<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
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.......... 9
Free Repurchase............... 9
Systematic Withdrawal Plan.... 9
Direct Deposits............... 9
How Fund Shares are Priced.... 10
Taxes......................... 10
Yield......................... 11
Management of the Fund........ 11
Distributor................... 12
Multiple Class Distribution... 13
Description of Shares......... 13
Custodian and Transfer Agent.. 14
Counsel and Auditors.......... 14
Additional Information........ 14
</TABLE>
LOGO
THE GOLDEN RAINBOW A JAMES ADVISED MUTUAL FUNDSM (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.
------------------
On July 16, 1996, Flagship Resources Inc. ("Flagship"), parent of Flagship
Financial Inc., the Manager for the Fund, signed an Agreement and Plan of
Merger with The John Nuveen Company, pursuant to which Flagship shall be
merged with and into The John Nuveen Company. The transaction is expected to
close on or about December 31, 1996. Your board of directors has approved the
transaction, which is contingent upon stockholder approval of new advisory
agreements. It is anticipated that after the transaction, the same management
team will continue to manage the Fund, and there will be no material changes
in portfolio investment objectives or policies.
------------------
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 24, 1996, 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 24, 1996
------------------
<PAGE>
- --------------------------------------------------------------------------------
FEES AND EXPENSES
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES AFTER
SHAREHOLDER TRANSACTION FEE WAIVERS & REIMBURSEMENT
EXPENSE ARRANGEMENTS*
------------------------ --------------------------------------
Total Fund
Operating
Maximum Expenses
Front End Maximum Without
Sales Load CDSL Total Fund Waiver Or
Imposed On Imposed on Management 12b-1 Other Operating Reimburse-
Purchases Purchases Fee Fee Expenses Expenses ment
------------ ----------- ---------- ----- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Class A Shares 4.20% N/A .74% .30% .16% 1.20% 1.30%
Class B Shares(d) N/A 5.0(a) .74 .85(c) .16 1.75 1.85
Class C Shares(d) N/A 1.0(b) .74 .85(c) .16 1.75 1.85
Class R Shares(d) N/A N/A .74 .00 .16 .90 .90
<CAPTION>
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
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Class A Shares $ 54 $78 $105 $181
Class B Shares(d) 69 99 118 192
Class C Shares(d) 28 55 95 206
Class R Shares(d) 9 29 50 111
</TABLE>
* 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.
- --------
(a) No initial sales load; contingent deferred sales charge of 5% declining to
1% in the 6th year if redeemed. Class B expenses in years 9 through 10 are
based on Class A expenses, because the shares automatically convert to
Class A after 8 years. If you did not redeem, the example of expenses would
be $52, $44, and $24 less in years 1, 3 and 5 respectively.
(b) No initial sales load; 1% contingent deferred sales charge if redeemed
within 1 year of purchase. Example of expenses would be $10 less in year 1
if no redemption occurs.
(c) Of this amount, 0.75% is an asset based sales charge and 0.10% is a service
fee.
(d) Scheduled to commence operations in 1996 through 1997. These amounts are
based on estimates and assume management fee waiver. In addition, the
Manager has agreed to reimburse the Fund for any initial period total fund
operating expenses in excess of the above. No reimbursement is currently
indicated.
The preceding 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 declining sales load for Class A Shares, a contingent deferred sales load
("CDSL") for Class B and Class C Shares and a no-fee, no-load structure for
institutional investors for Class R Shares. Class R Shares are subject to a
minimum purchase requirement of $1,000,000. Long-term Class B and Class C
stockholders could pay more than the economic equivalent of the maximum front-
end sales charge for Class A Shares. Class B Shares automatically convert to
Class A Shares after eight years. The Fund's 12b-1 plan and management fee 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, 1996. Class B, Class C, and Class R Shares were not
offered to the public during the fiscal year.
<TABLE>
<CAPTION>
INCOME FROM INVESTMENT OPERATIONS LESS DISTRIBUTIONS
----------------------------------- ----------------------------------
NET ASSET Distri- NET
VALUE Net Net Realized & Dividends butions ASSET
YEAR BEGINNING Invest- Unrealized TOTAL FROM (From Net (From Returns TOTAL VALUE
ENDED OF ment Gain (Loss) INVESTMENT Investment Capital of DISTRI- END OF Total*
JUNE 30, PERIOD Income on Securities OPERATIONS Income) Gains) Capital BUTIONS PERIOD Return
- -------- --------- -------- --------------- ---------- ---------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1992 $15.00 $.87 $ .90 $1.77 $.87 $.02 $-- $ .89 $15.88 11.91%
1993 15.88 .76 2.05 2.81 .75 .13 -- .88 17.81 18.09
1994 17.81 .66 (.89) (.23) .66 .25 -- .91 16.67 (1.49)
1995 16.67 .69 1.94 2.63 .68 .35 -- 1.03 18.27 16.55
1996 18.27 .73 .61 1.34 .74 1.31 -- 2.05 17.56 7.76
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
--------------------------------------
Ratio of
Ratio of Net
Expenses Investment
Net to Income
YEAR Assets Average to Average Portfolio
ENDED End of Net Net Turnover
JUNE 30, Period Assets Assets Rate
- --------- -------- -------- ---------- ---------
<S> <C> <C> <C> <C>
1992 $124,563 1.09% 5.51% 10.48%
1993 179,209 1.02 4.44 38.42
1994 188,747 .96 3.70 30.64
1995 191,473 1.04 4.05 48.46
1996 184,307 1.06 4.01 83.17
</TABLE>
- --------
* Prior to June, 1991, the Fund was organized as a Master Trust, with its
common and collective trust funds (the "Predecessor Funds") held at Citizens
Federal Bank, F.S.B. These Predecessor Funds were advised by the Fund's
investment adviser, James Investment Research, Inc., using investment
objectives, policies and strategies substantially similar to those used in
managing the Fund. The Predecessor Funds' returns for the years ended June
30, 1985 through June 30, 1991 were 20.35%, 33.73%, 17.73%, 16.53%, 10.37%,
6.49% and 8.24% respectively. This performance represents a compounded annual
return of 15.7%. The prior returns of the Predecessor Funds should not be
interpreted as the historical performance of the Fund.
The total returns for either the Predecessor Funds or the Fund should not be
interpreted as indicative of the Fund's future performance.
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 Securities and Exchange Commission ("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
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
5
<PAGE>
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 offered continuously 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 any applicable sales charge. The sales charge, 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 B and Class C Shares).
The Class R Shares are designed for institutional investors and are sold at net
asset value with no front-end sales load, no contingent deferred sales load and
no Rule 12b-1 charge. When placing purchase orders, investors should specify
whether the order is for Class A, Class B, Class C or Class R Shares. All
purchase orders that fail to specify a Class will automatically be invested in
Class A Shares.
Four classes of shares, Class A Shares, Class B Shares, Class C Shares and
Class R Shares are authorized for the Fund. They are described fully in the
SAI. 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
------------------------------ DEALER CONCESSION OR AGENCY
SIZE OF TRANSACTION PERCENTAGE OF PERCENTAGE OF COMMISSION AS PERCENTAGE
AT PUBLIC OFFERING PRICE OFFERING PRICE NET ASSET 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>
CLASS B SHARES
Class B Shares are offered at net asset value, without an initial sales charge,
subject to a continuing 0.95% annual distribution fee. Class B Shares are
subject to a declining contingent deferred sales load ("CDSL") if you redeem
your shares within six years from the purchase date. This CDSL charge is 5%,
4%, 4%, 3%, 2% and 1% for years one through six. Class B Shares automatically
convert to Class A Shares at the end of eight years. The conversion is based on
the relative net asset value of the two classes, and no sales load or other
charge is imposed.
The Distributor pays a 0.20% service fee to dealers in advance for the first
year upon the sale of Class B Shares. After the shares have been held for a
year, the Distributor pays the fee monthly. In addition, the Distributor pays
sales commission of 3.80% of the purchase price to dealers from its own
resources at the time of sale.
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.
CLASS R SHARES
You may purchase Class R Shares with monies representing dividends and capital
gain distributions on Class R Shares of the Fund. Also, you may purchase Class
R Shares if you are within the following specified categories of investors who
are also eligible to purchase Class A Shares at net asset value without an up-
front sales charge: officers, current and former directors of the Fund; bona
fide, full-time and retired employees of Flagship and James Investment
Research, Inc. and subsidiaries thereof, or their immediate family members; any
person who, for at least 90 days, has been an officer, director or bona fide
employee of any Authorized Dealer, or their immediate family members; officers
and directors of bank holding companies that make Fund shares available
directly or through subsidiaries or bank affiliates; and bank or broker-
affiliated trust departments; persons investing $1 million or more in Class R
Shares; and clients of investment advisers, financial planners or other
financial intermediaries that charge periodic or asset-based "wrap" fees for
their services.
If you are eligible to purchase either Class R Shares or Class A Shares without
a sales charge at net asset value, you should be aware of the differences
between these two classes of shares. Class A Shares are subject to an annual
distribution fee to compensate Flagship Funds Inc. (the "Distributor") for
distribution costs associated with the Fund and to an annual service fee to
compensate Authorized Dealers for providing you with ongoing account services.
Class R Shares are not subject to a distribution or service fee and,
consequently, holders of Class R Shares may not receive the same types or
levels of services from Authorized Dealers. In choosing between Class A Shares
and Class R Shares, you should weigh the benefits of the services to be
provided by Authorized Dealers against the annual service fee imposed upon the
Class A Shares.
The minimum initial investment in the Fund is $5,000, except for qualified
individual retirement plans which have a $2,000 minimum and investments in
Class R Shares which have a $1,000,000 minimum. Additional purchases of $100 or
more may be made at any time. Any order in an amount of $1,000,000 or more must
be for Class A or Class R Shares.
