reporting and recordkeeping and third
party consultancy or similar expenses relating to any activity for which
payment is authorized by the directors; and the financing of any activity for
which payment is authorized by the directors. Pursuant to the Plan, each Fund
itself through authorized officers may make similar payments for marketing
services to non-broker-dealers who enter into service agreements with such
Fund.
The maximum amount payable annually by any of the Funds under the Plan and
related agreements is .95% of average daily net assets for the year. Of this
amount, 0.75% is an asset based sales charge and 0.20% is a service fee. In
the case of broker-dealers and others, such as banks, who have selling or
service agreements with the Distributor or a Fund, the maximum amount payable
to any recipient is .00260% per day (.95% on an annualized basis) of the
proportion of average daily net assets represented by such person's
customers. A salesperson and any other person entitled to receive
compensation for selling Fund shares may receive different compensation for
selling one particular class of shares over another. The Board of Directors
may reduce these amounts at any time. Amounts payable by a class of shares
may be lower than the maximum and have been described previously.
Expenditures pursuant to the Plan and related agreements may reduce current
yield after expenses. For the fiscal year ended June 30, 1995, the Funds paid
the following amounts under the Plan and related agreements (the amounts
permanently waived by the Distributor are shown in parentheses): Limited
Term-Class A, $2,041 ($2,068 waived); Limited Term-Class C, $9,452 ($3,421
waived); Intermediate-Class A, $1,459 ($1,470 waived); and Intermediate-Class
C, $14,297 ($52 waived).
Flagship Funds periodically undertakes sales promotion programs with
broker-dealers with whom it has Distribution Agreements, in which it will
grant a partial or full reallowance of its retained underwriting commission
for fund sales as permitted by applicable rules. In addition, it will support
those firms' efforts in sales training seminars, management meetings, and
broker roundtables where it has the opportunity to present Flagship's
products and services. Flagship Funds also provides recognition for
outstanding sales achievements during a year through membership in its
Admiral's, Captain's or Yacht Clubs which includes a membership plaque and a
recognition memento. In addition, the distributor provides recognition
through the awarding of imprinted nominal promotional items; client leads; as
well as "thank you" dinners and entertainment. Its agents also typically
provide food for office meetings. Under appropriate terms it will share with
broker-dealers a portion of the cost of prospecting seminars and shareholder
gatherings. In those situations where there is no retained underwriting
commission, i.e., on the sale of Class C Shares, Flagship Funds will
periodically pay for similar activities at its own expense.
Various federal and state laws prohibit national banks and some
state-chartered commercial banks from underwriting or dealing in the Funds'
shares. In the unlikely event that a court were to find that these laws also
prohibit such banks from providing services of the type contemplated by each
Fund's service agreement, the Fund would seek alternative providers of such
services and expects that shareholders would not experience any disadvantage.
In addition, under the securities laws in some states, banks and financial
institutions may be required to register as dealers pursuant to state law.
The Funds do not offer their securities in conjunction with any retirement
plan.
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Corporation was organized on April 18, 1983, as a Maryland
corporation. On October 15, 1987, the Corporation's stockholders approved
amendments to the Corporation's Articles of Incorporation converting it into
a series fund. On June 4, 1992 the stockholders approved a change in the name
of the Corporation to Flagship Admiral Funds Inc. and a change in the name of
the Fund Stock to Flagship Utility Income Fund Portfolio Stock. The
authorized capital stock of the Corporation consists of 600,000,000 shares of
stock, par value $.001 per share, divided into five classes, 100,000,000
shares of the Flagship Intermediate U.S. Government Fund Portfolio Stock
allocated to the Flagship Intermediate U.S. Government Fund with four classes
authorized each with 24,500,000 shares designated as Class A, Class B, Class
C, and Class Y, respectively; 100,000,000 shares of the Flagship Limited Term
U.S. Government Fund Portfolio Stock allocated to the Flagship Limited Term
U.S. Government Fund with four classes authorized each with 24,500,000 shares
designated as Class A, Class B, Class C and Class Y, respectively; and
100,000,000 shares of the Flagship Short Term U.S. Government Fund Portfolio
Stock allocated to the Flagship Short Term U.S. Government Fund; with
200,000,000 shares of Flagship Utility Income Fund Portfolio Stock allocated
to the Flagship Utility Income Fund with four sub-classes authorized each
with 49,125,000 shares designated as Class A, Class B, Class C and Class Y,
respectively; and 100,000,000 shares of The Golden Rainbow--A James Advised
Mutual Fund Portfolio Stock allocated to The Golden Rainbow A James Advised
Mutual Fund. Pursuant to Maryland law and the Corporation's charter, the
Board of Directors
13
<PAGE>
may increase the authorized capital and reclassify unissued shares of any
class to create additional classes of stock with specified rights,
preferences, and limitations. Each share is entitled to one vote per share on
all matters subject to stockholders' vote. Shares of all classes vote
together as a single class except that where a matter affects a particular
class differently from other classes, that class will vote separately on such
matter. The Corporation is not required to hold meetings of stockholders for
the purpose of electing directors unless less than a majority of the
directors elected by stockholders remain in office. If the Corporation does
not hold annual meetings of stockholders, it will abide by Section 16 (c) of
the 1940 Act which provides that the Directors will call a meeting of
stockholders for the purpose of voting on the question of the removal of a
Director if so requested in writing by the holders of 10% or more of the
Fund's outstanding shares and will assist such stockholders in communicating
with the other stockholders. Directors may be removed by vote of a majority
of the outstanding shares of the Corporation.
Each share is entitled to participate equally in dividends and
distributions declared by the Directors with respect to shares of the same
class, and in the net distributable assets allocated to such class on
liquidation. Stockholders are entitled to redeem their shares, and such
shares are subject to redemption by the Fund, as set forth under "How to
Redeem Shares." There are no conversion, preemptive or exchange rights in
connection with any shares of the Fund, nor are there cumulative voting
rights. All shares of the Fund when issued will be fully paid and
nonassessable by the Fund.
CUSTODIAN AND TRANSFER AGENT
Boston Financial, 225 Franklin Street, Boston, Massachusetts 02106, is the
Funds' custodian, transfer agent and dividend disbursing agent. It also
maintains the Funds' accounting records, determines the net asset value, and
performs other stockholder services for the Corporation and each series.
COUNSEL AND AUDITORS
Skadden, Arps, Slate, Meagher & Flom, counsel to the Funds, passes upon
certain legal matters for the Corporation and the Funds. Deloitte & Touche
LLP, independent auditors, are auditors for the Funds and advise the Funds as
to certain tax matters.
Miles & Stockbridge, Maryland counsel to the Funds, passes upon the
legality of the Funds' shares.
ADDITIONAL INFORMATION
Please direct your inquiries to a Flagship Representative at
1-800-414-7447, or for TDD, 1-800-360-4521.
The Fund issues to its stockholders semiannual reports containing
unaudited financial statements for the Fund and annual reports containing
audited financial statements approved annually by the Board of Directors.
This Prospectus does not contain all the information included in the
Registration Statement filed with the SEC under the Securities Act of 1933
and the 1940 Act with respect to the securities offered hereby, certain
portions of which have been omitted pursuant to the rules and regulations of
the SEC. The Registration Statement including the exhibits filed therewith
may be examined at the office of the SEC in Washington, D.C.
Statements contained in this Prospectus as to the contents of any contract
or other document referred to are not necessarily complete, and, in each
instance, reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement of which this Prospectus
forms a part, each such statement being qualified in all respects by such
reference.
No person has been authorized to give any information or to make any
representations, other than those contained in this Prospectus, in connection
with the offer made by this Prospectus, and, if given or made, such other
information or representations must not be relied upon as having been
authorized by the Fund or its Distributor. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy by the Fund
or by the Distributor in any State in which such offer to sell or
solicitation of an offer to buy may not lawfully be made.
The symbol (sm) indicates a service mark of Flagship U.S. Government Funds
owned by Flagship Financial Inc.
(c) 1995, Flagship Funds Inc. US-A-3000 (10-26-95)
14
<PAGE>
FLAGSHIP U.S. GOVERNMENT FUNDS APPLICATION FORM
PLEASE PRINT OR TYPE ALL INFORMATION
NOTE: You must complete Sections 1, 2, 3, 4, 5 and sign the signature line.
Your signature is required for processing. Complete sections 7, 8, 9, 10, 11
and 12 for optional services.
PLEASE MAIL THIS APPLICATION & YOUR CHECK TO:
Boston Financial
Attn: Flagship U.S. Government Funds
P.O. Box 8509
Boston, MA 02266-8509
1. YOUR ACCOUNT REGISTRATION
Please check only ONE registration type:
Owner Name(s) (First, Middle Initial (if used), Last)
[ ] Individual or Joint Account*
_____________________________________________________________________________
_____________________________________________________________________________
*Joint tenants with rights of survivorship unless tenancy in common is
indicated
[ ] Other Entity
_____________________________________________________________________________
[ ] Uniform Gift to Minors
_____________________________________________________________________________
Custodian Name (One Name only)
_____________________________________________________________________________
Minor's Name (One name only)
Minor's state of residence _______
2. YOUR MAILING ADDRESS
_____________________________________________________________________________
Street or P.O. Box Suite or Apt. Number
_____________________________________________________________________________
City
______ ________________ _________
State Zip Code
( ) - ( ) -
_____________________________________________________________________________
Daytime Phone Evening Phone
[ ] U.S. Citizen or
[ ] Other (specify) _________________________________________________________
3. YOUR SOCIAL SECURITY/TAX ID NUMBER
For Individual or Joint accounts use Social Security Number of owner.
For custodial accounts use minor's Social Security Number.
________ ____ ________
Social Security Number
____ ____________________
Tax ID Number
4. YOUR INITIAL INVESTMENT
I want to invest in this Flagship Tax Exempt Fund.
Please indicate class of shares
A C
Limited Term Fund Amount* Shares** Shares***
_______________________ $ _____________________ [ ] [ ]
Intermediate Term Fund
_______________________ $ _____________________ [ ] [ ]
*Minimum of $3,000. **Front end sales charge. ***Level load. If no
share class is marked, investment will automatically be made in A Shares.
Attach check payable to Name of Fund
[ ] Purchase or check through Dealer Account.
[ ] Exchange of bonds. (See application and transmittal letter)
5. DIVIDEND/DISTRIBUTION OPTION
If no option is selected, all distributions will be reinvested.
[ ] Reinvest dividends and capital gains.
[ ] Pay dividends in cash, reinvest capital gains.
[ ] Pay dividends and capital gains in cash.
[ ] Direct dividends to an existing account with identical registration.
Designate the Fund name and account number below.
_____________________________________________________________________________
Name of the Fund
_____________________________________________________________________________
Existing Fund Account Number
[ ]Deposit dividends directly into the bank account indicated on the attached
VOIDED check (subject to terms and conditions in the prospectus).
6. DEALER AUTHORIZATION
We are a duly registered and licensed dealer and have a sales agreement with
Flagship Funds Inc. We are authorized to purchase shares from the Fund for
the investor. The investor is authorized to send any future payments directly
to the Fund for investment. Confirm each transaction to the investor and to
us. We guarantee the genuineness of the investor's signature.
_____________________________________________________________________________
Investment Firm
_____________________________________________________________________________
Investment Professional's Name Rep Number
______________________________________________________________________________
Branch Address Branch Number
______________________________________________________________________________
City
______ ________________ _________
State Zip Code
( ) -
______________________________________________________________________________
Investment Professional's Phone Number
X ___________________________________________________________________________
Signature of Investment Professional
7. LETTER OF INTENT (Class A Shares only)
I/we agree to the escrow provision described in the prospectus and intend to
purchase, although I'm not obligated to do so, shares of the Fund designated
on this application within a 13 month period which, together with the total
asset value of shares owned, will aggregate at least:
[ ] $50,000 [ ] $100,000 [ ] $250,000
[ ] $500,000 [ ] $1,000,000 [ ] $2,000,000
<PAGE>
8. CUMULATIVE PURCHASE DISCOUNT
I/we qualify for cumulative discount with the accounts listed below.
_____________________________________________________________________________
Fund Name
_____________________________________________________________________________
Account Number
_____________________________________________________________________________
Fund Name
_____________________________________________________________________________
Account Number
_____________________________________________________________________________
Fund Name
_____________________________________________________________________________
Account Number
9. AUTOMATIC INVESTMENT PLAN
Pursuant to the terms of the plan described in the prospectus, I/we authorize
the automatic monthly transfer of funds from my/our bank account and
investment in the above Flagship Fund. Attached is a VOIDED check from that
account.
$ ___________________________________________________________________________
Amount ($50 Minimum)
_____________________________________________________________________________
Name of Bank
_____________________________________________________________________________
Bank Account Number
_____________________________________________________________________________
Bank's Street Address
_____________________________________________________________________________
City
______ ________________ _________
State Zip Code
X ___________________________________________________________________________
Signature of Depositor Date
X ___________________________________________________________________________
Signature of Joint Depositor Date
10. SYSTEMATIC WITHDRAWAL PLAN
Pursuant to the terms of the plan described in the prospectus, please send
$_______________ [ ] per month [ ] quarterly to:
[ ] Me
[ ] The bank account indicated on the attached VOIDED check.
[ ] Payee below
Give name and address only if different from account registration
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
11. TELEPHONE REDEMPTION
I/we hereby authorize the Fund to implement the following telephone
redemption requests (under $50,000 only) without signature verification to
the registered fund account name and address. Redemption proceeds may be
wired to the U.S. commercial bank designated, provided you complete the
information below and enclose a VOIDED check for that account.
_____________________________________________________________________________
Name of Bank
_____________________________________________________________________________
Bank Account #
_____________________________________________________________________________
Bank's Street Address
_____________________________________________________________________________
City
______ ________________ _________
State Zip Code
[ ] I do not authorize redemtion by telephone.
12. INTERESTED PARTY MAIL/DIVIDEND MAIL
[ ] Send duplicate confirmation statements to the interested party listed
below.
[ ] Send my distributions to the address listed below.
_____________________________________________________________________________
Name of Individual
_____________________________________________________________________________
Street Address
_____________________________________________________________________________
City
______ ________________ _________
State Zip Code
SIGNATURE(S)
Under the penalties of perjury, I/we certify that the information provided on
this form is true, correct, and complete. The undersigned certify that I/we
have full authority and legal capacity to purchase, exchange or redeem shares
of the above named Fund(s) and affirm that I/we have received and read a
current Prospectus of the named Fund(s) and agree to be bound by its terms.
I/we agree to indemnify and hold harmless State Street Bank and Trust
Company, Boston Financial, and any Flagship funds which may be involved in
transactions authorized by telephone against any claim, loss, expense or
damage, including reasonable fees of investigation and counsel, in connection
with any telephone withdrawal effected on my account pursuant to procedures
described in the Prospectus.
X ___________________________________ X ___________________________________
Signature Date Signature (Joint Tenant) Date
1. As required by the IRS I/we certify (a) that the number shown on this form is
my correct Taxpayer Identification Number. I/we understand that if I/we do not
provide a Taxpayer Identification Number to the Fund within 60 days, the Fund is
required to withhold 31 percent of all reportable payments thereafter made to me
until I/we provide a number certified under penalties of perjury, and that I/we
may be subject to a $50 penalty by the IRS.
2. As required by the IRS I/we certify under penalties of perjury that I/we
are not subject to backup withholding by the IRS.
NOTE: Strike out Item (2) if you have been notified that you are subject to
backup withholding by the IRS and you have not received a notice from the IRS
advising you that backup withholding has been terminated.
X ___________________________________ X ___________________________________
Signature Date Signature (Joint Tenant) Date
Thank you for your investment in the Flagship Fund(s). You will receive a
confirmation statement shortly.
<PAGE>
FLAGSHIP ADMIRAL FUNDS INC.
STATEMENT OF ADDITIONAL INFORMATION
DATED OCTOBER 26, 1995
One Dayton Centre, One South Main Street; Dayton, Ohio 45402-2030
Flagship Short Term U.S. Government Fund series
Flagship Limited Term U.S. Government Fund series
Flagship Intermediate U.S. Government Fund series
This Statement of Additional Information provides certain detailed
information concerning the Funds. It is not a Prospectus and should be read
in conjunction with the Fund's current Prospectus dated October 26, 1995, for
Flagship Short Term U.S. Government Fund(SM), Flagship Limited Term U.S.
Government Fund(SM), and Flagship Intermediate U.S. Government Fund(SM). The
Flagship Short Term U.S. Government Fund(SM) is not currently being offered.
A copy of the Fund's Prospectus may be obtained without charge by written
request to: Flagship Funds Inc., One Dayton Centre, One South Main St.;
Dayton, Ohio 45402-2030, or by telephone (toll free) nationwide at: (800)
227-4648, or for TDD, (800) 360-4521.
Table of Contents
Page
-------
Investment Objectives and Policies 2
Shares of the Funds 9
Officers, Directors and Stockholders 9
Investment Advisory Services 11
Taxes 12
Yield and Total Return Calculation 13
Distributions 14
Distributor 14
Custodian and Transfer Agent 17
Auditors 17
Portfolio Transactions 17
Purchase, Redemption and Pricing of Shares 17
Servicemarks 19
Other Information 19
Financial Statements F-1
Appendix I--Description of Securities Ratings I-1
Appendix II--Description of Hedging Techniques II-1
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
Flagship Admiral Funds Inc. (the "Fund") has no fundamental objectives as
a whole. Each portfolio ("Portfolio") of the Fund has its own objectives. The
Flagship Short Term U.S. Government Fund(SM), Flagship Limited Term U.S.
Government Fund(SM) ("Limited Term Fund"), Flagship Intermediate U.S.
Government Fund(SM) ("Intermediate Fund"), ("Funds") have adopted the
following investment restrictions (which supplement the matters described
under "The Funds and Their Objective" in the Funds Prospectus), none of which
may be changed without the approval of the holders of a majority (as defined
in the Investment Company Act of 1940 (the "1940 Act")) of its outstanding
shares. The Funds may not:
(1) Purchase the securities of any one issuer, other than the U.S.
Government or any of its instrumentalities, if immediately after such
purchase more than 5% of the value of its total assets would be invested in
such issuer, or the Portfolio would own more than 10% of the outstanding
voting securities of such issuer, except that up to 25% of the value of the
Portfolio's total assets may be invested without regard to such 5% and 10%
limitations;
(2) Make loans, except to the extent the purchase of debt obligations
(including repurchase agreements) in accordance with the Portfolio's
investment objective and policies are considered loans and except that the
Portfolio may loan portfolio securities to qualified institutional investors
in compliance with requirements established from time to time by the
Securities and Exchange Commission and the securities exchanges in which such
securities are traded;
(3) Issue securities senior to its stock or borrow money, except that the
Portfolio has reserved the right to borrow money from banks on a temporary
basis from time to time to provide greater liquidity for redemptions or to
make additional portfolio investments. Such borrowings will not exceed 25% of
the Portfolio's net assets plus all outstanding borrowings immediately after
the time the latest such borrowing is made;
(4) Purchase or retain the securities of any issuer any of whose officers,
directors, or security holders is a director or officer of any of the Funds
or of its investment adviser if or so long as the directors and officers of
any of the Funds and of its investment adviser together own beneficially more
than 5% of any class of securities of such issuer;
(5) Mortgage, pledge or hypothecate any assets except in an amount up to
50% of the value of the Portfolio's net assets, taken at cost, and only to
secure borrowings permitted by clause (3) above;
(6) Except for mortgage backed securities or collateral thereof, purchase
or sell real estate, real estate mortgage loans, real estate investment trust
securities, and, except as permitted by applicable law, commodities,
commodity contracts or financial futures or contracts thereon, or oil and gas
interests;
(7) Except as permitted by applicable law, acquire securities of other
investment companies (other than in connection with the acquisitions of such
companies);
(8) Act as an underwriter of securities except to the extent that, in
connection with the sale of securities, it may be an underwriter, or invest
more than 15%of the Portfolio's assets, as determined at the time of
investment, in securities that are subject to restrictions on disposition
under the Securities Act of 1933 or for which market quotations are not
readily available, including repurchase agreements having more than seven
days to maturity;
(9) Purchase securities on margin, make short sales of securities or
maintain a net short position, except in connection with duration or risk
management of the portfolio. In order to permit the sale of shares in certain
states, any of the Funds may make commitments more restrictive than the
operating restrictions described above. Should any Fund determine that any
such commitment is no longer in the best interest of the stockholders, it
will revoke the commitment by terminating sales of its shares in the state
involved. Also, as a matter of policy that is not fundamental, the Funds have
determined that they will not invest in warrants, own more than 5% of the
outstanding voting securities of any issuer and will only write call options
which are fully covered.
The Funds place no restrictions on portfolio turnover except as may be
necessary to maintain their status as a regulated investment company under
the Internal Revenue Code of 1986, as amended ("the Code").
Leverage. Each of the Funds has reserved the right to borrow money from
time to time to provide greater liquidity for redemptions or to make
additional portfolio investments. If a Portfolio were to borrow money, income
earned from additional investments in excess of interest costs would improve
performance over what otherwise would be the case. Conversely, if the
investment performance of such additional investments failed to cover their
cost (including interest costs on such borrowings) the performance would be
poorer than would otherwise be the case. This speculative factor is known as
"leverage."
2
<PAGE>
The 1940 Act limits the amount of money a fund may borrow to 33-1/3% of
the value of such fund's net assets plus all outstanding borrowings
immediately after the time the latest such borrowing is made. If a Portfolio
were to borrow money and the value of its assets were to fall below the
statutory coverage requirement for any reason, the Portfolio would have to
take corrective action to achieve compliance within three business days and
accordingly might be required to sell a portion of its securities at a time
when such sale might be disadvantageous.
"When Issued" Transactions. Any of the Funds may purchase and sell
securities on a "when issued" and "delayed delivery" basis. These
transactions are subject to market fluctuation; the value at delivery may be
more or less than the purchase price. Since each of the Funds rely on the
buyer or seller, as the case may be, to consummate the transaction, failure
by the other party to complete the transaction may result in it missing the
opportunity of obtaining a price or yield considered to be advantageous. When
one of the Funds is the buyer in such a transaction, however, it will
maintain with its custodian cash or high-grade portfolio securities having an
aggregate value equal to the amount of such purchase commitments until
payment is made. To the extent one of the Funds engage in "when issued" and
"delayed delivery" transactions, it will do so for the purpose of acquiring
securities for its portfolio consistent with its investment objective and
policies and not for the purpose of investment leverage.
Diversification. As diversified funds, none of the Funds may purchase the
securities of any one issuer, other than the U.S. Government or any of its
instrumentalities, if immediately after such purchase more than 5% of the
value of its total assets would be invested in such issuer, or if it would
own more than 10% of the outstanding voting securities of such issuer, except
that up to 25% of the value of each of the Funds' total assets may be
invested without regard to such 5% and 10% limitations.
Zero Coupon Bonds and Deferred Interest Bonds. Each of the Funds may
invest in zero coupon bonds and deferred interest bonds which are debt
obligations which are issued or purchased at a significant discount from face
value. The discount approximates the total amount of interest the bonds will
accrue and compound over the period until maturity or the first interest
payment date at a rate of interest reflecting the market rate of the security
at the time of issuance. While zero coupon bonds do not require the periodic
payment of interest, deferred interest bonds provide for a period of delay
before the regular payment of interest begins may also invest a portion of
its assets in multiclass pass-through securities which are interests in a
trust composed of mortgage assets ("Mortgage Assets"), which must be issued
or guaranteed by the U.S. Government, its agencies, authorities or
instrumentalities. In a collateralized mortgage obligation ("CMO"), a series
of bonds or certificates is usually issued in multiple classes with different
maturities. Each class of CMOs, often referred to as a "tranche", is issued
at a specific fixed or floating coupon rate and has a stated maturity or
final distribution date. Principal prepayments on the Mortgage Assets may
cause the CMOs to be retired substantially earlier than their stated
maturities or final distribution dates, resulting in a loss of all or part of
the premium if any has been paid. These CMOs (which include multiclass
pass-through securities) may be issued by agencies, authorities or
instrumentalities of the U.S. Government or by private originators of or
investors in mortgage loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks and special purpose
subsidiaries of the foregoing. Payments of principal of and interest on the
Mortgage Assets, and any reinvestment income thereon, provide the funds to
pay debt service on the CMOs or make scheduled distributions on the
multiclass pass-through securities. Interest is paid or accrues on all
classes of the CMOs on a monthly, quarterly or semiannual basis. The
principal of and interest on the Mortgage Assets may be allocated among the
several classes of a series of a CMO in innumerable ways. In a common
structure, payments of principal, including any principal prepayments, on the
Mortgage Assets are applied to the classes of the series of a CMO in the
order of their respective stated maturities or final distribution dates, so
that no payment of principal will be made on any class of CMOs until all
other classes having an earlier stated maturity or final distribution date
have been paid in full. Certain CMOs may be stripped (securities which
provide only the principal or interest factor of the underlying security).
Each of the Funds may also invest in parallel pay CMOs and Planned
Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class.
These simultaneous payments are taken into account in calculating the stated
maturity date or final distribution date of each class, which, as with other
CMO structures, must be retired by its stated maturity date or final
distribution date, but may be retired earlier. PAC Bonds generally require
payments of a specified amount of principal on each payment date. PAC Bonds
are always parallel pay CMOs with the required principal payment on such
securities having the highest priority after interest has been paid to all
classes.
3
<PAGE>
Hedging Transactions. The Funds may utilize various other investment
strategies as described below to hedge various market risks (such as interest
rates, currency exchange rates and broad or specific equity market
movements), or to manage the effective maturity or duration of fixed-income
securities. Such strategies are generally accepted by modern portfolio
managers and are regularly utilized by many mutual funds and other
institutional investors. Techniques and instruments may change over time as
new instruments and strategies are developed or regulatory changes occur.
In the course of pursuing these investment strategies, the Fund may
purchase and sell exchange-listed and over-the-counter put and call options
on fixed-income indices and other financial instruments, purchase and sell
financial futures contracts and options thereon, enter into various interest
rate transactions such as swaps, caps, floors or collars (collectively, all
the above are called "Hedging Transactions"). Hedging Transactions may be
used to attempt to protect against possible changes in the market value of
securities held in or to be purchased for the Funds' portfolio resulting from
securities markets or currency exchange rate fluctuations, to protect the
Funds' unrealized gains in the value of its portfolio securities, to
facilitate the sale of such securities for investment purposes, to manage the
effective maturity or duration of the Funds' portfolio, or to establish a
position in the derivatives markets as a temporary substitute for purchasing
or selling particular securities. Any or all of these investment techniques
may be used at any time and there is no particular strategy that dictates the
use of one technique rather than another, as use of any Hedging Transaction
is a function of numerous variables including market conditions. The ability
of the Funds to utilize these Hedging Transactions successfully will depend
on the Adviser's ability to predict pertinent market movements, which cannot
be assured. The Funds will comply with applicable regulatory requirements
when implementing these strategies, techniques and instruments. Hedging
Transactions involving financial futures and options thereon will be
purchased, sold or entered into only for bona fide hedging, risk management
or portfolio management purposes and not for speculative purposes.
Hedging Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Hedging Transactions could result in losses greater than if
they had not been used. Use of put and call options may result in losses to
the Funds, force the sale or purchase of portfolio securities at inopportune
times or for prices higher than (in the case of put options) or lower than
(in the case of call options) current market values, limit the amount of
appreciation the Funds can realize on its investments or cause the Funds to
hold a security it might otherwise sell. The use of options and futures
transactions entails certain other risks. In particular, the variable degree
of correlation between price movements of futures contracts and price
movements in the related portfolio position of the Funds create the
possibility that losses on the hedging instrument may be greater than gains
in the value of the Funds' position. In addition, futures and options markets
may not be liquid in all circumstances. As a result, in certain markets, the
Funds might not be able to close out a transaction without incurring
substantial losses, if at all. Although the use of futures and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to
limit any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures
contracts would create a greater ongoing potential financial risk than would
purchases of options, where the exposure is limited to the cost of the
initial premium. Losses resulting from the use of Hedging Transactions would
reduce net asset value, and possibly income, and such losses can be greater
than if the Hedging Transactions had not been utilized.
General Characteristics of Options. Put options and call options typically
have similar structural characteristics and operational mechanics regardless
of the underlying instrument on which they are purchased or sold. Thus, the
following general discussion relates to each of the particular types of
options discussed in greater detail below. In addition, many Hedging
Transactions involving options require segregation of Funds assets in special
accounts, as described below under "Use of Segregated and Other Special
Accounts."
A put option gives the purchaser of the option, upon payment of a premium,
the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, currency or other instrument at the exercise
price. For instance, the Funds' purchase of a put option on a security might
be designed to protect its holdings in the underlying instrument (or, in some
cases, a similar instrument) against a substantial decline in the market
value by giving the Funds the right to sell such instrument at the option
exercise price. A call option, upon payment of a premium, gives the purchaser
of the option the right to buy, and the seller the obligation to sell, the
underlying instrument at the exercise price. The Funds' purchase of a call
option on a security, financial future, index, currency or other instrument
might be intended to protect the Funds against an increase in the price of
the underlying instrument that it intends to purchase in the future by fixing
the price at which it may purchase such instrument. An Ameri-
4
<PAGE>
can style put or call option may be exercised at any time during the option
period while a European style put or call option may be exercised only upon
expiration or during a fixed period prior thereto. The Funds are authorized
to purchase and sell exchange-listed options and over-the-counter options
("OTC options"). Exchange-listed options are issued by a regulated
intermediary such as the Options Clearing Corporation ("OCC"), which
guarantees the performance of the obligations of the parties to such options.
The discussion below uses the OCC as a paradigm, but is also applicable to
other financial intermediaries.
With certain exceptions, OCC-issued and exchange-listed options generally
settle by physical delivery of the underlying security or currency, although
in the future cash settlement may become available. Index options and
Eurodollar instruments are cash settled for the net amount, if any, by which
the option is "in-the-money" (i.e., where the value of the underlying
instrument exceeds, in the case of a call option, or is less than, in the
case of a put option, the exercise price of the option) at the time the
option is exercised. Frequently, rather than taking or making delivery of the
underlying instrument through the process of exercising the option, listed
options are closed by entering into offsetting purchase or sale transactions
that do not result in ownership of the new option.
The Funds' ability to close out its position as a purchaser or seller of
an OCC or exchange-listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of
a liquid option market on an exchange are: (i) insufficient trading interest
in certain options; (ii) restrictions on transactions imposed by an exchange;
(iii) trading halts, suspensions or other restrictions imposed with respect
to particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of
the OCC or an exchange; (v) inadequacy of the facilities of an exchange or
OCC to handle current trading volume; or (vi) a decision by one or more
exchanges to discontinue the trading of options (or a particular class or
series of options), in which event the relevant market for that option on
that exchange would cease to exist, although outstanding options on that
exchange would generally continue to be exercisable in accordance with their
terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent
that the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange-listed options,
which generally have standardized terms and performance mechanics, all the
terms of an OTC option, including such terms as method of settlement, term,
exercise price, premium, guarantees and security, are set by negotiation of
the parties. The Funds will only sell OTC options (other than OTC currency
options) that are subject to a buyback provision permitting the Funds to
require the Counterparty to sell the option back to the Funds at a formula
price within seven days. The Funds expect generally to enter into OTC options
that have cash settlement provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or
guaranty function in an OTC option. As a result, if the Counterparty fails to
make or take delivery of the security, currency or other instrument
underlying an OTC option it has entered into with the Funds or fails to make
a cash settlement payment due in accordance with the terms of that option,
the Funds will lose any premium it paid for the option as well as any
anticipated benefit of the transaction. Accordingly, the Adviser must assess
the creditworthiness of each such Counterparty or any guarantor or credit
enhancement of the Counterparty's credit to determine the likelihood that the
terms of the OTC option will be satisfied. The Funds will engage in OTC
option transactions only with United States government securities dealers
recognized by the Federal Reserve Bank of New York as "primary dealers" or
broker dealers, domestic or foreign banks or other financial institutions
which have received (or the guarantors of the obligations of which have
received) a short-term credit rating of "A-I" from Standard & Poor's
Corporation ("S&P") or "P-l" from Moody's Investor Services ("Moody's") or an
equivalent rating from any nationally recognized statistical rating
organization ("NRSRO"). The staff of the SEC currently takes the position
that OTC options purchased by the Funds, and portfolios securities "covering"
the amount of the Funds' obligation pursuant to an OTC option sold by it (the
cost of the sell-back plus the in-the-money amount, if any) are illiquid, and
are subject to the Funds' limitation on investing no more than 10% of its
assets in illiquid securities.
If the Funds sell a call option, the premium that it receives may serve as
a partial hedge, to the extent of the option premium, against a decrease in
the value of the underlying securities or instruments in its portfolio or
will increase the Funds' income. The sale of put options can also provide
income.
5
<PAGE>
The Funds may purchase and sell call options on securities, including U.S.
Treasury and agency securities, mortgage-backed securities, corporate debt
securities, equity securities (including convertible securities) and
Eurodollar instruments that are traded on U.S. and foreign securities
exchanges and in the over-the-counter markets and on securities indices,
currencies and futures contracts. All calls sold by the Funds must be
"covered" (i.e., the Fund must own the securities or futures contract subject
to the call) or must meet the asset segregation requirements described below
as long as the call is outstanding. Even though the Funds will receive the
option premium to help protect it against loss, a call sold by the Funds
exposes the Funds during the term of the option to possible loss of
opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the Funds to hold a security or
instrument which it might otherwise have sold.
The Funds may purchase and sell put options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, corporate debt
securities, equity securities (including convertible securities) and
Eurodollar instruments (whether or not it holds the above securities in its
portfolio) and on securities indices, currencies and futures contracts other
than futures on individual corporate debt and individual equity securities.
The Funds will not sell put options if, as a result, more than 50% of the
Funds' assets would be required to be segregated to cover its potential
obligations under such put options other than those with respect to futures
and options thereon. In selling put options, there is a risk that the Funds
may be required to buy the underlying security at a disadvantageous price
above the market price.
General Characteristics of Futures. The Funds may enter into financial
futures contracts or purchase or sell put and call options on such futures as
a hedge against anticipated interest rate or equity market changes, for
duration management and for risk management purposes. Futures are generally
bought and sold on the commodities exchanges where they are listed with
payment of initial and variation margin as described below. The sale of a
futures contract creates a firm obligation by the Funds, as seller, to
deliver to the buyer the specific type of financial instrument called for in
the contract at a specific future time for a specified price (or, with
respect to index futures and Eurodollar instruments, the net cash amount).
Options on futures contracts are similar to options on securities except that
an option on a futures contract gives the purchaser the right in return for
the premium paid to assume a position in a futures contract and obligates the
seller to deliver such option.
The Funds' use of financial futures and options thereon will in all cases
be consistent with applicable regulatory requirements and in particular the
rules and regulations of the Commodity Futures Trading Commission and will be
entered into only for bona fide hedging, risk management (including duration
management) or other portfolio management purposes. Typically, maintaining a
futures contract or selling an option thereon requires the Funds to deposit
with a financial intermediary as security for its obligation, an amount of
cash or other specified assets (initial margin) which initially is typically
l% to 10% of the face amount of the contract (but may be higher in some
circumstances). Additional cash or assets (variation margin) may be required
to be deposited thereafter on a daily basis as the mark to market value of
the contract fluctuates. The purchase of an option on financial futures
involves payment of a premium for the option without any further obligation
on the part of the Funds. If the Funds exercise an option on a futures
contract, it will be obligated to post initial margin (and potential
subsequent variation margin) for the resulting futures position just as it
would for any position. Futures contracts and options thereon are generally
settled by entering into an offsetting transaction, but there can be no
assurance that the position can be offset prior to settlement at an
advantageous price nor that delivery will occur.
