<PAGE>
NUVEEN
Growth and Income
Mutual Funds
October 28, 1998
Prospectus
Designed to provide superior
equity market performance
with less risk.
[PHOTO APPEARS HERE]
Utility
Income Fund
<PAGE>
Prospectus dated October 28, 1998
FLAGSHIP UTILITY INCOME FUND(R)
Flagship Utility Income Fund(R) (the "Fund") is a diversified series of Flag-
ship Admiral Funds Inc. (the "Corporation"), a series, open-end mutual fund.
The Fund seeks to provide current income and long-term growth of income and
capital for individual and corporate investors by investing primarily in the
preferred and common stocks of companies in the public utilities industry. The
Fund will seek capital appreciation as a secondary objective. No assurance can
be given that the Fund will achieve its objective. The investment adviser for
the Fund is Nuveen Advisory Corp. (the "Manager"), a registered investment ad-
viser since 1976.
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.................... 14
General Information...................... 15
Custodian and Transfer Agent............. 16
Counsel and Auditors..................... 16
Additional Information................... 16
Application.............................. 17
</TABLE>
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 28, 1998 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: 1-800-257-8787.
PROSPECTIVE SHAREHOLDERS SHOULD NOTE THAT THE FLAGSHIP UTILITY FUND INTENDS TO
HOLD A SPECIAL SHAREHOLDER MEETING ON NOVEMBER 12, 1998. THE PURPOSE OF THE
MEETING IS TO ASK SHAREHOLDERS TO APPROVE CHANGES IN THE FUND'S INVESTMENT
POLICIES, INCLUDING A CHANGE PERMITTING THE FUND TO NO LONGER CONCENTRATE ITS
PORTFOLIO OF SECURITIES IN THE UTILITY INDUSTRY; TO APPROVE INCREASES TO THE
FUND'S DISTRIBUTION AND SERVICE (12B-1) FEES; AND TO APPROVE A REORGANIZATION
OF THE FUND INTO A NEW SERIES OF A MASSACHUSETTS BUSINESS TRUST. CALL NUVEEN
AT (800) 257-8787 FOR MORE INFORMATION.
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.
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FEES AND EXPENSES
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS R
SHARES SHARES(A) SHARES SHARES(A)
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<S> <C> <C> <C> <C>
Shareholder Transaction Expenses
Maximum Front End Sales Charge
Imposed on Purchase 4.20% None None None
Maximum CDSC 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") .50% .50% .50% .50%
12b-1 Fee (See "About the Distribu-
tor") .20% .95%(d) .75%(e) None
Other Expenses .64% .64% .64% .64%
Total Fund Operating Expenses 1.34% 2.09% 1.89% 1.14%
Total Fund Operating Expenses Without
Waiver or Reimbursement 1.35% 2.10% 1.90% 1.15%
</TABLE>
Percentage based on actual fees incurred from the previous fiscal year. 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) These amounts are based on estimates.
(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 $39, $31 and $11 less in years 1, 3 and 5 respectively.
(c) No initial sales charge; 1% contingent deferred sales charge if redeemed
within 1 year of purchase.
(d) Of this amount, 0.75% is an asset based sales charge and 0.20% is a
service fee.
(e) Of this amount, 0.55% 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
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<S> <C> <C> <C> <C>
Class A Shares $55 $83 $112 $196
Class B Shares $61 $97 $124 $223
Class C Shares $19 $59 $102 $221
Class R Shares $12 $36 $ 63 $139
</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 charge for Class A Shares, a contingent deferred sales load
("CDSC") for Class B and Class C Shares and a no-fee, no-charge 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.
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<PAGE>
FINANCIAL HIGHLIGHTS
The following information was derived from financial highlights audited by Ar-
thur Andersen LLP, independent public accountants. Their report on the finan-
cial statements 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 July 1,
1988 to June 30, 1991, and of Class A Shares of the Flagship Utility Income
Fund ("Utility Fund") from July 1, 1991 to June 30, 1998, and of Class C
Shares of the Utility Fund from July 6, 1993 to June 30, 1998. 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 finan-
cial information below is primarily of historical value and has only limited
relevance to the Fund's current operations and performance as a utility fund.
<TABLE>
<CAPTION>
INCOME FROM
INVESTMENT OPERATIONS LESS DISTRIBUTIONS
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TOTAL
FROM DISTRI-
NET ASSET NET NET REALIZED INVEST- DIVIDENDS BUTIONS
VALUE INVEST- & UNREALIZED MENT FROM NET FROM TOTAL NET ASSET
YEAR ENDED BEGINNING MENT GAINS (LOSS) OPERA- INVESTMENT CAPITAL DISTRI- VALUE END TOTAL
JUNE 30, OF PERIOD INCOME(B) ON SECURITIES TIONS INCOME GAINS BUTIONS OF PERIOD RETURN(D)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Class A
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
1997 11.09 .66 .40 1.06 .64 -- .64 11.51 9.89
1998 11.51 .61 1.57 2.18 .63 -- .63 13.06 19.32
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
1997 11.08 .61 .38 .99 .58 -- .58 11.49 9.25
1998 11.49 .55 1.56 2.11 .57 -- .57 13.03 18.65
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
--------------------------------------------------
RATIO OF
RATIO OF NET
EXPENSES INVESTMENT AVERAGE
NET ASSETS TO INCOME TO COM-
END OF AVERAGE AVERAGE PORTFOLIO MISSION
YEAR ENDED PERIOD NET NET TURNOVER RATE
JUNE 30, (000'S) ASSETS(B) ASSETS(B) RATE(C) PAID(E)
- ---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A
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 $.0640
1997 20,157 .98 5.97 127.89 .0633
1998 20,013 1.34 4.93 101.00 .0637
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 .0640
1997 5,555 1.53 5.47 127.89 .0633
1998 5,707 1.89 4.39 101.00 .0637
</TABLE>
(a) Commencement of investment operations.
(b) After waiver of certain management fees or reimbursements of expenses, if
applicable, by Flagship Financial, predecessor to Nuveen Advisory.
(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.
(e) Average commission rate paid on equity portfolio transactions. Commissions
paid are included in the cost of the securities. Disclosure was not
required prior to June 30, 1996.
* Annualized
**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.
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<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.
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<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 charge 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 CDSC 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 Charge. 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 charge ("CDSC") 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 charge ("CDSC") if you
redeem your shares within six years from the purchase date. This CDSC charge
is 5%, 4%, 4%, 3%, 2% and 1% for years one through six. Class B Shares auto-
matically 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
charge 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 0.75% annual distribution fee (of which .55% is an as-
set based sales charge and .20% is a service fee) and a CDSC 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 0.55% 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 John Nuveen & Co. Incorporated, and
subsidiar-
-- 6 --
<PAGE>
ies 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 subsidi-
aries or bank affiliates; and bank or broker-affiliated trust departments;
persons investing $2.5 million or more in Class R Shares; and clients of in-
vestment 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 John Nuveen & Co. Incorporated (the "Distribu-
tor") 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 lev-
els 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 pro-
vided by Authorized 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: Nuveen Investor Services, P.O. Box 5186, Bowling Green Sta-
tion, New York, NY 10274-5186 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: Nuveen Investor
Services, P.O. Box 5186, Bowling Green Station, New York, NY 10274-5186.
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.
FUND-DIRECT--ELECTRONIC FUNDS TRANSFER
You may arrange to transfer funds electronically between your bank account and
your fund account by completing the appropriate section of the account appli-
cation. If you need additional copies of the form, or would like assistance in
completing it, contact your financial adviser or call Nuveen at (800) 257-
8787. You may request Fund Direct transfers to quickly and conveniently pur-
chase or sell shares by tele-
-- 7 --
<PAGE>
phone, systematically invest or withdraw funds, or send dividend payments di-
rectly to your bank account.
If you have established electronic funds transfer privileges on your account,
you may request that redemption proceeds of $1,000 or more be wired directly
to your bank account. While you will generally receive your redemption pro-
ceeds more quickly than a regular telephone redemption, the fund may charge
you a fee for this expedited service.
SYSTEMATIC INVESTMENT PLAN
Once you have opened an account, you may make regular investments of $50 or
more a month through automatic deductions from your bank account (see Fund Di-
rect above), or directly from your paycheck. To invest regularly from your
bank account, simply complete the appropriate section of the account applica-
tion. To invest regularly from your paycheck, call Nuveen for a Payroll Direct
Deposit Enrollment form. If you need additional copies of these forms, or
would like assistance completing them, contact your financial adviser or call
Nuveen at (800) 257-8787.
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)
You may qualify for a reduced sales charge on a purchase of Class A Shares of
the Fund, if the amount of your purchase, when added to the value that day of
all of your prior purchases of shares of any Nuveen Mutual Fund, or units of a
Nuveen unit trust, on which an up front sales charge or ongoing distribution
fee is imposed, falls within the amounts stated in the Class A Sales Charges
and Commissions table in the Prospectus. You or your financial adviser must
notify Nuveen or the Fund's transfer agent of any cumulative discount whenever
you plan to purchase Class A Shares of a Fund that you wish to qualify for a
reduced sales charge.
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 NUVEEN 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.
-- 8 --
<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 in the Fund to be proceeds from the redemption (within
sixty days of the purchase of Fund shares) of shares of unrelated investment
companies on which the investor has paid initial or contingent deferred sales
charges, or is no longer subject to a CDSC.
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 CDSC
For purchases of Class A Shares in amounts over $1,000,000, the contingent de-
ferred sales charge may be waived for purchases through a broker/dealer that
waives its commission.
8. REINVESTMENT FROM NUVEEN DEFINED PORTFOLIOS
Class A Shares may be purchased at net asset value by reinvestment of distri-
butions from any of the various Defined Portfolios sponsored by Nuveen. There
is no initial or subsequent minimum investment requirement for such reinvest-
ment purchases.
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 Nuveen that this Letter is in effect each time a purchase
is made.
HOW TO REDEEM SHARES
Upon receipt by Nuveen 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 redemp-
tion. For further information on redemptions or exchanges, please contact your
dealer or call Nuveen at: 1-800-257-8787.
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 Nuveen by the close of trading on the New York Stock Exchange on a
particular day in order for you to receive the redemption price based upon the
net asset value per share determined that day. If the dealer fails to do so,
you will receive the redemption price next calculated after your request and
any other materials are received and your entitlement to any prior day's re-
demption price must be settled between you and your dealer. Your dealer may
charge a service fee for handling your redemption request.
-- 9 --
<PAGE>
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: 1-800-257-8787.
You may also have redemption proceeds sent electronically to your pre-desig-
nated bank account. See "Fund Direct--Electronic Funds Transfer" above for de-
tails. For all other redemptions your redemption request must be submitted in
writing to the Transfer Agent at the address below. The Fund's purchase appli-
cation relieves the Fund and the Transfer Agent of any liability for loss,
costs, or expenses arising out of telephone redemptions that are reasonably
believed to be genuine. The Fund will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine, and if it does not,
it may be liable for any losses due to fraudulent or unauthorized instruc-
tions. The procedures include requiring a form of personal identification
prior to acting on telephone instructions, recording such instructions, and
providing written confirmation of such transactions.
Payment will be made by sending a check to you at the address on your most 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: Nuveen Investor Services, P.O. Box 5186, Bowling
Green Station, New York, NY 10274-5186.
SIGNATURE GUARANTEE
The Transfer Agent may require a signature guarantee on certain written trans-
actions. Signature guarantees can be obtained from a bank or brokerage, or
other financial intermediary that is a member of an Approved Medallion Guaran-
tee Program, or that is otherwise approved by the Fund. You should verify with
the institution that they are an acceptable 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 CDSC 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 Nuveen
at: 1-800-257-8787.
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 CDSC arrangement on the basis of relative net asset value per share
without the payment of any CDSC otherwise due upon redemption of Class C
Shares. For purposes of computing the CDSC 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 the Transfer Agent before
the exchange can be made. Stockholders of the Fund should obtain and read a
current prospectus of the fund into which the exchange is to be made before
effecting an exchange.
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 Nuveen or the Transfer Agent and sub-
mit it to Nuveen or the Transfer Agent. If you have certificates for any
shares being exchanged, you must surrender such certificates at the time of
exchange.