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 the Distributor. The Fund reserves the right to reject
any order for shares.
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PURCHASE FOR TRUST ACCOUNTS THROUGH DEALERS
To purchase shares through a dealer, you should direct your dealer to contact
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 stockholders who receive a quarterly statement from
Flagship the convenience of automatic monthly investing. On any regular
business day between the fifth and twenty-eighth of 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. Stockholders can
change the amount or discontinue their participation in the plan by written
notice to Boston Financial ("Stockholders 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 stockholder 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
stockholder's account in shares. If the total purchases, less redemptions by
the stockholder, his spouse, children and parents, equal the amount specified
under this Letter, the shares held in escrow will be deposited to the
stockholder's open account or delivered to the stockholder 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 stockholder 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 stockholder'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
stockholder. The stockholder or his dealer will inform the Stockholder 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 stockholder's Citizens Federal or other bank account
using the Automated Clearing House ("ACH") system. See "Direct Deposits."
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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.
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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 Stockholder 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 eligible guarantor prior to
signing.
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FREE REPURCHASE
A stockholder 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 stockholder 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.
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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 stockholder. 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 stockholder'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 Stockholder Services Agent. Maintaining a SWP concurrently
with an investment program would be disadvantageous because of the sales
charges included in share purchases. Therefore, a stockholder should not have a
SWP in effect at the same time he is making recurring purchases of shares of
the Fund. The stockholder by written instructions to the Stockholder Services
Agent may withdraw from the program, change the payee or change the dollar
amount of each payment. The Stockholder 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 Stockholder
Services Agent on 60 days' notice in writing to the stockholder 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.
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DIRECT DEPOSITS
Stockholders 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 stockholder's bank must be a member of Automated Clearing House. In
addition, the stockholder 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 Stockholder Services Agent has received the application and
the voided check, such stockholder's designated bank account, following any
dividend or redemption, will be credited with the proceeds. Once enrolled in
direct deposit, a stockholder may terminate participation at any time by
written notice to the Stockholder Services Agent.
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<PAGE>
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HOW FUND SHARES ARE PRICED
For purposes of pricing purchases and redemptions, the net asset value of the
Fund is separately determined by Boston Financial 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. If equity securities are not traded that
day, they are valued 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.
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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
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.
10
<PAGE>
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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 semi-annually 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 (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 which is calculated differently from
"average annual total return" (a "non-standardized 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 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 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 Fund 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.
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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
11
<PAGE>
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, State Street Bank and Trust Company.
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, 1996, 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 1.06% 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 $4.5 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 P.O. Box 8, Alpha, Ohio 45301.
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, 1996, 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.
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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.
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<PAGE>
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
stockholder 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, 1996, the Fund paid $385,785 under the Plan and
related agreements (the Distributor permanently waived $388,483 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.
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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.
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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, which are divided into five (5) portfolio
classes; namely, the Flagship Utility Income Fund Portfolio Stock, The Golden
Rainbow--A James Advised Mutual Fund Portfolio Stock, the Flagship Short Term
U.S. Government Fund Portfolio Stock, the Flagship Limited Term U.S. Government
Fund Portfolio Stock and the Flagship Intermediate U.S. Government Fund
Portfolio Stock.
The Flagship Utility Income Fund Portfolio Stock consists of 200,000,000
shares, which are divided into five (5) subclasses, designated respectively as
the Flagship Utility Income Fund Portfolio Stock, consisting of 3,500,000
shares, and the Flagship Utility Income Fund Portfolio Stock--Class A, Class B,
Class C and Class R, each
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consisting of 49,125,000 shares. The Golden Rainbow - A James Advised Mutual
Fund Portfolio Stock consists of 100,000,00 shares which are divided into five
(5) subclasses, designated respectively as The Golden Rainbow--A James Advised
Mutual Fund Portfolio Stock, consisting of 15,000,000 shares, and The Golden
Rainbow--A James Advised Mutual Fund Portfolio Stock--Class A, Class B, Class C
and Class R, each consisting of 21,250,000 shares. The Flagship Short Term U.S.
Government Fund Portfolio Stock consists of 100,000,000 shares which are
designated as the Flagship Short Term U.S. Government Fund Portfolio Stock. The
Flagship Limited Term U.S. Government Fund Portfolio Stock consists of
100,000,000 shares which are divided into five (5) subclasses, designated
respectively as the Flagship Limited Term U.S. Government Fund Portfolio Stock,
consisting of 2,000,000 shares and the Flagship Limited Term U.S. Government
Fund Portfolio Stock--Class A, Class B, Class C and Class R, each consisting of
24,500,000 shares. The Flagship Intermediate U.S. Government Fund Portfolio
Stock consists of 100,000,000 shares which are divided into five (5)
subclasses, designated respectively as the Flagship Intermediate Term U.S.
Government Fund Portfolio Stock consisting of 2,000,000 shares and the Flagship
Intermediate Term U.S. Government Fund Portfolio Stock--Class A, Class B, Class
C and Class R, each consisting of 24,500,000 shares.
The Flagship Utility Income Fund is 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
State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts
02106, is the custodian, transfer agent and dividend disbursing 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.
- --------------------------------------------------------------------------------
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
14
<PAGE>
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) 1996, Flagship Funds Inc. GR-O-3000 (10-24-96)
15
<PAGE>
GOLDEN RAINBOW FUND APPLICATION FORM
PLEASE PRINT OR TYPE ALL INFORMATION PLEASE MAIL THIS APPLICATION AND
YOUR CHECK TO:
NOTE: YOU MUST COMPLETE SECTIONS 1, Boston Financial
2, 3, 4, 5 AND SIGN THE SIGNATURE Attn.: Golden Rainbow Fund
LINE. YOUR SIGNATURE IS REQUIRED FOR P.O. Box 8509
PROCESSING. COMPLETE SECTIONS 7, 8, Boston, MA 02266-8509
9, 10 AND 11 FOR OPTIONAL SERVICES.
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
--- -------- ------
StateZip 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 this amount*:
$ ___________
*Minimum of $5,000.
Attach check payable to THE GOLDEN RAINBOW
5. DIVIDEND/DISTRIBUTION OPTIONS
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
--- -------- ------
StateZip 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
--- -------- ------
StateZip 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.
Date for Investment (Between 5th and 28th only)
---
$
----------------- Month to Begin Plan ______________________________________
Amount ($100 Minimum)
------------------------------------------------------------------------------
Name of Bank
------------------------------------------------------------------------------
Bank Account #
------------------------------------------------------------------------------
Bank's Street Address
------------------------------------------------------------------------------
City
--- -------- ------
StateZip Code
X
------------------------------------------------------------------------------
Signature of Depositor Date
X
------------------------------------------------------------------------------
Signature of Joint Depositor Date
9. SYSTEMATIC WITHDRAWAL PLAN
A minimum $10,000 balance is required.
BANK ACCOUNT CREDIT
Please redeem $ from my account and credit my bank account as indi-
cated in the banking information section below.
Month first credit is to be made: ____________________________________________
Day of the month that I wish the credit to be made:
---
(Between the 5th and 28th only.)
Please credit my account for each month I have selected.
<TABLE>
<CAPTION>
JAN FEB MAR APR MAY JUN
<S> <C> <C> <C> <C> <C>
[_] [_] [_] [_] [_] [_]
<CAPTION>
JUL AUG SEP OCT NOV DEC
<S> <C> <C> <C> <C> <C>
[_] [_] [_] [_] [_] [_]
</TABLE>
CHECK
Please redeem $ from my account on or about the 31st of each month
as selected above.
Month first credit is to be sent: ____________________________________________
Send checks to: [_] Address on account
[_] Special address (complete below)
------------------------------------------------------------------------------
Payee
------------------------------------------------------------------------------
Street
------------------------------------------------------------------------------
City
--- -------- ------
StateZip Code
10. TELEPHONE REDEMPTION
I/we hereby authorize the Fund to implement the following telephone redemp-
tion requests (under $50,000 only) without signature verification to the reg-
istered 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
--- ------- ------
StateZip Code
[_] I do not authorize redemption by telephone.
11. INTERESTED PARTY MAIL
[_] Send duplicate confirmation statements to the interested party listed
below.
------------------------------------------------------------------------------
Name of Individual
------------------------------------------------------------------------------
Street Address
------------------------------------------------------------------------------
City
--- -------- ------
StateZip 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 cur-
rent 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 transac-
tions authorized by telephone against any claim, loss, expense or damage, in-
cluding 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 24, 1996
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 24, 1996.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objectives and Policies......................................... 2
Shares of the Fund......................................................... 9
Officers, Directors and Stockholders....................................... 11
Investment Advisory Services............................................... 12
Taxes...................................................................... 13
Yield and Total Return Calculation......................................... 14
Distributions.............................................................. 15
Distributor................................................................ 15
Custodian and Transfer Agent............................................... 17
Auditors................................................................... 17
Portfolio Transactions..................................................... 17
Purchase, Redemption and Pricing of Shares................................. 18
Other Information.......................................................... 18
Financial Statements....................................................... F-1
Appendix I--Description of Securities Ratings.............................. I-1
Appendix II--Description of Hedging Techniques............................. II-1
</TABLE>
<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
2
<PAGE>
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 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 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
3
<PAGE>
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.
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 the
appreciation of 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.
4
<PAGE>
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.
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
5
<PAGE>
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.
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
6
<PAGE>
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 currency convertible into such
currently 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.
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
7
<PAGE>
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
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
8
<PAGE>
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.
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.
SHARES OF THE FUND
Four classes of shares, Class A Shares, Class B Shares, Class C Shares, and
Class R Shares are authorized for the Fund. Currently, the Fund is offering
Class A Shares. Other classes of shares are not presently available,
9
<PAGE>
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). 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 R 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 the Prospectus under "How Fund Shares are
Priced". The net assets attributable to Class A Shares are subject to an
ongoing distribution services fee (see "Distributor" in the Prospectus).