The Funds will not enter into future contracts or related option (except
for closing transactions) if, immediately thereafter, the sum of the amount
of its initial margin and premiums on open futures contracts and options
thereon would exceed 5% of the Funds' total assets (taken at current value);
however, in the case of an option that is in-the-money at the time of the
purchase, the in-the-money amount may be excluded in calculating the 5%
limitation. The segregation requirements with respect to futures contracts
and options thereon are described below.
Options on Securities Indices and Other Financial Indices. The Funds also
may purchase and sell call and put options on securities indices and other
financial indices and in so doing can achieve many of the same objectives it
would achieve through the sale or purchase of options on individual
securities or other instruments. Options on securities indices and other
financial indices are similar to options on a security or other instrument
except that, rather than settling by physical delivery of the underlying
instrument, they settle by cash settlement, i.e., an option on an index gives
the holder the right to receive, upon exercise of the option, an amount of
cash if the closing level of the index upon which the option is based
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option (except if, in the case of an OTC option,
physical delivery is specified). This amount of cash is equal to the excess
of the closing price of the index over the exercise price of the option,
which also may be multiplied by a formula value. The seller of the option is
obligated, in return for the premium received,
6
<PAGE>
to make delivery of this amount. The gain or loss on an option on an index
depends on price movements in the instruments making up the market, market
segment, industry or other composite on which the underlying index is based,
rather than price movements in individual securities, as is the case with
respect to options on securities.
Combined Transactions. The Funds may enter into multiple transactions,
including multiple options transactions, multiple futures transactions, and
any combination of futures and options ("component" transactions), instead of
a single Hedging Transaction, as part of a single or combined strategy when,
in the opinion of the Adviser, it is in the best interests of the Funds to do
so. A combined transaction will usually contain elements of risk that are
present in each of its component transactions. Although combined transactions
are normally entered into based on the Adviser's judgment that the combined
strategies will reduce risk or otherwise more effectively achieve the desired
portfolio management goal, it is possible that the combination will instead
increase such risks or hinder achievement of the portfolio management
objective.
Swaps, Caps, Floors and Collars. Among the Hedging Transactions into which
the Funds may enter are interest rate, currency and index swaps and the
purchase or sale of related caps, floors and collars. The Funds expect to
enter into these transactions primarily to preserve a return or spread on a
particular investment or portion of its portfolio, to protect against
currency fluctuations, as a duration management technique or to protect
against any increase in the price of securities the Funds anticipate
purchasing at a later date. The Funds intend to use these transactions as
hedges and not as speculative investments and will not sell interest rate
caps or floors where it does not own securities or other instruments
providing the income stream the Funds may be obligated to pay. Interest rate
swaps involve the exchange by the Funds with another party of their
respective commitments to pay or receive interest, e.g., an exchange of
floating rate payments for fixed rate payments with respect to a notional
amount of principal. A currency swap is an agreement to exchange cash flows
on a notional amount of two or more currencies based on the relative value
differential among them and an index swap is an agreement to swap cash flows
on a notional amount based on changes in the values of the reference indices.
The purchase of a cap entitles the purchaser to receive payments on a
notional principal amount from the party selling such cap to the extent that
a specified index exceeds a predetermined interest rate or amount. The
purchase of a floor entitles the purchaser to receive payments on a notional
principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar
is a combination of a cap and a floor that preserves a certain return within
a predetermined range of interest rates or values.
The Funds will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or
dates specified in the instrument, with the Funds receiving or paying, as the
case may be, only the net amount of the two payments. Inasmuch as these
swaps, caps, floors, and collars are entered into for good faith hedging
purposes, the Adviser and the Funds believe such obligations do not
constitute senior securities under the 1940 Act and, accordingly, will not
treat them as being subject to its borrowing restrictions. The Funds will not
enter into any swap, cap, floor or collar transaction unless, at the time of
entering into such transaction, the unsecured long-term debt of the
Counterparty, combined with any credit enhancements, is rated at least "A" by
S&P or Moody's or has an equivalent rating from an NRSRO or is determined to
be of equivalent credit quality by the Adviser. If there is a default by the
Counterparty, the Funds may have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown
substantially in recent years with a large number of banks and investment
banking firms acting both as principals and as agents utilizing standardized
swap documentation. As a result, the swap market has become relatively
liquid. Caps, floors and collars are more recent innovations for which
standardized documentation has not yet been fully developed and, accordingly,
they are less liquid than swaps.
Eurodollar Instruments. The Funds may make investments in Eurodollar
instruments. Eurodollar instruments are U.S. dollar-denominated futures
contracts or options thereon which are linked to the London Interbank Offered
Rate ("LIBOR"), although foreign currency-denominated instruments are
available from time to time. Eurodollar futures contracts enable purchasers
to obtain a fixed rate for the lending of funds and sellers to obtain a fixed
rate for borrowings. The Funds might use Eurodollar futures contracts and
options thereon to hedge against changes in LIBOR, to which many interest
rate swaps and fixed income instruments are linked.
Risks of Hedging Transactions Outside the United States. When conducted
outside the United States, Hedging Transactions may not be regulated as
rigorously as in the United States, may not involve a clearing mechanism and
related guarantees, and are subject to the risk of governmental actions
affecting trading in, or the prices of, foreign securities, currencies and
other instruments. The value of such positions also could be adversely
affected by: (i) other complex foreign political, legal and economic factors,
(ii) lesser availability than in the United States of data on which to make
trading decisions, (iii) delays in the Funds' ability to act upon economic
events occurring
7
<PAGE>
in foreign markets during nonbusiness hours in the United States, (iv) the
imposition of different exercise and settlement terms and procedures and
margin requirements than in the United States, and (v) lower trading volume
and liquidity.
Use of Segregated and Other Special Accounts. Many Hedging Transactions,
in addition to other requirements, require that the Funds segregate liquid
high grade assets with its custodian to the extent Funds obligations are not
otherwise "covered" through ownership of the underlying security, financial
instrument or currency. In general, either the full amount of any obligation
by the Funds to pay or deliver securities or assets must be covered at all
times by the securities, instruments or currency required to be delivered,
or, subject to any regulatory restrictions, an amount of cash or liquid high
grade securities at least equal to the current amount of the obligation must
be segregated with the custodian. The segregated assets cannot be sold or
transferred unless equivalent assets are substituted in their place or it is
no longer necessary to segregate them. For example, a call option written by
the Funds will require the Funds to hold the securities subject to the call
(or securities convertible into the needed securities without additional
consideration) or to segregate liquid high-grade securities sufficient to
purchase and deliver the securities if the call is exercised. A call option
sold by the Funds on an index will require the Funds to own portfolio
securities which correlate with the index or to segregate liquid high grade
assets equal to the excess of the index value over the exercise price on a
current basis. A put option written by the Funds require the Funds to
segregate liquid, high grade assets equal to the exercise price.
Except when the Funds enter into a forward contract for the purchase or
sale of a security denominated in a particular currency, which requires no
segregation, a currency contract which obligates the Funds to buy or sell
currency will generally require the Funds to hold an amount of that currency
or liquid securities denominated in that currency equal to the Funds'
obligations or to segregate liquid high grade assets equal to the amount of
the Funds' obligation.
OTC options entered into by the Funds, including those on securities,
currency, financial instruments or indices and OCC-issued and exchange-listed
index options will generally provide for cash settlement. As a result, when
the Funds sell these instruments it will only segregate an amount of assets
equal to its accrued net obligations, as there is no requirement for payment
or delivery of amounts in excess of the net amount. These amounts will equal
100% of the exercise price in the case of a noncash settled put, the same as
an OCC guaranteed listed option sold by the Funds, or the in-the-money amount
plus any sell-back formula amount in the case of a cash-settled put or call.
In addition, when the Funds sell a call option on an index at a time when the
in-the-money amount exceeds the exercise price, the Funds will segregate,
until the option expires or is closed out, cash or cash equivalents equal in
value to such excess. OCC-issued and exchange-listed options sold by the
Funds other than those above generally settle with physical delivery, or with
an election of either physical delivery or cash settlement and the Funds will
segregate an amount of assets equal to the full value of the option. OTC
options settling with physical delivery, or with an election of either
physical delivery or cash settlement, will be treated the same as other
options settling with physical delivery.
In the case of a futures contract or an option thereon, the Funds must
deposit initial margin and possible daily variation margin in addition to
segregating assets sufficient to meet its obligation to purchase or provide
securities or currencies, or to pay the amount owed at the expiration of an
index-based futures contract. Such assets may consist of cash, cash
equivalents, liquid debt or equity securities or other acceptable assets.
With respect to swaps, the Funds will accrue the net amount of the excess,
if any, of its obligations over its entitlements with respect to each swap on
a daily basis and will segregate an amount of cash or liquid high grade
securities having a value equal to the accrued excess. Caps, floors and
collars require segregation of assets with a value equal to the Funds' net
obligation, if any.
Hedging Transactions may be covered by other means when consistent with
applicable regulatory policies. The Funds may also enter into offsetting
transactions so that its combined position, coupled with any segregated
assets, equals its net outstanding obligation in related options and Hedging
Transactions. For example, the Funds could purchase a put option if the
strike price of that option is the same or higher than the strike price of a
put option sold by the Funds. Moreover, instead of segregating assets if the
Funds held a futures or forward contract, it could purchase a put option on
the same futures or forward contract with a strike price as high or higher
than the price of the contract held. Other Hedging Transactions may also be
offset in combinations. If the offsetting transaction terminates at the time
of or after the primary transaction no segregation is required, but if it
terminates prior to such time, assets equal to any remaining obligation would
need to be segregated.
8
<PAGE>
SHARES OF THE FUNDS
The Securities and Exchange Commission ("SEC") has adopted rules under the
1940 Act which permit funds to issue multiple classes of shares and impose
deferred sales charges. The Fund has adopted a plan under such rules and may
issue multiple classes of shares pursuant to such rules. The Funds are
currently authorized to offer four classes of shares of beneficial interest
("Class A Shares," "Class B Shares," "Class C Shares" and "Class Y Shares")
as discussed in the Prospectus. Class A Shares, Class B Shares, Class C
Shares and Class Y Shares have identical voting rights, except that each
class that is subject to a distribution fee votes separately as a class with
respect to the Fund's Rule l2b-l distribution plan. Currently, the Funds are
offering Class A and C Shares. No class B or Y Shares are available.
Class B Shares. Class B Shares are sold at net asset value (see "How Fund
Shares Are Priced" in the Prospectus) without a sales charge at the time of
purchase. Instead, the sales charge is imposed on a contingent deferred
basis. The net assets attributable to Class B Shares are subject to an
ongoing distribution fee (see "Distributor" below). The amount of the
contingent deferred sales charge, if any, will vary depending on the number
of years from the time of payment of the purchase of Class B Shares until the
time such shares are redeemed. Solely for purposes of determining the number
of years from the time of any payment of the purchase of Class B Shares, all
payments during any month will be aggregated and deemed to have been made on
the last day of the month.
Class B Shares automatically convert into Class A Shares not more than 10
years after the end of the month in which a shareholder's order to purchase
Class B Shares was accepted. As a result, the shares that converted will no
longer be subject to a sales charge upon redemption and will enjoy the lower
Class A distribution services fee.
For purposes of conversion of Class A Shares, Class B Shares purchased
through the reinvestment of dividends and distributions paid in respect of
Class B Shares in a shareholder's account will be considered to be held in a
separate sub-account. Each time any Class B Shares in the shareholder's
account (other than those in the sub-account) convert to Class A Shares, an
equal pro rata portion of the Class B Shares in the sub-account also will
convert to Class A Shares. The conversion of Class B Shares to Class A Shares
is subject to the continuing determination that (i) the assessment of the
higher distribution services fee and transfer agency cost with respect to
Class B Shares does not result in the Fund's dividends or distributions
constituting "preferential dividends" under the Code, and (ii) that the
conversion of Class B Shares does not constitute a taxable event under
federal income tax law. The conversion of Class B Shares to Class A Shares
may be suspended if such an opinion is no longer available. In that event, no
further conversions of Class B Shares would occur, and Class B Shares might
continue to be subject to the higher distribution services fee for an
indefinite period, which period may extend beyond the period ending 10 years
after the end of the month in which the shares were issued.
The Class B Shares are otherwise the same as Class C Shares and are
subject to the same conditions, except that they can only be exchanged for
other Class B Shares without imposition of sales charges.
Class Y Shares. Class Y Shares will be offered only to institutional
investors, at a price equal to net asset value. No front-end or deferred
sales charge is imposed on Class Y Shares. Additionally, Class Y Shares are
not subject to a Rule 12b-1 distribution fee. Net asset value will be
determined as described in this Prospectus under "Net Asset Value." The Class
Y Shares have no conversion feature, and they can only be exchanged for other
Class Y Shares without payment of applicable sales charges, if such charges
have not been previously paid.
OFFICERS, DIRECTORS AND STOCKHOLDERS
The directors and executive officers of the Funds are listed below. All of
the directors and officers hold the equivalent positions with Flagship Tax
Exempt Funds Trust and the series thereof. Except as indicated, each
individual has held the office shown or other offices in the same company for
the last five years and has a business address at One Dayton Centre, One
South Main St.; Dayton, Ohio 45402-2030, which is also the address of the
Funds.
The "interested" directors of the Funds (as defined in the 1940 Act) are
indicated by an asterisk (*).
9
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation
Name and Address Position With the Fund During Past Five Years
- --------------------------- ------------------------ -------------------------------------------------------
<S> <C> <C>
Bruce Paul Bedford* Director Chairman and Chief Executive Officer of Flagship
Resources Inc. ("Flagship"), Flagship Financial Inc.
(the "Manager"), and Flagship Funds Inc. (the
"Distributor").
Richard P. Davis* Director and President and Chief Operating Officer of Flagship, the
President Manager, and the Distributor.
Robert P. Bremner Director Private Investor and Management Consultant.
3725 Huntington St., N.W.
Washington, DC 20015
Joseph F. Castellano Director Professor and former Dean, College of Business and
4249 Honeybrook Avenue Administration, Wright State University.
Dayton, Ohio 45415
Paul F. Nezi Director Executive Vice President, Marketing Sales & Product
227 E. Dixon Avenue Development, ChoiceCare; prior to March 1993, Vice
Dayton, Ohio 45419 President and General Manager, Advanced Imaging
Products, a division of AM International; prior to
March 1991, Partner, Hooper & Nezi, a marketing and
communications firm.
William J. Schneider Director Senior Partner, Miller-Valentine Partners; Vice
4000 Miller-Valentine Ct. President, Miller-Valentine Realty, Inc.
P.O. Box 744
Dayton, Ohio 45401
M. Patricia Madden Vice President Vice President, Operations, of the Distributor.
Michael D. Kalbfleisch Treasurer and Secretary Vice President and Chief Financial Officer of Flagship,
the Manager, and the Distributor.
LeeAnne G. Sparling Controller Director of Portfolio Operations of the Manager.
Sharon M. Luster Assistant Secretary Compliance Manager of the Distributor; Assistant
Secretary of Flagship, the Manager, and the
Distributor.
</TABLE>
Compensation: Trustees and Officers
<TABLE>
<CAPTION>
Pension or Total Compensation
Retirement Estimated From Registrant and
Benefit Annual Fund Complex
Aggregate Accrued as Part Benefits (all other Flagship Mutual Funds)
Name of Person, Compensation of Upon Paid to Directors
Position From Registrant Fund Expenses Retirement (Number of Other Funds)
- ------------------ --------------- ---------------- ----------- ---------------------------------
<S> <C> <C> <C> <C>
Robert P. Bremner $6,000 $0 N/A $20,500 (26)
Director
Joseph F. Castellano $6,000 $0 N/A $19,500 (26)
Director
William J. Schneider $6,000 $0 N/A $20,000 (26)
Director
Paul F. Nezi $6,000 $0 N/A $20,000 (26)
Director
Bruce Paul Bedford 0 0 N/A 0
Chairman & Director
Richard P. Davis 0 0 N/A 0
President & Director
</TABLE>
10
<PAGE>
Compensation: Trustees and Officers
<TABLE>
<CAPTION>
Pension or Total Compensation
Retirement Estimated From Registrant and
Benefit Annual Fund Complex
Aggregate Accrued as Part Benefits (all other Flagship Mutual Funds)
Name of Person, Compensation of Upon Paid to Directors
Position From Registrant Fund Expenses Retirement (Number of Other Funds)
- ------------------ --------------- ---------------- ----------- ---------------------------------
<S> <C> <C> <C> <C>
M. Patricia Madden 0 0 N/A 0
Vice President
Michael D. Kalbfleisch 0 0 N/A 0
Treasurer & Secretary
LeeAnne G. Sparling 0 0 N/A 0
Controller
Sharon M. Luster 0 0 N/A 0
Assistant Secretary
</TABLE>
As of August 31, 1995, to the knowledge of management, no person
beneficially owned more than 5% of the outstanding shares of either the
Limited Term Fund or the Intermediate Fund.
All Directors and officers as a group own less than 1% of the outstanding
shares as of the above date. The Funds have no knowledge of any other person
owning more than 5% of the outstanding shares as of such date.
INVESTMENT ADVISORY SERVICES
As stated in the Funds' Prospectus, Flagship Financial Inc., a
wholly-owned subsidiary of Flagship Resources Inc., acts as investment
adviser (the "Manager") to the Funds pursuant to an Investment Advisory
Agreement (the "Advisory Agreement").
See "About the Investment Manager" in the Prospectus for a description of
the Manager's duties as investment adviser. The Manager's administrative
obligations include: (i) assisting in supervising all aspects of the Funds'
operations; (ii) providing each of the Funds, at the Manager's expense, with
the services of persons competent to perform such administrative and clerical
functions as are necessary in order to provide effective corporate
administration of the Funds; and (iii) providing at the Manager's expense,
with adequate office space and related services. The Funds' accounting
records are maintained at each of the Funds' expense, by its Custodian,
Boston Financial.
For the fiscal periods ended June 30, 1994 and 1995, with respect to each
Fund, the amounts paid to the Manager were as follows:
Fund 1994 1995
- ----------------- ------- ---------
Intermediate $294 $1,967
Limited Term 304 1,839
-----
TOTAL $598 $3,806
=====
The table set forth above does not include portions of the Manager's fee
which were permanently waived by the Manager. The amounts of compensation
waived by the Manager were:
Fund 1994 1995
- ----------------- ------- ---------
Intermediate $1,909 $ 9,246
Limited Term 1,196 6,499
-----
TOTAL $3,105 $15,745
=====
The Manager has advanced all organization expenses of the Funds which
include printing of documents, fees and disbursements of the Fund's counsel
and accountants, registration fees under the Securities Act of 1933, the 1940
Act, and state securities laws, as well as the initial fees of the Fund's
custodian and transfer agent. Such fees aggregated approximately $136,400 for
the Intermediate Fund and $131,600 for the Limited Term Fund. The expenses
are being reimbursed to the Manager by uniform pro rata deductions from the
net asset value of each of the Funds accrued daily and paid monthly over the
five-year period which commenced July 1, 1994.
11
<PAGE>
Also, under separate agreements with the Funds, for the period ended June
30, 1995, the Manager agreed to subsidize certain expenses as set forth
below. The Manager is not obligated to subsidize such expenses and may not do
so in the future, although the Manager expects such reimbursement will
continue until these funds reach a sufficient size to maintain a normal
expense ratio to net assets.
Amount Subsidized Amount Subsidized
Fund 6/30/94 6/30/95
-------------------- ---------------------
Intermediate $45,147 $132,664
Limited Term 45,153 130,372
------------------ --------------------
Total $90,300 $263,036
================== ====================
The Advisory Agreement will terminate automatically upon assignment and
its continuance must be approved annually by each of the Funds' Board of
Directors or a majority of each of the Funds' outstanding voting shares and
in either case, by a majority of each of the Funds' independent directors.
The Advisory Agreement is terminable at any time without penalty by the Board
of Directors or by a vote of a majority of the voting shares on 60 days'
written notice to the Manager, or by the Manager on 60 days' written notice
to any of the Funds.
The Managers of each of the Funds have agreed that in the event the
operating expenses of any of the Funds (including fees paid by any of the
Funds to the Manager and payments by any of the Funds to the Distributor but
excluding taxes, interest, brokerage and extraordinary expenses) for any
fiscal year ending on a date on which the Advisory Agreement with any of the
Funds is in effect, exceed the expense limitations imposed by applicable
state securities laws or any regulations thereunder, it will, up to the
amount of its fee, reduce its fee or reimburse any of the funds in the amount
of such excess. As of the date of this Prospectus, under the most restrictive
state regulations applicable, the Manager would be required to reimburse any
of the Funds such operating expenses exceeding 2-1/2% of the first $30
million of the average net assets, 2% of the next $70 million of the average
net assets, and l1/2% of the remaining average net assets. The Manager
believes that such operating expenses will be less than such amounts.
Securities held by any of the Funds may also be held by, or be appropriate
investments for, other investment advisory clients of the Manager and its
affiliates. Because of different objectives or other factors, a particular
security may be bought for one or more clients when one or more clients are
selling the same security. If purchases or sales of securities for any of the
Funds or other advisory clients arise for consideration at or about the same
time, transactions in such securities will be made, insofar as feasible, for
each of the Funds and such other clients in a manner deemed equitable to all.
To the extent that transactions on behalf of more than one client of the
Manager during the same period may increase the demand for securities being
purchased or the supply of securities being sold, there may be an adverse
effect on the price of such securities.
TAXES
References are made to the sections in the Prospectus entitled "Taxes" for
a discussion of relevant tax matters and to which the discussion below is
supplementary.
Taxation of the Funds
Each Portfolio of the Fund intends to qualify as a regulated investment
company ("RIC") for federal income tax purposes. In order to so qualify, each
Portfolio must, among other things: (a) derive at least 90% of its gross
income from dividends, interest, payments with respect to loans of securities
and gains from the sale or other disposition of securities or certain other
related income; (b) generally derive less than 30% of its gross income from
gains from the sale or other disposition of securities and certain other
investments held for less than three months; and (c) diversify its holdings
so that at the end of each fiscal quarter, (i) at least 50% of the value of
such Portfolio's assets is represented by cash, United States government
securities, securities of other regulated investment companies, and other
securities which, with respect to any one issuer, do not represent more than
5% of the value of such Portfolio's assets nor more than 10% of the voting
securities of such issuer, and (ii) not more than 25% of the value of such
Portfolio's assets is invested in the securities of any one issuer (other
than United States government securities or the securities of other RICs).
If each Portfolio of the Fund qualifies as an RIC and distributes to its
stockholders at least 90% of its investment company taxable income (not
including net capital gain, which is the excess of net long-term capital gain
over net short-term capital loss), then each Portfolio will not be subject to
federal income tax on the income so distributed.
12
<PAGE>
However, each Portfolio would be subject to corporate income tax (currently
at a 35% rate) on any undistributed income. In addition, each Portfolio will
be subject to a nondeductible 4% excise tax on the amount by which the income
it distributes in any calendar year is less than a required distribution
amount. The required distribution amount for a calendar year equals the sum
of (a) 98% of each Portfolio's ordinary income for such calendar year; (b)
98% of the excess of capital gains over capital losses for the one-year
period ending on October 31 of such calendar year; and (c) 100% of the
undistributed income and gains from prior years. Each Portfolio intends to
distribute sufficient income so as to avoid both corporate income tax and the
excise tax. However, a Portfolio may in the future decide to retain all or a
portion of its net capital gain. In such case, the Portfolio would be subject
to corporate income tax on such retained net capital gain; would designate to
stockholders the undistributed capital gain; stockholders would include as
long-term capital gain income such undistributed net capital gain; and
stockholders would be eligible for a credit with respect to such tax paid by
the Portfolio.
In the event that total distributions (including distributed or designated
net capital gain) for a taxable year exceed its investment company taxable
income and net capital gain, a portion of each distribution generally will be
treated as a return of capital. Distributions treated as a return of capital
reduce a stockholder's basis in its shares and could result in a capital gain
tax either when a distribution is in excess of basis or, more likely, when a
stockholder redeems its shares.
Stockholders of a Portfolio will be notified annually by the Fund as to
the Federal tax status of dividends and distributions paid during the
calendar year. Dividends and distributions may also be subject to state and
local taxes.
State and local tax treatment may vary according to applicable laws.
Stockholders can elect to receive distributions in cash or in additional
shares of such Portfolio. The price of the additional shares is determined as
of the record date for the dividend payment.
The Fund may in the future engage in various defensive hedging
transactions. Under various Code provisions such transactions might change
the character of recognized gains and losses, accelerate the recognition of
certain gains and losses, and defer the recognition of certain losses.
YIELD AND TOTAL RETURN CALCULATION
In accordance with SEC regulations, the Fund may include current yield and
average annual total return in advertisements or information furnished to
stockholders or potential investors. Yields are calculated (separately for
each class of shares) in accordance with the SEC's standardized yield
formula. Under this formula, dividend and interest income over the 30-day
measurement period, is reduced by period expenses and divided by the number
of days within the measurement period to arrive at a daily income rate. This
daily income rate is then expressed as a semiannually compounded yield based
on the maximum offering price of a share assuming a standardized 360-day
year. Each of the Funds may quote a tax equivalent yield which reflects the
rate a specified state taxpayer would have to earn on a taxable security that
is not a U.S. Treasury or full faith and credit U.S. Government agency
security in order to equal the same after-tax return.
The Fund may also advertise total return for each class of shares which is
calculated differently from "average annual total return" (a
"non-standardized quotation"). A non-standardized quotation of total return
measures the percentage change in the value of an account between the
beginning and end of a period, assuming no activity in the account other than
reinvestment of dividends and capital gains distributions. A non-standardized
quotation of total return for a particular class of shares will always be
accompanied by the "average annual total return" for such class. Average
annual total return for any time period is calculated (separately for each
class) by assuming an investment at the beginning of the measurement period
at the maximum offering price. Dividends from the net investable amount are
then reinvested in additional shares each month at the net asset value. At
the end of the measurement period, the total number of shares owned are
redeemed at net asset value (less any applicable contingent deferred sales
load). The change in the total value during the investment period is then
expressed as an average annual total rate of return. Each of the Funds may
also quote rankings, yields or returns as published by recognized statistical
services or publishers wherein its performance is categorized or compared
with other funds with similar investment objectives, such as Lipper
Analytical Service's "Utility Funds" under "Equity Funds," or this same data
as quoted by Barron's, Business Week, Forbes, Fortune, Micropal, Money,
Mutual Fund, Personal Investing, Worth, Value Line Mutual Fund Survey, or
others; Weisenberger Investment Companies Service's annual Investment
Companies under "U.S. Government"; or M0RNINGSTAR, Inc.'s Mutual Fund Values
under "U.S. Government-General." Each of the Funds may also compare its
investment performance or what it seeks to do with other investment vehicles
such as Certificates of Deposit, Treasury Bills, or Treasury Notes.
13
<PAGE>
Current yield and total return of each class will vary from time to time
depending on market conditions, the composition of the portfolio, operating
expenses and other factors. These factors and possible differences in method
of calculating performance figures should be considered when comparing the
performance figures of any of the Funds with those of other investment
vehicles.
Yield and Total Return Calculation as of June 30, 1995 (there is no
historical data for Class B or Y Shares):
<TABLE>
<CAPTION>
Average Annual Total Return
----------------------------------
Current
30-Day Yield 1 Year 5 Year 10 Year Inception Date
------------- --------- --------- --------- --------------------
<S> <C> <C> <C> <C> <C>
Intermediate Fund
Class A 6.25% 11.00% 3.84%* N/A* February 1, 1994
Class C 5.68% 12.58% 5.45%* N/A* February 3, 1994
Limited Term Fund
Class A 5.37% 6.35% 2.76%* N/A* February 1, 1994
Class C 5.25% 7.65% 4.29%* N/A* February 11, 1994
</TABLE>
*Inception to date
DISTRIBUTIONS
Each of the Funds anticipates making daily distributions. The anticipated
daily distributable income of any of the Funds for a particular day will be
equal to the "anticipated daily dividend and interest income" for the day,
less the "anticipated daily expenses" for that day plus or minus any special
adjustment for that day.
As with all declarations of distributions by investment companies, the net
asset value will be reduced by the amount of each daily dividend at the time
of declaration.
Anticipated Daily Expenses
In order to determine this component of the anticipated daily
distributable income, the Manager will first project the total amount of
anticipated expenses in a proportionate amount for each class and will then
divide such amount by the number of days during the year. The Manager will
continually monitor each of the Funds' expenses and will revise, as often as
appropriate, its projections of such expenses. In making any revision, the
Manager will, in the same manner as described above under "Anticipated Daily
Dividend and Interest Income," recalculate the anticipated daily expenses
figure and the cumulative difference and will then spread the amount of such
difference over the number of days remaining during the year.
DISTRIBUTOR
As stated in the Prospectus, Flagship Funds Inc., a wholly-owned
subsidiary of Flagship Resources Inc., acts as the distributor (the
"Distributor") of shares of each of the Funds in accordance with the terms of
the Distribution Agreement dated September 30, 1993 for the Flagship Utility
Income Fund. The Distributor will make a continuous offering of the shares
and will be responsible for all sales and promotion efforts. There is no
redemption charge. Each Distribution Agreement must be approved in the same
manner as the Advisory Agreement discussed under "Investment Advisory
Services" above and will terminate automatically if assigned by either party
thereto and is terminable at any time without penalty by the Board of
Directors of any of the Funds or by vote of a majority of any of the Funds'
outstanding shares on 60 days' written notice to the Distributor and by the
Distributor on 60 days' written notice to any of the Funds.
Pursuant to Rule 12b-l under the 1940 Act, the Fund has adopted a plan
(the "Plan") with respect to Class A Shares, Class B Shares and Class C
Shares which permits each of the Funds to pay for certain distribution and
promotion expenses related to marketing the shares of each Portfolio. The
Plan authorizes the Funds to expend their monies in an amount equal to the
aggregate for all such expenditures to such percentage of each Fund's daily
net asset value as may be determined from time to time by vote cast in person
at a meeting called for such purpose, by a majority of the Funds'
disinterested directors. The scope of the foregoing shall be interpreted by
the directors, whose decision shall be conclusive except to the extent it
contravenes established legal authority. Without in any way limiting the
discretion of the directors, the following activities are hereby declared to
be primarily intended to result in the sale of shares of the Funds:
advertising the Funds or the Funds' investment manager's mutual fund
activities; compensating underwriters, dealers, brokers, banks and other
selling entities and sales and marketing personnel of any of them for sales
of shares of the Funds, whether in a lump sum or on a continuous, periodic,
14
<PAGE>
contingent, deferred or other basis; compensating underwriters, dealers,
brokers, banks and other servicing entities and servicing personnel
(including the Funds' investment manager and its personnel or any of them for
providing services to shareholders of the Funds relating to their investment
in the Funds including assistance in connection with inquiries relating to
shareholder accounts; the production and dissemination of prospectuses
including statements of additional information) of the Funds and the
preparation, production and dissemination of sales, marketing and shareholder
servicing materials; and the ordinary or capital expenses, such as equipment,
rent, fixtures, salaries, bonuses, reporting and recordkeeping and third
party consultancy or similar expenses relating to any activity for which
payment is authorized by the directors; and the financing of any activity for
which payment is authorized by the directors. Pursuant to the Plan, each of
the Funds through authorized officers may make similar payments for marketing
services to non-broker-dealers who enter into service agreements with each of
the Funds.
The maximum amount payable by any of the Funds under the Plan and related
agreements with respect to Class A Shares is .40% of each Portfolio's average
daily net assets for the year attributable to such Class A Shares. For Class
B Shares, the maximum amount payable annually is .95% of such Portfolio's
average daily net assets attributable to such Class B Shares. For Class C
Shares, the maximum amount payable annually is .95% of such Portfolio's
average daily net assets attributable to such Class C Shares. In the case of
broker-dealers and others, such as banks, who have Selling or Service
Agreements with the Distributor or the Fund, the maximum amount payable to
any recipient is .001096% per day (.40% on an annualized basis) of the
proportion of daily net assets of the Portfolio attributable to Class A
Shares represented by such person's customers. The maximum amount payable to
any such recipient with respect to Class B Shares is .00260% per day (.95% on
an annualized basis) of the proportion of average daily net assets of such
Portfolio's attributable to Class B Shares represented by such person's
customers. The maximum amount payable to any such recipient with respect to
Class C Shares is .00260% per day (.95% on an annualized basis) of the
proportion of average daily net assets of such Portfolio's attributable to
Class C Shares represented by such person's customers. As described in the
Prospectus, the Board of Directors may reduce these amounts at any time. All
distribution expenses incurred by the Distributor and others, such as
broker-dealers or banks, in excess of the amount paid by a Portfolio will be
borne by such persons without any reimbursement from such Portfolio.
As detailed in the chart below, under the Plan and related agreements, the
Funds paid the amounts shown. Amounts permanently waived by the Distributor
for the same periods are also shown. There is no historical data for Class B
or Y shares.
Fiscal Year Amount Paid Amount Permanently
Ended June 30 to Distributor Waived by Distributor
Intermediate
Class A
1994 $ 80 $
1995 1,459 1,470
Class C
1994 $ 2,609
1995 14,297 $ 52
Limited Term
Class A
1994 239
1995 2,041 2,068
Class C
1994 1,616
1995 9,452 3,421
15
<PAGE>
These amounts are summarized below as to purpose.
<TABLE>
<CAPTION>
Purpose:
Fiscal Year Compensation Upfront Advertising & Salaries &
Ended June 30 to Brokers Commissions Promotions Benefits Overhead Total
<S> <C> <C> <C> <C> <C> <C>
Intermediate
Class A
1994 $ 80 $ -- $ -- $ -- $ -- $ 80
1995 1,459 -- -- -- -- 1,459
Class C
1994 -- 2,609 -- -- -- 2,609
1995 2,068 10,572 1,657 (--) (--) 14,297
Limited Term
Class A
1994 239 -- -- -- -- 239
1995 2,041 -- -- -- -- 2,041
Class C
1994 -- 1,616 -- -- -- 1,616
1995 733 8,719 (--) (--) (--) 9,452
</TABLE>
The Plan, the Distribution Agreement, the Selling Agreements and the
Service Agreements of each of the Funds have been approved with respect to
each of the Funds, by each of the Funds' Board of Directors, including a
majority of the directors who are not "interested persons" of the Fund and
who have no direct or indirect financial interest in the Plan or any related
agreement, by vote cast in person at meetings called for the purpose of
voting on the Plan and such agreements. Continuation of the Plan and the
related agreements must be approved annually in the same manner, and the Plan
or any related agreement may be terminated at any time without penalty by a
majority of such independent directors or by a majority of a Portfolio's
outstanding shares. Any amendment increasing the maximum percentage payable
under the Plan or other material change must be approved by a majority of the
respective Portfolio's outstanding shares, and all other material amendments
to the Plan or any related agreement must be approved by a majority of the
independent directors.
In order for the Plan to remain effective, the selection and nomination of
directors who are not "interested persons" of each of the Funds must be done
by the directors who are not "interested persons" and the persons authorized
to make payments under the Plans must provide written reports at least
quarterly to the Board of Directors for their review.
Also, in its capacity as national wholesale underwriter for shares of the
Funds, the Distributor received commissions on sales of the Funds' Class A
and Class C Shares offered on a continuous basis for the years ended June 30,
1994 and 1995, as follows (there is no historical data for Class B or Y
shares):
CLASS A SHARES
1994 1995
----------------------- ------------------------
Aggregate Retained Aggregate Retained
Fund Amount by Dist. Amount by Dist.