-- 10 --
<PAGE>
A stockholder who has redeemed shares may repurchase at net asset value, with-
out a sales charge, shares of the Fund or shares of other funds with a sales
charge distributed by the Distributor in any amount between the stated minimum
investment amount of such fund and the proceeds of redemption. The reinvest-
ment request must be received 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 Nuveen at: 1-800-257-8787.
SYSTEMATIC WITHDRAWAL PLAN
Accounts with a value of greater than $10,000 may establish a Systematic With-
drawal Plan ("SWP") and receive monthly, quarterly, semiannual, or annual
checks for $50 or more as specified by the shareholder. To establish a SWP all
distributions must be in the form of shares. Such payments are drawn from the
proceeds of the redemption shares held in the stockholder's account. To the
extent that redemptions for a SWP exceed dividend income reinvested in the ac-
count, 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 Transfer 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 pur-
chases of shares of the Fund. The stockholder by written instructions to the
Transfer Agent may withdraw from the program, change the payee or change the
dollar amount of each payment. The Transfer 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 as-
sessed against the account, but could be instituted by the Transfer 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.
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 the Transfer
Agent has received the application and the voided check, such stockholder's
designated bank account, following any dividend or redemption, will be cred-
ited with the proceeds. Once enrolled in direct deposit, a stockholder may
terminate participation at any time by written notice to the Transfer Agent.
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 the Transfer Agent 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.
-- 11 --
<PAGE>
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.
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 gains either when a distribution is in excess of basis, or more like-
ly, 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 are properly identified, as described
below, as relating to shares that have been held for more than 45 days.
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
-- 12 --
<PAGE>
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 re-
spect to such capital gains. Any actual or designated distributions attribut-
able to net capital gains will not be eligible for the dividends-received de-
duction. If a capital gain distribution is paid with respect to any shares
which are sold at a loss after being held for six months or less, then any
loss realized upon the sale of such shares will be treated as a long-term cap-
ital loss to the extent of such capital gain distribution.
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. Gain on the sale of shares held for more than 18 months will gener-
ally be taxed at a maximum marginal rate of 20%. 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
The funds automatically reinvest your dividends each month in additional fund
shares unless you request otherwise. You may request to have your dividends
paid to you by check, deposited directly into your bank account, paid to a
third party, sent to an address other than your address of record, or rein-
vested in shares of another Nuveen mutual fund. If you wish to do so, complete
the appropriate section of the account application, contact your financial ad-
viser, or call Nuveen at (800) 257-8787.
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 period to arrive at a
daily income rate. This daily income rate is then expressed as a semiannually
compounded yield based on the maximum offering price of a share assuming a
standardized 360 day year.
The average annual total return for each class of the Fund's shares for any
time period is calculated by assuming an investment at the beginning of the
measurement period at the maximum offering price. Dividends from the net
investable amount are then reinvested in additional shares each month at the
net asset value. At the end of the measurement period, the total number of
shares owned are redeemed at net asset value (less any applicable contingent
deferred sales load). The change in the total value during the investment 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 equiva-
-- 13 --
<PAGE>
lent current yield for corporate investors assuming the availability of the
70% dividends-received deduction for all of the Fund's daily dividends and an
appropriate specified corporate tax rate. These computations may or may not
include the effect of applicable sales charges which, if included, would re-
duce total return. A nonstandardized quotation of total return for a particu-
lar 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
INVESTMENT ADVISER
Nuveen Advisory Corp. ("Nuveen Advisory") serves as the investment adviser to
the Fund and in this capacity is responsible for the selection and on-going
monitoring of the securities in the Fund's investment portfolio. Nuveen Advi-
sory serves as investment adviser to investment portfolios with more than $35
billion in municipal assets under management. The Fund Board of Directors
oversees the activities of Nuveen Advisory, which also include managing the
Fund's business affairs and providing certain clerical, bookkeeping and other
administrative services. Established in 1976, Nuveen Advisory is a wholly-
owned subsidiary of John Nuveen & Co. Incorporated, which itself is approxi-
mately 78% owned by the St. Paul Companies, Inc. Effective January 1, 1997,
The John Nuveen Company acquired Flagship Resources Inc., and as part of that
acquisition, Flagship Financial, the adviser to the Flagship Admiral Funds,
was merged with Nuveen Advisory.
For providing these services, Nuveen Advisory is paid an annual management
fee. The following schedule applies to the Fund:
MANAGEMENT FEES
<TABLE>
- ------------------------------------------------------------------------------
<CAPTION>
AVERAGE DAILY NET ASSET VALUE MANAGEMENT FEE
- ------------------------------------------------------------------------------
<S> <C>
For the first $125 million 0.5000%
For the next $125 million 0.4875%
For the next $250 million 0.4750%
For the next $500 million 0.4625%
For the next $1 billion 0.4500%
For assets over $2 billion 0.4250%
</TABLE>
For more information about fees and expenses, see the expense tables on page
2.
ABOUT THE DISTRIBUTOR
The Fund has entered into a Distribution Agreement (the "Distribution Agree-
ment") with John Nuveen & Co. Incorporated (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.
-- 14 --
<PAGE>
Class A Shares are subject to a .20% service fee. The maximum amount payable
by the Fund under the Plan and related agreements on an annual basis for Class
B Shares is .95% of average daily net assets for the year and for Class C
Shares is .75% of average daily net assets for the year. Of this amount, for
Class B Shares 0.75% is an asset based sales charge and .20% is a service fee
and for Class C shares 0.55% is an asset based sales charge and 0.20% is a
service fee. In the case of broker-dealers and others, such as banks, who have
selling or service agreements with the Distributor or the Fund, the maximum
amount payable for Class B Shares to any recipient is .00260% per day (.95% on
an annualized basis) and for Class C Shares is .00205% per day (.75% on an
annualized basis) of the proportion of average daily net assets represented by
such person's customers. A salesperson and any other person entitled to re-
ceive compensation for selling Fund shares may receive different compensation
for selling one particular class of shares over another. The Board of Direc-
tors 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. Ex-
penditures 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, 1998 the Fund's Class A Shares paid $40,415 and Class C
Shares paid $42,528.
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. 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 pro-
vide food for office meetings. Under appropriate terms it will share with
broker/dealers a portion of the cost of prospecting seminars and shareholder
gatherings. In those situations where there is no retained underwriting com-
mission, i.e., on the sale of Class B, Class C or Class R Shares, the Distrib-
utor 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 would not experience any disadvantage. In addi-
tion, under the securities laws in some states, banks and financial institu-
tions 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 four (4) portfolio classes; namely, the Flagship
Utility Income 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 four (4) 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 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. Gov-
ernment Fund Portfolio Stock--Class A, Class B, Class C and Class R, each con-
sisting 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 Flag-
ship 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 Mary-
land 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 limita-
tions. 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 ex-
cept 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 di-
rectors unless less than a majority of the directors elected by stockholders
remain in office. If the Corporation does not hold annual meetings of stock-
holders, it will abide by Section 16 (c) of the 1940 Act which pro-
-- 15 --
<PAGE>
vides 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
The Chase Manhattan Bank, 4 New York Plaza, New York, New York 10004 is the
custodian of the Fund's assets. The custodian performs custodial, fund ac-
counting, portfolio accounting, shareholder, and transfer agency services.
Chase Global Funds Services Company, P.O. Box 5186, Bowling Green Station, New
York, NY 10274-5186, is the Fund's transfer, shareholder services, and divi-
dend disbursing agent. It also maintains the Fund's accounting records, deter-
mines the net asset value, and performs other stockholder services for the
Corporation and each series.
COUNSEL AND AUDITORS
Morgan, Lewis & Bockius LLP, counsel to the Fund, passes upon certain legal
matters for the Corporation and the Fund. Arthur Andersen LLP, independent
public accountants, are auditors for the Fund (effective July 1, 1997) and ad-
vise the Fund as to certain tax matters.
ADDITIONAL INFORMATION
Please direct your inquiries to Nuveen at 1-800-257-8787. The Fund issues to
its stockholders semiannual reports containing unaudited financial statements
for the Fund and annual reports containing audited financial statements ap-
proved 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.
-- 16 --
<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
John Nuveen & Co. Incorporated. 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
------------------------------------------------------------------------------
-- 17 --
<PAGE>
9. SYSTEMATIC 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 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.
-- 18 --
<PAGE>
Serving Investors
for Generations
[Photo of John Nuveen, Sr. appears here]
Since our founding in 1898, John Nuveen & Co. has been synonymous with
investments that withstand the test of time. Today we offer a broad range of
investments designed for individuals who plan to rely on their investments
as a principal source of their ongoing financial security. In fact, more than
1.3 million investors have entrusted Nuveen to help them maintain the lifestyle
they currently enjoy.
The cornerstone of Nuveen's investment philosophy is a commitment to disciplined
long-term investment strategies whose aim is to provide consistent, attractive
performance over time - with moderated risk. We emphasize high-quality
securities carefully chosen through in-depth research, and we follow those
securities closely over time to ensure that they continue to meet our exacting
standards.
Whether your focus is long-term growth, dependable current income or
preservation of capital, Nuveen offers a wide variety of products and services
to help meet your unique circumstances and financial planning needs. You can
choose among equity and fixed-income mutual funds, unit trusts, customized asset
management services and cash management products.
Talk with your financial adviser to learn more about how Nuveen investment
products and services can help you preserve your long-term financial security.
Or call us at (800) 257-8787 for more information, including a prospectus where
applicable. Please read that information carefully before investing.
NUVEEN
John Nuveen & Co. Incorporated
333 West Wacker Drive
Chicago, IL 60606-1286
(800) 257-8787
www.nuveen.com
(C)1997 by John Nuveen & Co. Incorporated. All rights reserved.
<PAGE>
FLAGSHIP ADMIRAL FUNDS INC.
STATEMENT OF ADDITIONAL INFORMATION
DATED OCTOBER 28, 1998
333 WEST WACKER DRIVE, CHICAGO, ILLINOIS 60606
FLAGSHIP UTILITY INCOME FUND SERIES
This Statement of Additional Information provides certain detailed
information concerning the Fund. It is not a Prospectus and should be read in
conjunction with the Fund's current Prospectus for the Flagship Utility Income
Fund, a copy of which may be obtained without charge by written request to:
Funds, c/o John Nuveen & Co. Incorporated; by telephone at: (800) 257-8787.
This Statement of Additional Information relates to the Flagship Utility
Income Fund Prospectus dated October 28, 1998.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Investment Objectives and Policies........................................ 2
Shares of the Fund........................................................ 6
Officers, Directors and Stockholders...................................... 8
Investment Advisory Services.............................................. 12
Taxes..................................................................... 13
Yield and Total Return Calculation........................................ 17
Distributions............................................................. 18
Distributor............................................................... 20
Custodian and Transfer Agent.............................................. 23
Auditors.................................................................. 23
Portfolio Transactions.................................................... 24
Purchase, Redemption and Pricing of Shares................................ 25
Other Information......................................................... 25
Appendix I--Description of Securities Ratings............................. I-1
Appendix II--Description of Hedging Techniques............................ II-1
Appendix III--Tax Equivalent Chart........................................ III-1
</TABLE>
The audited financial statements for the fiscal year ended June 30, 1998,
appear in the Annual Report of Flagship Utility Income Fund. The Annual Report
accompanies this Statement of Additional Information.
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
Flagship Admiral Funds Inc. (the "Fund") has no fundamental objectives as a
whole. Each Portfolio of the Fund has its own objectives. The Flagship Utility
Income Fund ("Utility Income Fund") has adopted the following investment
restrictions (which supplement the matters described under "The Fund and Its
Objective" in the Utility Income Fund Prospectus), none of which may be
changed without the approval of the holders of a majority (as defined in the
Investment Company Act of 1940 (the "1940 Act")) of its outstanding shares.
The Utility Income Fund may not:
(1) Purchase the securities of any one issuer, other than the U.S.