Purchasers of Class A Shares may be entitled to a reduced sales charge through
a Letter of Intent (see "Letter of Intent" in the Prospectus) even if their
current investment would not normally qualify for a quantity discount (see
"Reduced Sales Charges" in the Prospectus). The investor or the investor's
broker or dealer is responsible for promptly forwarding payment to the Fund
for shares purchased.
2. Class B Shares. Class B Shares are sold at 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 after 8 years after
the end of the month in which a stockholder'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 stockholder's account will be considered to be held in a
separate sub-account. Each time any Class B Shares in the stockholder'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 conversion period 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.
3. Class C Shares. Class C 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 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
"Distributor" in the Prospectus). The Class C Shares have no conversion
rights.
10
<PAGE>
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 B or Class C Shares derived from reinvestment of dividends
or capital gains distributions. The CDSL will be waived (i) on redemption of
shares following the disability (as determined in writing by the Social
Security Administration) or death of a stockholder, (ii) on certain
redemptions in connection with IRAs and other qualified retirement plans, and
(iii) when Class B or Class C Shares are exchanged for Class B or Class C
Shares of other Flagship funds distributed by the Distributor (see "Exchange
And Reinvestment Privilege" in the Prospectus). In the case of an exchange,
the length of time that the investor held the original Class B or Class C
Shares is counted towards satisfaction of the period during which a deferred
sales charge is imposed on the Class B or Class C for which the exchange was
made.
4. Class R Shares. You may purchase Class R Shares with monies representing
dividends and capital gain distributions on Class R Shares of the Fund. Also,
you may purchase Class R Shares if you are within the following specified
categories of investors who are also eligible to purchase Class A Shares at
net asset value without an up-front sales charge: officers, current and former
directors of the Fund, bona fide, full-time and retired employees of Flagship
and James Investment Research, Inc. and subsidiaries thereof, or their
immediate family members; any person who, for at least 90 days, has been an
officer, director or bona fide employee of any Authorized Dealer, or their
immediate family members; officers and directors of bank holding companies
that make Fund shares available directly or through subsidiaries or bank
affiliates; and bank or broker-affiliated trust departments; persons investing
$1 million or more in Class R Shares; and clients of investment advisers,
financial planners or other financial intermediaries that charge periodic or
asset-based "wrap" fees for their services.
If you are eligible to purchase either Class R Shares or Class A Shares
without a sales charge at net asset value, you should be aware of the
differences between these two classes of shares. Class A Shares are subject to
an annual distribution fee to compensate Flagship Funds Inc. (the
"Distributor") for distribution costs associated with the Fund and to an
annual service fee to compensate Authorized Dealers for providing you with
ongoing account services. Class R Shares are not subject to a distribution or
service fee and, consequently, holders of Class R Shares may not receive the
same types or levels of services from Authorized Dealers. In choosing between
Class A Shares and Class R Shares, you should weigh the benefits of the
services to be provided by Authorized Dealers against the annual service fee
imposed upon the Class A Shares.
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
------------------------- ----------------------- -------------------------------------------
<C> <C> <S>
Bruce P. Bedford* Director Chairman and Chief Executive Officer of
Flagship Resources Inc. ("Flagship"), Flag-
ship Financial Inc. (the "Manager"), and
Flagship Funds Inc. (the
"Distributor").
Richard P. Davis* President and Director President and Chief Operating Officer of
Flagship, the 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 Busi-
4249 Honeybrook Avenue ness and Administration, Wright State Uni-
Dayton, OH 45415 versity.
Paul F. Nezi Director Senior Vice President of Marketing and Un-
227 E. Dixon Avenue derwriting, TRIGON Blue Cross Blue Shield;
Dayton, OH 45419 prior to October, 1996, Executive Vice
President and Chief Marketing Officer,
ChoiceCare; prior to March, 1993, Vice
President and General Manager, Advanced Im-
aging Products, a division of AM Interna-
tional; prior to March, 1991, Partner,
Hooper & Nezi, a marketing and communica-
tions firm.
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND ADDRESS POSITIONS WITH THE FUND DURING PAST FIVE YEARS
------------------------- ----------------------- -------------------------------------------
<C> <C> <S>
William J. Schneider Director Senior Partner of Miller-Valentine Part-
4000 Miller-Valentine Ct. ners; Vice President of Miller-Valentine
P.O. Box 744 Realty, Inc.
Dayton, OH 45401
M. Patricia Madden Vice President Vice President, Operations, of the Distrib-
utor.
Michael D. Kalbfleisch Treasurer and Secretary Vice President and Chief Financial Officer
of
Flagship, the Manager, and the Distributor.
LeeAnne Sparling Controller Director of Portfolio Operations of the
Manager.
</TABLE>
COMPENSATION: DIRECTORS
<TABLE>
<CAPTION>
TOTAL COMPENSATION FROM
REGISTRANT AND
FUND COMPLEX (ALL OTHER
AGGREGATE FLAGSHIP MUTUAL FUNDS)
COMPENSATION PAID TO DIRECTORS
NAME OF PERSON, POSITION FROM REGISTRANT (NUMBER OF OTHER FUNDS)
- ----------------------------- --------------- -----------------------
<S> <C> <C>
Robert P. Bremner $5,000 $25,500 (26)
Director
Joseph F. Castellano $5,000 $26,500 (26)
Director
William J. Schneider Director $5,000 $26,500 (26)
Paul F. Nezi $5,000 $26,500 (26)
Director
</TABLE>
As of October 8, 1996, 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,
92%. 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, 1994,
June 30, 1995 and June 30, 1996, respectively, the GR Fund paid $1,434,132,
$1,396,526, and $1,434,522 to the Manager pursuant to its Management Agreement
of which $1,065,909, $1,037,959, and $1,066,199, 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,
State Street Bank and Trust Company.
12
<PAGE>
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 of 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 stockholders, 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
13
<PAGE>
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 the 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 in 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,
stockholders 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
14
<PAGE>
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 (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 GR
Fund 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 "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, 1996:
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------------------------------
CURRENT
30- DAY YIELD 1 YEAR 5 YEAR 10 YEAR INCEPTION DATE
- ------------- ------ ------ ------- --------------
<S> <C> <C> <C> <C>
3.53% 7.76% 10.33* N/A July 1, 1991
</TABLE>
- --------
*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 is 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
15
<PAGE>
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 stockholders of the GR Fund
relating to their investment in the GR Fund, including assistance in connection
with inquiries relating to stockholders 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 stockholders 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. 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 .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
charter below, under its Plan and related agreements, the GR Fund paid the
amounts shown. Amounts permanently waived for the same periods are also shown.
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT PAID AMOUNT PERMANENTLY
ENDED JUNE 30 TO DISTRIBUTOR WAIVED BY DISTRIBUTOR
- ------------- -------------- ---------------------
<S> <C> <C>
1993 $218,962 $371,378
1994 224,637 551,045
1995 321,321 433,700
1996 385,785 388,483
These amounts are summarized below as to purpose:
<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
1996 326,228 59,557 -0- 385,785
</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.
16
<PAGE>
CUSTODIAN AND TRANSFER AGENT
The custodian and transfer agent and dividend disbursing agent for the GR
Fund is State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02106.
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, 1996, the GR Fund paid
$163,555 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 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, 1995, to June 30, 1996, 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.
17
<PAGE>
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 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.
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.
18
<PAGE>
Prospectus dated October 24, 1996
FLAGSHIP UTILITY INCOME FUND(R)
LOGO
Flagship Utility Income Fund(R) (the "Fund") is a diversified series of Flag-
ship 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 invest-
ing primarily in the preferred and common stocks of companies in the public
utilities industry. The Fund will seek capital appreciation as a secondary ob-
jective. No assurance can be given that the Fund will achieve its objective.
The investment adviser for the Fund is Flagship Financial Inc. (the "Manag-
er"), a registered investment adviser since 1978.
TABLE OF CONTENTS PAGE
<TABLE>
<S> <C>
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............... 11
Direct Deposits.......................... 11
How Fund Shares Are Priced............... 11
Taxes.................................... 11
Distributions and Yield.................. 13
About the Investment Manager............. 14
About the Distributor.................... 15
General Information...................... 16
Custodian and Transfer Agent............. 16
Counsel and Auditors..................... 16
Additional Information................... 16
Application.............................. 19
</TABLE>
On July 16, 1996, Flagship Resources Inc. ("Flagship"), parent of the Manager
for the Fund, signed an Agreement and Plan of Merger with The John Nuveen Com-
pany, pursuant to which Flagship shall be merged with and into The John Nuveen
Company. The transaction is expected to close on or about December 31, 1996.
The Fund's board of directors has approved the transaction, which is contin-
gent upon stockholder approval of new advisory agreements. It is anticipated
that after the transaction, the same management team will continue to manage
the Fund, and there will be no material changes in portfolio investment objec-
tives or policies.
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 24, 1996 containing addi-
tional information about the Fund has been filed with the Securities and Ex-
change Commission, and is hereby incorporated by reference into this Prospec-
tus. 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 AC-
CURACY 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
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS R
SHARES SHARES(A) SHARES SHARES(A)
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses
Maximum Front End Sales Load
Imposed on Purchase 4.20% None None None
Maximum CDSL Imposed on Redemptions None 5.0%(b) 1.00%(c) None
Maximum Sales Charge Imposed on
Reinvested Dividend None None None None
Redemption Fee None None None None
Exchange Fee None None 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") .35% .35% .35% .35%
12b-1 Fee (See "About the Distribu-
tor") .40% .95%(d) .95%(d) None
Other Expenses .45% .45% .45% .45%
Total Fund Operating Expenses 1.20% 1.75% 1.75% .80%
Total Fund Operating Expenses Without
Waiver or Reimbursement 1.45% 1.90% 2.00% .95%
</TABLE>
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 B and 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) Scheduled to commence operations in 1996 through 1997. These amounts are
based on estimates and assume management fee waiver. In addition, the
Manager has agreed to reimburse the Fund for any initial period's total
fund operating expenses in excess of the above. No reimbursement is
currently indicated.