- ------------- ---------- --------- --------- -----------
Intermediate $ 6,300 $100 $11,100 $1,900
Limited Term 7,700 100 15,600 3,100
-------- ------- ------- ---------
TOTAL $14,000 $200 $27,700 $5,000
======== ======= ======= =========
CLASS C SHARES
1994 1995
---------------- ------------------
Contingent Contingent
Deferred Deferred
Fund Sales Load Sales Load
- ------------- ---------------- ------------------
Intermediate $200 $2,000
Limited Term 500 3,400
--------------
TOTAL $700 $5,400
==============
16
<PAGE>
CUSTODIAN AND TRANSFER AGENT
Boston Financial, 225 Franklin Street, Boston, Massachusetts 02107, is the
custodian, transfer agent and dividend disbursing agent for the Funds. It
also maintains the accounting records, determines the net asset value and
performs other stockholder services for each of the Funds.
AUDITORS
Deloitte & Touche LLP, 1700 Courthouse Plaza N.E., Dayton, OH 45402, are
the independent auditors for the Funds.
PORTFOLIO TRANSACTIONS
Subject to policy established by each of the Funds' Board of Directors,
the Manager is primarily responsible for each of the Funds' investment
decisions and the placing of securities orders. In placing orders, it is the
policy of the Funds that the Manager obtain the best net results taking into
account such factors as price (including the dealer spread, where
applicable); the size, type and difficulty of the transaction involved; the
size and breadth of the market; the firm's general execution and operational
facilities; and the firm's risk in positioning the securities involved. While
the Manager seeks reasonably competitive prices or commissions, the Funds
will not necessarily always be paying the lowest price or commission
available. The Manager does not expect to use any one particular broker or
dealer, but, subject to obtaining best execution, brokers or dealers who
provide supplemental investment research to each of the Funds or the Manager
may receive orders for transactions by any of the Funds. In addition, the
Manager may direct brokerage to brokers or dealers because of research
services provided. Such information may be used by other clients of the
Manager and not just the Funds. Conversely, each of the Funds may benefit
from research services provided in respect to other clients. All research
shall be paid for in compliance with Section 28 (e) of the Securities
Exchange Act of 1934 or consistent with the fiduciary duties of the Board and
the Manager. Information so received will be in addition to and not in lieu
of the services required to be performed by the Manager under its Agreement
and the expenses of the Manager will not necessarily be reduced as a result
of the receipt of such supplemental information. Money market securities,
bonds and debentures, in which the Manager may invest a portion of a Fund's
assets, are usually traded over-the-counter, but may be traded on an
exchange. For listed securities, the Manager will deal directly with the
brokers and dealers who make a market in the securities involved except in
those circumstances where better prices and execution are available
elsewhere. Such dealers usually are acting as principal for their own
account. On occasion, securities may be purchased directly from the issuer.
The Manager is able to fulfill its obligations to furnish a continuous
investment program to the Funds without receiving research from brokers;
however, it considers access to such information to be an important element
of financial management. Although such information is considered useful, its
value is not determinable, as it must be reviewed and assimilated, and does
not reduce normal research activities in rendering investment advice under
the Advisory Agreement. It is possible that the Manager's expenses could be
materially increased if it attempted to purchase this type of information or
generate it through its own staff.
One or more of the other accounts which the Manager manages may own from
time to time the same investments as the Funds. Investment decisions for the
Funds are made independently from those of such other accounts; however, from
time to time, the same investment decision may be made for more than one
company or account. When two or more companies or accounts seek to purchase
or sell the same securities, the securities actually purchased or sold will
be allocated among the companies and accounts on a good faith equitable basis
by the Manager in its discretion in accordance with the accounts' various
investment objectives. In some cases, this system may adversely affect the
price or size of the position obtainable for the Funds. In other cases,
however, the ability of the Funds to participate in volume transactions may
produce better execution. It is the opinion of each of the Funds' Board of
Directors that this advantage, when combined with the other benefits
available due to the Manager's organization, outweighs any disadvantages that
may be said to exist from exposure to simultaneous transactions.
PURCHASE, REDEMPTION AND PRICING OF SHARES
The various manners in which the shares of each of the Funds are offered
to the public or may be redeemed, and the method of calculation by each of
the Funds of net asset value per share (which is the offering price of the
shares plus a sales charge that varies with the amount purchased) are
described in the Funds' Prospectus.
17
<PAGE>
Purchase
The Directors of the Funds have eliminated sales charges from purchases of
$2,000,000 or more in view of the benefits to all stockholders of greater
total assets over which to spread fixed costs, the cost savings realized in
dealing with large accounts and the absence of any dilution or other adverse
effects on existing stockholders. On purchases of $2,000,000 or more
(including any applicable rights of accumulation and combination and
purchases under letters of intent), the Distributor will pay the dealer out
of the Distributor's funds an amount equal to up to .15% of the total
purchase, with the dealer required to repay such amount for any shares which
are redeemed within one year of purchase.
The Distributor offers several reduced sales charge programs as described
below.
1. Cumulative Purchase Discount (Class A Shares Only). Whenever an
individual stockholder purchases Class A Shares of any series of the Fund,
such individual stockholder may aggregate his holdings of all Class A Shares
in any other open-end mutual fund subject to a front-end sales charge
distributed by the Distributor and any current purchases of Class A Shares to
determine the applicable sales charge. A reduced sales charge will be imposed
if the aggregate amount qualifies under the rate schedule. An individual
stockholder may also aggregate the holdings of a spouse, any of their
children and parents in the same fashion when making a particular purchase.
Finally, for purposes of determining the applicable sales charge, trusts and
other fiduciaries may aggregate the holdings of each trust estate or other
fiduciary account in the same fashion even if the beneficiaries are
unrelated. Any stockholder may also combine his holdings of Class A Shares
subject to a front-end sales charge and current purchases of Class A Shares
in all such funds distributed by the Distributor in order to qualify for a
reduced sales charge on any particular purchase.
2. Letter of Intent (Class A Shares Only). A stockholder may also qualify
for reduced sales charges by sending to the Fund (within 90 days after the
first purchase desired to be included in the purchase program) a signed,
non-binding letter of intent to purchase, during a 13-month period, an amount
sufficient to qualify for a reduced sales charge. A single letter may be used
for spouses, their children and parents or any single trust estate or other
fiduciary account. All investments in Class A Shares of the Fund or in Class
A Shares of any other open-end mutual fund subject to a front-end sales
charge distributed by the Distributor count toward the indicated goal. Once
the Distributor receives the required letter of intent, it will apply to
qualifying purchases within the 13-month period the sales charge that would
be applicable to a single purchase of the total amount indicated in the
letter. During the period covered by the letter of intent, 5% of the shares
purchased will be restricted until the stated goal is reached. If the
intended purchase program is not completed within the 13-month period, the
sales charge will be adjusted upward as appropriate and a sufficient number
of restricted shares will be redeemed by the Fund if the stockholder does not
pay the increased sales charge.
3. Broker-dealer and Flagship Employees. In view of the reduction of
distribution expenses associated with sales of the Fund's shares to
registered representatives and full-time employees of broker/dealers who have
signed Selling agreements with the Distributor, such individuals are
permitted to purchase shares of the Fund at net asset value for their
personal accounts. The purchaser must certify to the Fund that certain
qualifications have been met and agree to certain restrictions (such as an
investment letter) in order to take advantage of this program. For similar
reasons, shares of the Fund may be purchased at net asset value and in
amounts less than the minimum purchase price by officers, trustees and
full-time employees of the Fund, the Distributor and the Manager. For this
purpose, the terms "registered representatives of broker/dealers who have
signed Dealer Agreements with the Distributor," "officers," "directors" and
"employees" include such persons' spouses, children, and parents, as well as
the trustee or custodian of any qualified pension or profit sharing plan or
IRA established for the benefit of such officer, director, employee, spouse,
child or parent.
4. Group Purchasers (Class A Shares Only). Members of a qualified group
may purchase shares of the Fund at a reduced sales charge applicable to the
group as a whole, if such purchases are made in an amount and manner
acceptable to the Fund. The sales charge, if any, is based on the aggregate
dollar value of shares purchased and still owned by the group, plus the
current purchase amount. Members of a qualified group may purchase shares at
net asset value (without sales charge) where the amount invested is
documented to the Fund to be proceeds from distributions of a unit investment
trust. Shares of the Fund may be purchased at net asset value (without sales
charge) by tax-qualified employee benefit plans and by trust companies and
bank trust departments for funds over which they exercise exclusive
discretionary investment authority for which they charge customary fees and
which are held in a fiduciary, agency, advisory, custodial or similar
capacity.
A "qualified group" is one which (i) has previously been in existence,
(ii) has a primary purpose other than acquiring Fund shares at a discount and
(iii) satisfies investment criteria described in the Prospectus which enables
18
<PAGE>
the Distributor to realize economies of scale in its costs of distributing
shares. A qualified group must have more than 10 members and must agree to
comply with certain administrative requirements relating to its group
purchases. Under such purchase plans, subsequent investments will continue
until such time as the investor notifies his group to discontinue further
investments. There may be a delay between the time a member's funds are
received by the group and the time the money reaches the Fund because of a
qualified group's remittance procedures. Unless otherwise noted above, the
investment in the Fund will be made at the public offering price based on net
asset value determined on the day that the funds are received in proper form
by the Fund.
5. Redemptions from Unrelated Funds. Shares of the Fund may be purchased
at net asset value where the amount invested is documented to the Fund to be
proceeds from the redemption (within one year of the purchase of Fund shares)
of shares of unrelated investment companies on which the investor has paid
initial or contingent deferred sales charges or is no longer subject to a
CDSL.
6. Wrap Fee Accounts. Shares of the Fund may be purchased at net asset
value by broker/dealers on behalf of wrap fee client accounts for which the
broker/dealer charges a fee and performs advisory, custodial, recordkeeping
or other services.
SERVICEMARKS
Flagship Financial has filed for federal registration of the Funds'
servicemark. In addition, Flagship Financial has filed for federal
registration with regard to its use of the servicemark "Plain Vanilla" in the
investment and mutual fund area.
OTHER INFORMATION
The Prospectus and the Statement of Additional Information do not contain
all the information included in the Registration Statement filed with the SEC
under the Securities Act of 1933 and the 1940 Act with respect to the Fund
and the securities offered by it pursuant to the Prospectus, certain portions
of which have been omitted pursuant to the rules and regulations of the SEC.
The Registration Statement including the exhibits filed therewith may be
examined at the office of the SEC in Washington, D.C.
Statements contained in the Prospectus or in the Statement of Additional
Information as to the contents of any contract or other document referred to
are not necessarily complete, and, in each instance, reference is made to the
copy of such contract or other document filed as an exhibit to the
Registration Statement of which the Prospectus and the Statement of
Additional Information form a part, each such statement being qualified in
all respects by such reference.
19
<PAGE>
Index to Financial Statements of
Flagship Admiral Funds Inc.
Flagship U.S. Government Funds
Financial Statements and Independent Auditors' Report for the period
ending June 30, 1995 for the following funds:
Page
-------
Flagship Limited Term U.S. Government Fund
Statement of Investments in Securities and Net Assets F-2
Statement of Assets and Liabilities F-3
Statement of Operations F-3
Statements of Changes in Net Assets F-4
Flagship Intermediate U.S. Government Fund
Statement of Investments in Securities and Net Assets F-5
Statement of Assets and Liabilities F-6
Statement of Operations F-6
Statement of Changes in Net Assets F-7
Notes to Financial Statements F-8
Financial Highlights F-11
Independent Auditors' Report F-15
F-1
<PAGE>
[Ship logo]
Portfolio Highlights Flagship Limited Term U.S. Government Fund
================================================================================
JUNE 30, JUNE 30,
ASSET ALLOCATION 1995 1994
U.S. GOVERNMENT AGENCIES 13.6% --.%
U.S. GOVERNMENT AGENCIES - MORTGAGE-BACKED SECURITIES 43.1% --.%
U.S. GOVERNMENT OBLIGATIONS 43.0% 101.3%
OTHER NET ASSETS 0.3% (1.3%)
PERFORMANCE COMPARISON* (Value of $10,000 investment from Fund's inception.) -
Class A
[Graphic: Line Graph]
June 30, 1994 1995
FUND BEFORE SALES
CHARGE OR EXPENSES $ 9,776 10,737
FUND AFTER SALES
CHARGE AND EXPENSES $ 9,533 10,393
MERRILL LYNCH U.S
TREASURY 5 YR. INDEX $ 9,474 10,561
The average total returns for the Fund for one year and since inception (2/1/94
Class A stock, 2/11/94 Class C stock), after deduction of the maximum sales
charge and reinvestment of dividends, as of June 30, 1995 are 6.35% and 2.76%
for Class A stock and 7.65% and 4.29% for Class C stock, respectively. *Assumes
reinvestment of all dividends and distributions. The performance of Class C
stock will be greater than or less than results of Class A stock due to
differing sales charges and expenses. The quoted data represents past
performance. Investment return and principal value will fluctuate. An investor's
shares, when redeemed, may be worth more or less than their original value.
U.S.GOVERNMENT 3
<PAGE>
[Ship logo]
Portfolio Highlights Flagship Intermediate U.S. Government Fund
================================================================================
JUNE 30, JUNE 30,
ASSET ALLOCATION 1995 1994
U.S. GOVERNMENT AGENCIES 8.8% --.%
U.S. GOVERNMENT AGENCIES - MORTGAGE-BACKED SECURITIES 44.2% --.%
U.S. GOVERNMENT OBLIGATIONS 46.7% 89.9%
OTHER NET ASSETS 0.3% 10.1%
PERFORMANCE COMPARISON* (Value of $10,000 investment from Fund's inception.) -
Class A
[Graphic: Line Graph]
June 30, 1994 1995
FUND BEFORE SALES
CHARGE OR EXPENSES $ 9,506 10,953
FUND AFTER SALES
CHARGE AND EXPENSES $ 9,212 10,548
MERRILL LYNCH U.S
TREASURY 10 YR. INDEX $ 9,071 10,458
The average total returns for the Fund for one year and since inception (2/1/94
Class A stock, 2/3/94 Class C stock), after deduction of the maximum sales
charge and reinvestment of dividends, as of June 30, 1995 are 11.00% and 3.84%
for Class A stock and 12.58% and 5.45% for Class C stock, respectively. *Assumes
reinvestment of all dividends and distributions. The performance of Class C
stock will be greater than or less than results of Class A stock due to
differing sales charges and expenses. The quoted data represents past
performance. Investment return and principal value will fluctuate. An investor's
shares, when redeemed, may be worth more or less than their original value.
U.S. GOVERNMENT 4
<PAGE>
[Ship logo]
Flagship Limited Term U.S. Government Fund
Statement of Investments in Securities and Net Assets June 30, 1995
================================================================================
<TABLE>
<CAPTION>
Face Market
Amount Value
<C> <S> <C>
U.S. GOVERNMENT AGENCIES - 13.6%
$ 500,000 Federal National Mortgage Association, 6.310%, 03/07/01 $ 483,980
Total U.S. Government Agencies 483,980
U.S. GOVERNMENT AGENCIES - MORTGAGE-BACKED SECURITIES - 43.1%
1,590,421 Federal National Mortgage Association, 6.000%, 05/01/09 1,537,729
Total U.S. Government Agencies - Mortgage-Backed Securities 1,537,729
U.S. GOVERNMENT OBLIGATIONS - 43.0%
500,000 U.S. Treasury Notes, 7.500%,10/31/99 527,968
500,000 U.S. Treasury Notes, 7.750%,11/30/99 533,593
440,000 U.S. Treasury Notes, 7.875%,11/15/99 471,625
Total U.S. Government Obligations 1,533,186
Total Investments in Government Securities (Cost $3,469,530) - 99.7% 3,554,895
Excess of Other Assets over Liabilities - 0.3% 12,663
Total Net Assets - 100% $ 3,567,558
</TABLE>
See notes to financial statements.
U.S. GOVERNMENT 5
<PAGE>
[Ship logo]
Flagship Limited Term U.S. Government Fund
Statement of Assets and Liabilities June 30, 1995
================================================================================
ASSETS:
Investments, at market value (cost $3,469,530) $3,554,895
Receivable for Fund shares sold 24,898
Interest receivable 31,969
Other 261
Total assets 3,612,023
LIABILITIES:
Bank overdraft 217
Distributions payable 16,535
Accrued expenses 27,713
Total liabilities 44,465
NET ASSETS $3,567,558
Class A:
Applicable to 166,540 shares issued
and outstanding $1,598,976
Net asset value per share $ 9.60
Class C:
Applicable to 204,944 shares issued
and outstanding $1,968,582
Net asset value per share $ 9.61
[Ship logo]
Flagship Limited Term U.S. Government Fund
Statement of Operations For the year ended June 30, 1995
================================================================================
INVESTMENT INCOME - INTEREST $ 166,916
EXPENSES:
Distribution fees - Class A (Note E) 4,109
Distribution fees - Class C (Note E) 12,873
Investment advisory fees (Note E) 8,338
Custody and accounting fees 55,175
Transfer agent's fees 25,865
Registration fees 28,013
Legal fees 213
Audit fees 3,039
Reimbursement of organizational expenses (Note F) 26,317
Directors' fees 258
Stockholder services fees (Note E) 326
Other 692
Distribution and advisory fees waived (Note E) (11,988)
Expense subsidy (Note E) (130,372)
Total expenses 22,858
Net investment income 144,058
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on security transactions (4,567)
Change in unrealized appreciation (depreciation)
of investments 108,840
Net gain on investments 104,273
Net increase in net assets resulting from operations $ 248,331
See notes to financial statements
6 U.S. GOVERNMENT
<PAGE>
[Ship logo]
Flagship Limited Term U.S. Government Fund
Statements of Changes in Net Assets
================================================================================
<TABLE>
<CAPTION>
Period From
Year Ended February 1, 1994
June 30, 1995 to June 30, 1994
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 144,058 $ 20,877
Net realized loss on security transactions (4,567) (24,328)
Change in unrealized appreciation (depreciation)
of investments 108,840 (23,475)
Net increase (decrease) in net assets
resulting from operations 248,331 (26,926)
Distributions to stockholders:
Dividends from net investment income - Class A (65,232) (8,363)
Dividends from net investment income - Class C (77,637) (11,841)
Net decrease in net assets from distributions to (65,232) (8,363)
stockholders - Class A
Net decrease in net assets from distributions to (77,637) (11,841)
stockholders - Class C
Capital stock transactions:
Proceeds from shares sold - Class A 1,943,777 576,702
Proceeds from shares sold - Class C 2,801,382 1,184,196
Net asset value of shares issued in reinvestment of 30,673 3,278
distributions - Class A
Net asset value of shares issued in reinvestment of 38,284 5,473
distributions - Class C
Cost of shares reacquired - Class A (853,476) (126,558)
Cost of shares reacquired - Class C (1,725,132) (369,373)
Net increase in net assets from capital stock 1,120,974 453,422
transactions - Class A
Net increase in net assets from capital stock 1,114,534 820,296
transactions - Class C
Total increase in net assets 2,340,970 1,226,588
NET ASSETS:
Beginning of period 1,226,588 -
End of period $ 3,567,558 $ 1,226,588
NET ASSETS CONSIST OF:
Common stock, at par $ 371 $ 131
Paid-in surplus 3,508,855 1,273,587
Undistributed net investment income 1,862 673
Accumulated net realized loss on security transactions (28,895) (24,328)
Unrealized appreciation (depreciation) of investments 85,365 (23,475)
$ 3,567,558 $ 1,226,588
</TABLE>
See notes to financial statements.
U.S. GOVERNMENT 7
<PAGE>
[Ship logo]
Flagship Intermediate U.S. Government Fund
Statement of Investments in Securities and Net Assets June 30, 1995
================================================================================
<TABLE>
<CAPTION>
Face Market
Amount Value
<S> <C> <C>
U.S. GOVERNMENT AGENCIES - 8.8%
$ 300,000 Federal Farm Credit Bank, 5.810%,11/10/03 $ 286,596
Total U.S. Government Agencies 286,596
U.S. GOVERNMENT AGENCIES - MORTGAGE-BACKED SECURITIES - 44.2%
1,500,622 Federal National Mortgage Association, 6.500%, 01/01/24 1,442,472
Total U.S. Government Agencies - Mortgage-Backed Securities 1,442,472
U.S. GOVERNMENT OBLIGATIONS - 46.7%
400,000 U.S. Treasury Notes, 5.875%, 02/15/04 390,874
1,000,000 U.S. Treasury Notes, 7.250%, 08/15/04 1,067,812
60,000 U.S. Treasury Notes, 7.875%,11/15/99 64,313
Total U.S. Government Obligations 1,522,999
Total Investments in Government Securities (Cost $3,091,415) - 99.7% 3,252,067
Excess of Other Assets over Liabilities - 0.3% 9,744
Total Net Assets - 100% $ 3,261,811
</TABLE>
See notes to financial statements.
8 U.S. GOVERNMENT
<PAGE>
Ship logo
Flagship Intermediate U.S. Government Fund
Statement of Assets and Liabilities June 30, 1995
================================================================================
ASSETS:
Investments, at market value (cost $3,091,415) $3,252,067
Receivable for Fund shares sold 10,287
Interest receivable 47,267
Other 244
Total assets 3,309,865
LIABILITIES:
Bank overdraft 4,961
Distributions payable 15,172
Accrued expenses 27,921
Total liabilities 48,054
NET ASSETS $3,261,811
Class A:
Applicable to 104,707 shares issued and outstanding $1,013,292
Net asset value per share $ 9.68
Class C:
Applicable to 232,156 shares issued and outstanding $2,248,519
Net asset value per share $ 9.69
[Ship logo]
Flagship Intermediate U.S. Government Fund
Statement of Operations For the year ended June 30, 1995
================================================================================
INVESTMENT INCOME - INTEREST $161,687
EXPENSES:
Distribution fees - Class A (Note E) 2,929
Distribution fees - Class C (Note E) 14,349
Investment advisory fees (Note E) 11,213
Custody and accounting fees 55,375
Transfer agent's fees 25,865
Registration fees 28,013
Legal fees 213
Audit fees 3,039
Reimbursement of organizational expenses (Note F) 27,284
Directors' fees 258
Stockholder services fees (Note E) 348
Other 692
Distribution and advisory fees waived (Note E) (10,768)
Expense subsidy (Note E) (132,664)
Total expenses 26,146
Net investment income 135,541
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on security transactions 8,320
Change in unrealized appreciation (depreciation) of investments 200,196
Net gain on investments 208,516
Net increase in net assets resulting from operations $ 344,057
See notes to financial statements
U.S. GOVERNMENT 9
<PAGE>
[Ship logo]
Flagship Intermediate U.S. Government Fund
Statements of Changes in Net Assets
================================================================================
<TABLE>
<CAPTION>
Period From
Year Ended February 1, 1994
June 30, 1995 to June 30, 1994
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 135,541 $ 23,322
Net realized gain (loss) on security transactions 8,320 (37,267)
Change in unrealized appreciation (depreciation) of investments 200,196 (39,544)
Net increase (decrease) in net assets resulting from operations 344,057 (53,489)
Distributions to stockholders:
Dividends from net investment income - Class A (48,544) (7,443)
Dividends from net investment income - Class C (87,097) (15,313)
Net decrease in net assets from distributions to (48,544) (7,443)
stockholders - Class A
Net decrease in net assets from distributions to (87,097) (15,313)
stockholders - Class C
Capital stock transactions:
Proceeds from shares sold - Class A 1,273,720 535,314
Proceeds from shares sold - Class C 1,575,716 1,161,223
Net asset value of shares issued in reinvestment of 17,162 2,914
distributions - Class A
Net asset value of shares issued in reinvestment of 26,900 1,886
distributions - Class C
Cost of shares reacquired - Class A (754,206) (107,417)
Cost of shares reacquired - Class C (576,068) (27,504)
Net increase in net assets from capital stock 536,676 430,811
transactions - Class A
Net increase in net assets from capital stock 1,026,548 1,135,605
transactions - Class C
Total increase in net assets 1,771,640 1,490,171
NET ASSETS:
Beginning of period 1,490,171 ---
End of period $ 3,261,811 $ 1,490,171
NET ASSETS CONSIST OF:
Common stock, at par $ 337 $ 165
Paid-in surplus 3,129,303 1,566,251
Undistributed net investment income 466 566
Accumulated net realized loss on security transactions (28,947) (37,267)
Unrealized appreciation (depreciation) of investments 160,652 (39,544)
$ 3,261,811 $ 1,490,171
</TABLE>
See notes to financial statements
10 U.S. GOVERNMENT
<PAGE>
[Ship logo]
Notes to Financial Statements Year ended June 30, 1995
================================================================================
A. DESCRIPTION OF BUSINESS
The Flagship Limited Term U.S. Government Fund and Flagship Intermediate U.S.
Government Fund are series of Flagship Admiral Funds Inc. (Corporation), a
Maryland corporation registered under the Investment Company Act of 1940, as
amended, as a diversified, open-end management investment company. The Funds
commenced investment operations on February 1, 1994. Both offer Class A and
Class C stock to the investing public. Class A stock is sold with a front-end
sales charge. Class C stock is offered with no front-end sales charge but is
assessed a contingent deferred sales charge if redeemed within one year from
the time of purchase. Both classes of stock have identical rights and
privileges except with respect to the effect of sales charges, the
distribution and/or service fees borne by each class, expenses specific to
each class, voting rights on matters affecting a single class and the
exchange privileges of each class. Capital stock of the Funds, which are
registered under the Securities Act of 1933, as amended, is offered to the
public on a continuous basis.
B. SIGNIFICANT ACCOUNTING POLICIES The following is a summary of significant
accounting policies consistently followed by the Funds.
Security Valuations: Portfolio securities are valued at the mean between the
over-the-counter bid and asked prices as furnished by an independent pricing
service. Short-term investments are stated at amortized cost, which
approximates market value.
Federal Income Taxes: It is the Funds' policy to comply with the Internal
Revenue Code requirements applicable to regulated investment companies and
distribute all taxable income to stockholders. Therefore, no federal income
tax provision is required. Distributions from net realized capital gains may
differ for financial statement and tax purposes primarily due to the
treatment of wash sales and post-October capital losses.
Security Transactions and Investment Income: Security transactions are
accounted for on the date the securities are purchased or sold (trade date).
Realized gains and losses on securities are based upon the specific
identification method for both financial statement and federal income tax
purposes. The Fund amortizes discounts and premiums on purchases of portfolio
securities on the same basis for both financial reporting and tax purposes.
Interest income is recorded on the accrual basis.
Distributions to Stockholders: The Funds' anticipated daily net investment
income is declared as a dividend each day and paid monthly. Dividends are
reinvested in additional shares unless otherwise requested. Net realized
gains on security transactions, to the extent they exceed available capital
loss carryforwards, are distributed to stockholders.
Expense Allocation: Estimated expenses are accrued daily. Shared expenses
incurred by the Corporation are allocated among the series based on each
series' ratio of net assets to the combined net assets. Specifically
identified direct expenses are charged to each series as incurred. Fund
expenses not specific to any class of shares are prorated among the classes
based upon the eligible net assets of each class. Specifically identified
direct expenses of each class are charged to that class as incurred.
Custodian Fees: The Funds have entered into an agreement with the custodian
to reduce monthly custodian charges for compensating cash balances maintained
on deposit. The compensating balance credit is based on 80% of the daily
effective federal funds rate.
Securities Purchased on a "When Issued" Basis: The Funds may, upon adequate
segregation of securities as collateral, purchase and sell portfolio
securities on a "when issued" basis. These securities are registered by a
government agency, but have not been issued to the public. Delivery and
payment take place after the date of the transaction and such securities are
subject to market fluctuations during this period. The current market value
of these securities is determined in the same manner as other portfolio
securities. There were no "when issued" purchase commitments included in the
statements of investments at June 30, 1995.
U.S. GOVERNMENT 11
<PAGE>
Notes to Financial Statements
================================================================================
C. CAPITAL STOCK
At June 30, 1995, there were 100,000,000 shares equally divided into four
Classes of $.001 par value capital stock authorized to each Fund.
Transactions in capital stock were as follows:
Period From
Year Ended February 1, 1994
June 30, 1995 to June 30, 1994
LIMITED TERM - Class A
Shares sold 209,201 59,575
Shares issued in
reinvestment of
distributions 3,307 347
Shares reacquired (92,489) (13,401)
Net increase in shares
outstanding 120,019 46,521
Outstanding at beginning
of period 46,521 -0-
Outstanding at end of period 166,540 46,521
Period From
Year Ended February 11, 1994
June 30, 1995 to June 30, 1994
LIMITED TERM - Class C
Shares sold 302,393 123,202
Shares issued in
reinvestment of
distributions 4,126 576
Shares reacquired (186,127) (39,226)
Net increase in shares
outstanding 120,392 84,552
Outstanding at beginning
of period 84,552 -0-
Outstanding at end of period 204,944 84,552
Period From
Year Ended February 1, 1994
June 30, 1995 to June 30, 1994
INTERMEDIATE - Class A
Shares sold 141,795 56,598
Shares issued in
reinvestment of
distributions 1,901 315
Shares reacquired (84,258) (11,644)
Net increase in shares
outstanding 59,438 45,269
Outstanding at beginning
of period 45,269 -0-
Outstanding at end of period 104,707 45,269
Period From
Year Ended February 3, 1994
June 30, 1995 to June 30, 1994
INTERMEDIATE - Class C
Shares sold 173,777 122,369
Shares issued in
reinvestment of
distributions 2,951 205
Shares reacquired (64,189) (2,957)
Net increase in shares
outstanding 112,539 119,617
Outstanding at beginning
of period 119,617 -0-
Outstanding at end of period 232,156 119,617
D. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities for the year ended June 30, 1995
aggregated:
Fund Purchases Sales
Limited Term $ 8,046,603 $ 5,847,320
Intermediate $ 6,470,739 $ 4,778,169
At June 30, 1995, net unrealized appreciation for financial reporting and
federal income tax purposes aggregated $85,365 and $160,652, for the Limited
Term and Intermediate Funds, respectively, and includes:
Unrealized Unrealized
Fund Appreciation Depreciation
Limited Term $ 96,308 $ 10,943
Intermediate $ 163,684 $ 3,032
At June 30, 1995, the Limited Term Fund has available capital loss
carryforwards of approximately $28,900 to offset future net capital gains in
the amounts of $6,200 expiring June 30, 2002 and $22,700 expiring on June 30,
2003. Also, at June 30, 1995, the Intermediate Fund has available a capital
loss carryforward of approximately $28,900 expiring June 30, 2002.
E. TRANSACTIONS WITH INVESTMENT
ADVISOR AND DISTRIBUTOR
Flagship Financial Inc. (Advisor), under the terms of agreements which
provide for furnishing of investment advice, office space and facilities to
the Funds, receives fees computed
12 U.S. GOVERNMENT
<PAGE>
Notes to Financial Statements
================================================================================
monthly on the daily net assets of the Funds. For the Limited Term Fund, fees
are computed at an annualized rate of .35% of the average daily net assets.
Fees are computed at an annualized rate of .50% of the average daily net
assets for the Intermediate Fund. During the year ended June 30, 1995, the
Advisor, at its discretion, permanently waived $6,499 and $9,246 of the
Limited Term and Intermediate Funds' advisory fees, respectively. Also, under
agreements with the Funds, the Advisor has agreed to subsidize certain
expenses (excluding advisory and distribution fees) until the Funds reach a
sufficient size to maintain a normal expense ratio to average net assets.
The Funds have Distribution Agreements with Flagship Funds Inc.
(Distributor). The Distributor serves as the exclusive selling agent and
distributor of the Funds' Class A and Class C stock and in that capacity is
responsible for all sales and promotional efforts including printing of
prospectuses and reports used for sales purposes. Pursuant to Rule 12b-1
under the Investment Company Act of 1940, the Funds have adopted plans to
reimburse the Distributor each month for its actual expenses incurred in the
distribution and promotion of all classes of the Funds' stock. The maximum
amount payable for these expenses on an annual basis is .40% and .95% of the
Funds' average daily net assets for Class A and Class C stock, respectively.
During the year ended June 30, 1995, the Distributor, at its discretion,
permanently waived distribution fees of $5,489 and $1,522 for the Limited
Term and Intermediate Funds, respectively. Included in accrued expenses at
June 30, 1995 are accrued distribution fees of $1,324 and $1,921 for the
Limited Term and Intermediate Funds, respectively. Certain non-promotional
expenses directly attributed to current stockholders are aggregated by the
Distributor and passed through to the Funds as stockholder services fees.
In its capacity as national wholesale underwriter for the shares of the
Funds, the Distributor received commissions on sales of the Funds' shares for
the year ended June 30, 1995, approximately as follows:
Gross Paid to Other
Fund Commissions Dealers
Limited Term $ 15,600 $ 12,500
Intermediate $ 11,100 $ 9,200
For the year ended June 30, 1995, the Distributor received approximately
$3,400 and $2,000 for the Limited Term and Intermediate Fund, respectively,
of contingent deferred sales charges on redemptions of Class C shares.
Certain officers and directors of the Funds are also officers and/or
directors of the Distributor and/or Advisor.
F. ORGANIZATIONAL EXPENSES
The organizational expenses incurred on behalf of the Funds, amounting to
$131,601 for the Limited Term Fund and $136,382 for the Intermediate Fund,
are being reimbursed to the Advisor on a straight-line basis over a period of
five years. As of June 30, 1995, $26,317 and $27,284 has been reimbursed,
respectively.
U.S. GOVERNMENT 13
<PAGE>
[Ship logo]
Flagship Limited Term U.S. Government Fund
Financial Highlights Selected data for each share
of capital stock outstanding
throughout the period.
================================================================================
Period From
Year ended February 1, 1994 to
June 30, 1995 June 30, 1994
Class A
Net asset value, beginning of period $ 9.36 $ 9.75
Income from investment operations:
Net investment income 0.59 0.20
Net realized and unrealized
gain (loss) on securities 0.24 (0.40)
Total from investment operations 0.83 (0.20)
Less distributions:
Dividends from net investment income (0.59) (0.19)
Total distributions (0.59) (0.19)
Net asset value, end of period $ 9.60 $ 9.36
Total return(a) 9.08% (5.54%)
Ratios to average net assets
(annualized where appropriate):
Actual net of waivers and reimbursements:
Expenses 0.70% 0.21%
Net investment income 6.32% 5.15%
Assuming no waivers and reimbursements:
Expenses 6.89% 11.29%
Net investment income 0.13% (5.93%)
Net assets, end of period (000's) $1,599 $ 435
Portfolio turnover rate 50.40% 113.35%
(a)The total returns shown do not include the effect of applicable front-end
sales charge and are annualized where appropriate.
14 U.S. GOVERNMENT
<PAGE>
[Ship logo]
Flagship Limited Term U.S. Government Fund
Financial Highlights Selected data for each share
of capital stock outstanding
throughout the period.
================================================================================
Period From
Year ended February 11, 1994 to
June 30, 1995 June 30, 1994
Class C
Net asset value, beginning of period $ 9.36 $ 9.75
Income from investment operations:
Net investment income 0.54 0.17
Net realized and unrealized
gain (loss) on securities 0.24 (0.39)
Total from investment operations 0.78 (0.22)
Less distributions:
Dividends from net investment income (0.53) (0.17)
Total distributions (0.53) (0.17)
Net asset value, end of period $ 9.61 $ 9.36
Total return(a) 8.65% (6.37%)
Ratios to average net assets
(annualized where appropriate):
Actual net of waivers and
reimbursements:
Expenses 1.16% 0.69%
Net investment income 5.84% 4.70%
Assuming no waivers and
reimbursements:
Expenses 7.50% 11.84%
Net investment income (0.50%) (6.45%)
Net assets, end of period (000's) $ 1,969 $ 791
Portfolio turnover rate 250.40% 113.35%
(a) The total returns shown do not include the effect of applicable contingent
deferred sales charge and are annualized where appropriate.