Government or any of its instrumentalities, if immediately after such purchase
more than 5% of the value of its total assets would be invested in such
issuer, or the Portfolio would own more than 10% of the outstanding voting
securities of such issuer, except that up to 25% of the value of the
Portfolio's total assets may be invested without regard to such 5% and 10%
limitations;
(2) Make loans, except to the extent the purchase of debt obligations
(including repurchase agreements) in accordance with the Portfolio's
investment objective and policies are considered loans and except that the
Portfolio may loan portfolio securities to qualified institutional investors
in compliance with requirements established from time to time by the
Securities and Exchange Commission ("SEC") and the securities exchanges in
which such securities are traded;
(3) Issue securities senior to its stock or borrow money, except that the
Portfolio has reserved the right to borrow money from banks on a temporary
basis from time to time to provide greater liquidity for redemptions or to
make additional portfolio investments. Such borrowings will not exceed 25% of
the Portfolio's net assets plus all outstanding borrowings immediately after
the time the latest such borrowing is made;
(4) Purchase or retain the securities of any issuer any of whose officers,
directors, or security holders is a director or officer of the Fund or of its
investment adviser if or so long as the directors and officers of the Fund and
of its investment adviser together own beneficially more than 5% of any class
of securities of such issuer;
(5) Mortgage, pledge or hypothecate any assets except in an amount up to 50%
of the value of the Portfolio's net assets, taken at cost, and only to secure
borrowings permitted by clause (3) above.
(6) Purchase or sell real estate, real estate mortgage loans, real estate
investment trust securities, commodities, commodity contracts (except for bona
fide hedging purposes) or oil and gas interests.
(7) Acquire securities of other investment companies (other than in
connection with the acquisitions of such companies).
(8) Act as an underwriter of securities or invest more than 10% of the
Portfolio's assets, as determined at the time of investment, in securities
that are subject to restrictions on disposition under the Securities Act of
1933 or for which market quotations are not readily available, including
repurchase agreements having more than seven days to maturity.
2
<PAGE>
(9) Purchase securities on margin, make short sales of securities or
maintain a net short position.
In order to permit the sale of shares in certain states, the Fund may make
commitments more restrictive than the operating restrictions described above.
Should the Fund determine that any such commitment is no longer in the best
interest of the stockholders, it will revoke the commitment by terminating
sales of its shares in the state involved. Also, as a matter of policy that is
not fundamental, the Utility Income Fund has determined that it will not
invest in warrants, own more than 5% of the outstanding voting securities of
any issuer and will only write call options which are fully covered.
The Fund places no restrictions on portfolio turnover except as may be
necessary to maintain its status as a regulated investment company under the
Internal Revenue Code of 1986, as amended (the "Code").
Repurchase Agreements. The Utility Income Fund may enter into repurchase
agreements with selected commercial banks and broker-dealers, in an amount up
to 5% of its total assets, under which such Fund acquires securities and
agrees to resell the securities to the other party at an agreed upon time and
at an agreed upon price. The Fund would accrue as interest the difference
between the amount it pays for the securities and the amount it receives upon
resale. At the time it enters into a repurchase agreement, the value of the
underlying security including accrued interest will be equal to or exceed the
value of the repurchase agreement and, for repurchase agreements that mature
in more than one day, the seller will agree that the value of the underlying
security including accrued interest will continue to be at least equal to the
value of the repurchase agreement. The Utility Income Fund will enter into
repurchase agreements only with creditworthy parties and will monitor such
creditworthiness on an ongoing basis. Generally, repurchase agreement
activities will be restricted to well-capitalized commercial banks with assets
in excess of $1 billion, primary dealers in U.S. Government securities or
broker-dealers registered with the Securities and Exchange Commission. The
underlying securities will only consist of U.S. Government or Government
Agency securities, certificates of deposit, bankers' acceptances or commercial
paper. In the event of default by such party, the delays and expenses
potentially involved in establishing the Fund's rights to, and in liquidating
the security may result in a loss.
Leverage. The Utility Income Fund has reserved the right to borrow money
from time to time to provide greater liquidity for redemptions or to make
additional portfolio investments. If a Portfolio were to borrow money, income
earned from additional investments in excess of interest costs would improve
performance over what otherwise would be the case. Conversely, if the
investment performance of such additional investments failed to cover their
cost (including interest costs on such borrowings) the performance would be
poorer than would otherwise be the case. This speculative factor is known as
"leverage."
The 1940 Act limits the amount of money a fund may borrow to 33 1/3% of the
value of such fund's net assets plus all outstanding borrowings immediately
after the time the latest such borrowing is made; the Utility Income Fund has
elected to restrict its borrowings to a maximum amount of 25%. If a Portfolio
were to borrow money and the value of its assets were to fall below the
statutory coverage requirement for any reason, the Portfolio would have to
take corrective action to achieve compliance within three business days and
accordingly might be required to sell a portion of its securities at a time
when such sale might be disadvantageous.
3
<PAGE>
"When Issued" Transactions. The Utility Income Fund may purchase and sell
securities on a "when issued" and "delayed delivery" basis. These transactions
are subject to market fluctuation; the value at delivery may be more or less
than the purchase price. Since the Fund relies on the buyer or seller, as the
case may be, to consummate the transaction, failure by the other party to
complete the transaction may result in it missing the opportunity of obtaining
a price or yield considered to be advantageous. When the Fund is the buyer in
such a transaction, however, it will maintain with its custodian cash or high-
grade portfolio securities having an aggregate value equal to the amount of
such purchase commitments until payment is made. To the extent the Fund
engages in "when issued" and "delayed delivery" transactions, it will do so
for the purpose of acquiring securities for its portfolio consistent with its
investment objective and policies and not for the purpose of investment
leverage.
Diversification. As a diversified fund, the Utility Income Fund may not
purchase the securities of any one issuer, other than the U.S. Government or
any of its instrumentalities, if immediately after such purchase more than 5%
of the value of its total assets would be invested in such issuer, or if it
would own more than 10% of the outstanding voting securities of such issuer,
except that up to 25% of the value of the Utility Income Fund's total assets
may be invested without regard to such 5% and 10% limitations.
GENERAL CHARACTERISTICS AND RISKS OF OPTIONS AND FUTURES
Put Options. A put option gives the purchaser of the option the right to
sell and the writer of the option the obligation to buy the underlying
security at the exercise price during the option period. The purchase of a put
option on a security would be designed to protect the Fund's holdings in a
security against a substantial decline in the market value. The Fund is
authorized to purchase exchange-listed options and over-the-counter options
("OTC Options"). Listed options are issued by the Options Clearing Corporation
("OCC") which guarantees the performance of the obligations of the parties to
such options. OTC options shall be treated as illiquid.
The Fund's ability to close out its position as a purchaser of an exchange-
listed put option is dependent upon the existence of a liquid secondary market
on option exchanges. Among the possible reasons for the absence of a liquid
secondary market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange;
(iii) trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities; (iv)
interruption of the normal operations on an exchange; (v) inadequacy of the
facilities of an exchange or OCC to handle current trading volume; or (vi) a
decision by one or more exchanges to discontinue the trading of options (or a
particular class or series of options), in which event the secondary market on
that exchange (or in that class 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 expiration 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.
4
<PAGE>
The hours of trading for options on securities may not conform to the hours
during which the underlying securities are traded. To the extent that the
option markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying markets
that cannot be reflected in the option markets.
FUTURES CONTRACTS AND RELATED OPTIONS
Characteristics. The Fund may sell financial futures contracts or purchase
put options on such futures as a hedge against anticipated interest rate
changes and may purchase stock index options or futures thereon to hedge
against changes in the equity markets. It may also utilize such investments to
hedge currency risk. A futures contract sale creates an obligation by the
Fund, as seller, to deliver the specific type of financial instrument called
for in the contract at a specified future time for a specified price. Options
on futures contracts are similar to options on securities except that an
option on a futures contract gives the purchaser the right in return for the
premium paid to assume a position in a futures contract (a long position if
the option is a call and a short position if the option is a put). Stock index
options may also be listed on a stock exchange.
Limitations on Use of Options and Futures. The Fund's use of futures and
options on futures will in all cases be consistent with applicable regulatory
requirements and in particular the rules and regulations of the Commodity
Futures Trading Commission with which the Fund must comply in order not to be
deemed a commodity pool operator within the meaning and intent of the
Commodity Exchange Act.
Risks. Typically, investment in futures contracts requires the Fund to
deposit with the applicable exchange or other specified financial intermediary
as security for its obligations an amount of cash or other specified
securities which initially is 1% to 5% of the face amount of the contract and
which thereafter fluctuates on a periodic basis as the value of the contract
fluctuates. Investment in options involves payment of a premium for the option
without any further obligation on the part of the Fund.
The Fund will not engage in transactions in futures contracts or related
options for speculative purposes but only as a hedge against changes resulting
from market conditions in the values of securities in its portfolio. In
addition, the Fund will not enter into a futures contract or related option
(except for closing transactions) if, immediately thereafter, the sum of the
amount of its initial deposits and premiums on open contracts and options
would exceed 5% of its total assets (taken at current value). Also, when
required, a segregated account of cash or cash equivalents will be maintained
and marked to market in an amount equal to the market value of the contract.
Hedging transactions present certain risks. In particular, the variable
degree of correlation between price movements of futures contracts and price
movements in the position being hedged creates the possibility that losses on
the hedge may be greater than gains in the value of the Fund's position. In
addition, futures and futures option markets may not be liquid in all
circumstances. As a result, in volatile markets, the Fund may not be able to
close out a transaction without incurring losses substantially greater than
the initial deposit. Although the contemplated use of these contracts should
tend to minimize the risk of loss due to a decline in the value of the hedged
position, at the same time they tend to limit any potential gain which might
result from an increase in the value of such position. The ability of the Fund
to hedge successfully will depend
5
<PAGE>
on the Adviser's ability to predict pertinent market movements, which cannot
be assured. Finally, the daily deposit requirements in futures contracts
create an ongoing greater potential financial risk than do options
transactions, where the exposure is limited to the cost of the initial
premium. Losses due to hedging transactions will reduce net asset value.
Income earned by the Fund from its hedging activities generally will be
treated as capital gains.
SHARES OF THE FUND
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 Class C Shares. Other classes of shares are not presently
available, but may be offered in the future. The Fund is authorized to offer
up to four classes of shares which may be purchased at a price equal to their
net asset value per share, plus (for certain classes) a sales charge
(discussed below) which, at the election of the purchaser, may be imposed
either (i) at the time of purchase (the "Class A Shares") or (ii) on a
contingent deferred basis (the "Class B Shares" or the "Class C Shares"). The
four classes of shares each represent an interest in the same portfolio of
investments of the Fund and have the same rights, except (i) Class B and Class
C Shares bear the expenses of the deferred sales arrangement and any expenses
(including a higher distribution services fee) resulting from such sales
arrangement, (ii) each class that is subject to a distribution fee has
exclusive voting rights with respect to those provisions of the Fund's Rule
12b-1 distribution plan which relate only to such class and (iii) the classes
have different exchange privileges. Additionally, Class B Shares will
automatically convert into Class A Shares after a specified period of years
(as described below). 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 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
"Exchange And Reinvestment Privilege" in the Prospectus. The investor or the
investor's broker or dealer is responsible for promptly forwarding payment to
the Fund for shares purchased. Class A Shares may be subject to a CDSC as
explained in the Prospectus under "Class A Contingent Deferred Sales Charge".
2. Class B Shares. Class B Shares are sold at net asset value (see "Net
Asset Value") without a sales charge at the time of purchase. Instead, the
sales charge is imposed on a contingent deferred basis. The net assets
attributable to Class B Shares are subject to an ongoing distribution fee (see
"Distributor" below). The amount of the contingent deferred sales charge, if
any, will vary depending on the number of years from the time of payment of
the purchase of Class B Shares until the time such shares are redeemed. Solely
for
6
<PAGE>
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% CDSC if they are
redeemed within one year after purchase. The net assets attributable to Class
C Shares are subject to an ongoing distribution and services fee of 0.75% (see
"About the Distributor" in the Prospectus). The Class C Shares have no
conversion rights.