(b) No initial sales load; contingent deferred sales charge of 5% declining
to 1% in the 6th year if redeemed. Class B expenses in years 9 through 10
are based on Class A expenses, because the shares automatically convert
to Class A after 8 years. If you did not redeem, the example of expenses
would be $52, $44, and $24 less in years 1, 3 and 5 respectively.
(c) No initial sales load; 1% contingent deferred sales charge if redeemed
within 1 year of purchase. Example of expenses would be $10 less in year
1 if no redemption occurs.
(d) 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.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares $54 $78 $105 $181
Class B Shares $69 $99 $118 $192
Class C Shares $28 $55 $ 95 $206
Class R Shares $ 8 $26 $ 44 $ 99
</TABLE>
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 de-
clining sales load for Class A Shares, a contingent deferred sales load
("CDSL") for Class B and Class C Shares and a no-fee, no-load struc-
ture for institutional investors for Class R Shares. Class R Shares are sub-
ject to a minimum purchase requirement of $1,000,000. Long-term Class B and
Class C stockholders could pay more than the economic equivalent of the maxi-
mum front-end sales charges for Class A Shares. Class B Shares automatically
convert to Class A Shares after eight years. The Fund's 12b-1 plan and manage-
ment fee are more fully described herein. These expenses should not be consid-
ered 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 re-
port 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, 1996, and of Class C Shares of the Utility Fund from July 6, 1993 to June
30, 1996. Class B and Class R Shares were not offered to the public during the
fiscal year. 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 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
-------------------------------------------------------------------
------------------------------------
DIVIDENDS DISTRI-
NET ASSET NET REALIZED TOTAL FROM FROM NET BUTIONS
VALUE NET & UNREALIZED INVEST- INVEST- FROM RETURNS TOTAL NET ASSET
YEAR ENDED BEGINNING INVESTMENT GAINS (LOSS) MENT MENT CAPITAL OF DISTRI- VALUE END TOTAL
JUNE 30, OF PERIOD INCOME ON SECURITIES OPERATIONS INCOME GAINS CAPITAL BUTIONS OF PERIOD RETURN(D)
- --------------------------------------------------------------------------------------------------------------------
<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)
- --------------------------------------------------------------------------------------------------------------------
<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
1996 10.24 .64 .85 1.49 .64 .64 11.09 14.82
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
1996 10.24 .58 .84 1.42 .58 .58 11.08 14.15
<S> <C> <C> <C> <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
1996 25,010 .98 5.82 115.30
Class C
1994(a) 5,129 1.46 5.69 193.14
1995 5,501 1.54 6.01 158.55
1996 6,302 1.52 5.27 115.30
</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 in-
vestment 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% divi-
dends-received deduction for corporations. The Fund's investment objectives
are fundamental and cannot be changed without authorization by a vote of a ma-
jority 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 com-
panies in the public utilities industry, including companies principally en-
gaged in the production, transmission or distribution of electric energy, gas,
water or communications services such as telephone or telecommunications serv-
ices, 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 rat-
ed, 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, be-
cause 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 limi-
tation by state public utilities commissions and tend to fluctuate with mar-
ginal 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 ca-
pacity to meet public demand. The nature of regulation in the utility indus-
tries 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 his-
torically 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 regula-
tions 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 au-
thorizations. 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 trans-
mission companies and gas distribution companies continue to undergo signifi-
cant changes as well. Many companies have diversified into oil and gas explo-
ration and development, making returns more sensitive to energy prices. In ad-
dition, 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 de-
veloped. 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
borrowing had not been made. To the extent the Fund invests the proceeds from
borrowings in equity or fixed income securities, the net
-- 4 --
<PAGE>
asset value of the Fund may appreciate or depreciate more rapidly than a fund
that does not utilize leverage. The Manager 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 re-
spect 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 deter-
mine whether certain securities are liquid pursuant to procedures approved by
the Fund's Board of Directors. Due to the less liquid nature of restricted se-
curities, 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 finan-
cial index options or futures thereon. The range of permissible hedging activ-
ities 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 require-
ments 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 Ex-
change Act and any applicable state laws. Hedging instruments have risks asso-
ciated with them including possible failure of delivery, illiquidity and mar-
ket 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 addi-
tion, 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 mini-
mize 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 suc-
cessfully 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 cer-
tain holding period requirements to be eligible for the dividends-received de-
duction. Finally, the daily deposit requirements in futures contracts would
create an ongoing greater potential financial risk than would purchases of op-
tions, 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 gener-
ally are regarded as having an adequate capacity to pay interest and repay
principal. However, such securities lack outstanding investment characteris-
tics 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 fi-
nancial 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 Man-
ager 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 in-
vest 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 agree-
ments), 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 agree-
ments 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 B and Class C Shares). The Class R Shares are designed for institu-
tional investors, with a minimum initial investment of $1,000,000. The Class R
Shares are sold at net asset value with no front-end sales load, no contingent
deferred sales load and no Rule 12b-1 charge. When placing purchase orders,
investors should specify whether the order is for Class A, Class B, Class C,
or Class R Shares. All purchase orders that fail to specify a Class will auto-
matically be invested in Class A Shares. Purchases may be made as described
below under "Purchase Through Dealers" and "Purchase by Check." The Fund re-
serves the right to reject any order for shares.
CLASSES OF SHARES
Four classes of shares, Class A Shares, Class B Shares, Class C Shares, and
Class R Shares, are authorized for the Fund. They are described fully in the
SAI. The following table shows the total sales charges or underwriting dis-
counts and dealer concessions for each amount.
CLASS A SHARES
<TABLE>
<CAPTION>
TOTAL SALES
CHARGE
----------------------------------------------------------------
DEALER CONCESSION OR AGENCY
SIZE OF TRANSACTION PERCENTAGE OF PERCENTAGE OF COMMISSION AS PERCENTAGE
AT PUBLIC OFFERING PRICE OFFERING PRICE NET ASSET 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
and over -- -- --*
</TABLE>
*A CDSL may be imposed as described below.
No sales charge will be assessed on purchases by stockholders who owned
shares of the Fund on June 4, 1992.
Class A Contingent Deferred Sales Load. There is no initial sales charge on
purchases of Class A Shares of the Fund for purchases aggregating $1 million
or more. The Distributor pays dealers of record commissions on those purchases
in an amount equal to the sum of 1.0% of the first $2.5 million, plus 0.50% of
the next $2.5 million, plus 0.25% of purchases over $5 million. If you redeem
any of those shares within 18 months of the end of the calendar month of their
purchase, a Class A contingent deferred sales load ("CDSL") may be deducted
from the redemption proceeds. That sales charge will be equal to 1.0% of ei-
ther (1) the aggregate net asset value of the redeemed shares (not including
shares purchased by reinvestment of dividends or capital gain distributions)
or (2) the original cost of the shares, whichever is less.
CLASS B SHARES
Class B Shares are offered at net asset value, without an initial sales
charge, subject to a continuing 0.95% annual distribution fee. Class B Shares
are subject to a declining contingent deferred sales load ("CDSL") if you re-
deem your shares within six years from the purchase date. This CDSL charge is
5%, 4%, 4%, 3%, 2% and 1% for years one through six. Class B Shares automati-
cally convert to Class A Shares at the end of eight years. The conversion is
based on the relative net asset value of the two classes, and no sales load or
other charge is imposed.
The Distributor pays a 0.20% service fee to dealers in advance for the first
year upon the sale of Class B Shares. After the shares have been held for a
year, the Distributor pays the fee monthly. In addition, the Distributor pays
sales commission of 3.80% of the purchase price to dealers from its own re-
sources at the time of sale.
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 as-
set 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 distribu-
tion 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.
CLASS R SHARES
You may purchase Class R Shares with monies representing dividends and capital
gain distributions on Class R Shares of the Fund. Also, you may purchase Class
R Shares if you are within the following specified categories of investors who
are also eligible to purchase Class A Shares at net asset value without an up-
front sales charge: officers, current and former directors of the Fund; bona
fide, full-time and retired employees of Flagship, and subsidiaries thereof,
or their imme-
-- 6 --
<PAGE>
diate family members; any person who, for at least 90 days, has been an offi-
cer, director or bona fide employee of any Authorized Dealer, or their immedi-
ate family members; officers and directors of bank holding companies that make
Fund shares available directly or through subsidiaries or bank affiliates; and
bank or broker-affiliated trust departments; persons investing $1 million or
more in Class R Shares; and clients of investment advisers, financial planners
or other financial intermediaries that charge periodic or asset-based "wrap"
fees for their services.
If you are eligible to purchase either Class R Shares or Class A Shares with-
out a sales charge at net asset value, you should be aware of the differences
between these two classes of shares. Class A Shares are subject to an annual
distribution fee to compensate Flagship Funds Inc. (the "Distributor") for
distribution costs associated with the Fund and to an annual service fee to
compensate Authorized Dealers for providing you with ongoing account services.
Class R Shares are not subject to a distribution or service fee and, conse-
quently, holders of Class R Shares may not receive the same types or levels of
services from Authorized Dealers. In choosing between Class A Shares and Class
R Shares, you should weigh the benefit of the services to be provided by Au-
thorized Dealers against the annual service fee imposed upon the Class A
Shares.