U.S. GOVERNMENT 15
<PAGE>
[Ship logo]
Flagship Intermediate U.S. Government Fund Selected data for each share
Financial Highlights of capital stock outstanding
throughout the period.
================================================================================
Period From
Year ended February 1, 1994 to
June 30, 1995 June 30, 1994
Class A
Net asset value, beginning of period $ 9.03 $ 9.70
Income from investment operations:
Net investment income 0.60 0.23
Net realized and unrealized gain (loss)
on securities 0.65 (0.68)
Total from investment operations 1.25 (0.45)
Less distributions:
Dividends from net investment income (0.60) (0.22)
Total distributions (0.60) (0.22)
Net asset value, end of period $ 9.68 $ 9.03
Total return(a) 14.43% (12.10%)
Ratios to average net assets
(annualized where appropriate):
Actual net of waivers and reimbursements:
Expenses 0.69% 0.19%
Net investment income 6.59% 5.90%
Assuming no waivers and reimbursements:
Expenses 7.42% 11.38%
Net investment income (0.14%) (5.29%)
Net assets, end of period (000's) $ 1,013 $ 409
Portfolio turnover rate 205.91% 83.87%
(a) The total returns shown do not include the effect of applicable front-end
sales charge and are annualized where appropriate.
16 U.S. GOVERNMENT
<PAGE>
[Ship logo]
Flagship Intermediate U.S. Government Fund
Financial Highlights Selected data for each share
of capital stock outstanding
throughout the period.
================================================================================
Period From
Year ended February 3, 1994 to
June 30, 1995 June 30, 1994
Class C
Net asset value, beginning of period $ 9.04 $ 9.70
Income from investment operations:
Net investment income 0.53 0.19
Net realized and unrealized
gain (loss) on securities 0.65 (0.66)
Total from investment operations 1.18 (0.47)
Less distributions:
Dividends from net investment income (0.53) (0.19)
Total distributions (0.53) (0.19)
Net asset value, end of period $ 9.69 $ 9.04
Total return(a) 13.58% (12.60%)
Ratios to average net assets
(annualized where appropriate):
Actual net of waivers and reimbursements:
Expenses 1.40% 0.91%
Net investment income 5.78% 5.04%
Assuming no waivers and reimbursements:
Expenses 8.10% 11.61%
Net investment income (0.92%) (5.66%)
Net assets, end of period (000's) $ 2,249 $ 1,081
Portfolio turnover rate 205.91% 83.87%
(a) The total returns shown do not include the effect of applicable contingent
deferred sales charge and are annualized where appropriate.
U.S. GOVERNMENT 17
<PAGE>
[Ship logo]
Independent Auditors' Report
================================================================================
TO THE STOCKHOLDERS AND DIRECTORS
FLAGSHIP U.S. GOVERNMENT FUNDS
We have audited the accompanying statements of assets and liabilities, including
the statements of investments in securities and net assets, of the Flagship
Limited Term U.S. Government Fund and the Flagship Intermediate U.S. Government
Fund as of June 30, 1995, the related statements of operations for the year then
ended, and the statements of changes in net assets and the financial highlights
for each of the periods presented. These financial statements and financial
highlights are the responsibility of the Funds' management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of June
30, 1995, by correspondence with the Funds' custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of the Flagship Limited
Term U.S. Government Fund and the Flagship Intermediate U.S. Government Fund at
June 30, 1995, the results of their operations, the changes in their net assets,
and the financial highlights for the respective stated periods, in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dayton, Ohio
July 24, 1995
18 U.S. GOVERNMENT
<PAGE>
APPENDIX I
DESCRIPTION OF SECURITIES RATINGS
Standard & Poor's Ratings Group(r) -- A brief description of the
applicable Standard & Poor's Ratings Group rating symbols and their meanings
(as published by Standard & Poor's Corporation) follows:
A Standard & Poor's corporate debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific debt obligation.
This assessment may take into consideration obligors such as guarantors,
insurers, or lessees.
The rating is not a recommendation to purchase, sell or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished by the issuer and
obtained by Standard & Poor's from other sources it considers reliable.
Standard & Poor's does not perform an audit in connection with any rating and
may, on occasion, rely on unaudited financial information. The ratings may be
changed, suspended, or withdrawn as a result of changes in, or unavailability
of, such information, or for other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
I. Likelihood of default -- capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in
accordance with the terms of the obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangements under
the laws of bankruptcy and other laws affecting creditors' rights.
l. Long-term bonds
AAA Bonds rated AAA have the highest rating assigned by Standard & Poor's
to a debt obligation. Capacity to pay interest and repay principal
is extremely strong.
AA Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small
degree.
A Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
bonds in higher rated categories.
BBB Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for bonds in this category than for
bonds in higher rated categories.
BB-D Debt rated "BB", "B", "CCC", "CC" and "C" is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation.
"BB" indicates the lowest degree of speculation and "C" the highest
degree of speculation. While such debt will likely have some quality
and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions. The
"CI" is reserved for income bonds on which no interest is being paid.
Debt rated "D" is in default, and payment of interest and/or
repayment of principal is in arrears.
Plus (+) or Minus (-): The ratings from "AA" to "BBB" may be modified by
the addition of a plus or a minus sign to show relative standing within the
major rating categories.
Provisional Ratings: The letter "P" indicates that the rating is provisional.
A provisional rating assumes the successful completion of the project being
financed by the bonds being rated and indicates that payment of debt service
requirements is largely or entirely dependent upon the successful and timely
completion of the project. This rating, however, while addressing credit quality
subsequent to completion of the project, makes no comment on the likelihood of,
or the risk of default upon failure of, such completion. The investor should
exercise his own judgment with respect to such likelihood and risk.
I-1
<PAGE>
2. Preferred stock rating criteria
Preferred stock ratings reflect the merits of each issue relative to the
universe of preferreds, and not in relation to debt obligations. Since
preferred stock is by definition a junior ranking security, preferred stock
ratings do not factor in the security's junior position -- in a bankruptcy
reorganization or liquidation -- to a company's debt obligations. However,
preferred stock cannot be rated higher than a company's highest-ranking debt
obligations because the same basic methodology and ratio norms are used to
rate both types of securities.
The financial analysis performed in conjunction with preferred stock
ratings is virtually the same as that used to rate debt. Fixed-charge
coverage and capitalization ratios are calculated treating preferred stock
obligations as though they were debt. Accordingly, if there is a substantial
amount of preferred, the rating on preferred stock could differ greatly from
the debt rating; the company has less capacity to pay dividends and debt
service than it has to meet debt service alone. The size of the differential
is a function of how much preferred is outstanding. (While the gap can be a
full rating category or more, a large amount of preferred will drag down the
debt rating as well. Even though a company under duress can stop paying the
preferred dividends to avoid default, the burden of the preferred increases
the risk that the company will face such a financial crisis. The company will
pay dividends as long as possible; this can sap its financial strength or
siphon off funds that otherwise could be used to protect the firm's
competitive position.)
Preferred stock ratings also consider the vulnerability of the dividend to
the firm's discretionary passing on a payment. It is often appropriate to
rate preferred stock lower than indicated by pure financial analysis -- and
well below the debt rating -- in the case of speculative grade credits. Such
issuers may be expected to eliminate preferred dividends to help avoid
financial constraints. Similarly, covenants in debt instruments can endanger
payment of preferred dividends even if financial measures indicate a capacity
to pay.
Moody's Investors Service Inc. -- A brief description of the applicable
Moody's Investors Service, Inc. rating symbols and their meanings follow:
l. Long-term bonds
Aaa -- Bonds which are rated Aaa are judged to be the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large, or by an
exceptionally stable, margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are more unlikely to impair the fundamentally strong position of such issues.
With the occasional exception of oversupply in a few specific instances, the
safety of obligations of this class is so absolute that their market value is
affected solely by money market fluctuations.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than
the Aaa Securities. These Aa bonds are high grade, their market value
virtually immune to all but money market influences, with the occasional
exception of oversupply in a few specific instances.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as higher medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to A-rated bonds may be influenced
to some degree by credit circumstances during a sustained period of depressed
business conditions. During periods of normalcy, bonds of this quality
frequently move in parallel with Aaa and Aa obligations, with the occasional
exception of oversupply in a few specific instances.
Baa -- Bonds which are rated Baa are considered as lower medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments may be lacking or may be characteristically unreliable over
any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well. The
market value of Baa-rated bonds is more sensitive to change in economic
circumstances, and aside from occasional speculative factors applying to some
bonds of this class, Baa market valuations move in parallel with Aaa, Aa, and
A obligations during periods of economic normalcy, except in instances of
oversupply.
Ba-C -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often, the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in
I-2
<PAGE>
this class. Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may
be small. Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to
principal or interest. Bonds which are rated Ca represent obligations which
are speculative in a high degree. Such issues are often in default or have
other marked shortcomings. Bonds which are rated C are the lowest rated class
of bonds, and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
Moody's bond rating symbols may contain numerical modifiers of a generic
rating classification. The modifier l 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 generic
rating category.
Con. -- Bonds for which the security depends upon the completion of some
act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operating experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting
condition attaches. Parenthetical rating denotes probable credit status upon
completion of construction or elimination of basis of condition.
2. Preferred Stock
aaa An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the
least risk of dividend impairment within the universe of preferred
stocks.
aa An issue which is rated "aa" is considered a high-grade preferred
stock. This rating indicates that there is a reasonable assurance
that earnings and asset protection will remain relatively well
maintained in the foreseeable future.
a An issue which is rated "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than
in the "aaa" and "aa" classification, earnings and asset protection
are, nevertheless, expected to be maintained at adequate levels.
baa An issue which is rated "baa" is considered to be a medium-grade
preferred stock, neither highly protected nor poorly secured.
Earnings and asset protection appear adequate at present but may be
questionable over any great length of time.
ba An issue which is rated "ba" is considered to have speculative
elements and its future cannot be considered well assured. Earnings
and asset protection may be very moderate and not well safeguarded
during adverse periods. Uncertainty of position characterizes
preferred stocks in this class.
b An issue which is rated "b" generally lacks the characteristics of
a desirable investment. Assurance of dividend payments and maintenance
of other terms of the issue over any long period of time may be small.
caa An issue which is rated "caa" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the
future status of payments.
ca An issue which is rated "ca" is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of
eventual payments.
c This is the lowest rated class of preferred or preference stock.
Issues so rated can be regarded as having extremely poor prospects of
everattaining any real investment standing.
- --------------
* Note: Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification: the modifier 1 indicates that the security ranks in the
higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking and the modifier 3 indicates that the issue ranks in the
lower end of its generic rating category.
I-3
<PAGE>
Fitch Investors Service, Inc. -- A brief description of the applicable
Fitch Investors Service, Inc. rating symbols and their meanings follows:
l. Long-term bonds
AAA Bonds considered to be investment grade and the of 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.
AA Bonds considered to be investment grade and of very
high credit quality. The obligor's ability to pay
interest and repay principal is very strong, although
not quite as strong as bonds rated 'AAA'. Because bonds
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-l+'.
A Bonds 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.
BBB Bonds 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.
Plus (+) Minus (-) Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the
rating category. Plus and minus signs, however, are
not used in the 'AAA' category. NR Indicates that Fitch
does not rate the specific issue.
Conditional A conditional rating is premised on the successful
completion of a project or the occurrence of a specific
event.
Suspended A rating is suspended when Fitch deems the amount of
information available from the issuer to be inadequate
for rating purposes.
Withdrawn A rating will be withdrawn when an issue matures or
is called or refinanced, and, at Fitch's discretion,
when an issuer fails to furnish proper and timely
information.
FitchAlert Ratings are placed on FitchAlert to notify investors
of an occurrence that is likely to result in a rating
change and the likely direction of such change. These
are designated as "Positive," indicating a potential
upgrade, "Negative," for potential downgrade, or
"Evolving," where ratings may be raised or lowered.
FitchAlert is relatively short-term, and should be
resolved within 12 months.
Credit Trend Credit trend indicators show whether credit
fundamentals are improving, stable, declining, or
uncertain, as follows:
Improving (up arrow)
Stable (left, right arrow)
Declining (down arrow)
Uncertain (up, down arrow)
Credit trend indicators are not predictions that any
rating change will occur, and have a longer-term time
frame than issues placed on FitchAlert.
I-4
<PAGE>
Duff & Phelps Credit Rating Scale -- A brief description of the applicable
Duff & Phelps rating symbols and their meanings follows:
AAA Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+ High credit quality. Protection factors are strong. Risk is modest
AA but may vary slightly from time to time because of economic conditions.
AA-
A+ Protection factors are average but adequate. However, risk factors
A are more variable and greater in periods of economic stress.
A-
BBB+ Below average protection factors but still considered sufficient for
BBB prudent investment. Considerable variability in risk during economic
BBB- cycles.
BB+ Below investment grade but deemed likely to meet obligations when due.
BB Present or prospective financial protection factors fluctuate according
BB- to industry conditions or company fortunes. Overall quality may move
up or down frequently within this category.
B+ Below investment grade and possessing risk that obligations will not
B be met when due. Financial protection factors will fluctuate widely
B- according to economic cycles, industry conditions and/or company
fortunes. Potential exists for frequent changes in the rating within
this category or into a higher or lower rating grade.
CCC Well below investment grade securities. Considerable uncertainty exists
as to timely payment of principal, interest or preferred dividends.
Protection factors are narrow and risk can be substantial with
unfavorable economic/industry conditions, and/or with unfavorable
company developments.
DD Defaulted debt obligations, issuer failed to meet scheduled principal
and/or interest payments.
DP Preferred stock with dividend arrearages.
I-5
<PAGE>
APPENDIX II
DESCRIPTION OF HEDGING TECHNIQUES
Set forth below is additional information regarding the funds' 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 a fund 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
series 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 series 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. A fund 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 series.
There is no guarantee that such closing transactions can be effected.
Index Contracts
Index Future. An index which assigns relative values to the securities
included in the index is traded on the Chicago Board of Trade. The index
fluctuates with changes in the market values of all such securities included
rather than a single security. An index future is a bilateral agreement
pursuant to which two parties agree to take or make delivery of an amount of
cash rather than any security -- equal to specified dollar amount times the
dif-
II-1
<PAGE>
ference 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 Fund may also purchase put or call options on U.S.
Government or equity 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.
Index futures and options transactions would be subject to risks similar
to transactions in financial futures and options thereon as described above.
No fund will enter into transactions in index or financial futures or related
options unless and until, in the Manager'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
such 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 such fund is authorized to invest. Repurchase agreements may be
characterized as loans secured by the underlying securities. A 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 Directors ("Qualified
Institutions"). The Manager will monitor the continued creditworthiness of
Qualified Institutions, subject to the oversight of the series Board of
Directors.
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 series 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 series' ability to dispose of the underlying securities may
be restricted. Finally, it is possible that the series 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 series 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.
II-2
<PAGE>
(1) Double-rules take place of graphic -- Rope Line
<PAGE>
[outside cover]
Investor Guide
Flagship U.S.
Government Funds(SM)
(A)
(bullet) Limited Term Fund
(bullet) Intermediate Fund
For Conservative Investors
Seeking Income With the
Highest Credit Quality
(B) FLAGSHIP
________________________________________________________________________________
THIS BROCHURE INCLUDES A PROSPECTUS WHICH DESCRIBES IN
DETAIL THE FUNDS' OBJECTIVES, INVESTMENT POLICIES, RISKS,
SALES CHARGES, FEES, AND OTHER MATTERS OF INTEREST.
PLEASE READ THE PROSPECTUS CAREFULLY BEFORE YOU INVEST
OR SEND MONEY.
<PAGE>
Your Investment Goals
United States
Government
Securities are
recognized
throughout the
investing world
as the standard
by which credit
safety is defined.
Reaching Financial Security
Whether you are seeking to stay ahead of inflation, plan for retirement, or
preserve your capital, you need to make investment decisions
which enable you to achieve your financial goals without assuming uncomfortable
levels of risk. Securities issued or backed by the U.S. Government are
investments which may help you achieve your goals and reach financial security.
Credit Safety and Income
Securities issued or backed by the U.S. Government are recognized throughout the
investing world as the standard by which credit safety is defined. Although
neither the market value of these securities or the Funds shares are guaranteed,
the timely payment of interest and principal is guaranteed by the U.S.
Government. These securities continue to meet the needs of investors who are
seeking to benefit from a high degree of safety with the opportunity for
attractive levels of income. Many individual and institutional investors
consistently invest in these securities for a core portion of their portfolio.
(D)
The Funds
The Flagship U. S. Government Funds are professionally managed portfolios of
securities issued or guaranteed by the U.S. Government or its agencies. The
Funds are a conservative choice for investors who are seeking higher returns
than traditional savings options. Flagship offers two U.S. Government Funds,
each with a different maturity structure.
- --------(C)--------
Not a part of the prospectus
(S)
<PAGE>
Opportunities for
Steady, Secure Income
The Limited Term Fund
The Limited Term Fund seeks to provide higher returns than shorter-term savings
vehicles like CDs and is managed for a high degree of price stability*. With a
one- to five-year average maturity, this Fund may be well-suited to more
conservative investors comfortable with the potential for minimal price movement
and attractive returns.
(E)
The Intermediate Fund
The Intermediate Fund seeks to provide slightly higher returns than the Limited
Term Fund with the potential for modest price movement. With an average maturity
of five to ten years, this Fund may be well-suited for slightly more experienced
investors comfortable with price changes greater than the Limited Term Fund, but
less than long-term funds.
- --------------------------------------------------------------------------------
The Funds Investment Philosophy
Flagships investment philosophy is to achieve high, current income with
liquidity and preservation of capital. The Funds manager will use technical and
quantitative analysis to select appropriate securities which seek to provide a
high yield with minimum interest rate risk exposure.
- --------------------------------------------------------------------------------
*CDs are FDIC insured and offer a fixed rate of return. Investment in the Funds
are not insured and their returns will fluctuate. Short-term investments are
generally less volatile. Investment in the Funds represent a greater degree of
risk to capital than investments in CDs. Shares, when redeemed, may be more or
less than their original cost.
--------(F)--------
Not a part of the prospectus
<PAGE>
U.S. Treasury Securities
(G)
The Appeal of U.S. Government Securities
Each Fund will invest in securities that are issued through the U.S. Treasury.
Considered among the highest quality fixed income investments, these securities
include U.S. Treasury Bills (less than one-year maturity), U.S. Treasury Notes
(one- to ten-year maturity) and U.S. Treasury Bonds (10- to 30-year maturity).
These issues have the full faith and credit of the U.S. Government behind them
which guarantees the timely payment of interest and principle.
The Funds will also invest in securities issued by other government entities.
These include U.S. Government agencies like the Government National Mortgage
Association (Ginnie Mae), Federal Farm Credit Bank, Federal Home Loan Bank,
Farmers Home Administration, Federal Home Loan Mortgage Corporation and the
Federal National Mortgage Association. Our government issues and guarantees the
timely payment of interest and principal on these securities.
(H)
- --------(I)--------
Not a part of the prospectus
(S)
<PAGE>
Choosing the Fund That is Right for You
Select the
Fund with the
reward and risk
profile that most
clearly matches your
investment objectives.
Balancing Reward and Risk
The value of most fixed income securities will fluctuate, primarily in response
to interest rate movement. By developing a clearer understanding of how a
securitys price will react to interest rates, you will be better equipped to
choose the investment that may meet your objectives. Think of security prices
and interest rates as being on opposite sides of a seesaw. When one goes up the
other goes down by how much is determined by a securitys maturity (the period of
time over which interest and principal payments are scheduled to be made).
(J)
Your Investment Time Horizon
If you are planning to invest for a short period of time, you may want to
consider the Limited Term Fund. This Fund will typically fluctuate less, given a
change in interest rates. If you are planning to invest for the longer term, you
may want to consider the Intermediate Fund. This Fund may experience slight
price changes, but may provide more attractive returns.
(K)
--------(L)--------
Not a part of the prospectus
<PAGE>
The Funds
are designed for
individual and
institutional
investors, including
personal or
company-sponsored
retirement plans.
Taking Advantage of the Yield Curve
The illustration of the traditional yield curve indicates where each Funds
maturity is positioned. As you can see, each investment may provide an
attractive return. But remember, each will react to interest rate movement
according to its maturity structure. Given a change in interest rates, a
limited-term investment should fluctuate less, a longer-term investment more.
(M)
The Convenience of a Mutual Fund
With a professionally managed mutual fund, investors benefit from the added
safety of owning many securities in one investment. Investors also avoid the
inconvenience and many of the transaction costs associated with the direct
purchase and holding of government securities. Investors in the Funds can buy or
sell shares any business day at the then current net asset value.
A Conservative, Fixed Income Alternative
For many individual investors, the Funds offer a high quality, fixed income
alternative to other short-term investments. The Fund may also be well-suited
to:
(bullet) Corporations (bullet) IRAs, Keoghs
(bullet) Pension Plans (bullet) Municipal and State Governments
The Funds special features include:
(bullet) Daily Investment and Liquidity at the Then Current Net Asset Value
(bullet) Published Net Asset Value
(bullet) Monthly Dividends
(bullet) Monthly Statements, Annual and Semi-Annual Reports
(bullet) Automatic Investment and Dividend Reinvestment Options
- --------(N)--------
Not a part of the prospectus
<PAGE>
The Funds' Investment Adviser
Flagship
Flagship was originally founded in 1970 as the money management division of The
Mead Corporation, the forest products company. Since the launch of Flagship and
its family of specialty fixed income mutual funds, assets under management have
grown to nearly $4.5 billion with a shareholder base of over 100,000. The
company is based in Dayton, Ohio.
(O)
Flagship's Investment Policy
Committee: (Seated left to right)
Bruce P. Bedford - Chairman,
Richard P. Davis - President.
Portfolio Managers: (Standing
left to right) Richard A. Huber,
Michael S. Davern, Robert M.
Ashbaugh, Jan E. Terbrueggen,
Walter K. Parker.
Performance
As a specialist in fixed income portfolio management, Flagship is well
positioned to uncover investment opportunities as it seeks to enhance
shareholder value. Flagships portfolio management team utilizes an active
strategy to anticipate the changing economic conditions, as well as state and
federal tax laws, as they seek to achieve your investment objectives.
Service
Flagships well-trained, responsive customer service team exists solely to meet
your needs. Their goal is to give every shareholder request individualized
attention, promptly providing accurate information and requested services.
(P)
Reliability
The investment strategies and disciplines of the portfolio management team are
supported by the company-wide commitment to provide consistently reliable
performance. Flagships professional staff is focused on meeting investor
expectations and in fulfilling their mission: to seek to provide superior
investment returns on the assets they manage for clients.
--------(Q)--------
Not a part of the prospectus
<PAGE>
[outside back cover]
(R) FLAGSHIP
One Dayton Centre
One South Main Street
Dayton, Ohio 45402-2030
This brochure is authorized for distribution only when accompanied or
preceded by an effective prospectus.
(C) 1994, Flagship Funds Inc. US-A-100 (08-94)
(S)
<PAGE>
Template for U.S. Government Investor Guide
Outside Cover
A - Family photo
B - Clipper ship
Page 1
C - Capital building
D - Family photo
Page 2
E - Average Maturity Range bar graph
Bar stretching from 1 years to five years labeled Limited Term Fund.
Also has a bar stretching from 5 years to 10 years labeled Intermediate fund
F - Capital building
Page 3
G - Elderly man and woman photo
H - Authorized Quality Ranges bar graph
Bar graph illustrating the quality of security funds. The x-axis is
labeled with securities ratings starting at AAA and ending at D. Two bars
stretch across the AAA range and are labeled Limited Term Fund and Intermediate
fund respectively.
I - Capital building
Page 4
J - Interest Rates vs. Security Prices line graph
Line graph illustrating the relationship of securities prices going down
as interest rates go up. No specific plot points are used. Limited Term and
Intermediate Term are used as samples with arrows pointed down.
<PAGE>
K - Relative Price Movement bar graph
Header shows interest rate changes of plus or minus 1% and the effect of
changes on security prices.
Y Axis shows interest rates at:
1 Year
5 Year
10 Year
30 Year
X Axis show security price movement at: 1 Year = 1% 5 Year = 4.3% 10
Year = 7% 30 Year = 13%
L - Capital building
Page 5
M - Traditional Yield Curve graph
A bar graph that illustrates the traditional yields of the Limited Term
and Intermediate Term funds. The Limited Term bar rises from the bottom to 80%
at the 5 year mark. The Intermediate Term bar rises from the bottom to 100% at
the 10 year mark. An arc which begins between the 40% and 60% level crosses the
Limited Term bar and the Intermediate bar at their top points and extends at
100% to the 15 year mark.
N - Capital building
Inside Back Cover
O - Flagship's Investment Policy Committee photo
P - Clipper ship inside a seal the reads "Flagship - Performance - Reliability -
Service" in the outside ring.
Q - Capital building
Outside Back Cover
R - Clipper ship
S - Capital building screen (also appears in background of pages 1 and 3)
<PAGE>
PART C: OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
List all financial statements and exhibits as part of the Registration
Statement.
(a) Financial Statements:
Included in Part A of the Registration Statement:
Financial Highlights for each series.
Included in Part B of the Registration Statement:
Audited Financial Statements for fiscal year ended June 30, 1995 for each
series of the Registrant.
Schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are omitted because they
are not required under the related instructions, they are inapplicable, or
the required information is presented in the financial statements or notes
thereto.
(b) Exhibits:
(1) Articles of Incorporation*
(a) Amendments approved on October 15, 1987*
(b) Articles Supplementary*
(c) Articles Supplementary classifying Golden Rainbow Stock*
(d) Articles of Amendment dated June 5, 1992*
(e) Articles Supplementary classifying Flagship Short Term U.S.
Government Fund Stock, Flagship Medium Term U.S. Government
Fund Stock and Flagship Long Term U.S. Government Fund Stock*
(f) Articles Supplementary creating subclasses
(2) (a) By-Laws*
(b) By-Laws as amended*
(c) Amended and Restated By-Laws*
(4) (a) Form of Certificate of Basic Value Fund Portfolio Stock*
(b) Form of Certificate of Plus Fund Portfolio Stock*
(c) Form of Certificate for the Golden Rainbow Fund Stock*
(d) Form of Certificate of Flagship Utility Income Fund Stock*
(e) Form of Certificate of Flagship Short Term U.S. Government
Fund Stock*
(f) Form of Certificate of Flagship Medium Term U.S. Government
Fund Stock*
(g) Form of Certificate of Flagship Long Term U.S. Government
Fund Stock*
(5) (a) Investment Advisory Agreement*
(b) Form of Plus Fund Advisory Agreement*
(c) Instrument Relating to Typographical Error*
(d) Form of Investment Advisory Agreement--Golden Rainbow Fund*
(e) Form of Management Agreement--Golden Rainbow Fund*
(f) Form of Investment Advisory Agreement--Flagship Short Term
U.S. Government Fund*
(g) Form of Investment Advisory Agreement--Flagship Medium Term
U.S. Government Fund*
(h) Form of Investment Advisory Agreement--Flagship Long Term
U.S. Government Fund*
(6) (a) Distribution Agreement*
(b) Selling Agreement*
(c) Form of Distribution Agreement--Golden Rainbow Fund*
(d) Form of Selling Agreement--Golden Rainbow Fund*
(e) Form of Distribution Agreement--Flagship Short Term U.S.
Government Fund*
(f) Form of Distribution Agreement--Flagship Medium Term U.S.
Government Fund*
(g) Form of Distribution Agreement--Flagship Long Term U.S.
Government Fund*
C-1
<PAGE>
(8) (a) Custodian Agreement*
(b) Custody Agreement--Golden Rainbow Fund*
(c) Custodian Fee Schedule
(9) (a) Transfer Agent Agreement*
(b) Transfer Agency and Accounting Services Agreement--Golden
Rainbow Fund*
(c) Asset Purchase Agreement*
(10) (a) Opinion and Consent of Counsel*
(b) Opinion and Consent of Counsel as to Series Stock*
(c) Opinion and Consent of Skadden, Arps, Slate, Meagher & Flom
as to Tax Matters*
(d) Opinion and Consent of Counsel for GR Fund Stock*
(e) Opinion and Consent of Counsel as to validity of Flagship
Short, Medium and Long Term U.S. Government Fund Stock*
(11) (a) Consent of Deloitte & Touche
(b) Auditor's Report on Multiple Class Procedures
(13) (a) Letter of Understanding relating to initial capital*
(15) (a) Distribution Plan*
(b) Service Agreement*
(c) Form of Distribution Plan--Golden Rainbow Fund*
(d) Form of Distribution Plan--Flagship Short Term U.S.
Government Fund*
(e) Form of Distribution Plan--Flagship Medium Term U.S.
Government Fund*
(f) Form of Distribution Plan--Flagship Long Term U.S. Government
Fund*
(16) Yield and Total Return Calculations*
(18) Rule 18f-3 Plan
(19) Code of Ethics
(27) Financial Data Schedule
*Previously filed.
Item 25. Persons Controlled by or under Common Control with Registrant.
Insofar as the following have identical boards of directors or trustees they
may be deemed with Registrant, to be under common control: Flagship Tax
Exempt Funds Trust.
Item 26. Number of Holders of Securities.
The approximate number of holders was:
(1) (2)
Number of
Record
Title of Class Holders
- --------------------------------------------------------------- ---------
Shares of common stock, par value $.001 per share
As of August 31, 1995
Flagship Utility Income Fund
Class A ........................................................ 1,089
Class C .......................................................... 240
Flagship Intermediate U.S. Government Fund
Class A ........................................................... 51
Class C ........................................................... 28
C-2
<PAGE>
(1) (2)
Number of
Record
Title of Class Holders
- --------------------------------------------------------------- ---------
Flagship Limited Term U.S. Government Fund
Class A ........................................................... 36
Class C ........................................................... 22
As of September 1, 1995
The Golden Rainbow A James Advised Mutual Fund ...................... 2,139
Total for Registrant ............................................. 3,605
Item 27. Indemnification.
Please see Article IX S. 1 of the Registrant's By-Laws (Exhibit 2) and
Section 2-418 of the Maryland General Corporation Law.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
the Registrant and the investment advisor and distributor pursuant to the
foregoing provisions or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant and the
principal underwriter in connection with the successful defense of any
action, suit or proceeding) is asserted against the Registrant by such
director, officer or controlling person or the Distributor in connection with
the shares being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Act and will be governed
by the final adjudication of such issue.
Item 28. Business and Other Connections of Investment Adviser.
See "Management of the Fund" in the Prospectus and "Officers, Directors and
Stockholders" in the Statement of Additional Information as well as each of
the Adviser's and the Manager's current Form ADV which is each incorporated
herein by reference.
Item 29. Principal Underwriters.
(a) The Distributor is also the principal underwriter for each sub-trust of
the Flagship Tax Exempt Funds Trust.
(b) The information required with respect to the directors and executive
officers of the Distributor is set forth under the heading "Officers,
Directors and Stockholders" in the Statement of Additional Information
incorporated by reference in the Prospectus constituting Part A of this
Registration Statement.
(c) Not applicable. The Registrant's only principal underwriter is an
affiliated person of an affiliated person of the Registrant.
Item 30. Location of Accounts and Records.
All accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940 and the Rules thereunder will be
maintained at the offices of Flagship Admiral Funds Inc., located at One
Dayton Centre, One South Main Street, Dayton, Ohio 45402, State Street Bank
and Trust Company, 1776 Heritage Drive, North Quincy, Massachusetts, Boston
Financial Data Services, P.O. Box 8509, Boston, Massachusetts 02266, a wholly
owned subsidiary of State Street or Fifth Third Bank, 38 Fountain Square
Plaza, Cincinnati, Ohio 45263.
Item 31. Management Services.
Other than as set forth under the captions "Distributor" and "Investment
Adviser" in the Prospectuses constituting Part A of this Registration
Statement, the Registrant is not a party to any management-related service
contract.
Item 32. Undertakings.
(a) Not applicable.
(b) Not applicable.
(c) Registrant will furnish each person to whom a prospectus is delivered
with a copy of the Registrant's latest annual report to shareholders upon
request and without charge.
C-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, Registrant (certifies that it meets all the
requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and) has duly caused this
amendment to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Dayton, and State of
Ohio, on the 23rd day of October, 1995.
FLAGSHIP ADMIRAL FUNDS INC.
By /s/ BRUCE PAUL BEDFORD
Bruce Paul Bedford
Chairman of the Board
POWER OF ATTORNEY
Know all Men By These Presents, that each person whose name appears below
constitutes and appoints Bruce Paul Bedford and Richard P. Davis, and each of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement and to file the
same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be
done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
This Power of Attorney may be executed in multiple counterparts, each of
which shall be deemed an original, but which taken together shall constitute
one instrument.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Title Date
- ----------------------------- ------------------------ -----------------
/s/ RICHARD P. DAVIS President and Director October 23, 1995
- -----------------------------
Richard P. Davis*
/s/ BRUCE PAUL BEDFORD Chairman of the Board
and Director October 23, 1995
- -----------------------------
Bruce Paul Bedford
/s/ MICHAEL D. KALBFLEISCH Treasurer and Secretary October 23, 1995
- -----------------------------
Michael D. Kalbfleisch*
/s/ ROBERT P. BREMNER Director October 23, 1995
- -----------------------------
Robert B. Bremner*
/s/ JOSEPH F. CASTELLANO Director October 23, 1995
- -----------------------------
Joseph F. Castellano*
/s/ PAUL F. NEZI Director October 23, 1995
- -----------------------------
Paul F. Nezi*
/s/ WILLIAM J. SCHNEIDER Director October 23, 1995
- -----------------------------
William J. Schneider*
*Signed pursuant to a power of attorney by Bruce Paul Bedford.
C-4
<PAGE>
SCHEDULE OF EXHIBITS TO FORM N-1A
Exhibit Exhibit Page
Number Number
--- -------------------------------------------------- ---------
(1) Articles of Incorporation*
(a) Amendments approved on October 15, 1987*
(b) Articles Supplementary*
(c) Articles Supplementary classifying Golden
Rainbow Stock*
(d) Articles of Amendment dated June 5, 1992*
(e) Articles Supplementary classifying Flagship
Short Term U.S. Government Fund Stock,
Flagship Medium U.S. Government Fund Stock and
Flagship Long Term U.S.Government Fund Stock*
(f) Articles Supplementary creating subclasses
(2) (a) By-Laws*
(b) By-Laws as amended*
(c) Amended and Restated By-Laws*
(4) (a) Form of Certificate for Basic Value Fund
Portfolio Stock*
(b) Form of Certificate for Plus Fund Portfolio
Stock*
(c) Form of Certificate for the Golden Rainbow
Fund Stock*
(d) Form of Certificate for Flagship Utility
Income Fund Stock*
(e) Form of Certificate of Flagship Short Term
U.S. Government Fund Stock*
(f) Form of Certificate of Flagship Medium Term
U.S. Government Fund Stock*
(g) Form of Certificate of Flagship Long Term U.S.
Government Fund Stock*
(5) (a) Investment Advisory Agreement*
(b) Form of Plus Fund Advisory Agreement*
(c) Instrument Relating to Typographical Error*
(d) Form of Investment Advisory Agreement--Golden
Rainbow Fund*
(e) Form of Management Agreement--Golden Rainbow
Fund*
(f) Form of Investment Advisory
Agreement--Flagship Short Term U.S. Government
Fund*
(g) Form of Investment Advisory
Agreement--Flagship Medium Term U.S.