The CDSC 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 CDSC 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
7
<PAGE>
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 Nuveen, and subsidiaries thereof, or their immediate family
members; any person who, for at least 90 days, has been an officer, director
or bona fide employee of any Authorized Dealer, or their immediate family
members; officers and directors of bank holding companies that make Fund
shares available directly or through subsidiaries or bank affiliates; 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 John Nuveen & Co. Incorporated (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 management of the Corporation, including general supervision of the
duties performed for the Funds under the Investment Management Agreement, is
the responsibility of its Board of Directors. The Corporation currently has
eight directors, two of whom are "interested persons" (as the term "interested
persons" is defined in the Investment Company Act of 1940) and six of whom are
"disinterested persons." The names and business addresses of the directors and
officers of the Corporation and their principal occupations and other
affiliations during the past five years are set forth below, with those
directors who are "interested persons" of the Corporation indicated by an
asterisk.
<TABLE>
<CAPTION>
POSITIONS
AND OFFICES PRINCIPAL OCCUPATIONS
NAME AND ADDRESS AGE WITH TRUST DURING PAST FIVE YEARS
- ---------------- --- ----------- ----------------------
<S> <C> <C> <C>
Timothy R. 49 Chairman and Chairman since July 1, 1996 of The John
Schwertfeger* Director Nuveen Company, John Nuveen & Co.
333 West Incorporated, Nuveen Advisory Corp. and
Wacker Drive Nuveen Institutional Advisory Corp.; prior
Chicago, IL thereto Executive Vice President and
60606 Director of The John Nuveen Company, John
Nuveen & Co. Incorporated, Nuveen Advisory
Corp. and Nuveen Institutional Advisory
Corp.; Chairman and Director (since January
1997) of Nuveen Asset Management, Inc.;
Director (since 1996) of Institutional
Capital Corporation.
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
POSITIONS
AND OFFICES PRINCIPAL OCCUPATIONS
NAME AND ADDRESS AGE WITH TRUST DURING PAST FIVE YEARS
- ---------------- --- ----------- ----------------------
<S> <C> <C> <C>
Anthony T. Dean* 53 President and President since July 1, 1996 of The John
333 West Wacker Drive Director Nuveen Company, John Nuveen & Co.
Chicago, IL 60606 Incorporated, Nuveen Advisory Corp. and
Nuveen Institutional Advisory Corp.; prior
thereto, Executive Vice President and
Director of The John Nuveen Company, John
Nuveen & Co. Incorporated, Nuveen Advisory
Corp. and Nuveen Institutional Advisory
Corp.; President and Director (since
January 1997) of Nuveen Asset Management,
Inc.; Chairman and Director (since 1997) of
Rittenhouse Financial Services, Inc.
Robert P. Bremner 58 Director Private Investor and Management Consultant.
3725 Huntington
Street, N.W.
Washington, D.C. 20015
Lawrence H. Brown 64 Director Retired (August 1989) as Senior Vice
201 Michigan Avenue President of The Northern Trust Company.
Highwood, IL 60040
Anne E. Impellizzeri 65 Director Executive Director of Manitoga (Center for
3 West 29th Street Russel Wright's Design with Nature);
New York, NY 10001 formerly President and Chief Executive
Officer of Blanton-Peale Institutes.
Peter R. Sawers 65 Director Adjunct Professor of Business and Economics,
22 The Landmark University of Dubuque, Iowa; Adjunct
Northfield, IL 60093 Professor, Lake Forest Graduate School of
Management, Lake Forest, Illinois;
Chartered Financial Analyst; Certified
Management Consultant.
William J. Schneider 54 Director Senior Partner, Miller-Valentine Partners,
4000 Miller-Valentine Vice President, Miller-Valentine Group.
Ct.
P.O. Box 744
Dayton, OH 45401
Judith M. Stockdale 50 Director Executive Director, Gaylord and Dorothy
35 E. Wacker Drive Donnelley Foundation (since 1994); prior
Suite 2600 thereto, Executive Director, Great Lakes
Chicago, IL 60601 Protection Fund (from 1990 to 1994).
Alan G. Berkshire 37 Vice President Vice President and General Counsel (since
333 West Wacker Drive and Assistant September 1997) and Secretary (since May
Chicago, IL 60606 Secretary 1998) of The John Nuveen Company, John
Nuveen & Co. Incorporated, Nuveen Advisory
Corp. and Nuveen Institutional Advisory
Corp., prior thereto, Partner in the law
firm of Kirkland & Ellis.
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
POSITIONS
AND OFFICES PRINCIPAL OCCUPATIONS
NAME AND ADDRESS AGE WITH TRUST DURING PAST FIVE YEARS
- ---------------- --- ----------- ----------------------
<S> <C> <C> <C>
Michael S. 41 Vice President Vice President of Nuveen Advisory Corp.
Davern (since January 1997); prior thereto, Vice
One South President and Portfolio Manager of Flagship
Main Street Financial.
Dayton, OH
45402
Lorna C. 53 Vice President Vice President of John Nuveen & Co.
Ferguson Incorporated; Vice President (since January
333 West 1998) of Nuveen Advisory Corp. and Nuveen
Wacker Institutional Advisory Corp.
Drive
Chicago, IL
60606
William M. 34 Vice President Vice President of Nuveen Advisory Corp.
Fitzgerald (since December 1995); Assistant Vice
333 West President of Nuveen Advisory Corp. (from
Wacker September 1992 to December 1995), prior
Drive thereto, Assistant Portfolio Manager of
Chicago, IL Nuveen Advisory Corp. (from June 1988 to
60606 September 1992).
Stephen D. 44 Vice President Vice President of John Nuveen & Co.
Foy and Controller Incorporated.
333 West
Wacker
Drive
Chicago, IL
60606
J. Thomas 43 Vice President Vice President of Nuveen Advisory Corp.
Futrell
333 West
Wacker
Drive
Chicago, IL
60606
Richard A. 35 Vice President Vice President of Nuveen Advisory Corp.
Huber (since January 1997); prior thereto, Vice
333 West President and Portfolio Manager of Flagship
Wacker Financial.
Drive
Chicago, IL
60606
Steven J. 41 Vice President Vice President of Nuveen Advisory Corp.
Krupa
333 West
Wacker
Drive
Chicago, IL
60606
Larry W. 47 Vice President Vice President, Assistant Secretary and
Martin Assistant General Counsel of John Nuveen &
333 West Co. Incorporated; Vice President and
Wacker Assistant Secretary of Nuveen Advisory
Drive Corp.; Vice President and Assistant
Chicago, IL Secretary of Nuveen Institutional Advisory
60606 Corp.; Assistant Secretary of The John
Nuveen Company.
Edward F. 33 Vice President Vice President (since September 1996),
Neild, IV previously Assistant Vice President (since
333 West December 1993) of Nuveen Advisory Corp.,
Wacker portfolio manager prior thereto; Vice
Drive President (since September 1996),
Chicago, IL previously Assistant Vice President (since
60606 May 1995) of Nuveen Institutional Advisory
Corp., portfolio manager prior thereto;
Chartered Financial Analyst.
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
POSITIONS
AND OFFICES PRINCIPAL OCCUPATIONS
NAME AND ADDRESS AGE WITH TRUST DURING PAST FIVE YEARS
- ---------------- --- ----------- ----------------------
<S> <C> <C> <C>
Stephen S. 40 Vice President Vice President (since September 1997),
Peterson previously Assistant Vice President (since
333 West September 1996) of Nuveen Advisory Corp.,
Wacker Drive Portfolio Manager prior thereto.
Chicago, IL
60606
Stuart W. 42 Vice President Vice President of John Nuveen & Co.
Rogers Incorporated.
333 West
Wacker Drive
Chicago, IL
60606
Thomas C. 47 Vice President Vice President of Nuveen Advisory Corp. and
Spalding, Jr. Nuveen Institutional Advisory Corp.;
333 West Chartered Financial Analyst.
Wacker Drive
Chicago, IL
60606
H. William 64 Vice President Vice President and Treasurer of The John
Stabenow and Treasurer Nuveen Company, John Nuveen & Co.
333 West Incorporated, Nuveen Advisory Corp. and
Wacker Drive Nuveen Institutional Advisory Corp.
Chicago, IL
60606
William S. 33 Vice President Vice President of John Nuveen & Co.
Swanson Incorporated (since October 1997), prior
333 West thereto, Assistant Vice President (since
Wacker Drive September 1996); formerly, Associate of
Chicago, IL John Nuveen & Co. Incorporated.
60606
Gifford R. 42 Vice President Vice President, Secretary and Assistant
Zimmerman and Secretary General Counsel of John Nuveen & Co.
333 West Incorporated; Vice President and Assistant
Wacker Drive Secretary of Nuveen Advisory Corp.; Vice
Chicago, IL President and Assistant Secretary of Nuveen
60606 Institutional Advisory Corp.; Chartered
Financial Analyst.
</TABLE>
Anthony Dean, Peter Sawers and Timothy Schwertfeger serve as members of the
Executive Committee of the Board of Directors. The Executive Committee, which
meets between regular meetings of the Board of Directors, is authorized to
exercise all of the powers of the Board of Directors.
The directors of the Corporation are directors or trustees, as the case may
be, of 37 Nuveen open-end funds and 52 Nuveen closed-end funds advised by
Nuveen Advisory Corp.
11
<PAGE>
The following table sets forth compensation paid by the Corporation to each
of the directors of the Corporation and the total compensation paid to each
director during the fiscal year ended June 30, 1998. The Corporation has no
retirement or pension plans. The officers and directors affiliated with Nuveen
serve without any compensation from the Corporation. Directors Brown,
Impellizzeri, Rosenheim and Sawers became directors of this Corporation on
January 30, 1997.
<TABLE>
<CAPTION>
AGGREGATE TOTAL COMPENSATION
COMPENSATION FROM CORPORATION AND
FROM THE TWO SERIES FUND COMPLEX
NAME OF DIRECTOR OF THIS CORPORATION PAID TO DIRECTORS
---------------- ------------------- --------------------
<S> <C> <C>
Robert P. Bremner................ $265 $66,446
Lawrence H. Brown................ $272 $79,000
Anne E. Impellizzeri............. $265 $73,000
Margaret K. Rosenheim............ $ 76 $29,506(1)
Peter R. Sawers.................. $265 $73,000
William J. Schneider............. $265 $66,446
Judith M. Stockdale.............. $195(2) $49,000(2)
</TABLE>
- --------
(1) Includes $1,256 in interest accrued on deferred compensation from prior
years; former director, retired July 1997.
(2) Elected to the Board in July 1997.
Each director who is not affiliated with Nuveen or Nuveen Advisory receives
a fee. The Corporation requires no employees other than its officers, all of
whom are compensated by Nuveen.
As of October 2, 1997, to the knowledge of management, the following
stockholder held of record more than 5% of the Class A Shares of the Utility
Income Fund: Merrill Lynch, Pierce, Fenner & Smith FSBC, Attn: Fund
Administration, 4800 Deer Lake Dr. E. Fl. 3, Jacksonville, FL 32246-6484,
28.72%; and the following stockholder held of record more than 5% of the Class
C Shares of the Utility Fund: Merrill Lynch, Pierce, Fenner & Smith FSBC,
Attn: Fund Administration, 4800 Deer Lake Dr. E. Fl. 3, Jacksonville, FL
32246-6484, 32.24%. All directors and officers as a group own less than 1% of
the outstanding shares as of the above date. The Fund has no knowledge of any
other person owning more than 5% of the outstanding shares as of such date.
INVESTMENT ADVISORY SERVICES
As stated in the Utility Income Fund Prospectus, Nuveen Advisory Corp. acts
as investment adviser (the "Manager") to the Utility Income Fund pursuant to
an Investment Advisory Agreement (the "Advisory Agreement").
See "About the Investment Manager" in the Prospectus for a description of
the Manager's duties as investment adviser. The Manager's administrative
obligations include: (i) assisting in supervising all aspects
12
<PAGE>
of the Utility Income Fund's operations; (ii) providing the Utility Income
Fund, at the Manager's expense, with the services of persons competent to
perform such administrative and clerical functions as are necessary in order
to provide effective corporate administration of the Utility Income Fund; and
(iii) providing the Utility Income Fund, at the Manager's expense, with
adequate office space and related services. The Utility Income Fund paid $0;
$0; and $126,947 to the Manager pursuant to its Advisory Agreement for the
three fiscal years ended June 30, 1996, June 30, 1997 and June 30, 1998,
respectively. The amounts paid for the fiscal years ended June 30, 1996, June
30, 1997 and June 30, 1998 do not include $157,329; $158,085; and $2,443
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, The Chase Manhattan
Bank.