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 or
Class R Shares. The Fund executes purchase orders immediately prior to decla-
ration 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 es-
tablished 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 sales-
person 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 trans-
mit 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 appli-
cable sales charge. Because the Fund determines net asset value for each se-
ries 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: 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. All purchases made by check
should be in U.S. dollars. Third-party checks will not be accepted.
AUTOMATIC INVESTMENT PLAN
The Fund offers current stockholders who receive a quarterly statement from
Flagship the convenience of automatic monthly investing. On any regular busi-
ness day between the fifth and twenty-eighth of each month, the amount you
specify ($50 minimum) will be transferred from your bank to
-- 7 --
<PAGE>
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. Be-
cause a sales charge is applied on new Class A Shares purchased, it would be
disadvantageous to purchase Class A Shares while also making systematic with-
drawals.
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 oper-
ating costs and for investor convenience, share certificates will not be is-
sued, 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 trans-
action) by such stockholder and a quarterly statement summarizing purchases,
redemptions and dividend accruals and distributions in the account during the
prior months.
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 aggre-
gated 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 fi-
duciaries 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 sin-
gle 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 pur-
chase 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 appro-
priate 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 cer-
tain 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 em-
ployees 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" in-
clude 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 pur-
chase shares at net asset value (without sales charge) where the amount in-
vested 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 exclu-
sive discretionary investment authority for which they charge customary fees
and which are held in a fiduciary, agency, advisory, custodial or similar ca-
pacity.
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<PAGE>
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 deter-
mined 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 in-
vested is documented to the Fund to be proceeds from (i) the redemption
(within one year of the purchase of Fund shares) of shares of unrelated in-
vestment companies on which the investor has paid initial or contingent de-
ferred sales charges or is no longer subject to a CDSL, (ii) the redemption of
related or unrelated investment companies with a Class R Share or a share
class similar in all material respects to Flagship's Class R Shares or (iii) a
Unit Investment Trust.
6. WRAP FEE ACCOUNTS (CLASS A OR CLASS R SHARES ONLY)
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.
7. WAIVER OF CDSL
For purchases of Class A Shares in amounts over $1,000,000, the contingent de-
ferred sales load may be waived for purchases through a broker/dealer that
waives its commission.
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 dis-
tributions on the escrowed shares will be credited to the stockholder's ac-
count in shares. If the total purchases, less redemptions by the stockholder,
his spouse, children and parents, equal the amount specified under this Let-
ter, the shares held in escrow will be deposited to the stockholder's open ac-
count or delivered to the stockholder 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 ad-
justment 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
stockholder 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 pur-
chases had been made at a single time. Upon such remittance the shares held
for the stockholder'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 Distribu-
tor such difference in sales charge is not paid, the Distributor is hereby au-
thorized 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 stockholder. The stockholder 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 Ex-
change 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 tele-
phone redemption service on your application) toll free at: 1-800-225-8530, or
for TDD,
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<PAGE>
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 re-
lieves the Fund and the Transfer Agent (Boston Financial) of any liability for
loss, costs, or expenses arising out of telephone redemptions that are reason-
ably 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 identifica-
tion 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 re-
cent 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 regu-
lations following receipt of the redemption request in proper form. For re-
demption 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 ex-
actly 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 transac-
tion requests. A signature guarantee may be executed by any eligible guaran-
tor. 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 in-
stitution that they are an 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 stock-
holder 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 in-
crease the value of his holdings to at least $1,000. Accounts with balances of
less than $25 will be redeemed without written notice. No CDSL will be imposed
on involuntary redemptions.
Shares purchased other than by Federal Funds wire or bank wire may not be re-
deemed 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, or taxable fixed-income fund or series thereof distributed
by the Distributor in any state where such exchange may legally be made. Simi-
larly, 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 in-
vestor held the Class C Shares will be counted toward the holding period ap-
plicable to the Class C Shares which the investor acquired through the ex-
change. 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 ex-
change 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 cur-
rent prospectus of the fund into which the exchange is to be made before ef-
fecting an exchange.
Stockholders with the desire to automatically exchange shares of a predeter-
mined amount on a monthly, quarterly, or annual basis may take advantage of
the systematic exchange plan. Please refer to the account application to es-
tablish this plan.
The exchange privilege may be modified or terminated at any time. The Fund re-
serves the right to limit the number of times an investor may exercise the ex-
change 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 be-
ing exchanged, you must surrender such certificates at the time of exchange.
A stockholder who has redeemed shares may repurchase at net asset value, with-
out a sales charge, shares of the Fund or
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<PAGE>
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 be-
tween 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 With-
drawal Plan ("SWP") and receive monthly or quarterly checks for $50 or more as
specified by the stockholder. To establish a SWP all distributions must be in
the form of shares. Such payments are drawn from the proceeds of the redemp-
tion shares held in the stockholder'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 Boston Financial. Maintaining a SWP concurrently with an in-
vestment program would be disadvantageous because of the sales charges in-
cluded in share purchases. Therefore, a stockholder should not have a SWP in
effect at the same time he is making recurring purchases of shares of the
Fund. The stockholder by written instructions to Boston Financial may withdraw
from the program, change the payee or change the dollar amount of each pay-
ment. Boston Financial may charge the account for services rendered and ex-
penses 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 stockholder 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
Stockholders can have dividends or SWP redemption proceeds deposited electron-
ically 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 stockholder's bank must
be a member of Automated Clearing House. In addition, the stockholder must (1)
fill out the appropriate section of the application attached to this Prospec-
tus 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 stockholder's desig-
nated bank account, following any dividend or redemption, will be credited
with the proceeds. Once enrolled in direct deposit, a stockholder may termi-
nate 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 portfo-
lio securities of the Fund such that net asset value per share might be af-
fected). 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 out-
standing at the time the determination is made.
Assets of the Fund for which market quotations are readily available are val-
ued 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 as-
sets 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 fed-
eral 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 informa-
tion 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 dis-
tributes its income to its stockholders. In order to so qualify, certain gross
income and other requirements must be satisfied.
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<PAGE>
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 corpo-
rations. 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 approx-
imately 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 be-
low under "Holding Period and Other Requirements". If the expenses and losses
of the Fund equal or exceed non-qualifying income (if any), all dividends dis-
tributed 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 invest-
ment company taxable income and net capital gain, a portion of each distribu-
tion will be treated as a return of capital, which will not qualify for the
dividends-received deduction. Distributions treated as a return of capital re-
duce 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, alterna-
tive 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 mini-
mum taxable income. Accordingly, an investment in the Fund may cause a corpo-
rate 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 disre-
garded. 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 stock-
holder will similarly satisfy the 46-day holding period on reinvested divi-
dends declared with respect to such shares to the extent that such stockhold-
er'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 stock-
holders are urged to consult their tax advisers.
CAPITAL GAIN DISTRIBUTIONS
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 stock-
holders and designated as capital gain distributions. If the Fund distributes
such capital gain distributions, 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 capi-
tal gains. Any actual or designated distributions attributable to net capital
gains will not be eligible for the dividends-received deduction. If a capital
gain distribution is
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<PAGE>
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 dis-
tribution.
REDEMPTIONS
Redemptions of shares will be taxable transactions for federal income tax pur-
poses. 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 re-
ceived. 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 de-
clares 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 of record at the time of declaration. All
daily dividends declared during a given month will be paid as of the last cal-
endar 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 SEC regulations, the Fund may include its cur-
rent yield and/or return in advertisements or information furnished to stock-
holders 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 re-
lationship 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 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.
If a stockholder's dividend or capital gains distribution check is returned by
the postal or other delivery service, such stockholder's check may be rein-
vested in their account. The stockholder's distribution options may also be
converted to having all dividends and other distributions reinvested in addi-
tional shares.
All reinvested or directed dividends will be at net asset value without any
sales charge. Your broker, or a 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 stock-
holders. 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 State-
ment of Additional Information, "Taxes."
CAPITAL GAIN DISTRIBUTIONS
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 de-
clared and distributed within certain time periods. The Fund retains the dis-
cretion, 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 inter-
est income over the 30 day measurement period is reduced by period expenses
and divided by the number of days within the measurement pe-
-- 13 --
<PAGE>
riod to arrive at a daily income rate. This daily income rate is then ex-
pressed 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 pe-
riod 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 percent-
age change in the value of an account between the beginning and end of a peri-
od, assuming no activity in the account other than reinvestment of dividends
and capital gains distributions. The Fund may also quote a tax equivalent cur-
rent yield for corporate investors assuming the availability of the 70% divi-
dends-received deduction for all of the Fund's daily dividends and an appro-
priate 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 de-
pending on market conditions, the composition of the portfolio, operating ex-
penses and other factors. These factors and possible differences in method of
calculating performance figures should be considered when comparing the per-
formance 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.
ABOUT THE INVESTMENT MANAGER
The business and affairs of the Fund are managed under the direction of its
Board of Directors. The Manager to the Fund is Flagship Financial Inc., 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 supervi-
sion of the Fund's Board of Directors and in conformity with the stated poli-
cies 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 the Fund. All securities pur-
chased must pass certain screening criteria by the portfolio managers and are
continuously monitored to various degrees by Credit Research Department ana-
lysts. Implementation, trading, and temporary modification of the 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 Fund. The
designated team leader for the Fund is Richard Huber, Vice President of the
Manager. Mr. Huber has been employed by the Manager since 1987.
In addition, the Manager performs, or supervises the performance of, adminis-
trative services in connection with the Fund including (i) assisting in super-
vising 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 ad-
ministrative and clerical functions as are necessary in order to provide ef-
fective 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 Custo-
dian, State Street Bank and Trust Company.
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, 1996, the fee paid to
the Manager was 0% of average net assets, and the total expenses of the Fund
was .98% of average net assets for Class A shares and 1.52% of average net as-
sets 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.