Government Fund*
(h) Form of Investment Advisory
Agreement--Flagship Long Term U.S. Government
Fund*
(6) (a) Distribution Agreement*
(b) Selling Agreement*
(c) Form of Distribution Agreement--Golden Rainbow
Fund*
(d) Form of Selling Agreement--Golden Rainbow
Fund*
(e) Form of Distribution Agreement--Flagship Short
Term U.S. Government Fund*
(f) Form of Distribution Agreement--Flagship
Medium Term U.S. Government Fund*
(g) Form of Distribution Agreement--Flagship Long
Term U.S. Government Fund*
(8) (a) Custodian Agreement*
(b) Custody Agreement--Golden Rainbow Fund*
(c) Custodian Fee Schedule
(9) (a) Transfer Agent Agreement*
(b) Transfer Agency and Accounting Services
Agreement--Golden Rainbow Fund*
(c) Asset Purchase Agreement*
(10) (a) Opinion and Consent of Counsel*
(b) Opinion and Consent of Counsel as to Series
Stock*
C-5
<PAGE>
(c) Opinion and Consent of Skadden, Arps, Slate,
Meagher & Flom as to Tax Matters*
(d) Opinion and Consent of Counsel for GR Fund
Stock*
(e) Opinion and Consent of Counsel as to validity
of Flagship Short, Medium and Long Term U.S.
Government Fund Stock*
(11) (a) Consent of Deloitte & Touche
(b) Auditor's Report on Multiple Class Procedures
(13) Letter of Understanding relating to initial capital*
(15) (a) Distribution Plan*
(b) Service Agreement*
(c) Form of Distribution Plan--Golden Rainbow
Fund*
(d) Form of Distribution Plan--Flagship Short Term
U.S. Government Fund*
(e) Form of Distribution Plan--Flagship Medium
Term U.S. Government Fund*
(f) Form of Distribution Plan--Flagship Long Term
U.S. Government Fund*
(16) Yield and Total Return Calculations*
(18) Rule 18f-3 Plan
(19) Code of Ethics
(27) Financial Data Schedule
*Previously filed.
C-6
ARTICLES SUPPLEMENTARY
OF
FLAGSHIP ADMIRAL FUNDS, INC.
FLAGSHIP ADMIRAL FUNDS, INC., a Maryland corporation having its
principal place of business at One Dayton Center, Dayton, Ohio 45402 (the
"Corporation") hereby certifies as follows:
FIRST: Pursuant to the authority vested in the Board of Directors of the
Corporation by Article FIFTH of the Charter of the Corporation, in order to
reflect current practices by the Corporation relating to its capital stock, and
to give legal effect thereto, the Board of Directors of the Corporation has duly
reclassified certain shares of its "Flagship Utility Income Fund Portfolio
Stock" into various sub-classes thereof as follows: (i) 49,125,000 shares of
"Flagship Utility Income Fund Portfolio Stock" have been, and are hereby,
reclassified as a sub-class thereof consisting of 49,125,000 shares hereafter
designated as "Flagship Utility Income Fund Portfolio Stock - Class A;" (ii)
49,125,000 shares of "Flagship Utility Income Fund Portfolio Stock" have been,
and are hereby, reclassified as a sub-class thereof consisting of 49,125,000
shares hereafter designated as "Flagship Utility Income Fund Portfolio Stock -
Class B;" (iii) 49,125,000 shares of "Flagship Utility Income Fund Portfolio
Stock" have been, and are hereby, reclassified as a sub-class thereof consisting
of 49,125,000 shares hereafter designated as "Flagship Utility Income Fund
Portfolio Stock - Class C;" and (iv) 49,125,000 shares of "Flagship Utility
Income Fund Portfolio Stock" have been, and are hereby, reclassified as a
sub-class thereof consisting of 49,125,000 shares hereafter designated as
"Flagship Utility Income Fund Portfolio Stock - Class Y."
SECOND: The shares of "Flagship Utility Income Fund Portfolio Stock -
Class A" (the "Utility Class A Stock"), "Flagship Utility Income Fund Portfolio
Stock - Class B" (the "Utility Class B Stock"), "Flagship Utility Income Fund
Portfolio Stock - Class C" (the "Utility Class C Stock") and "Flagship Utility
Income Fund Portfolio Stock - Class Y" (the "Utility Class Y Stock") shall have
the following preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications, and terms and
conditions of and rights to require redemption:
1. The Utility Class A Stock, the Utility Class B Stock, the Utility
Class C Stock, the Utility Class Y Stock and the shares of the capital stock of
the Corporation classified presently as "Flagship Utility Income Fund Portfolio
Stock" together shall be deemed to be a single "class" of the capital stock of
the Corporation within the meaning of the Charter of the Corporation and shall
be referred to herein collectively as the "Class."
<PAGE>
2. The Utility Class A Stock, the Utility Class B Stock, the Utility
Class C Stock, the Utility Class Y Stock and the shares of the capital stock of
the Corporation classified presently as "Flagship Utility Income Fund Portfolio
Stock" shall each hereafter be deemed to be a subclass of the Class, and each
share of each such subclass shall represent an equal proportionate interest in
the "assets belonging to" the Class (subject to the liabilities belonging to the
Class), as the "assets belonging to" the Class shall be determined in accordance
with Article FIFTH, Section 3 of the Charter of the Corporation, and, except as
otherwise specifically set forth herein, shall have the same preferences,
conversion and other rights, voting powers, restrictions, limitations as to
dividends, qualifications and terms and conditions of and rights to require
redemption as are afforded by the Charter of the Corporation and applicable law
to every other share of each subclass of the Class.
3. Without limiting the generality of the foregoing, the dividends and
distributions of investment income and capital gains with respect to the Utility
Class A Stock, the Utility Class B Stock, the Utility Class C Stock and the
Utility Class Y Stock shall be in such amounts as may be declared from time to
time by the Board of Directors, and such dividends and distributions may vary
from subclass to subclass within the Class to such extent and for such purposes
as the Board of Directors may deem appropriate, including, but not limited to,
the purpose of complying with requirements of regulatory or legislative
authorities.
4. As more fully set forth hereafter, the expenses and liabilities
attributable to the Utility Class A Stock, the Utility Class B Stock, the
Utility Class C Stock and the Utility Class Y Stock, respectively, shall be
determined separately, and, accordingly, the net asset value, the dividends and
distributions payable to holders, and the amounts distributable in the event of
dissolution and liquidation of the Corporation to holders, of shares of such
subclasses of the Class may vary from subclass to subclass within the Class.
5. For purposes of determining the net asset value per share of stock of
the Utility Class A Stock, the Utility Class B Stock, the Utility Class C Stock
and the Utility Class Y Stock, respectively (i) the "assets belonging to" the
Class shall be charged with the expenses and liabilities of the Corporation
attributable to the Class as a whole, if any (but not with any liabilities
attributable only to a particular subclass thereof) and with the Class's share
of the liabilities of the Corporation not attributable to any particular class
or subclass of the capital stock of the Corporation; in the latter case, in the
proportion that the aggregate net asset value of the Class (determined without
regard to such liabilities) bears to the net asset value of all classes of the
capital stock of the Corporation (determined without regard to such
liabilities), as determined in accordance with procedures established by the
Board of Directors, and then (ii) each share of the Utility Class A Stock, the
Utility Class B Stock,
- 2 -
<PAGE>
the Utility Class C Stock, the Utility Class Y Stock and "Flagship Utility
Income Fund Portfolio Stock" shall be allocated a proportionate interest in the
"assets belonging to" the Class (after application thereto of the expenses and
liabilities described in clause (i)) based upon the number of shares of each
such subclass then-outstanding, and then (iii) each such interest of each such
subclass in the "assets belonging to" the Class shall be charged with the
expenses and liabilities of the Corporation attributable solely to such
subclass, all as determined in accordance with procedures established by the
Board of Directors and as may be described in the Prospectus of the Corporation
relating to the Utility Class A Stock, the Utility Class B Stock, the Utility
Class C Stock or the Utility Class Y Stock in effect from time to time.
6. The net asset value of each share of the Utility Class A Stock, the
Utility Class B Stock, the Utility Class C Stock, and the Utility Class Y Stock
to be issued and sold or redeemed or purchased at net asset value shall be the
net asset value per share determined in accordance with the procedures adopted
by the Board of Directors based upon the "assets belonging to" the Class less
the expenses and liabilities charged to the Class and less the expenses and
liabilities charged to each such subclass as described in the Prospectus of the
Corporation relating to the Utility Class A Stock, the Utility Class B Stock,
the Utility Class C Stock or the Utility Class Y Stock in effect from time to
time.
7. All consideration received by the Corporation in respect of the
issuance or sale of shares of the Utility Class A Stock, the Utility Class B
Stock, the Utility Class C Stock or the Utility Class Y Stock, together with all
income, earnings, profits, and proceeds thereof, including any proceeds derived
from the sale, exchange or liquidation thereof, and any funds or payments
derived from any reinvestment of such proceeds in whatever form the same may be,
shall irrevocably belong to the Class for all purposes, subject only to the
rights of creditors of the Corporation and the rights of other subclasses of the
Class, and shall be so recorded upon the books of account of the Corporation.
8. The Utility Class A Stock, the Utility Class B Stock, the Utility
Class C Stock and the Utility Class Y Stock shall be entitled to such dividends
or distributions, in stock or in cash or both, as may be declared from time to
time by the Board of Directors, acting in its sole discretion, with respect to
each such subclass of the Class; provided, however, that dividends or
distributions shall be paid on shares of each such subclass of the Class only
out of "assets belonging to" the Class.
9. In the event of liquidation or dissolution of the Corporation,
holders of the Utility Class A Stock, the Utility Class B Stock, the Utility
Class C Stock and the Utility Class Y Stock shall be entitled to receive, as a
subclass, out of the assets of the Corporation available for distribution to
stockholders, a proportionate interest in the "assets belonging to"
- 3 -
<PAGE>
the Class. The assets so distributable to the stockholders of each such subclass
of the Class shall be distributed amongst the stockholders of such subclasses in
proportion to the number of shares of that subclass held by them as recorded on
the books of the Corporation. In the event that there are any "assets belonging
to" the Class which are available for distribution that are not attributable to
any particular subclass of such Class, such assets shall be allocated to all
subclasses in proportion to the net asset values of each of the respective
subclasses of the Class and then distributed to the holders of the stock of each
subclass in proportion to the number of shares of that subclass held by the
respective holders thereof.
10. Notwithstanding anything contained in the Charter of the Corporation
which may be inconsistent to the contrary, each share of the Utility Class A
Stock also shall be subject to the following provisions: (i) the shares of the
Utility Class A Stock may be issued and sold by the Corporation, from time to
time, at a purchase price equal to the net asset value thereof plus a sales
charge in such amount as may be established from time to time by the Board of
Directors of the Corporation and set forth in the Prospectus of the Corporation
relating to the Utility Class A Stock in effect at the time the shares of
Utility Class A Stock shall be purchased from the Corporation; and (ii) each
holder of shares of the Utility Class A Stock, upon request to the Corporation
(accompanied by surrender of the appropriate stock certificate or certificates
in proper form for transfer, if any certificates have been issued to represent
such shares), shall be entitled to require the Corporation to redeem, to the
extent that the Corporation may lawfully effect such redemption under the laws
of the State of Maryland, all or any part of the shares of the Utility Class A
Stock standing in the name of such holder on the books of the Corporation at a
price per share not exceeding the net asset value per share thereof.
11. Notwithstanding anything contained in the Charter of the Corporation
which may be inconsistent or to the contrary, each share of the Utility Class B
Stock also shall be subject to the following provisions: (i) the shares of the
Utility Class B Stock may be issued and sold by the Corporation, from time to
time, at a purchase price equal to the net asset value thereof subject to a
contingent deferred sales charge as set forth in the Prospectus of the
Corporation relating to the Utility Class B Stock in effect at the time the
shares of Utility Class B Stock shall be purchased from the Corporation, and may
be redeemed at the option of the Corporation, to the extent and at such times as
the Board of Directors shall, in its sole and absolute discretion, determine to
be necessary or advisable, upon such terms and conditions as the Board of
Directors shall deem advisable, at a redemption price equal to the net asset
value per share thereof, less any applicable redemption charges, including any
contingent deferred sales charge, imposed by the Corporation in respect of the
redemption of Utility Class B Stock, from time to time, in such amounts as may
be determined by the Board of Directors of the Corporation and set
- 4 -
<PAGE>
forth in the Prospectus of the Corporation relating to the Utility Class B Stock
in effect at the time the shares of Utility Class B Stock shall be purchased
from the Corporation; (ii) each holder of shares of the Utility Class B Stock,
upon request to the Corporation (accompanied by surrender of the appropriate
stock certificate or certificates in proper form for transfer, if any
certificates have been issued to represent such shares), shall be entitled to
require the Corporation to redeem, to the extent that the Corporation may
lawfully effect such redemption under the laws of the State of Maryland, all or
any part of the shares of the Utility Class B Stock standing in the name of such
holder on the books of the Corporation at a price per share equal to the net
asset value per share thereof, less any applicable redemption charges, including
any contingent deferred sales charge, imposed by the Corporation in respect of
the redemption of Utility Class B Stock, from time to time, in such amount(s) as
may be determined by the Board of Directors of the Corporation and set forth in
the Prospectus of the Corporation relating to the Utility Class B Stock in
effect at the time the shares of Utility Class B Stock shall be purchased from
the Corporation; and (iii) each share of the Utility Class B Stock shall convert
automatically, without any action on the part of the holder thereof, into one
share of Utility Class A Stock per share of Utility Class B Stock held by the
holder thereof on such date as may be established by the Board of Directors of
the Corporation, from time to time, in its sole and absolute discretion (the
"Conversion Date"); provided, however, that the Conversion Date shall not be a
date which less than four years following the date on which the shares of
Utility Class B Stock to be converted shall have been purchased by the holder
thereof and shall not be a date later than ten years following the date on which
the shares of the Class B Stock to be converted shall have been purchased by the
holder thereof.
For purposes of the foregoing conversion feature of the Utility Class B
Stock, shares of Utility Class B Stock which are purchased by the holder thereof
by reinvestment of dividends or distributions paid or made by the Corporation in
respect of the Utility Class B Stock shall convert to Utility Class A Stock on
the applicable Conversion Date on a proportionate basis in the same proportion
that the shares of Utility Class B Stock not so purchased held by such holder
convert to Utility Class A Stock on the applicable Conversion Date. From and
after the conversion of any shares of Utility Class B Stock to Utility Class A
Stock, all of the shares of Utility Class B Stock so converted shall have all of
the preferences, rights, voting powers, restrictions, limitations as to
dividends, and qualifications and terms and conditions of and rights to require
redemption as are afforded to each share of Utility Class A Stock pursuant to
the Charter of the Corporation and these Articles Supplementary.
12. Notwithstanding anything contained in the Charter of the
Corporation which may be inconsistent or to the contrary, each
share of the Utility Class C Stock also shall be subject to the
following provisions: (i) each share of the Utility Class C Stock
- 5 -
<PAGE>
may be issued and sold by the Corporation, from time to time, at a purchase
price equal to the net asset value thereof subject to a contingent deferred
sales charge as set forth in the Prospectus of the Corporation relating to the
Utility Class C Stock in effect at the time the shares of Utility Class C Stock
shall be purchased from the Corporation, and may be redeemed at the option of
the Corporation from any holder thereof to the extent that the Board of
Directors shall, in its sole and absolute discretion, determine to be necessary
or advisable, upon such terms and conditions as the Board of Directors may
determine to be advisable, at any time within the first year following the date
that the holder thereof shall have purchased such shares of Utility Class C
Stock from the Corporation at a price equal to the net asset value per share
thereof, less any applicable redemption charges, including a contingent deferred
sales charge, imposed by the Corporation from time to time in respect of the
redemption of Utility Class C Stock in such amounts as may be determined by the
Board of Directors of the Corporation and set forth in the Prospectus of the
Corporation relating to the Utility Class C Stock in effect at the time the
shares of Utility Class C Stock shall be purchased from the Corporation, and
thereafter may be redeemed from the holder thereof by the Corporation to the
extent that the Board of Directors may determine to be necessary or advisable,
upon such terms and conditions as the Board of Directors shall deem advisable,
at a price not exceeding the net asset value per share thereof; and (ii) each
holder of shares of the Utility Class C Stock, upon request to the Corporation
(accompanied by surrender of the appropriate stock certificate or certificates
in proper form for transfer, if any certificates have been issued to represent
such shares), shall be entitled to require the Corporation to redeem, to the
extent that the Corporation may lawfully effect such redemption under the laws
of the State of Maryland, all or any part of the shares of the Utility Class C
Stock standing in the name of such holder on the books of the Corporation at a
price per share equal to the net asset value per share thereof less any
applicable redemption charges, including any contingent deferred sales charge,
imposed by the Corporation from time to time in respect of the redemption of the
Class C Stock in such amount(s) as may be determined by the Board of Directors
of the Corporation and set forth in the Prospectus of the Corporation relating
to the Utility Class C Stock in effect at the time the shares of Utility Class C
Stock shall be purchased from the Corporation.
13. Notwithstanding anything contained in the Charter of the Corporation
which may be inconsistent or to the contrary, the shares of the Utility Class Y
Stock also shall be subject to the following provisions: (i) the Utility Class Y
Stock shall be offered, issued and sold by the Corporation only to institutional
investors making a minimum investment in Utility Class Y Stock of at least
$2,000,000, on an aggregate basis, upon such other terms and conditions as the
Board of Directors shall deem advisable, at a price not exceeding the net asset
value per share thereof; and (ii) each holder of shares of the Utility Class Y
Stock, upon request to the Corporation (accompanied by surrender of the
- 6 -
<PAGE>
appropriate stock certificate or certificates in proper form for transfer, if
any certificates have been issued to represent such shares), shall be entitled
to require the Corporation to redeem, to the extent that the Corporation may
lawfully affect such redemption under the laws of the State of Maryland, all or
any part of the shares of the Utility Class Y Stock standing in the name of such
holder on the books of the Corporation at a price per share not exceeding the
net asset value per share thereof.
14. The right of any holder of shares of the Utility Class A Stock, the
Utility Class B Stock, the Utility Class C Stock or the Utility Class Y Stock to
be redeemed by the Corporation as provided in these Articles Supplementary or
pursuant to Article FIFTH, Section 3(e) of the Charter of the Corporation to
receive dividends thereon and all other rights of such holder with respect to
such shares shall terminate at the time as of which the purchase or redemption
price of such shares is determined, except the right of such holder to receive
(i) the redemption price of such shares from the Corporation or its designated
agent and (ii) any dividend or distribution to which such holder has previously
become entitled as the record holder of such shares on the record date for such
dividend or distribution. Notwithstanding the foregoing, in the event that any
shares of such stock are redeemed by the Corporation and certificates
representing the redeemed shares have been issued by the Corporation, the
redemption price therefor need not be paid by the Corporation until the
certificates have been received by the Corporation or its agent duly endorsed
for transfer.
THIRD: The shares of "Flagship Utility Income Fund Portfolio Stock"
shall continue to have the same preferences, conversion and other rights, voting
powers, restrictions, limitations as to dividends, qualifications and terms and
conditions of and rights to require redemption as were afforded to "Flagship
Utility Income Fund Portfolio Stock" prior to the effectiveness of these
Articles Supplementary.
FOURTH: Pursuant to the authority vested in the Board of Directors of
the Corporation by Article FIFTH of the Charter of the Corporation, in order to
reflect current practices by the Corporation relating to its capital stock, and
to give legal effect thereto, the Board of Directors of the Corporation has duly
reclassified shares of its "Flagship Limited Term U.S. Government Fund Portfolio
Stock" into various sub-classes thereof as follows: (i) 24,500,000 shares of
"Flagship Limited Term U.S. Government Fund Portfolio Stock" have been, and are
hereby, reclassified as a sub-class thereof consisting of 24,500,000 shares
hereafter designated as "Flagship Limited Term U.S. Government Fund Portfolio
Stock - Class A;" (ii) 24,500,000 shares of "Flagship Limited Term U.S.
Government Fund Portfolio Stock" have been, and are hereby, reclassified as a
sub-class thereof consisting of 24,500,000 shares hereafter designated as
"Flagship Limited Term U.S. Government Fund Portfolio Stock - Class B;" (iii)
24,500,000 shares of "Flagship Limited Term U.S. Government Fund Portfolio
Stock" have been, and are hereby, reclassified as a sub-class thereof consisting
of
- 7 -
<PAGE>
24,500,000 shares hereafter designated as "Flagship Limited Term U.S. Government
Fund Portfolio Stock - Class C;" and (iv) 24,500,000 shares of "Flagship Limited
Term U.S. Government Fund Portfolio Stock" have been, and are hereby,
reclassified as a sub-class thereof consisting of 24,500,000 shares hereafter
designated as "Flagship Limited Term U.S. Government Fund Portfolio Stock Class
Y."
FIFTH: The shares of "Flagship Limited Term U.S. Government Fund
Portfolio Stock - Class A" (the "Limited Term Class A Stock"), "Flagship Limited
Term U.S. Government Fund Portfolio Stock - Class B" (the "Limited Term Class B
Stock"), "Flagship Limited Term U.S. Government Fund Portfolio Stock - Class C"
(the "Limited Term Class C Stock") and "Flagship Limited Term U.S. Government
Fund Portfolio Stock - Class Y" (the "Limited Term Class Y Stock") shall have
the following preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications, and terms and
conditions of and rights to require redemption:
1. The Limited Term Class A Stock, the Limited Term Class B Stock, the
Limited Term Class C Stock, the Limited Term Class Y Stock and the shares of the
capital stock of the Corporation classified presently as "Flagship Utility
Income Fund Portfolio Stock" together shall be deemed to be a single "class" of
the capital stock of the Corporation within the meaning of the Charter of the
Corporation and shall be referred to herein collectively as the "Class."
2. The Limited Term Class A Stock, the Limited Term Class B Stock, the
Limited Term Class C Stock, the Limited Term Class Y Stock and the shares of the
capital stock of the Corporation classified presently as "Flagship Utility
Income Fund Portfolio Stock" shall each hereafter be deemed to be a subclass of
the Class, and each share of each such subclass shall represent an equal
proportionate interest in the "assets belonging to" the Class (subject to the
liabilities belonging to the Class), as the "assets belonging to" the Class
shall be determined in accordance with Article FIFTH, Section 3 of the Charter
of the Corporation, and, except as otherwise specifically set forth herein,
shall have the same preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms and
conditions of and rights to require redemption as are afforded by the Charter of
the Corporation and applicable law to every other share of each subclass of the
Class.
3. Without limiting the generality of the foregoing, the dividends and
distributions of investment income and capital gains with respect to the Limited
Term Class A Stock, the Limited Term Class B Stock, the Limited Term Class C
Stock and the Limited Term Class Y Stock shall be in such amounts as may be
declared from time to time by the Board of Directors, and such dividends and
distributions may vary from subclass to subclass within the Class to such extent
and for such purposes as the Board of Directors may deem appropriate, including,
but not limited to, the purpose of
- 8 -
<PAGE>
complying with requirements of regulatory or legislative authorities.
4. As more fully set forth hereafter, the expenses and liabilities
attributable to the Limited Term Class A Stock, the Limited Term Class B Stock,
the Limited Term Class C Stock and the Limited Term Class Y Stock, respectively,
shall be determined separately, and, accordingly, the net asset value, the
dividends and distributions payable to holders, and the amounts distributable in
the event of dissolution and liquidation of the Corporation to holders, of
shares of such subclasses of the Class may vary from subclass to subclass within
the Class.
5. For purposes of determining the net asset value per share of stock of
the Limited Term Class A Stock, the Limited Term Class B Stock, the Limited Term
Class C Stock and the Limited Term Class Y Stock, respectively (i) the "assets
belonging to" the Class shall be charged with the expenses and liabilities of
the Corporation attributable to the Class as a whole, if any (but not with any
liabilities attributable only to a particular subclass thereof) and with the
Class's share of the liabilities of the Corporation not attributable to any
particular class or subclass of the capital stock of the Corporation; in the
latter case, in the proportion that the aggregate net asset value of the Class
(determined without regard to such liabilities) bears to the net asset value of
all classes of the capital stock of the Corporation (determined without regard
to such liabilities), as determined in accordance with procedures established by
the Board of Directors, and then (ii) each share of the Limited Term Class A
Stock, the Limited Term Class B Stock, the Limited Term Class C Stock, the
Limited Term Class Y Stock and "Flagship Utility Income Fund Portfolio Stock"
shall be allocated a proportionate interest in the "assets belonging to" the
Class (after application thereto of the expenses and liabilities described in
clause (i)) based upon the number of shares of each such subclass
then-outstanding, and then (iii) each such interest of each such subclass in the
"assets belonging to" the Class shall be charged with the expenses and
liabilities of the Corporation attributable solely to such subclass, all as
determined in accordance with procedures established by the Board of Directors
and as may be described in the Prospectus of the Corporation relating to the
Limited Term Class A Stock, the Limited Term Class B Stock, the Limited Term
Class C Stock or the Limited Term Class Y Stock in effect from time to time.
6. The net asset value of each share of the Limited Term Class A Stock,
the Limited Term Class B Stock, the Limited Class C Stock, and the Limited Term
Class Y Stock to be issued and sold or redeemed or purchased at net asset value
shall be the net asset value per share determined in accordance with the
procedures adopted by the Board of Directors based upon the "assets belonging
to" the Class less the expenses and liabilities charged to the Class and less
the expenses and liabilities charged to each such subclass as described in the
Prospectus of the Corporation relating to the Limited Term Class A Stock, the
Limited Term Class B Stock,
- 9 -
<PAGE>
the Limited Term Class C Stock or the Limited Term Class Y Stock in effect from
time to time.
7. All consideration received by the Corporation in respect of the
issuance or sale of shares of the Limited Term Class A Stock, the Limited Term
Class B Stock, the Limited Term Class C Stock or the Limited Term Class Y Stock,
together with all income, earnings, profits, and proceeds thereof, including any
proceeds derived from the sale, exchange or liquidation thereof, and any funds
or payments derived from any reinvestment of such proceeds in whatever form the
same may be, shall irrevocably belong to the Class for all purposes, subject
only to the rights of creditors of the Corporation and the rights of other
subclasses of the Class, and shall be so recorded upon the books of account of
the Corporation.
8. The Limited Term Class A Stock, the Limited Term Class B Stock, the
Limited Term Class C Stock and the Limited Term Class Y Stock shall be entitled
to such dividends or distributions, in stock or in cash or both, as may be
declared from time to time by the Board of Directors, acting in its sole
discretion, with respect to each such subclass of the Class; provided, however,
that dividends or distributions shall be paid on shares of each such subclass of
the Class only out of "assets belonging to" the Class.
9. In the event of liquidation or dissolution of the Corporation,
holders of the Limited Term Class A Stock, the Limited Term Class B Stock, the
Limited Term Class C Stock and the Limited Term Class Y Stock shall be entitled
to receive, as a subclass, out of the assets of the Corporation available for
distribution to stockholders, a proportionate interest in the "assets belonging
to" the Class. The assets so distributable to the stockholders of each such
subclass of the Class shall be distributed amongst the stockholders of such
subclasses in proportion to the number of shares of that subclass held by them
as recorded on the books of the Corporation. In the event that there are any
"assets belonging to" the Class which are available for distribution that are
not attributable to any particular subclass of such Class, such assets shall be
allocated to all subclasses in proportion to the net asset values of each of the
respective subclasses of the Class and then distributed to the holders of the
stock of each subclass in proportion to the number of shares of that subclass
held by the respective holders thereof.
10. Notwithstanding anything contained in the Charter of the Corporation
which may be inconsistent to the contrary, each share of the Limited Term Class
A Stock also shall be subject to the following provisions: (i) the shares of the
Limited Term Class A Stock may be issued and sold by the Corporation, from time
to time, at a purchase price equal to the net asset value thereof plus a sales
charge in such amount as may be established from time to time by the Board of
Directors of the Corporation and set forth in the Prospectus of the Corporation
relating to the Limited Term Class A Stock in effect at the time the shares of
Limited Term Class A
- 10 -
<PAGE>
Stock shall be purchased from the Corporation; and (ii) each holder of shares of
the Limited Term Class A Stock, upon request to the Corporation (accompanied by
surrender of the appropriate stock certificate or certificates in proper form
for transfer, if any certificates have been issued to represent such shares),
shall be entitled to require the Corporation to redeem, to the extent that the
Corporation may lawfully effect such redemption under the laws of the State of
Maryland, all or any part of the shares of the Limited Term Class A Stock
standing in the name of such holder on the books of the Corporation at a price
per share not exceeding the net asset value per share thereof.
11. Notwithstanding anything contained in the Charter of the Corporation
which may be inconsistent or to the contrary, each share of the Limited Term
Class B Stock also shall be subject to the following provisions: (i) the shares
of the Limited Term Class B Stock may be issued and sold by the Corporation,
from time to time, at a purchase price equal to the net asset value thereof
subject to a contingent deferred sales charge as set forth in the Prospectus of
the Corporation relating to the Limited Term Class B Stock in effect at the time
the shares of Limited Term Class B Stock shall be purchased from the
Corporation, and may be redeemed at the option of the Corporation, to the extent
and at such times as the Board of Directors shall, in its sole and absolute
discretion, determine to be necessary or advisable, upon such terms and
conditions as the Board of Directors shall deem advisable, at a redemption price
equal to the net asset value per share thereof, less any applicable redemption
charges, including any contingent deferred sales charge, imposed by the
Corporation in respect of the redemption of Limited Term Class B Stock, from
time to time, in such amounts as may be determined by the Board of Directors of
the Corporation and set forth in the Prospectus of the Corporation relating to
the Limited Term Class B Stock in effect at the time the shares of Limited Term
Class B Stock shall be purchased from the Corporation; (ii) each holder of
shares of the Limited Term Class B Stock, upon request to the Corporation
(accompanied by surrender of the appropriate stock certificate or certificates
in proper form for transfer, if any certificates have been issued to represent
such shares), shall be entitled to require the Corporation to redeem, to the
extent that the Corporation may lawfully effect such redemption under the laws
of the State of Maryland, all or any part of the shares of the Limited Term
Class B Stock standing in the name of such holder on the books of the
Corporation at a price per share equal to the net asset value per share thereof,
less any applicable redemption charges, including any contingent deferred sales
charge, imposed by the Corporation in respect of the redemption of Limited Term
Class B Stock, from time to time, in such amount(s) as may be determined by the
Board of Directors of the Corporation and set forth in the Prospectus of the
Corporation relating to the Limited Term Class B Stock in effect at the time the
shares of Limited Term Class B Stock shall be purchased from the Corporation;
and (iii) each share of the Limited Term Class B Stock shall convert
automatically, without any action on the part of the holder thereof, into one
share of Limited Term
- 11 -
<PAGE>
Class A Stock per share of Limited Term Class B Stock held by the holder thereof
on such date as may be established by the Board of Directors of the Corporation,
from time to time, in its sole and absolute discretion (the "Conversion Date");
provided, however, that the Conversion Date shall not be a date which less than
four years following the date on which the shares of Limited Term Class B Stock
to be converted shall have been purchased by the holder thereof and shall not be
a date later than ten years following the date on which the shares of the
Limited Term Class B Stock to be converted shall have been purchased by the
holder thereof.
For purposes of the foregoing conversion feature of the Limited Term
Class B Stock, shares of Limited Term Class B Stock which are purchased by the
holder thereof by reinvestment of dividends or distributions paid or made by the
Corporation in respect of the Limited Term Class B Stock shall convert to
Limited Term Class A Stock on the applicable Conversion Date on a proportionate
basis in the same proportion that the shares of Limited Term Class B Stock not
so purchased held by such holder convert to Limited Term Class A Stock on the
applicable Conversion Date. From and after the conversion of any shares of
Limited Term Class B Stock to Limited Class A Stock, all of the shares of
Limited Term Class B Stock so converted shall have all of the preferences,
rights, voting powers, restrictions, limitations as to dividends, and
qualifications and terms and conditions of and rights to require redemption as
are afforded to each share of Limited Term Class A Stock pursuant to the Charter
of the Corporation and these Articles Supplementary.
12. Notwithstanding anything contained in the Charter of the Corporation
which may be inconsistent or to the contrary, each share of the Limited Term
Class C Stock also shall be subject to the following provisions: (i) each share
of the Limited Term Class C Stock may be issued and sold by the Corporation,
from time to time, at a purchase price equal to the net asset value thereof
subject to a contingent deferred sales charge as set forth in the Prospectus of
the Corporation relating to the Limited Term Class C Stock in effect at the time
the shares of Limited Term Class C Stock shall be purchased from the
Corporation, and may be redeemed at the option of the Corporation from any
holder thereof to the extent that the Board of Directors shall, in its sole and
absolute discretion, determine to be necessary or advisable, upon such terms and
conditions as the Board of Directors may determine to be advisable, at any time
within the first year following the date that the holder thereof shall have
purchased such shares of Limited Term Class C Stock from the Corporation at a
price equal to the net asset value per share thereof, less any applicable
redemption charges, including a contingent deferred sales charge, imposed by the
Corporation from time to time in respect of the redemption of Limited Term Class
C Stock in such amounts as may be determined by the Board of Directors of the
Corporation and set forth in the Prospectus of the Corporation relating to the
Limited Term Class C Stock in effect at the time the shares of Limited Term
Class C Stock shall be purchased from the Corporation, and thereafter may
- 12 -
<PAGE>
be redeemed from the holder thereof by the Corporation to the extent that the
Board of Directors may determine to be necessary or advisable, upon such terms
and conditions as the Board of Directors shall deem advisable, at a price not
exceeding the net asset value per share thereof; and (ii) each holder of shares
of the Limited Term Class C Stock, upon request to the Corporation (accompanied
by surrender of the appropriate stock certificate or certificates in proper form
for transfer, if any certificates have been issued to represent such shares),
shall be entitled to require the Corporation to redeem, to the extent that the
Corporation may lawfully effect such redemption under the laws of the State of
Maryland, all or any part of the shares of the Limited Term Class C Stock
standing in the name of such holder on the books of the Corporation at a price
per share equal to the net asset value per share thereof less any applicable
redemption charges, including any contingent deferred sales charge, imposed by
the Corporation from time to time in respect of the redemption of the Limited
Term Class C Stock in such amount(s) as may be determined by the Board of
Directors of the Corporation and set forth in the Prospectus of the Corporation
relating to the Limited Term Class C Stock in effect at the time the shares of
Limited Term Class C Stock shall be purchased from the Corporation.
13. Notwithstanding anything contained in the Charter of the Corporation
which may be inconsistent or to the contrary, the shares of the Limited Term
Class Y Stock also shall be subject to the following provisions: (i) the Limited
Term Class Y Stock shall be offered, issued and sold by the Corporation only to
institutional investors making a minimum investment in Limited Term Class Y
Stock of at least $2,000,000, on an aggregate basis, upon such other terms and
conditions as the Board of Directors shall deem advisable, at a price not
exceeding the net asset value per share thereof; and (ii) each holder of shares
of the Limited Term Class Y Stock, upon request to the Corporation (accompanied
by surrender of the appropriate stock certificate or certificates in proper form
for transfer, if any certificates have been issued to represent such shares),
shall be entitled to require the Corporation to redeem, to the extent that the
Corporation may lawfully affect such redemption under the laws of the State of
Maryland, all or any part of the shares of the Limited Term Class Y Stock
standing in the name of such holder on the books of the Corporation at a price
per share not exceeding the net asset value per share thereof.