The Advisory Agreement will terminate automatically upon assignment and its
continuance must be approved annually by the Fund's Board of Directors or a
majority of the Fund's outstanding voting shares and in either case, by a
majority of the Fund's independent directors. The Advisory Agreement is
terminable at any time without penalty by the Board of Directors or by a vote
of a majority of the voting shares on 60 days' written notice to the Manager,
or by the Manager on 60 days' written notice to the Utility Income Fund.
The Manager of the Utility Income Fund has agreed that in the event the
operating expenses of the Utility Income Fund (including fees paid by the
Utility Income Fund to the Manager and payments by the Utility Income Fund to
the Distributor but excluding taxes, interest, brokerage and extraordinary
expenses) for any fiscal year ending on a date on which the Advisory Agreement
with the Utility Income Fund is in effect, exceed the expense limitations
imposed by applicable state securities laws or any regulations thereunder, it
will, up to the amount of its fee, reduce its fee or reimburse the Utility
Income Fund in the amount of such excess. As of the date of this Prospectus,
under the most restrictive state regulations applicable, the Manager would be
required to reimburse the Utility Income Fund such operating expenses
exceeding 2 1/2% of the first $30 million of the average net assets, 2% of the
next $70 million of the average net assets, and 1 1/2% of the remaining
average net assets. The Manager believes that such operating expenses will be
less than such amounts.
Securities held by the Utility Income Fund may also be held by, or be
appropriate investments for, other investment advisory clients of the Manager
and its affiliates. Because of different objectives or other factors, a
particular security may be bought for one or more clients when one or more
clients are selling the same security. If purchases or sales of securities for
the Utility Income Fund or other advisory clients arise for consideration at
or about the same time, transactions in such securities will be made, insofar
as feasible, for the Utility Income Fund and such other clients in a manner
deemed equitable to all. To the extent that transactions on behalf of more
than one client of the Manager during the same period may increase the demand
for securities being purchased or the supply of securities being sold, there
may be an adverse effect on the price of such securities.
TAXES
References are made to the sections in the Prospectus entitled "Taxes" for a
discussion of relevant tax matters and to which the discussion below is
supplementary.
13
<PAGE>
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 (this requirement applies only to
taxable years beginning on or before August 5, 1997); and (c) diversify its
holdings so that at the end of each fiscal quarter, (i) at least 50% of the
value of such Portfolio's assets is represented by cash, United States
government securities, securities of other regulated investment companies, and
other securities which, with respect to any one issuer, do not represent more
than 5% of the value of such Portfolio's assets nor more than 10% of the
voting securities of such issuer, and (ii) not more than 25% of the value of
such Portfolio's assets is invested in the securities of any one issuer (other
than United States government securities or the securities of other RICs).
If each Portfolio of the Fund qualifies as a RIC and distributes to its
stockholders at least 90% of its investment company taxable income (not
including net capital gain, which is the excess of net long-term capital gain
over net short-term capital loss), then each Portfolio will not be subject to
federal income tax on the income so distributed. However, each Portfolio would
be subject to corporate income tax on any undistributed income. In addition,
each Portfolio will be subject to a nondeductible 4% excise tax on the amount
by which the income it distributes in any calendar year is less than a
required distribution amount. The required distribution amount for a calendar
year equals the sum of (a) 98% of each Portfolio's ordinary income for such
calendar year; (b) 98% of the excess of capital gains over capital losses for
the one-year period ending on October 31 of such calendar year; and (c) 100%
of the undistributed income and gains from prior years. Each Portfolio intends
to distribute sufficient income so as to avoid both corporate income tax and
the excise tax. However, a Portfolio may in the future decide to retain all or
a portion of its net capital gain. In such case, the Portfolio would be
subject to corporate income tax on such retained net capital gain; would
designate to stockholders the undistributed capital gain; stockholders would
include as long-term capital gain income such undistributed net capital gain;
and stockholders would be eligible for a credit with respect to such tax paid
by the Portfolio.
TAX OBJECTIVE OF DIVIDEND POLICY FOR CORPORATE INVESTORS
The Utility Income Fund's dividend procedures are designed to maximize the
federal income tax advantage of the 70% dividends-received deduction to
domestic corporate stockholders. If the Utility Income Fund did not declare
dividends on a frequent basis, the net asset value would tend to rise during
the period between dividends, due to income received on the investment
portfolio and the gradual increase in market value shown by many preferred
stocks or other securities as periodic dividend payment dates approach. Under
this method, any increase in net asset value would result in short- or long-
term capital gains rather than dividend income for stockholders who redeemed
shares between dividend payment dates. By averaging the anticipated income on
a daily basis and declaring each day's anticipated income as a dividend, the
Utility Income Fund seeks to maximize the portion of the Utility Income Fund's
income and temporary unrealized appreciation that will qualify as dividend
income. Although the Utility Income Fund and the Manager believe that the
Utility Income Fund will be able to achieve its tax objectives, there can be
no assurances on this matter.
14
<PAGE>
Dividends distributed by the Fund to stockholders will only be eligible for
the dividends-received deduction to the extent of the Fund's gross income that
consists of dividends received on equity securities of domestic corporations
with respect to which the Fund meets the same holding period, risk of loss and
borrowing limitations applicable to the Fund's stockholders, as described
below under "Holding Period and Other Requirements". If the expenses and
losses of the Fund equal or exceed non-qualifying income (if any), all
dividends distributed by the Fund may qualify for the dividends-received
deduction.
In the event that the Fund's total distributions (including distributed or
designated net capital gain) for a taxable year exceed, generally, its
investment company taxable income and net capital gain, a portion of each
distribution will be treated as a return of capital, which will not qualify
for the dividends-received deduction. Distributions treated as a return of
capital reduce a stockholder's basis in its shares and could result in
recognition of capital gain either when a distribution is in excess of basis,
or more likely, when a stockholder redeems its shares.
For purposes of the alternative minimum tax imposed on corporations,
alternative minimum taxable income will be increased by 75% of the amount by
which an alternative measure of income (adjusted current earnings) that
includes the full amount of dividends received (without regard to the
dividends-received deduction) exceeds the amount otherwise determined to be
the alternative minimum taxable income. Accordingly, an investment in the Fund
may cause a corporate stockholder to be subject to (or result in an increased
liability under) the alternative minimum tax.
HOLDING PERIOD AND OTHER REQUIREMENTS
In order to qualify for the benefits of the dividends-received deduction, a
corporate stockholder must satisfy certain holding period requirements with
respect to the Fund's shares. Section 246 of the Code permits the dividends-
received deduction to corporate stockholders only if the shares with respect
to which the dividends were paid have been held for more than 45 days during
the 90-day period beginning on the date which is 45 days before the date on
which such shares become ex-dividend with respect to such dividend. The
holding period requirements are separately applicable to each block of shares
acquired, including each block of shares received in payment of the Fund's
daily dividends. The Fund has received a ruling under Section 246 with respect
to this issue from the Internal Revenue Service (the "IRS") confirming the
Fund's interpretation. For purposes of determining whether this holding period
requirement has been met, the day of acquisition and any day after the first
45 days after the date on which such shares become ex-dividend must be
disregarded. The Fund and the Manager believe that once a stockholder has
satisfied this 46-day holding period with respect to any block of shares, such
stockholder will similarly satisfy the 46-day holding period on reinvested
dividends declared with respect to such shares to the extent that such
stockholder's total redemptions during any period are properly identified, as
described below, as relating to shares with respect to which the stockholder
has satisfied the 45-day period.
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.
15
<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
stockholders are urged to consult their tax advisers.
A stockholder and the Fund may also be subject to the extraordinary dividend
provision of the Code under which a stockholder's basis in stock can be
reduced if certain extraordinary dividends are received.
Identification of Utility Income Fund Shares. The IRS has specific
regulations governing the identification of shares to be redeemed by a
stockholder that wishes to redeem some, but not all, of its shares. In effect,
provided that any shares redeemed are properly identified, as described below,
as shares which have been held for more than 45 days, these regulations permit
a stockholder to make redemptions on a weekly or even daily basis without
adversely affecting the availability of the dividends-received deduction.
The IRS's regulations permit a stockholder to identify specifically the
shares to be redeemed, thereby enabling such stockholder to select for
redemption those shares having a tax basis and holding period considered to be
most favorable by such stockholder. Alternatively, the regulations also permit
a stockholder to elect to differentiate shares on the basis of long- and
short-term holding periods and to designate from which category the redeemed
shares are to be drawn. For tax basis purposes, the basis of all shares in a
category will be averaged. In the absence of adequate identification under the
rules, any shares redeemed, including classes of shares subject to a
contingent deferred sales load, will be charged against the earliest lot(s)
acquired for both holding period and tax basis purposes.
Basis Adjustment for Extraordinary Dividends of Utility Income Fund. Under
section 1059 of the Code, a corporation which receives an "extraordinary
dividend" and disposes of the stock with respect to which such dividend was
paid, provided generally that such stock has not been held for at least two
years prior to the date of declaration, announcement or agreement about the
extraordinary dividend, is required to reduce its basis in such stock (but not
below zero) by the amount of the dividend which was not taxed because of the
dividends-received deduction with such basis reduction generally being treated
as having occurred immediately before the sale or disposition of such stock.
To the extent that such untaxed amount exceeds the shareholder's basis, such
excess will be taxed as gain upon a sale or disposition of such stock. An
extraordinary dividend generally is any dividend that equals or exceeds 10% of
the shareholder's basis in the stock (5% in the case of preferred stocks).
For this purpose, generally, all dividends received within any 85-day
period, and, if such dividends total more than 20% of the shareholder's basis
in its stock, all dividends received within one year, must be aggregated for
purposes of determining whether such dividends constitute extraordinary
dividends. The holder may elect to determine the status of extraordinary
dividends by reference to the fair market value of the stock as of the date
before the ex-dividend date, rather than by reference to the adjusted basis of
such stock (provided the holder established the fair market value to the
satisfaction of the IRS). If the Fund receives any extraordinary dividends (as
so defined) with respect to any stock and does not maintain the two-year
holding period described above, its basis in such stock will be reduced, and
it may recognize additional gain upon disposition of such stock. Similarly, if
the dividends received by an investor constitute
16
<PAGE>
extraordinary dividends, the investor may be required to recognize additional
gain upon redemption. See "Taxes--Capital Gain Dividends" and "Taxes--
Redemptions" in the Utility Income Fund Prospectus.
Section 1059(f) of the Code generally provides that dividends on certain
self-liquidating stock are treated as extraordinary dividends without regard
to the period that the taxpayer has held such stock. In general, the stock
that is subject to this provision is preferred stock which (i) when issued,
has a dividend rate which declines (or can reasonably be expected to decline)
in the future (ii) has an issue price in excess of its liquidation rights or
stated redemption price, or (iii) is otherwise structured to enable corporate
stockholders to reduce tax through a combination of dividend received
deduction and loss on the disposition of the stock. Although it is arguable
that the dividend rate on adjustable rate preferred stock can reasonably be
expected to decline in the future, the Fund does not believe that this
provision was intended to cover stock which is not designed to produce both an
increased dividends received deduction and a capital loss. The Fund does not
intend to invest in stock paying dividends which are treated as extraordinary
under this provision.
In determining whether the two-year holding period has been met, the same
rules apply as are applicable to the 45-day holding period requirement for the
dividends-received deductions.
In the event that total distributions (including distributed or designated
net capital gain) for a taxable year exceed its investment company taxable
income and net capital gain, a portion of each distribution generally will be
treated as a return of capital. Distributions treated as a return of capital
reduce a stockholder's basis in its shares and could result in a capital gains
tax either when a distribution is in excess of basis or, more likely, when a
stockholder redeems its shares.