-- 14 --
<PAGE>
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 4.6 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 4.0 billion, all assets as of August 31, 1996.
ABOUT THE DISTRIBUTOR
The Fund has entered into a Distribution Agreement (the "Distribution Agree-
ment") 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 di-
rectors. The scope of the foregoing shall be interpreted by the directors,
whose decision shall be conclusive except to the extent it contravenes estab-
lished legal authority. Without in any way limiting the discretion of the di-
rectors, 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 under-
writers, 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 stockholders of the Fund relating to their investment in
the Fund, including assistance in connection with inquiries relating to stock-
holder accounts; the production and dissemination of prospectuses including
statements of additional information) of the Fund and the preparation, produc-
tion and dissemination of sales, marketing and stockholder servicing materi-
als; 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 autho-
rized by the directors. Pursuant to the Plan, the Fund through authorized of-
ficers 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 sales-
person 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, 1996 the Fund's Class A Shares
paid $102,095 and Class C Shares paid $56,449.
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 bro-
ker roundtables where it has the opportunity to present the Distributor's
products and services. The Distributor also provides recognition for outstand-
ing sales achievements during a year through membership in its Admiral's, Cap-
tain's or Yacht Clubs which includes a membership plaque and a recognition me-
mento. 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 situ-
ations where there is no retained underwriting commission, i.e., on the sale
of Class B, Class C or Class R Shares, the Distributor will periodically pay
for similar activities at its own expense.
Various federal and state laws prohibit national banks and some state-chart-
ered 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
-- 15 --
<PAGE>
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, which are divided into five (5) portfolio classes; namely, the Flagship
Utility Income Fund Portfolio Stock, The Golden Rainbow--A James Advised Mu-
tual Fund Portfolio Stock, the Flagship Short Term U.S. Government Fund Port-
folio Stock, the Flagship Limited Term U.S. Government Fund Portfolio Stock
and the Flagship Intermediate U.S. Government Fund Portfolio Stock.
The Flagship Utility Income Fund Portfolio Stock consists of 200,000,000
shares, which are divided into five (5) subclasses, designated respectively as
the Flagship Utility Income Fund Portfolio Stock, consisting of 3,500,000
shares, and the Flagship Utility Income Fund Portfolio Stock-- Class A, Class
B, Class C and Class R, each consisting of 49,125,000 shares. The Golden Rain-
bow--A James Advised Mutual Fund Portfolio Stock consists of 100,000,000
shares which are divided into five (5) subclasses, designated respectively as
The Golden Rainbow--A James Advised Mutual Fund Portfolio Stock, consisting of
15,000,000 shares, and The Golden Rainbow--A James Advised Mutual Fund Portfo-
lio Stock--Class A, Class B, Class C and Class R, each consisting of
21,250,000 shares. The Flagship Short Term U.S. Government Fund Portfolio
Stock consists of 100,000,000 shares which are designated as the Flagship
Short Term U.S. Government Fund Portfolio Stock. The Flagship Limited Term
U.S. Government Fund Portfolio Stock consists of 100,000,000 shares which are
divided into five (5) subclasses, designated respectively as the Flagship Lim-
ited Term U.S. Government Fund Portfolio Stock, consisting of 2,000,000 shares
and the Flagship Limited Term U.S. Government Fund Portfolio Stock--Class A,
Class B, Class C and Class R, each consisting of 24,500,000 shares. The Flag-
ship Intermediate U.S. Government Fund Portfolio Stock consists of 100,000,000
shares which are divided into five (5) subclasses, designated respectively as
the Flagship Intermediate Term U.S. Government Fund Portfolio Stock consisting
of 2,000,000 shares and the Flagship Intermediate Term U.S. Government Fund
Portfolio Stock--Class A, Class B, Class C and Class R, each consisting of
24,500,000 shares. 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 an-
nual 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 or Exchange." There are no con-
version, preemptive or exchange rights in connection with any shares of the
Fund, nor are there cumulative voting rights. All shares of the Fund when is-
sued will be fully paid and nonassessable by the Fund.
CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachu-
setts 02106, is the Fund's custodian, transfer agent and dividend disbursing
agent. It also maintains the Fund's accounting records, determines the net as-
set 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, inde-
pendent 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 unau-
-- 16 --
<PAGE>
dited 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 Registra-
tion 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 in-
stance, 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 represen-
tations, 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)1996, Flagship Funds Inc.
UI-A-3000 (10-24-96)
-- 17 --
<PAGE>
(This Page Intentionally Left Blank)
-- 18 --
<PAGE>
Flagship Utility Income Fund Application Form
PLEASE PRINT OR TYPE ALL INFORMATION PLEASE MAIL THIS APPLICATION AND
YOUR
NOTE: You must complete Sections 1, CHECK TO:
2, 3, 4, 5 and sign the signature Boston Financial
line. Your signature is required Attn.: Flagship Utility Income Fund
for processing. Complete sections P.O. Box 8509
7, 8, 9, 10, 11, 12 and 13 for op- Boston, MA 02266-8509
tional services.
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
--- -------- -------
StateZip 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
$ [_] 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 OPTIONS
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
--- -------- -------
StateZip 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
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
------------------------------------------------------------------------------
-- 19 --
<PAGE>
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.
Date for Investment (Between 5th and 28th Only)
---
$
----------------- Month to Begin Plan_______________________________________
Amount ($50 Minimum)
------------------------------------------------------------------------------
Name of Bank
------------------------------------------------------------------------------
Bank Account#
------------------------------------------------------------------------------
Bank's Street Address
------------------------------------------------------------------------------
City
--- -------- -------
StateZip Code
X
------------------------------------------------------------------------------
Signature of Depositor Date
X
------------------------------------------------------------------------------
Signature of Joint Depositor Date
10. SYSTEMATIC WITHDRAWAL PLAN
A minimum $10,000 balance is required.
BANK ACCOUNT CREDIT
Please redeem $ from my account and credit my bank account as indi-
cated in the banking information section below.
Month first credit is to be made: ____________________________________________
Day of the month that I wish the credit to be made:
---
(Between the 5th and 28th only.)
Please credit my account for each month I have selected.
<TABLE>
<CAPTION>
JAN FEB MAR APR MAY JUN
<S> <C> <C> <C> <C> <C>
[_] [_] [_] [_] [_] [_]
<CAPTION>
JUL AUG SEP OCT NOV DEC
<S> <C> <C> <C> <C> <C>
[_] [_] [_] [_] [_] [_]
</TABLE>
CHECK
Please redeem $ from my account on or about the 31st of each month
as selected above.
Month first credit is to be sent: ____________________________________________
Send checks to: [_] Address on account
[_] Special address (complete below)
------------------------------------------------------------------------------
Payee
------------------------------------------------------------------------------
Street
------------------------------------------------------------------------------
City
--- -------- -------
StateZip Code
11. SYSTEMATIC EXCHANGES
IMPORTANT: The account registrations for the originating and receiving funds
must be identical. I hereby authorize automatic exchanges of;
Amount $ ($50 minimum)
From fund name _______________________________________________________________
Account no. (if known) _______________________________________________________
Into fund name _______________________________________________________________
Account no. (if known) _______________________________________________________
Exchanges will be made on or about the 16th of these months:
<TABLE>
<CAPTION>
JAN FEB MAR APR MAY JUN
<S> <C> <C> <C> <C> <C>
[_] [_] [_] [_] [_] [_]
<CAPTION>
JUL AUG SEP OCT NOV DEC
<S> <C> <C> <C> <C> <C>
[_] [_] [_] [_] [_] [_]
</TABLE>
12. TELEPHONE REDEMPTION
I/we hereby authorize the Fund to implement the following telephone redemp-
tion requests (under $50,000 only) without signature verification to the reg-
istered 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
--- -------- -------
StateZip Code
[_] I do not authorize redemption by telephone.
13. INTERESTED PARTY MAIL/DIVIDEND MAIL
[_] Send duplicate confirmation statements to the interested party listed be-
low.
[_] Send my distributions to the address listed below.
------------------------------------------------------------------------------
Name of Individual
------------------------------------------------------------------------------
Street Address
------------------------------------------------------------------------------
City
--- -------- -------
StateZip 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 cur-
rent 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 transac-
tions authorized by telephone against any claim, loss, expense or damage, in-
cluding 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.
-- 20 --
<PAGE>
FLAGSHIP ADMIRAL FUNDS INC.
STATEMENT OF ADDITIONAL INFORMATION
DATED OCTOBER 24, 1996
ONE DAYTON CENTRE, ONE SOUTH MAIN STREET; DAYTON, OH 45402-2030
FLAGSHIP UTILITY INCOME FUND SERIES
This Statement of Additional Information provides certain detailed informa-
tion concerning the Fund. It is not a Prospectus and should be read in con-
junction 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 In-
come Fund Prospectus dated October 24, 1996.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Investment Objectives and Policies........................................ 2
Shares of the Fund........................................................ 5
Officers, Directors and Stockholders...................................... 6
Investment Advisory Services.............................................. 7
Taxes..................................................................... 8
Yield and Total Return Calculation........................................ 11
Distributions............................................................. 12
Distributor............................................................... 13
Custodian and Transfer Agent.............................................. 15
Auditors.................................................................. 15
Portfolio Transactions.................................................... 15
Purchase, Redemption and Pricing of Shares................................ 16
Servicemark and Trademark................................................. 16
Other Information......................................................... 16
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
</TABLE>
<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 re-
strictions (which supplement the matters described under "The Fund and Its Ob-
jective" 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 Invest-
ment 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. Govern-
ment 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 as-
sets may be invested without regard to such 5% and 10% limitations;
(2) Make loans, except to the extent the purchase of debt obligations (in-
cluding 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 ba-
sis 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 connec-
tion with the acquisitions of such companies).