14. The right of any holder of shares of the Limited Term Class A Stock,
the Limited Term Class B Stock, the Limited Class C Stock or the Limited Term
Class Y Stock to be redeemed by the Corporation as provided in these Articles
Supplementary or pursuant to Article FIFTH, Section 3(e) of the Charter of the
Corporation to receive dividends thereon and all other rights of such holder
with respect to such shares shall terminate at the time as of which the purchase
or redemption price of such shares is determined, except the right of such
holder to receive (i) the redemption price of such shares from the Corporation
or its designated agent and (ii)
- 13 -
<PAGE>
any dividend or distribution to which such holder has previously become entitled
as the record holder of such shares on the record date for such dividend or
distribution. Notwithstanding the foregoing, in the event that any shares of
such stock are redeemed by the Corporation and certificates representing the
redeemed shares have been issued by the Corporation, the redemption price
therefor need not be paid by the Corporation until the certificates have been
received by the Corporation or its agent duly endorsed for transfer.
SIXTH: The shares of "Flagship Utility Income Fund Portfolio Stock"
shall continue to have the same preferences, conversion and other rights, voting
powers, restrictions, limitations as to dividends, qualifications and terms and
conditions of and rights to require redemption as were afforded to "Flagship
Utility Income Fund Portfolio Stock" prior to the effectiveness of these
Articles Supplementary.
SEVENTH: Pursuant to the authority vested in the Board of Directors of
the Corporation by Article FIFTH of the Charter of the Corporation, in order to
reflect current practices by the Corporation with respect its capital stock, and
to give legal effect thereto, the Board of Directors of the Corporation has duly
reclassified shares of its "Flagship Intermediate U.S. Government Fund Portfolio
Stock" into various sub-classes thereof as follows: (i) 24,500,000 shares of
"Flagship Intermediate U.S. Government Fund Portfolio Stock" have been, and are
hereby, reclassified as a sub-class thereof consisting of 24,500,000 shares
hereafter designated as "Flagship Intermediate U.S. Government Fund Portfolio
Stock - Class A;" (ii) 24,500,000 shares of "Flagship Intermediate U.S.
Government Fund Portfolio Stock" have been, and are hereby, reclassified as a
sub-class thereof consisting of 24,500,000 shares hereafter designated as
"Flagship Intermediate U.S. Government Fund Portfolio Stock - Class B;" (iii)
24,500,000 shares of "Flagship Intermediate U.S. Government Fund Portfolio
Stock" have been, and are hereby, reclassified as a sub-class thereof consisting
of 24,500,000 shares hereafter designated as "Flagship Intermediate U.S.
Government Fund Portfolio Stock - Class C;" and (iv) 24,500,000 shares of
"Flagship Intermediate U.S. Government Fund Portfolio Stock" have been, and are
hereby, reclassified as a sub-class thereof consisting of 24,500,000 shares
hereafter designated as "Flagship Intermediate U.S. Government Fund Portfolio
Stock Class Y."
EIGHTH: The shares of "Flagship Intermediate U.S. Government Fund
Portfolio Stock - Class A" (the "Intermediate Class A Stock"), "Flagship
Intermediate U.S. Government Fund Portfolio Stock - Class B" (the "Intermediate
Class B Stock"), "Flagship Intermediate U.S. Government Fund Portfolio Stock -
Class C" (the "Intermediate Class C Stock") and "Flagship Intermediate U.S.
Government Fund Portfolio Stock - Class Y" (the "Intermediate Class Y Stock")
shall have the following preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications, and terms and
conditions of and rights to require redemption:
- 14 -
<PAGE>
1. The Intermediate Class A Stock, the Intermediate Class B Stock, the
Intermediate Class C Stock, the Intermediate Class Y Stock and the shares of the
capital stock of the Corporation classified presently as "Flagship Utility
Income Fund Portfolio Stock" together shall be deemed to be a single "class" of
the capital stock of the Corporation within the meaning of the Charter of the
Corporation and shall be referred to herein collectively as the "Class."
2. The Intermediate Class A Stock, the Intermediate Class B Stock, the
Intermediate Class C Stock, the Intermediate Class Y Stock and the shares of the
capital stock of the Corporation classified presently as "Flagship Utility
Income Fund Portfolio Stock" shall each hereafter be deemed to be a subclass of
the Class, and each share of each such subclass shall represent an equal
proportionate interest in the "assets belonging to" the Class (subject to the
liabilities belonging to the Class), as the "assets belonging to" the Class
shall be determined in accordance with Article FIFTH, Section 3 of the Charter
of the Corporation, and, except as otherwise specifically set forth herein,
shall have the same preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms and
conditions of and rights to require redemption as are afforded by the Charter of
the Corporation and applicable law to every other share of each subclass of the
Class.
3. Without limiting the generality of the foregoing, the dividends and
distributions of investment income and capital gains with respect to the
Intermediate Class A Stock, the Intermediate Class B Stock, the Intermediate
Class C Stock and the Intermediate Class Y Stock shall be in such amounts as may
be declared from time to time by the Board of Directors, and such dividends and
distributions may vary from subclass to subclass within the Class to such extent
and for such purposes as the Board of Directors may deem appropriate, including,
but not limited to, the purpose of complying with requirements of regulatory or
legislative authorities.
4. As more fully set forth hereafter, the expenses and liabilities
attributable to the Intermediate Class A Stock, the Intermediate Class B Stock,
the Intermediate Class C Stock and the Intermediate Class Y Stock, respectively,
shall be determined separately, and, accordingly, the net asset value, the
dividends and distributions payable to holders, and the amounts distributable in
the event of dissolution and liquidation of the Corporation to holders, of
shares of such subclasses of the Class may vary from subclass to subclass within
the Class.
5. For purposes of determining the net asset value per share of stock of
the Intermediate Class A Stock, the Intermediate Class B Stock, the Intermediate
Class C Stock and the Intermediate Class Y Stock, respectively (i) the "assets
belonging to" the Class shall be charged with the expenses and liabilities of
the Corporation attributable to the Class as a whole, if any (but not with any
- 15 -
<PAGE>
liabilities attributable only to a particular subclass thereof) and with the
Class's share of the liabilities of the Corporation not attributable to any
particular class or subclass of the capital stock of the Corporation; in the
latter case, in the proportion that the aggregate net asset value of the Class
(determined without regard to such liabilities) bears to the net asset value of
all classes of the capital stock of the Corporation (determined without regard
to such liabilities), as determined in accordance with procedures established by
the Board of Directors, and then (ii) each share of the Intermediate Class A
Stock, the Intermediate Class B Stock, the Intermediate Class C Stock, the
Intermediate Class Y Stock and "Flagship Utility Income Fund Portfolio Stock"
shall be allocated a proportionate interest in the "assets belonging to" the
Class (after application thereto of the expenses and liabilities described in
clause (i)) based upon the number of shares of each such subclass
then-outstanding, and then (iii) each such interest of each such subclass in the
"assets belonging to" the Class shall be charged with the expenses and
liabilities of the Corporation attributable solely to such subclass, all as
determined in accordance with procedures established by the Board of Directors
and as may be described in the Prospectus of the Corporation relating to the
Intermediate Class A Stock, the Intermediate Class B Stock, the Intermediate
Class C Stock or the Intermediate Class Y Stock in effect from time to time.
6. The net asset value of each share of the Intermediate Class A Stock,
the Intermediate Class B Stock, the Intermediate Class C Stock, and the
Intermediate Class Y Stock to be issued and sold or redeemed or purchased at net
asset value shall be the net asset value per share determined in accordance with
the procedures adopted by the Board of Directors based upon the "assets
belonging to" the Class less the expenses and liabilities charged to the Class
and less the expenses and liabilities charged to each such subclass as described
in the Prospectus of the Corporation relating to the Intermediate Class A Stock,
the Intermediate Class B Stock, the Intermediate Class C Stock or the
Intermediate Class Y Stock in effect from time to time.
7. All consideration received by the Corporation in respect of the
issuance or sale of shares of the Intermediate Class A Stock, the Intermediate
Class B Stock, the Intermediate Class C Stock or the Intermediate Class Y Stock,
together with all income, earnings, profits, and proceeds thereof, including any
proceeds derived from the sale, exchange or liquidation thereof, and any funds
or payments derived from any reinvestment of such proceeds in whatever form the
same may be, shall irrevocably belong to the Class for all purposes, subject
only to the rights of creditors of the Corporation and the rights of other
subclasses of the Class, and shall be so recorded upon the books of account of
the Corporation.
8. The Intermediate Class A Stock, the Intermediate Class B
Stock, the Intermediate Class C Stock and the Intermediate Class Y
Stock shall be entitled to such dividends or distributions, in
- 16 -
<PAGE>
stock or in cash or both, as may be declared from time to time by the Board of
Directors, acting in its sole discretion, with respect to each such subclass of
the Class; provided, however, that dividends or distributions shall be paid on
shares of each such subclass of the Class only out of "assets belonging to" the
Class.
9. In the event of liquidation or dissolution of the Corporation,
holders of the Intermediate Class A Stock, the Intermediate Class B Stock, the
Intermediate Class C Stock and the Intermediate Class Y Stock shall be entitled
to receive, as a subclass, out of the assets of the Corporation available for
distribution to stockholders, a proportionate interest in the "assets belonging
to" the Class. The assets so distributable to the stockholders of each such
subclass of the Class shall be distributed amongst the stockholders of such
subclasses in proportion to the number of shares of that subclass held by them
as recorded on the books of the Corporation. In the event that there are any
"assets belonging to" the Class which are available for distribution that are
not attributable to any particular subclass of such Class, such assets shall be
allocated to all subclasses in proportion to the net asset values of each of the
respective subclasses of the Class and then distributed to the holders of the
stock of each subclass in proportion to the number of shares of that subclass
held by the respective holders thereof.
10. Notwithstanding anything contained in the Charter of the Corporation
which may be inconsistent to the contrary, each share of the Intermediate Class
A Stock also shall be subject to the following provisions: (i) the shares of the
Intermediate Class A Stock may be issued and sold by the Corporation, from time
to time, at a purchase price equal to the net asset value thereof plus a sales
charge in such amount as may be established from time to time by the Board of
Directors of the Corporation and set forth in the Prospectus of the Corporation
relating to the Intermediate Class A Stock in effect at the time the shares of
Intermediate Class A Stock shall be purchased from the Corporation; and (ii)
each holder of shares of the Intermediate Class A Stock, upon request to the
Corporation (accompanied by surrender of the appropriate stock certificate or
certificates in proper form for transfer, if any certificates have been issued
to represent such shares), shall be entitled to require the Corporation to
redeem, to the extent that the Corporation may lawfully effect such redemption
under the laws of the State of Maryland, all or any part of the shares of the
Intermediate Class A Stock standing in the name of such holder on the books of
the Corporation at a price per share not exceeding the net asset value per share
thereof.
11. Notwithstanding anything contained in the Charter of the Corporation
which may be inconsistent or to the contrary, each share of the Intermediate
Class B Stock also shall be subject to the following provisions: (i) the shares
of the Intermediate Class B Stock may be issued and sold by the Corporation,
from time to time, at a purchase price equal to the net asset value thereof
subject to a contingent deferred sales charge as set forth in the
- 17 -
<PAGE>
Prospectus of the Corporation relating to the Intermediate Class B Stock in
effect at the time the shares of Intermediate Class B Stock shall be purchased
from the Corporation, and may be redeemed at the option of the Corporation, to
the extent and at such times as the Board of Directors shall, in its sole and
absolute discretion, determine to be necessary or advisable, upon such terms and
conditions as the Board of Directors shall deem advisable, at a redemption price
equal to the net asset value per share thereof, less any applicable redemption
charges, including any contingent deferred sales charge, imposed by the
Corporation in respect of the redemption of Intermediate Class B Stock, from
time to time, in such amounts as may be determined by the Board of Directors of
the Corporation and set forth in the Prospectus of the Corporation relating to
the Intermediate Class B Stock in effect at the time the shares of Intermediate
Class B Stock shall be purchased from the Corporation; (ii) each holder of
shares of the Intermediate Class B Stock, upon request to the Corporation
(accompanied by surrender of the appropriate stock certificate or certificates
in proper form for transfer, if any certificates have been issued to represent
such shares), shall be entitled to require the Corporation to redeem, to the
extent that the Corporation may lawfully effect such redemption under the laws
of the State of Maryland, all or any part of the shares of the Intermediate
Class B Stock standing in the name of such holder on the books of the
Corporation at a price per share equal to the net asset value per share thereof,
less any applicable redemption charges, including any contingent deferred sales
charge, imposed by the Corporation in respect of the redemption of Intermediate
Class B Stock, from time to time, in such amount(s) as may be determined by the
Board of Directors of the Corporation and set forth in the Prospectus of the
Corporation relating to the Intermediate Class B Stock in effect at the time the
shares of Intermediate class B Stock shall be purchased from the Corporation;
and (iii) each share of the Intermediate Class B Stock shall convert
automatically, without any action on the part of the holder thereof, into one
share of Intermediate Class A Stock per share of Intermediate Class B Stock held
by the holder thereof on such date as may be established by the Board of
Directors of the Corporation, from time to time, in its sole and absolute
discretion (the "Conversion Date"); provided, however, that the Conversion Date
shall not be a date which less than four years following the date on which the
shares of Intermediate Class B Stock to be converted shall have been purchased
by the holder thereof and shall not be a date later than ten years following the
date on which the shares of the Intermediate Class B Stock to be converted shall
have been purchased by the holder thereof.
For purposes of the foregoing conversion feature of the Intermediate
Class B Stock, shares of Intermediate Class B Stock which are purchased by the
holder thereof by reinvestment of dividends or distributions paid or made by the
Corporation in respect of the Intermediate Class B Stock shall convert to
Intermediate Class A Stock on the applicable Conversion Date on a proportionate
basis in the same proportion that the shares of
- 18 -
<PAGE>
Intermediate Class B Stock not so purchased held by such holder convert to
Intermediate Class A Stock on the applicable Conversion Date. From and after the
conversion of any shares of Intermediate Class B Stock to Intermediate Class A
Stock, all of the shares of Intermediate Class B Stock so converted shall have
all of the preferences, rights, voting powers, restrictions, limitations as to
dividends, and qualifications and terms and conditions of and rights to require
redemption as are afforded to each share of Intermediate Class A Stock pursuant
to the Charter of the Corporation and these Articles Supplementary.
12. Notwithstanding anything contained in the Charter of the Corporation
which may be inconsistent or to the contrary, each share of the Intermediate
Class C Stock also shall be subject to the following provisions: (i) each share
of the Intermediate Class C Stock may be issued and sold by the Corporation,
from time to time, at a purchase price equal to the net asset value thereof
subject to a contingent deferred sales charge as set forth in the Prospectus of
the Corporation relating to the Intermediate Class C Stock in effect at the time
the shares of Intermediate Class C Stock shall be purchased from the
Corporation, and may be redeemed at the option of the Corporation from any
holder thereof to the extent that the Board of Directors shall, in its sole and
absolute discretion, determine to be necessary or advisable, upon such terms and
conditions as the Board of Directors may determine to be advisable, at any time
within the first year following the date that the holder thereof shall have
purchased such shares of Intermediate Class C Stock from the Corporation at a
price equal to the net asset value per share thereof, less any applicable
redemption charges, including a contingent deferred sales charge, imposed by the
Corporation from time to time in respect of the redemption of Intermediate Class
C Stock in such amounts as may be determined by the Board of Directors of the
Corporation and set forth in the Prospectus of the Corporation relating to the
Intermediate Class C Stock in effect at the time the shares of Intermediate
Class C Stock shall be purchased from the Corporation, and thereafter may be
redeemed from the holder thereof by the Corporation to the extent that the Board
of Directors may determine to be necessary or advisable, upon such terms and
conditions as the Board of Directors shall deem advisable, at a price not
exceeding the net asset value per share thereof; and (ii) each holder of shares
of the Intermediate Class C Stock, upon request to the Corporation (accompanied
by surrender of the appropriate stock certificate or certificates in proper form
for transfer, if any certificates have been issued to represent such shares),
shall be entitled to require the Corporation to redeem, to the extent that the
Corporation may lawfully effect such redemption under the laws of the State of
Maryland, all or any part of the shares of the Intermediate Class C Stock
standing in the name of such holder on the books of the Corporation at a price
per share equal to the net asset value per share thereof less any applicable
redemption charges, including any contingent deferred sales charge, imposed by
the Corporation from time to time in respect of the redemption of the
Intermediate Class C Stock in such amount(s) as may be
- 19 -
<PAGE>
determined by the Board of Directors of the Corporation and set forth in the
Prospectus of the Corporation relating to the Intermediate Class C Stock in
effect at the time the shares of Intermediate Class C Stock shall be purchased
from the Corporation.
13. Notwithstanding anything contained in the Charter of the Corporation
which may be inconsistent or to the contrary, the shares of the Intermediate
Class Y Stock also shall be subject to the following provisions: (i) the
Intermediate Class Y Stock shall be offered, issued and sold by the Corporation
only to institutional investors making a minimum investment in Intermediate
Class Y Stock of at least $2,000,000, on an aggregate basis, upon such other
terms and conditions as the Board of Directors shall deem advisable, at a price
not exceeding the net asset value per share thereof; and (ii) each holder of
shares of the Intermediate Class Y Stock, upon request to the Corporation
(accompanied by surrender of the appropriate stock certificate or certificates
in proper form for transfer, if any certificates have been issued to represent
such shares), shall be entitled to require the Corporation to redeem, to the
extent that the Corporation may lawfully affect such redemption under the laws
of the State of Maryland, all or any part of the shares of the Intermediate
Class Y Stock standing in the name of such holder on the books of the
Corporation at a price per share not exceeding the net asset value per share
thereof.
14. The right of any holder of shares of the Intermediate Class A Stock,
the Intermediate Class B Stock, the Intermediate Class C Stock or the
Intermediate Class Y Stock to be redeemed by the Corporation as provided in
these Articles Supplementary or pursuant to Article FIFTH, Section 3(e) of the
Charter of the Corporation to receive dividends thereon and all other rights of
such holder with respect to such shares shall terminate at the time as of which
the purchase or redemption price of such shares is determined, except the right
of such holder to receive (i) the redemption price of such shares from the
Corporation or its designated agent and (ii) any dividend or distribution to
which such holder has previously become entitled as the record holder of such
shares on the record date for such dividend or distribution. Notwithstanding the
foregoing, in the event that any shares of such stock are redeemed by the
Corporation and certificates representing the redeemed shares have been issued
by the Corporation, the redemption price therefor need not be paid by the
Corporation until the certificates have been received by the Corporation or its
agent duly endorsed for transfer.
NINTH: The shares of "Flagship Utility Income Fund Portfolio
Stock" shall continue to have the same preferences, conversion and
[this space intentionally left blank]
- 20 -
<PAGE>
other rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of and rights to require redemption as
were afforded to "Flagship Utility Income Fund Portfolio Stock" prior to the
effectiveness of these Articles Supplementary.
IN WITNESS WHEREOF, Flagship Admiral Funds, Inc. has caused these
Articles Supplementary to be executed in its name and on its behalf by its
President and its corporate seal to be hereunto affixed and attested to by its
Secretary as of the 9th day of December, 1994.
ATTEST: FLAGSHIP ADMIRAL FUNDS, INC.
/s/ Michael D. Kalbfleisch /s/ Richard P. Davis
___________________________ By____________________________(SEAL)
Michael D. Kalbfleisch Richard P. Davis
Secretary President
The undersigned, being the duly elected and acting President of Flagship
Admiral Funds, Inc., hereby acknowledges the foregoing Articles Supplementary to
be the act of the Corporation and hereby certifies that, to the best of his
knowledge, information and belief, under penalties for perjury, all matters and
facts contained in such Articles Supplementary are true in all material
respects.
/s/ Richard P. Davis
------------------------------------
Richard P. Davis
President
- 21 -
STATE STREET BANK AND TRUST COMPANY
CUSTODIAN FEE SCHEDULE
FLAGSHIP ADMIRAL SERIES
Flagship Utility Income Fund
Flagship Government Limited Term Fund
Flagship Government Intermediate Fund
_______________________________________________________________________________
I. Administration
--------------
Custody, Portfolio and Fund Accounting Services - Maintain custody of fund
assets. Settle portfolio purchases and sales. Report buy and sell fails.
Determine and collect portfolio income. Make cash disbursements and report
cash transactions. Maintain investment ledgers, provide selected portfolio
transactions, position and income reports. Prepare daily trial balance.
Calculate net asset value daily. Provide selected general ledger reports.
Securities yield or market value quotations will be provided to State
Street by the fund.
The administration fee shown below is annual charge, billed and payable
monthly, based on average monthly net assets.
ANNUAL FEES PER PORTFOLIO
-------------------------
Custody, Portfolio
Fund Net Assets and Fund Accounting
- --------------- -------------------
First $50 Million 1/15 of 1%
Next $100 Million 1/30 of 1%
Excess 1/100 of 1%
Minimum Monthly Charges
Portfolios Under $30 Million $3,000
Portfolios Over $30 Million $3,500
II. Portfolio Transactions - For each line item processed
-----------------------------------------------------
State Stree Bank Repos $ 7.00
Fed Book Entry $12.00
Maturity Collections $ 8.00
All other trades $20.00
III. Options
-------
Option charge for each option written or
closing contract, per issue, per broker $25.00
Option expiration charge, per issue, per broker $15.00
Option exercised charge, per issue, per broker $15.00
IV. Lending of Securities
---------------------
Deliver loaned securities verse cash collateral $20.00
Deliver loaned securities versus securities collateral $30.00
Receive/deliver additional cash collateral $ 6.00
Substitutions of securities collateral $30.00
Deliver cash collateral versus receipt of loaned
securities $25.00
Loan administration - mark to market per day, per loan $ 3.00
V. Interest Rate Futures
---------------------
Transaction - no security movement $10.00
VI. Coupon Bonds
------------
Monitoring for calls and processing coupons -
for each coupon issue held - monthly charge $ 5.00
For billing purposes, the monthly quote charge will be
based on the average number of positions in the
portfolio at month end.
VII. Holding Charge
--------------
For each issue maintained monthly charge $ 3.75
VIII. Principal Reduction Payments
----------------------------
Per paydown $10.00
IX. Earnings Credit
---------------
An earning credit will be applied toward custodian balances held on
deposit with state Street Bank and Trust Company. The earnings credit will
be based on 80% of the daily effective Federal Funds rate on the first
business day of the month and will be applied against the above custodian
fees. The earnings credit will be cumulative to offset month to month
custodian fees, however, may not be carried over the calendar year end
(December 31).
XI. Special Services
----------------
Fees for activities of a non-recurring nature such as fund consolidations
or reorganizations, extraordinary security shipments and the preparation
of special reports will be subject to negotiation. Fees for tax accounting
recordkeeping for options, financial futures, and other special items will
be negotiated separately.
XII. Out-of-Pocket Expenses
----------------------
A billing for the recovery of applicable out-of-pocket expenses will be
made as of the end of each month. Out-of-pocket expenses include, but are
not limited to the following:
Telephone
Wire Charges ($3.85 per wire and $3.70 out)
Postage and Insurance
Courier Service
Duplicating
Legal Fees
Supplies Related to Fund records
Rush Transfer - $8.00 Each
Sub-custodian Charges
Price Waterhouse Audit Letter
Federal Reserve Fee for Return Check items over $2,500 - $4.25
GNMA Transfer - $15 each
Affirmations - $1.00
XIII. Payment
-------
The above fees will be charged against the fund's custodian checking
account five (5) days after the invoice is mailed to the fund's offices.
FLAGSHIP UTILITY INCOME FUND STATE STREET BANK AND TRUST CO.
FLAGSHIP GOVERNMENT LIMITED TERM FUND
FLAGSHIP GOVERNMENT INTERMEDIATE FUND
By: /s/ Michael D. Kalbfleisch By: /s/ M.L. Summers
---------------------------- ----------------------------
Title: Treasurer Title: Vice President
------------------------- -------------------------
Date: 3/30/95 Date: 4/12/95
-------------------------- --------------------------
INDEPENDENT AUDITORS' CONSENT
We consent to the use in Post-Effective Amendment No. 22 to Registration
Statement under the Securities Act of 1933 and Amendment No. 23 to Registration
Statement under the Investment Company Act of 1940, both filed under
Registration Statement No. 2-84470, of our reports dated July 24, 1995 on the
financial statements of the Flagship Utility Income Fund, The Golden Rainbow A
James Advised Mutual Fund, and the Flagship U.S. Government Funds which are
series of Flagship Admiral Funds Inc., appearing in the Statements of Additional
Information, which are part of such Registration Statement, and to the reference
to us under the caption "Financial Highlights" appearing in the Prospectuses of
the Flagship Utility Income Fund, The Golden Rainbow A James Advised Mutual
Fund, and the Flagship U.S. Government Funds, which are also part of such
Registration Statement.
/s/ DELOITTE & TOUCHE LLP
Dayton, Ohio
October 19, 1995
To the Trustees and Directors of
Flagship Tax Exempt Funds Trust,
Flagship Pennsylvania Triple Tax Exempt Fund and
Flagship Admiral Funds, Inc.:
We have examined the accompanying description of the overview of operations and
control procedures of Flagship Financial Inc., Manager of Flagship Tax Exempt
Funds Trust, Flagship Pennsylvania Triple Tax Exempt Fund, and Flagship Admiral
Funds, Inc. (the "Funds"), (Section I), as implemented at State Street Bank &
Trust Company, the Funds' custodian and recordkeeper, related to the Flagship
Multi-Class Pricing Worksheet in Section IV (the "Worksheet") as it relates to
the Funds. Our examination included procedures to obtain reasonable assurance
about whether (1) the accompanying description presents fairly, in all material
respects, the aspects of Flagship Financial Inc.'s policies and procedures, with
respect to the Worksheet, that may be relevant to the Funds' internal control
structure, (2) the control structure policies and procedures included in the
description were suitably designed to achieve the control objectives specified
in the description, if those policies and procedures were complied with
satisfactorily, and (3) such policies and procedures had been placed in
operation as of June 30, 1995. The control objectives were specified by Flagship
Financial Inc. and by the order pursuant to Section 6(c) of the Investment
Company Act of 1940, filed with the Securities and Exchange Commission on March
19, 1992. Our examination was performed in accordance with standards established
by the American Institute of Certified Public Accountants and included those
procedures we considered necessary in the circumstances to obtain a reasonable
basis for rendering our opinion.
In our opinion, the accompanying description of the aforementioned overview of
operations and control procedures presents fairly, in all material respects, the
relevant aspects of Flagship Financial Inc.'s policies and procedures, with
respect to the Worksheet, as it relates to the Funds, that had been placed in
operation as of June 30, 1995. Also, in our opinion, the policies and
procedures, as described, are suitably designed to provide reasonable assurance
that the specified control objectives would be achieved if the described
policies and procedures were complied with satisfactorily and the Fund applied
the internal control structure policies and procedures contemplated in the
design of Flagship Financial Inc.'s policies and procedures with respect to the
Worksheet.
<PAGE>
Page 2
In addition to the procedures we considered necessary to render our opinion as
expressed in the previous paragraph, we applied tests, listed in Section III, to
specific control procedures to obtain evidence about their effectiveness in
meeting the control objectives, described in Section II, during the period from
July 1, 1994 to June 30, 1995. The specific control procedures are listed in
Section II and the nature, timing, extent and results of the tests are listed in
Section III. In our opinion the control procedures that were tested, as
described in Sections II and III, were operating with sufficient effectiveness
to provide reasonable, but not absolute, assurance that the control objectives
specified in Section II were achieved during the period indicated above.
However, the scope of our engagement did not include tests to determine whether
control objectives and procedures listed in Section II and not tested in Section
III were achieved; accordingly, we express no opinion on the achievement of
control objectives and procedures listed in Section II and not tested in Section
III.
The description of control procedures at Flagship Financial Inc. is as of June
30, 1995, and information about tests of the operating effectiveness of
specified control procedures covers the periods indicated above. Any projection
of such information to the future is subject to risk that, because of change,
the description may no longer portray the system in existence. The potential
effectiveness of specified control procedures at Flagship Financial Inc. is
subject to inherent limitations and, accordingly, errors or irregularities may
occur and not be detected. Furthermore, the projection of any conclusions, based
on our findings, to future periods is subject to the risk that changes may alter
the validity of such conclusions.
This report is intended solely for the use of the Trustees, Directors and
management of The Flagship Tax Exempt Funds Trust, Flagship Pennsylvania Triple
Tax Exempt Fund, The Flagship Admiral Funds, Inc. and for filing with the
Securities and Exchange Commission and should not be used for any other purpose.
/s/ Deloitte & Touche LLP
Dayton, Ohio
July 6, 1995
<PAGE>
SECTION I
Overview of Operations and Control Procedures
of the Flagship Multi-Class Pricing Worksheet
Effective March 19, 1992, the Funds, offered by Flagship Financial Inc. and
Flagship Funds Inc., adopted a multiple class pricing system. The pricing system
consists of multiple classes of shares (Class A, Class B, Class C and Class Y)
for the Funds. The Class A shares are subject to a front-end sales charge, the
Class B shares are subject to a contingent deferred sales charge, the Class C
shares are subject to an ongoing 12b-1 fee in addition to a contingent deferred
sales charge, and the Class Y shares are not subject to a sales charge or 12b-1
fee. The multiple classes of shares represent interests in the same portfolio of
investments of the respective Fund and are identical in all respects, except
that each class is subject to different distribution expenses and has exclusive
voting rights with respect to the Rule 12b-1 distribution plan pursuant to which
such distribution expenses are paid.
In order to allocate income and expenses among the multiple classes of shares,
State Street Bank and Trust Company (the Fund's custodian and recordkeeper)
utilizes the Flagship Multi-Class Pricing Worksheet (the "Worksheet"). The
Worksheet is a supplementary application that extracts relevant data from the
Fund's primary accounting system, allocates income and expenses among the
classes of shares and computes the daily net asset value and, if applicable, the
dividend/distribution for each class of shares. Internal accounting controls
that are relevant to the Fund can be divided into two components - controls
related to the mutual fund accounting system resident at State Street Bank and
Trust Company (the "primary accounting system") and controls related to the
Worksheet. The design of the internal control structure policies and procedures
related to the Worksheet contemplates the application of certain internal
control structure policies and procedures to the primary accounting system.
The specific control objectives and procedures relating to the Worksheet are
described in Section II of this report.
Flagship Financial Inc. is the manager of the Funds and has represented that
adequate facilities are in place to implement the methodology and procedures for
calculating the net asset value and dividends/distributions of the multiple
classes of shares and allocating of income and expenses among the multiple
classes of shares.
<PAGE>
(1)
SECTION II
Control Objectives and Procedures
of the Flagship Multi-Class Pricing Worksheet
The Worksheet is a supplementary application to the Funds' primary accounting
system. Certain data is extracted from the primary accounting system to allocate
income and expenses and to calculate the daily net asset value and, if
applicable, dividends/distributions for each class of shares. The primary
accounting system includes the details of transactions in accordance with the
Investment Company Act of 1940.
The following represents the internal accounting control objectives and
procedures for the allocation of income and expenses and the computation of the
daily net asset value and, if applicable, the dividends/distributions for each
class of shares utilizing the Worksheet. It does not cover the internal
accounting control procedures surrounding the processing of information into the
Funds' primary accounting system.
<TABLE>
<CAPTION>
CONTROL OBJECTIVES CONTROL PROCEDURES
<S> <C>
A. Capital share activity as reported by the Fund's 1. Daily, the transfer agent forwards reports
transfer agent is recorded for each class in an of capital share and dollar activity for each
accurate and timely manner by the Fund. class which includes a summary of
subscriptions,
redemptions,
exchanges and other
information (the
Supersheet"). The
opening day's
balance for shares
outstanding and for
shares eligible for
dividends are
recorded on the
Worksheet.
2. Estimated interim
share activity for
the current day not
recorded in the
Supersheet is
received via
telefax from the
transfer agent and
is recorded for
each class on the
Worksheet.
B. Allocation of income and expenses, 1. The prior day's ending NAV per share
computation of daily net asset value (unrounded) for each class is agreed to the
("NAV") and, if applicable, the dividends/ prior day's Worksheet.
distributions for each class are accurately
computed on a daily basis.
2. The daily net capital share activity for each
class for the current day is agreed to the
Supersheet as described in Control
Procedures A.1. and 2., above.
3. Percent of Assets
by Class and
Percent of Dividend
Assets by Class are
calculated for each
class based upon
information from
the prior day's
Worksheet and
information
recorded on the
Supersheet.
<PAGE>
CONTROL OBJECTIVES CONTROL PROCEDURES
4. Composite dividend
income, interest
income (including
amortization
income), management
fees, other
expenses, realized
gains and losses,
and unrealized
appreciation/depreciation
is agreed to the
primary accounting
system of the Fund.
5. Daily investment
income is allocated
to each class based
on the dividend
asset allocation
percentage for each
class.
6. Expenses are allocated to each class as
follows:
a. Expenses directly attributable to each
class (12b-1 distribution expenses) are
calculated and recorded to that class.
b. Expenses attributable to all classes are
allocated in accordance with the
dividend asset allocation percentage
for each class.
7. Realized and
unrealized gains and
losses are allocated
to the class in
accordance with the
appropriate asset
allocation
percentage of each
class.
8. Dividends/distributions to shareholders of
each class are recorded in separate capital
share accounts in the primary accounting
system.
9. The net assets for each class are aggregated
and agreed to the total net assets recorded in
the primary accounting system.
10. For each class, the
current day's NAV
and, if applicable,
the
dividends/distributions
are reconciled to
the previous day's
NAV and
dividends/distributions
for each class.
11. Relative movements of net asset value per
share are compared by the Fund accountant
and supervisor to anticipated movements.
12. The above procedures are reviewed by the
Fund supervisor or manager.
</TABLE>
<PAGE>
SECTION III
Testing Compliance with Internal Control Procedures
Relating to the Flagship Multi-Class Pricing Worksheet
We reviewed the methodology and procedures for calculating the Fund's daily net
assets, daily net asset value ("NAV") and dividend/distribution, if applicable,
for each class of shares of the Fund. We selected 25 Worksheets for the Funds
during the period from July 1, 1994 to June 30, 1995, which we believe is a
representative sample, to test compliance with the control procedures as
described in Section II. Our performance of the following steps did not result
in any exceptions.
The following are the principal procedures which we performed relating to the
Worksheet.
I. Beginning Balances
(1) Agreed beginning net assets by class and in total per the Worksheet to
ending net assets per the prior day's Worksheet.
II. Data Obtained from Primary Accounting System
(1) Agreed the following data from the Worksheet to the primary
accounting system:
(a) Capital share activity by class and in total.
(b) Total income (dividends and interest).
(c) Total expenses, including 12b-1 fee differential charged to
Class C shares.
(d) Total realized gain (loss) on investments.
(e) Total unrealized appreciation/depreciation.
(f) Total dividends/distributions from net investment income
and/or capital gains, if applicable.
(g) Total net assets and shares outstanding.
(2) Recalculated the year-to-date amounts per the Worksheet by totaling
the prior day's year-to-date amounts and the current day's activity
per the Worksheet. Agreed year-to-date amounts to the primary
accounting system.
(3) Recalculated 12b-1 fee differential charged to Class C shares.
<PAGE>
III. Allocation of Day's Activity to Each Class
(1) Agreed capital share activity and shares outstanding for each class to
daily reports received by the Fund from the transfer agent.
(2) Recalculated percentages used (percent of assets by class and percent
of dividend assets by class) for allocating income and expense items
to each class.
(3) Using percentages recalculated in (2) above, recalculated by class the
daily amount for each of the following:
(a) Income (dividends and interest).