Stockholders of a Portfolio will be notified annually by the Fund as to the
federal tax status of dividends and distributions paid during the calendar
year. Dividends and distributions may also be subject to state and local
taxes. State and local tax treatment may vary according to applicable laws.
Stockholders can elect to receive distributions in cash or in additional
shares of such Portfolio. The price of the additional shares is determined as
of the record date for the dividend payment.
The Fund may in the future engage in various defensive hedging transactions.
Under various Code provisions such transactions might change the character of
recognized gains and losses, accelerate the recognition of certain gains and
losses, and defer the recognition of certain losses.
YIELD AND TOTAL RETURN CALCULATION
In accordance with SEC regulations, the Fund may include current yield and
average annual total return in advertisements or information furnished to
stockholders or potential investors. Yields are calculated (separately for
each class of shares) in accordance with the SEC's standardized yield formula.
Under this formula, dividend and interest income over the 30 day measurement
period, is reduced by period expenses and divided by the number of days within
the measurement period to arrive at a daily income rate. This daily income
rate is then expressed as a semiannually compounded yield based on the maximum
offering price of a share assuming a standardized 360 day year. The Utility
Income Fund may quote a tax equivalent yield,
17
<PAGE>
which reflects the rate a corporate investor (assuming the availability of the
70% dividends-received deduction for all daily dividends and a then
appropriate and specified corporate tax rate) would have to earn on a taxable
security in order to equal the same after-tax return.
The Fund may also advertise total return for each class of shares which is
calculated differently from "average annual total return" (a "non-standardized
quotation"). A non-standardized quotation of total return measures the
percentage change in the value of an account between the beginning and end of
a period, assuming no activity in the account other than reinvestment of
dividends and capital gains distributions. A non-standardized quotation of
total return for a particular class of shares will always be accompanied by
the "average annual total return" for such class. Average annual total return
for any time period is calculated (separately for each class) by assuming an
investment at the beginning of the measurement period at the maximum offering
price. Dividends from the net investable amount are then reinvested in
additional shares each month at the net asset value. At the end of the
measurement period, the total number of shares owned are redeemed at net asset
value (less any applicable contingent deferred sales load). The change in the
total value during the investment period is then expressed as an average
annual total rate of return. The Utility Income Fund may also quote its
current yield and total return of each class on a tax equivalent basis
assuming the availability of the 70% dividends-received deduction for all of
its daily dividends and a then appropriate and specified corporate tax rate.
The Utility Income Fund may also quote rankings, yields or returns as
published by recognized statistical services or publishers wherein its
performance is categorized or compared with other funds with similar
investment objectives, such as Lipper Analytical Service's "Utility Funds"
under "Equity Funds," or this same data as quoted by Barron's, Business Week,
Forbes, Fortune, Micropal, Money, Mutual Fund, Personal Investing, Worth,
Value Line Mutual Fund Survey, or others; Weisenberger Investment Companies
Service's annual Investment Companies under "Growth and Current Income"; or
Morningstar, Inc.'s Mutual Fund Values under "Specialty--Utilities."
Current yield and total return of each class will vary from time to time
depending on market conditions, the composition of the portfolio, operating
expenses and other factors. These factors and possible differences in method
of calculating performance figures should be considered when comparing the
performance figures of the Utility Income Fund with those of other investment
vehicles.
Yield and Total Return Calculation as of June 30, 1998, for the Utility
Income 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 5 YEAR SINCE INCEPTION* DATE
------- ------ ------ ---------------- -------------
<S> <C> <C> <C> <C> <C>
Class A 3.85% 14.35% 8.67 9.83% Aug. 26, 1983
Class C 3.47% 18.65% 8.99 10.01% July 6, 1993
</TABLE>
- --------
*Since inception returns are reflected since the change in investment
objectives as of 7/1/91.
DISTRIBUTIONS
The Utility Income Fund anticipates making daily distributions. The
anticipated daily distributable income of the Utility Income Fund for a
particular day will be equal to the "anticipated daily dividend and
18
<PAGE>
interest income" for the day, less the "anticipated daily expenses" for that
day plus or minus any special adjustment for that day.
As with all declarations of distributions by investment companies, the net
asset value will be reduced by the amount of each daily dividend at the time
of declaration.
ANTICIPATED DAILY DIVIDEND AND INTEREST INCOME
In order to determine this component of anticipated daily distributable
income, the Manager will first project the amount of the next anticipated
dividend or interest payment (or accretion of discount in the case of
discounted instruments) on each security and the date upon which such dividend
or interest is scheduled to be paid and will then divide such amount by the
number of days from the most recent dividend or interest payment date to the
next anticipated payment date.
The Manager will continually monitor each portfolio instrument held by the
Utility Income Fund and will revise, as often as appropriate, its projections
of the amount and timing of dividend and interest payments. In making any
revision, the Manager will recalculate the anticipated daily dividend or
interest income for the instrument and calculate the difference between the
original and revised anticipated daily income figures. The Manager will then
use the revised figure after temporarily adjusting it to account for the
cumulative effect of such revision on the period prior to such revision. In
making this temporary adjustment, the Manager will generally add or subtract
such difference to or from the revised daily income figure for the particular
instrument for the same number of days as have already elapsed prior to such
revision during the anticipated payment period. However, if the revised figure
is less than 50% of the original figure, the Manager will make such adjustment
over a longer period of time or, in extreme cases, will apply such adjustment
to other portfolio securities in order to minimize the effect of any such
revision.
Special dividends, if any, will not be included in anticipated daily income
until declared and will then be included ratably over the number of days
remaining from the time the Manager learns of such declaration to the end of
the month following the month during which such dividend is paid (but in no
event later than the end of the Utility Income Fund's taxable year).
There is, of course, no assurance that dividends will be declared by the
directors of the companies in which the Utility Income Fund invests or that
interest will be paid on the debt obligations held by the Utility Income Fund.
ANTICIPATED DAILY EXPENSES
In order to determine this component of the anticipated daily distributable
income, the Manager will first project the total amount of anticipated
expenses in a proportionate amount for each class and will then divide such
amount by the number of days during the year. The Manager will continually
monitor the Utility Income Fund's expenses and will revise, as often as
appropriate, its projections of such expenses. In making any revision, the
Manager will, in the same manner as described above under "Anticipated Daily
Dividend and Interest Income," recalculate the anticipated daily expenses
figure and the cumulative difference and will then spread the amount of such
difference over the number of days remaining during the year.
19
<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
income because (i) it is the belief of the Utility Income Fund and the Manager
that any component of gains and losses on the sale of securities that is
attributable to the timing of dividend or interest payments on portfolio
securities is likely to be reflected in the anticipated dividend and interest
income component of the daily dividend formula and (ii) the Utility Income
Fund and the Manager do not expect that a significant portion of the Utility
Income Fund's income will be short- or long-term capital gain or loss.
The Manager will, however, continually monitor the Utility Income Fund's
aggregate short- and long-term capital gain or loss and ordinary income after
taking into account dividends declared with respect to anticipated dividend
and interest income on portfolio securities sold prior to the Utility Income
Fund being entitled to receive such income. If the Manager concludes that the
Utility Income Fund is accumulating short-term capital gain or loss ordinary
income in an amount which may be material, the Utility Income Fund reserves
the right to adjust the daily dividend so as to more nearly accomplish the
Utility Income Fund's objective of distributing as much as practicable of its
investment company taxable income in the form of dividends. Any such
adjustments will be made over the course of such period of not less than 60
days as the Utility Income Fund shall determine (but in no event ending later
than the last day of the Utility Income Fund's taxable year).
DISTRIBUTOR
As stated in the Prospectus, John Nuveen & Co., Incorporated acts as the
distributor (the "Distributor") of shares of the Fund in accordance with the
terms of the Distribution Agreement originally dated January 1, 1997. The
Distributor will make a continuous offering of the shares and will be
responsible for all sales and promotion efforts. There is no redemption
charge. Each Distribution Agreement must be approved in the same manner as the
Advisory Agreement discussed under "Investment Advisory Services" above and
will terminate automatically if assigned by either party thereto and is
terminable at any time without penalty by the Board of Directors of the Fund
or by vote of a majority of the Utility Income Fund's outstanding shares on 60
days' written notice to the Distributor and by the Distributor on 60 days'
written notice to the Utility Income Fund.
Pursuant to Rule 12b-1 under the 1940 Act, the Fund has adopted a plan (the
"Plan") with respect to Class A Shares, Class B Shares and Class C Shares
which permits the Fund to pay for certain distribution and promotion expenses
related to marketing the shares of each Portfolio. The Plan authorizes the
Fund to expend its monies in an amount equal to the aggregate for all such
expenditures to such percentage of the Fund's daily net asset value as may be
determined from time to time by vote cast in person at a meeting called for
such purpose, by a majority of the Fund's disinterested directors. The scope
of the foregoing shall be interpreted by the directors, whose decision shall
be conclusive except to the extent it contravenes
20
<PAGE>
established legal authority. Without in any way limiting the discretion of the
directors, the following activities are hereby declared to be primarily
intended to result in the sale of shares of the Fund: advertising the Fund or
the Fund's investment manager's mutual fund activities; compensating
underwriters, dealers, brokers, banks and other selling entities and sales and
marketing personnel of any of them for sales of shares of the Fund, whether in
a lump sum or on a continuous, periodic, contingent, deferred or other basis;
compensating underwriters, dealers, brokers, banks and other servicing
entities and servicing personnel (including the Fund's investment manager and
its personnel of any of them for providing services to stockholders of the
Fund relating to their investment in the Fund, including assistance in
connection with inquiries relating to stockholder 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 maximum amount payable by the Fund under the Plan and related agreements
with respect to Class A Shares is .20% of each Portfolio's average daily net
assets for the year attributable to such Class A Shares. For Class B Shares,
the maximum amount payable annually is .95% of such Portfolio's average daily
net assets attributable to such Class B Shares. For Class C Shares, the
maximum amount payable annually is .75% of such Portfolio's average daily net
assets attributable to such Class C Shares. In the case of broker-dealers and
others, such as banks, who have Selling or Service Agreements with the
Distributor or the Fund, the maximum amount payable to any recipient is
.000548% per day (.20% on an annualized basis) of the proportion of daily net
assets of the Portfolio attributable to Class A Shares represented by such
person's customers. The maximum amount payable to any such recipient with
respect to Class B Shares is .00260% per day (.95% on an annualized basis) of
the proportion of average daily net assets of such Portfolio's attributable to
Class B Shares represented by such person's customers. The maximum amount
payable to any such recipient with respect to Class C Shares is .00205% per
day (.75% on an annualized basis) of the proportion of average daily net
assets of such Portfolio's attributable to Class C Shares represented by such
person's customers. As described in the Prospectus, the Board of Directors may
reduce these amounts at any time. All distribution expenses incurred by the
Distributor and others, such as broker-dealers or banks, in excess of the
amount paid by a Portfolio will be borne by such persons without any
reimbursement from such Portfolio.
21
<PAGE>
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
1997 73,137 --
1998 40,415 --
Class C
1994 32,610 3,378
1995 48,312 --
1996 53,871 2,578
1997 50,127 --
1998 42,528 --
</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
1997* 31,512 8,092 2,321 6,796 48,721
1998 40,415 -- -- -- 40,415
Class C
1994 32,610 -- -- -- 32,610
1995 37,018 5,929 4,566 799 48,312
1996 50,580 3,291 -- -- 53,871
1997* 22,239 2,138 2,638 1,696 28,711
1998 38,928 -- -- -- 38,928
</TABLE>
* Amounts represent the period from July 1, 1996 through December 31, 1996.
The Plan, the Distribution Agreement, the Selling Agreements and the Service
Agreements of the Fund have been renewed with respect to the Utility Income
Fund, by the Fund's Board of Directors, including a majority of the directors
who are not "interested persons" of the Fund and who have no direct or
indirect financial interest in the Plan or any related agreement, by vote cast
in person at meetings called for the purpose of voting on the Plan and such
agreements. Continuation of the Plan and the related agreements must be
approved annually in the same manner, and the Plan or any related agreement
may be terminated at any time without penalty by a majority of such
independent directors or by a majority of a Portfolio's outstanding shares.
Any amendment increasing the 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.