(8) Act as an underwriter of securities or invest more than 10% of the Port-
folio'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 main-
tain 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 in-
vest 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 nec-
essary to maintain its status as a regulated investment company under the In-
ternal 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 be-
tween the amount it pays for the securities and the
2
<PAGE>
amount it receives upon resale. At the time it enters into a repurchase agree-
ment, 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 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 secu-
rities or broker-dealers registered with the Securities and Exchange Commis-
sion. The underlying securities will only consist of U.S. Government or Gov-
ernment Agency securities, certificates of deposit, bankers' acceptances or
commercial paper. In the event of default by such party, the delays and ex-
penses potentially involved in establishing the Fund's rights to, and in liq-
uidating 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 ad-
ditional 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 invest-
ment 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 "lever-
age."
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 statu-
tory coverage requirement for any reason, the Portfolio would have to take
corrective action to achieve compliance within three business days and accord-
ingly 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 com-
plete 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 en-
gages in "when issued" and "delayed delivery" transactions, it will do so for
the purpose of acquiring securities for its portfolio consistent with its in-
vestment objective and policies and not for the purpose of investment lever-
age.
Diversification. As a diversified fund, the Utility Income Fund may not pur-
chase 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 secu-
rity at the exercise price during the option period. The purchase of a put op-
tion on a security would be designed to protect the Fund's holdings in a secu-
rity against a substantial decline in the market value. The Fund is authorized
to purchase exchange-listed options and over-the-counter options ("OTC Op-
tions"). Listed options are issued by the Options Clearing Corporation ("OCC")
which guarantees the performance of the obligations of the parties to such op-
tions. 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 cer-
tain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to par-
ticular classes or series of options or underlying securities; (iv) interrup-
tion of the normal operations on an exchange; (v) inadequacy of the facilities
of an exchange or OCC to handle current trading
3
<PAGE>
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 or 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 expi-
ration date, exercise price and premium will be agreed upon between the Fund
and the transacting 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 op-
tion markets close before the markets for the underlying securities, signifi-
cant 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 op-
tion 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 op-
tions 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 Commod-
ity Exchange Act.
Risks. Typically, investment in futures contracts requires the Fund to de-
posit with the applicable exchange or other specified financial intermediary
as security for its obligations an amount of cash or other specified securi-
ties 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 fluctu-
ates. Investment in options involves payment of a premium for the option with-
out any further obligation on the part of the Fund.
The Fund will not engage in transactions in futures contracts or related op-
tions for speculative purposes but only as a hedge against changes resulting
from market conditions in the values of securities in its portfolio. In addi-
tion, the Fund will not enter into a futures contract or related option (ex-
cept 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 re-
quired, 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 de-
gree 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 circum-
stances. As a result, in volatile markets, the Fund may not be able to close
out a transaction without incurring losses substantially greater than the ini-
tial 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 posi-
tion, at the same time they tend to limit any potential gain which might re-
sult 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 perti-
nent market movements, which cannot be assured. Finally, the daily deposit re-
quirements 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 as-
set value. Income earned by the Fund from its hedging activities generally
will be treated as capital gains.
4
<PAGE>
SHARES OF THE FUND
Four classes of shares, Class A Shares, Class B Shares, Class C Shares, and
Class R Shares are authorized for the Fund. Currently, the Fund is offering
Class A and 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 clas-
ses 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 distri-
bution 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). The net income attrib-
utable 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 serv-
ices 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 R Shares is expected to be substan-
tially 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 the Prospectus under "How Fund Shares are
Priced". The net assets attributable to Class A Shares are subject to an ongo-
ing distribution services fee (see "About the Distributor" in the Prospectus).
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" in the Prospectus). Class A Shares also
qualify for certain exchange and reinvestment privileges as described in "Ex-
change And Reinvestment Privilege" in the Prospectus. The investor or the in-
vestor's broker or dealer is responsible for promptly forwarding payment to
the Fund for shares purchased. Class A Shares may be subject to a CDSL as ex-
plained in the Prospectus under "Class A Contingent Deferred Sales Load".
2. Class B Shares. Class B Shares are sold at net asset value (see "Net As-
set 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 "Distribu-
tor" 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 pur-
chase 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 after 8 years after
the end of the month in which a stockholder'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 distribu-
tion 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 stockholder's account will be considered to be held in a
separate sub-account. Each time any Class B Shares in the stockholder's ac-
count (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 con-
vert 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 conversion period 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.
5
<PAGE>
3. Class C Shares. Class C 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 Class C Shares are subject to a 1% CDSL if they are re-
deemed 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" in the Prospectus). The Class C Shares have no conver-
sion 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 as-
sessed on Class B or Class C Shares derived from reinvestment of dividends or
capital gains distributions. The CDSL will be waived (i) on redemption of
shares following the disability (as determined in writing by the Social Secu-
rity Administration) or death of a stockholder, (ii) on certain redemptions in
connection with IRAs and other qualified retirement plans, and (iii) when
Class B or Class C Shares are exchanged for Class B or Class C Shares of other
Flagship funds distributed by the Distributor (see "Exchange And Reinvestment
Privilege" in the Prospectus). In the case of an exchange, the length of time
that the investor held the original Class B or Class C Shares is counted to-
wards satisfaction of the period during which a deferred sales charge is im-
posed on the Class B or Class C for which the exchange was made.
4. Class R Shares. You may purchase Class R Shares with monies representing
dividends and capital gain distributions on Class R Shares of the Fund. Also,
you may purchase Class R Shares if you are within the following specified cat-
egories of investors who are also eligible to purchase Class A Shares at net
asset value without an up-front sales charge: officers, current and former di-
rectors of the Fund; bona fide, full-time and retired employees of Flagship,
and subsidiaries thereof, or their immediate family members; any person who,
for at least 90 days, has been an officer, director or bona fide employee of
any Authorized Dealer, or their immediate family members; officers and direc-
tors of bank holding companies that make Fund shares available directly or
through subsidiaries or bank affiliates; and bank or broker-affiliated trust
departments; persons investing $1 million or more in Class R Shares; and cli-
ents of investment advisers, financial planners or other financial intermedi-
aries that charge periodic or asset-based "wrap" fees for their services.
If you are eligible to purchase either Class R Shares or Class A Shares
without a sales charge at net asset value, you should be aware of the differ-
ences between these two classes of shares. Class A Shares are subject to an
annual distribution fee to compensate Flagship Funds Inc. (the "Distributor")
for distribution costs associated with the Fund and to an annual service fee
to compensate Authorized Dealers for providing you with ongoing account serv-
ices. Class R Shares are not subject to a distribution or service fee and,
consequently, holders of Class R Shares may not receive the same types or lev-
els of services from Authorized Dealers. In choosing between Class A Shares
and Class R Shares, you should weigh the benefits of the services to be pro-
vided by Authorized Dealers against the annual service fee imposed upon the
Class A Shares.
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 Ex-
empt 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 in-
dicated by an asterisk (*).
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND ADDRESS POSITIONS WITH THE FUND DURING PAST FIVE YEARS
------------------------- ----------------------- -------------------------------------------
<C> <C> <S>
Bruce P. Bedford* Director Chairman and Chief Executive Officer of
Flagship Resources Inc. ("Flagship"), Flag-
ship Financial Inc. (the "Manager"), and
Flagship Funds Inc. (the "Distributor").
Richard P. Davis* President and Director President and Chief Operating Officer of
Flagship, the Manager, and the Distributor.
Robert P. Bremner Director Private Investor and Management Consultant.
3725 Huntington St., N.W.
Washington, DC 20015
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND ADDRESS POSITIONS WITH THE FUND DURING PAST FIVE YEARS
------------------------- ----------------------- -------------------------------------------
<C> <C> <S>
Joseph F. Castellano Director Professor and Former Dean, College of Busi-
4249 Honeybrook Avenue ness and Administration, Wright State Uni-
Dayton, OH 45415 versity.
Paul F. Nezi Director Senior Vice President of Marketing and Un-
227 E. Dixon Avenue derwriting, TRIGON Blue Cross Blue Shield;
Dayton, OH 45419 prior to October, 1996, Executive Vice
President and Chief Marketing Officer,
ChoiceCare; prior to March, 1993, Vice
President and General Manager, Advanced Im-
aging Products, a division of AM Interna-
tional; prior to March, 1991, Partner,
Hooper & Nezi, a marketing and communica-
tions firm.
William J. Schneider Director Senior Partner of Miller-Valentine Part-
4000 Miller-Valentine Ct. ners; Vice President of Miller-Valentine
P.O. Box 744 Realty, Inc.
Dayton, OH 45401
M. Patricia Madden Vice President Vice President, Operations, of the Distrib-
utor.
Michael D. Kalbfleisch Treasurer and Secretary Vice President and Chief Financial Officer
of Flagship, the Manager, and the Distribu-
tor.
LeeAnne G. Sparling Controller Director of Portfolio Operations of the
Manager.
</TABLE>
COMPENSATION: DIRECTORS
<TABLE>
<CAPTION>
TOTAL COMPENSATION FROM
REGISTRANT AND
FUND COMPLEX (ALL OTHER
AGGREGATE FLAGSHIP MUTUAL FUNDS)
COMPENSATION PAID TO DIRECTORS
NAME OF PERSON, POSITION FROM REGISTRANT (NUMBER OF OTHER FUNDS)
- ----------------------------- --------------- -----------------------
<S> <C> <C>
Robert P. Bremner
Director $5,000 $25,500 (26)
Joseph F. Castellano
Director $5,000 $26,500 (26)
William J. Schneider Director $5,000 $26,500 (26)
Paul F. Nezi
Director $5,000 $26,500 (26)
</TABLE>
As of October 8, 1996, to the knowledge of management, no person benefi-
cially 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 out-
standing 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 obli-
gations include: (i) assisting in supervising all aspects of the Utility In-
come Fund's operations; (ii) providing the Utility Income Fund, at the Manag-
er's expense, with the services of persons competent to perform such adminis-
trative 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 $20,811; $6,194; and $0 to the
Manager pursuant to its Advisory Agreement for the three fiscal years ended
June 30, 1994; June 30, 1995; and June 30, 1996; respectively. The amounts
paid for the fiscal years ended June 30, 1994; June 30, 1995; and June 30,
1996; do not include $158,722; $145,717; and $157,329 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, State Street Bank and Trust Company.