(b) Expenses, excluding 12b-1 fee differential.
(c) Realized gain (loss) on investments.
(d) Unrealized appreciation/depreciation.
IV. Net Assets, NAV and Dividend/Distribution
(1) Recalculated dividend/distribution by class, if applicable.
(2) Recalculated net assets by class and in total.
(3) Recalculated NAV and maximum offering price by class.
V. Reconciliation of Net Assets by Class to Prior Day
Reconciled net assets for each class from prior day to current day.
VI. Management Review
We inquired of and were told by management of Flagship Financial Inc. that
the control procedures as described in Section II are reviewed/approved on
a daily basis by the Fund supervisor and/or manager.
<PAGE>
SECTION IV
(See attached pages)
<PAGE>
<TABLE>
<CAPTION>
SECTION IV
===================================================================================================================================
STATE STREET BANK & TRUST COMPANY MULTI-CLASS PRICING WORKSHEET
FLAGSHIP
===================================================================================================================================
Composite Class - A Class - B Class - C
-------------------- --------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Prior Day NAV per share 0. 000 00 0. 000 00 0. 000 00
- -------------------------
..................... .................... ....................
Asset Allocation
- ----------------
Beginning Outstanding Shares 0.000 0.000 0.000 0.000
.................... ..................... .................... ....................
Share Activity 0.000 0.000 0.000 0.000
==================== ===================== ==================== ====================
Current Shares Outstanding 0.000 0.000 0.000 0.000
.................... ..................... .................... ....................
Adjusted Total Assets 0.00 0.00 0.00 0.00
-------------------- --------------------- -------------------- --------------------
% Assets By Class 0. 000 000 0% 0. 000 000 0% 0. 000 000 0% 0. 000 000 0%
.................... ..................... .................... ....................
Dividend Allocation
- -------------------
Beginning Div Shares 0.000 0.000 0.000 0.000
.................... ..................... .................... ....................
Activity 0.000 0.000 0.000 0.000
==================== ===================== ==================== ====================
Net Div Shares 0.000 0.000 0.000 0.000
.................... ..................... .................... ....................
Adjusted Div Assets 0.00 0.00 0.00 0.00
-------------------- --------------------- -------------------- --------------------
% Div Assets 0. 000 000 0% 0. 000 000 0% 0. 000 000 0% 0. 000 000 0%
.................... ..................... .................... ....................
Income and Expenses
- -------------------
Dividend Income 0.00 0.00 0.00 0.00
-------------------- ..................... .................... ....................
Interest Income - LT+ST 0.00 0.00 0.00 0.00
-------------------- ..................... .................... ....................
Amortization Income - LT 0.00 0.00 0.00 0.00
-------------------- ..................... .................... ....................
Amortization Income - ST 0.00 0.00 0.00 0.00
-------------------- ..................... .................... ....................
Other Income 0.00 0.00 0.00 0.00
==================== ===================== ==================== ====================
Daily Income 0.00 0.00 0.00 0.00
.................... ..................... .................... ....................
Management Fee 0.00 0.00 0.00 0.00
-------------------- ..................... .................... ....................
Fixed Expenses - Fund 0.00 0.00 0.00 0.00
-------------------- ..................... .................... ....................
Other 0.00 0.00 0.00 0.00
-------------------- ..................... .................... ....................
Transfer Expense - Class 0.00 0.00 0.00 0.00
.................... --------------------- -------------------- --------------------
Distribution Expense - Class 0.00 0.00 0.00 0.00
.................... --------------------- -------------------- --------------------
Adjustment For Rounding 0.00 0.00 0.00 0.00
==================== ===================== ==================== ====================
Daily Expenses 0.00 0.00 0.00 0.00
.................... ..................... .................... ....................
Daily Net Income 0.00 0.00 0.00 0.00
.................... ..................... .................... ....................
Dividend Rate 0. 000 000 000 0. 000 000 000 0. 000 000 000
--------------------- -------------------- --------------------
Prior Day Rate 0. 000 000 000 0. 000 000 000 0. 000 000 000
..................... .................... ....................
Change in Rate 0. 000 000 000 0. 000 000 000 0. 000 000 000
..................... .................... ....................
</TABLE>
Page 1 of 8
<PAGE>
<TABLE>
<CAPTION>
SECTION IV
===================================================================================================================================
STATE STREET BANK & TRUST COMPANY MULTI-CLASS PRICING WORKSHEET
FLAGSHIP
===================================================================================================================================
Composite Class - A Class - B Class - C
-------------------- --------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Capital
- -------
Income Distribution 0.00 0.00 0.00 0.00
.................... ..................... .................... ....................
Undistributed Net Income 0.00 0.00 0.00 0.00
.................... ..................... .................... ....................
Capital Stock Activity 0.00 0.00 0.00 0.00
.................... ..................... .................... ....................
Capital Gain Distribution 0.00 0.00 0.00 0.00
.................... --------------------- -------------------- --------------------
Prior Day Adjustments 0.00 0.00 0.00 0.00
.................... --------------------- -------------------- --------------------
Realized Gain/Loss - LT 0.00 0.00 0.00 0.00
-------------------- ..................... .................... ....................
Realized Gain/Loss - ST 0.00 0.00 0.00 0.00
-------------------- ..................... .................... ....................
Realized Gain/Loss - Foreign 0.00 0.00 0.00 0.00
-------------------- ..................... .................... ....................
Realized Gain/Loss - Option 0.00 0.00 0.00 0.00
-------------------- ..................... .................... ....................
Realized Gain/Loss - Other 0.00 0.00 0.00 0.00
==================== ===================== ==================== ====================
Total Realized Gain/Loss 0.00 0.00 0.00 0.00
.................... ..................... .................... ....................
Chg Unrealized App/Dep - LT 0.00 0.00 0.00 0.00
.................... ..................... .................... ....................
Chg Unrealized App/Dep - ST 0.00 0.00 0.00 0.00
.................... ..................... .................... ....................
Chg Unrealized App/Dep - Foreign 0.00 0.00 0.00 0.00
.................... ..................... .................... ....................
Chg Unrealized App/Dep - 0.00 0.00 0.00 0.00
Option
.................... ..................... .................... ....................
Chg Unrealized App/Dep - 0.00 0.00 0.00 0.00
Other
==================== ===================== ==================== ====================
Total Chg Unrealized 0.00 0.00 0.00 0.00
App/Dep
.................... ..................... .................... ....................
Futures Variation Margin 0.00 0.00 0.00 0.00
.................... ..................... .................... ....................
Daily Net Assets Change 0.00 0.00 0.00 0.00
.................... ..................... .................... ....................
Prior Day Net Assets 0.00 0.00 0.00 0.00
==================== ===================== ==================== ====================
Current Day Net Assets 0.00 0.00 0.00 0.00
.................... ..................... .................... ....................
NAV Per Share 0. 000 00 0. 000 00 0. 000 00
..................... .................... ....................
Change from Prior Day NC NC NC
..................... .................... ....................
Load Factor 1.000 1.000 1.000
..................... .................... ....................
Offering Price ( NAV/ Factor ) 0.00 0.00 0.00
..................... .................... ....................
</TABLE>
Page 2 of 8
<PAGE>
<TABLE>
<CAPTION>
SECTION IV
===================================================================================================================================
STATE STREET BANK & TRUST COMPANY COMPOSITE BACK-UP
FLAGSHIP
===================================================================================================================================
Composite Class - A Class - B Class - C
-------------------- --------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Prior Day NAV
( Less Market Value ) 0.00
....................
Add:
Reversals
Foreign App/Dep 0.00
....................
Option App/Dep 0.00
....................
Other App/Dep 0.00
....................
Receivables - Investment
Long Term 0.00
....................
Receivables - Subscriptions
Subscriptions 0.00 0.00 0.00 0.00
.................... --------------------- -------------------- --------------------
Reverse Prior Day Estimate 0.00 0.00 0.00 0.00
.................... ..................... .................... ....................
Current Day Estimate 0.00 0.00 0.00 0.00
.................... --------------------- -------------------- --------------------
Dividend Reinvestment 0.00 0.00 0.00 0.00
.................... --------------------- -------------------- --------------------
Cap Gain Reinvestment 0.00 0.00 0.00 0.00
.................... --------------------- -------------------- --------------------
Late CapStock (not in ratio) 0.00 0.00 0.00 0.00
.................... --------------------- -------------------- --------------------
Reverse Prior Late CapStock 0.00 0.00 0.00 0.00
.................... ..................... .................... ....................
Ex Dividends 0.00
....................
Interest Accrual 0.00
....................
Amortization Income - ST 0.00
....................
Short Term Gain/(Loss) 0.00
....................
Income Adjustments / Other 0.00
....................
Subtract:
Payables - Investments
Long Term 0.00
....................
Payables - Redemptions
Redemptions 0.00 0.00 0.00 0.00
.................... --------------------- -------------------- --------------------
Accrued Expenses 0.00
....................
Capital Gain Distribution 0.00
Payable
....................
Income Distribution Payable 0.00
....................
Add:
Foreign Gain/Loss 0.00
....................
Option Gain/Loss 0.00
....................
Other Gain/Loss 0.00
====================
Adjusted Book NAV 0.00
....................
Add:
Foreign App/Dep 0.00
--------------------
Option App/Dep 0.00
--------------------
Other App/Dep 0.00
--------------------
Futures Variation Margin 0.00
====================
Net Adjusted Book NAV 0.00
....................
Short Term App/Dep 0.00
--------------------
Market Value of Investments - LT 0.00
====================
Total Net Asset Value 0.00
....................
</TABLE>
Page 3 of 8
<PAGE>
<TABLE>
<CAPTION>
SECTION IV
===================================================================================================================================
STATE STREET BANK & TRUST COMPANY COMPOSITE BACK-UP
FLAGSHIP
===================================================================================================================================
Composite Class - A Class - B Class - C
-------------------- --------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Prior Day Cap Stock Shares 0.000 0.000 0.000 0.000
.................... ..................... .................... ....................
New Subscriptions 0.000 0.000 0.000
--------------------- -------------------- --------------------
Reverse Prior Day Net 0.000 0.000 0.000
Estimates
..................... .................... ....................
Today's CapStock Estimates 0.000 0.000 0.000
--------------------- -------------------- --------------------
New Redemptions 0.000 0.000 0.000
--------------------- -------------------- --------------------
Reverse Prior Late CapStock 0.000 0.000 0.000
..................... .................... ....................
Dividend Reinvestment 0.000 0.000 0.000
--------------------- -------------------- --------------------
Capital Gain Reinvestment 0.000 0.000 0.000
===================== ==================== ====================
Activity 0.000 0.000 0.000
===================== ==================== ====================
Shares Outstanding 0.000 0.000 0.000 0.000
.................... ..................... .................... ....................
Late CapStock (not in ratio) 0.000 0.000 0.000
===================== ==================== ====================
Net Shares Outstanding 0.000 0.000 0.000 0.000
.................... ..................... .................... ....................
</TABLE>
Page 4 of 8
<PAGE>
<TABLE>
<CAPTION>
SECTION IV
===================================================================================================================================
STATE STREET BANK & TRUST COMPANY COMPOSITE NAV RECONCILIATION
FLAGSHIP
===================================================================================================================================
Composite Class - A Class - B Class - C
-------------------- --------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
1) Fund Shares
Prior Day Shares 0.000 0.000 0.000
..................... .................... ....................
Today's Net Activity 0.000 0.000 0.000
..................... .................... ....................
Current Shares Outstanding 0.000 0.000 0.000
..................... .................... ....................
Activity x Prior NAV 0.00 0.00 0.00
..................... .................... ....................
Difference 0.00 0.00 0.00
--------------------- -------------------- --------------------
NAV Impact 0. 000 00 0. 000 00 0. 000 00
..................... .................... ....................
2) Capital Gain Distribution
Capital Gain Distribution 0.00 0.00 0.00 0.00
.................... --------------------- -------------------- --------------------
NAV Impact 0. 000 00 0. 000 00 0. 000 00
..................... .................... ....................
3) Portfolio Activity
Prior Day Market Value 0.00
....................
Like Purchase at Mkt 0.00
....................
New Purchase at Cost 0.00
....................
Sale at Mkt 0.00
====================
Adjusted Prior Mkt 0.00
....................
Proceeds from Sales 0.00
....................
Market Gain/Loss on Sales 0.00 0.00 0.00 0.00
.................... --------------------- -------------------- --------------------
NAV Impact 0. 000 00 0. 000 00 0. 000 00
..................... .................... ....................
Purchase at Cost 0.00
....................
Market Gain/Loss on 0.00 0.00 0.00 0.00
Purchase
.................... --------------------- -------------------- --------------------
NAV Impact 0. 000 00 0. 000 00 0. 000 00
..................... .................... ....................
5) Income & Expenses
Dividend Income 0.00 0.00 0.00 0.00
.................... ..................... .................... ....................
Interest Income 0.00 0.00 0.00 0.00
.................... ..................... .................... ....................
Amortization Income 0.00 0.00 0.00 0.00
.................... ..................... .................... ....................
Other Income/Adjustments 0.00 0.00 0.00 0.00
.................... ..................... .................... ....................
Expenses 0.00 0.00 0.00 0.00
.................... ..................... .................... ....................
Distribution 0.00 0.00 0.00 0.00
==================== ===================== ==================== ====================
Net After Distribution 0.00 0.00 0.00 0.00
.................... --------------------- -------------------- --------------------
NAV Impact 0. 000 00 0. 000 00 0. 000 00
..................... .................... ....................
</TABLE>
Page 5 of 8
<PAGE>
<TABLE>
<CAPTION>
SECTION IV
===================================================================================================================================
STATE STREET BANK & TRUST COMPANY COMPOSITE NAV RECONCILIATION
FLAGSHIP
===================================================================================================================================
Composite Class - A Class - B Class - C
-------------------- --------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
6) Amortization Income
Amortization Income 0.00 0.00 0.00 0.00
.................... --------------------- -------------------- --------------------
NAV Impact 0. 000 00 0. 000 00 0. 000 00
..................... .................... ....................
7) TEST PRICE
Prior NAV 0. 000 00 0. 000 00 0. 000 00
..................... .................... ....................
Sum of Impacts 0. 000 00 0. 000 00 0. 000 00
===================== ==================== ====================
Test Price 0. 000 00 0. 000 00 0. 000 00
..................... .................... ....................
Comparison Worksheet 0. 000 00 0. 000 00 0. 000 00
Price
..................... .................... ....................
8) Foreign/Options/Futures/Misc
Foreign
Prior Mkt to Mkt 0.00
....................
Gain/(Loss) Adjustments 0.00
....................
Current Mkt to Mkt 0.00
====================
Chg in Foreign Mkt to Mkt 0.00 0.00 0.00 0.00
.................... --------------------- -------------------- --------------------
NAV Impact 0. 000 00 0. 000 00 0. 000 00
..................... .................... ....................
Short Term
Prior Mkt to Mkt 0.00
....................
Gain/(Loss) Adjustments 0.00
....................
Current Mkt to Mkt 0.00
====================
Chg in Short Term Mkt to 0.00 0.00 0.00 0.00
Mkt
.................... --------------------- -------------------- --------------------
NAV Impact 0. 000 00 0. 000 00 0. 000 00
..................... .................... ....................
Option
Prior Mkt to Mkt 0.00
....................
Gain/(Loss) Adjustments 0.00
....................
Current Mkt to Mkt 0.00
====================
Chg in Option Mkt to Mkt 0.00 0.00 0.00 0.00
.................... --------------------- -------------------- --------------------
NAV Impact 0. 000 00 0. 000 00 0. 000 00
..................... .................... ....................
Other App/Dep
Prior Mkt to Mkt 0.00
....................
Gain/(Loss) Adjustments 0.00
....................
Current Mkt to Mkt 0.00
====================
Chg in Other Mkt to Mkt 0.00 0.00 0.00 0.00
.................... --------------------- -------------------- --------------------
NAV Impact 0. 000 00 0. 000 00 0. 000 00
..................... .................... ....................
Futures
Futures Variation Margin 0.00 0.00 0.00 0.00
.................... --------------------- -------------------- --------------------
NAV Impact 0. 000 00 0. 000 00 0. 000 00
..................... .................... ....................
</TABLE>
Page 6 of 8
<PAGE>
<TABLE>
<CAPTION>
SECTION IV
===================================================================================================================================
STATE STREET BANK & TRUST COMPANY COMPOSITE NAV RECONCILIATION
FLAGSHIP
===================================================================================================================================
Composite Class - A Class - B Class - C
-------------------- --------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
10) Increase (Decrease) in Market Value of Long Term Portfolio Shares
Current Day's Mkt Value 0.00
....................
Prior Adjusted Mkt Value 0.00
....................
Inc/(Dec) in Market Value 0.00 0.00 0.00 0.00
.................... --------------------- -------------------- --------------------
NAV Impact 0. 000 00 0. 000 00 0. 000 00
..................... .................... ....................
11) NAV Price Verification
---------------------- --------------------- --------------------
NAV Calculated | 0. 000 00 | | 0. 000 00 | | 0. 000 00 |
|--------------------| |-------------------| |-------------------|
NAV per Worksheet 0. 000 00 0. 000 00 0. 000 00
Delta 0. 000 00 0. 000 00 0. 000 00
Tolerance Check Ok Ok Ok
------------------------------------------------------------------------------------
| PORTFOLIO SHARES: Prior Day Shares 0.00 |
| Total Buys 0.00 |
| Total Sells 0.00 |
| Current Day 0.00 |
| Shares |
|-----------------------------------------------------------------------------------|
------------------------------------------------------------------------------------
| SECURITIES Bonds 0.00 |
| ..................... |
| Equities 0.00 |
| ..................... |
| Forwards - Long 0.00 |
| ..................... |
| Forwards - Short 0.00 |
| ..................... |
| Futures - Long 0.00 |
| ..................... |
| Futures - Short 0.00 |
| ..................... |
| Options - Bought 0.00 |
| ..................... |
| Options - Written 0.00 |
| ..................... |
| Short Term Cost 0.00 |
| ..................... |
|-----------------------------------------------------------------------------------|
</TABLE>
Page 7 of 8
<PAGE>
<TABLE>
<CAPTION>
SECTION IV
===================================================================================================================================
STATE STREET BANK & TRUST COMPANY NAV SUMMARY
FLAGSHIP
===================================================================================================================================
-----------------------------------------------------------------------------------------------
Daily Distibution Fund Class - A Class - B Class - C
--------------- ---------------- ----------------
7/12/94 18:42
==================================================================================================
<C> <S> <C> <C> <C>
Net Shares Outstanding 0.000 0.000 0.000
--------------------------------------------------------------------------------------------------
Assets Before Market 0.00 0.00 0.00
Net Asset Value 0.00 0.00 0.00
--------------------------------------------------------------------------------------------------
Allocation Ratio 0. 000 000 000 0. 000 000 000 0. 000 000 000
==================================================================================================
Prior Day NAV 0. 000 00 0. 000 00 0. 000 00
--------------------------------------------------------------------------------------------------
Fund Share Impact 0. 000 00 0. 000 00 0. 000 00
Capital Gain Distribution 0. 000 00 0. 000 00 0. 000 00
Sell Gain/Loss 0. 000 00 0. 000 00 0. 000 00
Purchase Gain/Loss 0. 000 00 0. 000 00 0. 000 00
ST Net Gain/Loss 0. 000 00 0. 000 00 0. 000 00
Income/Expense Impact 0. 000 00 0. 000 00 0. 000 00
Foreign/Options/Futures 0. 000 00 0. 000 00 0. 000 00
Market Value Impact 0. 000 00 0. 000 00 0. 000 00
==================================================================================================
NAV Price Change NC NC NC
--------------------------------------------------------------------------------------------------
Current NAV 0. 000 00 0. 000 00 0. 000 00
--------------------------------------------------------------------------------------------------
Current NAV Rounded 0.00 0.00 0.00
--------------------------------------------------------------------------------------------------
Reported Price Change NC NC NC
-------------------------
Authorized Signature
--------------------------------------------------------------------------------------------------
Offer NAV 0.00 0.00 0.00
--------------------------------------------------------------------------------------------------
Today is Friday, check for 1 vs 3 day rate
--------------------------------------------------------------------------------------------------
Yesterdays Rate 0. 000 000 000 0. 000 000 000 0. 000 000 000
Todays Dividend Rate 0. 000 000 000 0. 000 000 000 0. 000 000 000
Change in Rate NC NC NC
--------------------------------------------------------------------------------------------------
</TABLE>
Page 8 of 8
FLAGSHIP ADMIRAL FUNDS INC.
Form of
Multiple Class Distribution Plan
Pursuant to Rule 18f-3
Under the Investment Company Act of 1940
The attached document which was the original version of the Notice of Order
of Exemption under Section 6(c) of the Investment Company Act of 1940, as
amended (the "1940 Act") permitting Flagship Admiral Funds Inc. (the "Fund") to,
among other things, issue multiple classes of shares and assess or waive a
contingent deferred sales charge is hereby adopted as the written plan
contemplated by Rule 18f-3 ("Plan") under the 1940 Act of each series (each a
"Portfolio") of the Fund; provided however, that any restrictions or limitations
contained herein which are more restrictive than those required by Rule 18f-3
are hereby deleted. This Plan sets forth the separate arrangement and expense
allocation of classes that may be issued under the Fund's multiple class
distribution system.
This Plan is hereby approved by a majority of the directors of each
Portfolio, including a majority of the directors who are not interested persons
of each Portfolio (collectively, the "Directors"). The Directors have found that
this Plan, including the expense allocation, is in the best interests of each
class individually and each Portfolio as a whole. The Directors have made this
determination after requesting and evaluating such information as may be
reasonably necessary to evaluate this Plan.
Dated: June 30, 1995
SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC - 18993; 812-7889]
Flagship Tax Exempt Funds Trust, et al.; Notice of Application
October 1, 1992
Agency: Securities and Exchange Commission (the "SEC" or "Commission")
Action: Notice of Application for Exemption under the Investment Company
Act of 1940 (the "Act").
Applicants: Flagship Tax Exempt Funds Trust, Flagship
Pennsylvania Triple Tax Exempt Fund, Flagship Admiral Funds Inc., (the
"Funds"), Flagship Financial Inc. (the "Advisor"), and Flagship Funds Inc.
(the "Distributor").
Relevant 1940 Act Sections: Conditional order requested under section 6(c)
for an exemption from the provisions of section 2(a)(32), 2(a)(35), 18(f),
18(g), 18(i), 22(c), and 22(d) of the Act and rule 22c-1 thereunder.
Summary of Application: Applicants seek a conditional order permitting the
Funds, series of the Funds, and certain future series and funds to: (a)
issue four classes of shares representing interests in the same portfolio
of securities and (b) assess and, under certain circumstances, waive a
contingent deferred sales load on certain redemptions of the shares of two
of the classes.
<PAGE>
Filing Dates: The application was filed on March 19, 1992 and amended on
July 20, 1992, August 25, 1992, and September 25, 1992.
Hearing or Notification of Hearing: An order granting the application
will be issued unless the SEC orders a hearing. Interested persons may
request a hearing by writing to the SEC's Secretary and serving applicants
with a copy of the request, personally or by mail. Hearing requests
should be received by the SEC by 5:30 p.m. on October 26, 1992, and should
be accompanied by proof of service on applicants, in the form of an
affidavit or, for lawyers, a certificate of service. Hearing requests
should state the nature of the writer's interest, the reason for the
request, and the issues contested. Persons who wish to be notified of a
hearing may request notification by writing to the SEC's Secretary.
Addresses: Secretary, SEC, 450 5th Street, N.W., Washington, D.C. 20549.
Applicants, One First National Plaza, 130 W. Second Street, Dayton, Ohio
45402-1506.
For Further Information Contact: Elaine M. Boggs, Staff Attorney, at
(202) 272-3026, or Elizabeth G. Osterman, Branch Chief, at (202) 272-3016
(Division of Investment Management, Office of Investment Company
Regulation).
2
<PAGE>
Supplementary Information: The following is a summary of the application.
The complete application may be obtained for a fee at the SEC's Public
Reference Branch.
Applicant's Representations:
1. Applicants seek a conditional order under section 6(c) of the Act on
behalf of the Funds and any future sub-trust or series of the Funds, or any
future registered open-end investment companies and any future sub-trust or
series thereof that are part of the same "group of investment companies," as
defined in rule lla-3 under the Act, and (a) whose investment adviser (i) is the
Adviser or (ii) directly or indirectly controls, controlled by, or under common
control with the Adviser, (b) whose principal underwriter is the Distributor or
is directly or indirectly controlling, controlled by, or under common control
with the Distributor, (c) that hold themselves out to investors as being related
for purposes of investment and investor services, and (d) whose shares are
divided into up to four classes of securities whose sales load, contingent
deferred sales load ("CDSL"), rate of distribution fees, exchange privileges,
conversion feature, and differences in voting rights are substantially
identical to those applicable to the Class A shares, Class B shares, Class C
shares, and Class D
3
<PAGE>
shares, described below. Any such series or investment company will be subject
to each of the conditions contained in the application.
2. The Funds are open-end management investment companies registered
under the Act. The Adviser acts as the Funds, investment adviser. The
Distributor acts as principal underwriter of the Funds' shares. The shares of
each of the Funds, series(1) are currently offered at net asset value plus a
front-end sales load. In addition, the Funds have each adopted a distribution
plan pursuant to rule 12b-1 under the Act.
3. Applicants propose to establish a multiple distribution system (the
"Multiple Distribution System") enabling each of the Funds' series to offer four
classes of shares and to assess and, under certain circumstances, waive a CDSL
on certain redemptions of Class B and Class C shares.
A. The Multiple Distribution System
1. Under the Multiple Distribution System, all of the current shares
outstanding of each series of the Funds will be redesignated as "Class A"
shares. In addi-
- -----------------
(1) Any description or representation regarding a "series" of any of the
Funds also refers to any of the Funds which do not have separate series
outstanding.
4
<PAGE>
tion, each series will create up to three additional classes of
shares, referred to herein as "Class B," "Class C," and "Class D."
2. Class A shares will be sold at net asset value plus a front-end
sales load. The sales load will be subject to reductions for larger purchases
under a combined purchase privilege, under a right of accumulation, or under a
letter of intent. The sales load will be subject to other reductions permitted
by section 22(d) of the Act and set forth in the Funds' prospectuses. Pursuant
to the Funds' 12b-I distribution plan, the Funds will be able to spend up to
.40t per year of the average daily net assets attributable to the Funds' Class A
shares for distribution-related expenses.
3. Class B shares will be sold at net asset value per share without the
imposition of a sales load at the time of purchase (the "Deferred Option"). Up
to 1% per year of the average daily net assets attributable to the Class B
shares will be subject to the Funds' 12b-1 distribution plan. An investor's
proceeds from a redemption of Class B shares made within a specified period of
years following their purchase (which will be at least four years but will not
exceed ten years) generally will be subject to a CDSL payable to the
Distributor. The CDSL
5
<PAGE>
is expected to range from 3% to 6% on Class B shares redeemed during the first
year after purchase and will be reduced each year over the applicable CDSL
period.
4. Class C shares will be sold at net asset value without the imposition
of a front-end sales load (the "Level-Load Option"). An investors's proceeds
from a redemption of Class C shares made within one year of the date of purchase
will be subject to a CDSL of l%, with no CDSL charged for any redemptions after
one year. Up to l% per year of the average daily net assets attributable to the
Class C shares will be subject to the Funds' 12b-1 distribution plan.
5. Class D shares will be sold to institutional investors without a
front-end sales load, a CDSL, or a rule 12b-1 fee (the "No Fee/No Load Option").
6. All Class B shares, other than those purchased through the
reinvestment of dividends and distributions, automatically will convert to Class
A shares after a certain number of years (which shall be at least four but not
more than ten years) after the end of the calendar month in which the
shareholder's order to purchase was accepted. Shares purchased through the
reinvestment of dividends and other distributions paid in respect of Class B
shares will be treated as Class B shares for
6
<PAGE>
purposes of determining the applicable distribution fee. For purposes of
conversion to Class A shares, however, such Class B shares will be considered to
be held in a separate sub-account. Each time any Class B shares in the
shareholder's account, other than those in the sub-account, convert to Class A
shares, a proportionate number of Class B shares in the sub-account also will
convert to Class A shares.
7. All expenses incurred by each series of the Funds will be allocated
daily to each class of shares based on the percentage of net assets at the
beginning of the day, except for the distribution expenses incurred pursuant to
the Funds' rule 12b-1 distribution plan, and the incremental transfer agency
costs to be borne by the Class B shares and the Class C shares. Because of the
additional expenses borne by Class B shares and Class C shares, the net income
attributable to and the dividends payable on Class B shares and Class C shares
may be lower than the net income attributable to and the dividends payable on
Class A shares and Class D shares. As Class D shares have no Rule 12b-1 Plan or
sales loads, the income attributable to Class D shares will not be lower than on
Class A shares and is expected to be higher than that of Class B and Class C
shares.
7
<PAGE>
8. Class A shares of each series of the Funds will be exchangeable for
shares of the other funds which are sold subject to a front-end sales load, and
for shares of money market funds distributed by the Distributor that offer an
exchange privilege. Shareholders of other funds sponsored by the Distributor
that are sold subject to a front-end sales load (or a holder of money market
fund shares acquired through an exchange of such shares were such funds to be
offered) and offer an exchange privilege will be able to exchange their shares
for Class A shares of any series of the Funds. Class B shares of any series of
the Funds will be exchangeable only for shares offered pursuant to a Deferred
Option by any other series or fund in the complex which offers an exchange
privilege. Class C shares of any series of the Funds will be exchangeable only
for shares offered pursuant to a Level-Load Deferred Option by any other series
or fund in the complex which offers an exchange privilege. Similarly, Class D
shares of any series of the Funds will be exchangeable only for shares offered
pursuant to a No Fee/No Load Option by any other series or fund in the complex
which offers an exchange privilege. The exchange privilege for all classes of
shares of the Funds will comply with the provisions of rule lla-3 under the Act.
8
<PAGE>
B. The CDSL
1. The Class B shares and Class C shares will be sold subject to a CDSL.
The amount of the CDSL charged will vary depending on the length of time shares
have been held and the net asset value of the shares at the time of redemption.
The amount of any CDSL will be calculated as the lessor of the amount that
represents a specified percentage of the net asset value of the shares at the
time of purchase, or the amount that represents a specified percentage of the
net asset value of the shares at the time of redemption.
2. The CDSL will not be imposed on redemptions of (a) Class B shares
purchased more than ten years prior to their redemption or Class C shares
purchased more than one year prior to their redemption (the "CDSL Period"), (b)
Class B shares or Class C shares derived from the reinvestment of distributions,
or (c) an amount which represents an increase in the value of the shareholder's
account resulting from capital appreciation above the amount paid for shares
purchased during the CDSL Period. In determining whether a CDSL is applicable,
it will be assumed that a redemption is made first of Class B or Class C shares
derived from reinvestment of dividends and distributions, second of Class B or
Class C shares held
9
<PAGE>
for a period longer than the CDSL Period, third of any Class A shares in the
shareholder's Fund account, and fourth of Class B or Class C shares held for a
period not longer than the CDSL Period.
3. The Funds propose to waive the CDSL on redemptions of Class B or
Class C shares (a) following the death of a shareholder and (b) with respect to
distributions from an Individual Retirement Account, a custodial account
maintained pursuant to Section 403(b)(7) of the Internal Revenue Code (the
"Code"), or a qualified pension or profit-sharing plan, (i) in connection with a
lump-sum or other distribution after attaining age 59 or, in the case of a
qualified pension or profit-sharing plan, after termination of employment after
age 55, (ii) on any redemption which results from the tax-free return of an
excess contribution pursuant to section 408(d)(4) or (5) of the Code, (iii) on
the return of excess deferral amounts pursuant to section 401(i)(8) or
402(g)(2) of the Code, or (iv) from the death or disability of the employee.
4. If a series waives or reduces the CDSL, such waiver or reduction will
be uniformly applied to all Class B or Class C shareholders, respectively, of
such series. In waiving or reducing a CDSL, the Funds will
10
<PAGE>
comply with the requirements of rule 22d-1 under the Act as if such CDSL were a
sales load.
5. If the trustees or directors of the Funds determine to discontinue
the waiver of the CDSL, the disclosure in the affected Fund's prospectus will be
appropriately revised. Class B shares and Class C shares purchased prior to the
termination of such waiver will be able to have the CDSL waived as provided in
that Fund's prospectus at the time of the purchase of such shares. Any changes
in the annual rate of reduction with respect to the CDSL or any variation in the
period over which the CDSL is charged will be reflected in the affected Funds'
prospectus, and any such change or changes will not affect shares that have
already been issued.
Applicants' Legal Analysis:
C. The Multiple Distribution System
1. Applicants seek an exemption from sections 18(g), 18(f)(1), and 18(i)
of the Act to the extent the Multiple Distribution System may result in the
issuance and sale of a senior security, as defined by section 18(g), which would
be prohibited by section 18(f)(1), and to the extent the allocation of voting
rights under the Multiple Distribution System may violate the provisions of
section 18(i). The proposal does not involve
11
<PAGE>
borrowings and will not affect the Funds' assets or reserves. Nor will the
proposed arrangement increase the speculative character of the shares of the
Funds since all shares will participate equally as a class in all of a Fund's
income and expenses with the exception of the differing rule 12b-I distribution
expenses and transfer agency costs.
2. Applicants believe that the issuance and sale of each class of shares
by the Funds will better enable the Funds to meet the competitive demands of
today's financial services industry and that the Multiple Distribution System
will both facilitate the distribution of their securities and provide investors
with a choice as to the appropriate method of purchasing shares without assuming
excessive accounting and bookkeeping costs or unnecessary investment risks. In
addition, applicants believe owners of all classes of shares may be relieved of
a portion of the fixed costs normally associated with mutual funds since such
costs will, potentially, be spread over a greater number of shares than they
would be otherwise. Finally, the conversion feature will benefit long-term Class
B shareholders by relieving them from most of the burden of distribution-related
expenses.
12
<PAGE>
3. Applicants believe that the allocation of expenses and voting rights
relating to the rule 12b-1 distribution plans in the manner described above is
equitable and would not discriminate against any group of shareholders. In
addition, the proposed arrangement should not give rise to any conflict of
interest because the rights and privileges of each class of shares are
substantially identical and the interests of each respective class of
shareholders will be adequately protected since the rule 12b-1 plans will
conform to the requirements of rule 12b-1, including the requirement that the
plans be approved and continued on an annual basis by the trustees or directors
of the Funds.
4. Applicants argue that investors will not be given misleading
impressions as to the safety or risk of any classes of shares because each class
of shares will be redeemable at all times. No class of shares will have any
preference or priority over any other class in the Fund in the usual sense (that
is, no class will have distribution or liquidation preference with respect to
particular assets, no class will have any right to require that lapsed dividends
be paid before dividends are declared on the other classes, and no class will be
protected by any reserve or other account). The similar-
13
<PAGE>
ities and the dissimilarities of the classes will be fully disclosed in the
Funds' prospectuses and statements of additional information.
D. The CDSL
1. Applicants also seek an exemption from the provisions of sections
2(a)(32), 2(a)(35), 22(c), and 22(d) of the Act, and rule 22c-1 thereunder to
permit the Funds to assess a CDSL on certain redemptions of Class B shares and
Class C shares, and to permit the Funds to waive the CDSL for certain types of
redemptions.
2. Section 2(a)(32) of the Act defines redeemable security to be a
security that, upon presentation to the issuer or to a person designated by the
issuer, entitles the shareholder to receive approximately his proportionate
share of the issuer's current net assets. Applicants assert that the imposition
of the CDSL will not restrict a shareholder from receiving his proportionate
share of the current net assets of a series of a Fund, but merely defers the
deduction of a sales charge and makes it contingent upon an event which may
never occur. However, to avoid uncertainty in this regard, applicants request an
exemption from the operation of section 2(a)(32) of the Act to the extent
necessary to permit implementation of the proposed CDSL.