22
<PAGE>
In order for the Plan to remain effective, the selection and nomination of
directors who are not "interested persons" of the Fund must be done by the
directors who are not "interested persons" and the persons authorized to make
payments under the Plans must provide written reports at least quarterly to
the Board of Directors for their review.
Also in its capacity as national wholesale underwriter for shares of the
Fund, the Distributor received commissions on sales of the Fund's Class A and
Class C Shares offered on a continuous basis for the years ended June 30,
1993, 1994, 1995, 1996, 1997 and 1998, 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
1997 18,900 2,400
1998 24,800 3,200
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE
-------------------
<S> <C> <C>
Class C
1994 $ 2,600
1995 4,100
1996 1,200
1997 10,900
1998 900
</TABLE>
CUSTODIAN AND TRANSFER AGENT
The Chase Manhattan Bank, 4 New York Plaza, New York, New York 10004 is the
custodian for the Utility Income Fund.
The Fund's transfer, shareholder services, and dividend paying agent is
Chase Global Funds Services Company, 73 Tremont Street, Boston, Massachusetts
02108.
AUDITORS
Arthur Andersen LLP, 33 West Monroe Street, Chicago, Illinois 60603, are the
independent public accountants for the Fund effective July 1, 1997.
23
<PAGE>
PORTFOLIO TRANSACTIONS
Subject to policy established by the Fund's Board of Directors, the Manager
is primarily responsible for the Utility Income Fund's investment decisions
and the placing of securities orders. In placing orders, it is the policy of
the Fund that the Manager obtain the best net results taking into account such
factors as price (including the dealer spread, where applicable); the size,
type and difficulty of the transaction involved; the size and breadth of the
market; the firm's general execution and operational facilities; and the
firm's risk in positioning the securities involved. While the Manager seeks
reasonably competitive prices or commissions, the Portfolio will not
necessarily always be paying the lowest price or commission available. The
Manager does not expect to use any one particular broker or dealer, but,
subject to obtaining best execution, brokers or dealers who provide
supplemental investment research to the Fund or the Manager may receive orders
for transactions by the Fund. In addition, the Manager may direct brokerage to
brokers or dealers because of research services provided. Such information may
be used by other clients of the Manager and not just the Fund. Conversely, the
Fund may benefit from research services provided in respect to other clients.
All research shall be paid for in compliance with Section 28 (e) of the
Securities Exchange Act of 1934 or consistent with the fiduciary duties of the
Board and the Manager. Information so received will be in addition to and not
in lieu of the services required to be performed by the Manager under its
Agreement and the expenses of the Manager will not necessarily be reduced as a
result of the receipt of such supplemental information. For the fiscal year
ended June 30, 1998, the Utility Income Fund paid $51,714 in brokerage
commissions. The preferred stock and other equity securities in which the
Utility Income Fund may invest are traded primarily on the national securities
exchanges and in the over-the-counter market. Money market securities, bonds
and debentures, in which the Manager may invest a portion of the Portfolio's
assets, are usually traded over-the-counter, but may be traded on an exchange.
For listed securities, the Manager will deal directly with the brokers and
dealers who make a market in the securities involved except in those
circumstances where better prices and execution are available elsewhere. Such
dealers usually are acting as principal for their own account. On occasion,
securities may be purchased directly from the issuer.
The Manager is able to fulfill its obligations to furnish a continuous
investment program to the Portfolio without receiving research from brokers;
however, it considers access to such information to be an important element of
financial management. Although such information is considered useful, its
value is not determinable, as it must be reviewed and assimilated, and does
not reduce normal research activities in rendering investment advice under the
Advisory Agreement. It is possible that the Manager's expenses could be
materially increased if it attempted to purchase this type of information or
generate it through its own staff.
One or more of the other accounts which the Manager manages may own from
time to time the same investments as the Portfolio. Investment decisions for
the Portfolio are made independently from those of such other accounts;
however, from time to time, the same investment decision may be made for more
than one company or account. When two or more companies or accounts seek to
purchase or sell the same securities, the securities actually purchased or
sold will be allocated among the companies and accounts on a good faith
equitable basis by the Manager in its discretion in accordance with the
accounts' various investment objectives. In some cases, this system may
adversely affect the price or size of the position obtainable for the
Portfolio. In other cases, however, the ability of the Portfolio to
participate in volume transactions may produce better execution for the
Portfolio. It is the opinion of the Fund's Board of Directors that this
advantage, when combined with the other benefits available due to the
Manager's organization, outweighs any disadvantages that may be said to exist
from exposure to simultaneous transactions.
24
<PAGE>
PURCHASE, REDEMPTION AND PRICING OF SHARES
The various manners in which the shares of the Utility Income Fund are
offered to the public or may be redeemed, and the method of calculation by the
Utility Income Fund of net asset value per share (which is the offering price
of the shares plus a sales charge that varies with the amount purchased) are
described in the Utility Income Fund's Prospectus.
Under "Group Purchases," shares of the Fund may be purchased at net asset
value (without sales charge) by tax-qualified employee benefit plans and by
trust companies and bank trust departments for funds over which they exercise
exclusive discretionary investment authority for which they charge customary
fees and which are held in a fiduciary, agency, advisory, custodial or similar
capacity.
OTHER INFORMATION
The Prospectus and the Statement of Additional Information do not contain
all the information included in the Registration Statement filed with the SEC
under the Securities Act of 1933 and the 1940 Act with respect to the Fund and
the securities offered by it pursuant to the Prospectus, certain portions of
which have been omitted pursuant to the rules and regulations of the SEC. The
Registration Statement including the exhibits filed therewith may be examined
at the office of the SEC in Washington, D.C.
Statements contained in the Prospectus or in the Statement of Additional
Information as to the contents of any contract or other document referred to
are not necessarily complete, and, in each instance, reference is made to the
copy of such contract or other document filed as an exhibit to the
Registration Statement of which the Prospectus and the Statement of Additional
Information form a part, each such statement being qualified in all respects
by such reference.
25
<PAGE>
APPENDIX I
DESCRIPTION OF SECURITIES RATINGS
STANDARD & POOR'S RATINGS GROUP(R)--A brief description of the applicable
Standard & Poor's Ratings Group rating symbols and their meanings (as
published by Standard & Poor's Corporation) follows:
A Standard & Poor's corporate debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific debt obligation.
This assessment may take into consideration obligors such as guarantors,
insurers, or lessees.
The rating is not a recommendation to purchase, sell or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished by the issuer and
obtained by Standard & Poor's from other sources it considers reliable.
Standard & Poor's does not perform an audit in connection with any rating and
may, on occasion, rely on unaudited financial information. The ratings may be
changed, suspended, or withdrawn as a result of changes in, or unavailability
of, such information, or for other circumstances.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of default--capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with
the terms of the obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangements under
the laws of bankruptcy and other laws affecting creditors' rights.
l. Long-term bonds
<TABLE>
<C> <S>
AAA Bonds rated AAA have the highest rating assigned by Standard & Poor's to
a debt obligation. Capacity to pay interest and repay principal is
extremely strong.
AA Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
A Bonds rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher
rated categories.
BBB Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for bonds in this category than for bonds in
higher rated categories.
BB-D Debt rated "BB", "B", "CCC", "CC" and "C" is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and
repay principal in accordance with the terms of the obligation. "BB"
indicates the lowest degree of speculation and "C" the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions. The "CI" is reserved for income
bonds on which no interest is being paid. Debt rated "D" is in default,
and payment of interest and/or repayment of principal is in arrears.
</TABLE>
I-1
<PAGE>
Plus (+) or Minus (-): The ratings from "AA" to "BBB" may be modified by the
addition of a plus or a minus sign to show relative standing within the major
rating categories.
Provisional Ratings: The letter "P" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the bonds being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no comment on
the likelihood of, or the risk of default upon failure of, such completion.
The investor should exercise his own judgment with respect to such likelihood
and risk.
2. Preferred stock rating criteria
Preferred stock ratings reflect the merits of each issue relative to the
universe of preferreds, and not in relation to debt obligations. Since
preferred stock is by definition a junior ranking security, preferred stock
ratings do not factor in the security's junior position--in a bankruptcy
reorganization or liquidation--to a company's debt obligations. However,
preferred stock cannot be rated higher than a company's highest-ranking debt
obligations because the same basic methodology and ratio norms are used to
rate both types of securities.
The financial analysis performed in conjunction with preferred stock ratings
is virtually the same as that used to rate debt. Fixed-charge coverage and
capitalization ratios are calculated treating preferred stock obligations as
though they were debt. Accordingly, if there is a substantial amount of
preferred, the rating on preferred stock could differ greatly from the debt
rating; the company has less capacity to pay dividends and debt service than
it has to meet debt service alone. The size of the differential is a function
of how much preferred is outstanding. (While the gap can be a full rating
category or more, a large amount of preferred will drag down the debt rating
as well. Even though a company under duress can stop paying the preferred
dividends to avoid default, the burden of the preferred increases the risk
that the company will face such a financial crisis. The company will pay
dividends as long as possible; this can sap its financial strength or siphon
off funds that otherwise could be used to protect the firm's competitive
position.)
Preferred stock ratings also consider the vulnerability of the dividend to
the firm's discretionary passing on a payment. It is often appropriate to rate
preferred stock lower than indicated by pure financial analysis and well below
the debt rating--in the case of speculative grade credits. Such issuers may be
expected to eliminate preferred dividends to help avoid financial constraints.
Similarly, covenants in debt instruments can endanger payment of preferred
dividends even if financial measures indicate a capacity to pay.
MOODY'S INVESTORS SERVICE INC.--A brief description of the applicable
Moody's Investors Service, Inc. rating symbols and their meanings follow:
l. Long-term bonds
Aaa--Bonds which are rated Aaa are judged to be the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large, or by an exceptionally
stable, margin and principal is secure. While the various protective elements
are likely to
I-2
<PAGE>
change, such changes as can be visualized are more unlikely to impair the
fundamentally strong position of such issues. With the occasional exception of
oversupply in a few specific instances, the safety of obligations of this
class is so absolute that their market value is affected solely by money
market fluctuations.
Aa--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than the Aaa
Securities. These Aa bonds are high grade, their market value virtually immune
to all but money market influences, with the occasional exception of
oversupply in a few specific instances.
A--Bonds which are rated A possess many favorable investment attributes and
are to be considered as higher medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to A-rated bonds may be influenced
to some degree by credit circumstances during a sustained period of depressed
business conditions. During periods of normalcy, bonds of this quality
frequently move in parallel with Aaa and Aa obligations, with the occasional
exception of oversupply in a few specific instances.
Baa--Bonds which are rated Baa are considered as lower medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments may be lacking or may be characteristically unreliable over
any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well. The
market value of Baa-rated bonds is more sensitive to change in economic
circumstances, and aside from occasional speculative factors applying to some
bonds of this class, Baa market valuations move in parallel with Aaa, Aa, and
A obligations during periods of economic normalcy, except in instances of
oversupply.
Ba-C--Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often, the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class. Bonds which are rated B generally
lack characteristics of the desirable investment. Assurance of interest and
principal payments or of maintenance of other terms of the contract over any
long period of time may be small. Bonds which are rated Caa are of poor
standing. Such issues may be in default or there may be present elements of
danger with respect to principal or interest. Bonds which are rated Ca
represent obligations which are speculative in a high degree. Such issues are
often in default or have other marked shortcomings. Bonds which are rated C
are the lowest rated class of bonds, and issues so rated can be regarded as
having extremely poor prospects of ever attaining any real investment
standing.
Moody's bond rating symbols may contain numerical modifiers of a generic
rating classification. The modifier l indicates that the bond ranks at the
high end of its category; the modifier 2 indicates a mid-range ranking; and
the modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.
Con.--Bonds for which the security depends upon the completion of some act
or the fulfillment of some condition are rated conditionally. These are bonds
secured by (a) earnings of projects under construction,
I-3
<PAGE>
(b) earnings of projects unseasoned in operating experience, (c) rentals which
begin when facilities are completed, or (d) payments to which some other
limiting condition attaches. Parenthetical rating denotes probable credit
status upon completion of construction or elimination of basis of condition.