7
<PAGE>
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 ma-
jority of the Fund's independent directors. The Advisory Agreement is termina-
ble 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 op-
erating expenses of the Utility Income Fund (including fees paid by the Util-
ity Income Fund to the Manager and payments by the Utility Income Fund to the
Distributor but excluding taxes, interest, brokerage and extraordinary ex-
penses) 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 im-
posed 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 In-
come Fund in the amount of such excess. As of the date of this Prospectus, un-
der the most restrictive state regulations applicable, the Manager would be
required to reimburse the Utility Income Fund such operating expenses exceed-
ing 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 appro-
priate 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 equita-
ble 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 ad-
verse 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 sup-
plementary.
TAXATION OF THE FUND
Each Portfolio of the Fund intends to qualify as a regulated investment com-
pany ("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 in-
come 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 in-
vestments 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 securi-
ties, 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 as-
sets 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 in-
cluding 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 undistrib-
uted 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 ordi-
nary 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 cal-
endar 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 undis-
tributed net capital gain; and stockholders would be eligible for a credit
with respect to such tax paid by the Portfolio.
8
<PAGE>
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 domes-
tic corporate stockholders. If the Utility Income Fund did not declare divi-
dends 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 meth-
od, any increase in net asset value would result in short- or long-term capi-
tal gains rather than dividend income for stockholders who redeemed shares be-
tween 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 In-
come Fund will be able to achieve its tax objectives, there can be no assur-
ances 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 be-
low under "Holding Period and Other Requirements". If the expenses and losses
of the Fund equal or exceed non-qualifying income (if any), all dividends dis-
tributed 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 invest-
ment company taxable income and net capital gain, a portion of each distribu-
tion will be treated as a return of capital, which will not qualify for the
dividends-received deduction. Distributions treated as a return of capital re-
duce 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, alter-
native 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 mini-
mum taxable income. Accordingly, an investment in the Fund may cause a corpo-
rate 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 disre-
garded. 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 stock-
holder will similarly satisfy the 46-day holding period on reinvested divi-
dends declared with respect to such shares to the extent that such stockhold-
er'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.
9
<PAGE>
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 stock-
holders 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 re-
duced if certain extraordinary dividends are received.
Identification of Utility Income Fund Shares. The IRS has specific regula-
tions 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 ad-
versely affecting the availability of the dividends-received deduction to the
extent that total redemptions by such stockholder during any period do not ex-
ceed 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 redemp-
tion 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 de-
ferred 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 divi-
dend" 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 extraor-
dinary 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 divi-
dends-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 extraordi-
nary 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 peri-
od, 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 pur-
poses of determining whether such dividends constitute extraordinary divi-
dends. 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
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 Prospec-
tus.
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
stockholders to reduce tax through a combination of dividend received deduc-
tion and loss on the disposition of the stock. Although it is arguable that
the dividend rate on adjustable rate preferred stock can reasonably be ex-
pected 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.
10
<PAGE>
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 in-
come 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 tax-
es. 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 corpo-
rate investor (assuming the availability of the 70% dividends-received deduc-
tion 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 per-
centage 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 divi-
dends and capital gains distributions. A non-standardized quotation of total
return for a particular class of shares will always be accompanied by the "av-
erage annual total return" for such class. Average annual total return for any
time period is calculated (separately for each class) by assuming an invest-
ment 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 peri-
od, 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 dur-
ing 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 re-
turn 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 ap-
propriate and specified corporate tax rate. The Utility Income Fund may also
quote rankings, yields or returns as published by recognized statistical serv-
ices 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, Per-
sonal 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 de-
pending on market conditions, the composition of the portfolio, operating ex-
penses and other factors. These factors and possible differences in method of
calculating performance figures should be considered when comparing the per-
formance figures of the Utility Income Fund with those of other investment ve-
hicles.
11
<PAGE>
Yield and Total Return Calculation as of June 30, 1996, for the Utility In-
come Fund (there is no historical data for Class B or R Shares):
<TABLE>
<CAPTION>
CURRENT AVERAGE ANNUAL TOTAL RETURN
30 DAY ---------------------------------------- INCEPTION
YIELD 1 YEAR SINCE INCEPTION DATE
------- ------ --------------- -------------
<S> <C> <C> <C> <C>
Class A 5.82% 10.00% 7.55%* Aug. 26, 1983
Class C 5.61% 13.15% 5.86% July 6, 1993
</TABLE>
- --------
* Since change in investment objective (July 1, 1992)
DISTRIBUTIONS
The Utility Income Fund anticipates making daily distributions. The antici-
pated 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 in-
come, the Manager will first project the amount of the next anticipated divi-
dend or interest payment (or accretion of discount in the case of discounted
instruments) on each security and the date upon which such dividend or inter-
est 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 antic-
ipated 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 re-
vision, the Manager will recalculate the anticipated daily dividend or inter-
est income for the instrument and calculate the difference between the origi-
nal and revised anticipated daily income figures. The Manager will then use
the revised figure after temporarily adjusting it to account for the cumula-
tive 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 in-
strument for the same number of days as have already elapsed prior to such re-
vision 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 re-
vision.
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 re-
maining 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 di-
rectors of the companies in which the Utility Income Fund invests or that in-
terest will be paid on the debt obligations held by the Utility Income Fund.
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 ex-
penses 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 appro-
priate, 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.
12
<PAGE>
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 in-
come 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 at-
tributable to the timing of dividend or interest payments on portfolio securi-
ties 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 ag-
gregate 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 adjust-
ments 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. Fol-
lowing stockholder approval of multiple classes of shares and consequent
changes to the Distribution Plan, revised Distribution Agreements were exe-
cuted 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 Agree-
ment 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 ex-
penditures 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 ac-
tivities 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, period-
ic, 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 stockholders of the Fund relating to their investment in the Fund,
including assistance in connection with inquiries relating to stockholder ac-
counts; the production and dissemination of prospectuses including statements
of additional information) of the Fund and the preparation, production and
dissemination of sales, marketing and stockholder servicing materials; and the
ordinary or capital expenses, such as equipment, rent, fixtures, salaries, bo-
nuses, reporting and recordkeeping and third party consultancy or similar ex-
penses relating to any activity for which payment is authorized by the direc-
tors; 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.
13
<PAGE>
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 maxi-
mum amount payable annually is .95% of such Portfolio's average daily net as-
sets 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 Dis-
tributor 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 cus-
tomers. 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 Port-
folio'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.
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT PAID AMOUNT PERMANENTLY
ENDED JUNE 30 TO DISTRIBUTOR WAIVED BY DISTRIBUTOR
- ------------- -------------- ---------------------
<S> <C> <C>
Class A
1993 $ 53,599 $10,139
1994 128,548 --
1995 101,226 --
1996 92,234 9,861
Class C
1994 32,610 3,378
1995 48,312 --
1996 53,871 2,578
</TABLE>
These amounts are summarized below as to purpose:
<TABLE>
<CAPTION>
FISCAL YEAR COMPENSATION SALARIES & ADVERTISING &
ENDED JUNE 30 TO BROKERS BENEFITS PROMOTIONS OVERHEAD TOTAL
- ------------- ------------ ---------- ------------- -------- -------
<S> <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
1996 60,116 23,120 8,998 -- 92,234
Class C
1994 32,610 -- -- -- 32,610
1995 37,018 5,929 4,566 799 48,312
1996 50,580 3,291 -- -- 53,871
</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 indi-
rect 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 ap-
proved 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 outstand-
ing 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 di-
rectors who are not "interested persons" and the persons authorized
14
<PAGE>
to make payments under the Plans must provide written reports at least quar-
terly 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, 1994, 1995 and 1996, as follows (no commissions were received in prior
years; there is no historical data for Class B or R Shares):
<TABLE>
<CAPTION>
FISCAL YEAR AGGREGATE RETAINED BY
ENDED JUNE 30 AMOUNT DISTRIBUTOR
------------- ------------------- -----------
<S> <C> <C>
Class A
1993 $1,009,000 $46,000
1994 297,500 37,300
1995 84,100 10,200
1996 100,800 12,600
<CAPTION>
CONTINGENT DEFERRED
SALES LOAD
-------------------
<S> <C> <C>
Class C
1994 $ 2,600
1995 4,100
1996 1,200
</TABLE>
CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachu-
setts 02106, is the custodian, transfer agent and dividend disbursing agent
for the Utility Income Fund. It also maintains the accounting records, deter-
mines 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 necessar-
ily 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 invest-
ment 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 deal-
ers 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 re-
search 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,
1996, the Utility Income Fund paid $62,962 in brokerage commissions. The pre-
ferred 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 securi-
ties, 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.
15
<PAGE>
The Manager is able to fulfill its obligations to furnish a continuous in-
vestment 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 mate-
rially increased if it attempted to purchase this type of information or gen-
erate 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; howev-
er, 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 pur-
chase 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' vari-
ous 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 disadvan-
tages 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 of-
fered 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 AND TRADEMARK
Flagship Financial has obtained federal registration of the Fund's
servicemark. In addition, Flagship Financial was granted a federal registered
trademark for its use of "Plain Vanilla"(R) 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 In-
formation 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 ref-
erence.
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