14
<PAGE>
3. Applicants believe that the proposed CDSL qualifies as a "sales load"
within the meaning of section 2(a)(35) of the Act. Applicants believe that the
CDSL is functionally a sales charge because it is paid to the Distributor to
reimburse it for expenses related to offering shares for sale to the public.
Applicants contend that the deferral of the sales charge, and its contingency
upon the occurrence of an event that may not occur, does not change the basic
nature of this charge, which is in every other respect a sales charge.
Nevertheless, in view of the possibility that section 2(a)(35) might be
construed to apply only to sales loads charged at the time of purchase,
applicants request an exemption from the provisions Of section 2(a)(35) to the
extent necessary or appropriate to implement the proposed CDSL.
4. Section 22(c) of the Act and rule 22c-1 thereunder require that the
price of a redeemable security issued by a registered investment company for
purposes of sale, redemption, or repurchase be based on the company's current
net asset value. When a redemption of the Funds' shares is effected, the price
of such shares on redemption will be based on current net asset value. The CDSL
will be deducted at the time of redemption in arriving at the shareholder's
proportionate redemption proceeds.
15
<PAGE>
However, to avoid any question as to the potential applicability of section
22(c) and rule 22c-1, applicants request an exemption from rule 22c-1 to the
extent necessary to permit applicants to impose the proposed CDSL.
5. Section 22(d) of the Act requires a registered investment company,
principal underwriter, or dealer to sell a redeemable security only at a current
offering price described in the company's prospectus. Rule 22d-1, in substance,
permits variation or elimination of sales loads to particular classes of
investors, provided that such variation is described in the investment company's
registration statement. The CDSL and the waivers therefrom will be applied as
described in the Funds' registration statements. Nonetheless, to preclude any
assertion that rule 22d-1 is inapplicable to the CDSL, applicants request an
exemption from section 22(d) to the extent necessary or appropriate to implement
the CDSL and waivers therefrom as described above.
Applicants' Conditions:
Applicants agree that any order granting the requested relief shall be
subject to the following conditions:
A. Conditions Relating to the Multiple Distribution System
16
<PAGE>
1. Class A shares, Class B shares, Class C shares, and Class D shares
will represent interests in the same portfolio of investments of each series of
each Fund, and be identical in all respects, except as set forth below. The only
difference between Class A shares, Class B shares, Class C shares, and Class D
shares will relate solely to (i) the impact of the disproportionate rule 12b-1
distribution plan payments allocated to each of the holders of Class A shares,
Class B shares, and Class C shares of each series of each Fund, the incremental
transfer agency costs attributable to the Class B shares and Class C shares of
each series of each Fund resulting from the Deferred Option arrangement, and any
other incremental expenses subsequently identified that should be properly
allocated to one class of shares which shall be approved by the Commission
pursuant to an amended order; (ii) the Class B shares will be subject to a CDSL,
the Class A shares will be sold subject to a front-end sales load, the Class C
shares will be subject to a short-term low CDSL, and the Class D shares will not
be subject to any sales load or distribution fee; (iii) the fact that each class
of shares that is subject to a rule 12b-1 distribution expense will vote
separately as a class with respect to each series of each Fund's rule
17
<PAGE>
12b-1 distribution plan; (iv) different exchange privileges of the Class A
shares, Class B shares, Class C shares, and Class D shares; (v) the fact that
only Class B shares will have a conversion feature; (vi) the fact that the
designation of each class of shares of the respective series of the Funds will
differ; and (vii) the fact that the Class D shares will only be offered to
institutional investors.
2. The trustees or directors, including a majority of the independent
trustees or independent directors, will approve the Multiple Distribution
System. The minutes of the meetings of the trustees or directors regarding the
deliberations of the trustees or directors with respect to the approvals
necessary to implement the Multiple Distribution System will reflect in detail
the reasons for the trustees' or directors determination that the proposed
Multiple Distribution System is in the best interests of both the individual
Fund and its shareholders.
3. On an ongoing basis, the trustees or directors, pursuant to their
fiduciary responsibilities under the Act and otherwise, will monitor each series
of each Fund for the existence of any material conflicts between the interests
of the four classes of shares of each such
18
<PAGE>
series. The trustees or directors, including a majority of the independent
trustees or independent directors, shall take such action as is reasonably
necessary to eliminate any such conflicts that may develop. The adviser and the
distributor will be responsible for reporting any potential or existing
conflicts to the trustees or directors. If a conflict arises, the adviser and
the distributor at their own cost will remedy such conflict up to and including
establishing a new registered management investment company.
4. Any rule 12b-1 plan adopted or amended by a series of any Fund to
permit the assessment of a rule 12b-1 fee on any class of shares which has not
had its rule 12b-1 plan approved by the public shareholders of that class of
shares of such Fund will be submitted to the public shareholders of such class
for approval at the next meeting of such shareholders after the initial issuance
of the class of shares if such approval is still required by the Commission. If
still required, such meeting is to be held within 16 months of the date that the
registration statement relating to such class first becomes effective or, if
applicable, the date that the amendment to the registration statement necessary
to offer such class first becomes effective.
19
<PAGE>
5. The trustees or directors will receive quarterly and annual
statements concerning distribution expenditures complying with paragraph
(b)(3)(ii) of rule 12b-1, as it may be amended from time to time. In the
statements, only distribution expenditures properly attributable to the sale of
a particular class of shares will be used to justify the distribution fee
charged to that class. Expenditures not related to the sale of a particular
class of shares will not be presented to the trustees or directors to justify
the distribution fee attributable to that class. The statements, including the
allocations upon which they are based, will be subject to the review and
approval of the independent trustees or independent directors in the exercise of
their fiduciary duties.
6. Dividends paid by any series of any Fund with respect to its Class A
shares, Class B shares, Class C shares, and Class D shares, to the extent any
dividends are paid, will be calculated in the same manner, at the same time, on
the same day, and will be in the same amount, except that distribution fee
payments relating to each class of shares subject to such an expense will be
borne exclusively by that class and any incremental transfer agency costs
relating to Class B shares or Class
20
<PAGE>
C shares will be borne exclusively by that class.
7. The methodology and procedures for calculating the net asset value
and dividends and distributions of the four classes and the proper allocation of
expenses between the four classes will be reviewed by an expert, who has
rendered a report to applicants, which has been provided to the staff of the
Commission, that such methodology and procedures are adequate to ensure that
such calculations and allocations will be made in an appropriate manner. On an
ongoing basis, the expert, or an appropriate substitute expert, will monitor the
manner in which the calculations and allocations are being made and, based upon
such review, will render at least annually reports to the Funds that the
calculations and allocations are being made properly. The reports of the expert
shall be filed as part of the periodic reports filed with the Commission
pursuant to sections 30(a) and 30(b)(1) of the Act. The work papers of the
expert with respect to such reports, following request by the Funds (which the
Funds agree to provide), will be available for inspection by the Commission
staff upon the written request to a Fund for such work papers by a senior member
of the Division of Investment Management, limited to the Director, an Associate
Director, the Chief Accountant, the
21
<PAGE>
Chief Financial Analyst, an Assistant Director and any Regional Administrators
or Associate and Assistant Administrators. The initial report of the expert is a
"Special Purpose" report on the "Design of a System," and the ongoing reports
will be "Special Purpose" reports on the "Design of a System and Certain
Compliance Tests" as defined and described in SAS No. 44 of the AICPA, as it may
be amended from time to time, or in similar auditing standards as may be adopted
by the AICPA from time to time.
8. To ensure that the net asset value per share of each class of shares
of any series of any Fund that will maintain a constant-dollar net asset value
does not deviate from the net asset value per share of the other classes as a
result of variations in net income among the from day to day, no class of any
such series of any Fund will on any day bear any accrued class expenses that
would cause the accrued expenses of such class for such day to exceed its
allocated gross income. To accomplish this, any series of any Fund maintaining a
constant dollar net asset value will obtain undertakings from its service
providers stating that, if necessary to prevent accrued class expenses of any
class from exceeding the allocated gross incomes of such class on any given day,
22
<PAGE>
they will waive some or all of the payments to which they otherwise would have
been entitled. In this manner, the net asset value per share of each class of
shares in any such series of any Fund will remain the same.
9. Applicants have adequate facilities in place to ensure implementation
of the methodology and procedures for calculating the net asset value and
dividends and distributions of the four classes of shares and the proper
allocation of expenses between the four classes of shares, and this
representation is expected to be concurred with by the expert in the initial
report referred to in condition (7) above and will be concurred with by the
expert, or an appropriate substitute expert, on an ongoing basis at least
annually in the ongoing reports referred to in condition (7) above. Applicants
will take immediate corrective measures if this representation is not concurred
in by the expert or appropriate substitute expert.
10. The prospectuses of the Funds will contain a statement to the effect
that a salesperson and any other person entitled to receive compensation for
selling Fund shares may receive different compensation for selling one
particular class of shares over another in the Funds.
23
<PAGE>
11. The distributor will adopt compliance standards as to when Class A
shares, Class B shares, Class C shares, and Class D shares may appropriately be
sold to particular investors. Applicants will require all persons selling shares
of any series of any Fund to agree to conform to such standards.
12. The conditions pursuant to which the exemptive order is granted and
the duties and responsibilities of the trustees or directors with respect to the
Multiple Distribution System will be set forth in guidelines which will be
furnished to the trustees or directors.
13. The Funds will disclose the respective expenses, performance data,
distribution arrangements, services, fees, sales loads, deferred sales loads and
exchange privileges applicable to each class of shares in every prospectus,
regardless of whether all classes of shares are offered through each prospectus.
The Funds will disclose with respect to each series the respective expenses and
performance data applicable to all classes of shares in every shareholder
report. To the extent any advertisement of sales literature describes the
expenses or performance data applicable to any class of shares, it will also
disclose the respective expenses and/or performance data applicable to all
classes of
24
<PAGE>
shares. The information provided by applicants for publication in any
newspaper or similar listing of the series of the Funds' net asset value
and public offering price will present each class of shares separately.
14. Applicants acknowledge that the grant of the exemptive order
requested by the application will not imply Commission approval, authorization
or acquiescence in any particular level of payments that any Fund may make
pursuant to its rule 12b-1 distribution plan in reliance on the exemptive order.
15. In the circumstances and subject to the qualifications described in
the application(2), after four but not more than ten years from the date on
which a shareholder purchases Class B shares, such shares will convert
- ------------------
(2) The Funds will obtain a revenue ruling from the Internal Revenue Service
that the assessment of the higher distribution expenses and transfer agency
costs and any other special allocations described above with respect to Class B
shares, Class C shares, and Class D shares does not result in any dividends or
distributions constituting "preferential dividends" under the Internal Revenue
Code of 1986, as amended ("IRC"), and that the conversion of Class B shares to
Class A shares does not constitute a taxable event under current federal income
tax law. The conversion of Class B shares to Class A shares might be suspended
if such a ruling was no longer available at the time such conversion was to
occur. In that event, no further conversions of Class B shares would occur, and
such shares might continue to be subject to the additional distribution fee for
an indefinite period which might extend beyond the time at which the conversion
of the shares would otherwise have occurred.
25
<PAGE>
into Class A shares on the basis of the relative net asset values
of the two classes, without the imposition of any sales load, fee or other
charge.
B. Condition Relating to the CDSL
1. Applicants will comply with the provisions of proposed rule 6c-10
under the Act, Investment Company Act Release No. 16619 (Nov. 2, 1988), as such
rule is currently proposed and as it may be reproposed, adopted or amended.
For the SEC, by the Division of Investment Management, under
delegated authority.
Jonathan G. Katz
Secretary
By: Margaret H. McFarland
Deputy Secretary
26
FLAGSHIP ADMIRAL FUNDS INC.
CODE OF ETHICS
Overview
The Flagship Admiral Funds Inc. (the "Fund") is required under the Investment
Company Act of 1940 (the "1940 Act") to adopt a Code of Ethics. The Code of
Ethics was first adopted at a special meeting of the Board of Directors on
August 25, 1982. This revised Code of Ethics has been adopted at a meeting of
the Board of Directors on December 9, 1994. The Code of Ethics affects all
access persons meaning directors, officers, advisory persons or investment
personnel of the Fund.
Prohibited purchases or sales relating to the Code of Ethics include any
purchases or sales of a security which is a) being considered for purchase or
sale by the Fund; or b) is being purchased or sold by the Fund. Purchases and
sales which are not prohibited include those securities that, under the meaning
set forth in Section 2(a)(36) of the 1940 Act, are securities that are issued by
the government of the United States, short-term debt securities which are
"government securities," bankers acceptances, repurchase agreements, bank
certificates of deposit, commercial paper, or shares of a registered open-end
investment company.
Every access person shall report to the Fund the information relative to a
prohibited transaction. Disinterested directors of the Fund need only report a
transaction of a security if such director at the time of transaction knew or,
in the ordinary course of fulfilling his official duties as a director of the
Fund, should have known that during the 15-day period immediately preceding the
date of the transaction by the director such security was purchased or sold by
the Fund or was being considered by the Fund or its investment advisor for
purchase or sale. Reports as to these prohibited transactions shall be made not
later than ten days after the end of the calendar quarter in which the
transaction occurred.
Upon discovering a violation of this Code, the Board of Directors of the Fund
may impose such sanctions as it deems appropriate including inter alia a letter
of consensus or suspension or termination of the employment of the violator.
1
<PAGE>
Flagship Admiral Funds Inc.
Code of Ethics
1. Definitions
(a) "Fund" means Flagship Admiral Funds Inc. and includes any and all
of its series and classes.
(b) "Access person" means any director, officer, advisory person,
investment personnel or primary Distributor of the Fund.
(c) "Advisory person" means (i) any employee of the Fund or Flagship
Financial Inc. ("the Adviser"), Flagship Funds Inc. (the
"Distributor"), or Flagship Resources Inc. (the "Holding Company")
who, in connection with his regular functions or duties, makes,
participates in, or obtains information regarding the purchase or
sale of a security by the Fund, or whose functions relate to the
making of any recommendations with respect to such purchases or
sales; and (ii) any natural person in a control relationship to the
Fund, who obtains information concerning recommendations made to
the Fund, with regard to the purchase or sale of a security.
(d) "Investment Personnel" means (i) portfolio managers who have direct
responsibility and authority to make investment decisions affecting
the Fund, (ii) assistant portfolio managers and portfolio
operations personnel who help execute the portfolio managers'
decisions, and (iii) securities and credit analysts who provide
information and advice to a portfolio manager.
(e) A security is "being considered for purchase or sale" when a
recommendation to purchase or sell a security has been made and
communicated and, with respect to the person making the
recommendation, when such person seriously considers making such a
recommendation.
(f) "Beneficial ownership" shall be interpreted in the same manner as
it would be in determining whether a person is subject to the
provisions of Section 16 of the Securities Exchange Act of 1934, as
amended and the rules and regulations thereunder, except that the
determination of direct or indirect beneficial ownership shall
apply to all securities which an access person has or acquires.
(g) "Control" shall have the same meaning as that set forth in Section
2(a)(9) of the Investment Company Act of 1940, as amended (the
"1940 Act").
(h) "Disinterested director" means a director of the Fund who is not an
"interested person" of the Fund within the meaning of Section
2(a)(19) of the 1940 Act.
2
<PAGE>
(i) "Purchase or sale of a security" includes, inter alia, the writing
of an option to purchase or sell a security.
(j) "Security" shall have the meaning set forth in Section 2(a)(36) of
the 1940 Act, except that it shall not include shares of registered
open-end investment companies, securities issued by the Government
of the United States, short-term debt securities which are
"government securities" within the meaning of Section 2(a)(16) of
the 1940 Act, bankers' acceptances, repurchase agreements, bank
certificates of deposit, commercial paper, and such other money
market instruments as designated by the Board of Directors of the
Fund.
2. Statement of General Fiduciary Principles
(a) The interests of the shareholders must come first. All access
persons have a duty to place the interests of shareholders first,
and they must scrupulously avoid serving their own personal
interests ahead of the shareholders.
(b) All access persons owe a fiduciary duty to, among others, the
shareholders of the Funds, to conduct their personal securities
transactions in a manner which does not interfere with Fund
portfolio transactions or otherwise take unfair advantage of their
relationship to the Funds. Persons covered by this code must adhere
to this general principle as well as comply with the code's
specific provisions. Technical compliance with the code's
procedures will not automatically insulate from scrutiny trades
which show a pattern of abuse of the individual's fiduciary duties
to the Funds or a portfolio within the group.
(c) All access persons must not take inappropriate advantage of their
position with or on behalf of the Fund. Any situation that might
compromise or call into question their exercise of fully
independent judgement in the interests of shareholders, such as
receipt of unusual investment opportunities, perquisites, or gifts
of more than de minimus value from persons doing or seeking
business with the Funds, must be avoided.
(d) Investment personnel who are members of the Association for
Investment Management and Research ("AIMR") or who are Chartered
Financial Analysts ("CFA") or CFA candidates are required to abide
by the AIMR Code of Ethics and Standards of Professional Conduct.
3. Exempted Transactions
The prohibitions of Section 4 of this Code shall not apply to:
(a) Purchases or sales effected in any account over which the access
person has no direct or indirect influence or control.
3
<PAGE>
(b) Purchases or sales of securities which are not eligible for
purchase or sale by the Fund.
(c) Purchases or sales which are non-volitional on the part of either
the access person or the Fund.
(d) Purchases which are part of an automatic dividend reinvestment
plan.
(e) Purchases effected upon the exercise of rights issued by an issuer
pro rata to all holders of a class of its securities, to the extent
such rights were acquired from such issuer, and sales of such
rights so acquired.
(f) Purchases or sales which clearly are not related economically to
the securities to be purchased, sold, or held by the Fund.
(g) Purchases or sales of the same category or type of securities in
which the Fund has an economic interest, upon approval of the
Fund's board of directors or such officer or officers of the Fund
designated by the board.
4. Prohibited Purchases and Sales
NO ACCESS PERSON shall purchase or sell, directly or
indirectly, any security in which he has, or by reason of such transaction
acquires, any direct or indirect beneficial ownership and which at the
time of such purchase or sale:
(a) Is the subject of a pending "buy" or "sell" order in that same
security on the same day as the personal securities transaction,
until that order is executed or withdrawn. Any profits realized on
trades within this proscribed period are required to be disgorged
to either the Fund or to a charitable organization.
Furthermore, NO INVESTMENT PERSONNEL shall purchase or sell,
directly or indirectly, any security in which he has, or by reason of such
transaction acquires, any direct or indirect beneficial ownership and
which at the time of such purchase or sale:
(a) Is being purchased or sold by a Fund during the 15-day period
immediately preceding or following the date of this transaction.
Any profits realized on trades within this proscribed period are
required to be disgorged to either the Fund or to a charitable
organization.
(b) Investment personnel are prohibited from profiting in the purchase
and sale, or sale and purchase, of the same (or equivalent)
securities within 30 calendar days. Individuals may request
permission for exceptions from the firm's registered general
principals on a case-by-case basis; otherwise, any profits realized
on such short-term trades are required to be disgorged to either
the Fund or to a charitable organization.
4
<PAGE>
(c) Investment personnel are prohibited from acquiring any securities
in any initial public offering.
(d) In the case of private placements, investment personnel may only
invest by following this three-step procedure:
(i) Prior written approval by either a registered principal, a
registered financial/operations principal, or staff counsel.
(ii) Persons who have been authorized to acquire securities in a
private placement are required to disclose that investment
when they play a material role in any Fund's subsequent
consideration of an investment in that issuer.
(iii) In such a circumstance, the Fund's decision to purchase
securities of that issuer will be subject to an independent
review by investment personnel who have no personal interest
in the issuer, along with principals of the firm.
5. Pre-Clearance
All investment personnel intending to effect securities
transactions (other than exempted transactions listed above) are required
to pre-clear all such transactions with a registered principal. This
requirement does not apply to equity securities of companies with market
capitalization in excess of $1 billion or to debt securities which meet
specified market value and liquidity criteria. Such clearance will be
effective for the one day during which the clearance is granted.
6. Reporting
(a) All interested directors, officers, access persons, advisory
persons and investment personnel are required to disclose all
personal securities holdings at the commencement of employment and
thereafter on an annual basis.
(b) All interested directors, officers, access persons other than
disinterested trustees, advisory persons and investment personnel
are required to direct their brokers to provide to the Compliance
Department, on a timely basis, duplicate copies of confirmations of
all personal securities transactions and copies of periodic
statements for all securities accounts.
(c) Every access person shall report to the Fund the information
described in Section 4(e) of this
5
<PAGE>
Code with respect to transactions in any security in which such
access person has, or by reason of such transaction acquires, any
direct or indirect beneficial ownership in the security; provided,
however, that an access person shall not be required to make a
report with respect to transactions effected for any account over
which such person does not have any direct or indirect influence.
(d) A disinterested director of the Fund need only report a transaction
in a security if such director, at the time of that transaction,
knew or, in the ordinary course of fulfilling his official duties
as a director of the Fund, should have known that, during the
15-day period immediately preceding the date of the transaction by
the director, such security was purchased or sold by the Fund or
was being considered by the Fund or its investment advisor for
purchase or sale by the Fund.
(e) Every report shall be made not later than 10 days after the end of
the calendar quarter in which the transaction to which the report
relates was effected, and shall contain the following information:
(i) The date of the transaction, the title and the number of
shares, and the principal amount of each security involved;
(ii) The nature of the transaction (i.e., purchase, sale, or any
other type of acquisition or disposition);
(iii) The price at which the transaction was effected; and,
(iv) The name of the broker, dealer, or bank with or through whom
the transaction was effected.
(f) Any such report may contain a statement that the report shall not
be construed as an admission by the person making such report that
he has any direct or indirect beneficial ownership in the security
to which the report relates.
7. Gifts
All access persons are prohibited from receiving any gift or
other thing of more than de minimus value from any person or entity that
does business with or on behalf of any Fund.
8. Service as a Director
6
<PAGE>
(a) INVESTMENT PERSONNEL are prohibited from serving on the boards of
directors of publicly traded companies, unless prior written
authorization has been received from a registered principal based
upon a determination that the board service would be consistent
with the interests of the Fund and its shareholders. Should any
such board service be authorized, compliance procedures will
isolate those investment personnel serving as directors from those
making investment decisions.
(b) Any ACCESS PERSON who is chosen to serve on the board of directors
of a publicly traded company must disclose such information to a
registered principal prior to such board service.
9. Review by Board of Directors
The Adviser shall prepare and present an annual report to
the Fund's Board of Directors that:
(a) Summarizes existing procedures concerning personal investing and
any changes in the procedures made during the past year;
(b) Identifies any violations requiring significant remedial action
during the past year; and
(c) Identifies any recommended changes in existing restrictions or
procedures based upon the investment company's experience under its
code of ethics, evolving industry practices, or developments in
applicable laws or regulations.
10. Sanctions
Upon discovering a violation of this Code, the Board of
Directors of the Fund may impose such sanctions as it deems appropriate,
including, inter alia, a letter of censure or suspension or termination of
the employment of the violator.
7
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000721704
<NAME> THE GOLDEN RAINBOW A JAMES ADVISED MUTUAL FUND
<SERIES>
<NUMBER> 02
<NAME> CLASS A
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUL-01-1994
<PERIOD-END> JUN-30-1995
<INVESTMENTS-AT-COST> 161,596,676
<INVESTMENTS-AT-VALUE> 183,071,892
<RECEIVABLES> 2,090,522
<ASSETS-OTHER> 6,803,175
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 191,965,589
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 493,062
<TOTAL-LIABILITIES> 493,062
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 164,402,410
<SHARES-COMMON-STOCK> 10,481,430
<SHARES-COMMON-PRIOR> 11,325,239
<ACCUMULATED-NII-CURRENT> 101,968
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 5,492,933
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 21,475,216
<NET-ASSETS> 191,472,527
<DIVIDEND-INCOME> 1,930,218
<INTEREST-INCOME> 7,679,134
<OTHER-INCOME> 0
<EXPENSES-NET> (1,963,667)
<NET-INVESTMENT-INCOME> 7,645,685
<REALIZED-GAINS-CURRENT> 7,317,261
<APPREC-INCREASE-CURRENT> 14,027,956
<NET-CHANGE-FROM-OPS> 28,990,902
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (7,543,717)
<DISTRIBUTIONS-OF-GAINS> (3,868,849)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,053,735
<NUMBER-OF-SHARES-REDEEMED> (2,521,692)
<SHARES-REINVESTED> 624,148
<NET-CHANGE-IN-ASSETS> 2,725,089
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 2,044,521
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,396,526
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,397,367
<AVERAGE-NET-ASSETS> 188,755,373
<PER-SHARE-NAV-BEGIN> 16.67
<PER-SHARE-NII> 0.69
<PER-SHARE-GAIN-APPREC> 1.94
<PER-SHARE-DIVIDEND> (0.68)
<PER-SHARE-DISTRIBUTIONS> (0.35)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 18.27
<EXPENSE-RATIO> 1.04
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000721704
<NAME> FLAGSHIP INTERMEDIATE US GOVERNMENT FUND
<SERIES>
<NUMBER> 051
<NAME> CLASS A
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUL-01-1994
<PERIOD-END> JUN-30-1995
<INVESTMENTS-AT-COST> 3,091,415
<INVESTMENTS-AT-VALUE> 3,252,067
<RECEIVABLES> 57,554
<ASSETS-OTHER> 244
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 3,309,865
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 48,054
<TOTAL-LIABILITIES> 48,054
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 3,129,640
<SHARES-COMMON-STOCK> 104,707
<SHARES-COMMON-PRIOR> 45,269
<ACCUMULATED-NII-CURRENT> 466
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (28,947)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 160,652
<NET-ASSETS> 3,261,811
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 161,687
<OTHER-INCOME> 0
<EXPENSES-NET> (26,146)
<NET-INVESTMENT-INCOME> 135,541
<REALIZED-GAINS-CURRENT> 8,320
<APPREC-INCREASE-CURRENT> 200,196
<NET-CHANGE-FROM-OPS> 344,057
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (48,544)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 141,795
<NUMBER-OF-SHARES-REDEEMED> (84,258)
<SHARES-REINVESTED> 1,901
<NET-CHANGE-IN-ASSETS> 604,463
<ACCUMULATED-NII-PRIOR> 566
<ACCUMULATED-GAINS-PRIOR> (37,267)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 11,213
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 169,578
<AVERAGE-NET-ASSETS> 2,242,544
<PER-SHARE-NAV-BEGIN> 9.03
<PER-SHARE-NII> 0.60
<PER-SHARE-GAIN-APPREC> 0.65
<PER-SHARE-DIVIDEND> (0.60)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.68
<EXPENSE-RATIO> 0.69
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000721704
<NAME> FLAGSHIP INTERMEDIATE US GOVERNMENT FUND
<SERIES>
<NUMBER> 053
<NAME> CLASS C
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUL-01-1994
<PERIOD-END> JUN-30-1995
<INVESTMENTS-AT-COST> 3,091,415
<INVESTMENTS-AT-VALUE> 3,252,067
<RECEIVABLES> 57,554
<ASSETS-OTHER> 244
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 3,309,865
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 48,054
<TOTAL-LIABILITIES> 48,054
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 3,129,640
<SHARES-COMMON-STOCK> 232,156
<SHARES-COMMON-PRIOR> 119,617
<ACCUMULATED-NII-CURRENT> 466
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (28,947)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 160,652
<NET-ASSETS> 3,261,811
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 161,687
<OTHER-INCOME> 0
<EXPENSES-NET> (26,146)
<NET-INVESTMENT-INCOME> 135,541
<REALIZED-GAINS-CURRENT> 8,320
<APPREC-INCREASE-CURRENT> 200,196
<NET-CHANGE-FROM-OPS> 344,057
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (87,097)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 173,777
<NUMBER-OF-SHARES-REDEEMED> (64,189)
<SHARES-REINVESTED> 2,951
<NET-CHANGE-IN-ASSETS> 1,167,177
<ACCUMULATED-NII-PRIOR> 566
<ACCUMULATED-GAINS-PRIOR> (37,267)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 11,213
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 169,578
<AVERAGE-NET-ASSETS> 2,242,544
<PER-SHARE-NAV-BEGIN> 9.04
<PER-SHARE-NII> 0.53
<PER-SHARE-GAIN-APPREC> 0.65
<PER-SHARE-DIVIDEND> (0.53)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.69
<EXPENSE-RATIO> 1.40
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000721704
<NAME> FLAGSHIP LIMITED TERM US GOVERNMENT FUND
<SERIES>
<NUMBER> 041
<NAME> CLASS A
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUL-01-1994
<PERIOD-END> JUN-30-1995
<INVESTMENTS-AT-COST> 3,469,530
<INVESTMENTS-AT-VALUE> 3,554,895
<RECEIVABLES> 56,867
<ASSETS-OTHER> 261
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 3,612,023
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 44,465
<TOTAL-LIABILITIES> 44,465
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 3,509,226
<SHARES-COMMON-STOCK> 166,540
<SHARES-COMMON-PRIOR> 46,521
<ACCUMULATED-NII-CURRENT> 1,862
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (28,895)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 85,365
<NET-ASSETS> 3,567,558
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 166,916
<OTHER-INCOME> 0
<EXPENSES-NET> (22,858)
<NET-INVESTMENT-INCOME> 144,058
<REALIZED-GAINS-CURRENT> (4,567)
<APPREC-INCREASE-CURRENT> 108,840
<NET-CHANGE-FROM-OPS> 248,331
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (65,232)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 209,201
<NUMBER-OF-SHARES-REDEEMED> (92,489)
<SHARES-REINVESTED> 3,307
<NET-CHANGE-IN-ASSETS> 1,177,373
<ACCUMULATED-NII-PRIOR> 673
<ACCUMULATED-GAINS-PRIOR> (24,328)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 8,338
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 165,218
<AVERAGE-NET-ASSETS> 2,382,232
<PER-SHARE-NAV-BEGIN> 9.36
<PER-SHARE-NII> 0.59
<PER-SHARE-GAIN-APPREC> 0.24
<PER-SHARE-DIVIDEND> (0.59)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.60
<EXPENSE-RATIO> 0.70
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000721704
<NAME> FLAGSHIP LIMITED TERM US GOVERNMENT FUND
<SERIES>
<NUMBER> 043
<NAME> CLASS C
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUL-01-1994
<PERIOD-END> JUN-30-1995
<INVESTMENTS-AT-COST> 3,469,530
<INVESTMENTS-AT-VALUE> 3,554,895
<RECEIVABLES> 56,867
<ASSETS-OTHER> 261
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 3,612,023
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 44,465
<TOTAL-LIABILITIES> 44,465
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 3,509,226
<SHARES-COMMON-STOCK> 204,944
<SHARES-COMMON-PRIOR> 84,552
<ACCUMULATED-NII-CURRENT> 1,862
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (28,895)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 85,365
<NET-ASSETS> 3,567,558
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 166,916
<OTHER-INCOME> 0
<EXPENSES-NET> (22,858)
<NET-INVESTMENT-INCOME> 144,058
<REALIZED-GAINS-CURRENT> (4,567)
<APPREC-INCREASE-CURRENT> 108,840
<NET-CHANGE-FROM-OPS> 248,331
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (77,637)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 302,393
<NUMBER-OF-SHARES-REDEEMED> (186,127)
<SHARES-REINVESTED> 4,126
<NET-CHANGE-IN-ASSETS> 1,163,597
<ACCUMULATED-NII-PRIOR> 673
<ACCUMULATED-GAINS-PRIOR> (24,328)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 8,338
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 165,218
<AVERAGE-NET-ASSETS> 2,382,232
<PER-SHARE-NAV-BEGIN> 9.36
<PER-SHARE-NII> 0.54
<PER-SHARE-GAIN-APPREC> 0.24
<PER-SHARE-DIVIDEND> (0.53)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.61
<EXPENSE-RATIO> 1.16
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000721704
<NAME> FLAGSHIP UTILITY INCOME FUND
<SERIES>
<NUMBER> 011
<NAME> CLASS A
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUL-01-1994
<PERIOD-END> JUN-30-1995
<INVESTMENTS-AT-COST> 28,393,940
<INVESTMENTS-AT-VALUE> 29,421,742
<RECEIVABLES> 793,589
<ASSETS-OTHER> 506,188
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 30,721,519
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 220,195
<TOTAL-LIABILITIES> 220,195
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 73,636,751
<SHARES-COMMON-STOCK> 2,440,747
<SHARES-COMMON-PRIOR> 2,778,003
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (44,163,229)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,027,802
<NET-ASSETS> 30,501,324
<DIVIDEND-INCOME> 2,185,091
<INTEREST-INCOME> 100,479
<OTHER-INCOME> 0
<EXPENSES-NET> (331,548)
<NET-INVESTMENT-INCOME> 1,954,022
<REALIZED-GAINS-CURRENT> (1,509,016)
<APPREC-INCREASE-CURRENT> 3,182,126
<NET-CHANGE-FROM-OPS> 3,627,132
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,648,894)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 429,971
<NUMBER-OF-SHARES-REDEEMED> (853,817)
<SHARES-REINVESTED> 86,590
<NET-CHANGE-IN-ASSETS> (1,921,196)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (50,186,899)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 151,911
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 488,215
<AVERAGE-NET-ASSETS> 30,382,187
<PER-SHARE-NAV-BEGIN> 9.69
<PER-SHARE-NII> 0.64
<PER-SHARE-GAIN-APPREC> 0.55
<PER-SHARE-DIVIDEND> (0.64)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.24
<EXPENSE-RATIO> 1.00
<AVG-DEBT-OUTSTANDING> 153,900
<AVG-DEBT-PER-SHARE> 0.02
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000721704
<NAME> FLAGSHIP UTILITY INCOME FUND
<SERIES>
<NUMBER> 013
<NAME> CLASS C
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUL-01-1994
<PERIOD-END> JUN-30-1995
<INVESTMENTS-AT-COST> 28,393,940
<INVESTMENTS-AT-VALUE> 29,421,742
<RECEIVABLES> 793,589
<ASSETS-OTHER> 506,188
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 30,721,519
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 220,195
<TOTAL-LIABILITIES> 220,195
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 73,636,751
<SHARES-COMMON-STOCK> 537,415
<SHARES-COMMON-PRIOR> 529,516
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (44,163,229)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,027,802
<NET-ASSETS> 30,501,324
<DIVIDEND-INCOME> 2,185,091
<INTEREST-INCOME> 100,479
<OTHER-INCOME> 0
<EXPENSES-NET> (331,548)
<NET-INVESTMENT-INCOME> 1,954,022
<REALIZED-GAINS-CURRENT> (1,509,016)
<APPREC-INCREASE-CURRENT> 3,182,126
<NET-CHANGE-FROM-OPS> 3,627,132
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (305,128)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 136,957
<NUMBER-OF-SHARES-REDEEMED> (150,761)
<SHARES-REINVESTED> 21,703
<NET-CHANGE-IN-ASSETS> 372,393
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (50,186,899)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 151,911
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 488,215
<AVERAGE-NET-ASSETS> 30,382,187
<PER-SHARE-NAV-BEGIN> 9.69
<PER-SHARE-NII> 0.59
<PER-SHARE-GAIN-APPREC> 0.55
<PER-SHARE-DIVIDEND> (0.59)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.24
<EXPENSE-RATIO> 1.54
<AVG-DEBT-OUTSTANDING> 153,900
<AVG-DEBT-PER-SHARE> 0
</TABLE>