2. Preferred Stock
<TABLE>
<C> <S>
aaa An issue which is rated "aaa" is considered to be a top-quality preferred
stock. This rating indicates good asset protection and the least risk of
dividend impairment within the universe of preferred stocks.
aa An issue which is rated "aa" is considered a high-grade preferred stock.
This rating indicates that there is a reasonable assurance that earnings
and asset protection will remain relatively well maintained in the
foreseeable future.
a An issue which is rated "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in the
"aaa" and "aa" classification, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.
baa An issue which is rated "baa" is considered to be a medium-grade preferred
stock, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any
great length of time.
ba An issue which is rated "ba" is considered to have speculative elements
and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse
periods. Uncertainty of position characterizes preferred stocks in this
class.
b An issue which is rated "b" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of
other terms of the issue over any long period of time may be small.
caa An issue which is rated "caa" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future
status of payments.
ca An issue which is rated "ca" is speculative in a high degree and is likely
to be in arrears on dividends with little likelihood of eventual payments.
c This is the lowest rated class of preferred or preference stock. Issues so
rated can be regarded as having extremely poor prospects of everattaining
any real investment standing.
</TABLE>
- --------
*Note: Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification: the modifier 1 indicates that the security ranks in the
higher end of its generic rating category; the modifier 2 indicates a mid-
range ranking and the modifier 3 indicates that the issue ranks in the
lower end of its generic rating category.
I-4
<PAGE>
FITCH INVESTORS SERVICE, INC.--A brief description of the applicable Fitch
Investors Service, Inc. rating symbols and their meanings follows:
l. Long-term bonds
<TABLE>
<C> <S>
AAA Bonds considered to be investment grade and the of highest
credit quality. The obligor has an exceptionally strong
ability to pay interest and repay principal, which is
unlikely to be affected by reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and
repay principal is very strong, although not quite as
strong as bonds rated "AAA'. Because bonds rated in the
"AAA' and "AA' categories are not significantly vulnerable
to foreseeable future developments, short-term debt of
these issuers is generally rated "F-l+'.
A Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay
principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and
repay principal is considered to be adequate. Adverse
changes in economic conditions and circumstances, however,
are more likely to have adverse impact on these bonds, and
therefore impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is
higher than for bonds with higher ratings.
Plus (+) Minus (-) Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the
rating category. Plus and minus signs, however, are not
used in the "AAA' category. NR Indicates that Fitch does
not rate the specific issue.
Conditional A conditional rating is premised on the successful
completion of a project or the occurrence of a specific
event.
Suspended A rating is suspended when Fitch deems the amount of
information available from the issuer to be inadequate for
rating purposes.
Withdrawn A rating will be withdrawn when an issue matures or is
called or refinanced, and, at Fitch's discretion, when an
issuer fails to furnish proper and timely information.
FitchAlert Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and
the likely direction of such change. These are designated
as "Positive," indicating a potential upgrade, "Negative,"
for potential downgrade, or "Evolving," where ratings may
be raised or lowered. FitchAlert is relatively short-term,
and should be resolved within 12 months.
Credit Trend Credit trend indicators show whether credit fundamentals
are improving, stable, declining, or uncertain, as follows:
Improving
Stable
Declining
Uncertain
Credit trend indicators are not predictions that any rating
change will occur, and have a longer-term time frame than
issues placed on FitchAlert.
</TABLE>
I-5
<PAGE>
DUFF & PHELPS CREDIT RATING SCALE--A brief description of the applicable Duff
& Phelps rating symbols and their meanings follows:
<TABLE>
<C> <S>
AAA Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+ High credit quality. Protection factors are strong. Risk is modest but
AA may vary slightly from time to time because of economic conditions.
AA-
A+ Protection factors are average but adequate. However, risk factors are
A more variable and greater in periods of economic stress.
A-
BBB+ Below average protection factors but still considered sufficient for
BBB prudent investment. Considerable variability in risk during economic
BBB- cycles.
BB+ Below investment grade but deemed likely to meet obligations when due.
BB Present or prospective financial protection factors fluctuate according
BB- to industry conditions or company fortunes. Overall quality may move up
or down frequently within this category.
B+ Below investment grade and possessing risk that obligations will not be
B met when due. Financial protection factors will fluctuate widely
B- according to economic cycles, industry conditions and/or company
fortunes. Potential exists for frequent changes in the rating within this
category or into a higher or lower rating grade.
CCC Well below investment grade securities. Considerable uncertainty exists
as to timely payment of principal, interest or preferred dividends.
Protection factors are narrow and risk can be substantial with
unfavorable economic/industry conditions, and/or with unfavorable company
developments.
DD Defaulted debt obligations, issuer failed to meet scheduled principal
and/or interest payments.
DP Preferred stock with dividend arrearages.
</TABLE>
I-6
<PAGE>
APPENDIX II
DESCRIPTION OF HEDGING TECHNIQUES
Set forth below is additional information regarding the Fund's defensive
hedging techniques and use of repurchase agreements.
FUTURES AND INDEX TRANSACTIONS
Financial Futures. A financial future is an agreement between two parties to
buy and sell a security for a set price on a future date. They have been
designed by boards of trade which have been designated "contracts markets" by
the Commodity Futures Trading Commission ("CFTC").
The purchase of financial futures is for the purpose of hedging a fund's
existing or anticipated holdings of long-term debt securities. When a fund
purchases a financial future, it deposits in cash or securities an "initial
margin" of between 1% and 5% of the contract amount. Thereafter, the fund's
account is either credited or debited on a daily basis in correlation with the
fluctuation in price of the underlying future or other requirements imposed by
the exchange in order to maintain an orderly market. The fund must make
additional payments to cover debits to its account and has the right to
withdraw credits in excess of the liquidity, the fund may close out its
position at any time prior to expiration of the financial future by taking an
opposite position. At closing a final determination of debits and credits is
made, additional cash is paid by or to the fund to settle the final
determination and the fund realizes a loss or gain depending on whether on a
net basis it made or received such payments.
The sale of financial futures is for the purpose of hedging a fund's
existing or anticipated holdings of long-term debt securities. For example, if
a fund owns long-term bonds and interest rates were expected to increase, it
might sell financial futures. If interest rates did increase, the value of
long-term bonds in the fund's portfolio would decline, but the value of the
fund's financial futures would be expected to increase at approximately the
same rate thereby keeping the net asset value of the fund from declining as
much as it otherwise would have.
Among the risks associated with the use of financial futures by a fund as a
hedging device, perhaps the most significant is the imperfect correlation
between movements in the price of the financial futures and movements in the
price of the debt securities which are the subject of the hedge.
Thus, if the price of the financial future moves less or more than the price
of the securities which are the subject of the hedge, the hedge will not be
fully effective. To compensate for this imperfect correlation, the series may
enter into financial futures in a greater dollar amount than the dollar amount
of the securities being hedged if the historical volatility of the prices of
such securities has been greater than the historical volatility of the
financial futures. Conversely, the series may enter into fewer financial
futures if the historical volatility of the price of the securities being
hedged is less than the historical volatility of the financial futures.
The market prices of financial futures may also be affected by factors other
than interest rates. One of these factors is the possibility that rapid
changes in the volume of closing transactions, whether due to
II-1
<PAGE>
volatile markets or movements by speculators, would temporarily distort the
normal relationship between the markets in the financial future and the chosen
debt securities. In these circumstances as well as in periods of rapid and
large price movements, the fund might find it difficult or impossible to close
out a particular transaction.
Options on Financial Futures. A fund may also purchase put or call options
on financial futures which are traded on a U.S. Exchange or board of trade and
enter into closing transactions with respect to such options to terminate an
existing position. Currently, options can be purchased with respect to
financial futures on U.S. Treasury Bonds on The Chicago Board of Trade. The
purchase of put options on financial futures is analogous to the purchase of
put options by a fund on its portfolio securities to hedge against the risk of
rising interest rates. As with options on debt securities, the holder of an
option may terminate his position by selling an option of the same series.
There is no guarantee that such closing transactions can be effected.
INDEX CONTRACTS
Index Futures. An index which assigns relative values to the securities
included in the index is traded on the Chicago Board of Trade. The index
fluctuates with changes in the market values of all such securities included
rather than a single security. An index future is a bilateral agreement
pursuant to which two parties agree to take or make delivery of an amount of
cash--rather than any security--equal to specified dollar amount times the
difference between the index value at the close of the last trading day of the
contract and the price at which the index future was originally written. Thus,
an index future is similar to traditional financial futures except that
settlement is made in cash.
Index Options. The Fund may also purchase put or call options on U.S.
Government or equity index futures and enter into closing transactions with
respect to such options to terminate an existing position. Options on index
futures are similar to options on debt instruments except that an option on an
index future gives the purchaser the right, in return for the premium paid, to
assume a position in an index contract rather than an underlying security at a
specified exercise price at any time during the period of the option. Upon
exercise of the option, the delivery of the futures position by the writer of
the option to the holder of the option will be accompanied by delivery of the
accumulated balance of the writer's futures margin account which represents
the amount by which the market price of the index futures contract, at
exercise, is less than the exercise price of the option on the index future.
Index futures and options transactions would be subject to risks similar to
transactions in financial futures and options thereon as described above. No
fund will enter into transactions in index or financial futures or related
options unless and until, in the Manager's opinion, the market for such
instruments has developed sufficiently.
REPURCHASE AGREEMENTS
A fund may invest temporarily up to 5% of its assets in repurchase
agreements, which are agreements pursuant to which securities are acquired by
such fund from a third party with the understanding that they will be
repurchased by the seller at a fixed price on an agreed date. These agreements
may be made with respect to any of the portfolio securities in which such fund
is authorized to invest. Repurchase agreements
II-2
<PAGE>
may be characterized as loans secured by the underlying securities. A fund may
enter into repurchase agreements with (i) member banks of the Federal Reserve
System having total assets in excess of $500 million and (ii) securities
dealers, provided that such banks or dealers meet the creditworthiness
standards established by the Fund's Board of Directors ("Qualified
Institutions"). The Manager will monitor the continued creditworthiness of
Qualified Institutions, subject to the oversight of the series Board of
Directors.
The use of repurchase agreements involves certain risks. For example, if the
seller of securities under a repurchase agreement defaults on its obligation
to repurchase the underlying securities, as a result of its bankruptcy or
otherwise, the series will seek to dispose of such securities, which action
could involve costs or delays. If the seller becomes insolvent and subject to
liquidation or reorganization under applicable bankruptcy or other laws, the
series' ability to dispose of the underlying securities may be restricted.
Finally, it is possible that the series may not be able to substantiate its
interest in the underlying securities. To minimize this risk, the securities
underlying the repurchase agreement will be held by the custodian at all times
in an amount at least equal to the repurchase price, including accrued
interest. If the seller fails to repurchase the securities, the series may
suffer a loss to the extent proceeds from the sale of the underlying
securities are less than the repurchase price.
The resale price reflects the purchase price plus an agreed upon market rate
of interest which is unrelated to the coupon rate or date of maturity of the
purchased security. The collateral is marked to market daily. Such agreements
permit the fund to keep all its assets earning interest while retaining
"overnight" flexibility in pursuit of investments of a longer-term nature.
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<PAGE>
APPENDIX III
TAX EQUIVALENT YIELD
This chart shows the taxable yield that a corporate investor would have to
earn in order to equal the amount of after tax income generated by the given
Fund yield.
<TABLE>
<CAPTION>
FUND YIELD CORPORATE TAXABLE FUND YIELD
(BEFORE FUND YIELD (BEFORE
TAX) (AFTER TAX) TAX)
- ---------- ----------------- ----------
<S> <C> <C>
6.00% 5.37% 8.26%
7.00 6.27 9.64
8.00 7.16 11.02
9.00 8.06 12.39
10.00 8.95 13.77
11.00 9.85 15.15
12.00 10.74 16.52
13.00 11.64 17.90
14.00 12.53 19.28
15.00 13.43 20.65
16.00 14.32 22.03
</TABLE>
- --------
*Assuming that all the Fund's income qualifies for the 70% corporate dividend-
received deduction and that the corporate investor is at a maximum Federal
tax rate (35% tax rate).
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